Is It Safe? Conseco Stares Down 'B' Word

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Conseco(CNO Quote), 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 Quote) at 12.3 or Prudential Financial(PRU Quote) 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 Quote) 2.6%, Hartford Financial's(HIG Quote) 0.5% and Lincoln National's(LNC Quote) 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 Quote) analyst Thomas Gallagher reduced his 2009 earnings estimate after projecting a $45 million annual interest increase following the restructured terms.