CEO Bill Shea is the only member of Conseco Inc.’s current board of directors who will carry over to the new board scheduled to take charge after the company emerges from Chapter 11 bankruptcy.
IBJ has learned Glenn Hilliard, a veteran insurance executive who retired this spring as CEO of Atlanta-based ING Americas, will serve as non-executive chairman of the seven-member board.
The company and key creditors in the bankruptcy case refused to confirm Hilliard’s selection or identify who beyond Shea would serve on the board. An announcement of the full panel could come before the end of July.
Behind the scenes, it’s been a contentious process, people familiar with the discussions said.
None of the controversy surrounds Hilliard, who could not be reached for comment. Insurance observers say it was a coup for Conseco to land an executive who, through a series of acquisitions, helped build one of the largest life-insurance operations in the United States.
Companies increasingly have been appointing non-executive chairmen as part of corporate-governance reforms that give independent directors more clout. Hilliard’s skills are expected to complement those of Shea, who has specialized in corporate restructurings.
But who else will serve on the board, and what strategies they’ll advance, is another matter. Conseco’s reorganization plan shifts ownership of the company to bondholders in return for erasing billions of dollars in debt. As part of the plan, a committee of banks and bondholders gets to pick five of the board members.
Here’s the rub: Some of those creditors are so-called vulture investorsinstitutions that swooped in during the past year to buy debt at steep discounts and might be prone to look for ways to make a fast profit, such as finding a buyer for the entire company.
Stability is what insurance regulators want to see and what the reorganization plan awaiting court approval envisions. The plan calls for the company to focus on building up the capital inside the insurance subsidiaries and steadily paying down more than $1.3 billion in bank debt.
As one person familiar with the discussions said: “There has been a real hassle over who these board members are going to be. The hassle has to do with the reputation and background of certain of the major bondholders, who may be people who want to get in and out in a hurry.”
After the reorganization, Conseco’s largest shareholder would become Appaloosa Management, a New Jersey based hedge-fund outfit run by David Tepper, which regulatory filings show would have at least a 16-percent stake.
The stake could swell to as much as 25 percent if Appaloosa canceled pending swaps it arranged with third parties that reduce its Conseco exposure, said Betty Patterson, senior associate commissioner of the Texas Department of Insurance.
Appaloosa’s Tepper, whose funds top $2 billion in assets, was one of 13 investment gurus profiled in Lois Peltz’s 2001 book, “The New Investment Superstars.” Hedge-fund publications say 2002 proved challenging, however. His distressed-securities fund shed 24 percent of its value, reducing its three-year return to 25 percent, according to Barron’s.
A regulatory filing in Texas, the home state for key Conseco insurance subsidiaries, says Appaloosa bought Conseco bonds with a face value of more than $400 million. It does not disclose how many millions of dollars Appaloosa paid for those bonds, and in an interview with IBJ Tepper declined to say.
Appaloosa would be the only holder of more than 10 percent of Conseco stock. As outlined in Conseco bankruptcy court filings, the company’s common stock after the reorganization would be worth about $1.65 billion, making a 16-percent Appaloosa stake worth $265 million.
Tepper told IBJ it was unclear how long he would stay with Conseco. “We could sit here for two or three years for this investment,” he said. But he added: “If you are going to give me a fabulous price, I am not going to turn it down. … The main purpose pose of the fund is to make money.”
Tepper said his desire to maximize Appaloosa’s returns doesn’t suggest he favors veering from Conseco’s long-term strategy. “The way you make the most money is to run the company for the long term. Always. Always. You never make the money trying to turn a quick profit,” he said.
Yet regulatory filings suggest Tepper makes insurance regulators nervous.
Indiana and Texas regulators, for instance, have negotiated agreements with Tepper that prevent Appaloosa from submitting any proposals to Conseco’s board or shareholders without first running them through their insurance departments.
The Indiana agreement also says no Appaloosa employee or director can seek to join Conseco’s board without approval from state insurance Commissioner Sally McCarty.
“This guy, Mr. Tepper, agreed not to be on the board. That was a big hurdle right there,” said Greg Thomas, chief deputy commissioner of the Indiana Department of Insurance.
He said McCarty was concerned about lawsuits pending against Tepper disclosed in a biographical affidavit. Most of the suits involve Kindred Healthcare, a Louisville company besieged by investor lawsuits during a period Tepper served on its board.
The suits charge the company withheld bad news, enabling Tepper and other insiders to unload millions of dollars in shares before the stock fell. In court papers, attorneys for the company and directors say the litigation has no merit.
Thomas characterized as secondary concerns that Tepper appeared to have limited experience running insurance companies and that as a hedge-fund manager he might be inclined toward a quick sale.
“When you combine that with the litigation that is pending against him, there seemed to be some concern among regulators that we needed to take a proactive approach to protect consumers,” he said.
Tepper otherwise might have been a natural choice for the board. Appaloosa’s substantial investment earned it clout on the committee entrusted with choosing five of the board members. Court papers show an Appaloosa representative was appointed co-chairman of that committee.
Regardless of who the committee enlisted as directors, they’re likely to be more focused on profit maximization than a long-term, local owner might be, said Ken Skarbeck, managing partner of Aldebaran Capital in Indianapolis.
Indeed, the Conseco board has lost most of its local flavor since late 1999, when the company began experiencing financial strain. Before that, seven of the 11 members lived in central Indiana. The current board has just three area residentsformer Lt. Gov. John Mutz, retired Cook Group Treasurer Phil Hathaway and Shea, who moved here two years ago after becoming president.
Mutz, a board member since 1997, said he doesn’t know who’s on the list of new board members. But he hopes it includes local representation beyond Shea. He said the banks and bondholders in charge of filling most of the slots would send a reassuring message by seeking out that additional representation.
“My view is that with a company like this that could operate almost anywhere, the local representatives are likely to look out for the benefits of the local employees and the local community,” he said.
Position: non-executive chairman of Conseco Inc.
Age: 60
Residence: Atlanta
Most recent post: Refired in April as CEO of Atlanta-based ING Americas, one of the five largest life insurance companies in the United States. ING Americas encompasses the North American and South American operations of the Dutch financial-services giant ING Groep NV.
Background: Joined ING upon its 1989 purchase of Security Life of Denver, where he was CEO. Became CEO of ING Americas in 1999. He retired as pan of a management restructuring that left him without a job.
Copyright IBJ Corporation Jul 14, 2003
