Remaking History – The Turnaround At Conseco

Everyone knew the bankruptcy filing of Conseco Inc. was one of the largest in U.S. corporate history. But few people knew that the job of turning the company around would be even larger.

With more than $52 billion in assets, the petition of the one-time high-flying financial services corporation in December of 2002 ranked behind only WorldCom’s $107 billion bankruptcy and the $63 billion filing of Enron Corp. 

Its excesses and downfall were well-documented. There was the lavish lifestyle of its founder and former CEO Stephen Hilbert; the hundreds of millions of dollars the company loaned to its directors; and the rapid succession of acquisitions the company made during the 1980s and 1990s including a final, ruinous blunder.

 In its darkest days Conseco was billions of dollars in debt with its operations in turmoil. Insurance regulators had downgraded the company. Debt-rating agencies had lowered their scores and stock analysts were questioning the company’s accounting methods.

 But Conseco survived and its recovery is a lesson for other failing companies looking for a lifeline. The right team of experienced turnaround specialists can impartially evaluate a company, swiftly eliminate weaknesses and focus on its strengths. In the case of Conseco, that team was Tempus Partners.

 This is a case study of how William J. Shea, L. Michael Hone and their Tempus associates returned Conseco to profitability by restructuring the company’s debt, reorganizing its operations and marshalling some of the country’s top financial and legal experts to act as outside advisors. Today, Conseco is actively traded with a market capitalization of more than $3 billion.

 “When you undertake a turnaround it doesn’t make a difference what the business is, as long as your people have certain skill sets,” says Shea. “We had a game plan and the people to implement it at Conseco.”

 One Deal Too Many

For most of the 1980s and 90s Conseco could do no wrong. Through numerous acquisitions the Indianapolis-based firm became one of the largest insurers in the country and a darling on Wall Street. After going public in 1985, Conseco’s stock soared with an average total return of 47 percent per year from 1988 to 1998. 

But Conseco’s fortunes turned in April of 1998 when it acquired Green Tree Financial Corp, a Minnesota mobile home lender, for $6 billion. The plan was to market a broader array of services to each other’s customers. Conseco was a major seller of life insurance, annuities and supplemental health insurance such as cancer, heart, stroke and Medicare coverage. Green Tree was the largest originator of loans for the manufactured housing market and the second largest provider of private credit cards. 

Conseco had little success with Green Tree’s working-class consumers because, as Hone would later say, “It’s hard to sell them more insurance when they could barely pay their mortgages.”

Investors were sour on the deal, driving the stock price down 15 percent on the day it was announced. Three months later the company began a series of write-downs when it announced second-quarter after-tax charges of $498 million, mostly the result of unexpected loan prepayments. About $350 million of the charge was earmarked to cover increasing prepayment rates at Green Tree.

 Losses began to mount including $407 million in the second quarter and $487 million in the third. Thousands of jobs were cut, mostly at Green Tree. In very little time it had become a very large drain on Conseco.

 Shea Joins Conseco

During the final third of 2001, Shea and then Hone joined Conseco. Shea was recruited to become president and chief operating officer in September by then-Chairman and CEO Gary Wendt, along with Thomas Lee Partners of Boston, one of the country’s top private equity firms, which held more than $400 million worth of Conseco stock. His background in reviving flagging companies was well known. In 2001 he and Hone completed a successful turnaround of Centennial Technologies of Wilmington, MA, a firm nearly ruined when management fraud was discovered in 1997.

 Bankruptcy was not on Shea’s mind when he joined Conseco, but the company’s finances were eroding fast. Conseco’s earnings growth in the 1990s had been from its successive acquisitions, not from improved operations. Questionable accounting methods were pumping up near-term profits, but exposing the company to drastic revisions in the future. And there was also the company’s debt. Conseco was paying $550 million to $600 million annually in debt service, strangling its cash flow.

 “Underlying what looked like a fairly healthy company was some very inappropriate accounting,” says Shea. “There were businesses that didn’t have any earnings power because there were a lot of losses that hadn’t been recognized on the balance sheet. 

 “As things started to crumble,” he added, “there wasn’t any way to support that debt load with the earnings of the company.”

 Shea took the debt problem head-on. In January of 2002 an $800 million debt relief plan was announced. Another $170 million was gained through the later sale of subsidiaries Manhattan National Life Insurance and Conseco Variable Insurance Co. He also limited the company’s financial exposure by settling a class-action lawsuit filed by shareholders. And he settled a dispute in Texas that a Conseco company had failed to promptly pay health-care claims.

 But troubles continued. By late summer of 2002 three major credit agencies lowered their ratings on Conseco bonds and the company’s stock price plunged below $1. The board of directors and major creditors such as Bank of America and JPMorgan Chase & Co. had had enough. In October Wendt was asked to resign as chief executive officer, but remained as chairman. Day-to-day management of the company was given to Shea.

 Shea asked a trusted group of advisors to assist. He retained Lazard, the international debt restructuring advisor and the Chicago law firm of Kirkland & Ellis, which had advised on other major corporate bankruptcies.

  “We had the right advisors in place and they gave us options,” says Shea. “Their recommendation was to take it through bankruptcy. Not everyone agreed. But even the Tommy Lee guys, who had $500 million in there, felt that bankruptcy was right.”

 On Dec. 17, 2002, Conseco filed for Chapter 11 bankruptcy protection after Shea and the board reached an agreement with the major creditors to restructure about $6.5 billion in debt. 

The Tempus Team Steps In

When Shea replaced Wendt as CEO, Hone, whom Shea had brought on shortly after being named president, stepped up as chief operating officer of the Conseco Insurance Group. He began streamlining a corporation that had done little to integrate more than 40 acquisitions.

 “When we took over, Conseco was really 40 companies thrown together in the cornfields of Indianapolis,” says Hone. “Both the organizational chart and the IT system looked like a wad of spaghetti.”

 Most of Conseco’s companies used separate computer systems, which led to such customer service problems as inaccurate policy information and poor oversight of claims. Similarly there were troubles when compensating or recovering debts from agents. In some cases agents who owed money to one Conseco subsidiary were being paid by another.

Hone, who had managed the recovery of other technology companies including PSC Inc., in Rochester, N.Y., Centennial Technologies in Boston, and Bizfon Inc. in Salem, NH, called on many of the same Tempus associates who had joined him at those companies.

 Jacques Assour was brought in as senior VP of operations. Richard Stathes was named executive VP of sales & service. Richard Pulsifer also joined the sales department as a vice president, first focusing on agent debt and then resurrecting and managing the “worksite” operating team.

 “They’re all experts in their own fields of operations, IT, accounting, sales, marketing and customer service,” says Hone. “That’s why I have them on my team. They’re driven, very effective, very efficient and they aren’t looking for glory. They’re looking to get the job done.”

 Hone identified several priorities including:

• Stabilize relationships with key partners, especially independent marketing operations (IMOs) and insurance agents.
• Develop new Conseco products for IMOs and agents to sell.
• Reorganize Conseco’s call center – the company’s frontline when interacting with customers and policyholders.

 Hone began by assuring IMOs and insurance agents that it was Conseco’s holding company that had filed for bankruptcy. The insurance company itself still had products in health, life and annuities.

 “We weren’t out of business and we weren’t going out of business,” says Hone. 

But there was a touchy issue of about $50 million in debt owed to the company by agents. When a policy was sold, Conseco would pay an advance on the agent’s commission, which it would recover through the customer’s monthly payments. If the customer cancelled the policy, the agent was expected to repay the outstanding portion of the advance.

 However, Conseco wasn’t collecting from the agents for cancelled policies. Many couldn’t pay their debt, some couldn’t be found. So Conseco officials tried to recover their money by pursuing the IMOs, where the agents were licensed. When a sales person makes a sale, he receives a commission. That sales person has a manager who earns an override on the commission and the IMO, often the next level up, also earns an override. Conversely, the IMO is ultimately responsible for the sales agent’s debt. 

But often the IMOs, who were typically established professionals successfully selling Conseco insurance products, were unaware there was a debt issue with a lower agent. They argued that Conseco should not have paid commissions to unscrupulous sales people. Conseco was in danger of destroying its product distribution channel by alienating its productive IMOs. 

“It was our responsibility to take care of the policyholder once the agent brought them to us,” says Hone. “But our customer, the person who brings us new revenue, was not the policyholder. It was the agents and the IMOs and Conseco had not treated them well. So we worked hard to change that.”

Hone and Pulsifer found a solution. Insurance rating agencies had downgraded the financial strength of Conseco’s insurance units. Sales were declining. Agents not beholden to Conseco were selling more highly rated products. They proposed that liable IMOs pay off the debt by selling more Conseco policies. 

“It would have been short-sighted to tell them to pay us the $50,000 they owed and then never do business with them again,” says Pulsifer. “We tried to take a real negative that was destroying our distribution channel and turn it into a positive by using it to motivate them to sell for us.” 

At the same time, Hone put more emphasis on product development. A new process was developed that brought together all of the people involved in selling and delivering policies including underwriters, marketing and sales people and agents. Ultimately the integrated process was able to roll out new products more quickly and efficiently than Conseco’s old approach. And it had the bonus of making agents more invested in Conseco’s business. 

“That sort of communication with agents had not been done before,” says Hone. “It really made them more committed to the product.” 

Improving Conseco’s call centers – which fielded questions from IMOs, agents and policyholders – was also crucial in the company’s turnaround. To save money Wendt had transferred the call center to India. It was a disastrous move as the personnel fielding the calls were generally unqualified.

 “It wasn’t organized correctly,” says Hone. “You had people working hard but not doing the right thing. They didn’t understand that the customer was the agent and the IMO, not the policy holders. If they quit selling the product we were going out of business.” 

Conseco brought the call center back to the U.S. Though there was still the job of condensing the company’s 30-plus computer systems, Hone asked Stathes to tackle customer service by recruiting better hires. Stathes began hiring better educated personnel, improved their training through his in-house “Conseco University” seminars, and enticed them to stay by promising careers in the field. 

Hone turned to Assour to improve the efficiency of Conseco’s operations. Quickly Assour saw that no one was monitoring quality control. He named one person from each department to a quality control committee, whose job was to insure that each group within Operations had appropriate processes in place with the required resources. 

Additionally, Assour clamped down on “leakage” – payment due to errors made by adjusters within Conseco – by having the company’s actuaries forecast payments for claims just as the sales department would forecast revenues. If the amount of money paid out in a month exceeded the forecast figure, he wanted to know why.

 “We found out that because of an error in the software system, some doctors who sent a bill more than once got paid more than once,” says Assour. “The system was supposed to compare each bill coming in to assure they weren’t redundant. It wasn’t doing that and that was a big problem. We corrected that.” 

Conseco Comes Back

In March of 2003, Conseco Finance, the subsidiary that brought Conseco down, was sold in two parts for a total of $1.2 billion. A trio of investors that included J.C. Flowers & Co., Fortress Investment Group and Cerberus Partners, Ltd, acquired Conseco Finance’s servicing platform, while GE Capital purchased Mill Creek Bank, the lender that funded Conseco Finance’s private-label credit card business.

 The following September Conseco officially emerged from Chapter 11. The stock that once traded for less than $1, opened at more than $20 per share.

 “Conseco was a bear of a job, but well worth the effort,” says Hone. “The company has turned around. Today it’s well-financed, reorganized and reenergized, with good products and a bright future ahead.”