2009 Annual Report | Conseco, Inc

2009 Annual Report | Conseco, Inc. Table of Contents 3 Letter to Shareholders 6 Our New Brand 9 Committed to Customer Service 10 Sound Advice to Meet Our Customers’ Needs 13 Financial Protection for the Unexpected 14 Conseco in the Community 17 Annual Report on Form 10-K 57 Market for Registrant’s Common Equity Related Stockholder Matters and Issuer Purchases of Equity Securities 60 Selected Consolidated Financial Data 61 Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations 132 Consolidated Financial Statements and Supplementary Data 222 Exhibits and Financial Statement Schedules 231 Directors of Conseco, Inc. 233 Investor Information CNO Financial Group I 1 Our new brand exemplifies our commitment to our customers and reflects our improved financial position, our more clearly-defined business strategy and the positive opportunities for growth in the years ahead. C. James Prieur Chief Executive Officer To Our Shareholders: What an extraordinary year 2009 was for Conseco. investors and each of our three distribution channels is Following the economic downturn and turmoil in the consistent with our goal to focus even more clearly on U.S. and worldwide capital markets the previous year, our customers. Conseco made significant progress at both the holding company and the operating businesses. The culmination Our company has been streamlined and simplified over of those efforts and the strategic initiatives carried out in the past three years to concentrate on those businesses recent years has substantially transformed our company. where we are best positioned to meet the needs of a fast- growing but underserved marketplace that we understand This widespread transformation included recapitalizing well. Our company is defined by that market of middle- the company, reducing debt, increasing equity, providing income working Americans and retirees and not by our greater financial flexibility to enhance our ability to grow set of products, giving us what we believe is a unique profitably and delivering four consecutive profitable value proposition. quarters. Numerous business and operational initiatives were undertaken across the company, and many more The projected growth in our target market is remarkable. are under way. The first of the Baby Boom generation will become Medicare-eligible next year, and in 10 years, the number To reflect the fundamental change that has taken place of people 65 years old and over will increase by 50 percent. in recent years, including closure on many legacy issues, As this group moves towards retirement, we stand ready we have undertaken a re-branding initiative. As you see to serve them with products designed to meet their specific introduced on the cover of this report, Conseco, Inc. needs. Not surprisingly, our total Medicare and life is becoming CNO Financial Group, Inc., the holding insurance sales in 2009 showed double-digit percentage company for Bankers Life and Casualty Company, growth over the previous year, and we expect they will Colonial Penn Life Insurance Company and Washington show continued strong growth, along with other products National Insurance Company, which will be the new designated for our market. name for most of the Conseco Insurance Group business. Our business model has been refined to become even The new name incorporates the holding company’s more customer driven, and our new brand symbol— New York Stock Exchange symbol, CNO, already familiar inspired by an American quilt pattern—stands for our to investors. Changing the name of our holding company commitment to helping our customers meet their needs. to CNO Financial Group and having separate brands for CNO Financial Group I 3 Financial Performance were reached involving policyholders who opted out of the previously settled R-factor class action litigation and We were pleased with our return to profitability during a multi-state market conduct examination involving 2009, reporting four consecutive quarters of net income. holders of Lifetrend life insurance policies. The Lifetrend Earnings before net realized investment losses, discontinued action resolves regulatory issues related to the sale and operations, corporate interest, gain (loss) on extinguishment administration of Lifetrend policies and regulatory or modification of debt and taxes were $337 million, issues regarding Conseco Life’s ability to manage non- up 16 percent, compared to $291 million in the prior guaranteed elements in the Lifetrend block of business. year. Total new annualized premium, excluding private fee-for-service, was $392 million, an increase of 6 percent from 2008. Business Performance We were very pleased with the strong performance in Net income for the year was $86 million, or 45 cents per 2009 at Bankers Life and Casualty, our career distribution diluted share, compared to a net loss of $1,132 million channel. Total new annualized premium, excluding in the prior year. The prior year’s loss included a private fee for service, increased by 12 percent to $723 million loss from discontinued operations related $278 million. The year was a record for sales in both to our transferring the stock of Senior Health Insurance Medicare supplement products and life insurance, and Company of Pennsylvania to an independent trust. a record year for agent recruitment in the Bankers career agent sales force, which grew 9 percent to approximately Capital management was our primary focus during this 5,100 agents. transformational year, highlighted by our recapitalization plan. Through public and private sales of stock, we raised At Colonial Penn, our direct distribution channel, new $296 million of common equity. Additionally, we repaid annualized premium, excluding private fee for service, $198 million of our senior debt in the fourth quarter and was down 16 percent to $42 million. The decrease was restructured and extended our debt covenants, giving us expected as a result of our reduced advertising as part of greater financial flexibility going forward. These actions capital management, but despite that reduction, collected increased our holding company liquidity to $146 million premium increased by 6 percent over 2008. at year end. Conseco Insurance Group, our independent distribution The refinancing of our old 3.5 percent convertible debentures channel, saw new annualized premium increase by was critical to our success in 2009. We are replacing these 0.4 percent to $72 million, despite a de-emphasis of securities with new 7 percent convertible debentures annuity sales. Our worksite business, an important market due in 2016. for us, had sales growth of 11 percent for the year, and sales were strong at Performance Matters Associates, our Those and other capital management activities, including wholly-owned distribution organization. reinsurance and reduction of marketing costs at Colonial Penn, contributed to a meaningful increase in our As we resume our investment in growth, our outlook consolidated risk-based capital level to 309 percent from is optimistic for all of our businesses. At Bankers Life, 255 percent at the end of the prior year. Collectively, we are reinsuring less of our new business, thus investing our actions to strengthen our financial position have more, while continuing to expand the sales force. For led to positive moves from some of the ratings agencies. Colonial Penn, we are increasing our marketing efforts Standard & Poor’s upgraded our rating two notches to as we re-focus on growth potential that was purposely B- and upgraded our outlook to stable, while Moody’s curtailed last year, and at Conseco Insurance Group, upgraded our outlook to positive. we are growing our new, more profitable business and taking the necessary steps to improve the Cleaning up some of the company’s remaining legacy underperforming legacy blocks of business. issues continued during the year. Settlements in principle 4 I CNO Financial Group Leadership Looking Ahead Our people, our leadership team and our culture also are As we look toward fulfilling our long-term goals, being transformed as we re-focus and re-brand our company. we continue to invest in the profitable growth of our Our ability to bring in top talent from outside the company, company. Continued expansion of our Bankers Life sales and identify and promote top people from inside the force, increased marketing efforts at Colonial Penn and company, remained a priority for us again in 2009. continued emphasis on profitable supplemental health and life insurance products at Washington National are During the past year, we were pleased that Tom Kaehr, key to our future. Vice President, Internal Audit, and Jacqueline Brainard, Vice President, Re-engineering, joined the company. Our focus on middle-income working Americans and Internally, we filled a number of leadership positions, retirees defines our company and our commitment to our including Chris Foote, Vice President, Asset Liability customers. Our new brand exemplifies that commitment Management; Erik Helding, Vice President, Financial and reflects our improved financial position, our more Planning and Analysis; Jerry Lynch, Vice President, clearly-defined business strategy and the positive Bankers Life Valuation and Projections; Chris Quallen, opportunities for growth in the years ahead. Vice President, Derivative Trading; David Vega, Vice President, Underwriting and New Business; and Bruce We recognize that we have much to accomplish and the Jordan, Northeast Territory Vice President. need

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