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Conseco

(CNC) - Get Centene Corporation Report

,the insurance and consumer finance firm, is showing that self-destruction can be gradual.

After several months of damaging developments that have crushed its stock price, the Carmel, Ind.-based company issued more bad news Friday. It set a $350 million charge that will wipe out more than a third of last year's profits. Conseco also said its 1999 annual report will be filed late, signaling that Conseco's auditors are unwilling to approve the firm's financial statements, according to observers.

The firm also said that it intends to sell its consumer finance arm,

Conseco Finance

, in a move that appears to be designed to raise cash and cut leverage at Conseco's parent company. (Until recently, Conseco Finance was called

Green Tree Financial

.) In addition, the future of top managers, particularly Chairman and Chief Executive Stephen Hilbert and finance chief Rollin Dick, appears to be in question. Some analysts are wondering whether Conseco is now likely to be acquired.

When asked for comment, Conseco sent some remarks by Hilbert that didn't address the questions submitted. The firm's auditor,

PricewaterhouseCoopers

, declined to comment on client matters.

In heavy trading, Conseco shares slumped 2 1/4, or 16%, to 11 7/16, which is 67% below their 52-week high.

Two Long Years

In the conference call Friday, Hilbert said, "It's been a difficult two years for our shareholders." Indeed it has. Green Tree, which Hilbert once said would "make Conseco a leading provider of insurance and financial services," is by Hilbert's own admission probably going to be sold for much less than the $6.5 billion Conseco paid for it about two years ago.

Since then, Conseco has had to

restate financial documents registered with the

TheStreet Recommends

Securities and Exchange Commission

and

slow growth at Conseco Finance to allay

fears about cash-flow problems. It has also cut its earnings outlook and sold bonds at a steep discount to buyout firm

Thomas H. Lee

to raise money.

The $350 million writedown at Conseco Finance, which will take last year's earnings per share down to $1.85 from $2.89, validates the work of Colin Devine, an insurance analyst at

Salomon Smith Barney

.

A little background: Conseco bundles up its loans and sells them as bonds, a process called securitization. Portions of these securitizations are retained on Conseco's balance sheet and are called interest-only securities. It was these I-O securities that were marked down.

Since they don't trade on any market, firms value I-O strips themselves. They do this by making assumptions about how many of the underlying loans will go bad, whether they will be repaid early and what the future level of interest rates will be. These assumptions are then assessed by auditors.

Those Bad Loans

Devine has for many months wondered whether Conseco's assumptions were appropriate, and he has said that bad loans may be more of a problem than the firm had been saying. Conseco Finance's main business is to lend to people who want to buy mobile homes, and this market is experiencing a rise in delinquencies.

When asked during a conference call Friday what valuation assumption Conseco had got wrong, Hilbert failed to offer specifics. Then, asked if Conseco had been too optimistic about credit quality assumptions at Conseco Finance, he said, "Conseco Finance, on a delinquency and on a loss profile, is performing well within targets." Hilbert said investment bankers working on the sale of Conseco Finance suggested the writedown.

One analyst, who requested anonymity and whose firm has done no underwriting for Conseco, says Friday's huge drop in Conseco shares shows that investors don't trust Hilbert to run the insurance businesses that will be left after Conseco Finance is sold.

He thinks getting rid of Conseco Finance "broadens the scope of potential buyers" to include a wide range of European and U.S. insurance firms that wouldn't want the consumer finance division. In such a transaction, he says, Hilbert and his management team would almost certainly leave.

What Price?

First, however, Conseco has to find a buyer for Conseco Finance that will pay a good price, or the ratings agencies won't upgrade the company, as they want to see how much cash is gained from any sale.

Moody's Investors Service

said Friday that it was preparing to change Conseco's rating but made a point of not saying whether it was likely to upgrade or downgrade the firm.

Conseco needs to get a price that "gives the ability to pay down debt and get it on firm ground," says Patrick Finnegan, an analyst at Moody's. Conseco's parent company -- where most of the firm's debt is borrowed and the focus of most of the recent cash-flow worries -- aimed to be earning twice as much cash as it spends by early 2000, Hilbert had said in November. The company didn't say during the call whether it has achieved that goal.

Hilbert said a rough starting price for Conseco Finance may be $4.7 billion, which combines $2.2 billion of equity and $2.5 billion in debt payable to the Conseco parent. But Salomon's Devine wonders whether a buyer will want to pay Conseco all that $2.5 billion in debt. If it didn't, it could mean the parent company gets less money from the deal and cash-flow concerns would continue.

On top of the $2.2 billion needed to pay for the existing equity, a buyer would have to pump in another $1.7 billion in equity funds to get Conseco Finance's debt-to-equity ratio down to Conseco's recently stated goal of 15-to-1, from 23-to-1 at the end of last year, Devine says. That means the buyer would probably be unwilling to take the much more than $700 million of the $2.5 billion in intercompany debt. If the acquirer took more than that, it would put the overall price above the $4.7 billion envisaged by Hilbert, Devine says.