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Activist shareholder makes case against Conseco's board

May 11, 2009
An activist shareholder vying to become a director of Conseco Inc. says the insurance company's board "completely misjudged" the risks it faced when it emerged from bankruptcy in 2003 and hasn't recovered since.

Now an independent shareholder advisory firm is siding with him.

"The board is blindly pushing forward into risky waters with limited view into what they're getting into," said Keith Long, 61, a graduate of Indiana University who is now president of Florida-based Otter Creek Management, which holds 1.4 million Conseco shares.

Election Day for Long is May 12, the date shareholders of the Carmel-based insurance company gather—in person or by proxy—at their annual meeting in Carmel.

Perhaps Long's strongest piece of evidence is Conseco's stock price. It has plunged 83 percent in the past year and as of May 6 traded for just $2.10.

But Conseco's existing board members are trying to block Long from joining them. In securities filings, they have argued that Conseco has cleared up old problems, has improved its underlying performance, and is generally on the right track.

In an April 30 presentation to the Risk-Metrics Group, the New York-based firm that supports Long's election bid, Conseco officials emphasized all the actions the company has taken since it hired Jim Prieur as CEO in September 2006.

Those include staunching losses in the long-term-care portfolio and transferring it to an independent trust. Conseco also has improved the performance of its three insurance subsidiaries: Chicago-based Bankers Life & Casualty Co., Philadelphia-based Colonial Penn and Carmel-based Conseco Insurance Group.

Profits at those companies surged 25 percent last year.

Long, who led a 2003 board takeover of Texas-based insurer Financial Industries Corp., has no problem with Prieur's performance. But he thinks the board dealt him a bad hand.

Long faults the board for not getting serious about fixing the long-term-care problems immediately after emerging from bankruptcy in September 2003. He also said board members spent too aggressively to grow the Bankers Life unit, which stressed the company's capital levels. Conseco's capital levels dipped low enough earlier this year that it had to renegotiate to avoid breaching its bank loan agreements. Conseco had to pay higher interest rates for the privilege, which is a drag on its profits.

"You can't judge people on a short-term basis, but this has been going on for six years," Long said. "Rightly or wrongly, somebody has to bear responsibility."

Long is running directly against Philip R. Roberts, a former investment officer for New York-based Mellon Financial Corp. He chairs the investment committee and sits on the audit committee.

There have been problems in both areas, according to RiskMetrics Group's analysis of Conseco. The company still has internal-control weaknesses that make its reported financial results uncertain. And Conseco's investments, while producing a yield on par with peer companies, have suffered a greater proportion of losses in the past year.

Conseco released a statement on May 7 criticizing RiskMetrics' support of Long over Roberts. The company also noted that another shareholder advisory firm, Virginia-based Proxy Governance Inc., supported Roberts and Conseco's other board members.

"It's disappointing that RMG's recommendation ignored the clearly superior qualifications—including insurance industry and investment management experience—of current director Phil Roberts," said Prieur, in a prepared statement.

RiskMetrics also found that Conseco has performed worse than 18 peer insurance companies on such measures as capital-to-assets ratios and returns on assets and equity.

"Because there is evidence of Conseco's consistent financial underperformance visa-vis its peers, we believe greater management oversight is warranted in this case. Given Keith Long's skill set and experience, we believe his addition to the board could prove beneficial in bringing a new perspective to the board's deliberations," RiskMetrics wrote in its May 6 report.

Board Chairman Glenn Hilliard was traveling and could not be reached for comment. 
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