When annuity marketing material needs a little embellishment, that can be a big problem in court.
Aug. 2--Conseco Inc. likely will take at least a $100.3 million hit to end a class-action lawsuit with holders of its life insurance policies.
That's the after-tax amount of a tentative settlement disclosed Tuesday by Conseco, a Carmel-based insurance company. The agreement must pass a court fairness hearing and other conditions before it is finalized.
The settlement would more than wipe out Conseco's expected profits for its second quarter, which it will announce today, and could delay the upgrade in financial rating that Conseco executives covet. But, analysts said, it clears away one more hurdle to that upgrade, at least in the long term.
Conseco was sued in 2004 by scores of holders of its "Lifestyle" and "Lifetime" insurance policies after it boosted monthly charges by changing how it calculated the cost of insurance. The change, which the lawsuits claim was not properly disclosed in advance, affected about 86,500 policies. It also added $360 million to Conseco's bottom line, the lawsuit claims.
Other companies sold the policies before Conseco acquired them, Conseco said.
Conseco officials declined to disclose the pretax amount of the settlement. But analysts estimated a tax rate of 35 percent, which would make the total settlement more than $150 million.
The size of the settlement surprised Jukka Lipponen, an analyst who follows Conseco for Keefe, Bruyette & Woods in Connecticut. When Conseco announced in May it had boosted its litigation reserves by $15 million, he figured that extra money would cover the settlement.
"In some respects, I thought they had already accrued for it," he said. But, he added, "it certainly is a positive thing that they are able to put this issue to bed."
Conseco still is trying to clear up outstanding issues after it emerged from bankruptcy nearly three years ago. Its executives are trying to win an A-level rating from A.M. Best, the most influential insurance rating agency. Such a rating could improve Conseco's sales of some policies, such as life insurance, to certain customers.
For Conseco shareholders, the settlement means a loss of 55 cents per diluted share, which will be recorded for the quarter ended June 30. According to Thomson Financial, analysts predict earnings per diluted share of 45 cents.
But shareholders will benefit from a previously announced settlement with the Internal Revenue Service, which will boost shareholders' equity by $260 million. Conseco announced Tuesday that the tax benefit, which stems from Conseco's losses on its former Conseco Finance unit, was recently OK'd by a congressional committee.
Investors reacted favorably to the news, bidding up Conseco's shares 34 cents to $23.14.