A.M. Best Co. has revised the outlook to positive from negative and affirmed the issuer credit ratings (ICR) of “bb” as well as revised the outlook to stable from negative and affirmed the financial strength rating (FSR) of B (Fair) of the key life/health subsidiaries of Conseco, Inc. (Conseco) (Carmel, IN) [NYSE: CNO]. A.M. Best also has revised the outlook to positive from negative and affirmed the ICR of “b-” and senior debt rating of “b-” of Conseco. (See below for a detailed listing of companies and ratings.)

The revised outlooks reflect Conseco’s improved risk-adjusted capital levels and financial flexibility due to the company’s recapitalization plan, which was completed during fourth quarter 2009. The plan encompassed several phases, the first being the replacement of convertible debentures, which addressed a put provision that would have been exercisable in September 2010. Simultaneously, Paulson & Co. Inc. (Paulson), a private equity firm purchased common equity and warrants for a purchase price of approximately $78 million, resulting in Paulson owning 9.9% of Conseco’s outstanding shares. $37.8 million of the proceeds from this issuance was used to pay indebtedness on the senior credit facility. Following the closing of the Paulson transaction (in early December, 2009) Conseco completed an amendment to its senior credit facility providing covenant relief in exchange for additional principal payments. In late December 2009, Conseco completed a public offering of common stock that generated approximately $223 million in proceeds, of which about $161 million was used to repay indebtedness under the aforementioned senior credit facility. A.M. Best views favorably the successful completion of Conseco’s recapitalization plan, noting that the covenant relief mitigates any near-term concerns as the facility’s requirements do not step-up until 2011 and provide comfortable margins with respect to the statutory based measures.

The rating actions also reflect Conseco’s recently stabilized and improving operating profile. The company continues to manage its exposure to long-term care and non-core life insurance businesses through various management actions and reinsurance transactions. In addition, Conseco has streamlined and simplified the company’s focus on markets where it has true competitive advantages. A.M. Best acknowledges the significant strategic management actions Conseco has undertaken (over the last couple of years) in rebuilding its business profile to better position the company to serve the life, health and retirement needs of the middle-income marketplace.

A.M. Best notes that Conseco continues to incur sizable impairments within its investment portfolio. Despite recent prospects of economic recovery, A.M. Best believes the potential exists for additional material investment losses given the likelihood of higher bond credit defaults and emerging risks in the commercial mortgage market as the credit cycle unwinds. Additionally, despite the improvements in Conseco’s business profile, A.M. Best remains concerned regarding the operating performance of the Conseco Insurance Group unit. Should Conseco not meet its profitability projections and/or incur additional large realized capital losses, the organization will be challenged to maintain its cushion on certain ratios or measures within its existing debt covenants. Moreover, the company has experienced issues with internal controls in the past—all of which have not been remediated.

A.M. Best also has downgraded the FSR to B- (Fair) from B (Fair) and ICR to “bb-” from “bb” of Conseco Life Insurance Company (CLIC) (Carmel, IN). The outlook for both ratings is negative.

The ratings recognize CLIC’s significant decrease in risk-adjusted capitalization and continued realized losses in its investment portfolio. As the company has been placed in run off, A.M. Best believes the level of support that Conseco will provide to CLIC in the future is unclear.

The ICRs of “bb” have been affirmed with a revised outlook to positive from negative and the FSR of B (Fair) has been affirmed with a revised outlook to stable from negative for the following key 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
• Washington National Insurance Company

The following debt rating has been affirmed with a revised outlook to positive from negative:

Conseco, Inc.—

-- “b-” on $300 million 3.5% senior unsecured convertible debentures, due 2035 ($52.5 million debentures currently outstanding)

The following debt ratings have been assigned with a positive outlook:

Conseco, Inc.—

-- “b-” on $176.5 million 7.0% senior unsecured convertible debentures, due 2016

-- “b-” on $64 million 7.0% senior unsecured convertible debentures, due 2016

-- “b-” on $52.5 million 7.0% senior unsecured convertible debentures, due 2016

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.