Conseco hopes to receive crucial upgrade: Ratings firm A.M. Best Co. may make decision soon

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The holiday season may arrive a few months early for Conseco Inc. if its subsidiaries receive the ratings upgrade that has topped their wish lists since their parent emerged from bankruptcy.

A.M. Best Co. plans to complete a Conseco review this summer, and it probably will deliver the gift of good news afterward, according to some analysts who cover the Carmel-based holding company.

New Jersey-based Best currently rates the financial strength of Conseco’s core subsidiaries at a B++ level, one notch below the A level Conseco covets.

Conseco executives have set their sights squarely on Best upgrades since shortly after the company emerged from Chapter 11 bankruptcy in 2003. The company considers Best the most influential ratings firm in the business, the one that matters most to agents and customers.

In June 2004, Best delivered a rare, double upgrade in raising the subsidiaries to B++, but the company wants more. An Alevel rating will allow its subsidiaries to compare more favorably with other insurers.

“It’s one of the most significant objectives for the company because it really increases your ability to sell products, retain customers and drive business value,” Conseco spokesman Jim Rosensteele said.

The company’s core subsidiaries are Conseco Insurance Group and Chicagobased Bankers Life and Casualty Co. The two sell and administer supplemental health insurance, annuities and individual life insurance, among other products. Bankers Life does business through branch offices while Conseco Insurance works mostly through independent channels.

Rosensteele said Best gave Conseco “a clear road map” pointing the way to that next upgrade. A key landmark on the journey is consistency. Best wants to see Conseco string together several quarters of solid performance before making a decision.

Analyst Jukka Lipponen gives Conseco passing grades so far.

“I think the company certainly is showing progress at Bankers and, perhaps, some very, very modest progress in the independent channel,” said Lipponen, a Connecticut-based analyst for Keefe Bruyette & Woods.

He said Conseco has made progress consolidating computer systems. It also has worked to reduce expenses and build sustainable earnings and cash flow, all things Best considers in its review.

The company reported $70 million in operating income and more than $1 billion in total revenue for the first quarter this year. Its earnings per share of 43 cents beat the consensus estimate of 41 cents, according to Mark Finkelstein, a Chicago-based analyst for Cochran Caronia Securities LLC.

Lipponen believes the company could see an upgrade to A-minus within the next few weeks.

Another analyst predicted Conseco will receive an outlook change from stable to positive before Best hands out an upgrade.

Best reviews the companies it covers every 12 months or after a big event like a sale or bankruptcy. Conseco received that double upgrade June 25, 2004, but that doesn’t mean the ratings firm is eager to crank out another review.

“It’s not a ratings factory,” said Andrew Edelsberg, a Best managing senior financial analyst.

Sometimes, Best analysts wait beyond 12 months to follow a trend or see how a company action plays out. Edelsberg also noted that this is Best’s busiest time of the year, as it works to put together a ratings book it publishes in August.

In the process, a Best analyst presents his Conseco report to an internal committee. That committee then debates the analyst’s report and decides whether to take action.

Best could issue an upgrade, raise Conseco’s outlook to positive, or do nothing, Lipponen said. He sees no reason for a downgrade.

Conseco faces no deadline to receive the upgrade.

After the company emerged from bankruptcy, a credit agreement called for a December 2005 deadline for achieving that A-level rating or lenders could declare Conseco in default. That credit agreement has been replaced, and the company no longer has a deadline, Rosensteele said.

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