Straight Shooter Takes Aim at Rebuilding Job.

Charles Chokel left a co-CEO post at another insurance firm to join struggling Conseco Inc. as CFO. His diverse background is expected to help the company plot a course for recovery.

Charles B. "Chuck" think of himself as a contrarian investor. So when the opportunity presented itself to work with the highly acclaimed Gary Wench 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 Conscco'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.

Credibility Counts

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 S1.9 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?"

The Trouble Begins

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.

Beginning The Turnaround

Wendt wasted little time once he arrived at Conseco's headquarters in suburban Indianapolis. He raised cash by selling $1.7 billion in non-strategic assets and used it to help retire a big chunk of bank debt that was coming due at the end of this year; that averted a looming crisis that could have pushed the company into bankruptcy. Wendt also began the time-consuming process of transforming Conseco from an acquisition vehicle -- its basic model under Hilbert -- into a true operating company.

This is where Chokel comes in. He may have missed some of Wendt's earliest moves, but Chokel will play a key role in Conseco's future. There is, for starters, another $3.8 billion in long-term debt that still needs to be addressed. "It's pretty clear that we have to pay down the debt, get the cost of our financing down and control expenses," he says.

Chokel's diverse background -- he had a number of operating jobs at Progressive prior to becoming CFO -- will prove extremely valuable as Wendt tries to improve Conseco's operating performance. Says Benacci, "They have to demonstrate to the Street and shareholders that it is a different company than it was under previous management in that there are no surprises."

It may seem imprudent for Chokel to leave a successful company like Progressive to take a chance on the recovery of Conseco, one of the most heavily shorted stocks on the New York Stock Exchange -- hardly a vote of confidence in its future. Chokel sees his gutsy career move differently. "You invest in your career as you invest your money," he says.

There was, for starters, the opportunity to work on a challenging turnaround project with someone of Wendt's reputation. Although he didn't know Wendt, "I've been a GE investor for 15 years and followed his career with interest," says Chokel. He also liked the fact that Conseco was a more diversified company than Progressive and offered exposure to some businesses that were new to him. And Wendt gave Chokel added incentive in the form of options on Conseco stock that could make him a wealthy man if the turnaround succeeds.

Chokel grew up in the well-to-do Cleveland, Ohio, suburb of Shaker Heights and attended Williams College. At one point during his years at Williams, Chokel worked for a mortgage company in the evenings as a loan collector. "I'd call people at home and talk to them about their loans," he says.

After graduation, Chokel took a job as a property/casualty underwriter with the Chubb & Sons insurance company while earning an MBA from the University of Chicago's night program. He later joined Progressive, located outside Cleveland in Mayfield Village, Ohio, and ended up having 15 jobs in 23 years there. Prior to serving as Progressive's co-CEO, Chokel spent seven years as CFO. Earlier assignments included five years as president of the company's California division and a stint as national sales manager.

At Conseco, Chokel has set his sights on an important goal - returning its debt rating to investment-grade status. "I won't predict when, but we've got to make that happen," he says. The company's senior debt currently is rated BBB- by S&P, and Chokel says that if Conseco had an investment-grade credit rating, it could have brought out its recent bond issue at 8 percent or 9 percent rather than nearly 11 percent -- for a significant savings. Apply that lower rate to Conseco's outstanding debt, and the difference would be huge.

The company has attained one important upgrade already. late last year, A.M. Best Co. -- probably the most influential of the insurance rating firms -- raised the company's claims-paying rating to A-. This should improve the competitiveness of Conseco's life insurance business.

Ready For The Job

Chokel believes that his diverse background -- including his operating experience -- makes him a more effective CFO. "You come to understand what are the intrinsic values driving a business," he says. "And once you know that, you understand how to expand it." This insight into what determines a unit's growth and profitability of a particular business will be invaluable as Chokel attempts to improve the company's efficiency.

This can be looked at in a couple of different ways. For example, Chokel wants Conseco to make better decisions about how it allocates capital internally. This requires that company managers have a system for measuring such things as internal rate of return on invested capital. During his first week on the job, Chokel sat through a series of meetings in which managers described how they were meeting their revenue and expense budgets for the year. "Everyone was talking about their results versus plan," he says. "I said that was great, but were they returning 6 percent, 10 percent or 16 percent? No one knew."

Chokel also knows that he needs to attain greater efficiency by greatly reducing the company's cost structure. There are a variety of initiatives going on at the company now, including a "cost-out" program in which a team of consultants are digging through Conseco's various businesses units and processes in search of an immediate $50 million in savings. There's also a longer-term effort that looks closely at how to improve Conseco's productivity by changing many of its processes.

According to Chokel, the "biggest, boldest step" in the company's costreduction effort was Wendt's decision to relocate 2,000 customer-service and backroom processing jobs to India over the next 21 months. There are two primary reasons for doing this. For starters, Conseco was experiencing turnover above 40 percent yearly in some of its customer-service units, which was seriously hurting service levels. Indians, by contrast, consider these highly desirable jobs and are much less likely to quit. They also work for less than most Americans, which could slash customer-service costs as much as 40 percent. Chokel adds that "huge improvements" in India's telecommunications infrastructure make the considerations of time and distance irrelevant. "I'm confident that service is going to improve," he says.

One of Wendt's most controversial decisions to date has been to retain Conseco's mobile home lending business. S&P's Seifert admits she has "mixed feelings" about the old Green Tree unit and worries about its asset quality, particularly as the economy slows. Chokel, influenced perhaps by the experience of collecting mortgage loans back in college, waves that concern aside by pointing out that when times get tough, mobile home borrowers will pay their mortgages before most other creditors. Conseco also has a much higher recovery rate on foreclosed mobile homes than its competitors, which should further reduce its losses,

Hilbert had tried to dump the business before he resigned but couldn't find a buyer. Chokel argues that retaining the mobile home operation is now the right thing to do. Not only is Conseco the largest mobile home lender, it also has a big piece of the market for financing dealer inventory. "Manufactured housing is one of the businesses where we have a sustainable competitive advantage," he says.

It's hard to overstate the value of the credibility that Chokel brings. With some modesty, Chokel says that analysts and investors are still taking most of their cues from Wendt. But his own reputation for integrity will be a boon to the company over the long term. "When analysts come out, they all want to talk with me," he says. "I'm not invisible."

Indeed, one should expect Chuck Chokel to become a whole lot more visible as he helps move Conseco down the path to recovery.

Jack Milligan is a freelance banking and business writer based in Charlottesville, Va.