form10k.htm




UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-K

[ X ] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2009 or

[    ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from _________ to _________

Commission file number: 001-31792

Conseco, Inc.

Delaware
 
75-3108137
State of Incorporation
 
IRS Employer Identification No.
     
11825 N. Pennsylvania Street
   
Carmel, Indiana  46032
 
(317) 817-6100
Address of principal executive offices
 
Telephone

Securities registered pursuant to Section 12(b) of the Act:

Title of each class
 
Name of Each Exchange on which Registered
Common Stock, par value $0.01 per share
 
New York Stock Exchange
Rights to purchase Series A Junior Participating Preferred Stock
 
New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:
None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes [  ]  No [ X ]

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.
Yes [  ] No [ X ]

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days: Yes [ X ]  No [  ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes [  ] No [  ]
 
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [  ]

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  Large accelerated filer [  ]  Accelerated filer [ X ]  Non-accelerated filer [  ] Smaller reporting company [  ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):  Yes [  ] No [ X ]

At June 30, 2009, the last business day of the Registrant’s most recently completed second fiscal quarter, the aggregate market value of the Registrant’s common equity held by nonaffiliates was approximately $430 million.

Indicate by check mark whether the Registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.  Yes [ X ]  No [  ]

Shares of common stock outstanding as of February 12, 2010:  250,786,216

DOCUMENTS INCORPORATED BY REFERENCE:  Portions of the Registrant’s definitive proxy statement for the 2010 annual meeting of shareholders are incorporated by reference into Part III of this report.
 
 

 

 

TABLE OF CONTENTS
     
   
Page
PART I
   
     
Item 1.
Business of Conseco                                                                                                                 
3
     
Item 1A.
Risk Factors                                                                                                                 
22
     
Item 1B.
Unresolved Staff Comments                                                                                                                 
40
     
Item 2.
Properties                                                                                                                 
40
     
Item 3.
Legal Proceedings                                                                                                                 
40
     
Item 4.
Submission of Matters to a Vote of Security Holders                                                                                                                 
40
     
 
Executive Officers of the Registrant                                                                                                                 
41
     
PART II
   
     
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
42
     
Item 6.
Selected Consolidated Financial Data                                                                                                                 
45
     
Item 7.
Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations
46
     
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk                                                                                                                 
117
     
Item 8.
Consolidated Financial Statements and Supplementary Data                                                                                                                 
117
     
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
204
     
Item 9A.
Controls and Procedures                                                                                                                 
204
     
Item 9B.
Other Information                                                                                                                 
206
     
PART III
   
     
Item 10.
Directors, Executive Officers and Corporate Governance                                                                                                                 
206
     
Item 11.
Executive Compensation                                                                                                                 
206
     
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
206
     
Item 13.
Certain Relationships and Related Transactions, and Director Independence
206
     
Item 14.
Principal Accountant Fees and Services                                                                                                                 
206
     
PART IV
   
     
Item 15.
Exhibits and Financial Statement Schedules                                                                                                                 
207

 
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PART I

ITEM 1.               BUSINESS OF CONSECO.

Conseco, Inc., a Delaware corporation (“CNO”), is the holding company for a group of insurance companies operating throughout the United States that develop, market and administer supplemental health insurance, annuity, individual life insurance and other insurance products.  CNO became the successor to Conseco, Inc., an Indiana corporation (our “Predecessor”), in connection with our bankruptcy reorganization which became effective on September 10, 2003 (the “Effective Date”).  The terms “Conseco,” the “Company,” “we,” “us,” and “our” as used in this report refer to CNO and its subsidiaries or, when the context requires otherwise, our Predecessor and its subsidiaries.

We focus on serving the senior and middle-income markets, which we believe are attractive, underserved, high growth markets.  We sell our products through three distribution channels: career agents, professional independent producers (some of whom sell one or more of our product lines exclusively) and direct marketing.  As of December 31, 2009, we had shareholders’ equity of $3.5 billion and assets of $30.3 billion.  For the year ended December 31, 2009, we had revenues of $4.3 billion and net income of $85.7 million.  See our consolidated financial statements and accompanying footnotes for additional financial information about the Company and its segments.

We manage our business through the following:  three primary operating segments, Bankers Life, Colonial Penn and Conseco Insurance Group, which are defined on the basis of product distribution, and corporate operations, which consists of holding company activities and certain noninsurance company businesses that are not part of our other segments.  Our segments are described below:

· 
Bankers Life, which consists of the business of Bankers Life and Casualty Company (“Bankers Life”), markets and distributes health and life insurance products and annuities to the middle-income senior market through a dedicated field force of over 5,600 career agents and sales managers supported by a network of over 150 community-based branch offices.  Products include Medicare supplement insurance, life insurance, fixed annuities and long-term care insurance.  Bankers Life also markets and distributes Medicare Part D prescription drug plans through a distribution and reinsurance arrangement with Coventry Health Care (“Coventry”) and Medicare Advantage plans primarily through a distribution arrangement with Humana Inc. (“Humana”).
   
· 
Colonial Penn, which consists of the business of Colonial Penn Life Insurance Company (“Colonial Penn”), markets primarily graded benefit and simplified issue life insurance directly to customers through television advertising, direct mail, the internet and telemarketing.  Colonial Penn markets its products under its own brand name.
   
· 
Conseco Insurance Group, which markets and distributes specified disease insurance, accident, disability, life insurance and annuities to middle-income consumers at home and at the worksite.  These products are marketed through Performance Matters Associates, Inc., a wholly owned subsidiary, and through independent marketing organizations and insurance agencies.  Products being marketed by Conseco Insurance Group are underwritten by Conseco Insurance Company, Conseco Health Insurance Company (“Conseco Health”) and Washington National Insurance Company (“Washington National”).  This segment also includes blocks of long-term care and other insurance business, in these companies and in Conseco Life Insurance Company (“Conseco Life”), which we no longer market.

On November 12, 2008, Conseco and CDOC, Inc. (“CDOC”), a wholly owned subsidiary of Conseco, completed the transfer (the “Transfer”) of the stock of Senior Health Insurance Company of Pennsylvania (“Senior Health”) to Senior Health Care Oversight Trust, an independent trust (the “Independent Trust”) for the exclusive benefit of Senior Health’s long-term care policyholders.  Consummation of the transaction was subject to the approval of the Pennsylvania Insurance Department.  As a result of the Transfer, a substantial portion of our long-term care business is presented as a discontinued operation.

In connection with the Transfer, the Company entered into a $125.0 million Senior Note due November 12, 2013 (the “Senior Note”), payable to Senior Health.  The note has a five-year maturity date; a 6 percent interest rate; and requires annual principal payments of $25.0 million.  As a condition of the order from the Pennsylvania Insurance Department approving the Transfer, Conseco agreed that it would not pay cash dividends on its common stock while any portion of the $125.0 million note remained outstanding.

 
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OUR STRATEGIC DIRECTION AND 2010 PRIORITIES

Our mission is to be a premier provider of life insurance, supplemental health products and annuities to America’s middle-income consumers with a focus on seniors and to provide value to our shareholders.  We believe we can accomplish this mission through the effective execution of the following strategies:

·  
Remain focused on the Needs of Our Middle Income Market Customers.  We define our business by our target markets and not by our products.  We continue to adapt our distribution, product offerings and product features to the evolving needs of our middle income and senior customers.  We provide a broad range of middle market products to meet the protection needs of our customers and to provide them with longevity solutions.  We are able to reach our customers through our career agents and independent agent relationships, directly, through our Colonial Penn direct distribution platform, and at work, through our worksite marketing channel.

·  
Expand and Improve the Efficiency of our Distribution Channels.  The continued development and maintenance of our distribution channels is critical to our continued sales growth.  We dedicate substantial resources to the recruitment, development and retention of our Bankers Life career agents and seek to maximize their productivity by providing them with high quality leads for new business opportunities.  Investments in our Colonial Penn direct distribution platform have enabled us to achieve significant sales growth since 2004.  In our Conseco Insurance Group segment, we have refocused efforts on supplemental health and life insurance products to utilize the competitive strengths of our wholly owned distributor, Performance Matters Associates, Inc.

·  
Seek Profitable Growth.  We continue to pursue profitable growth opportunities in the middle income market.  We focus on marketing and selling products that meet the needs of our customers and we believe it will enable us to provide long-term value for our shareholders.  As part of this strategy, we have de-emphasized products with return characteristics that we consider to be inadequate.

·  
Pursue Operational Efficiencies and Cost Reduction Opportunities.  We seek to strengthen our competitive position with a focus on cost control and enhanced operational efficiency.  Our efforts include:

·  
improvements to our policy administration processes and procedures to reduce costs and improve customer service;

·  
continued consolidation of policy processing systems, including conversions and elimination of systems;

·  
streamlining administrative procedures and consolidating processes across the enterprise to reduce personnel costs; and

·  
eliminating expenses associated with the marketing of those products that do not meet our return objectives.

·  
Strengthen Our Financial Profile.  In response to the challenging economic environment and to our financial situation, our management team has taken several capital and risk management initiatives to enhance our capital and liquidity position and to improve our profitability.  These initiatives included the private placement of new convertible debentures and shares of our common stock and warrants and the public offering of our common stock.  The proceeds from these recapitalization transactions were used to refinance our 3.5% Convertible Debentures due September 30, 2035 (the “3.5% Debentures”) and to decrease the outstanding indebtedness under our senior credit agreement, with the remaining amounts available for general corporate purposes.  In addition, we have pursued several reinsurance transactions that have improved the capitalization of our life insurance subsidiaries and have served to offset the negative effects of the adverse economic and investment environment.

·  
Continue to manage and reduce the risk profile of our business where possible.  We actively manage the risks associated with our business and have taken several steps to reduce the risk profile of our business.  In the fourth quarter of 2007, we completed a transaction to coinsure 100 percent of a block of inforce equity-indexed annuity and fixed annuity business sold through our independent distribution channel.  Such business was largely out of the surrender charge periods and had policyholder account balances in excess of $2.5 billion.  This transaction significantly reduced the asset and liability risks associated with this business.  In the fourth quarter of 2008, we

 
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transferred the stock of Senior Health to an independent trust, eliminating our exposure to a substantial block of long-term care business previously included in our run-off segment.  In 2009, we began coinsuring a significant portion of the new long-term care business written through our Bankers Life segment.  These transactions have reduced our exposure to long-term care business that has produced volatile earnings in the past.

We have purposefully avoided products like variable life, variable annuity and guaranteed investment contracts that we believe would expose us to risks that are not commensurate with potential profits.  We plan to continue to emphasize products that are straight forward and have a lower risk profile.  We believe such products meet various needs of the middle income markets we serve.  We will continue to manage the investment risks associated with our insurance business by:

·  
maintaining a largely investment-grade, diversified fixed-income portfolio;

·  
maximizing the spread between the investment income we earn and the yields we pay on investment products within acceptable levels of risk; and

·  
continually tailoring our investment portfolio to consider expected liability durations, cash flows and other requirements.

·  
Capitalize on favorable trends in our markets.  It is our vision to be a premier provider of insurance products to America’s middle-income families and seniors.  We believe our middle-income target market is underserved by the financial services industry.  In addition, our focus on seniors provides us with significant growth opportunities as an estimated 78 million “baby boomer” Americans born between 1946 and 1964 plan for retirement and become eligible for Medicare.  Our middle-income market consumers are impacted by a number of trends, including:

·  
increased life expectancy;

·  
discontinuance or reduction in employer-sponsored benefit programs;

·  
rising healthcare costs; and

·  
projected gaps between the needs of seniors and amounts provided by government-sponsored plans such as Social Security and Medicare.

We believe that our focus on middle-income families and seniors will position us favorably to capitalize on the future growth in these markets.

Our major goals for 2010 include:

·  
Continuing to improve the focus and profitability mix of sales at Conseco Insurance Group.

·  
Maintaining strong growth at Bankers Life.

·  
Improving earnings stability and reducing volatility.

·  
Determining that improved controls implemented in 2009 have operated for a period of time sufficient to demonstrate their effectiveness and thereby remediating our material weakness in internal controls.

·  
Continuing to actively manage our enterprise exposure to long-term care business.

·  
Improving profitability of existing lines of business or disposing of underperforming blocks of business.

OTHER INFORMATION

CNO is the successor to our Predecessor.  We emerged from bankruptcy on the Effective Date.  Our Predecessor was organized in 1979 as an Indiana corporation and commenced operations in 1982.  Our executive offices are located at 11825 N. Pennsylvania Street, Carmel, Indiana 46032, and our telephone number is (317) 817-6100.  Our annual reports on Form

 
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10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act are available free of charge on our website at www.conseco.com as soon as reasonably practicable after they are electronically filed with, or furnished to, the Securities and Exchange Commission (the “SEC”).  These filings are also available on the SEC’s website at www.sec.gov.  In addition, the public may read and copy any document we file at the SEC’s Public Reference Room located at 100 F Street, NE, Room 1580, Washington, D.C. 20549.  The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.  Copies of these filings are also available, without charge, from Conseco Investor Relations, 11825 N. Pennsylvania Street, Carmel, IN  46032.

Our website also includes the charters of our Audit and Enterprise Risk Committee, Executive Committee, Governance and Strategy Committee, Human Resources and Compensation Committee and Investment Committee, as well as our Corporate Governance Operating Principles and our Code of Business Conduct and Ethics that applies to all officers, directors and employees.  Copies of these documents are available free of charge on our website at www.conseco.com or from Conseco Investor Relations at the address shown above.  Within the time period specified by the SEC and the New York Stock Exchange, we will post on our website any amendment to our Code of Business Conduct and Ethics and any waiver applicable to our principal executive officer, principal financial officer or principal accounting officer.

In June 2009, we filed with the New York Stock Exchange the Annual CEO Certification regarding the Company’s compliance with their Corporate Governance listing standards as required by Section 303A.12(a) of the New York Stock Exchange Listed Company Manual.  In addition, we have filed as exhibits to this 2009 Form 10-K the applicable certifications of the Company’s Chief Executive Officer and Chief Financial Officer required under Section 302 of the Sarbanes-Oxley Act of 2002 regarding the Company’s public disclosures.

Data in Item 1 are provided as of or for the year ended December 31, 2009 (as the context implies), unless otherwise indicated.

MARKETING AND DISTRIBUTION

Insurance

Our insurance subsidiaries develop, market and administer supplemental health insurance, annuity, individual life insurance and other insurance products.  We sell these products through three primary distribution channels:  career agents, professional independent producers (some of whom sell one or more of our product lines exclusively) and direct marketing.  We had premium collections of $4.1 billion, $4.5 billion and $4.0 billion in 2009, 2008 and 2007, respectively.

Our insurance subsidiaries collectively hold licenses to market our insurance products in all fifty states, the District of Columbia, and certain protectorates of the United States.  Sales to residents of the following states accounted for at least five percent of our 2009 collected premiums:  Florida (7.6 percent), California (6.9 percent), Pennsylvania (6.4 percent) and Texas (6.1 percent).

We believe that most purchases of life insurance, accident and health insurance and annuity products occur only after individuals are contacted and solicited by an insurance agent.  Accordingly, the success of our distribution system is largely dependent on our ability to attract and retain experienced and highly motivated agents.  A description of our primary distribution channels is as follows:

Career Agents.  This agency force of approximately 5,600 agents and sales managers working from over 150 branch offices establishes one-on-one contact with potential policyholders and promotes strong personal relationships with existing policyholders.  The career agents sell primarily supplemental health and long-term care insurance policies, life insurance and annuities.  In 2009, this distribution channel accounted for $3,000.9 million, or 73 percent, of our total collected premiums.  These agents sell Bankers Life and Casualty policies, as well as Coventry’s Medicare Part D and Medicare Advantage products, and typically visit the prospective policyholder’s home to conduct personalized “kitchen-table” sales presentations. After the sale of an insurance policy, the agent serves as a contact person for policyholder questions, claims assistance and additional insurance needs.

Professional Independent Producers.  Professional independent producers are a diverse network of independent agents, insurance brokers and marketing organizations.  The general agency and insurance brokerage distribution system is comprised of independent licensed agents doing business in all fifty states, the District of Columbia, and certain protectorates of the United States.  In 2009, this distribution channel in our Conseco Insurance Group segment collected $919.1 million, or

 
6

 

22 percent, of our total premiums.

Marketing organizations typically recruit agents for the Conseco Insurance Group segment by advertising our products and commission structure through direct mail advertising or through seminars for agents and brokers.  These organizations bear most of the costs incurred in marketing our products.  We compensate the marketing organizations by paying them a percentage of the commissions earned on new sales generated by agents recruited by such organizations.  Certain of these marketing organizations are specialty organizations that have a marketing expertise or a distribution system related to a particular product or market, such as worksite and individual supplemental health products.  During 1999 and 2000, the Conseco Insurance Group segment purchased three organizations that specialize in marketing and distributing supplemental health products and combined them under the name PMA.  In 2009, the PMA distribution channel accounted for $212.6 million, or 5 percent, of our total collected premiums.

Direct Marketing.  This distribution channel is engaged primarily in the sale of graded benefit life insurance policies through Colonial Penn.  In 2009, this channel accounted for $194.8 million, or 5 percent, of our total collected premiums.

Products

The following table summarizes premium collections by major category and segment for the years ended December 31, 2009, 2008 and 2007 (dollars in millions):

Total premium collections
   
2009
   
2008
   
2007
 
Supplemental health:
                 
Bankers Life                                       
  $ 1,711.7     $ 1,887.0     $ 1,546.1  
Colonial Penn                                       
    7.5       8.9       10.4  
Conseco Insurance Group
    600.4       621.8       633.4  
                         
Total supplemental health
    2,319.6       2,517.7       2,189.9  
                         
Annuities:
                       
Bankers Life                                       
    1,060.4       1,224.1       885.5  
Conseco Insurance Group
    78.4       129.8       368.6  
                         
Total annuities                                   
    1,138.8       1,353.9       1,254.1  
                         
Life:
                       
Bankers Life                                       
    228.8       209.4       200.0  
Colonial Penn                                       
    187.3       174.1       113.7  
Conseco Insurance Group
    240.3       269.8        287.3  
                         
Total life                                   
    656.4       653.3       601.0  
                         
Total premium collections                                           
  $ 4,114.8     $ 4,524.9     $ 4,045.0  
                         

In addition, the long-term care business included in our discontinued operations had collected premiums of $225.9 million and $269.1 million in 2008 and 2007, respectively.

 
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Our insurance companies collected premiums from the following products:

Supplemental Health

Supplemental Health Premium Collections (dollars in millions)
                   
   
2009
   
2008
   
2007
 
                   
Medicare supplement:
                 
Bankers Life                                                                             
  $ 653.7     $ 636.6     $ 636.1  
Colonial Penn                                                                             
    7.0       8.1       9.4  
Conseco Insurance Group                                                                             
    177.8       203.8        225.9  
                         
Total
    838.5       848.5       871.4  
                         
Long-term care:
                       
Bankers Life 
    601.6       625.7       622.4  
Conseco Insurance Group                                                                             
    31.4       33.7       36.7  
                         
Total                                                                           
    633.0       659.4       659.1  
                         
Prescription Drug Plan and Medicare Advantage products included in Bankers Life
    444.4       614.0       277.8  
                         
Specified disease products included in Conseco Insurance Group
    383.3       374.6       359.2  
                         
Other:
                       
Bankers Life                                                                             
    12.0       10.7       9.8  
Colonial Penn                                                                             
    .5       .8       1.0  
Conseco Insurance Group                                                                             
    7.9       9.7       11.6  
                         
Total                                                                           
    20.4       21.2       22.4  
                         
Total supplemental health premium collections                                                                                
  $ 2,319.6     $ 2,517.7     $ 2,189.9  

The following describes our major supplemental health products:

Medicare Supplement.  Medicare supplement collected premiums were $838.5 million during 2009 or 20 percent of our total collected premiums.  Medicare is a federal health insurance program for disabled persons and seniors (age 65 and older).  Part A of the program provides protection against the costs of hospitalization and related hospital and skilled nursing facility care, subject to an initial deductible, related coinsurance amounts and specified maximum benefit levels.  The deductible and coinsurance amounts are subject to change each year by the federal government.  Part B of Medicare covers doctor’s bills and a number of other medical costs not covered by Part A, subject to deductible and coinsurance amounts for charges approved by Medicare.  The deductible amount is subject to change each year by the federal government.

Medicare supplement policies provide coverage for many of the hospital and medical expenses which the Medicare program does not cover, such as deductibles, coinsurance costs (in which the insured and Medicare share the costs of medical expenses) and specified losses which exceed the federal program’s maximum benefits.  Our Medicare supplement plans automatically adjust coverage to reflect changes in Medicare benefits.  In marketing these products, we currently concentrate on individuals who have recently become eligible for Medicare by reaching the age of 65.  Approximately 55 percent of new sales of Medicare supplement policies in 2009 were to individuals who had recently reached the age of 65.

Both Bankers Life and Conseco Insurance Group sell Medicare supplement insurance.

Long-Term Care.  Long-term care collected premiums were $633.0 million during 2009, or 15 percent of our total collected premiums.  Long-term care products provide coverage, within prescribed limits, for nursing homes, home healthcare, or a combination of both.  We sell the long-term care plans primarily to retirees and, to a lesser degree, to older self-employed individuals in the middle-income market.

 
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Current nursing home care policies cover incurred charges up to a daily fixed-dollar limit with an elimination period (which, similar to a deductible, requires the insured to pay for a certain number of days of nursing home care before the insurance coverage begins), subject to a maximum benefit.  Home healthcare policies cover incurred charges after a deductible or elimination period and are subject to a weekly or monthly maximum dollar amount, and an overall benefit maximum.  Comprehensive policies cover both nursing home care and home healthcare.  We monitor the loss experience on our long-term care products and, when necessary, apply for rate increases in the jurisdictions in which we sell such products. Regulatory filings are made before we increase our premiums on these products.

A small portion of our long-term care business resides in the Conseco Insurance Group segment.  This business was sold through the independent producer distribution channel and was largely underwritten by certain of our subsidiaries prior to their acquisitions by our Predecessor in 1996 and 1997.  The performance of these blocks of business did not meet the expectations we had when the blocks were acquired.  As a result, we ceased selling new long-term care policies through this distribution channel in 2003.

We continue to sell long-term care insurance through the Bankers Life career agent distribution channel.  This business is underwritten using stricter underwriting and pricing standards than had previously been used on our acquired blocks of long-term care business included in the Conseco Insurance Group segment.

Prescription Drug Plan and Medicare Advantage.  The Medicare Prescription Drug, Improvement and Modernization Act of 2003 (“MMA”) provided for the introduction of a prescription drug program under Medicare Part D.  Persons eligible for Medicare can receive their Part D coverage through a stand-alone Prescription Drug Plan (“PDP”).  In order to offer a PDP product to our current and potential future policyholders without investment in management and infrastructure, we entered into a national distribution agreement with Coventry to use our career and independent agents to distribute Coventry’s PDP product, Advantra Rx.  We receive a fee based on the number of PDP plans sold through our distribution channels.  In addition, Conseco has a quota-share reinsurance agreement with Coventry for Conseco enrollees that provides Conseco with a specified percentage of net premiums and related profits subject to a risk corridor.  The Part D program was effective January 1, 2006.  PDP collected premiums were $75.4 million during 2009 or 2 percent of our total collected premiums.

Conseco expanded its strategic alliance with Coventry by entering into national distribution agreements under which our career agents began distributing Coventry’s Private-Fee-For-Service (“PFFS”) plan, with coverage beginning January 1, 2007.  The PFFS product, Advantra Freedom, is a Medicare Advantage plan designed to provide seniors with more choices and better coverage at lower cost than original Medicare and Medicare Advantage plans offered through HMOs.  Under the agreement, we received a fee based on the number of PFFS plans sold through our distribution channels.  In addition, Conseco had a quota-share reinsurance agreement with Coventry for Conseco enrollees that provided Conseco with a specified percentage of the net premiums and related profits.  Coventry decided to cease selling PFFS plans effective January 1, 2010.  On July 22, 2009, Bankers Life announced a strategic alliance under which it will offer Humana’s Medicare Advantage plans to its policyholders and consumers nationwide through its career agency force and will receive marketing fees based on sales.  Effective January 1, 2010, the Company will no longer be assuming the underwriting risk related to PFFS business.

During 2007 and 2008, Conseco entered into three quota-share reinsurance agreements with Coventry related to the PFFS business written by Coventry under certain group policies.  Conseco received a specified percentage of the net premiums and related profits associated with this business as long as the ceded revenue margin is less than or equal to five percent.  In order to reduce the required statutory capital associated with the assumption of this business, Conseco terminated two group policy quota-share agreements as of December 31, 2008 and terminated the last agreement on June 30, 2009.  Premiums assumed through these reinsurance agreements totaled $47.5 million in 2009.  The income before income taxes related to the assumed business was $14.0 million during the year ended December 31, 2009.

PFFS collected premiums were $369.0 million in 2009 or 9 percent of our total collected premiums.

Specified Disease Products.  Specified disease collected premiums were $383.3 million during 2009, or 9 percent of our total collected premiums.  These policies generally provide fixed or limited benefits.  Cancer insurance and heart/stroke products are guaranteed renewable individual accident and health insurance policies.  Payments under cancer insurance policies are generally made directly to, or at the direction of, the policyholder following diagnosis of, or treatment for, a covered type of cancer.  Heart/stroke policies provide for payments directly to the policyholder for treatment of a covered heart disease, heart attack or stroke.  Accident products combine insurance for accidental death with limited benefit disability

 
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income insurance.  Hospital indemnity products provide a fixed dollar amount per day of confinement in a hospital.  The benefits provided under the specified disease policies do not necessarily reflect the actual cost incurred by the insured as a result of the illness, or accident, and benefits are not reduced by any other medical insurance payments made to or on behalf of the insured.

Approximately 75 percent of the total number of our specified disease policies inforce was sold with return of premium or cash value riders.  The return of premium rider generally provides that, after a policy has been in force for a specified number of years or upon the policyholder reaching a specified age, we will pay to the policyholder, or in some cases, a beneficiary under the policy, the aggregate amount of all premiums paid under the policy, without interest, less the aggregate amount of all claims incurred under the policy.  For some policies, the return of premium rider does not have any claim offset.  The cash value rider is similar to the return of premium rider, but also provides for payment of a graded portion of the return of premium benefit if the policy terminates before the return of premium benefit is earned.

Other Supplemental Health Products.  Other supplemental health product collected premiums were $20.4 million during 2009.  This category includes various other health products such as major medical health insurance, senior hospital indemnity and disability income products which are sold in small amounts or other products which are no longer actively marketed.

Annuities

Annuity premium collections (dollars in millions)

   
2009
   
2008
   
2007
 
Equity-indexed annuity:
                 
Bankers Life
  $ 350.1     $ 522.8     $ 437.4  
Conseco Insurance Group
    76.6       123.7        344.6  
                         
Total equity-indexed annuity premium collections
    426.7       646.5       782.0  
                         
Other fixed annuity:
                       
Bankers Life
    710.3       701.3       448.1  
Conseco Insurance Group
    1.8       6.1       24.0  
                         
Total fixed annuity premium collections
    712.1       707.4       472.1  
                         
Total annuity premium collections
  $ 1,138.8     $ 1,353.9     $ 1,254.1  

During 2009, we collected annuity premiums of $1,138.8 million or 28 percent of our total premiums collected.  Annuity products include equity-indexed annuity, traditional fixed rate annuity and single premium immediate annuity products sold through both Bankers Life and Conseco Insurance Group.  Annuities offer a tax-deferred means of accumulating savings for retirement needs, and provide a tax-efficient source of income in the payout period.  Our major source of income from fixed rate annuities is the spread between the investment income earned on the underlying general account assets and the interest credited to contractholders’ accounts.  For equity-indexed annuities, our major source of income is the spread between the investment income earned on the underlying general account assets and the cost of the index options purchased to provide index-based credits to the contractholders’ accounts.

Sales of many of our annuity products have been affected by the financial strength ratings assigned to our insurance subsidiaries by independent rating agencies.  The current financial strength rating of our primary insurance subsidiaries from A.M. Best Company (“A.M. Best”) is “B” which was downgraded from “B+” on March 4, 2009.  During 2009, we continued to reduce the emphasis on the sale of annuities through professional independent agents, who are more sensitive in the near-term to A.M. Best ratings.  Career agents selling annuity products in the Bankers Life segment are less sensitive in the near-term to A.M. Best ratings, since these agents only sell our products.

In 2009, the change in mix of premium collections between Bankers Life’s equity-indexed products and fixed annuity products has fluctuated due to volatility in the financial markets in recent periods.  In addition, premium collections from Bankers Life’s fixed annuity products decreased in the fourth quarter of 2009 as continuing decreases in new money interest rates resulted in a reduction to the bonus on our bonus interest annuity.  A new product, which will provide more flexibility in setting the bonus interest rate is expected to launch in early 2010.

 
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Premium collections from Bankers Life’s fixed annuity products increased sharply in the last half of 2008 due to volatility in the financial markets which made these products more attractive to customers.

The following describes the major annuity products:

Equity-Indexed Annuities.  These products accounted for $426.7 million, or 11 percent, of our total premium collections during 2009.  The account value (or “accumulation value”) of these annuities is credited in an amount that is based on changes in a particular index during a specified period of time.  Within each contract issued, each equity-indexed annuity specifies:

·  
The index to be used;

·  
The time period during which the change in the index is measured and, at the end of which, the change in the index is applied to the account value.  The time period of the contract ranges from 1 to 4 years.

·  
The method used to measure the change in the index.

·  
The measured change in the index may be multiplied by a “participation rate” (percentage of change in the index) before the credit is applied.  Some policies guarantee the initial participation rate for the life of the contract, and some vary the rate for each period.

·  
The measured change in the index may also be limited to a “cap” before the credit is applied.  Some policies guarantee the initial cap for the life of the contract, and some vary the cap for each period.

·  
The measured change in the index may also be limited to the excess in the measured change over a “margin” before the credit is applied.  Some policies guarantee the initial margin for the life of the contract, and some vary the margin for each period.

These products have guaranteed minimum cash surrender values, regardless of actual index performance and the resulting indexed-based interest credits applied.

We generally buy call options and similar investments on the applicable indices in an effort to hedge potential increases to policyholder benefits resulting from increases in the indices to which the product’s return is linked.

Fixed Rate Annuities.  These products include fixed rate single-premium deferred annuities (“SPDAs”), flexible premium deferred annuities (“FPDAs”) and single-premium immediate annuities (“SPIAs”).  These products accounted for $712.1 million, or 17 percent, of our total premium collections during 2009.  Our fixed rate SPDAs and FPDAs typically have an interest rate (the “crediting rate”) that is guaranteed by the Company for the first policy year, after which we have the discretionary ability to change the crediting rate to any rate not below a guaranteed minimum rate.  The guaranteed rates on annuities written recently range from 2.5 percent to 3.0 percent, and the rates, on all policies inforce range from 2.5 percent to 6.0 percent.  The initial crediting rate is largely a function of:

·  
the interest rate we can earn on invested assets acquired with the new annuity fund deposits;

·  
the costs related to marketing and maintaining the annuity products; and

·  
the rates offered on similar products by our competitors.

For subsequent adjustments to crediting rates, we take into account current and prospective yields on investments, annuity surrender assumptions, competitive industry pricing and the crediting rate history for particular groups of annuity policies with similar characteristics.

In 2009, a significant portion of our new annuity sales were “bonus interest” products.  The initial crediting rate on these products specifies a bonus crediting rate of 1.0 to 3.0 percent of the annuity deposit for the first policy year only.  After the first year, the bonus interest portion of the initial crediting rate is automatically discontinued, and the renewal crediting rate is established.  As of December 31, 2009, the average crediting rate, excluding bonuses, on our outstanding traditional

 
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annuities was 3.7 percent.

Withdrawals from deferred annuities (including equity-indexed annuities) are generally subject to a surrender charge of 3 percent to 19 percent in the first year, declining to zero over a 4 to 16 year period, depending on issue age and product. Surrender charges are set at levels intended to protect us from loss on early terminations and to reduce the likelihood that policyholders will terminate their policies during periods of increasing interest rates.  This practice is intended to lengthen the duration of policy liabilities and to enable us to maintain profitability on such policies.

Penalty-free withdrawals from deferred annuities of up to 10 percent of either premiums or account value are available in most plans after the first year of the annuity’s term.

Some deferred annuity products apply a market value adjustment during the surrender charge period.  This adjustment is determined by a formula specified in the annuity contract, and may increase or decrease the cash surrender value depending on changes in the amount and direction of market interest rates or credited interest rates at the time of withdrawal. The resulting cash surrender values will be at least equal to the guaranteed minimum values.

SPIAs accounted for $14.5 million, or .4 percent, of our total premiums collected in 2009.  SPIAs are designed to provide a series of periodic payments for a fixed period of time or for life, according to the policyholder’s choice at the time of issuance.  Once the payments begin, the amount, frequency and length of time over which they are payable are fixed.  SPIAs often are purchased by persons at or near retirement age who desire a steady stream of payments over a future period of years.  The single premium is often the payout from a terminated annuity contract.  The implicit interest rate on SPIAs is based on market conditions when the policy is issued.  The implicit interest rate on our outstanding SPIAs averaged 7.0 percent at December 31, 2009.

Life Insurance

Life insurance premium collections (dollars in millions)

   
2009
   
2008
   
2007
 
Interest-sensitive life products:
                 
Bankers Life                                                                 
  $ 63.2     $ 63.7     $ 63.4  
Colonial Penn                                                                 
    .5       .5       .5  
Conseco Insurance Group                                                                 
    180.6       202.5       214.0  
                         
Total interest-sensitive life premium collections
    244.3       266.7       277.9  
                         
Traditional life:
                       
Bankers Life                                                                 
    165.6       145.7       136.6  
Colonial Penn                                                                 
    186.8       173.6       113.2  
Conseco Insurance Group                                                                 
    59.7       67.3       73.3  
                         
Total traditional life premium collections
    412.1       386.6       323.1  
                         
Total life insurance premium collections                                                                    
  $ 656.4     $ 653.3     $ 601.0  

Life products include traditional and interest-sensitive life insurance products.  These products are currently sold through Bankers Life, Conseco Insurance Group and Colonial Penn.  During 2009, we collected life insurance premiums of $656.4 million, or 16 percent, of our total collected premiums.  Sales of life products are affected by the financial strength ratings assigned to our insurance subsidiaries by independent rating agencies.  See “Competition” below.

Interest-Sensitive Life Products.  These products include universal life and other interest-sensitive life products that provide whole life insurance with adjustable rates of return related to current interest rates.  They accounted for $244.3 million, or 5.9 percent, of our total collected premiums in 2009.  These products are marketed by professional independent producers and, to a lesser extent, career agents (including professional independent producers and career agents specializing in worksite sales).  The principal differences between universal life products and other interest-sensitive life products are policy provisions affecting the amount and timing of premium payments.  Universal life policyholders may vary the frequency and size of their premium payments, and policy benefits may also fluctuate according to such payments.  Premium payments under other interest-sensitive policies may not be varied by the policyholders.  Universal life products include

 
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equity-indexed universal life products.  The account value of these policies is credited with interest at a guaranteed rate, plus additional interest credits based on changes in a particular stock index during a specified time period.

Traditional Life.  These products accounted for $412.1 million, or 10 percent, of our total collected premiums in 2009.  Traditional life policies, including whole life, graded benefit life, term life and single premium whole life products, are marketed through professional independent producers, career agents and direct response marketing.  Under whole life policies, the policyholder generally pays a level premium over an agreed period or the policyholder’s lifetime.  The annual premium in a whole life policy is generally higher than the premium for comparable term insurance coverage in the early years of the policy’s life, but is generally lower than the premium for comparable term insurance coverage in the later years of the policy’s life.  These policies combine insurance protection with a savings component that gradually increases in amount over the life of the policy.  The policyholder may borrow against the savings component generally at a rate of interest lower than that available from other lending sources.  The policyholder may also choose to surrender the policy and receive the accumulated cash value rather than continuing the insurance protection.  Term life products offer pure insurance protection for life with a guaranteed level premium for a specified period of time — typically 10, 15, 20 or 30 years.  In some instances, these products offer an option to return the premium at the end of the guaranteed period.

Traditional life products also include graded benefit life insurance products.  Graded benefit life products accounted for $180.5 million, or 4.4 percent, of our total collected premiums in 2009.  Graded benefit life insurance products are offered on an individual basis primarily to persons age 50 to 80, principally in face amounts of $350 to $30,000, without medical examination or evidence of insurability.  Premiums are paid as frequently as monthly.  Benefits paid are less than the face amount of the policy during the first two years, except in cases of accidental death.  Our Colonial Penn segment markets graded benefit life policies under its own brand name using direct response marketing techniques.  New policyholder leads are generated primarily from television, print advertisements and direct response mailings.

Traditional life products also include single premium whole life insurance.  This product requires one initial lump sum payment in return for providing life insurance protection for the insured’s entire lifetime.  Single premium whole life products accounted for $35.3 million, or .9 percent, of our total collected premiums in 2009.

INVESTMENTS

40|86 Advisors, Inc. (“40|86 Advisors”), a registered investment adviser and wholly-owned subsidiary of Conseco, Inc., manages the investment portfolios of our insurance subsidiaries.  40|86 Advisors had approximately $21.9 billion of assets (at fair value) under management at December 31, 2009, of which $21.2 billion were assets of our subsidiaries and $.7 billion were assets managed for third parties.  Our general account investment strategies are to:

·  
maintain a largely investment-grade, diversified fixed-income portfolio;

·  
maximize the spread between the investment income we earn and the yields we pay on investment products within acceptable levels of risk;

·  
provide adequate liquidity;

·  
construct our investment portfolio considering expected liability durations, cash flows and other requirements; and

·  
maximize total return through active investment management.

During 2009, 2008 and 2007, we recognized net realized investment losses of $60.5 million, $262.4 million and $158.0 million, respectively, excluding any such amounts included in discontinued operations.  During 2009, net realized investment losses were comprised of:  (i) $134.9 million of net gains from the sales of investments (primarily fixed maturities); and (ii) $195.4 million of writedowns of investments for other than temporary declines in fair value recognized through net income ($385.0 million, prior to the $189.6 million of impairment losses recognized through other comprehensive loss).  During 2008, net realized investment losses were comprised of:  (i) $100.1 million of net losses from the sales of investments (primarily fixed maturities); and (ii) $162.3 million of writedowns of investments for other than temporary declines in fair value.  A substantial portion of the net investment losses realized on sales of investments in 2007 were recognized on the sale of securities collateralized by sub prime residential mortgage loans.  We decided to sell these securities given our evaluation regarding the potential effect of future adverse developments on the value and recoverable amount of these securities.  For further information on our sub prime holdings, refer to the caption entitled “Other Investments” in the “Investments” section of Management’s Discussion and Analysis of Financial Condition and Results of

 
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Operations.

Investment activities are an integral part of our business because investment income is a significant component of our revenues.  The profitability of many of our insurance products is significantly affected by spreads between interest yields on investments and rates credited on insurance liabilities.  Although substantially all credited rates on SPDAs, FPDAs and interest sensitive life products may be changed annually (subject to minimum guaranteed rates), changes in crediting rates may not be sufficient to maintain targeted investment spreads in all economic and market environments.  In addition, competition, minimum guaranteed rates and other factors, including the impact of surrenders and withdrawals, may limit our ability to adjust or to maintain crediting rates at levels necessary to avoid narrowing of spreads under certain market conditions.  As of December 31, 2009, the average yield, computed on the cost basis of our actively managed fixed maturity portfolio, was 5.7 percent, and the average interest rate credited or accruing to our total insurance liabilities was 4.5 percent.

We manage the equity-based risk component of our equity-indexed annuity products by:

·  
purchasing equity-based options with similar payoff characteristics; and

·  
adjusting the participation rate to reflect the change in the cost of such options (such cost varies based on market conditions).

The price of the options we purchase to manage the equity-based risk component of our equity-indexed annuities varies based on market conditions.  The price of the options generally increases with increases in the volatility of the applicable indices, which may either reduce the profitability of the equity-indexed products or cause us to lower participation rates.  Accordingly, volatility of the indices adds uncertainty regarding the profitability of our equity-indexed products.  We attempt to mitigate this risk by adjusting the participation rates to reflect the change in the cost of such options.

We seek to manage the interest rate risk inherent in our invested assets with the interest rate characteristics of our insurance liabilities.  We attempt to minimize this exposure by managing the durations and cash flows of our fixed maturity investments and insurance liabilities.  For example, duration measures the expected change in the fair value of assets and liabilities for a given change in interest rates.  If interest rates increase by 1 percent, the fair value of a fixed maturity security with a duration of 5 years is typically expected to decrease in value by approximately 5 percent.  When the estimated durations of assets and liabilities are similar, a change in the value of assets should be largely offset by a change in the value of liabilities.

We calculate asset and liability durations using our estimates of future asset and liability cash flows.  At December 31, 2009, the duration of our fixed maturity investments (as modified to reflect prepayments and potential calls) was approximately 9.0 years and the duration of our insurance liabilities was approximately 8.1 years.  These durations indicate that while our investment portfolio had a longer duration and, consequently, was more sensitive to interest rate fluctuations than our liabilities at that date, this sensitivity was within corporate guidelines.  We generally seek to minimize the gap between asset and liability durations.

For information regarding the composition and diversification of the investment portfolio of our subsidiaries, see “Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations — Investments.”

COMPETITION

The markets in which we operate are highly competitive.  Our current ratings have had an adverse impact on our ability to compete in certain markets.  Compared to Conseco, many companies in the financial services industry are larger, have greater capital, technological and marketing resources, have better access to capital and other sources of liquidity at a lower cost, offer broader and more diversified product lines and have larger staffs.  An expanding number of banks, securities brokerage firms and other financial intermediaries also market insurance products or offer competing products, such as mutual fund products, traditional bank investments and other investment and retirement funding alternatives.  We also compete with many of these companies and others in providing services for fees.  In most areas, competition is based on a number of factors including pricing, service provided to distributors and policyholders and ratings.  Conseco’s subsidiaries must also compete to attract and retain the allegiance of agents, insurance brokers and marketing companies.

In the individual health insurance business, companies compete primarily on the bases of marketing, service and price. Pursuant to federal regulations, the Medicare supplement products offered by all companies have standardized policy features.  This increases the comparability of such policies and intensifies competition based on other factors.  See “Insurance

 
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Underwriting” and “Governmental Regulation” for additional information.  In addition to competing with the products of other insurance companies, commercial banks, thrifts, mutual funds and broker dealers, our insurance products compete with health maintenance organizations, preferred provider organizations and other health care-related institutions which provide medical benefits based on contractual agreements.

We believe that the volatility experienced in the financial markets in recent periods, its impact on the capital position of many competitors, and subsequent actions by regulators and rating agencies have altered the competitive environment.  In particular, these factors have emphasized financial strength as a significant differentiator from the perspective of consumers.  The effects of the current market conditions may also lead to consolidation in the insurance industry.  Although we can not predict the ultimate impact of these conditions, we believe that the strongest companies will have a competitive advantage as a result of the current circumstances.

An important competitive factor for life insurance companies is the ratings they receive from nationally recognized rating organizations.  Agents, insurance brokers and marketing companies who market our products and prospective purchasers of our products use the ratings of our insurance subsidiaries as one factor in determining which insurer’s products to market or purchase.  Ratings have the most impact on our annuity, interest-sensitive life insurance and long-term care products.  Insurance financial strength ratings are opinions regarding an insurance company's financial capacity to meet the obligations of its insurance policies in accordance with their terms.  They are not directed toward the protection of investors, and such ratings are not recommendations to buy, sell or hold securities.
 
On October 16, 2009, A.M. Best affirmed the financial strength rating of “B” of our primary insurance subsidiaries and the ratings outlook as negative.  Also, A.M. Best removed the ratings from under review with negative implications.  On March 4, 2009, A.M. Best downgraded the financial strength ratings of our primary insurance subsidiaries to “B” from “B+” and such ratings had been placed under review with negative implications.  The “B” rating is assigned to companies that have a fair ability, in A.M. Best’s opinion, to meet their current obligations to policyholders, but are financially vulnerable to adverse changes in underwriting and economic conditions.  A.M. Best ratings for the industry currently range from “A++ (Superior)” to “F (In Liquidation)” and some companies are not rated.  An “A++” rating indicates a superior ability to meet ongoing obligations to policyholders.  A.M. Best has sixteen possible ratings.  There are six ratings above our “B” rating and nine ratings that are below our rating.

On October 14, 2009, Standard & Poor’s Corporation (“S&P”) affirmed the financial strength rating of “BB-” of our primary insurance subsidiaries and revised the outlook to stable from credit watch with negative implications.  On March 2, 2009, S&P had placed the financial strength ratings of our primary insurance subsidiaries on credit watch with negative implications.  On February 26, 2009, S&P downgraded the financial strength ratings of our primary insurance subsidiaries to “BB-” from “BB+” and the outlook remained negative for our primary insurance subsidiaries.   A “stable” designation means that a rating is not likely to change.  S&P financial strength ratings range from “AAA” to “R” and some companies are not rated.  Rating categories from “BB” to “CCC” are classified as “vulnerable”, and pluses and minuses show the relative standing within a category.  In S&P’s view, an insurer rated “BB” has marginal financial security characteristics and although positive attributes exist, adverse business conditions could lead to an insufficient ability to meet financial commitments.  S&P has twenty-one possible ratings.  There are twelve ratings above our “BB-” rating and eight ratings that are below our rating.

On October 14, 2009, Moody’s Investor Services, Inc. (“Moody’s”) affirmed the financial strength rating of “Ba2” of our primary insurance subsidiaries and revised the outlook to positive from negative.  On March 3, 2009, Moody’s downgraded the financial strength ratings of our primary insurance subsidiaries to “Ba2” from “Ba1” and the outlook remained negative for our primary insurance subsidiaries.  Moody’s financial strength ratings range from “Aaa” to “C”.  Rating categories from “Aaa” to “Baa” are classified as “secure” by Moody’s and rating categories from “Ba” to “C” are considered “vulnerable” and these ratings may be supplemented with numbers “1”, “2”, or “3” to show relative standing within a category.  In Moody’s view, an insurer rated “Ba2” offers questionable financial security and, often, the ability of these companies to meet policyholders’ obligations may be very moderate and thereby not well safeguarded in the future.  Moody’s has twenty-one possible ratings.  There are eleven ratings above our “Ba2” rating and nine ratings that are below our rating.

A.M. Best, S&P and Moody’s review our ratings from time to time.  We cannot provide any assurance that the ratings of our insurance subsidiaries will remain at their current levels or predict the impact of any future rating changes on our business.

 
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INSURANCE UNDERWRITING

Under regulations promulgated by the National Association of Insurance Commissioners (“NAIC”) (an association of state regulators and their staffs) and adopted as a result of the Omnibus Budget Reconciliation Act of 1990, we are prohibited from underwriting our Medicare supplement policies for certain first-time purchasers.  If a person applies for insurance within six months after becoming eligible by reason of age, or disability in certain limited circumstances, the application may not be rejected due to medical conditions.  Some states prohibit underwriting of all Medicare supplement policies.  For other prospective Medicare supplement policyholders, such as senior citizens who are transferring to our products, the underwriting procedures are relatively limited, except for policies providing prescription drug coverage.

Before issuing long-term care products, we generally apply detailed underwriting procedures to assess and quantify the insurance risks.  We require medical examinations of applicants (including blood and urine tests, where permitted) for certain health insurance products and for life insurance products which exceed prescribed policy amounts.  These requirements vary according to the applicant’s age and may vary by type of policy or product.  We also rely on medical records and the potential policyholder’s written application.  In recent years, there have been significant regulatory changes with respect to underwriting certain types of health insurance.  An increasing number of states prohibit underwriting and/or charging higher premiums for substandard risks.  We monitor changes in state regulation that affect our products, and consider these regulatory developments in determining the products we market and where we market them.

Our specified disease policies are individually underwritten using a simplified issue application.  Based on an applicant’s responses on the application, the underwriter either:  (i) approves the policy as applied for; (ii) approves the policy with reduced benefits; or (iii) rejects the application.

Most of our life insurance policies are underwritten individually, although standardized underwriting procedures have been adopted for certain low face-amount life insurance coverages.  After initial processing, insurance underwriters obtain the information needed to make an underwriting decision (such as medical examinations, doctors’ statements and special medical tests).  After collecting and reviewing the information, the underwriter either:  (i) approves the policy as applied for; (ii) approves the policy with an extra premium charge because of unfavorable factors; or (iii) rejects the application.

We underwrite group insurance policies based on the characteristics of the group and its past claim experience.  Graded benefit life insurance policies are issued without medical examination or evidence of insurability.  There is minimal underwriting on annuities.

LIABILITIES FOR INSURANCE PRODUCTS

At December 31, 2009, the total balance of our liabilities for insurance products was $24.3 billion.  These liabilities are generally payable over an extended period of time.  The profitability of our insurance products depends on pricing and other factors.  Differences between our expectations when we sold these products and our actual experience could result in future losses.

Liabilities for insurance products are calculated using management’s best judgments, based on our past experience and standard actuarial tables, of mortality, morbidity, lapse rates, investment experience and expense levels.  For all of our insurance products, we establish an active life reserve, a liability for due and unpaid claims, claims in the course of settlement and incurred but not reported claims.  In addition, for our supplemental health insurance business, we establish a reserve for the present value of amounts not yet due on incurred claims.  Many factors can affect these reserves and liabilities, such as economic and social conditions, inflation, hospital and pharmaceutical costs, changes in doctrines of legal liability and extra-contractual damage awards.  Therefore, our reserves and liabilities are necessarily based on extensive estimates, assumptions and historical experience.  Establishing reserves is an uncertain process, and it is possible that actual claims will materially exceed our reserves and have a material adverse effect on our results of operations and financial condition.  Our financial results depend significantly upon the extent to which our actual claims experience is consistent with the assumptions we used in determining our reserves and pricing our products.  If our assumptions with respect to future claims are incorrect, or our reserves are insufficient to cover our actual losses and expenses, we would be required to increase our liabilities, which would negatively affect our operating results.

 
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REINSURANCE

Consistent with the general practice of the life insurance industry, our subsidiaries enter into both facultative and treaty agreements of indemnity reinsurance with other insurance companies in order to reinsure portions of the coverage provided by our insurance products.  Indemnity reinsurance agreements are intended to limit a life insurer’s maximum loss on a large or unusually hazardous risk or to diversify its risk.  Indemnity reinsurance does not discharge the original insurer’s primary liability to the insured.  Our reinsured business is ceded to numerous reinsurers.  Based on our periodic review of their financial statements, insurance industry reports and reports filed with state insurance departments, we believe the assuming companies are able to honor all contractual commitments.

As of December 31, 2009, the policy risk retention limit of our insurance subsidiaries was generally $.8 million or less. Reinsurance ceded by Conseco represented 26 percent of gross combined life insurance inforce and reinsurance assumed represented .9 percent of net combined life insurance inforce.  Our principal reinsurers at December 31, 2009 were as follows (dollars in millions):

   
Ceded life
   
A.M. Best
 
Name of Reinsurer
 
insurance inforce
   
rating
 
             
Wilton Reassurance Company (“Wilton Re”)
  $ 3,994.8       A
Swiss Re Life and Health America Inc.                                                                        
    3,335.4       A  
Security Life of Denver Insurance Company                                                                        
    2,762.5       A  
Reassure America Life Insurance Company
(“REALIC”) (a)                                                                    
    1,360.4       A  
RGA Reinsurance Company                                                                        
    906.4       A +
Munich American Reassurance Company                                                                        
    858.4       A +
Lincoln National Life Insurance Company                                                                        
    591.5       A +
Scor Global Life Re Insurance Co of Texas                                                                        
    506.9       A
Hannover Life Reassurance Company                                                                        
    371.4       A  
General Re Life Corporation                                                                        
    367.6       A ++
All others (b)                                                                        
    1,406.2          
                 
    $ 16,461.5          
____________________
 (a)
In addition to the life insurance business summarized above, REALIC has assumed certain annuity business from our insurance subsidiaries through a coinsurance agreement.  Such business had total insurance policy liabilities of $2.0 billion at December 31, 2009.
 (b)
No other single reinsurer assumed greater than 2 percent of the total ceded business inforce.

EMPLOYEES

At December 31, 2009, we had approximately 3,500 full time employees, including 1,175 employees supporting our Bankers Life segment, 350 employees supporting our Colonial Penn segment and 1,975 employees supporting our Conseco Insurance Group segment and corporate segment.  None of our employees are covered by a collective bargaining agreement.  We believe that we have good relations with our employees.

GOVERNMENTAL REGULATION

Our insurance businesses are subject to extensive regulation and supervision by the insurance regulatory agencies of the jurisdictions in which they operate.  This regulation and supervision is primarily for the benefit and protection of customers, and not for the benefit of investors or creditors.  State laws generally establish supervisory agencies that have broad regulatory authority, including the power to:

·  
grant and revoke business licenses;

·  
regulate and supervise sales practices and market conduct;

·  
establish guaranty associations;

 
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·  
license agents;

·  
approve policy forms;

·  
approve premium rates and premium rate increases for some lines of business such as long-term care and Medicare supplement;

·  
establish reserve requirements;

·  
prescribe the form and content of required financial statements and reports;

·  
determine the reasonableness and adequacy of statutory capital and surplus;

·  
perform financial, market conduct and other examinations;

·  
define acceptable accounting principles; and

·  
regulate the types and amounts of permitted investments.

In addition, the NAIC issues model laws and regulations, many of which have been adopted by state insurance regulators, relating to:

·  
reserve requirements;

·  
risk-based capital (“RBC”) standards;

·  
codification of insurance accounting principles;

·  
investment restrictions;

·  
restrictions on an insurance company’s ability to pay dividends; and

·  
product illustrations.

In addition to the regulations described above, most states have also enacted laws or regulations regarding the activities of insurance holding company systems, including acquisitions, the terms of surplus debentures, the terms of transactions between insurance companies and their affiliates and other related matters.  Various notice and reporting requirements generally apply to transactions between insurance companies and their affiliates within an insurance holding company system, depending on the size and nature of the transactions.  These requirements may include prior regulatory approval or prior notice for certain material transactions.  Currently, the Company and its insurance subsidiaries are registered as a holding company system pursuant to such laws and regulations in the domiciliary states of the insurance subsidiaries.  In addition, the Company’s insurance subsidiaries routinely report to other jurisdictions.

Insurance regulators may prohibit the payment of dividends or other payments by our insurance subsidiaries to parent companies if they determine that such payment could be adverse to our policyholders or contract holders.  Otherwise, the ability of our insurance subsidiaries to pay dividends is subject to state insurance department regulations and is based on the financial statements of our insurance subsidiaries prepared in accordance with statutory accounting practices prescribed or permitted by regulatory authorities, which differ from generally accepted accounting principles (“GAAP”).  These regulations generally permit dividends to be paid from statutory earned surplus of the insurance company for any 12-month period in amounts equal to the greater of, or in a few states, the lesser of:

·  
statutory net gain from operations or statutory net income for the prior year; or

·  
10 percent of statutory capital and surplus at the end of the preceding year.

 
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Any dividends in excess of these levels require the approval of the director or commissioner of the applicable state insurance department.

In accordance with an order from the Florida Office of Insurance Regulation, Washington National may not distribute funds to any affiliate or shareholder without prior notice to the Florida Office of Insurance Regulation.  In addition, the RBC and other capital requirements described below can also limit, in certain circumstances, the ability of our insurance subsidiaries to pay dividends.

Our insurance subsidiaries that have long-term care business have made insurance regulatory filings seeking actuarially justified rate increases on our long-term care policies.  Most of our long-term care business is guaranteed renewable, and, if necessary rate increases are not approved, we may be required to write off all or a portion of the insurance acquisition costs and establish a premium deficiency reserve.  If we are unable to raise our premium rates because we fail to obtain approval for actuarially justified rate increases in one or more states, our financial condition and results of operations could be adversely affected.

During 2006, the Florida legislature enacted a statute, known as House Bill 947, intended to provide new protections to long-term care insurance policyholders.  Among other requirements, this statute requires: (i) claim experience of affiliated long-term care insurers to be pooled in determining justification for rate increases for Florida policyholders; and (ii) insurers with closed blocks of long-term care insurance to not raise rates above the comparable new business premium rates offered by affiliated insurers.  The manner in which the requirements of this statute are applied to our long-term care policies in Florida (including policies subject to the order from the Florida Office of Insurance Regulation as described in “Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations”) may affect our ability to achieve our anticipated rate increases on this business.

Most states have also enacted legislation or adopted administrative regulations that affect the acquisition (or sale) of control of insurance companies.  The nature and extent of such legislation and regulations vary from state to state.  Generally, these regulations require an acquirer of control to file detailed information and the plan of acquisition, and to obtain administrative approval prior to the acquisition of control.  “Control” is generally defined as the direct or indirect power to direct or cause the direction of the management and policies of a person and is rebuttably presumed to exist if a person or group of affiliated persons directly or indirectly owns or controls 10 percent or more of the voting securities of another person.

Using statutory statements filed with state regulators annually, the NAIC calculates certain financial ratios to assist state regulators in monitoring the financial condition of insurance companies.  A “usual range” of results for each ratio is used as a benchmark.  In the past, variances in certain ratios of our insurance subsidiaries have resulted in inquiries from insurance departments, to which we have responded.  These inquiries have not led to any restrictions affecting our operations.

The NAIC’s RBC requirements provide a tool for insurance regulators to determine the levels of statutory capital and surplus an insurer must maintain in relation to its insurance and investment risks and the need for possible regulatory attention.  The RBC requirements provide four levels of regulatory attention, varying with the ratio of the insurance company’s total adjusted capital (defined as the total of its statutory capital and surplus, asset valuation reserve and certain other adjustments) to its RBC (as measured on December 31 of each year), as follows:

·  
if a company’s total adjusted capital is less than 100 percent but greater than or equal to 75 percent of its RBC (the “Company Action Level”), the company must submit a comprehensive plan to the regulatory authority proposing corrective actions aimed at improving its capital position;

·  
if a company’s total adjusted capital is less than 75 percent but greater than or equal to 50 percent of its RBC, the regulatory authority will perform a special examination of the company and issue an order specifying the corrective actions that must be taken;

·  
if a company’s total adjusted capital is less than 50 percent but greater than or equal to 35 percent of its RBC (the “Authorized Control Level”), the regulatory authority may take any action it deems necessary, including placing the company under regulatory control; and

·  
if a company’s total adjusted capital is less than 35 percent of its RBC (the “Mandatory Control Level”), the regulatory authority must place the company under its control.

 
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In addition, the RBC requirements provide for a trend test if a company’s total adjusted capital is between 100 percent and 125 percent of its RBC at the end of the year.  The trend test calculates the greater of the decrease in the margin of total adjusted capital over RBC:

·  
between the current year and the prior year; and

·  
for the average of the last 3 years.

It assumes that such decrease could occur again in the coming year.  Any company whose trended total adjusted capital is less than 95 percent of its RBC would trigger a requirement to submit a comprehensive plan as described above for the Company Action Level.

In January 2009, the NAIC considered, but declined, a number of reserve and capital relief requests made by the American Council of Life Insurers, acting on behalf of its member companies.  These requests, if adopted, would have generally resulted in lower statutory reserve and capital requirements, effective December 31, 2008, for life insurance companies.  However, notwithstanding the NAIC’s action on these requests, insurance companies have the right to approach the insurance regulator in their respective state of domicile and request relief.  Insurance subsidiaries of the Company requested and were granted certain permitted practices, with a beneficial impact on statutory capital as of December 31, 2008.

The 2009 statutory annual statements filed with the state insurance regulators of each of our insurance subsidiaries reflected total adjusted capital in excess of the levels subjecting the subsidiaries to any regulatory action.  No assurances can be given that we will make future contributions or otherwise make capital available to our insurance subsidiaries.

In addition to the RBC requirements, certain states have established minimum capital requirements for insurance companies licensed to do business in their state.  These additional requirements generally have not had a significant impact on the Company’s insurance subsidiaries, but the capital requirements in Florida have caused Conseco Health to maintain a higher level of capital and surplus than it would otherwise maintain and have thus limited its ability to pay dividends.  Refer to the note entitled “Statutory Information (Based on Non-GAAP Measures)” in our notes to consolidated financial statements for more information on our RBC ratios.

In addition, although we are under no obligation to do so, we may elect to contribute additional capital to strengthen the surplus of certain insurance subsidiaries.  Any election regarding the contribution of additional capital to our insurance subsidiaries could affect the ability of our insurance subsidiaries to pay dividends to the holding company.  The ability of our insurance subsidiaries to pay dividends is also impacted by various criteria established by rating agencies to maintain or receive higher ratings and by the capital levels that we target for our insurance subsidiaries.
 
The NAIC has adopted model long-term care policy language providing nonforfeiture benefits and has proposed a rate stabilization standard for long-term care policies.  Various bills are introduced from time to time in the U.S. Congress which propose the implementation of certain minimum consumer protection standards in all long-term care policies, including guaranteed renewability, protection against inflation and limitations on waiting periods for pre-existing conditions.  Federal legislation permits premiums paid for qualified long-term care insurance to be tax-deductible medical expenses and for benefits received on such policies to be excluded from taxable income.

Our insurance subsidiaries are required, under guaranty fund laws of most states, to pay assessments up to prescribed limits to fund policyholder losses or liabilities of insolvent insurance companies.  Assessments can be partially recovered through a reduction in future premium taxes in some states.

Most states mandate minimum benefit standards and benefit ratios for accident and health insurance policies.  We are generally required to maintain, with respect to our individual long-term care policies, minimum anticipated benefit ratios over the entire period of coverage of not less than 60 percent.  With respect to our Medicare supplement policies, we are generally required to attain and maintain an actual benefit ratio, after three years, of not less than 65 percent.  We provide to the insurance departments of all states in which we conduct business annual calculations that demonstrate compliance with required minimum benefit ratios for both long-term care and Medicare supplement insurance.  These calculations are prepared utilizing statutory lapse and interest rate assumptions.  In the event that we fail to maintain minimum mandated benefit ratios, our insurance subsidiaries could be required to provide retrospective refunds and/or prospective rate reductions.  We believe that our insurance subsidiaries currently comply with all applicable mandated minimum benefit ratios.

 
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The federal government does not directly regulate the insurance business.  However, federal legislation and administrative policies in several areas, including pension regulation, age and sex discrimination, financial services regulation, securities regulation, privacy laws and federal taxation, do affect the insurance business.  Legislation has been introduced from time to time in Congress that could result in the federal government assuming some direct role in the regulation of insurance.  In view of recent events involving certain financial institutions, it is possible that the federal government will heighten its oversight of insurers, possibly through a federal system of insurance regulation.

Numerous proposals to reform the current health care system (including Medicare) have been introduced in Congress and in various state legislatures.  Proposals have included, among other things, modifications to the existing employer-based insurance system, a quasi-regulated system of “managed competition” among health plans, and a single-payer, public program.  Changes in health care policy could significantly affect our business.  For example, Federal comprehensive major medical or long-term care programs, if proposed and implemented, could partially or fully replace some of Conseco’s current products.  Recent federal and state legislation and legislative proposals relating to healthcare reform contain features that could severely limit or eliminate our ability to vary our pricing terms or apply medical underwriting standards, which could have the effect of increasing our benefit ratios and adversely affecting our financial results.  Also, Medicare reform and legislation concerning prescription drugs could affect our ability to price or sell our products.

The United States Department of Health and Human Services has issued regulations under the Health Insurance Portability and Accountability Act relating to standardized electronic transaction formats, code sets and the privacy of member health information.  These regulations, and any corresponding state legislation, affect our administration of health insurance.

A number of states have passed or are considering legislation that limits the differentials in rates that insurers could charge for health care coverages between new business and renewal business for similar demographic groups.  State legislation has also been adopted or is being considered that would make health insurance available to all small groups by requiring coverage of all employees and their dependents, by limiting the applicability of pre-existing conditions exclusions, by requiring insurers to offer a basic plan exempt from certain benefits as well as a standard plan, or by establishing a mechanism to spread the risk of high risk employees to all small group insurers.  Congress and various state legislators have from time to time proposed changes to the health care system that could affect the relationship between health insurers and their customers, including external review.  We cannot predict with certainty the effect of any legislative proposals on our insurance businesses and operation.

The asset management activities of 40|86 Advisors are subject to various federal and state securities laws and regulations.  The SEC and certain state securities commissions are the principal regulators of our asset management operations.  In addition, Conseco has a subsidiary that is registered as a broker/dealer, which is regulated by the Financial Industry Regulatory Authority and by state securities commissioners.

FEDERAL INCOME TAXATION

Our annuity and life insurance products generally provide policyholders with an income tax advantage, as compared to other savings investments such as certificates of deposit and bonds, because taxes on the increase in value of the products are deferred until received by policyholders.  With other savings investments, the increase in value is generally taxed as earned.  Annuity benefits and life insurance benefits, which accrue prior to the death of the policyholder, are generally not taxable until paid.  Life insurance death benefits are generally exempt from income tax.  Also, benefits received on immediate annuities (other than structured settlements) are recognized as taxable income ratably, as opposed to the methods used for some other investments which tend to accelerate taxable income into earlier years.  The tax advantage for annuities and life insurance is provided in the Internal Revenue Code (the “Code”), and is generally followed in all states and other United States taxing jurisdictions.

In recent years, Congress enacted legislation to lower marginal tax rates, reduce the federal estate tax gradually over a ten-year period, with total elimination of the federal estate tax in 2010, and increase contributions that may be made to individual retirement accounts and 401(k) accounts.  While these tax law changes will sunset at the beginning of 2011 absent future congressional action, they could in the interim diminish the appeal of our annuity and life insurance products.  Additionally, Congress has considered, from time to time, other possible changes to the U.S. tax laws, including elimination of the tax deferral on the accretion of value of certain annuities and life insurance products.  It is possible that further tax legislation will be enacted which would contain provisions with possible adverse effects on our annuity and life insurance products.

 
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Our insurance company subsidiaries are taxed under the life insurance company provisions of the Code.  Provisions in the Code require a portion of the expenses incurred in selling insurance products to be deducted over a period of years, as opposed to immediate deduction in the year incurred.  This provision increases the tax for statutory accounting purposes, which reduces statutory earnings and surplus and, accordingly, decreases the amount of cash dividends that may be paid by the life insurance subsidiaries.

Our income tax expense includes deferred income taxes arising from temporary differences between the financial reporting and tax bases of assets and liabilities, capital loss carryforwards and net operating loss carryforwards (“NOLs”).  In evaluating our deferred income tax assets, we consider whether it is more likely than not that the deferred income tax assets will be realized.  The ultimate realization of our deferred income tax assets depends upon generating future taxable income during the periods in which our temporary differences become deductible and before our NOLs expire.  In addition, the use of our NOLs is dependent, in part, on whether the Internal Revenue Service (“IRS”) ultimately agrees with the tax position we plan to take in our current and future tax returns.  Accordingly, with respect to our deferred tax assets, we assess the need for a valuation allowance on an ongoing basis.

Based upon information existing at the time of our emergence from bankruptcy, we established a valuation allowance equal to our entire balance of net deferred income tax assets because, at that time, the realization of such deferred tax assets in future periods was uncertain.  As of December 31, 2009, 2008 and 2007, we determined that a full valuation allowance was no longer necessary.  However, as further discussed in the note to the consolidated financial statements entitled “Income Taxes”, we continue to believe that it is necessary to have a valuation allowance on a portion of our deferred tax asset.  This determination was made by evaluating each component of the deferred tax assets and assessing the effects of limitations or issues on the value of such component to be fully recognized in the future.

ITEM 1A.                         RISK FACTORS.

Conseco and its businesses are subject to a number of risks including general business and financial risk factors.  Any or all of such factors could have a material adverse effect on the business, financial condition or results of operations of Conseco.  In addition, please refer to the “Cautionary Statement Regarding Forward-Looking Statements” included in “Item 7 – Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations”.

We have substantial indebtedness that will require a significant portion of the cash available to CNO, restricting our ability to take advantage of business, strategic or financing opportunities.

As of December 31, 2009, we had aggregate principal amount of indebtedness of $1,045.1 million, consisting of the following (dollars in millions):

Second Amended and Restated Credit Agreement dated as of
October 10, 2006 among Conseco, Bank of America, N.A. as Agent, J.P. Morgan Chase Bank, N.A., as Syndication Agent and other parties (“Senior Credit Agreement”)
  $ 652.1  
3.5% Debentures                                                                              
    116.5  
7.0% Convertible Senior Debentures due 2016 (“7.0% Debentures”)
    176.5  
Senior Note                                                                              
    100.0  
         
    $ 1,045.1  

CNO’s indebtedness will require over $218 million in cash to service in 2010 (assuming the holders of our 3.5% Debentures require the Company to repurchase their 3.5% Debentures on September 30, 2010 pursuant to their put right).   See “Liquidity of the Holding Companies” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations for additional information regarding the sources and uses of cash by CNO.

 
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The principal payments on our direct corporate obligations (including payments required under the Senior Credit Agreement, the Senior Note, the 3.5% Debentures and the 7.0% Debentures) are as follows (dollars in millions):

2010                                     
  $ 141.5  
(a)
2011                                     
    60.0    
2012                                     
    65.0    
2013                                     
    602.1    
2016                                     
    176.5    
           
    $ 1,045.1    
_____________
 
(a)
Includes $116.5 million of the 3.5% Debentures.  The holders of our 3.5% Debentures have the right to require the Company to repurchase their 3.5% Debentures for cash on September 30, 2010.  This amount assumes that all remaining holders of our 3.5% Debentures exercise that right.  In February 2010, as further discussed in the note to the consolidated financial statements entitled “Subsequent Events”, we repurchased $64 million of the 3.5% Debentures and issued $64 million of the 7.0% Debentures.

The payment of principal and interest on our outstanding indebtedness will require a substantial portion of CNO’s available cash each year, which, as a holding company, is limited, as further described in the risk factor entitled “We are a holding company and our liquidity and ability to meet our obligations may be constrained by the ability of our insurance subsidiaries to distribute cash to us” below.  Our debt obligations may restrict our ability to take advantage of business, strategic or financing opportunities.
 
    We expect to fund our obligation to repurchase the 3.5% Debentures that we may be required to repurchase on September 30, 2010 primarily by the issuance of additional 7.0% Debentures pursuant to the purchase agreement described in the note to the consolidated financial statements entitled “Notes Payable – Direct Corporate Obligations.”  The purchase agreement for the sale of the 7.0% Debentures may be terminated by Morgan Stanley & Co. Incorporated (“Morgan Stanley”), as the initial purchaser, if with respect to any closing date for the offering of the 7.0% Debentures, any Form 10-Q or 10-K that we are required to file with the SEC on or before October 5, 2010 (or such earlier closing date by which all $293.0 million aggregate principal amount of debentures have been issued and delivered) is not filed on or before the date we are required to file such Form 10-Q or Form 10-K, as the case may be, with the SEC; our financial statements included in such Form 10-Q have not been subjected to a completed SAS 100 review or our independent registered public accountants have not issued an audit report on our financial statements included in such Form 10-K, as the case may be; and we fail to deliver an officer’s certificate to the initial purchaser by the business day following the deadline for filing such Form 10-Q or Form 10-K, as the case may be, stating that our failure to file such Form 10-Q or Form 10-K, as the case may be, within the SEC’s deadlines pertains to something other than in connection with the conclusion of our management or our independent registered public accountants that there is a substantial doubt about our ability to continue as a going concern; provided, that, if we fail to file such Form 10-Q or Form 10-K, as the case may be, and fail to deliver such officer’s certificate, the initial purchaser may, upon prior written notice, elect to terminate the purchase agreement, and thus each forward purchase agreement, prior to such subsequent closing date.

As disclosed in the note to the consolidated financial statements entitled “Notes Payable – Direct Corporate Obligations” and in the following risk factor, our Senior Credit Agreement contains various restrictive covenants and required financial ratios that we must meet or maintain and that limit our operating flexibility.  If we default under any of these covenants, the lenders could declare all outstanding borrowings, accrued interest and fees to be immediately due and payable.  In such event, the holders of our 3.5% Debentures, our 7.0% Debentures and the Senior Note could elect to take similar action with respect to those debts.  If that were to occur, we would not have sufficient liquidity to repay our indebtedness.  Absent sufficient liquidity to repay our indebtedness, our management may conclude that there is substantial doubt regarding our ability to continue as a going concern.

If we fail to pay interest or principal on the 3.5% Debentures or the 7.0% Debentures, we will be in default under the applicable indenture governing such debentures.  A default under either indenture could also lead to a default under agreements governing our existing and future indebtedness, including under our Senior Credit Agreement.  If the repayment of the related indebtedness were to be accelerated after any applicable notice or grace periods, we likely would not have sufficient funds to repay our indebtedness.

 
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Our Senior Credit Agreement contains various restrictive covenants and required financial ratios that limit our operating flexibility.  The violation of one or more loan covenant requirements would entitle our lenders to declare all outstanding amounts under the Senior Credit Agreement to be due and payable.

As of December 31, 2009, we had $652.1 million principal amount of debt outstanding under our Senior Credit Agreement.  Pursuant to our Senior Credit Agreement, we agreed to a number of covenants and other provisions that restrict our ability to borrow money and pursue some operating activities without the prior consent of the lenders.  We also agreed to meet or maintain various financial ratios and balances.  Our ability to meet these financial tests and maintain ratings may be affected by events beyond our control.  There are several conditions or circumstances that could lead to an event of default under our Senior Credit Agreement, as described below.  In the event of an event of default, management would likely conclude there is substantial doubt regarding our ability to continue as a going concern, which would have material adverse consequences to our financial condition and results of operations, as further described below.

The Senior Credit Agreement prohibits or restricts, among other things:

·  
the payment of cash dividends on our common stock;

·  
the repurchase of our common stock;

·  
the issuance of additional debt or capital stock;

·  
liens;

·  
the transfer or sale of assets unless the net proceeds are reinvested in our insurance operations or used to reduce the amount due under the Senior Credit Agreement;

·  
certain affiliate transactions;

·  
certain investment activities;

·  
change in business; and

·  
prepayment of indebtedness (other than the Senior Credit Agreement).

The Senior Credit Agreement also requires that our annual audited consolidated financial statements be accompanied by an opinion from a nationally-recognized independent public accounting firm stating that such audited consolidated financial statements present fairly, in all material respects, our financial position and results of operations in conformity with GAAP for the periods indicated.  For us to remain in compliance with the Senior Credit Agreement, such opinion cannot include an explanatory paragraph regarding our ability to continue as a going concern or similar qualification.  Although we were in compliance with the provisions of the Senior Credit Agreement as of December 31, 2009, these provisions represent significant restrictions on the manner in which we may operate our business.  If we default under any of these provisions, the lenders could declare all outstanding borrowings, accrued interest and fees to be due and payable.  If that were to occur, we would likely not have sufficient liquidity to repay amounts due under the Senior Credit Agreement in full or any of our other debts.

Pursuant to the Senior Credit Agreement, as long as the debt to total capitalization ratio (as defined in the Senior Credit Agreement) is greater than 20% or certain insurance subsidiaries (as defined in the Senior Credit Agreement) have financial strength ratings of less than A- from A.M. Best, we are required to make mandatory prepayments with all or a portion of the proceeds from the following transactions or events: (i) the issuance of certain indebtedness; (ii) certain equity issuances; and (iii) certain asset sales or casualty events.  Pursuant to the terms of the Senior Credit Agreement, we made payments of:  (i) $36.8 million (equal to half of the net proceeds from the issuance and sale of shares of our common stock and warrants to Paulson & Co. Inc. (“Paulson”)); and (ii) $161.4 million (equal to $150 million plus half of the net proceeds in excess of $200 million from the public offering of 49.5 million shares of our common stock) in 2009.


 
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The following chart summarizes:  (i) the most significant financial ratios and balances we must maintain pursuant to our Senior Credit Agreement; (ii) the current ratios and balances as of December 31, 2009; and (iii) the margins for adverse developments before such ratio or balance requirement is not met (dollars in millions):

     
Balance or
   
     
ratio as of
 
Margin for adverse
 
Covenant under the
 
December 31,
 
development from
 
Senior Credit Agreement
 
2009
 
December 31, 2009 levels
           
Aggregate risk-based capital ratio
Greater than or equal to 200% from March 31, 2009 through December 31, 2010; greater than or equal to 225% from March 31, 2011 through December 31, 2011; and thereafter, greater than 250%.
    309%  
Reduction to total adjusted capital (defined as combined statutory capital and surplus plus the asset valuation reserve and 50 percent of the balance of the provision of policyholder dividends) of approximately $507 million, or an increase to required risk-based capital of approximately $253 million.
             
Combined statutory capital and surplus
Greater than $1,100 from March 31, 2009 through December 31, 2010; greater than $1,200 million from March 31, 2011 through December 31, 2011; and thereafter, $1,300 million.
 
$1,439 million
 
Reduction to combined statutory capital and surplus of approximately $339 million.
             
Debt to total capitalization ratio
Not more than 32.5% from March 31, 2009 through December 31, 2009 and thereafter, not more than 30%.
    21.6%  
Reduction to shareholders’ equity of approximately $1,620 million or additional debt of $780 million.
             
Interest coverage ratio
Greater than or equal to 1.50 to 1 for rolling four quarters from March 31, 2009 through December 31, 2010; greater than or equal to 1.75 to 1 for rolling four quarters from March 31, 2011 through December 31, 2011; and thereafter, 2.00 to 1.
 
2.38 to 1
 
Reduction in cash flows to the holding company of approximately $58 million.

These covenants place significant restrictions on the manner in which we may operate our business and our ability to meet these financial covenants may be affected by events beyond our control.  If we default under any of these covenants, the lenders could declare all outstanding borrowings, accrued interest and fees to be immediately due and payable, which would have material adverse consequences to us.  If the lenders under our Senior Credit Agreement would elect to accelerate the amounts due, the holders of our 3.5% Debentures, 7.0% Debentures and Senior Note could elect to take similar action with respect to those debts.  If that were to occur, we would not have sufficient liquidity to repay our indebtedness.

We are required to assess our ability to continue as a going concern as part of our preparation of financial statements at each quarter-end.  The assessment includes, among other things, consideration of our plans to address our liquidity and capital needs during the following 12 months and our ability to comply with the future loan covenant and financial ratio requirements under our Senior Credit Agreement, including the covenant regarding minimum risk-based capital ratios.  The calculation of risk-based capital ratios is based on rules established by the NAIC.  Recently the NAIC has modified the calculation of our required capital for commercial mortgages based on the Mortgage Experience Adjustment Factor
 
 
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(“MEAF”) and the calculation of risked-based capital requirements for investments in residential mortgage-backed securities (“RMBS”).  The NAIC could further modify these or other RBC requirements in the future.  Any such modifications would result from a regulatory process over which we have no control and which is not required to take our specific circumstances into account and could negatively impact our ability to remain in compliance with our Senior Credit Agreement and, therefore, impact management’s assessment of our ability to continue as a going concern in conjunction with the completion of our future financial statements, as further described below.  Any modifications to the RBC requirements may be effective for a limited period of time which could limit our ability to consider them when assessing our ability to continue as a going concern.  Our RBC ratio may suffer future deterioration as a result of future realized losses on investments (including other-than-temporary impairments), decreases in the ratings of certain of our investments, net statutory losses from the operations of our insurance subsidiaries, changes in statutory regulations with respect to RBC requirements or the valuation of assets or liabilities, or for other reasons.

Accordingly, in connection with the preparation of our financial statements for future periods, we, or our independent registered public accountants, may conclude that there is not a sufficient likelihood that we will be able to comply with the RBC ratio, statutory capital and surplus and other covenants in our Senior Credit Agreement.  In such event, we may be required to conclude that there is substantial doubt regarding our ability to continue as a going concern in our financial statements for subsequent periods.  If we were to conclude there was substantial doubt regarding our ability to continue as a going concern in our financial statements for subsequent periods, we may be required to increase the valuation allowance for deferred tax assets, which could result in the violation of one or more loan covenant requirements under the Senior Credit Agreement.

If in future periods we are not able to demonstrate that we will be in compliance with the financial covenant requirements in the Senior Credit Agreement for at least 12 months following the date of the financial statements, management would conclude there is substantial doubt about our ability to continue as a going concern and the audit opinion that we would receive from our independent registered public accounting firm would include an explanatory paragraph regarding our ability to continue as a going concern.  Such an opinion would be in breach of the covenants in the Senior Credit Agreement.  If the circumstances leading to the substantial doubt were not cured prior to the issuance of the audit opinion, or we were unable to obtain a waiver on the going concern opinion requirement within 30 days after notice from the lenders, it would be an event of default entitling the lenders to declare all outstanding borrowings, accrued interest and fees to be due and payable.  If an event of default were to occur, it is highly probable that we would not have sufficient liquidity to repay our bank indebtedness in full or any of our other indebtedness which could also be accelerated as a result of the default.

The obligations under our Senior Credit Agreement are guaranteed by our current and future domestic subsidiaries, other than our insurance subsidiaries and certain immaterial subsidiaries.  CDOC’s guarantee under our Senior Credit Agreement is secured by a lien on substantially all of the assets of the guarantors, including the stock of Conseco Life Insurance Company of Texas (“Conseco Life of Texas”) (which is the parent of Bankers Life and Casualty Company, Bankers Conseco Life Insurance Company (“Bankers Conseco Life”) and Colonial Penn), Washington National (which is the parent of Conseco Insurance Company and Conseco Life) and Conseco Health.  If we fail to make the required payments, do not meet the financial covenants or otherwise default on the terms of our Senior Credit Agreement, the stock of Conseco Life of Texas, Washington National and Conseco Health could be transferred to the lenders under such agreement.  Any such transfer would have a material adverse effect on our business, financial condition and results of operations, and would have a significant adverse effect on the market value of our common stock.

Our current credit ratings may adversely affect our ability to access capital and the cost of such capital, which could have a material adverse effect on our financial condition and results of operations.

On December 17, 2009, S&P upgraded the rating on our senior secured debt, to “B-” from “CCC”.  In S&P’s view, an obligation rated “B” is more vulnerable to nonpayment than obligations rated “BB”, but the obligor currently has the capacity to meet its financial commitment on the obligation.  Adverse business, financial, or economic conditions will likely impair the obligor’s capacity or willingness to meet its financial commitment on the obligation.  A “negative” designation means that a rating may be lowered.  S&P has a total of 22 separate categories rating senior debt, ranging from “AAA (Extremely Strong)” to “D (Payment Default).” There are fifteen ratings above our “B-” rating and six ratings that are below our rating.  Moody’s has assigned a “Caa1” rating on our senior secured debt with a positive outlook.  In Moody’s view, an obligation rated “Caa1” is in poor standing and there may be present elements of danger with respect to principal or interest.  Moody’s has a total of 21 separate categories in which to rate senior debt, ranging from “Aaa (Exceptional)” to “C (Lowest Rated).” There are 16 ratings above our “Caa1” rating and four ratings that are below our rating.  If we were to require additional capital, either to refinance our existing indebtedness or for any other reason, our current senior debt ratings, as well as economic conditions in the credit markets generally, could severely restrict our access to and the cost of such capital.

 
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We are a holding company and our liquidity and ability to meet our obligations may be constrained by the ability of our insurance subsidiaries to distribute cash to us.

We and CDOC, a wholly owned subsidiary of ours and a guarantor under our Senior Credit Agreement, are holding companies with no business operations of our own.  We and CDOC depend on our operating subsidiaries for cash to make principal and interest payments on debt and to pay administrative expenses and income taxes.  We and CDOC receive cash from insurance subsidiaries, consisting of dividends and distributions, principal and interest payments on surplus debentures and tax-sharing payments, as well as cash from our non-insurance subsidiaries consisting of dividends, distributions, loans and advances.  A deterioration in the financial condition, earnings or cash flow of our significant subsidiaries for any reason could hinder the ability of such subsidiaries to pay cash dividends or other disbursements to us and/or CDOC, which would limit our ability to meet our debt service requirements and satisfy other financial obligations.  In addition, we may elect to contribute additional capital to certain insurance subsidiaries to strengthen their surplus for covenant compliance or regulatory purposes or to provide the capital necessary for growth, in which case it is less likely that our insurance subsidiaries would pay dividends to us.  Accordingly, this could limit our ability to meet debt service requirements and satisfy other holding company financial obligations.

We receive dividends and other payments from CDOC and from certain non-insurance subsidiaries.  CDOC receives dividends and surplus debenture interest payments from our insurance subsidiaries and payments from certain of our non-insurance subsidiaries.  Payments from our non-insurance subsidiaries to us or CDOC, and payments from CDOC to us, do not require approval by any regulatory authority or other third party.  However, the payment of dividends or surplus debenture interest by our insurance subsidiaries to CDOC is subject to state insurance department regulations and may be prohibited by insurance regulators if they determine that such dividends or other payments could be adverse to our policyholders or contract holders.  Insurance regulations generally permit dividends to be paid from statutory earned surplus of the insurance company without regulatory approval for any 12-month period in amounts equal to the greater of (or in a few states, the lesser of):

·  
statutory net gain from operations or statutory net income for the prior year, or

·  
10% of statutory capital and surplus as of the end of the preceding year.

This type of dividend is referred to as “ordinary dividends.” Any dividends in excess of these levels require the approval of the director or commissioner of the applicable state insurance department.  This type of dividend is referred to as “extraordinary dividends.” During 2009, our insurance subsidiaries paid extraordinary dividends of $35.0 million to CDOC.  Each of the immediate insurance subsidiaries of CDOC had negative earned surplus at December 31, 2009.  Accordingly, any dividend payments from the insurance subsidiaries to the holding company will require the prior approval of the director or commissioner of the applicable state insurance department.

During 2010, we are expecting our insurance subsidiaries to pay approximately $105 million of extraordinary dividends to CDOC (subject to approval by the applicable state insurance department).  In addition, we are expecting Conseco Life of Texas to pay interest on surplus debentures of $49 million in 2010, which will not require additional approval provided the RBC ratio of Conseco Life of Texas exceeds 100 percent (but will require prior written notice to the Texas state insurance department).

Furthermore, RBC requirements and other capital requirements can also limit, in certain circumstances, the ability of our insurance subsidiaries to pay dividends to CDOC.  For example, certain states have established minimum capital requirements for insurance companies licensed to do business in their state.  These additional requirements generally have not had a significant impact on our insurance subsidiaries, but the capital requirements in Florida have caused Conseco Health to maintain a higher level of capital and surplus than it would otherwise maintain and have thus limited its ability to pay dividends.

In addition, although we are under no obligation to do so, we may elect to contribute additional capital to strengthen the surplus of certain insurance subsidiaries for covenant compliance or regulatory purposes or to provide the capital necessary for growth.  Any election regarding the contribution of additional capital to our insurance subsidiaries could affect the ability of our top tier insurance subsidiaries to pay dividends.  The ability of our insurance subsidiaries to pay dividends is also impacted by various criteria established by rating agencies to maintain or receive higher ratings and by the capital levels that we target for our insurance subsidiaries, as well as RBC and statutory capital compliance requirements under our Senior Credit Agreement.

 
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In addition, our insurance subsidiary Washington National may not distribute funds to any affiliate or shareholder, without prior notice to the Florida Office of Insurance Regulation, in accordance with an order from the Florida Office of Insurance Regulation.

The following table sets forth the aggregate amount of dividends and other distributions that our insurance subsidiaries paid to us in each of the last three fiscal years:

   
Years ended
December 31,
 
 
 
2009
   
2008
   
2007
 
   
(dollars in millions)
 
                   
Dividends
  $ 35.0     $ 20.0     $ 50.0  
Surplus debenture interest
    59.3       56.4       69.9  
Fees for services provided pursuant to service agreements
    77.8       83.2       92.9  
Tax sharing payments
    3.4       1.1       1.9  
Total paid                                                                                                        
  $ 175.5     $ 160.7     $ 214.7  

There are risks to our business associated with the current economic environment.

Over the past two years, the U.S. economy has experienced unprecedented credit and liquidity issues and entered into a recession.  Following several years of rapid credit expansion, a contraction in mortgage lending coupled with substantial declines in home prices, rising mortgage defaults and increasing home foreclosures, resulted in significant write-downs of asset values by financial institutions, including government-sponsored entities and major commercial and investment banks.  These write-downs, initially of mortgage-backed securities but spreading to many sectors of the related credit markets, and to related credit default swaps and other derivative securities, have caused many financial institutions to seek additional capital, to merge with larger and stronger institutions, to be subsidized by the U.S. government and, in some cases, to fail.  These factors, combined with declining business and consumer confidence and increased unemployment, have precipitated an economic slowdown and the potential of a prolonged recession.

Even under more favorable market conditions, general factors such as the availability of credit, consumer spending, business investment, capital market conditions and inflation affect our business.  For example, in an economic downturn, higher unemployment, lower family income, lower corporate earnings, lower business investment and lower consumer spending may depress the demand for life insurance, annuities and other insurance products.  In addition, this type of economic environment may result in higher lapses or surrenders of policies.  Accordingly, the risks we face related to general economic and business conditions are more pronounced given the severity and magnitude of the recent adverse economic and market conditions experienced.

More specifically, our business is exposed to the performance of the debt and equity markets.  Adverse market conditions can affect the liquidity and value of our investments.  The manner in which debt and equity market performance and changes in interest rates have affected, and will continue to affect, our business, financial condition, growth and profitability include, but are not limited to, the following:

·  
The value of our investment portfolio has been materially affected in recent periods by changes in market conditions which have resulted in, and may continue to result in, substantial realized and/or unrealized losses.  For example, in 2008 the value of our investments decreased by $2.5 billion due to net unrealized losses on investments.  A widening of credit spreads, such as the market has experienced in 2008, increases the net unrealized loss position of our investment portfolio and may ultimately result in increased realized losses.  The value of our investment portfolio can also be affected by illiquidity and by changes in assumptions or inputs we use in estimating fair value.  Further, certain types of securities in our investment portfolio, such as structured securities supported by residential and commercial mortgages, have been disproportionately affected.  Although the value of our investments increased on an aggregate basis in 2009, there can be no assurance that higher realized and/or unrealized losses will not occur in the future.  Future adverse capital market conditions could result in additional realized and/or unrealized losses.

·  
Changes in interest rates also affect our investment portfolio.  In periods of increasing interest rates, life insurance policy loans, surrenders and withdrawals could increase as policyholders seek investments with higher returns.  This could require us to sell invested assets at a time when their prices are depressed by the increase in interest rates,

 
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which could cause us to realize investment losses.  Conversely, during periods of declining interest rates, we could experience increased premium payments on products with flexible premium features, repayment of policy loans and increased percentages of policies remaining in-force.  We would obtain lower returns on investments made with these cash flows.  In addition, borrowers may prepay or redeem bonds in our investment portfolio so that we might have to reinvest those proceeds in lower yielding investments.  As a consequence of these factors, we could experience a decrease in the spread between the returns on our investment portfolio and amounts credited to policyholders and contract owners, which could adversely affect our profitability.

·  
The attractiveness of certain of our products may decrease because they are linked to the equity markets and assessments of our financial strength, resulting in lower profits.  Increasing consumer concerns about the returns and features of our products or our financial strength may cause existing customers to surrender policies or withdraw assets, and diminish our ability to sell policies and attract assets from new and existing customers, which would result in lower sales and fee revenues.

These extraordinary economic and market conditions have materially and adversely affected us.  It is difficult to predict how long the current economic and market conditions will continue, whether the financial markets will continue to deteriorate and which aspects of our products and/or business will be adversely affected.  However, the lack of credit, lack of confidence in the financial sector, increased volatility in the financial markets and reduced business activity are likely to continue to materially and adversely affect our business, financial condition and results of operations.

Our investment portfolio is subject to several risks that may diminish the value of our invested assets and negatively impact our profitability, our financial condition, our liquidity and our ability to continue to comply with the financial covenants under our Senior Credit Agreement.

The value of our investment portfolio is subject to numerous factors, which may be difficult to predict, and are often beyond our control.  These factors include, but are not limited to, the following:

·  
changes in interest rates and credit spreads can reduce the value of our investments as further discussed in the risk factor below entitled “— Changing interest rates may adversely affect our results of operations;”

·  
changes in patterns of relative liquidity in the capital markets for various asset classes;

·  
changes in the ability of issuers to make timely repayments can reduce the value of our investments.  This risk is significantly greater with respect to below-investment grade securities, which comprised 8% of our actively managed fixed maturity investments as of December 31, 2009; and

·  
changes in the estimated timing of receipt of cash flows.  For example, our structured security investments, which comprised 17% of our actively managed fixed maturity investments at December 31, 2009, are subject to risks relating to variable prepayment on the assets underlying such securities, such as mortgage loans.  When structured securities prepay faster than expected, investment income may be adversely affected due to the acceleration of the amortization of purchase premiums or the inability to reinvest at comparable yields in lower interest rate environments.

We have recorded writedowns of fixed maturity investments, equity securities and other invested assets as a result of conditions which caused us to conclude a decline in the fair value of the investment was other than temporary as follows (excluding any such amounts included in discontinued operations): $195.4 million in 2009 ($385.0 million of which was recognized through net income and $189.6 million of which was recognized through accumulated other comprehensive loss); $162.3 million in 2008; and $105.5 million in 2007 (including $73.7 million of writedowns of investments which were subsequently transferred pursuant to a coinsurance agreement as further discussed in the note to our consolidated financial statements entitled “Summary of Significant Accounting Policies”).  Our investment portfolio is subject to the risks of further declines in realizable value.  However, we attempt to mitigate this risk through the diversification and active management of our portfolio.

In the event of substantial product surrenders or policy claims, we may choose to maintain highly liquid, and potentially lower-yielding, assets or to sell assets at a loss, thereby eroding the performance of our portfolio.

Because a substantial portion of our operating results are derived from returns on our investment portfolio, significant losses in the portfolio may have a direct and materially adverse impact on our results of operations.  In addition, losses on our

 
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investment portfolio could reduce the investment returns that we are able to credit to our customers of certain products, thereby impacting our sales and eroding our financial performance.  Investment losses may also reduce the capital of our insurance subsidiaries, which may cause us to make additional capital contributions to those subsidiaries or may limit the ability of the insurance subsidiaries to make dividend payments to the holding company.  In addition, future investment losses could cause us to be in violation of the financial covenants under our Senior Credit Agreement.

Deteriorating financial performance of securities collateralized by mortgage loans and commercial mortgage loans may lead to writedowns, which could have a material adverse effect on our results of operations and financial condition.

Changes in mortgage delinquency or recovery rates, declining real estate prices, changes in credit or bond insurer credit ratings and the quality of service provided by service providers on securities in our portfolios could lead us to determine that writedowns are appropriate in the future.

The determination of the amount of realized investment losses recorded as impairments of our investments is highly subjective and could have a material adverse effect on our operating results and financial condition.

The determination of realized investment losses recorded as impairments varies by investment type and is based upon our ongoing evaluation and assessment of known risks.  Such evaluations and assessments are revised as conditions change and new information becomes available.  We update our evaluations regularly and reflect changes in realized investment gains and losses from impairments in operating results as such evaluations are revised.  Our assessment of whether unrealized losses are other-than-temporary impairments requires significant judgment and future events may occur, or additional information may become available, which may necessitate future impairments of securities in our portfolio.  Historical trends may not be indicative of future other-than-temporary impairments.  For example, the cost of our fixed maturity and equity securities is adjusted for impairments in value deemed to be other than temporary in the period in which the determination is made.  The assessment of whether impairments have occurred is based on our case-by-case evaluation of the underlying reasons for the decline in fair value.

The determination of our fixed maturity securities results in unrealized net investment gains and losses and is highly subjective and could materially impact our operating results and financial condition.

In determining fair value, we generally utilize market transaction data for the same or similar instruments.  The degree of management judgment involved in determining fair values is inversely related to the availability of market observable information.  The fair value of financial assets and financial liabilities may differ from the amount actually received to sell an asset or the amount paid to transfer a liability in an orderly transaction between market participants at the measurement date.  Moreover, the use of different valuation assumptions may have a material effect on the fair values of the financial assets and financial liabilities.  As of December 31, 2009, our total unrealized net investment losses before adjustments for insurance intangibles and deferred income taxes were $473.4 million.

Litigation and regulatory investigations are inherent in our business, may harm our financial strength and reputation and negatively impact our financial results.

Insurance companies historically have been subject to substantial litigation.  In addition to the traditional policy claims associated with their businesses, insurance companies face policyholder suits and class action suits.  We also face significant risks related to regulatory investigations and actions.  The litigation and regulatory investigations we are, have been, or may become subject to include matters related to sales or underwriting practices, payment of contingent or other sales commissions, claim payments and procedures, product design, product disclosure, administration, additional premium charges for premiums paid on a periodic basis, calculation of cost of insurance charges, changes to certain non-guaranteed policy features, denial or delay of benefits, charging excessive or impermissible fees on products and recommending unsuitable products to customers.  Certain of our insurance policies allow or require us to make changes based on experience to certain non-guaranteed elements such as cost of insurance charges, expense loads, credited interest rates and policyholder bonuses.  We intend to make changes to certain non-guaranteed elements in the future.  In some instances in the past, such action has resulted in litigation and similar litigation may arise in the future.  Our exposure (including the potential adverse financial consequences of delays or decisions not to pursue changes to certain non-guaranteed elements), if any, arising from any such action cannot presently be determined.  Our pending legal and regulatory actions include matters that are specific to us, as well as matters faced by other insurance companies.  State insurance departments focus on sales and claims payment practices and product issues in their market conduct examinations.  Negotiated settlements of class action and other lawsuits have had a material adverse effect on the business, financial condition and results of operations of our insurance companies.

 
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We are, in the ordinary course of our business, a plaintiff or defendant in actions arising out of our insurance business, including class actions and reinsurance disputes, and, from time to time, we are also involved in various governmental and administrative proceedings and investigations and inquiries such as information requests, subpoenas and books and record examinations, from state, federal and other authorities.  The ultimate outcome of these lawsuits and investigations cannot be predicted with certainty.  In the event of an unfavorable outcome in one or more of these matters, the ultimate liability may be in excess of liabilities we have established and could have a material adverse effect on our business, financial condition, results of operations or cash flows.  We could also suffer significant reputational harm as a result of such litigation, regulatory action or investigation which could have a material adverse effect on our business, financial condition, results of operations or cash flows.

The limited historical claims experience on our long-term care products could negatively impact our operations if our estimates prove wrong and we have not adequately set premium rates.

In setting premium rates, we consider historical claims information and other factors, but we cannot predict future claims with certainty.  This is particularly applicable to our long-term care insurance products, for which we (as well as other companies selling these products) have relatively limited historical claims experience.  Long-term care products tend to have fewer claims than other health products such as Medicare supplement, but when claims are incurred, they tend to be much higher in dollar amount and longer in duration.  Also, long-term care claims are incurred much later in the life of the policy than most other supplemental health products.  As a result of these traits, it is difficult to appropriately price this product.  For our long-term care insurance, actual persistency in later policy durations that is higher than our persistency assumptions could have a negative impact on profitability.  If these policies remain in-force longer than we assumed, then we could be required to make greater benefit payments than anticipated when the products were priced.  Mortality is a critical factor influencing the length of time a claimant receives long-term care benefits.  Mortality continues to improve for the general population, and life expectancy has increased.  Improvements in actual mortality trends relative to assumptions may adversely affect our profitability.

Our Bankers Life segment has offered long-term care insurance since 1985.  Recently, the claims experience on our Bankers Life long-term care blocks has generally been higher than our pricing expectations and, the persistency of these policies has been higher than our pricing expectations which may result in higher benefit ratios in the future.

After the Transfer, we continue to hold long-term care business acquired through previous acquisitions in our Conseco Insurance Group segment.  The premiums collected from this block totaled $31.4 million in 2009.  The experience on this acquired block has generally been worse than the acquired companies’ original pricing expectations.  We have received regulatory approvals for numerous premium rate increases in recent years pertaining to these blocks.  Even with these rate increases, this block experienced benefit ratios of 186.7% in 2009, 169.6% in 2008, and 192.4% in 2007.  If future claims experience continues to be worse than anticipated as our long-term care blocks continue to age, our financial results could be adversely affected.  In addition, rate increases may cause existing policyholders to allow their policies to lapse.

The results of operations of our insurance business will decline if our premium rates are not adequate or if we are unable to obtain regulatory approval to increase rates.

We set the premium rates on our health insurance policies based on facts and circumstances known at the time we issue the policies and on assumptions about numerous variables, including the actuarial probability of a policyholder incurring a claim, the probable size of the claim, maintenance costs to administer the policies and the interest rate earned on our investment of premiums.  In setting premium rates, we consider historical claims information, industry statistics, the rates of our competitors and other factors, but we cannot predict with certainty the future actual claims on our products.  If our actual claims experience proves to be less favorable than we assumed and we are unable to raise our premium rates to the extent necessary to offset the unfavorable claims experience, our financial results will be adversely affected.

We review the adequacy of our premium rates regularly and file proposed rate increases on our health insurance products when we believe existing premium rates are too low.  It is possible that we will not be able to obtain approval for premium rate increases from currently pending requests or from future requests.  If we are unable to raise our premium rates because we fail to obtain approval in one or more states, our financial results will be adversely affected.  Moreover, in some instances, our ability to exit unprofitable lines of business is limited by the guaranteed renewal feature of the policy.  Due to this feature, we cannot exit such business without regulatory approval, and accordingly, we may be required to continue to service those products at a loss for an extended period of time.  Most of our long-term care business is guaranteed renewable, and, if necessary rate increases are not approved, we would be required to recognize a loss and establish a premium deficiency reserve.  During 2009, the financial statements of three of our subsidiaries prepared in accordance with statutory

 
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accounting practices prescribed or permitted by regulatory authorities reflected asset adequacy or premium deficiency reserves.  Total asset adequacy or premium deficiency reserves for Washington National, Conseco Life and Bankers Conseco Life were $79.1 million, $257.1 million and $21.2 million, respectively, at December 31, 2009.  Due to differences between statutory and GAAP insurance liabilities, we were not required to recognize a similar premium deficiency reserve in our consolidated financial statements prepared in accordance with GAAP.  The determination of the need for and amount of asset adequacy reserves is subject to numerous actuarial assumptions, including our ability to change non-guaranteed elements related to certain products consistent with contract provisions.

If, however, we are successful in obtaining regulatory approval to raise premium rates, the increased premium rates may reduce the volume of our new sales and cause existing policyholders to allow their policies to lapse.  This could result in a significantly higher ratio of claim costs to premiums if healthier policyholders who get coverage elsewhere allow their policies to lapse, while policies of less healthy policyholders continue in-force.  This would reduce our premium income and profitability in future periods.

Most of our supplemental health policies allow us to increase premium rates when warranted by our actual claims experience.  These rate increases must be approved by the applicable state insurance departments, and we are required to submit actuarial claims data to support the need for such rate increases.  The re-rate application and approval process on supplemental health products is a normal recurring part of our business operations and reasonable rate increases are typically approved by the state departments as long as they are supported by actual claims experience and are not unusually large in either dollar amount or percentage increase.  For policy types on which rate increases are a normal recurring event, our estimates of insurance liabilities assume we will be able to raise rates if experience on the blocks warrants such increases in the future.

The benefit ratio for our long-term care products included in the Conseco Insurance Group segment has increased in recent periods and was 186.7% in 2009 and 169.6% in 2008.  We will have to continue to raise rates or take other actions with respect to some of these policies or our financial results will be adversely affected.

As a result of higher persistency and resultant higher claims in our long-term care block in the Bankers Life segment than assumed in the original pricing, our premium rates were too low.  Accordingly, we have been seeking approval from regulatory authorities for rate increases on portions of this business.  Many of the rate increases have been approved by regulators and implemented.  However, it is possible that we will not be able to obtain approval for all or a portion of the premium rate increases from currently pending requests or future requests.  If we are unable to obtain these rate increases, the profitability of these policies and the performance of this block of business will be adversely affected.  In addition, such rate increases may reduce the volume of our new sales and cause existing policyholders to allow their policies to lapse, resulting in reduced profitability.

We have implemented and will continue to implement from time to time and when actuarially justified, premium rate increases in our long-term care business.  In some cases, we offer policyholders the opportunity to reduce their coverage amounts or accept non-forfeiture benefits as alternatives to increasing their premium rates.  The financial impact of our rate increase actions could be adversely affected by policyholder anti-selection, meaning that policyholders who are less likely to incur claims may lapse their policies or reduce their benefits, while policyholders who are more likely to incur claims may maintain full coverage and accept their rate increase.

We have identified a material weakness in our internal control over financial reporting, and our business and stock price may be adversely affected if we have not adequately addressed the weakness or if we have other material weaknesses or significant deficiencies in our internal controls over financial reporting.

We did not maintain effective controls over the accounting and disclosure of insurance policy benefits and the liabilities for some of our insurance products.  We previously identified a material weakness in internal controls over the actuarial reporting processes related to the design of controls to ensure the completeness and accuracy of certain in-force policies in our Bankers Life segment, Conseco Insurance Group segment, and the long-term care business reflected in discontinued operations.  Remediation efforts to enhance controls over the actuarial reporting process have been continuing over the last several years under the direction of the chief financial officer, and a number, but not all, of the weaknesses have been addressed.  Material control deficiencies in the actuarial reporting process related to the design and operating effectiveness of controls over completeness and accuracy of inforce policies in all insurance blocks other than certain specified disease policies were remediated, and the new controls were determined to be effective at December 31, 2009.  However, a material weakness relating to the actuarial reporting process over certain specified disease policies in our Conseco Insurance Group segment continued to exist as of December 31, 2009, and our remediation efforts are continuing.

 
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These control deficiencies resulted in adjustments to insurance policy benefits and the liabilities for insurance products in the consolidated financial statements for the years ended December 31, 2007, December 31, 2008 and December 31, 2009.  If we cannot produce reliable financial reports, investors could lose confidence in our reported financial information, the market price of our stock could decline significantly, we may be unable to obtain additional financing to operate and expand our business, and our business and financial condition could be harmed.  In addition, we face the risk that, notwithstanding our efforts to date to identify and remedy all material errors in those financial statements, we may discover other errors in the future and that the cost of identifying and remedying the errors and remediating our material weakness in internal controls will be high and have a material adverse effect on our financial condition and results of operations.

Our ability to use our existing NOLs may be limited by this or other transactions, and any impairment of existing NOLs would likely breach the debt to total capitalization covenant of our Senior Credit Agreement.

As of December 31, 2009, we had approximately $4.7 billion of federal tax NOLs and $1.1 billion of capital loss carry-forwards, resulting in a deferred tax asset of approximately $2.0 billion, expiring in years 2010 through 2029.  Section 382 of the Code imposes limitations on a corporation’s ability to use its NOLs when it undergoes a 50% “ownership change” over a three year period.  Although we underwent an ownership change in 2003 as the result of our reorganization, the timing and manner in which we will be able to utilize our NOLs is not currently limited by Section 382.

We regularly monitor ownership changes (as calculated for purposes of Section 382) based on available information and, as of December 31, 2009, our analysis indicated that we were below the 50% ownership change threshold that would limit our ability to utilize our NOLs.  However, taking into account the common stock issuance to Paulson and our public offering of common stock in 2009, we are close to the 50% ownership change level.  As a result, any future transaction or transactions and the timing of such transaction or transactions could trigger an additional ownership change under Section 382.  Such transactions may include, but are not limited to, additional repurchases or issuances of common stock (including upon conversion of our outstanding 3.5% Debentures or 7.0% Debentures (including conversion pursuant to a make whole adjustment event), or exercise of the warrants sold to Paulson, as discussed above), or acquisitions or sales of shares of our stock by certain holders of our shares, including persons who have held, currently hold or may accumulate in the future 5% or more of our outstanding common stock (“5% Shareholders”) for their own account.  In January 2009, our board of directors adopted a Section 382 Rights Agreement, which is designed to protect shareholder value by preserving the value of our NOLs.  See the note to the consolidated financial statements entitled “Income Taxes”.  The rights agreement provides a strong economic disincentive for any one shareholder knowingly, and without the approval of our board, to become a 5% Shareholder and for any of the 5% Shareholders as of the date of the rights agreement to increase their ownership stake by more than 1% of the shares of our common stock then outstanding — and thus limits the uncertainty with regard to the potential for future ownership changes.  However, despite the strong economic disincentives of the Section 382 Rights Agreement, shareholders may elect to increase their ownership, including beyond the limits set by the rights agreement, and thus adversely affect our ownership shift calculations.

Additionally, based on the advice of our tax advisor, we have taken the position that, upon issuance, the 7.0% Debentures are not treated as stock for purposes of Section 382 and do not trigger an ownership change.  However, the IRS may not agree with our position.  If the IRS were to succeed in challenging this position, the issuance of the 7.0% Debentures would push us above the 50% ownership change level described above and trigger an ownership change under Section 382.

If an ownership change were to occur for purposes of Section 382, we would be required to calculate an annual limitation on the amount of our taxable income that may be offset by NOLs arising prior to such ownership change.  That limitation would apply to all of our current NOLs.  The annual limitation would be calculated based upon the fair market value of our equity at the time of such ownership change, multiplied by a federal long-term tax exempt rate (4.16 percent at December 31, 2009), and the annual restriction would eliminate our ability to use a substantial portion of our NOLs to offset future taxable income.  Additionally, the writedown of our deferred tax assets that would occur in the event of an ownership change for purposes of Section 382 could cause us to breach the debt to total capitalization covenant of our Senior Credit Agreement.

The value of our deferred tax assets may be impaired to the extent our future profits are less than we have projected and such impairment may have a material adverse effect on our results of operations and our financial condition.

As of December 31, 2009, we had deferred tax assets of $1.1 billion.  In 2009, we increased the deferred tax valuation allowance by $27.8 million, of which $23 million related to our reassessment of the recovery of our deferred tax assets following the completion of reinsurance transactions in 2009; and $4.8 million was associated with capital loss carry-

 
33

 

forwards recognized in 2009.

Our income tax expense includes deferred income taxes arising from temporary differences between the financial reporting and tax bases of assets and liabilities, capital loss carry-forwards and NOLs.  We evaluate the realizability of our deferred income tax assets and assess the need for a valuation allowance on an ongoing basis.  In evaluating our deferred income tax assets, we consider whether it is more likely than not that the deferred income tax assets will be realized.  The ultimate realization of our deferred income tax assets depends upon generating sufficient future taxable income during the periods in which our temporary differences become deductible and before our capital loss carry-forwards and NOLs expire.  Additionally, the value of our deferred tax assets would be significantly impaired if we were to undergo a 50% “ownership change” for purposes of Section 382 of the Code, as discussed in the risk factor immediately above.  Our assessment of the realizability of our deferred income tax assets requires significant judgment.  However, recovery is dependent on achieving such projections and failure to do so would result in an increase in the valuation allowance in a future period.  Any future increase in the valuation allowance would result in additional income tax expense which could have a material adverse effect upon our earnings in the future, and reduce shareholders’ equity.

Concentration of our investment portfolios in any particular sector of the economy or type of asset may have an adverse effect on our financial position or results of operations.

The concentration of our investment portfolios in any particular industry, group of related industries, asset classes (such as residential mortgage-backed securities and other asset-backed securities), or geographic area could have an adverse effect on its value and performance and, consequently, on our results of operations and financial position.  While we seek to mitigate this risk by having a broadly diversified portfolio, events or developments that have a negative impact on any particular industry, group of related industries or geographic area may have an adverse effect on the investment portfolios to the extent that the portfolios are concentrated.

Our business is subject to extensive regulation, which limits our operating flexibility and could result in our insurance subsidiaries being placed under regulatory control or otherwise negatively impact our financial results.

Our insurance business is subject to extensive regulation and supervision in the jurisdictions in which we operate.  Our insurance subsidiaries are subject to state insurance laws that establish supervisory agencies.  Such agencies have broad administrative powers including the power to:

·  
grant and revoke business licenses;

·  
regulate and supervise sales practices and market conduct;

·  
establish guaranty associations;

·  
license agents;

·  
approve policy forms;

·  
approve premium rates for some lines of business such as long-term care and Medicare supplement;

·  
establish reserve requirements;

·  
prescribe the form and content of required financial statements and reports;

·  
determine the reasonableness and adequacy of statutory capital and surplus;

·  
perform financial, market conduct and other examinations;

·  
define acceptable accounting principles; and

·  
regulate the types and amounts of permitted investments.

 
34

 


The regulations issued by state insurance agencies can be complex and subject to differing interpretations.  If a state insurance regulatory agency determines that one of our insurance company subsidiaries is not in compliance with applicable regulations, the subsidiary is subject to various potential administrative remedies including, without limitation, monetary penalties, restrictions on the subsidiary’s ability to do business in that state and a return of a portion of policyholder premiums.  In addition, regulatory action or investigations could cause us to suffer significant reputational harm, which could have an adverse effect on our business, financial condition and results of operations.

Our insurance subsidiaries are also subject to RBC requirements.  These requirements were designed to evaluate the adequacy of statutory capital and surplus in relation to investment and insurance risks associated with asset quality, mortality and morbidity, asset and liability matching and other business factors.  The requirements are used by states as an early warning tool to discover companies that may be weakly-capitalized for the purpose of initiating regulatory action.  Generally, if an insurer’s RBC falls below specified levels, the insurer is subject to different degrees of regulatory action depending upon the magnitude of the deficiency.  The 2009 statutory annual statements filed with the state insurance regulators of each of our insurance subsidiaries reflected total adjusted capital in excess of the levels subjecting the subsidiaries to any regulatory action.

Our reserves for future insurance policy benefits and claims may prove to be inadequate, requiring us to increase liabilities which results in reduced net income and shareholders’ equity.

Liabilities for insurance products are calculated using management’s best judgments, based on our past experience and standard actuarial tables of mortality, morbidity, lapse rates, investment experience and expense levels.  For our health insurance business, we establish an active life reserve, a liability for due and unpaid claims, claims in the course of settlement, incurred but not reported claims, and a reserve for the present value of amounts on incurred claims not yet due.  We establish reserves based on assumptions and estimates of factors either established at the fresh-start date for business in-force then or considered when we set premium rates for business written after that date.

Many factors can affect these reserves and liabilities, such as economic and social conditions, inflation, hospital and pharmaceutical costs, changes in life expectancy, regulatory actions, changes in doctrines of legal liability and extra-contractual damage awards.  Therefore, the reserves and liabilities we establish are necessarily based on estimates, assumptions, industry data and prior years’ statistics.  It is possible that actual claims will materially exceed our reserves and have a material adverse effect on our results of operations and financial condition.  We have incurred significant losses beyond our estimates as a result of actual claim costs and persistency of our long-term care business included in our Bankers Life and Conseco Insurance Group segments.  The benefit ratios for our long-term care products in our Bankers Life segment were 105.2%, 107.6% and 102.0% in 2009, 2008 and 2007, respectively.  The benefit ratios for our long-term care products in our Conseco Insurance Group segment were 186.7%, 169.6% and 192.4% in 2009, 2008 and 2007, respectively.  Our financial performance depends significantly upon the extent to which our actual claims experience and future expenses are consistent with the assumptions we used in setting our reserves.  If our assumptions with respect to future claims are incorrect, and our reserves prove to be insufficient to cover our actual losses and expenses, we would be required to increase our liabilities, and our financial results could be adversely affected.

We may be required to accelerate the amortization of the cost of policies produced or the value of policies in-force at the Effective Date.

Cost of policies produced represent the costs that vary with, and are primarily related to, producing new insurance business.  The value of policies in-force at the Effective Date represents the value assigned to the right to receive future cash flows from contracts existing at September 10, 2003, the effective date of our predecessor company’s plan of reorganization.  The balances of these accounts are amortized over the expected lives of the underlying insurance contracts.  On an ongoing basis, we test these accounts recorded on our balance sheet to determine if these amounts are recoverable under current assumptions.  In addition, we regularly review the estimates and assumptions underlying these accounts for those products for which we amortize the cost of policies produced or the value of insurance in-force at the Effective Date in proportion to gross profits or gross margins.  If facts and circumstances change, these tests and reviews could lead to reduction in the balance of those accounts that could have an adverse effect on the results of our operations and our financial condition.

Our operating results will suffer if policyholder surrender levels differ significantly from our assumptions.

Surrenders of our annuities and life insurance products can result in losses and decreased revenues if surrender levels differ significantly from assumed levels.  At December 31, 2009, approximately 20 percent of our total insurance liabilities,

 
35

 

or approximately $5.0 billion, could be surrendered by the policyholder without penalty.  The surrender charges that are imposed on our fixed rate annuities typically decline during a penalty period, which ranges from five to twelve years after the date the policy is issued.  Surrender charges are eliminated after the penalty period.  Surrenders and redemptions could require us to dispose of assets earlier than we had planned, possibly at a loss.  Moreover, surrenders and redemptions require faster amortization of either the acquisition costs or the commissions associated with the original sale of a product, thus reducing our net income.  We believe policyholders are generally more likely to surrender their policies if they believe the issuer is having financial difficulties, or if they are able to reinvest the policy’s value at a higher rate of return in an alternative insurance or investment product.

Changing interest rates may adversely affect our results of operations.

Our profitability is affected by fluctuating interest rates.  While we monitor the interest rate environment and, in some cases, employ asset/liability and hedging strategies to mitigate such impact, our financial results could be adversely affected by changes in interest rates.  Our spread-based insurance and annuity business is subject to several inherent risks arising from movements in interest rates, especially if we fail to anticipate or respond to such movements.  First, interest rate changes can cause compression of our net spread between interest earned on investments and interest credited to customer deposits.  Our ability to adjust for such a compression is limited by the guaranteed minimum rates that we must credit to policyholders on certain products, as well as the terms on most of our other products that limit reductions in the crediting rates to pre-established intervals.  As of December 31, 2009, approximately 41 percent of our insurance liabilities were subject to interest rates that may be reset annually; 41 percent had a fixed explicit interest rate for the duration of the contract; 13 percent had credited rates that approximate the income we earn; and the remainder had no explicit interest rates.  Second, if interest rate changes produce an unanticipated increase in surrenders of our spread-based products, we may be forced to sell invested assets at a loss in order to fund such surrenders.  Third, the profits from many non-spread-based insurance products, such as long-term care policies, can be adversely affected when interest rates decline because we may be unable to reinvest the cash from premiums received at the interest rates anticipated when we sold the policies.  Finally, changes in interest rates can have significant effects on the fair value and performance of our investments in general and specifically on the performance of our structured securities portfolio, including collateralized mortgage obligations, as a result of changes in the prepayment rate of the loans underlying such securities.

We employ asset/liability strategies that are designed to mitigate the effects of interest rate changes on our profitability but do not currently extensively employ derivative instruments for this purpose.  We may not be successful in implementing these strategies and achieving adequate investment spreads.

We use computer models to simulate our cash flows expected from existing business under various interest rate scenarios.  With such estimates, we seek to manage the relationship between the duration of our assets and the expected duration of our liabilities.  When the estimated durations of assets and liabilities are similar, exposure to interest rate risk is minimized because a change in the value of assets should be largely offset by a change in the value of liabilities.  At December 31, 2009, the duration of our fixed maturity investments (as modified to reflect prepayments and potential calls) was approximately 9.0 years, and the duration of our insurance liabilities was approximately 8.1 years.  We estimate that our fixed maturity securities and short-term investments, net of corresponding changes in insurance acquisition costs, would decline in fair value by approximately $455 million if interest rates were to increase by 10% from rates as of December 31, 2009.  This compares to a decline in fair value of $185 million based on amounts and rates at December 31, 2008.  The calculations involved in our computer simulations incorporate numerous assumptions, require significant estimates and assume an immediate change in interest rates without any management reaction to such change.  Consequently, potential changes in the values of our financial instruments indicated by the simulations will likely be different from the actual changes experienced under given interest rate scenarios, and the differences may be material.  Because we actively manage our investments and liabilities, our net exposure to interest rates can vary over time.

General market conditions affect investments and investment income.

The performance of our investment portfolio depends in part upon the level of and changes in interest rates, risk spreads, real estate values, market volatility, the performance of the economy in general, the performance of the specific obligors included in our portfolio and other factors that are beyond our control.  Changes in these factors can affect our net investment income in any period, and such changes can be substantial.

Financial market conditions can also affect our realized and unrealized investment gains (losses).  During periods of rising interest rates, the fair values of our investments will typically decline.  Conversely, during periods of falling interest rates, the fair values of our investments will typically rise.

 
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Our results of operations may be negatively impacted if our initiatives to restructure our insurance operations are unsuccessful or if our planned conversions result in valuation differences.

Our Conseco Insurance Group segment has experienced decreases in premium revenues and new annualized premiums in recent years as well as expense levels that exceed product pricing expense assumptions.  We have implemented several initiatives to improve operating results, including: (i) focusing sales efforts on higher margin products; (ii) reducing operating expenses by eliminating or reducing marketing costs of certain products; (iii) streamlining administrative procedures and reducing personnel; and (iv) increasing retention rates on our more profitable blocks of in-force business.  Many of our initiatives address issues resulting from the substantial number of acquisitions of our predecessor company.  Between 1982 and 1997, our predecessor company completed 19 transactions involving the acquisitions of 44 separate insurance companies.  Our efforts involve improvements to our policy administration procedures and significant systems conversions, such as the elimination of duplicate processing systems for similar business.  These initiatives may result in unforeseen expenses, complications or delays, and may be inadequate to address all issues.  Some of these initiatives have only recently begun to be executed, and may not ultimately be successfully completed.  While our future operating performance depends greatly on the success of these efforts, even if we successfully implement these measures, they alone may not sufficiently improve our results of operations.

Conversions to new systems can result in valuation differences between the prior system and the new system.  We have recognized such differences in the past.  Our planned conversions could result in future valuation adjustments, and these adjustments may have a material adverse effect on future earnings.

Our financial position may be negatively impacted if we are unable to achieve our goals.

We have identified a number of goals, including maintaining strong growth at Bankers Life, improving earnings stability and reducing volatility and reducing our enterprise exposure to long-term care business.  The most consistent components of our operations in recent years have been Bankers Life and Colonial Penn, and the continued growth and profitability of those businesses is critical to our overall results.  The failure to achieve these and our other goals could have a material adverse effect on our results of operations, financial condition and the price of our common stock.

A failure to improve the financial strength ratings of our insurance subsidiaries or a decline from the current ratings could cause us to experience decreased sales, increased agent attrition and increased policyholder lapses and redemptions.

An important competitive factor for our insurance subsidiaries is the ratings they receive from nationally recognized rating organizations.  Agents, insurance brokers and marketing companies who market our products, and prospective policyholders view ratings as an important factor in evaluating an insurer’s products.  This is especially true for annuity, interest-sensitive life insurance and long-term care products.  The current financial strength ratings of our primary insurance subsidiaries from A.M. Best, S&P and Moody’s are “B (Fair),” “BB-” and “Ba2,” respectively.  A.M. Best has 16 possible ratings.  There are six ratings above our “B” rating and nine ratings that are below our rating.  S&P has 21 possible ratings.  There are twelve ratings above our “BB -”  rating and eight ratings that are below our rating.  Moody’s has 21 possible ratings.  There are 11 ratings above our “Ba2” rating and nine ratings that are below our rating.  Most of our competitors have higher financial strength ratings and, to be competitive over the long term, we believe it is critical to achieve improved ratings.

If we fail to achieve ratings upgrades from A.M. Best or if our ratings are further downgraded, we may experience declining sales of certain of our insurance products, defections of our independent and career sales force, and increased policies being redeemed or allowed to lapse.  These events would adversely affect our financial results, which could then lead to ratings downgrades.

Competition from companies that have greater market share, higher ratings, greater financial resources and stronger brand recognition, may impair our ability to retain existing customers and sales representatives, attract new customers and sales representatives and maintain or improve our financial results.

The supplemental health insurance, annuity and individual life insurance markets are highly competitive.  Competitors include other life and accident and health insurers, commercial banks, thrifts, mutual funds and broker-dealers.

Our principal competitors vary by product line.  Our main competitors for agent sold long-term care insurance products include Genworth Financial, John Hancock Financial Services and MetLife.  Our main competitors for agent sold Medicare supplement insurance products include United HealthCare, Blue Cross and Blue Shield Plans, Mutual of Omaha

 
37

 

and United American.

In some of our product lines, such as life insurance and fixed annuities, we have a relatively small market share.  Even in some of the lines in which we are one of the top five writers, our market share is relatively small.  For example, while our Bankers Life segment ranked fourth in annualized premiums of individual long-term care insurance in 2008 with a market share of approximately 4.6%, the top three writers of individual long-term care insurance had annualized premiums with a combined market share of approximately 57% during the period.  In addition, while our Bankers Life segment was ranked fourth in direct premiums earned for individual Medicare supplement insurance in 2008 with a market share of 3.7%, the top writer of individual Medicare supplement insurance had direct premiums with a market share of 16.1% during the period.

Virtually all of our major competitors have higher financial strength ratings than we do.  Many of our competitors are larger companies that have greater capital, technological and marketing resources and have access to capital at a lower cost.  Recent industry consolidation, including business combinations among insurance and other financial services companies, has resulted in larger competitors with even greater financial resources.  Furthermore, changes in federal law have narrowed the historical separation between banks and insurance companies, enabling traditional banking institutions to enter the insurance and annuity markets and further increase competition.  This increased competition may harm our ability to maintain or improve our profitability.

In addition, because the actual cost of products is unknown when they are sold, we are subject to competitors who may sell a product at a price that does not cover its actual cost.  Accordingly, if we do not also lower our prices for similar products, we may lose market share to these competitors.  If we lower our prices to maintain market share, our profitability will decline.

We must attract and retain sales representatives to sell our insurance and annuity products.  Strong competition exists among insurance and financial services companies for sales representatives.  We compete for sales representatives primarily on the basis of our financial position, financial strength ratings, support services, compensation, products and product features.  Our competitiveness for such agents also depends upon the relationships we develop with these agents.  Our predecessor company’s bankruptcy continues to be an adverse factor in developing relationships with certain agents.  If we are unable to attract and retain sufficient numbers of sales representatives to sell our products, our ability to compete and our revenues and profitability would suffer.

Volatility in the securities markets, and other economic factors, may adversely affect our business, particularly our sales of certain life insurance products and annuities.

Fluctuations in the securities markets and other economic factors may adversely affect sales and/or policy surrenders of our annuities and life insurance policies.  For example, volatility in the equity markets may deter potential purchasers from investing in equity-indexed annuities and may cause current policyholders to surrender their policies for the cash value or to reduce their investments.  In addition, significant or unusual volatility in the general level of interest rates could negatively impact sales and/or lapse rates on certain types of insurance products.

Federal and state legislation could adversely affect the financial performance of our insurance operations.

During recent years, the health insurance industry has experienced substantial changes, including those caused by healthcare legislation.  Recent federal and state legislation and pending legislative proposals concerning healthcare reform contain features that could severely limit, or eliminate, our ability to vary pricing terms or apply medical underwriting standards to individuals, thereby potentially increasing our benefit ratios and adversely impacting our financial results.  In particular, Medicare reform could affect our ability to price or sell our products or profitably maintain our blocks in-force.  For example, the Medicare Advantage program provides incentives for health plans to offer managed care plans to seniors.  The growth of managed care plans under this program could decrease sales of the traditional Medicare supplement products we sell.  Some current proposals contain government provided long-term care insurance which could affect the sales of our long-term care products.

Proposals currently pending in Congress and some state legislatures may also affect our financial results.  These proposals include the implementation of minimum consumer protection standards in all long-term care policies, including: guaranteed premium rates; protection against inflation; limitations on waiting periods for pre-existing conditions; setting standards for sales practices for long-term care insurance; and guaranteed consumer access to information about insurers, including information regarding lapse and replacement rates for policies and the percentage of claims denied.  Enactment of any proposal that would limit the amount we can charge for our products, such as guaranteed premium rates, or that would

 
38

 

increase the benefits we must pay, such as limitations on waiting periods, or that would otherwise increase the costs of our business, could adversely affect our financial results.

Tax law changes could adversely affect our insurance product sales and profitability.

We sell deferred annuities and some forms of life insurance that are attractive, in part, because policyholders generally are not subject to U.S. federal income tax on increases in policy values until some form of distribution is made.  Congress has enacted legislation to lower marginal tax rates, to reduce the U.S. federal estate tax gradually over a ten-year period (with total elimination of the U.S. federal estate tax in 2010) and to increase contributions that may be made to individual retirement accounts and 401(k) accounts.  While these tax law changes are scheduled to expire at the beginning of 2011 absent future congressional action, they could in the interim diminish the appeal of our annuity and life insurance products because the benefit of tax deferral is lessened when tax rates are lower and because fewer people may purchase these products when they can contribute more to individual retirement accounts and 401(k) accounts.  Additionally, Congress has considered, from time to time, other possible changes to U.S. tax laws, including elimination of the tax deferral on the accretion of value within certain annuities and life insurance products.  Such a change would make these products less attractive to prospective purchasers and therefore would likely cause our sales of these products to decline.

We face risk with respect to our reinsurance agreements.

We transfer exposure to certain risks to others through reinsurance arrangements.  Under these arrangements, other insurers assume a portion of our losses and expenses associated with reported and unreported claims in exchange for a portion of policy premiums.  The availability, amount and cost of reinsurance depend on general market conditions and may vary significantly.  As of December 31, 2009, our reinsurance receivables totaled $3.6 billion.  Our ceded life insurance in-force totaled $16.5 billion.  Our ten largest reinsurers accounted for 91% of our ceded life insurance in-force.  We face credit risk with respect to reinsurance.  When we obtain reinsurance, we are still liable for those transferred risks if the reinsurer cannot meet its obligations.  Therefore, the inability of our reinsurers to meet their financial obligations may require us to increase liabilities, thereby reducing our net income and shareholders’ equity.

Our insurance subsidiaries may be required to pay assessments to fund other companies’ policyholder losses or liabilities and this may negatively impact our financial results.

The solvency or guaranty laws of most states in which an insurance company does business may require that company to pay assessments up to certain prescribed limits to fund policyholder losses or liabilities of other insurance companies that become insolvent.  Insolvencies of insurance companies increase the possibility that these assessments may be required.  These assessments may be deferred or forgiven under most guaranty laws if they would threaten an insurer’s financial strength and, in certain instances, may be offset against future premium taxes.  We cannot estimate the likelihood and amount of future assessments.  Although past assessments have not been material, if there were a number of large insolvencies, future assessments could be material and could have a material adverse effect on our operating results and financial position.

 
39

 


ITEM 1B.                         UNRESOLVED STAFF COMMENTS.

None.


ITEM 2.               PROPERTIES.

Our headquarters and the administrative operations of our Conseco Insurance Group segment and certain administrative operations of our subsidiaries are located on a Company-owned corporate campus in Carmel, Indiana, immediately north ofIndianapolis.  We currently occupy five buildings on the campus with approximately 526,000 square feet of space.  

Our Bankers Life segment is primarily administered from a facility in downtown Chicago, Illinois.  Bankers Life has approximately 222,000 square feet leased under an agreement which expires in 2018.  In addition, Bankers Life leases approximately 114,000 square feet of space in its former location, the Merchandise Mart.  Approximately 75 percent of that space is subleased through November 2013, the early termination date of the lease.  We also lease 238 sales offices in various states totaling approximately 718,000 square feet.  These leases generally are short-term in length, with remaining lease terms expiring between 2010 and 2017.

Our Colonial Penn segment is administered from a Company-owned office building in Philadelphia, Pennsylvania, with approximately 127,000 square feet.  We occupy approximately 60 percent of this space, with unused space leased to tenants.

Management believes that this office space is adequate for our needs.

ITEM 3.               LEGAL PROCEEDINGS.

Information required for Item 3 is incorporated by reference to the discussion under the heading “Legal Proceedings” in note 9 “Commitments and Contingencies” to our consolidated financial statements included in Item 8 of this Form 10-K.

ITEM 4.               SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

None.

 
40

 


Executive Officers of the Registrant

Officer
     
Positions with Conseco, Principal
Name and Age (a)
 
Since
 
Occupation and Business Experience (b)
         
C. James Prieur, 58                                           
 
2006
 
Since September 2006, chief executive officer.  From April 1999 until September 2006, president and chief operating officer of Sun Life Financial, Inc. and chief operating officer of its principal subsidiary, Sun Life Assurance Company.
         
Edward J. Bonach, 56                                           
 
2007
 
Since May 2007, executive vice president and chief financial officer.  From 2002 until 2007, Mr. Bonach served as chief financial officer of National Life Group.
         
Russell M. Bostick, 53                                           
 
2005
 
Since August 2008, executive vice president of technology and operations.  From 2005 until August 2008, executive vice president and chief information officer.  From 1998 until 2005, chief technology officer of Chase Insurance and its predecessors.
         
Eric R. Johnson, 49                                           
 
1997
 
Since September 2003, chief investment officer of Conseco and president and chief executive officer of 40|86 Advisors, Conseco’s wholly-owned registered investment advisor.  Mr. Johnson has held various investment management positions since joining Conseco in 1997.
         
John R. Kline, 52                                           
 
1990
 
Since July 2002, senior vice president and chief accounting officer.  Mr. Kline has served in various accounting and finance capacities with Conseco since 1990.
         
Susan L. Menzel, 44                                           
 
2005
 
Since May 2005, executive vice president, human resources.  From 2004 to May 2005, senior vice president, human resources of APAC Customer Services.  From 1997 to 2004, vice president, human resources of Sears Roebuck.
         
Christopher J. Nickele, 53                                           
 
2005
 
Since October 2005, executive vice president, product management.  From 2002 until September 2005, vice president – product development of Lincoln National Corporation.
         
Scott R. Perry, 47                                           
 
2001
 
Since 2006, president of Bankers Life.  Employed in various capacities for Bankers Life since 2001.
         
Steven M. Stecher, 49                                           
 
2004
 
Since August 2008, president of Conseco Insurance Group.  From January 2007 until August 2008, executive vice president, operations.  From August 2004 until January 2007, executive vice president of Conseco Insurance Group.  From 2003 until May 2004 chief information officer of Orix Financial Services.  From 1997 until 2002, Mr. Stecher held several executive positions with ING Americas, including chief information officer, vice president of strategic marketing and head of shared services.
         
Matthew J. Zimpfer, 42                                           
 
1998
 
Since June 2008, executive vice president and general counsel. Mr. Zimpfer has held various legal positions since joining Conseco in 1998.
____________________
 
(a)
The executive officers serve as such at the discretion of the Board of Directors and are elected annually.
 
(b)
Business experience is given for at least the last five years.

 
41

 


PART II

 
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

MARKET INFORMATION

The following table sets forth the ranges of high and low sales prices per share for our common stock on the New York Stock Exchange for the quarterly periods beginning January 1, 2008.  There have been no dividends paid or declared on our common stock during this period.

Period
 
Market price
 
   
High
   
Low
 
             
2008:
           
First Quarter                                                   
  $ 12.64     $ 8.71  
Second Quarter                                                   
    12.34       9.62  
Third Quarter                                                   
    10.16       3.06  
Fourth Quarter                                                   
    5.21       1.31  
                 
2009:
               
First Quarter                                                   
  $ 5.10     $ .26  
Second Quarter                                                   
    3.90       .82  
Third Quarter                                                   
    6.31       1.79  
Fourth Quarter                                                   
    7.03       4.41  

As of February 19, 2010, there were approximately 40,000 holders of the outstanding shares of common stock, including individual participants in securities position listings.

 
42

 


PERFORMANCE GRAPH

The Performance Graph below compares Conseco’s cumulative total shareholder return on its common stock for the period from December 31, 2004 through December 31, 2009 with the cumulative total return of the Standard & Poor’s 500 Composite Stock Price Index (the “S&P 500 Index”) and the Dow Jones Life Insurance Index.  The comparison for each of the periods assumes that $100 was invested on December 31, 2004 in each of Conseco common stock, the stocks included in the S&P 500 Index and the stocks included in the Dow Jones Life Insurance Index and that all dividends were reinvested.  The stock performance shown in this graph represents past performance and should not be considered an indication of future performance of Conseco’s common stock.

COMPARISON OF CUMULATIVE TOTAL RETURN
AMONG CONSECO, S&P 500 INDEX AND DOW JONES LIFE INSURANCE INDEX

Performance Graph
Cumulative Total Returns
 
12/31/04
   
12/31/05
   
12/31/06
   
12/31/07
   
12/31/08
   
12/31/09
 
DJ Life Insurance Index
  $ 100     $ 122     $ 138     $ 147     $ 72     $ 86  
S&P 500 Index
  $ 100     $ 105     $ 121     $ 128     $ 81     $ 102  
Conseco, Inc. 
  $ 100     $ 116     $ 100     $ 63     $ 26     $ 25  

DIVIDENDS

The Company does not anticipate declaring or paying cash dividends on its common stock in the foreseeable future, and is currently limited in doing so pursuant to our debt agreements.  Please refer to “Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations – Liquidity of the Holding Companies” for further discussion of these restrictions.

 
43

 


ISSUER PURCHASES OF EQUITY SECURITIES

Period
 
Total number of shares (or units)
   
Average price paid per share (or unit)
   
Total number of
shares (or units) purchased as part of publicly announced plans or programs
   
Maximum number (or approximate dollar value)
of shares (or units) that
may yet be purchased
under the plans or programs(a)
 
                     
(dollars in millions)
 
                         
October 1 through October 31
    -       -       -     $ 262.8  
                                 
November 1 through November 30
    -       -       -       262.8  
                                 
December 1 through December 31
    -       -        -       262.8  
                                 
Total                           
    -       -        -       262.8  
____________
(a)  
On December 21, 2006, the Company announced a common share repurchase program of up to $150 million.  On May 8, 2007, the Company announced that the maximum amount that was authorized under the common share repurchase program had been increased to $350 million.

EQUITY COMPENSATION PLAN INFORMATION

The following table summarizes information, as of December 31, 2009, relating to our common stock that may be issued under the Conseco, Inc. Amended and Restated Long-Term Incentive Plan.

   
Number of securities
to be issued upon exercise of outstanding options, warrants or rights
   
Weighted-average exercise price of outstanding options, warrants or rights
   
Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in first column)
 
                   
Equity compensation plans approved by
security holders
    8,559,700     $ 11.65       12,565,204  
                         
Equity compensation plans not approved
by security holders                                                
    -       -       -  
                         
Total                                                   
    8,559,700     $ 11.65       12,565,204  


 
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ITEM 6.       SELECTED CONSOLIDATED FINANCIAL DATA.

   
Years ended December 31,
 
   
2009
   
2008(a)
   
2007(a)
   
2006(a)
   
2005(a)
 
                               
(Amounts in millions, except per share data)
                             
STATEMENT OF OPERATIONS DATA (b)
                             
Insurance policy income
  $ 3,093.6     $ 3,253.6     $ 2,895.7     $ 2,696.4     $ 2,620.9  
Net investment income
    1,292.7       1,178.8       1,369.8       1,350.8       1,222.8  
Net realized investment gains (losses)
    (60.5 )     (262.4 )     (158.0 )     (46.6 )     (3.3 )
Total revenues
    4,341.4       4,189.7       4,131.3       4,019.8       3,865.1  
Interest expense
    117.9       106.5       125.3       81.0       61.0  
Total benefits and expenses
    4,167.8       4,186.0       4,149.3       3,860.6       3,462.1  
Income (loss) before income taxes and discontinued operations
    173.6       3.7       (18.0 )     159.2       403.0  
Income tax expense
    87.9       413.3       61.1       58.3       143.1  
Income (loss) before discontinued operations
    85.7       (409.6 )     (79.1 )     100.9       259.9  
Discontinued operations, net of income taxes
    -       (722.7 )     (105.9 )     .3       51.1  
Net income (loss)
    85.7       (1,132.3 )     (185.0 )     101.2       311.0  
Preferred stock dividends
    -       -       14.1       38.0       38.0  
Net income (loss) applicable to common stock
    85.7       (1,132.3 )     (199.1 )     63.2       273.0  
                                         
PER SHARE DATA  (b)
                                       
Income (loss) before discontinued operations, basic
  $ .45     $ (2.22 )   $ (.54 )   $ .42     $ 1.47  
Income (loss) before discontinued operations, diluted
    .45       (2.22 )     (.54 )     .41       1.40  
Net income, basic
    .45       (6.13 )     (1.15 )     .42       1.81  
Net income, diluted
    .45       (6.13 )     (1.15 )     .41       1.68  
Book value per common share outstanding
    14.09       8.82       23.03       26.64       25.45  
Weighted average shares outstanding for basic earnings
    188.4       184.7       173.4       151.7       151.2  
Weighted average shares outstanding for diluted earnings
    193.3       184.7       173.4       152.5       185.0  
Shares outstanding at period-end
    250.8       184.8       184.7       152.2       151.5  
                                         
BALANCE SHEET DATA - AT PERIOD END (b)
                                       
Total investments
  $ 21,530.2     $ 18,647.5     $ 21,324.5     $ 23,768.8     $ 23,424.6  
Total assets
    30,343.8       28,763.3       33,961.5       33,580.2       32,871.0  
Corporate notes payable
    1,037.4       1,311.5       1,167.6       966.4       809.4  
Total liabilities
    26,811.4       27,133.3       29,709.2       28,858.6       28,347.4  
Shareholders’ equity
    3,532.4       1,630.0       4,252.3       4,721.6       4,523.6  
                                         
STATUTORY DATA – AT PERIOD END (c)
                                       
Statutory capital and surplus
  $ 1,410.7     $ 1,311.5     $ 1,336.2     $ 1,554.5     $ 1,603.8  
Asset valuation reserve (“AVR”)
    28.2       55.0       161.3       179.1       142.7  
Total statutory capital and surplus and AVR
    1,438.9       1,366.5       1,497.5       1,733.6       1,746.5  
____________________
(a)  
Selected amounts have been restated to reflect the retrospective application of the adoption of authoritative guidance that specifies that issuers of convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) should separately account for the liability and equity components in a manner that will reflect the entity’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods.  The guidance has been applied retrospectively to the years ended December 31, 2008, 2007, 2006 and 2005.
(b)  
As a result of the Transfer, as further discussed in the note to the consolidated financial statements entitled “Transfer of Senior Health Insurance Company of Pennsylvania to an Independent Trust”, a substantial portion of our long-term care business is presented as discontinued operations in our consolidated financial statements and prior periods have been restated to conform with the current year presentation.

 
45

 


(c)  
We have derived the statutory data from statements filed by our insurance subsidiaries with regulatory authorities which are prepared in accordance with statutory accounting principles, which vary in certain respects from GAAP, and include amounts related to our discontinued operations in 2007, 2006 and 2005.

 
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

In this section, we review the consolidated financial condition of Conseco at December 31, 2009, and the consolidated results of operations for the years ended December 31, 2009, 2008 and 2007 and, where appropriate, factors that may affect future financial performance.  Please read this discussion in conjunction with the consolidated financial statements and notes included in this Form 10-K.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

Our statements, trend analyses and other information contained in this report and elsewhere (such as in filings by Conseco with the SEC, press releases, presentations by Conseco or its management or oral statements) relative to markets for Conseco’s products and trends in Conseco’s operations or financial results, as well as other statements, contain forward-looking statements within the meaning of the federal securities laws and the Private Securities Litigation Reform Act of 1995.  Forward-looking statements typically are identified by the use of terms such as “anticipate,” “believe,” “plan,” “estimate,” “expect,” “project,” “intend,” “may,” “will,” “would,” “contemplate,” “possible,” “attempt,” “seek,” “should,” “could,” “goal,” “target,” “on track,” “comfortable with,” “optimistic” and similar words, although some forward-looking statements are expressed differently.  You should consider statements that contain these words carefully because they describe our expectations, plans, strategies and goals and our beliefs concerning future business conditions, our results of operations, financial position, and our business outlook or they state other “forward-looking” information based on currently available information.  The “Risk Factors” in Item 1A provide examples of risks, uncertainties and events that could cause our actual results to differ materially from the expectations expressed in our forward-looking statements.  Assumptions and other important factors that could cause our actual results to differ materially from those anticipated in our forward-looking statements include, among other things:

·  
our ability to continue to satisfy the financial ratio and balance requirements and other covenants of our debt agreements;

·  
general economic, market and political conditions, including the performance and fluctuations of the financial markets which may affect our ability to raise capital or refinance existing indebtedness and the cost of doing so;

·  
our ability to generate sufficient liquidity to meet our debt service obligations and other cash needs;

·  
our ability to obtain adequate and timely rate increases on our supplemental health products, including our long-term care business;

·  
the receipt of any required regulatory approvals for dividend and surplus debenture interest payments from our insurance subsidiaries;

·  
 mortality, morbidity, the increased cost and usage of health care services, persistency, the adequacy of our previous reserve estimates and other factors which may affect the profitability of our insurance products;

·  
 changes in our assumptions related to the cost of policies produced or the value of policies in force at the effective date;

·  
 the recoverability of our deferred tax assets and the effect of potential ownership changes and tax rate changes on its value;

·  
 our assumption that the positions we take on our tax return filings, including our position that our 7.0% Debentures will not be treated as stock for purposes of Section 382 of the Code and will not trigger an ownership change, will not be successfully challenged by the IRS;

 
46

 


·  
changes in accounting principles and the interpretation thereof;

·  
our ability to achieve anticipated expense reductions and levels of operational efficiencies including improvements in claims adjudication and continued automation and rationalization of operating systems,

·  
performance and valuation of our investments, including the impact of realized losses (including other-than-temporary impairment charges);

·  
 our ability to identify products and markets in which we can  compete effectively against competitors with greater market share, higher ratings, greater financial resources and stronger brand recognition;

·  
the ultimate outcome of lawsuits filed against us and other legal and regulatory proceedings to which we are subject;

·  
our ability to complete the remediation of  the material weakness in internal controls over our actuarial reporting process and to maintain effective controls over financial reporting;

·  
our ability to continue to recruit and retain productive agents and distribution partners and customer response to new products, distribution channels and marketing initiatives;

·  
our ability to achieve eventual upgrades of the  financial strength ratings of Conseco and our insurance company subsidiaries as well as the impact of rating downgrades on our business and our ability to access capital;

·  
 the risk factors or uncertainties listed from time to time in our filings with the SEC;

·  
 regulatory changes or actions, including those relating to regulation of the financial affairs of our insurance companies, such as the payment of dividends and surplus debenture interest to us, regulation of financial services affecting (among other things) bank sales and underwriting of insurance products, regulation of the sale, underwriting and pricing of products, and health care regulation affecting health insurance products; and

·  
 changes in the Federal income tax laws and regulations which may affect or eliminate the relative tax advantages of some of our products.

Other factors and assumptions not identified above are also relevant to the forward-looking statements, and if they prove incorrect, could also cause actual results to differ materially from those projected.

All written or oral forward-looking statements attributable to us are expressly qualified in their entirety by the foregoing cautionary statement.  Our forward-looking statements speak only as of the date made.  We assume no obligation to update or to publicly announce the results of any revisions to any of the forward-looking statements to reflect actual results, future events or developments, changes in assumptions or changes in other factors affecting the forward-looking statements.

OVERVIEW

We are a holding company for a group of insurance companies operating throughout the United States that develop, market and administer supplemental health insurance, annuity, individual life insurance and other insurance products.  We focus on serving the senior and middle-income markets, which we believe are attractive, underserved, high growth markets.  We sell our products through three distribution channels: career agents, professional independent producers (some of whom sell one or more of our product lines exclusively) and direct marketing.

 
47

 


We manage our business through the following:  three primary operating segments, Bankers Life, Colonial Penn and Conseco Insurance Group, which are defined on the basis of product distribution; and corporate operations, which consists of holding company activities and certain noninsurance company businesses that are not part of our other segments.  Our segments are described below:

· 
Bankers Life, which consists of the business of Bankers Life and Casualty Company, markets and distributes health and life insurance products and annuities to the middle-income senior market through a dedicated field force of over 5,600 career agents and sales managers supported by a network of over 150 community-based branch offices.  Products include Medicare supplement insurance, life insurance, fixed annuities and long-term care insurance.  Bankers Life also markets and distributes Medicare Part D prescription drug plans through a distribution and reinsurance arrangement with Coventry and Medicare Advantage plans primarily through a distribution arrangement with Humana.
   
· 
Colonial Penn, which consists of the business of Colonial Penn, markets primarily graded benefit and simplified issue life insurance directly to customers through television advertising, direct mail, the internet and telemarketing.  Colonial Penn markets its products under its own brand name.
   
· 
Conseco Insurance Group, which markets and distributes specified disease insurance, accident, disability, life insurance and annuities to middle-income consumers at home and at the worksite.  These products are marketed through Performance Matters Associates, Inc., a wholly owned subsidiary, and through independent marketing organizations and insurance agencies.  Products being marketed by Conseco Insurance Group are underwritten by Conseco Insurance Company, Conseco Health and Washington National.  This segment also includes blocks of long-term care and other insurance business, in these companies and in Conseco Life, which we no longer market.


 
48

 


The following summarizes our earnings for the three years ending December 31, 2009 (dollars in millions, except per share data):

   
2009
   
2008
   
2007
 
Earnings before net realized investment gains (losses), discontinued operations,
corporate interest, gain (loss) on extinguishment or modification of debt and income taxes (“EBIT” a non-GAAP financial measure) (a):
                 
Bankers Life
  $ 278.0     $ 171.5     $ 241.8  
Colonial Penn
    29.4       25.2       18.1  
Conseco Insurance Group
    67.3       121.3       (26.3 )
Corporate Operations, excluding corporate interest expense
    (37.7 )     (26.7 )     (49.0 )
EBIT
    337.0       291.3       184.6  
Corporate interest expense
    (84.7 )     (67.9 )     (80.3 )
Income before gain (loss) on extinguishment or modification of debt, net realized investment losses, taxes and discontinued operations
    252.3       223.4       104.3  
Tax expense on operating income
    87.7       86.4       35.9  
Income before gain (loss) on extinguishment or modification of debt, net realized investment losses, valuation allowance for deferred tax assets and discontinued operations 
    164.6       137.0       68.4  
Preferred stock dividends
    -       -       (14.1 )