after announcing it would stop using gain-on-sale accounting.

The Carmel, Ind., insurance and finance company's stock has dropped 19% since it announced Sept. 8 that it would drop the controversial accounting method.

Gain-on-sale requires lenders to book profits on loan sales in advance. Many of Conseco's counterparts in subprime lending took hits last year when they were forced to change their gain-on-sale assumptions. In announcing the proposed accounting switch, chief financial officer Rollin Dick called it "an important step toward improved investor confidence in Conseco's future earnings quality and visibility. In addition, portfolio accounting is the method preferred by the credit rating agencies."

But the immediate effect of the move is to cancel an estimated $334.5 million Conseco would have booked as income this year under gain-on-sale accounting. It said it is reducing earnings projections by $1.01, to $2.95 a share, this year and by $1.57, to $3 a share, next year as a result of the switch.

What's more, some analysts question whether Conseco has the strength to carry off the switch to portfolio accounting.

"We're moving into an upward rate environment at the end of an economic cycle, and they're lending into the sub-subprime market. That's the one that's going to be hit first,'' said Colin Devine, an analyst at Citigroup Inc.'s Salomon Smith Barney unit. "A standard portfolio lender keeps title to the loans on their books and borrows against them under their own credit. Conseco's credit is not strong enough to let them do that."

Mr. Devine said that Conseco is operating at a cash-flow deficit and that its life insurance unit continues to have flat earnings. "I think you can make the case that total debt-to-capital on that company is over 50% -- that's very leveraged," he said. "The holding company continues to operate at a deficit in terms of cash available. What's available to it from its insurance operations or what's distributable out of GreenTree is not enough to cover its current company debt. They need to keep borrowing" and cannot.

The Securities and Exchange Commission is expected to rule on Conseco's accounting plan by yearend, and Salomon says the agency is unlikely to rubber-stamp it.

"Conseco is attempting to change the form but not the substance of how it finances its GreenTree consumer finance operations," Salomon said in a report, noting that Conseco continues to securitize loans. "We believe Conseco's accounting move will receive considerable scrutiny from both the SEC and (Financial Accounting Standards Board), given that GreenTree arguably represents the industry's securitizing bellwether."

Conseco did not respond by press time to a request for comment.

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