Financial Executives Online

Charles B. "Chuck" Chokel likes to think of himself as a contrarian investor. So when the opportunity presented itself to work with the highly acclaimed Gary Wendt on the turnaround of Conseco Inc., an insurance and consumer finance company that had fallen hard from grace with Wall Street, Chokel jumped.

One group that probably thought he was jumping into professional oblivion were predatory investors who shorted the stock, hoping that Conseco's misery would get worse before it got better. Chokel was undeterred. "I believed that the path that Gary had laid out would work, and I was happy to participate in that," he says.

Wendt is the lead dog on the Conseco sleigh, but Chokel - who joined the company as chief financial officer in March after a successful 23-year-career at Progressive Corp., the last two and a half years as co-CEO - brings a wealth of experience to the job. Wendt joined Conseco (NYSE: CNC) as chairman and chief executive officer in June 2000 after having resigned as the long-time head of General Electric Capital Corp., which he turned into an international powerhouse.

Wendt had once been considered a strong candidate to replace General Electric Co. Chairman and CEO Jack Welch, but stepped down after several clashes with Welch. When Wendt signed on at Conseco - in return for a $45 million signing bonus and enough incentives to more than double that amount if he leads the company back to health - it was considered to be a coup even at that price.

The 48-year-old Chokel, who joins Wendt and President and Chief Operating Officer Thomas J. Kilian in an office of the chairman, obviously lacks Wendt's star power. What he does bring to the company is a diverse background that includes broad experience in a number of high-profile operating roles - as well as something else that may be just as important: credibility. Conseco's former CEO and CFO resigned in April 2000 amidst a swirl of controversy over many of their dealings.

According to those who know him, Chokel, over time, will help Wendt rebuild Wall Street's trust in the company. "He's very well-respected," says McDonald Investments stock analyst Nancy Benacci, who knows him from her years covering Progressive, a property/casualty insurance company. "He's very well thought of as a straight shooter."

That reputation will be vital as Conseco works to restructure its balance sheet. The company still owes about $1.5 billion in loans to a group of commercial banks - although its next scheduled principal payment isn't until December 2003 - and has another $1.9 billion tied up in trust-preferred securities. "We have a long way to go yet," Chokel says.

Although the company is well along in its effort to raise cash by disposing of non-core assets, there are still a few things yet to sell, including a 19 percent stake in wireless telecommunications company Tritel Inc., which Conseco has been reluctant to sell into a depressed market for technology stocks. Proceeds from these and other asset sales can be used to further reduce the company's debt load.

It's also likely that Conseco will follow its recent $400 million issue of seven-year senior notes with additional offerings that can replace its shorter-term bank debt or more expensive trust preferred. The offering was important because it marked Conseco's reentry into the capital markets after a prolonged absence. Simultaneous with the offering, Conseco swapped the bonds' 10.75 percent fixed interest rate for a variable one that reduced the effective rate to less than 8.5 percent.

Founded in 1979, Carmel, Ind.-based Conseco makes most of its money selling a variety of financial products to a primarily blue-collar customer base. Its insurance subsidiaries sell everything from Medicare supplemental and long-term care coverage to life insurance and annuities. And a consumer finance operation is the largest underwriter of subprime loans to finance the purchase of mobile homes (also known as manufactured housing), while also selling home equity loans and offering private-label credit cards.

"They've got a solid business model and well-defined target market," says Cathy Seifert, an equities analyst at Standard & Poor's Corp. Seifert worries about how Conseco's blue-collar customer base will fare in the country's economic slowdown and the impact this could have on the company's performance. But she feels that Conseco's worst days are probably behind it. "I think the company is on solid footing," she says. "It's through the crisis period. The question is, where does it go from here?"

It was the mobile home business that nearly led to the company's undoing. In 1998, Conseco paid a hefty $6 billion to acquire Green Tree Financial Corp., the undisputed leader in the mobile home financing market. Wall Street never liked the deal because most analysts didn't see much synergy between subprime lending and insurance. Moreover, Green Tree used something called "gain-on-sale" accounting, which soon led to trouble.

Like most finance companies, Green Tree - later renamed Conseco Finance - funded its lending activities in part by packaging its loans and selling them to investors as securities. Gain-on-sale accounting allowed Conseco to book future expected profits on those securities as current income - which turbocharged its reported earnings but forced the company to originate a steady stream of loans for securitization in order to produce more income. After acquiring Green Tree, Conseco accelerated the unit's loan volume and funded that growth through borrowings from a consortium of commercial banks. Over a two-year stretch beginning in mid-1998, Conseco borrowed $4 billion to fund the finance unit's growth.

Disaster struck in late 1998, when shock waves from the Russian bond default reverberated through the global financial system and led to a virtual meltdown of the securitization market for subprime loans, temporarily shutting off an important funding source. Then, in early 2000, Conseco was forced to restate its 1999 earnings when the loss experience on its securitized mobile home loans turned out to be worse than expected and it had to make a large accounting adjustment. The company eventually abandoned gain-on-sale accounting in September 2000.

Investor alarm over the earnings debacle, combined with Conseco's growing debt burden, knocked the company's stock from $50 a share to as low as $5, although it has since recovered to around $15. When it became obvious that investors had lost all confidence in founder and former CEO Stephen Hilbert and former CFO Rollin Dick, the pair resigned.