Is It Safe? Conseco Stares Down 'B' Word

Tuesday, Jun 02,2009, 11:29:40 AM Click:

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TheStreet.com

May 29, 2009 Friday 03:59 AM EST

SECTION: NEWS & ANALYSIS; Insurance

LENGTH: 585 words

HEADLINE: Is It Safe? Conseco Stares Down 'B' Word

BYLINE: Gavin Magor, TheStreet.com Ratings Senior Health Insurance Analyst.

Gavin Magor joined TheStreet.com Ratings in 2008, and is the senior analyst responsible for assigning financial strength ratings to health insurers and supporting other health care-related consumer products, including Medicare supplement insurance, long-term care insurance and elder care information. He conducts industry analysis in these areas. He has more than 20 years' international experience in credit risk management, commercial lending and analysis, working in the U.K., Sweden, Mexico, Brazil and the U.S. He holds a master's degree in business administration from The Open University in the U.K.

"Is It Safe?" is a daily feature by TheStreet.com Ratings that looks at a company's risk-and-reward potential. Find out if your stocks are safe each morning at 4.

Conseco(CNO:NYSE), an Indiana-based life insurer, has been a momentum investor's dream this year, surging 10-fold since early March.

How did that happen? The company posted a first-quarter profit after eight consecutive quarters of losses. It lost $1.1 billion in 2008.

And, still, the shares aren't overpriced. With a price-to-book value of 32%, it's one of the cheapest stocks in the industry. The price-to-average-earnings-per-share for 2009 of 3.2 is very low compared with MetLife(MET:NYSE) at 12.3 or Prudential Financial(PRU:NYSE) with 7.9. Each has a price-to-book value of more than 100%.

The stock's cheapness comes at a price, of course. Analysts have raised questions about whether the group will have to file for bankruptcy.

Lower ratings have decreased the company's ability to compete in an increasingly credit-sensitive market and scared off policyholders. The effect of dwindling income and potentially forced sales of investments to meet policyholder withdrawals could lead to further losses.

Last year's surrender ratio of 3.6% was considerably higher than Ameriprise Financial's(AMP:NYSE) 2.6%, Hartford Financial's(HIG:NYSE) 0.5% and Lincoln National's(LNC:NYSE) 1.2%. (The ratio measures the percentage of policyholders who cash out their policies early.)

Another issue is a renegotiated $911.8 million senior secured credit agreement. Due in 2013, the loan covenants were in danger of being broken. Following amendments that provide some margins in the financial covenant levels for 18 months, Conseco will be paying a higher interest rate. Credit Suisse(CS:NYSE) analyst Thomas Gallagher reduced his 2009 earnings estimate after projecting a $45 million annual interest increase following the restructured terms.

A total of $327 million in debt payments are due next year. Conseco says it won't be able to service this debt through existing cash flow, although the company is confident it has sufficient liquidity for 2009.

If Conseco can't renegotiate debt payments or find another way to generate cash, the group will look increasingly vulnerable. The insurer may need to sell one or all of its subsidiary insurers. AIG(AIG:NYSE) has been trying to do the same.

Moreover, Conseco's investment portfolio looks ugly. Its $2.1 billion commercial mortgage loan portfolio has a loan-to-value of 69%, considerably higher than Genworth's(GNW:NYSE) 46% and Ameriprise's 45%. (Loan-to-value gauges the amount of a first-mortgage lien as a percentage of the total appraised value of real property.)

Conseco had $23 million in loans 60 days or more past due at the end of March. Some analysts say this sector may suffer a slump that lasts 18 months, suggesting more serious problems for Conseco.

Conseco's insurance subsidiaries carry a financial strength rating of D or D-plus from TheStreet.com Ratings, indicating significant weakness. The company's stock rating is D, or "sell." Short-term investors might find opportunities to make profits, especially if the stock rises to analysts' projections of $4 this year. (It's now about $2.50.) However, long-term investors could be buying a ticking bomb.

TSC Ratings provides exclusive stock, ETF and mutual fund ratings and commentary based on award-winning, proprietary tools. Its "safety first" approach to investing aims to reduce risk while seeking solid outperformance on a total return basis.