Dear Mr. Berko:

M.R., Fort Walton Beach, Fla. Dear M.R.:

Conseco Inc. (CNO-$20.18) and its subsidiaries Bankers Life and Casualty and Colonial Penn Life have been writing health insurance, life insurance, annuities, Medicare supplemental policies and cancer policies for almost three decades. CNO did reasonably well, with more than $5 billion in annual revenues, before collapsing under a mountain of debt and filing for reorganization under Chapter 11 of the U.S. Bankruptcy Code in late 2002. The company came out of bankruptcy a year later and is now profitable, with expected 2007 revenues of $4.6 billion and projected earnings of $1.54 a share.

Revenue growth since emerging from bankruptcy has been poky, less than 1 percent per year. Earnings have been just as dawdling and are lower today than they were in the past few years. Net profit margins are a dinky 2.16 percent, return on equity is a blush-worthy 1.48 percent, the shares trade at 11 times earnings and the debt/equity ratio is just 0.30. However, it is interesting to note that the company’s book value is $31 per share and CNO trades at 65 percent of book. One might suggest that the low share price to book value is an indication of the low esteem in which investors hold the company.

Most of us remember a dozen years ago when health insurance companies purposefully and methodically denied coverage to policyholders for even mundane procedures. While denying coverage to policyholders, they also short-sheeted doctors and hospitals. Those health insurers had a virtual monopoly to print money; they made it hand over fist because huge dollops of lobbyists’ dollars guaranteed that state and congressional regulators looked the other way.

Well, it seems that CNO has taken a page from the playbook of the mid-1990s. The bottom line is that insurance companies make big bucks when they don’t pay claims. According to Mary Beth Senkewicz, who last year resigned as head of the National Association of Insurance Commissioners, “they’ll do anything to avoid paying, because if they wait long enough, they know the policyholders will die.”

CNO is going to make a bundle of money this year, because its management has become expert in denying long-term health-care claims. The volume of complaints against Conseco far exceeds those against other long-term-care insurers. Conseco is turning its “denied claims department” into a profit center. These concerns are ignored by state regulators and lawmakers.

I’d buy CNO because potential earnings (thanks to superb claims denial) could rise above $2 a share from projected 2007 earnings of $1.54. That 30 percent increase in earnings is anticipated even with flat revenue growth for next year. So with a price to earnings ratio of 11, CNO should trade at the $22 to $23 level, which is a 10 to 15 percent increase in share price.

Go ahead and buy 300 shares. But my friend Pious Sam wouldn’t recommend buying a long-term-care policy from CNO. Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, Fla. 33429 or e-mail him at malber@adelphia.net.© Copley News Service