Faced with a plunging stock and mounting concerns about its solvency,

Conseco

(CNC) - Get Report

rolled out the top brass of its large finance business at a New York meeting Thursday. The assembled execs offered a wealth of detail on its lending businesses.

But in Detox's opinion, Conseco's cash-flow projections for 2002 were deeply flawed, while explanations of its loan extension policies were incomplete.

Conseco stock edged up 2 cents to $4.76 on Friday. It's down 75% from its 52-week high.

Conseco is split into two main parts: the insurance business, which operates through a number of subsidiaries, and Conseco Finance, which makes mobile home, home equity and credit card loans. Though Conseco Finance has problems, such as deteriorating credit quality, it is supposed to be the main source of earnings growth over the next three years in CEO Gary Wendt's revival plan. The unit made $73 million in operating earnings in the third quarter, compared with $208 million from the insurance operations.

Need Some Scratch?

Conseco's most pressing problem is finding the cash to pay back money borrowed by the parent company, which is weighed down with $4.2 billion of debt. Wendt said last month that Conseco Finance can throw $310 million to $340 million of cash to the parent in 2002. That projection has been met with skepticism in many quarters because the company drastically slashed its cash flow projection for $26 billion of loans made before September 1999 under the previous management.

Conseco said that instead of the $120 million it expected in 2002 from these loans, it now thinks they'll

consume

$50 million in cash next year. With that massive reversal, investors at the meeting were curious to find out where the cash will come from now.

Here's how Conseco management broke out the forecast on Thursday. It expects some $18 billion of loans made mainly from September 1999 to year-end 2001 to produce $187 million of cash in 2001. Conseco believes this sum can be repeated in 2002.

Fair enough. Then it expects to make an additional $150 million on $3 billion of new loans it expects to make in 2002, and probably an extra $100 million on the $18 billion from a wider interest margin. Then we need to subtract additional credit losses of around $75 million, and $50 million of additional guarantee payments to loan-backed bonds.

That would have Conseco producing an incremental cash flow of $125 million in 2002 to add to the $187 million. This brings the cash-flow total to $312 million, at the bottom of the $310 million-to-$340 million expected range.

There's a big problem with the cash-flow projections for the loans booked in 2002. Conseco says the 5% spread on the $3 billion of loans added next year will earn it $150 million.

But there's a flaw in this approach, which Detox addresses in a

follow-up article.

The other talking point at the investor briefing was an explanation of the policies designed to help troubled borrowers.

As this column has chronicled, Conseco has been allowing troubled borrowers to skip monthly loan payments. The missed payments are added to the principal of the loan, and the loan is classified as current.

Conseco's collectors have said these so-called extensions are being done to artificially hold down delinquenices, while the company says the aim is to ensure that troubled loans actually get collected. A chart shown to the public for the first time Thursday showed accounts with extensions soaring, verifying claims by collectors to this column that the policy was becoming more widespread.

But Mark Shepherd, the Conseco exec in charge of collections, then produced a slide claiming to show what percentage of extended accounts were "cured," or didn't return to delinquency. Shepherd's chart showed 65% to 95% of extended loans remained current, depending on the age of the loan. However, Shepherd didn't give a dollar amount for extensions.

Why is that important? Because collectors have said that accounts are being extended for longer than just one month's payment. That would show up on a dollar figure for extensions. In addition, if an increasing number of extensions are for more than one month, the borrower effectively gets a longer grace period, which would explain the high "cure" rates. When this columnist asked Shepherd if loans were being extended for longer periods, he said: "Not materially." He didn't give dollar numbers for extensions.

One last interesting snippet: Bruce Crittenden, CEO of Conseco Finance, said the unit's credit card borrowers had the credit scores of creditworthy, or "prime," borrowers. But this doesn't gel with the decidedly "subprime" charge-off rate of 7.7% on the portfolio, which is financed with federally insured deposits taken through Conseco Bank.

Bank regulators are clamping down on banks that are designed for funding subprime portfolios after recent scandals in that area of lending. That credit card chargeoff rate could be a red flag to the regulators, especially since Conseco had added over $800 million in credit card loans so far this year.

As originally published, this story contained an error. Please see

Corrections and Clarifications.

Know any companies that the market may be misvaluing? Detox would like to hear about them. Please send all feedback to

peavis@thestreet.com.

In keeping with TSC's editorial policy, Peter Eavis doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships.