A.M. Best Co. has removed from under review with negative implications and affirmed the financial strength rating (FSR) of B (Fair) and issuer credit ratings (ICR) of “bb” of the life/health insurance subsidiaries of Conseco, Inc. (Conseco) (Carmel, IN) [NYSE: CNO]. Concurrently, A.M. Best has removed from under review with negative implications and affirmed the ICR and senior debt rating of “b-” of Conseco. The outlook assigned to all ratings is negative. (See below for a detailed listing of the companies and ratings.)

These rating actions follow Conseco’s recent announcement of its recapitalization plan, which includes the issuance of common shares as well as the exchange of debt. The debt portion commenced with a private offering of $293 million of 7.0% convertible senior debentures, which will be used to retire its outstanding 3.5% convertibles as they are tendered. This refinancing eliminates the September 2010 put option within the existing convertible notes, which A.M. Best views favorably.

The equity raise is expected to be completed in two parts. The first being a private transaction with Paulson & Co. Inc. and affiliates (Paulson) for common equity and warrants totaling approximately $78 million. Upon closing, in aggregate, Paulson will own 9.9% of Conseco’s outstanding shares. Additionally, Conseco has announced that it plans to file a registration statement to offer common stock that would generate at least $200 million in gross proceeds. One-half of the combined net equity proceeds will be used to pay down the existing bank loan, with the remaining proceeds used for general corporate purposes. Overall, the capital raise will have a modest favorable impact on Conseco’s financial leverage and a negligible effect on interest coverage, both of which are within A.M. Best’s guidelines for the current ratings.

A.M. Best believes that these offerings will enhance the organization’s overall financial flexibility, while providing additional cushion with respect to certain covenants in Conseco’s senior secured credit facility. Additionally, A.M. Best would view favorably any infusion of funds to Conseco’s insurance subsidiaries by the holding company as statutory capital growth has been constrained recently by asset impairments. A.M. Best notes some potential for execution risk with respect to Conseco’s ability to complete the second equity transaction. Conseco’s operating companies maintain exposure to additional asset impairments through its significant holdings in below investment grade bonds and commercial mortgage loans relative to its capital and surplus. With respect to commercial mortgages, A.M. Best is particularly concerned with retail, hotel and office properties within close proximity to distressed housing markets and/or labor markets where unemployment is high.

The FSR of B (Fair) and ICRs of “bb” have been removed from under review with negative implications and affirmed for the life/health subsidiaries of Conseco, Inc.:

• Bankers Life and Casualty Company
• Colonial Penn Life Insurance Company
• Conseco Health Insurance Company
• Conseco Insurance Company
• Bankers Conseco Life Insurance Company
• Conseco Life Insurance Company
• Washington National Insurance Company

The following debt rating has been removed from under review with negative implications and affirmed

Conseco, Inc. —

-- “b-” on $300 million 3.5% senior unsecured convertible debentures, due 2035

For Best’s Credit Ratings, an overview of the rating process and rating methodologies, please visit www.ambest.com/ratings.

The principal methodologies used in determining these ratings, including any additional methodologies and factors that may have been considered, can be found at www.ambest.com/ratings/methodology.

Founded in 1899, A.M. Best Company is a global full-service credit rating organization dedicated to serving the financial and health care service industries, including insurance companies, banks, hospitals and health care system providers. For more information, visit www.ambest.com.