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CNO Financial Group, Inc. 10-K 2008
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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, 2007 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 No. 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 of Each Exchange on which Registered
------------------- ------------------------------------
Common Stock, par value $0.01 per share New York Stock Exchange
Series A Warrants New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:
3.50% Convertible Debentures due September 30, 2035

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 [ ] No [ X ]

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 [ X ] Accelerated filer [ ] 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, 2007, 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 $3,919,718,000.

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 [ ] No [ X ]

Shares of common stock outstanding as of March 20, 2008: 184,655,525

DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Registrant's
definitive proxy statement for the 2008 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................................................. 33

Item 2. Properties.................................................................. 33

Item 3. Legal Proceedings........................................................... 34

Item 4. Submission of Matters to a Vote of Security Holders......................... 34

Executive Officers of the Registrant........................................ 35

PART II

Item 5. Market for Registrant's Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities................................... 37

Item 6. Selected Consolidated Financial Data........................................ 40

Item 7. Management's Discussion and Analysis of Consolidated
Financial Condition and Results of Operations............................... 44

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.................. 98

Item 8. Consolidated Financial Statements and Supplementary Data.................... 99

Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure........................................................ 181

Item 9A. Controls and Procedures..................................................... 181

Item 9B. Other Information........................................................... 183

PART III

Item 10. Directors, Executive Officers and Corporate Governance...................... 183

Item 11. Executive Compensation...................................................... 183

Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters................................................. 183

Item 13. Certain Relationships and Related Transactions, and Director Independence... 183

Item 14. Principal Accountant Fees and Services...................................... 183

PART IV

Item 15. Exhibits and Financial Statement Schedules.................................. 184


2



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 ("Old Conseco" or 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, Old Conseco 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, 2007, we had shareholders' equity of $4.2 billion
and assets of $33.5 billion. For the year ended December 31, 2007, we had
revenues of $4.6 billion and a net loss of $179.9 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, Conseco Insurance Group and Colonial Penn, which are
defined on the basis of product distribution; a fourth segment comprised of
other business in run-off; and corporate operations. Our segments are described
below:

o Bankers Life, which consists of the business of Bankers Life and
Casualty Company ("Bankers Life and Casualty"), markets and
distributes Medicare supplement insurance, life insurance, long-term
care insurance, Medicare Part D prescription drug program, Medicare
Advantage products and certain annuity products to the senior market
through approximately 5,100 career agents and sales managers. Bankers
Life and Casualty markets its products under its own brand name and
Medicare Part D and Medicare Advantage products primarily through
marketing agreements with Coventry Health Care ("Coventry").

o Conseco Insurance Group, which markets and distributes specified
disease insurance, Medicare supplement insurance, and certain life and
annuity products to the senior and middle-income markets through
approximately 350 independent marketing organizations ("IMOs") that
represent over 5,200 producing independent agents. This segment
markets its products under the "Conseco" and "Washington National" (a
wholly-owned insurance subsidiary of Conseco) brand names. Conseco
Insurance Group includes primarily the business of Conseco Health
Insurance Company ("Conseco Health"), Conseco Life Insurance Company
("Conseco Life"), Conseco Insurance Company and Washington National
Insurance Company ("Washington National"), other than any run-off
long-term care and major medical insurance issued by those companies.
Such run-off business is included in the Other Business in Run-off
segment.

o Colonial Penn, which consists of the business of Colonial Penn Life
Insurance Company ("Colonial Penn"), markets 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.

o Other Business in Run-off, which includes blocks of business that we
no longer market or underwrite and are managed separately from our
other businesses. This segment consists of: (i) long-term care
insurance sold in prior years through independent agents; and (ii)
major medical insurance. The Other Business in Run-off segment is
primarily comprised of long-term care business issued by Conseco
Senior Health Insurance Company ("Conseco Senior") and Washington
National, subsidiaries that were acquired in 1996 and 1997,
respectively. Long-term care collected premiums represented more than
99 percent of this segment's total collected premiums in 2007. Of the
long-term care collected premiums in this segment for the year ended
December 31, 2007, approximately 88 percent related to Conseco Senior,
approximately 8 percent related to Washington National and 4 percent
related to other Conseco insurance subsidiaries. In 2007, long-term
care premiums represented approximately 84 percent of the premiums
collected by Conseco Senior and approximately 6 percent of the
premiums collected by Washington National.

o Corporate operations, which consists of holding company activities and
certain noninsurance company businesses that are not part of our other
segments.

3




OUR STRATEGIC DIRECTION AND 2008 PRIORITIES

It is our vision to be a premier provider of insurance products to
America's middle-income families and seniors. Our insurance companies help
protect them from financial adversity: Medicare supplement, long-term care,
cancer, heart/stroke and accident policies protect people against unplanned
expenses; annuities and life products help people plan for their financial
future. We believe our products meet the needs of our target markets.

We believe our middle market target is underserved by a majority of financial
service providers and that the aging population will create strong growth in
these target markets. Important trends impacting middle market consumers
include:

o Increased life expectancy.

o Discontinuance or reduction in employer-sponsored benefit programs.

o Rising healthcare costs.

o Projected gaps between the annual costs and revenues of
government-sponsored plans such as Social Security and Medicare.

We believe our multiple distribution channels provide broad reach across the
market since consumers can access our products through an agent (Bankers Life or
Conseco Insurance Group), without an agent (Colonial Penn), and at the worksite
(Conseco Insurance Group).

Our major goals for 2008 include:

o Maintaining strong growth at Bankers Life and Colonial Penn.

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

o Improving earnings stability and reducing volatility.

o Improving the performance of the long-term care business in our Other
Business in Run-off segment by continuing to aggressively seek
actuarially justified rate increases and by improving claims
management.

o Completing the remediation project relating to our material weakness
in internal controls.

o Reducing our enterprise exposure to long-term care business.

o Improving or disposing of underperforming blocks of business.

o Re-deploying capital to generate improved returns.

o Positioning the Company to achieve an 11 percent operating return on
equity in 2009.

OTHER INFORMATION

CNO is the successor to Old Conseco. We emerged from bankruptcy on the
Effective Date. Old Conseco 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 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

4


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 2007, 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
2007 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, 2007
(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 $4.3 billion, $4.3 billion and $3.9 billion in 2007, 2006 and
2005, 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 2007 collected premiums: Florida (8.5
percent), California (7.3 percent), Texas (6.6 percent) and Pennsylvania (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 5,100 agents and sales
managers working from 159 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 2007, this
distribution channel accounted for $2,631.6 million, or 61 percent, of our total
collected premiums. These agents sell only Bankers Life and Casualty policies
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 2007,
this distribution channel in our Conseco Insurance Group segment collected
$1,014.4 million, or 24 percent, of our total premiums, and in our Other
Business in Run-off segment collected $308.1 million, or 7 percent, of Conseco's
total collected 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

5


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 Performance
Matters Associates, Inc. ("PMA"). In 2007, the PMA distribution channel
accounted for $235.9 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 2007,
this channel accounted for $124.1 million, or 3 percent, of our total collected
premiums.

Products

The following table summarizes premium collections by major category and
segment for the years ended December 31, 2007, 2006 and 2005 (dollars in
millions):

Total premium collections


2007 2006 2005
---- ---- ----

Supplemental health:
Bankers Life............................................................ $1,546.1 $1,308.3 $1,213.7
Conseco Insurance Group................................................. 594.4 611.6 661.5
Colonial Penn........................................................... 10.4 12.0 13.8
Other Business in Run-off............................................... 308.1 327.8 351.9
-------- -------- --------

Total supplemental health............................................ 2,459.0 2,259.7 2,240.9
-------- -------- --------

Annuities:
Bankers Life............................................................ 885.5 997.5 951.1
Conseco Insurance Group................................................. 368.6 433.3 161.7
-------- -------- --------

Total annuities...................................................... 1,254.1 1,430.8 1,112.8
-------- -------- --------

Life:
Bankers Life............................................................ 200.0 184.2 152.1
Conseco Insurance Group................................................. 287.3 314.6 335.0
Colonial Penn........................................................... 113.7 97.2 85.1
-------- -------- --------

Total life........................................................... 601.0 596.0 572.2
-------- -------- --------

Total premium collections.................................................. $4,314.1 $4,286.5 $3,925.9
======== ======== ========



6


Our insurance companies collected premiums from the following products:

Supplemental Health

Supplemental Health Premium Collections (dollars in millions)



2007 2006 2005
---- ---- ----

Medicare supplement:
Bankers Life................................................................. $ 636.1 $ 629.1 $ 638.8
Conseco Insurance Group...................................................... 225.9 244.2 288.8
Colonial Penn................................................................ 9.4 10.9 12.4
-------- -------- --------

Total..................................................................... 871.4 884.2 940.0
-------- -------- --------

Long-term care:
Bankers Life ................................................................ 622.4 592.4 564.2
Other Business in Run-off ................................................... 305.8 323.0 349.1
-------- -------- --------

Total..................................................................... 928.2 915.4 913.3
-------- -------- --------

Prescription Drug Plan and Medicare Advantage products
included in Bankers Life..................................................... 277.8 76.7 -
-------- -------- --------

Specified disease products included in
Conseco Insurance Group...................................................... 359.2 357.7 359.5
-------- -------- --------

Major medical business included in Other Business in Run-off..................... 2.3 4.8 2.8
-------- -------- --------

Other:
Bankers Life ................................................................ 9.8 10.1 10.7
Conseco Insurance Group...................................................... 9.3 9.7 13.2
Colonial Penn................................................................ 1.0 1.1 1.4
-------- -------- --------

Total..................................................................... 20.1 20.9 25.3
-------- -------- --------

Total supplemental health premium collections.................................... $2,459.0 $2,259.7 $2,240.9
======== ======== ========



The following describes our major supplemental health products:

Medicare Supplement. Medicare supplement collected premiums were $871.4
million during 2007 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 50 percent of new sales of Medicare
supplement policies in 2007 were to individuals who had recently reached the age
of 65.

7


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

Long-Term Care. Long-term care collected premiums were $928.2 million
during 2007, or 22 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.

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 portion of our long-term care business resides in the Other Business in
Run-off 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 Old Conseco 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 Other Business in Run-off
segment.

Prescription Drug Plan and Medicare Advantage. The Medicare Prescription
Drug, Improvement and Modernization Act of 2003 (the "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 premiums collected on plans sold
through our distribution channels. In addition, Conseco has a quota-share
reinsurance agreement with Coventry for Conseco enrollees that provides Conseco
with 50 percent of net premiums and related profits subject to a risk corridor.
The Part D program was effective January 1, 2006. PDP collected premiums were
$82.3 million during 2007 or 2 percent of our total collected premiums.

Conseco expanded its strategic alliance with Coventry by entering into a
national distribution agreement 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 receive a fee based on the number of PFFS plans sold
through our distribution channels. In addition, Conseco has a quota-share
reinsurance agreement with Coventry for Conseco enrollees that provide Conseco
in 2007 with approximately 50 percent of the net premiums and related profits.

Effective July 1, 2007, Conseco entered into a quota-share reinsurance
agreement with Coventry related to the PFFS business written by Coventry under
certain group policies. Conseco receives 50 percent 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. Conseco receives 25 percent of the
net premiums and related profits on the ceded margin in excess of five percent.
PFFS collected premiums were $195.5 million in 2007 or 5 percent of our total
collected premiums.

During the fourth quarter of 2007, we initiated a pilot program to test the
marketing and distribution of Coventry's PFFS plan through Colonial Penn's
direct response distribution channel.

Specified Disease Products. Specified disease collected premiums were
$359.2 million during 2007, or 8 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

8


heart disease, heart attack or stroke. Accident products combine insurance for
accidental death with limited benefit disability 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 78 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.

Major Medical. Our major medical business is included in our Other Business
in Run-off segment. Sales of our major medical health insurance products were
targeted to self-employed individuals, small business owners, large employers
and early retirees. This business was not profitable, and during 2001 and 2002,
we decided to discontinue our major medical business by not renewing these
policies except for certain business that is guaranteed renewable. During 2007,
we collected major medical premiums of $2.3 million.

Other Supplemental Health Products. Other supplemental health product
collected premiums were $20.1 million during 2007. This category includes
various other health products such as 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)



2007 2006 2005
---- ---- ----

Equity-indexed annuity:
Bankers Life ............................................................ $ 437.4 $ 276.5 $ 130.3
Conseco Insurance Group.................................................. 344.6 378.5 104.4
-------- -------- --------

Total equity-indexed annuity premium collections ..................... 782.0 655.0 234.7
-------- -------- --------

Other fixed annuity:
Bankers Life ............................................................ 448.1 721.0 820.8
Conseco Insurance Group.................................................. 24.0 54.8 57.3
-------- -------- --------

Total fixed annuity premium collections .............................. 472.1 775.8 878.1
-------- -------- --------

Total annuity premium collections........................................... $1,254.1 $1,430.8 $1,112.8
======== ======== ========



During 2007, we collected annuity premiums of $1,254.1 million or 29
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. Many of our professional independent agents discontinued marketing our
annuity products after A.M. Best Company ("A.M. Best") lowered the financial
strength ratings assigned to our insurance subsidiaries in 2002. During the
second half of 2007, we changed the pricing of specific products and we no
longer emphasized the sale of certain products resulting in a decrease in
collected premiums, partially offset by the sales of several new products
distributed through new national partners. Career agents selling annuity
products in the Bankers Life segment

9


are less sensitive in the near-term to A.M. Best ratings, since these agents
only sell our products.

We believe the sales of our equity-indexed products in both segments were
favorably impacted in 2007 due in part to general stock market conditions which
made these products attractive relative to fixed annuities.

The increase in short-term interest rates in 2007 resulted in lower
first-year fixed annuity sales as certain other competing products, such as
certificates of deposits, have become attractive relative to fixed annuities.

The following describes the major annuity products:

Equity-Indexed Annuities. These products accounted for $782.0 million, or
18 percent, of our total premium collections during 2007. 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:

o The index to be used;

o 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.

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

o 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.

o 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.

o 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
$472.1 million, or 11 percent, of our total premium collections during 2007. 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:

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

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

o 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.

10


In 2007, substantially all of our new annuity sales were "bonus interest"
products. The initial crediting rate on these products specifies a bonus
crediting rate generally ranging from 2.0 percent 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, 2007, the average
crediting rate, excluding bonuses, on our outstanding traditional 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 $38.0 million, or .9 percent, of our total premiums
collected in 2007. 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 6.9 percent at December 31, 2007.

Life Insurance

Life insurance premium collections (dollars in millions)



2007 2006 2005
---- ---- ----

Interest-sensitive life products:
Bankers Life............................................................... $ 63.4 $ 62.2 $ 50.9
Conseco Insurance Group.................................................... 214.0 235.0 251.1
Colonial Penn.............................................................. .5 .6 .6
------ ------ ------

Total interest-sensitive life premium collections....................... 277.9 297.8 302.6
------ ------ ------

Traditional life:
Bankers Life............................................................... 136.6 122.0 101.2
Conseco Insurance Group.................................................... 73.3 79.6 83.9
Colonial Penn.............................................................. 113.2 96.6 84.5
------ ------ ------

Total traditional life premium collections.............................. 323.1 298.2 269.6
------ ------ ------

Total life insurance premium collections...................................... $601.0 $596.0 $572.2
====== ====== ======



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 2007, we collected life insurance
premiums of $601.0 million, or 14 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
$277.9 million, or 6.4 percent, of our total collected premiums in 2007. These
products are marketed by professional independent producers and, to a lesser
extent, career agents (including professional independent producers and career
agents specializing

11


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 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 $323.1 million, or 7.5
percent, of our total collected premiums in 2007. 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, which we continue to market on a limited basis, 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. We ceased most term life product
sales through the professional independent producer distribution channel during
2003, but reentered the market in 2006.

Traditional life products also include graded benefit life insurance
products. Graded benefit life products accounted for $108.8 million, or 2.5
percent, of our total collected premiums in 2007. 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 $40.2 million, or .9 percent, of our total collected
premiums in 2007.

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 $24.7 billion of
assets (at fair value) under management at December 31, 2007, of which $23.8
billion were assets of our subsidiaries and $.9 billion were assets managed for
third parties. Our general account investment strategies are to:

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

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

o provide adequate liquidity;

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

o maximize total return through active investment management.

During 2007, 2006 and 2005, we recognized net realized investment losses of
$155.4 million, $47.2 million and $2.9 million, respectively. During 2007, net
realized investment losses included: (i) $48.7 million of net losses from the
sales of investments (primarily fixed maturities) with proceeds of $7.2 billion;
(ii) $33.0 million of writedowns of investments for other than temporary
declines in fair value; and (iii) $73.7 million of writedowns of investments
(which were subsequently transferred pursuant to a coinsurance agreement as
further discussed in the note to the consolidated financial statements entitled
"Summary of Significant Accounting Policies - Reinsurance") as a result of our
intent not to hold such investments

12


for a period of time sufficient to allow for any anticipated recovery in 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 concerns regarding the effect future adverse developments could have on the
value of these securities. For further information on our sub prime holdings,
refer to the caption entitled "Structured Securities Collateralized by Sub Prime
Residential Mortgage Loans" in the "Investments" section of Management's
Discussion and Analysis of Financial Condition and Results of 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 and FPDAs 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, 2007,
the average yield, computed on the cost basis of our actively managed fixed
maturity portfolio, was 6.0 percent, and the average interest rate credited or
accruing to our total insurance liabilities was 4.7 percent.

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

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

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

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, 2007, the duration of our fixed
maturity investments (as modified to reflect prepayments and potential calls)
was approximately 7.6 years and the duration of our insurance liabilities was
approximately 7.9 years. The difference between these durations indicates that
our investment portfolio had a shorter duration and, consequently, was less
sensitive to interest rate fluctuations than that of our liabilities at that
date. 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 a material 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 Underwriting" and
"Governmental Regulation." In addition to competing with the products of other
insurance companies,

13


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.

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 August 7, 2007, A.M. Best downgraded the financial strength ratings of
our primary insurance subsidiaries to "B+ (Good)" from "B++ (Very Good)", except
Conseco Senior (the issuer of most of our long-term care business in our Other
Business in Run-off segment), whose "B- (Fair)" rating was downgraded to "C++
(Marginal)". A.M. Best also revised the outlook for the ratings of our primary
insurance subsidiaries, as well as Conseco Senior, to negative from stable. The
"B+" rating is assigned to companies that have a good ability, in A.M. Best's
opinion, to meet their ongoing obligations to policyholders. The "C++" rating is
assigned to companies which have a marginal 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. The "B+" rating and the "C++"
rating from A.M. Best are the sixth and ninth highest, respectively, of sixteen
possible ratings.

On August 7, 2007, Standard & Poor's Corporation ("S&P") affirmed the
financial strength ratings of "BB+"of our primary insurance subsidiaries, except
Conseco Senior, whose "CCC" rating was downgraded to "CCC-". S&P also revised
the outlook for the ratings of our primary insurance subsidiaries to negative
from stable, except for Conseco Senior, whose outlook of negative was affirmed.
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. In S&P's view, an insurer
rated "CCC" has very weak financial security characteristics and is dependent on
favorable business conditions to meet financial commitments. The "BB+" rating
and the "CCC-" rating from S&P are the eleventh and nineteenth highest,
respectively, of twenty-one possible ratings.

The current financial strength ratings of our primary insurance
subsidiaries (except Conseco Senior) from Moody's Investor Services, Inc.
("Moody's") are "Baa3" and Conseco Senior's rating is "Caal". On September 7,
2007, Moody's affirmed the financial strength ratings of our core insurance
subsidiaries and Conseco Senior and revised its outlook on all our insurance
subsidiaries to negative from stable. 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
"Baa3" offers adequate financial security, however, certain protective elements
may be lacking or may be characteristically unreliable over any great length of
time. In Moody's view, an insurer rated "Caa" offers very poor financial
security and may default on its policyholder obligations or there may be
elements of danger with respect to punctual payment of policyholder obligations
and claims. The "Baa3" rating and the "Caa1" rating from Moody's are the tenth
and seventeenth highest, respectively, of twenty-one possible ratings.

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.

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

14


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, 2007, the total balance of our liabilities for insurance
products was $26.7 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, and 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.

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.

15


As of December 31, 2007, the policy risk retention limit of our insurance
subsidiaries was generally $.8 million or less. Reinsurance ceded by Conseco
represented 21 percent of gross combined life insurance inforce and reinsurance
assumed represented 1.6 percent of net combined life insurance inforce. Our
principal reinsurers at December 31, 2007 were as follows (dollars in millions):



Ceded life A.M. Best
Name of Reinsurer insurance inforce rating
----------------- ----------------- ---------

Swiss Re Life and Health America Inc.................................... $ 3,874.6 A+
Security Life of Denver Insurance Company............................... 3,349.4 A+
Reassure America Life Insurance Company ("REALIC") (a).................. 1,617.1 A+
RGA Reinsurance Company................................................. 998.5 A+
Munich American Reassurance Company..................................... 938.5 A+
Lincoln National Life Insurance Company................................. 733.2 A+
Scor Global Life Re Insurance Co of Texas............................... 611.0 A-
General Re Life Corporation............................................. 447.0 A++
Hannover Life Reassurance Company....................................... 455.3 A
All others (b).......................................................... 1,692.6
---------

$14,717.2
=========

--------------------
(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 $2.6 billion at December 31, 2007.
(b) No other single reinsurer assumed greater than 3 percent of the total
ceded business inforce.



EMPLOYEES

At December 31, 2007, we had approximately 3,950 full time employees,
including 950 employees supporting our Bankers Life segment, 350 employees
supporting our Colonial Penn segment and 2,650 employees supporting our Conseco
Insurance Group segment, Other Business in Run-off 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.

16


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:

o grant and revoke business licenses;

o regulate and supervise sales practices and market conduct;

o establish guaranty associations;

o license agents;

o approve policy forms;

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

o establish reserve requirements;

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

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

o perform financial, market conduct and other examinations;

o define acceptable accounting principles; and

o 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:

o reserve requirements;

o risk-based capital ("RBC") standards;

o codification of insurance accounting principles;

o investment restrictions;

o restrictions on an insurance company's ability to pay dividends; and

o 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

17


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:

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

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

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

In accordance with orders from the Florida Office of Insurance Regulation,
Conseco Senior may not distribute funds to any affiliate or shareholder unless
such distributions have been approved by the Florida Office of Insurance
Regulation and Washington National may not make similar distributions 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.

In connection with monitoring the financial condition of insurers, certain
state insurance departments have requested additional information from two of
the Company's insurance subsidiaries, Conseco Senior and Conseco Life, because
each such insurance subsidiary has incurred statutory losses in a 12 month
period in excess of 50 percent of its capital and surplus. The statutory losses
of Conseco Life are primarily attributable to a litigation settlement. For
further information related to this case, refer to the caption entitled "Cost of
Insurance Litigation" included in the note to our consolidated financial
statements entitled "Commitments and Contingencies". The statutory losses of
Conseco Senior are primarily attributable to the adverse development of prior
period claim reserves, an increase in claims incurred in 2006 and 2007 and
strengthening of statutory active life reserves using the prospective unlocking
method (as permitted by insurance regulators), all of which related to long-term
care policies. Based on our discussions with state insurance departments, we do
not expect the regulators to take any actions against Conseco Senior or Conseco
Life that would have a material adverse effect on the financial position or
results of operations of these companies.

Conseco Senior has been aggressively seeking actuarially justified rate
increases and pursuing other actions on our long-term care policies. During the
third quarter of 2006, we began a new program to file requests for rate
increases on various long-term care products in the Other Business in Run-off
segment as we believe the existing rates were too low to fund expected future
benefits. These filings are expected to be the first of three rounds of rate
increase filings for many of the same policies, and in some cases we requested
three years of successive rate increases. Based on recent experience, certain of
the policies in this segment will continue to be unprofitable even if we obtain
the three rounds of rate increases, and it is likely that we will request
additional rate increases when the current program is complete. We have chosen
to request a series of smaller rate increases, rather than a single large
increase, to limit the impact on a policyholder's premiums in any single year.
The effects of the first round of rate filings have been partially realized in
our premium revenue with the remaining impact expected to be realized by the end
of 2008. In the second quarter of 2007, we began filing requests for the second
round of rate increases on many of the same policies. As of December 31, 2007,
almost all of the expected second round filings had been submitted for
regulatory approval, and approximately 42 percent of the expected amounts had
been approved by regulators. The full effect of all three rounds of rate
increases may not be fully realized until 2011. It is possible that it will take
more time than we expect to prepare rate increase filings and obtain approval
from the state insurance regulators. In addition, it is likely that we will not
be able to obtain approval for some of the actuarially justified rate increases
currently pending or for the additional rate increases we plan to file
especially in light of the magnitude of some past premium rate increases and
current consumer and regulator sentiment. 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

18


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 - Other Business in
Run-off") 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 ("AVR") and certain other adjustments) to its RBC (as measured
on December 31 of each year), as follows:

o 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;

o 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;

o 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

o 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.

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:

o between the current year and the prior year; and

o 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.

The 2007 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. However, the RBC ratio of Conseco Senior, which has experienced losses
on its long-term care business in our Other Business in Run-off segment, was
near the level at which it would have been required to submit a comprehensive
plan to insurance regulators proposing correcting actions aimed at improving its
capital position. In order to avoid triggering the trend test with respect to
Conseco Senior, we elected to make capital contributions totaling $202.0 million
during 2007 to Conseco Senior, including $56.0 million which was accrued at
December 31, 2007, and paid in February 2008. In the aggregate, we have made
more than $900 million of capital contributions to Conseco Senior since its
acquisition by Old Conseco in 1996. We were under

19


no obligation to make such capital contributions to Conseco Senior, and we may
determine not to make additional contributions in the future. No assurances can
be given that we will make future contributions or otherwise make capital
available to our insurance subsidiaries, including Conseco Senior.

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" 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. During 2007, we
made capital contributions of $48.0 million (including $25.0 million which was
accrued at December 31, 2007, and paid in February 2008) to Conseco Life in an
effort to meet such criteria and our targeted capital level.

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.

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.

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

20


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.

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, 2007 and
2006, we determined that a full valuation allowance was no

21


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".

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
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. Also, long-term care products have a much longer tail, meaning that
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 inforce 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.
The claims experience on our Bankers Life long-term care blocks has generally
been lower than our pricing expectations. However, the persistency of these
policies has been higher than our pricing expectations and this may result in
higher benefit ratios in the future.

The long-term care insurance businesses included in the Other Business in
Run-off segment were acquired through acquisitions completed in 1996 and 1997.
The experience on these acquired blocks 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, these blocks experienced benefit
ratios of 191 percent in 2007, 134 percent in 2006 and 95 percent in 2005. If
future claims experience proves to be worse than anticipated as our long-term
care blocks continue to age, our financial results could be adversely affected.
In addition, such rate increases may cause existing policyholders to allow their
policies to lapse, resulting in reduced profitability.

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 may be adversely affected.

We review the adequacy of our premium rates regularly and file proposed
rate increases on our 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

22


necessary rate increases were not approved, we would be required to recognize a
loss and establish a premium deficiency reserve. During 2007, the financial
statements of two of our subsidiaries prepared in accordance with statutory
accounting practices prescribed or permitted by regulatory authorities reflected
the establishment of asset adequacy and premium deficiency reserves related to
long-term care policies. The asset adequacy and premium deficiency reserves
related to health products for Washington National and Bankers Conseco Life
Insurance Company were $57.8 million and $30.6 million, respectively, at
December 31, 2007. 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.

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 inforce. 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 Other
Business in Run-off segment has increased in recent periods and was 191 percent
during 2007. 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 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 began a program in 2006 to seek approval from
regulatory authorities for rate increases on approximately 65 percent of this
block. In addition, another round of increases was filed during the second and
third quarters of 2007 on newer long-term care, home health care, and short-term
care policies not included in the first round of rate increases. The policies in
this round represent approximately 25 percent of the inforce block. As of
December 31, 2007, all such filings had been submitted for regulatory approval,
and approximately 38 percent of the amounts had 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 could 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
control over financial reporting.

We did not maintain effective controls over the accounting and disclosure
of insurance policy benefits and the liabilities for insurance products. We
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 inforce policies in our Bankers Life segment, Conseco
Insurance Group segment, and Other Business in Run-off segment. 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, 2006 and December 31, 2007. As a result of the
errors we identified related to these deficiencies during remediation procedures
performed in 2007, Conseco has restated its financial statements for the

23


years ended December 31, 2006 and 2005, along with affected Selected
Consolidated Financial Data for 2004 and 2003, and quarterly financial
information for 2006 and the first three quarters of 2007. 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 affect on our financial condition and
results of operation. See Item 9A of this annual report for additional
information.

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, and 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 inforce 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 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 the Other Business in Run-off segment. In prior periods, we have
increased our estimates of incurred claims on this block due to prior period
deficiencies, including an increase of $118 million in the second quarter of
2007, $22 million in the first quarter of 2007 and $54.1 million in the fourth
quarter of 2006. 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 inforce 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
inforce at the Effective Date represents the value assigned to the right to
receive future cash flows from contracts existing at September 10, 2003. The
balances of these accounts are amortized over the expected lives of the
underlying insurance contracts. Management, on an ongoing basis, tests 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 inforce 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 net income and revenues 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, 2007, approximately 18 percent of our total
insurance liabilities, or approximately $4.8 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. 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.

24


Our investment portfolio is subject to several risks that may diminish the
value of our invested assets and negatively impact our profitability.

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

o Changes in interest rates can reduce the value of our investments as
further discussed in the risk factor entitled "Changing interest rates
may adversely affect our results of operations".

o Changes in patterns of relative liquidity in the capital markets for
various asset classes.

o Changes in the ability of issuers to make timely repayments on
actively managed fixed maturity investments can reduce the value of
our investments. This risk is significantly greater with respect to
below-investment grade securities, which comprised 8.0 percent of our
actively managed fixed maturity investments as of December 31, 2007.

o Changes in the estimated timing of receipt of cash flows. For example,
our structured security investments, which comprised 23 percent of our
actively managed fixed maturity investments at December 31, 2007, 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.

o Changes in the relative risk premium required in the market for a
given level of risk.

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: $106.7 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 the consolidated
financial statements entitled "Summary of Significant Accounting Policies") as a
result of our intent not to hold investments for a period of time sufficient to
allow for any anticipated recovery in value); $22.4 million in 2006; and $14.7
million in 2005. 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 net income is 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 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.

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 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, 2007, approximately 38 percent of
our insurance liabilities were subject to interest rates that may be reset
annually; 47 percent had a fixed explicit interest rate for the duration of the
contract; 11 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

25


premiums received at the interest rates anticipated when we sold the policies.
Finally, changes in interest rates can have significant effects on the market
value and performance of our investments in general and specifically on the
performance of our structured securities portfolio, including collateralized
mortgage obligations ("CMOs"), 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. These simulations help us
measure the potential gain or loss in fair value of our interest-sensitive
financial instruments. 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, 2007,
the duration of our fixed maturity investments (as modified to reflect
prepayments and potential calls) was approximately 7.6 years, and the duration
of our insurance liabilities was approximately 7.9 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 $490 million if interest rates were to increase by 10 percent from
rates as of December 31, 2007. This compares to a decline in fair value of $515
million based on amounts and rates at December 31, 2006. 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.

Concentration of our investment portfolios in any particular sector of the
economy 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 Conseco seeks 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.

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 the Company's 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. The Company intends 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. The Company's

26


exposure, 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. 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,
however, 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.

For a description of current legal proceedings, see note 9 of the
consolidated financial statements.

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:

o grant and revoke business licenses;
o regulate and supervise sales practices and market conduct;
o establish guaranty associations;
o license agents;
o approve policy forms;
o approve premium rates for some lines of business such as long-term
care and Medicare supplement;
o establish reserve requirements;
o prescribe the form and content of required financial statements and
reports;
o determine the reasonableness and adequacy of statutory capital and
surplus;
o perform financial, market conduct and other examinations;
o define acceptable accounting principles; and
o regulate the types and amounts of permitted investments.

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.

In connection with monitoring the financial condition of insurers, certain
state insurance departments have requested additional information from two of
the Company's insurance subsidiaries, Conseco Senior and Conseco Life, because
each such insurance subsidiary has incurred statutory losses in a 12 month
period in excess of 50 percent of its capital and surplus. The statutory losses
of Conseco Life are primarily attributable to a litigation settlement. For
further information related to this case, refer to the caption entitled "Cost of
Insurance Litigation" included in the note to our consolidated financial
statements entitled "Commitments and Contingencies". The statutory losses of
Conseco Senior are primarily attributable to the adverse development of prior
period claim reserves, an increase in claims incurred in 2006 and 2007 and
strengthening of statutory active life reserves using the prospective unlocking
method (as permitted by insurance regulators), all of which related to long-term
care policies. Based on our discussions with state insurance departments, we do
not expect the regulators to take any actions against Conseco Senior or Conseco
Life that would have a material adverse effect on the financial position or
results of operations of these companies.

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

27


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 2007 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. However, the RBC ratio of Conseco Senior, which has
experienced losses on its long-term care business in our Other Business in
Run-off segment, was near the level at which it would have been required to
submit a comprehensive plan to insurance regulators proposing corrective actions
aimed at improving its capital position. In order to avoid triggering the trend
test with respect to Conseco Senior, we elected to contribute $202.0 million to
the capital and surplus of Conseco Senior in 2007, including $56.0 million which
was accrued at December 31, 2007, and paid in February 2008. We were under no
obligation to make such capital contributions to Conseco Senior, and we may
determine not to make additional contributions in the future. No assurances can
be given that we will make future contributions or otherwise make capital
available to our insurance subsidiaries, including Conseco Senior.

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

As of December 31, 2007, we had deferred tax assets of $1,909.4 million.
During the fourth quarter of 2007, we increased the deferred tax valuation
allowance by $68.0 million primarily related to losses incurred in 2007. 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 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
carryforwards and NOLs expire. This assessment 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 and reduce shareholders' equity, and such an increase could have a
material adverse affect upon our earnings in the future.

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 inforce business. Many of our initiatives address
issues resulting from the substantial number of acquisitions of our predecessor.
Between 1982 and 1997, our predecessor 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. During the fourth quarter of 2005, our conversion to a seriatim-based
valuation system to determine reserves for the long-term care block of business
in run-off resulted in decreases to insurance liabilities of approximately $38
million. Our planned conversions could result in future valuation adjustments,
and there can be no assurance that these adjustments will not have a material
adverse effect on future earnings.

Our financial position may be negatively impacted if we are unable to
achieve our goals for 2008.

We have identified a number of goals for 2008, including maintaining strong
growth at Bankers Life and Colonial Penn, improving earnings stability and
reducing volatility, improving the performance of our long-term care business in
the Other Business in Run-off segment and reducing our enterprise exposure to
long-term care business. The most consistent

28


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. By contrast, the long-term care business in our Other
Business in Run-off segment has been very volatile and has produced substantial
losses in the last two years. We are continuing to pursue a number of measures
designed to improve the performance of that segment, including aggressively
seeking actuarially justified rate increases and improving claims management.
These measures may be inadequate to address the issues of that segment. In
addition, our efforts to improve claims management by changing claim
adjudication procedures have resulted in increased complaints from our
policyholders, and, in some cases, have resulted in inquiries from state
regulators. The relative size and volatility of our combined long-term care
business presents a risk that our results of operations will be materially
impacted by the changes in the performance of that business, and we are
exploring ways to reduce our enterprise exposure to the long-term care business.
The failure to achieve these and our other goals for 2008 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 (other than Conseco Senior) from A.M. Best,
S&P and Moody's are "B+ (Good)," "BB+" and "Baa3," respectively. The ratings of
Conseco Senior from A.M. Best, S&P and Moody's are "C++ (Marginal)," "CCC-" and
"Caa1," respectively. The "B+" rating and the "C++" rating from A.M. Best are
the sixth and ninth highest, respectively, of sixteen possible ratings. The
"BB+" rating and the "CCC-" rating from S&P are the eleventh and nineteenth
highest, respectively, of twenty-one possible ratings. The "Baa3" rating and the
"Caa1" rating from Moody's are the tenth and seventeenth highest of twenty-one
possible ratings. 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 and maintain an "A" category rating from A.M. Best or
if our ratings are 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 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 2007 with a market share of approximately
six percent, the top three writers of individual long-term care insurance had
annualized premiums with a combined market share of approximately 60 percent
during the period. In addition, while our Bankers Life segment was ranked fourth
in direct premiums earned for individual Medicare supplement insurance in 2007
with a market share of 3.8 percent, the top writer of individual Medicare
supplement insurance had direct premiums with a market share of 14.1 percent
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

29


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'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.

Our ability to meet our obligations may be constrained by our subsidiaries'
ability to distribute cash to us.

Conseco, Inc. and CDOC, Inc. ("CDOC"), our wholly owned subsidiary and a
guarantor under our $875.0 million secured credit agreement (the "Second Amended
Credit Facility"), are holding companies with no business operations of their
own; they depend on their operating subsidiaries for cash to make principal and
interest payments on debt and to pay administrative expenses and income taxes.
Conseco 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 the
significant subsidiaries of Conseco or CDOC for any reason could hinder the
ability of such subsidiaries to pay cash dividends or other disbursements to
Conseco and/or CDOC which, in turn, would limit the ability of Conseco and/or
CDOC to meet 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 and this could affect the ability of
our top tier insurance subsidiary to pay dividends. Accordingly, this would
limit our ability to meet debt service requirements and satisfy other holding
company financial obligations.

The obligations under our Second Amended Credit Facility are guaranteed by
our current and future domestic subsidiaries, other than our insurance
subsidiaries and certain immaterial subsidiaries. CDOC's guarantee under the
Second Amended Credit Facility is secured by a lien on substantially all of the
assets of the guarantors, including the stock of our top tier insurance company,
Conseco Life Insurance Company of Texas. If we fail to make the required
payments, do not meet the financial covenants or otherwise default on the terms
of the Second Amended Credit Facility, the stock of Conseco Life Insurance
Company of Texas, which at December 31, 2007 owned the stock of all of our other
insurance subsidiaries, could be transferred to the lender under such facility.
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.

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. 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): (i) statutory net gain from
operations or statutory net income for the prior year; or (ii) 10 percent of
statutory capital and surplus as of the end of the preceding year. Any dividends
in excess of these levels require the approval of the director or commissioner
of the

30


applicable state insurance department. All of the dividends we plan to have our
insurance subsidiaries pay in 2008 will require regulatory approval.

In accordance with orders from the Florida Office of Insurance Regulation,
Conseco Senior may not distribute funds to any affiliate or shareholder unless
such distributions have been approved by the Florida Office of Insurance
Regulation and Washington National may not make similar distributions 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.

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.

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 top tier insurance
subsidiary 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. During 2007, we made capital contributions of $48.0
million (including $25.0 million which was accrued at December 31, 2007, and
paid in February 2008) to Conseco Life in an effort to meet such criteria and
our targeted capital level for this subsidiary.

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 two
fiscal years (dollars in millions):



Years ended December 31,
------------------------
2007 2006
---- ----

Dividends................................................................... $ 50.0 $ 72.5
Surplus debenture interest.................................................. 69.9 68.2
Fees for services provided pursuant to service agreements................... 92.9 89.4
Tax sharing payments........................................................ 91.5 (5.5)
------ ------

Total paid................................................................ $304.3 $224.6
====== ======



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.

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 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.

31


Our Second Amended Credit Facility contains various restrictive covenants
and required financial ratios that limit our operating flexibility; 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.

As of December 31, 2007, we had $865.5 million principal amount of debt
outstanding under our Second Amended Credit Facility. The Second Amended Credit
Facility imposes a number of covenants and financial ratios as defined in the
Second Amended Credit Facility that we must meet or maintain, including:

o a debt to total capitalization ratio;
o an interest coverage ratio;
o an aggregate RBC ratio; and
o a combined statutory capital and surplus level.

At December 31, 2007, we were in compliance with all of the Second Amended
Credit Facility's covenants and financial ratios. Although our forecasts
indicate we will meet and/or maintain all of the Second Amended Credit
Facility's covenants and financial ratios, our ability to do so may be affected
by events beyond our control.

Our Second Amended Credit Facility also imposes restrictions that limit our
flexibility to plan for and react to changes in the economy and industry,
thereby increasing our vulnerability to adverse economic and industry
conditions. These restrictions include limitations on our ability to:

o incur additional indebtedness;
o transfer or sell assets;
o enter into mergers or other business combinations;
o pay cash dividends or repurchase stock; and
o make investments and capital expenditures.

S&P has assigned a "B+" rating on our senior secured debt with a negative
outlook. In S&P's view, an obligation rated "B+" is more vulnerable to
nonpayment than obligations rated "BB", but has the capacity to meet its
financial commitment on the obligation. Adverse business, financial or economic
conditions would likely impair the obligator's capacity or willingness to meet
its financial commitment on the obligation. S&P has a total of twenty-two
separate categories rating senior debt, ranging from "AAA (Extremely Strong)" to
"D (Payment Default)." A "B+" rating is the fourteenth highest rating. Moody's
has assigned a "Ba3" rating on our senior secured debt with a negative outlook.
In Moody's view, an obligation rated "Ba3" is judged to have speculative
elements and is subject to substantial credit risk. Moody's has a total of
twenty-one separate categories in which to rate senior debt, ranging from "Aaa
(Exceptional)" to "C (Lowest Rated)." A "Ba3" rating is the thirteenth highest
rating. A negative outlook by S&P and Moody's is an opinion regarding the likely
direction of a rating over the medium term. 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 restrict our access to and the cost of such capital.

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 United
States 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 federal estate tax gradually over a ten-year period (with
total elimination of the 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 will 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.

32


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, 2007, our reinsurance receivables totaled $3.6 billion. Our
ceded life insurance inforce totaled $14.7 billion. Our nine largest reinsurers
accounted for 89 percent of our ceded life insurance inforce. 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.

ITEM 1B. UNRESOLVED STAFF COMMENTS.

On July 3, 2007, we received written comments from the staff of the
Division of Corporation Finance of the SEC (the "SEC staff") relating to our
Form 10-K for the fiscal year ended December 31, 2006 and our Form 10-Q for the
quarterly period ended March 31, 2007. The one remaining unresolved comment
relates to the release of reserves totaling $19.3 million related to the return
of premium benefit on specified disease policies during the first quarter of
2007. As described in our Form 10-Q for the quarterly period ended March 31,
2007, we determined that the coding in our administrative system related to
policies with the return of premium rider was inaccurate resulting in an
overstatement of prior reserves. The SEC staff has requested an explanation as
to why the reserve release was recorded in the first three months of 2007 rather
than in the period in which the inaccurate coding occurred. We have provided the
SEC staff with our evaluation of the out-of-period adjustment and the basis upon
which we concluded we were not required to restate our previously filed
financial statements based on the guidance of Staff Accounting Bulletin 99
"Materiality."

Subsequent to providing the evaluation of out-of-period adjustments to the
SEC staff, we identified additional errors in our previously filed financial
statements. On February 25, 2008, we announced that due to the significance of
those errors, we would restate our financial statements for the years ended
December 31, 2006 and 2005, along with affected selected Consolidated Financial
Data for 2004 and 2003, and quarterly financial information for 2006 and the
first three quarters of 2007. In conjunction with the restatement process, we
also corrected previously identified errors, including the $19.3 million reserve
correction related to return of premium benefits on specified disease policies
that is the subject of the SEC staff's unresolved comment. For further
information on these and other restatement adjustments, refer to the notes to
the consolidated financial statements entitled "Restatement of Previously Issued
Financial Statements" and "Restated Quarterly Financial Data (Unaudited)".

With the completion of the restated financial statements included in this
filing, the SEC staff will consider resolving the remaining open comment.


ITEM 2. PROPERTIES.

Our headquarters and the administrative operations of our Conseco Insurance
Group segment as well as our Other Business in Run-off segment are located on a
Company-owned 117-acre corporate campus in Carmel, Indiana, immediately north of
Indianapolis. The six buildings on the campus contain approximately 626,000
square feet of space and house Conseco's executive offices and certain
administrative operations of its subsidiaries. In May 2007, we entered into a
listing agreement for the sale/lease of one of these buildings (approximately
100,000 square feet). Management believes that our remaining office space is
adequate for our needs.

Our Bankers Life segment is primarily administered from a facility in
downtown Chicago, Illinois. Bankers Life has

33


approximately 222,000 square feet leased under an agreement which expires in
2018. In addition, Bankers Life leases approximately 114,000 square feet that it
expects to vacate in 2008. This space is expected to be subleased through
November 2013, the early termination date of the lease. We also lease 227 sales
offices in various states totaling approximately 650,000 square feet. These
leases are short-term in length, with remaining lease terms expiring between
2008 and 2013.

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 the remainder leased to
tenants.

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.

34


Executive Officers of the Registrant


Officer Positions with Conseco, Principal
Name and Age (a) Since Occupation and Business Experience (b)
---------------- ----- --------------------------------------

C. James Prieur, 56................................ 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, 54............................... 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.

Mark E. Alberts, 42................................ 2004 Since January 2007, executive vice president and chief actuary. Mr.
Alberts has served in various actuarial capacities with Conseco
since 2004 and also from 1991 to 2001. From 2001 until April 2004,
senior vice president, chief actuary, Standard Life Insurance
Company of Indiana.

Russell M. Bostick, 51............................. 2005 Since 2005, executive vice president and chief information officer.
From 1998 until 2005, chief technology officer of Chase Insurance and
its predecessors.

Dan R. Bardin, 57.................................. 2007 Since December 2007, president of Conseco Insurance Group. From 2006
until 2007, Mr. Bardin was an insurance industry consultant. From
1999 until 2006, Mr. Bardin held several executive positions with
Prudential Corporation, Asia, including managing director and chief
executive of insurance.

Eric R. Johnson, 47................................ 1997 Since September 2003, 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, 50.................................. 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, 42................................ 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, 51......................... 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, 45................................. 2001 Since 2006, president of Bankers Life. Employed in various capacities
for Bankers Life since 2001.

35




Steven M. Stecher, 47.............................. 2004 Since January 2007, 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.

Mr. Kline served as an officer of our Predecessor company, which filed a
bankruptcy petition on December 17, 2002.

--------------------
(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.



36


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, 2006. There have been no dividends paid or declared
on our common stock during this period.



Period Market price
------ ------------------
High Low
---- ---

2006:
First Quarter........................................... $25.95 $23.16
Second Quarter.......................................... 25.86 22.00
Third Quarter........................................... 23.46 19.91
Fourth Quarter.......................................... 21.17 19.53

2007:
First Quarter........................................... $20.46 $16.56
Second Quarter.......................................... 21.25 17.25
Third Quarter........................................... 21.02 13.25
Fourth Quarter.......................................... 16.26 12.05



As of February 22, 2008, there were approximately 77,000 holders of the
outstanding shares of common stock, including individual participants in
securities position listings.

37


PERFORMANCE GRAPH

The Performance Graph below compares Conseco's cumulative total shareholder
return on its common stock for the period from September 12, 2003 (the first day
of trading of the common stock on the New York Stock Exchange after Conseco's
emergence from bankruptcy) through December 31, 2007 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 September 12, 2003 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

[GRAPH OMITTED]




Cumulative Total Returns 9/12/03 12/31/03 12/31/04 12/31/05 12/31/06 12/31/07
------------------------ ------- -------- -------- -------- -------- --------

DJ Life Insurance Index $ 100 $ 113 $ 137 $ 168 $ 189 $ 201
S&P 500 Index $ 100 $ 110 $ 122 $ 128 $ 148 $ 156
Conseco, Inc. $ 100 $ 107 $ 98 $ 114 $ 98 $ 62



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 credit agreement. Please refer to "Management's Discussion and
Analysis of Consolidated Financial Condition and Results of Operations -
Liquidity of the Holding Companies" for a further discussion of these
restrictions.

38


ISSUER PURCHASES OF EQUITY SECURITIES



Total number of Maximum number (or
shares (or units) approximate dollar value)
Total Average price purchased as part of shares (or units) that
number of shares paid per share of publicly announced may yet be purchased
Period (or units)(a) (or unit) plans or programs under the plans or programs(b)
------ ---------- --------- ----------------- ---------------------------
(dollars in millions)

October 1 through
October 31........ 4,784 $15.70 - $285.7

November 1 through
November 30....... 1,330,000 13.48 1,330,000 267.8

December 1 through
December 31....... 403,089 12.66 394,300 262.8
--------- ---------

Total................. 1,737,873 13.29 1,724,300 262.8
========= =========

------------
(a) The Company purchased 4,784 and 8,789 shares of its common stock in
October and December 2007, respectively, in connection with employee
benefit compensation plans. Such purchases are not included against
the maximum number of shares that may be purchased as part of our
publicly announced share repurchase program.
(b) 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, 2007,
relating to our common stock that may be issued under the Conseco, Inc. 2003
Amended and Restated Long-Term Incentive Plan.



Number of securities
remaining available for
Number of securities Weighted-average future issuance under
to be issued upon exercise exercise price of equity compensation
of outstanding options, outstanding options, plans (excluding securities
warrants or rights warrants or rights reflected in first column)
------------------ ------------------ --------------------------

Equity compensation plans
approved by security holders...... 4,827,925 $19.82 2,794,017
Equity compensation plans not
approved by security holders...... - - -
--------- ------ ---------

Total................................. 4,827,925 $19.82 2,794,017
========= ====== =========



39




ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.

Conseco has restated its consolidated financial statements for each of
2007, 2006, 2005, 2004 and for the four months ended December 31, 2003. The
restated consolidated financial statements reflect: (i) the correction of
errors, the majority of which were identified in 2007 during procedures
performed in an effort to remediate the material weakness in internal controls
disclosed in our 2006 Form 10-K and subsequent quarterly filings with the SEC;
(ii) restatement of accounting for premium rate increases; and (iii) the
correction of previously identified immaterial errors. Refer to the note to the
consolidated financial statements entitled "Restatement of Previously Issued
Financial Statements" for further information related to the restatement. The
Selected Consolidated Financial Data should be used in conjunction with
Management's Discussion and Analysis of Consolidated Financial Condition and
Results of Operations and the consolidated financial statements and accompanying
notes included elsewhere herein.



Successor Predecessor
----------------------------------------------------- --------------
Years
ended Four months Eight months
December 31, ended ended
-------------------------------------- December 31, August 31,
2007 2006 2005 2004 2003 2003
---- ---- ---- ---- ---- ----
(Restated) (Restated) (Restated) (Restated)

(Amounts in millions, except per share data)
STATEMENT OF OPERATIONS DATA
Insurance policy income......................... $3,167.3 $2,989.0 $2,930.1 $2,949.3 $1,005.8 $2,204.3
Net investment income........................... 1,536.6 1,506.4 1,374.6 1,322.7 474.6 969.0
Net realized investment gains (losses) ......... (155.4) (47.2) (2.9) 40.6 11.8 (5.4)
Total revenues.................................. 4,572.3 4,467.4 4,326.5 4,334.1 1,505.5 3,203.4
Interest expense (contractual interest:
$268.5 for the eight months ended August 31,
2003)......................................... 117.3 73.5 58.3 79.5 36.8 202.5
Total benefits and expenses..................... 4,745.3 4,300.2 3,842.2 3,888.0 1,356.0 1,031.2
Income (loss) before income taxes, minority
interest, discontinued operations and
cumulative effect of accounting change........ (173.0) 167.2 484.3 446.1 149.5 2,172.2
Net income (loss)............................... (179.9) 106.0 312.7 289.7 96.3 2,201.7
Preferred stock dividends ...................... 14.1 38.0 38.0 65.5 27.8 -
Net income (loss) applicable to common stock.... (194.0) 68.0 274.7 224.2 68.5 2,201.7

PER SHARE DATA
Net income, basic............................... $ (1.12) $ .45 $ 1.82 $ 1.70 $ .68
Net income, diluted............................. (1.12) .45 1.69 1.59 .67
Book value per common share outstanding......... 22.94 26.50 25.27 21.34 19.28
Weighted average shares outstanding for
basic earnings................................ 173.4 151.7 151.2 132.3 100.1
Weighted average shares outstanding for
diluted earnings.............................. 173.4 152.5 185.0 155.9 143.5
Shares outstanding at period-end................ 184.7 152.2 151.5 151.1 100.1

BALANCE SHEET DATA - AT PERIOD END
Total investments............................... $23,801.9 $25,736.4 $25,041.2 $24,306.3 $22,792.6 $22,018.3
Goodwill ...................................... - - - - 952.2 99.4
Total assets.................................... 33,514.8 32,724.0 31,557.9 30,794.6 30,002.3 28,318.1
Corporate notes payable......................... 1,193.7 1,000.8 851.5 768.0 1,300.0 -
Liabilities subject to compromise............... - - - - - 6,951.4
Total liabilities............................... 29,278.9 28,023.9 27,060.6 26,902.7 27,184.7 30,519.5
Shareholders' equity (deficit).................. 4,235.9 4,700.1 4,497.3 3,891.9 2,817.6 (2,201.4)

STATUTORY DATA(a) - AT PERIOD END
Statutory capital and surplus................... $1,336.2 $1,554.5 $1,603.8 $1,510.0 $1,514.1
Asset valuation reserve ("AVR")................. 161.3 179.1 142.7 117.0 40.9
Total statutory capital and surplus and AVR..... 1,497.5 1,733.6 1,746.5 1,627.0 1,555.0

--------------------
(a) 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. The statutory data presented above
reflects our current financial statement filings with various
regulatory authorities. It is our intention to evaluate each of the
items that have been restated in our consolidated financial statements
prepared in accordance with GAAP to determine whether restatement to
our previously filed statutory financial statements is needed. We
cannot reasonably estimate the effects of any such restatements should
they occur.



40


The effects of the restatement adjustments on selected consolidated
financial data are presented below.




Year ended December 31, 2006
------------------------------------------------------------------------
Adjustments
--------------------------------------------
Accounting for Previously
As previously Remediation premium rate identified As
reported procedures increases errors restated
-------- ---------- --------- ------ --------
(Dollars in millions, except per share data)

STATEMENT OF OPERATIONS DATA
Insurance policy income................... $2,989.0 $ - $ - $ - $2,989.0
Net investment income..................... 1,506.4 - - - 1,506.4
Net realized investment gains (losses) ... (47.2) - - - (47.2)
Total revenues ........................... 4,467.4 - - - 4,467.4
Interest expense ........................ 73.5 - - - 73.5
Total benefits and expenses............... 4,315.1 (4.0) (14.1) 3.2 4,300.2
Income (loss) before income taxes,
minority interest, discontinued operations
and cumulative effect of accounting
change ................................ 152.3 4.0 14.1 (3.2) 167.2
Net income (loss) ........................ 96.5 2.6 9.0 (2.1) 106.0
Preferred stock dividends ................ 38.0 - - - 38.0
Net income (loss) applicable to common
stock ................................ 58.5 2.6 9.0 (2.1) 68.0

PER SHARE DATA
Net income, basic......................... $ .39 $.45
Net income, diluted....................... .38 .45
Book value per common share
outstanding ............................ 26.58 26.49
Weighted average shares outstanding for
basic earnings.......................... 151.7 151.7
Weighted average shares outstanding for
diluted earnings........................ 152.5 152.5
Shares outstanding at period-end ......... 152.2 152.2


BALANCE SHEET DATA - AT PERIOD END
Total investments......................... $25,736.4 $ - $ - $ - $25,736.4
Total assets.............................. 32,717.3 29.7 (21.6) (1.4) 32,724.0
Corporate notes payable................... 1,000.8 - - - 1,000.8
Total liabilities......................... 28,004.2 50.3 (30.6) - 28,023.9
Shareholders' equity (deficit) ........... 4,713.1 (20.6) 9.0 (1.4) 4,700.1

41








Year ended December 31, 2005
-----------------------------------------------------------
Adjustments
----------------------------
Previously
As previously Remediation identified As
reported procedures errors restated
-------- ---------- ------ --------
(Dollars in millions, except per share data)

STATEMENT OF OPERATIONS DATA
Insurance policy income................... $2,930.1 $ - $ - $2,930.1
Net investment income..................... 1,374.6 - - 1,374.6
Net realized investment gains (losses) ... (2.9) - - (2.9)
Total revenues ........................... 4,326.5 - - 4,326.5
Interest expense.......................... 58.3 - - 58.3
Total benefits and expenses............... 3,823.1 22.2 (3.1) 3,842.2
Income (loss) before income taxes,
minority interest, discontinued operations
and cumulative effect of accounting
change ................................ 503.4 (22.2) 3.1 484.3
Net income (loss) ........................ 324.9 (14.2) 2.0 312.7
Preferred stock dividends ................ 38.0 - - 38.0
Net income (loss) applicable to common
stock ................................ 286.9 (14.2) 2.0 274.7

PER SHARE DATA
Net income, basic......................... $1.90 $1.82
Net income, diluted....................... 1.76 1.69
Book value per common share
outstanding ............................ 25.42 25.27
Weighted average shares outstanding for
basic earnings.......................... 151.2 151.2
Weighted average shares outstanding for
diluted earnings........................ 185.0 185.0
Shares outstanding at period-end ......... 151.5 151.5


BALANCE SHEET DATA - AT PERIOD END
Total investments......................... $25,041.2 $ - $ - $25,041.2
Total assets.............................. 31,525.3 32.6 - 31,557.9
Corporate notes payable................... 851.5 - - 851.5
Total liabilities......................... 27,005.5 55.8 (.7) 27,060.6
Shareholders' equity (deficit) ........... 4,519.8 (23.2) .7 4,497.3



42






Year ended December 31, 2004
-----------------------------------------------------------
Adjustments
----------------------------
Previously
As previously Remediation identified As
reported procedures errors restated
-------- ---------- ------ --------
(Dollars in millions, except per share data)

STATEMENT OF OPERATIONS DATA
Insurance policy income................... $2,949.3 $ - $ - $2,949.3
Net investment income..................... 1,318.6 - 4.1 1,322.7
Net realized investment gains (losses) ... 40.6 - - 40.6
Total revenues ........................... 4,330.0 - 4.1 4,334.1
Interest expense.......................... 79.5 - - 79.5
Total benefits and expenses............... 3,875.9 6.5 5.6 3,888.0
Income (loss) before income taxes,
minority interest, discontinued operations
and cumulative effect of accounting
change ................................ 454.1 (6.5) (1.5) 446.1
Net income (loss) ........................ 294.8 (4.2) (.9) 289.7
Preferred stock dividends ................ 65.5 - - 65.5
Net income (loss) applicable to common
stock ................................ 229.3 (4.2) (.9) 224.2

PER SHARE DATA
Net income, basic......................... $1.73 $1.70
Net income, diluted....................... 1.63 1.59
Book value per common share
outstanding ............................ 21.41 21.34
Weighted average shares outstanding for
basic earnings.......................... 132.3 132.3
Weighted average shares outstanding for
diluted earnings........................ 155.9 155.9
Shares outstanding at period-end ......... 151.1 151.1


BALANCE SHEET DATA - AT PERIOD END
Total investments......................... $24,306.3 $ - $ - $24,306.3
Total assets.............................. 30,732.6 26.0 36.0 30,794.6
Corporate notes payable................... 768.0 - - 768.0
Total liabilities......................... 26,830.4 35.0 37.3 26,902.7
Shareholders' equity (deficit) ........... 3,902.2 (9.0) (1.3) 3,891.9






December 31, 2003
-----------------------------------------------------------
Adjustments
----------------------------
Previously
As previously Remediation identified As
reported procedures errors restated
-------- ---------- ------ --------
(Dollars in millions)

BALANCE SHEET DATA - AT PERIOD END
Total investments......................... $22,796.7 $ - $ (4.1) $22,792.6
Goodwill ................................ 952.2 4.8 .4 957.4
Total assets.............................. 29,990.4 30.0 (18.1) 30,002.3
Corporate notes payable................... 1,300.0 - - 1,300.0
Total liabilities......................... 27,172.8 30.0 (18.1) 27,184.7
Shareholders' equity (deficit) ........... 2,817.6 - - 2,817.6



43


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, 2007, and the consolidated results of operations for the years
ended December 31, 2007, 2006 and 2005 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:

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

o mortality, morbidity, 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;

o changes in our assumptions related to the cost of policies produced or
the value of policies inforce at the Effective Date;

o the recoverability of our deferred tax asset;

o changes in accounting principles and the interpretation thereof;

o 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;

o performance of our investments;

o 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;

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

o our ability to remediate the material weakness in internal controls
over the actuarial reporting process that we identified at year-end
2006 and to maintain effective controls over financial reporting;

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

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

44


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

o regulatory changes or actions, including those relating to regulation
of the financial affairs of our insurance companies, such as the
payment of dividends 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;

o general economic conditions and other factors, including prevailing
interest rate levels, stock and credit market performance and health
care inflation, which may affect (among other things) our ability to
sell products and access capital on acceptable terms, the returns on
and the market value of our investments, and the lapse rate and
profitability of policies; and

o 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.

We manage our business through the following: three primary operating
segments, Bankers Life, Conseco Insurance Group and Colonial Penn, which are
defined on the basis of product distribution; a fourth segment comprised of
other business in run-off; and corporate operations. Our segments are described
below:

o Bankers Life, which consists of the business of Bankers Life and
Casualty, markets and distributes Medicare supplement insurance, life
insurance, long-term care insurance, Medicare Part D prescription drug
program, Medicare Advantage products and certain annuity products to
the senior market through approximately 5,100 career agents and sales
managers. Bankers Life and Casualty markets its products under its own
brand name and Medicare Part D and Medicare Advantage products
primarily through marketing agreements with Coventry.

o Conseco Insurance Group, which markets and distributes specified
disease insurance, Medicare supplement insurance, and certain life and
annuity products to the senior and middle-income markets through
approximately 350 IMOs that represent over 5,200 producing independent
agents. This segment markets its products under the "Conseco" and
"Washington National" brand names. Conseco Insurance Group includes
the business of Conseco Health, Conseco Life, Conseco Insurance
Company and Washington National, other than any run-off long-term care
and major medical insurance issued by those companies. Such run-off
business is included in the Other Business in Run-off segment.

o Colonial Penn, which consists of the business of Colonial Penn,
markets 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.

o Other Business in Run-off, which includes blocks of business that we
no longer market or underwrite and are managed separately from our
other businesses. This segment consists of: (i) long-term care
insurance sold in prior years through independent agents; and (ii)
major medical insurance. The Other Business in Run-off segment is
primarily comprised of long-term care business issued by Conseco
Senior and Washington National, subsidiaries

45


that were acquired in 1996 and 1997, respectively. Long-term care
collected premiums represented more than 99 percent of this segment's
total collected premiums in 2007. Of the long-term care collected
premiums in this segment for the year ended December 31, 2007,
approximately 88 percent related to Conseco Senior and approximately 8
percent related to Washington National and 4 percent related to other
Conseco insurance subsidiaries. In 2007, long-term care premiums
represented approximately 84 percent of the premiums collected by
Conseco Senior and approximately 6 percent of the premiums collected
by Washington National.

o Corporate operations, which consists of holding company activities and
certain noninsurance company businesses that are not part of our other
segments.

For the year ended December 31, 2007, net loss after dividends on our
preferred stock totaled $194.0 million, or $1.12 per diluted share.

Our major goals for 2008 include:

o Maintaining strong growth at Bankers Life and Colonial Penn.

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

o Improving earnings stability and reducing volatility.

o Improving the performance of the long-term care business in our Other
Business in Run-off segment by continuing to aggressively seek
actuarially justified rate increases and by improving claims
management.

o Completing the remediation project relating to our material weakness
in internal controls.

o Reducing our enterprise exposure to long-term care business.

o Improving or disposing of underperforming blocks of business.

o Re-deploying capital to generate improved returns.

o Positioning the Company to achieve an 11 percent operating return on
equity in 2009.

CRITICAL ACCOUNTING POLICIES

The preparation of financial statements in accordance with GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Management has made estimates in the past
that we believed to be appropriate but were subsequently revised to reflect
actual experience. If our future experience differs materially from these
estimates and assumptions, our results of operations and financial condition
could be affected.

We base our estimates on historical experience and other assumptions that
we believe are reasonable under the circumstances. We continually evaluate the
information used to make these estimates as our business and the economic
environment change. The use of estimates is pervasive throughout our financial
statements. The accounting policies and estimates we consider most critical are
summarized below. Additional information on our accounting policies is included
in the note to our consolidated financial statements entitled "Summary of
Significant Accounting Policies".

46


Investments

At December 31, 2007, the carrying value of our investment portfolio was
$23.8 billion.

We defer any fees received or costs incurred when we originate investments.
We amortize fees, costs, discounts and premiums as yield adjustments over the
contractual lives of the investments. We consider anticipated prepayments on
structured securities when we estimate yields on such securities. When actual
prepayments differ from our estimates, the adjustment to yield is recognized as
investment income (loss).

We regularly evaluate our investments for possible impairment based on
current economic conditions, credit loss experience and other investee-specific
circumstances and developments. When we conclude that a decline in a security's
net realizable value is other than temporary, the decline is recognized as a
realized loss and the cost basis of the security is reduced to its estimated
fair value. During the year ended December 31, 2007, writedowns of investments
included: (i) $33.0 million of writedowns of investments for other than
temporary declines in fair value; and (ii) $73.7 million of writedowns of
investments (which were subsequently transferred pursuant to a coinsurance
agreement as further discussed in the note to the consolidated financial
statements entitled "Summary of Significant Accounting Policies") as a result of
our intent not to hold such investments for a period of time sufficient to allow
for any anticipated recovery in value.

Our evaluation of investments for impairment requires significant
judgments, including: (i) the identification of potentially impaired securities;
(ii) the determination of their estimated fair value; and (iii) the assessment
of whether any decline in estimated fair value is other than temporary.

Our assessment of whether unrealized losses are "other than temporary"
requires significant judgment. Factors considered include: (i) the extent to
which market value is less than the cost basis; (ii) the length of time that the
market value has been less than cost; (iii) whether the unrealized loss is
event-driven, credit-driven or a result of changes in market risk premium or
interest rates; (iv) the near-term prospects for improvement in the issuer
and/or its industry; (v) our view of the investment's rating and whether the
investment is investment-grade and/or has been downgraded since its purchase;
(vi) whether the issuer is current on all payments in accordance with the
contractual terms of the investment and is expected to meet all of its
obligations under the terms of the investment; (vii) our ability and intent to
hold the investment for a period of time sufficient to allow for any anticipated
recovery; and (viii) the underlying current and prospective asset and enterprise
values of the issuer and the extent to which our investment may be affected by
changes in such values. At December 31, 2007, our net accumulated other
comprehensive income (loss) included gross unrealized losses on fixed maturity
securities of $630.9 million, which we consider to be temporary declines in
estimated fair value.

When the cost basis of a security is written down to fair value due to an
other than temporary decline, we review the circumstances of that particular
investment in relation to other investments in our portfolio. If such
circumstances exist with respect to other investments, those investments may
also be written down to fair value. Future events may occur, or additional or
updated information may become available, which may necessitate future realized
losses of securities in our portfolio. If new information becomes available or
the financial condition of the investee changes, our judgments may change
resulting in the recognition of a realized investment loss at that time.
Significant realized losses on our investments could have a material adverse
effect on our earnings in future periods.

Estimated fair values for our investments are determined by using
nationally recognized pricing services, broker-dealer market makers and
internally developed methods. Our internally developed methods require us to
make judgments about the security's credit quality, liquidity and market spread.

Below-investment grade securities have different characteristics than
investment grade corporate debt securities. Based on historical performance,
risk of default by the borrower is significantly greater for below-investment
grade securities and in many cases, severity of loss is relatively greater as
such securities are generally unsecured and often subordinated to other
indebtedness of the issuer. Also, issuers of below-investment grade securities
usually have higher levels of debt and may be more financially leveraged hence,
all other things being equal, more sensitive to adverse economic conditions,
such as recession or increasing interest rates. The Company attempts to reduce
the overall risk related to its investment in below-investment grade securities,
as in all investments, through careful credit analysis, strict investment policy
guidelines, and diversification by issuer and/or guarantor and by industry.

During 2007, we sold $7.0 billion of fixed maturity investments which
resulted in net realized investment losses of $39.1 million. Our fixed maturity
investments are generally purchased in the context of a long-term strategy to
fund

47


insurance liabilities, so we do not generally seek to purchase and sell such
securities to generate short-term realized gains. In certain circumstances,
including those in which securities are selling at prices which exceed our view
of their current fair value, and it is possible to reinvest the proceeds to
better meet our long-term asset-liability objectives, we may sell certain
securities. During 2007, we sold $3.3 billion of fixed maturity investments
which resulted in gross investment losses (before income taxes) of $134.0
million. We sell securities at a loss for a number of reasons including, but not
limited to: (i) changes in the investment environment; (ii) expectation that the
market value could deteriorate further; (iii) desire to reduce our exposure to
an issuer or an industry; (iv) changes in credit quality; or (v) changes in
expected liability cash flows.

We generally seek to balance the duration and cash flows of our invested
assets with the estimated duration and cash flows of benefit payments arising
from contract liabilities. These efforts may cause us to sell investments before
their maturity date and could result in the realization of net realized
investment gains (losses). 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. In certain circumstances, a mismatch of the durations or related
cash flows of invested assets and insurance liabilities could have a significant
impact on our results of operations and financial position. See "-- Quantitative
and Qualitative Disclosures About Market Risks" for additional discussion of the
duration of our invested assets and insurance liabilities.

For more information on our investment portfolio and our critical
accounting policies related to investments, see the note to our consolidated
financial statements entitled "Investments".

Value of Policies Inforce at the Effective Date and Cost of Policies
Produced

In conjunction with the implementation of fresh start accounting, we
eliminated the historical balances of Old Conseco's cost of policies purchased
and cost of policies produced as of the Effective Date and replaced them with
the value of policies inforce at the Effective Date.

The value assigned to the right to receive future cash flows from contracts
existing at the Effective Date is referred to as the value of policies inforce
at the Effective Date. We also defer renewal commissions paid in excess of
ultimate commission levels related to the existing policies in this account. The
balance of this account is amortized, evaluated for recovery, and adjusted for
the impact of unrealized gains (losses) in the same manner as the cost of
policies produced described below. We expect to amortize approximately 13
percent of the December 31, 2007 balance of value of policies inforce in 2008,
12 percent in 2009, 11 percent in 2010, 7 percent in 2011 and 6 percent in 2012.

The cost of policies produced are those costs that vary with, and are
primarily related to, producing new insurance business in the period after
September 10, 2003. For universal life or investment products, we amortize these
costs using the interest rate credited to the underlying policy in relation to
the estimated gross profits. For other products, we amortize these costs using
the projected investment earnings rate in relation to future anticipated premium
revenue. The value of policies inforce and the cost of policies produced are
collectively referred to as "insurance acquisition costs."

Insurance acquisition costs are amortized to expense over the lives of the
underlying policies in relation to future anticipated premiums or gross profits.
The insurance acquisition costs for policies other than universal life and
investment-type products are amortized with interest (using the projected
investment earnings rate) over the estimated premium-paying period of the
policies, in a manner which recognizes amortization expense in proportion to
each year's premium income. Limited-payment policies are amortized over the
contract period. The insurance acquisition costs for universal life and
investment-type products are amortized with interest (using the interest rate
credited to the underlying policy) in proportion to estimated gross profits. The
interest, mortality, morbidity and persistency assumptions used to amortize
insurance acquisition costs are consistent with those assumptions used to
estimate liabilities for insurance products. For universal life and
investment-type products, these assumptions are reviewed on a regular basis.
When actual profits or our current best estimates of future profits are
different from previous estimates, we adjust cumulative amortization of
insurance acquisition costs to maintain amortization expense as a constant
percentage of gross profits over the entire life of the policies.

During 2007, we were required to accelerate the amortization of insurance
acquisition costs related to our universal life products because the prior
balance was not recoverable by the value of future estimated gross profits on
this block. This additional amortization was necessary so that our insurance
acquisition costs would not exceed the value of future estimated gross profits
and is expected to continue to be recognized in subsequent periods. Because our
insurance acquisition costs are now equal to the value of future estimated gross
profits, this block is expected to generate break-even earnings in the future.
We continue to hold insurance acquisition costs of approximately $140 million
related to these products, which we determined are recoverable by the value of
estimated gross profits. In addition, results for this block are expected to
exhibit

48


increased volatility in the future, because the entire difference between our
assumptions and actual experience is expected to be reflected in earnings in the
period such differences occur.

During the fourth quarter of 2007, we recognized additional amortization
expense of $14.8 million to reflect changes in our estimates of future mortality
rates on our universal life business, net of planned increases to associated
policyholder charges.

During the fourth quarter of 2006, we recognized additional amortization
expense of $7.8 million to reflect a change in an actuarial assumption related
to a block of interest-sensitive life insurance policies based on a change in
management's intent on the administration of such policies. The policies
affected by the adjustments described above were issued through a subsidiary
prior to its acquisition by Conseco in 1996.

During the first quarter of 2006, we made certain adjustments to our
assumptions of expected future profits for the annuity and universal life blocks
of business in this segment related to investment returns, lapse rates, the cost
of options underlying our equity-indexed products and other refinements. We
recognized additional amortization expense of $12.4 million in 2006 due to these
changes. This increase to amortization expense was offset by a reduction to
insurance policy benefit expense of $11.5 million, to reflect the effect of the
changes in these assumptions on the calculation of certain insurance
liabilities, such as the liability to purchase future options underlying our
equity-indexed products.

When lapses of our insurance products exceed levels assumed in determining
the amortization of insurance intangibles, we adjust amortization to reflect the
change in future premiums or estimated gross profits resulting from the
unexpected lapses. We recognized additional amortization expense of $7.9 million
during the first six months of 2006 as a result of higher than expected lapses
of our Medicare supplement products. We believe the unexpected lapses were
primarily related to premium rate increases and competition from companies
offering Medicare Advantage products. During the first nine months of 2006, we
changed our estimates of the future gross profits of certain universal life
products, which under certain circumstances are eligible for interest bonuses in
addition to the declared base rate. These interest bonuses are not required in
the current crediting rate environment and our estimates of future gross profits
have been changed to reflect the discontinuance of the bonus. We reduced
amortization expense by $4.0 million during the first six months of 2006 as a
result of this change. During 2005, we conducted a review of our methodology for
identifying and capitalizing deferred acquisition costs related to the
traditional life block of business in our Bankers Life segment. Based on our
review, we reduced the total cost capitalized in prior years by $1.1 million,
which was reflected as an increase in amortization expense for the year ended
December 31, 2005. There have been no other significant changes to assumptions
used to amortize insurance acquisition costs during 2007, 2006 or 2005.
Revisions to assumptions in future periods could have a significant adverse or
favorable effect on our results of operations and financial position.

When we realize a gain or loss on investments backing our universal life or
investment-type products, we adjust the amortization of insurance acquisition
costs to reflect the change in estimated gross profits from the products due to
the gain or loss realized and the effect on future investment yields. We
decreased amortization expense for such changes by $35.7 million, $10.1 million
and $2.8 million during the years ended December 31, 2007, 2006 and 2005,
respectively. We also adjust insurance acquisition costs for the change in
amortization that would have been recorded if actively managed fixed maturity
securities had been sold at their stated aggregate fair value and the proceeds
reinvested at current yields. We include the impact of this adjustment in
accumulated other comprehensive income (loss) within shareholders' equity. The
total pre-tax impact of such adjustments on accumulated other comprehensive
income (loss) was an increase of $62.0 million at December 31, 2007.

At December 31, 2007, the balance of insurance acquisition costs was $3.1
billion. The recoverability of this amount is dependent on the future
profitability of the related business. Each year, we evaluate the recoverability
of the unamortized balance of insurance acquisition costs. These evaluations are
performed to determine whether estimates of the present value of future cash
flows, in combination with the related liability for insurance products, will
support the unamortized balance. These future cash flows are based on our best
estimate of future premium income, less benefits and expenses. The present value
of these cash flows, plus the related balance of liabilities for insurance
products, is then compared with the unamortized balance of insurance acquisition
costs. In the event of a deficiency, such amount would be charged to
amortization expense. The determination of future cash flows involves
significant judgment. Revisions to the assumptions which determine such cash
flows could have a significant adverse effect on our results of operations and
financial position.

49


The table presented below summarizes our estimates of cumulative
adjustments to insurance acquisition costs resulting from hypothetical revisions
to certain assumptions. Although such hypothetical revisions are not currently
required or anticipated, we believe they could occur based on past variances in
experience and our expectations of the ranges of future experience that could
reasonably occur. We have assumed that revisions to assumptions resulting in the
adjustments summarized below would occur equally among policy types, ages and
durations within each product classification. Any actual adjustment would be
dependent on the specific policies affected and, therefore, may differ from the
estimates summarized below. In addition, the impact of actual adjustments would
reflect the net effect of all changes in assumptions during the period.




Estimated adjustment to
income before
income taxes based on
Change in assumptions revisions to certain assumptions
--------------------------------
(dollars in millions)

Universal life-type products (a):
5% increase to assumed mortality.................................. $(103.4)
5% decrease to assumed mortality.................................. 36.0
15% increase to assumed expenses.................................. (19.4)
15% decrease to assumed expenses.................................. 6.3
10 basis point decrease to assumed spread......................... (22.5)
10 basis point increase to assumed spread......................... 9.4
10% increase to assumed lapses.................................... 6.5
10% decrease to assumed lapses.................................... (7.2)

Investment-type products:
20% increase to assumed surrenders................................ (4.0)
20% decrease to assumed surrenders................................ 4.8
15% increase to assumed expenses.................................. (1.6)
15% decrease to assumed expenses.................................. 1.5
10 basis point decrease to assumed spread......................... (5.1)
10 basis point increase to assumed spread......................... 4.9

Other than universal life and investment-type products (b):
5% increase to assumed morbidity.................................. (130.2)
50 basis point decrease to investment earnings rate............... (39.3)


--------------------
(a) A significant portion of our universal life-type products inforce are
in loss recognition status. A favorable change in experience on such
blocks may slow down future amortization; however, the current period
adjustment to insurance acquisition costs would be small. This causes
the downside sensitivities above to be lower in magnitude than the
upside results.

(b) We have excluded the effect of reasonably likely changes in mortality,
lapse, surrender and expense assumptions for policies other than
universal life and investment-type products. Our estimates indicate
such changes would not result in any portion of the $2.4 billion
balance of unamortized insurance acquisition costs related to these
policies being unrecoverable.



Accounting for marketing and reinsurance agreements with Coventry

Prescription Drug Benefit

The MMA provided for the introduction of a PDP product. In order to offer
this product to our current and potential future policyholders without investing
in management and infrastructure, we entered into a national distribution
agreement with Coventry to use our career and independent agents to distribute
Coventry's prescription drug plan, Advantra Rx. We receive a fee based on the
premiums collected on plans sold through our distribution channels. In addition,
Conseco has a quota-share reinsurance agreement with Coventry for Conseco
enrollees that provides Conseco with 50 percent of net premiums and related
policy benefits subject to a risk corridor. The Part D program was effective
January 1, 2006.

The following describes how we account for and report our PDP business:

50


Our accounting for the national distribution agreement

o We recognize distribution and licensing fee income from Coventry based
upon negotiated percentages of collected premiums on the underlying
Medicare Part D contracts. This fee income is recognized over the
calendar year term as premiums are collected.

o We also pay commissions to our agents who sell the plans on behalf of
Coventry. These payments are deferred and amortized over the remaining
term of the initial enrollment period (the one-year life of the
initial policy).

Our accounting for the quota-share agreement

o We recognize premium revenue evenly over the period of the underlying
Medicare Part D contracts.

o We recognize policyholder benefits and ceding commission expense as
incurred.

o We recognize risk-share premium adjustments consistent with Coventry's
risk-share agreement with the Centers for Medicare and Medicaid
Services.

The following summarizes the pre-tax income of the PDP business (dollars in
millions):



2007 2006
---- ----

Insurance policy income................................ $70.8 $74.4
Fee revenue and other.................................. 2.4 5.3
----- -----

Total revenues....................................... 73.2 79.7
----- -----

Insurance policy benefits.............................. 57.2 59.6
Commission expense..................................... 6.4 8.7
Other operating expenses............................... 1.0 6.5
----- -----

Total expense........................................ 64.6 74.8
----- -----

Pre-tax income....................................... $ 8.6 $ 4.9
===== =====



Private-Fee-For-Service

Conseco expanded its strategic alliance with Coventry by entering into a
national distribution agreement under which our career agents began distributing
Coventry's PFFS plan, beginning January 1, 2007. The Advantra Freedom product 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 receive a fee based on the
number of PFFS plans sold through our distribution channels. In addition,
Conseco has a quota-share reinsurance agreement with Coventry for Conseco
enrollees that provides Conseco in 2007 with approximately 50 percent of the net
premiums and related profits. During the fourth quarter of 2007, we initiated a
pilot program to test the marketing and distribution of Coventry's PFFS plan
through Colonial Penn's direct response distribution channel.

We receive distribution fees from Coventry and we pay sales commissions to
our agents for these enrollments. In addition, we participate at an
approximately 50 percent level in the income (loss) related to this business
pursuant to a quota-share agreement with Coventry.

The following summarizes our accounting and reporting practices for the
PFFS business.

Our accounting for the distribution agreement

o We receive distribution income from Coventry and other parties based
on a fixed fee per PFFS contract. This income is deferred and
recognized over the remaining calendar year term of the initial
enrollment period.

51


o We also pay commissions to our agents who sell the plans on behalf of
Coventry and other parties. These payments are deferred and amortized
over the remaining term of the initial enrollment period (the one-year
life of the initial policy).

Our accounting for the quota-share agreement

o We recognize revenue evenly over the period of the underlying PFFS
contracts.

o We recognize policyholder benefits and ceding commission expense as
incurred.

The following summarizes the pre-tax income of the PFFS business (dollars
in millions):



2007
----

Insurance policy income............................ $100.8
Fee revenue and other.............................. 8.6
------

Total revenues................................. 109.4
------

Insurance policy benefits.......................... 82.7
Commission expense................................. 4.2
Other operating expenses........................... 8.8
------

Total expense.................................. 95.7
------

Pre-tax income..................................... $ 13.7
======



Large Group Private-Fee-For-Service Block

Effective July 1, 2007, Conseco entered into a quota-share reinsurance
agreement with Coventry related to the PFFS business written by Coventry under
certain group policies. Conseco receives 50 percent 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. Conseco receives 25 percent of the
net premiums and related profits on the ceded margin in excess of five percent.
The following summarizes the pre-tax income of this business (dollars in
millions):



2007
----

Premium income.................................................. $99.8
-----

Policy benefits................................................. 91.2
Commission expense.............................................. 4.1
-----

Total expenses.............................................. 95.3
-----

Pre-tax income.................................................. $ 4.5
=====



Income Taxes

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 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 carryforwards and NOLs expire. This assessment 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 and reduce shareholders' equity, and such an
increase could have a significant impact upon our earnings in the future. In
addition, the use of the Company's NOLs is dependent, in part, on

52


whether the IRS does not take an adverse position in the future regarding the
tax position we have taken in our tax returns with respect to the allocation of
cancellation of indebtedness income.

Based upon information existing at the time of our emergence from
bankruptcy, we established a valuation allowance against our entire balance of
net deferred income tax assets because we believed that the realization of such
net deferred income tax assets in future periods was uncertain. During 2005 and
2006, we concluded that it was no longer necessary to hold certain portions of
the previously established valuation allowance. Accordingly, we reduced our
valuation allowance by $585.8 million and $260.0 million in 2005 and 2006,
respectively. However, we are required to continue to hold a valuation allowance
of $672.9 million at December 31, 2007 because we have determined that it is
more likely than not that a portion of our deferred tax assets will not be
realized. This determination was made by evaluating each component of the
deferred tax asset and assessing the effects of limitations or interpretations
on the value of such component to be fully recognized in the future.

The Code limits the extent to which losses realized by a non-life entity
(or entities) may offset income from a life insurance company (or companies) to
the lesser of: (i) 35 percent of the income of the life insurance company; or
(ii) 35 percent of the total loss of the non-life entities (including NOLs of
the non-life entities). There is no limitation on the extent to which losses
realized by a life insurance entity (or entities) may offset income from a
non-life entity (or entities).

In addition, the timing and manner in which the Company will be able to
utilize some of its NOLs is limited by Section 382 of the Code. Section 382
imposes limitations on a corporation's ability to use its NOLs when the company
undergoes an ownership change. Because the Company underwent an ownership change
pursuant to its reorganization, this limitation applies to the Company. Any
losses that are subject to the Section 382 limitation will only be utilized by
the Company up to approximately $142 million per year with any unused amounts
carried forward to the following year. Our Section 382 limitation for 2008 will
be approximately $587 million (including $445 million of unused amounts carried
forward from prior years).

Changes in our valuation allowance are summarized as follows (dollars in
millions):



Balance at December 31, 2004............................................. $1,629.6

Release of valuation allowance (a)..................................... (585.8)
--------

Balance at December 31, 2005............................................. 1,043.8

Expiration of NOL and capital loss carryforwards....................... (6.0)
Release of valuation allowance (a)..................................... (260.0)
--------

Balance at December 31, 2006............................................. 777.8

Increase in 2007....................................................... 68.0
Expiration of capital loss carryforwards............................... (157.6)
Write off of certain state NOLs (recovery is remote)................... (15.3)
--------

Balance at December 31, 2007............................................. $ 672.9
========


-------------------
(a) There is a corresponding increase to additional paid-in capital.



53




As of December 31, 2007, we had $5.0 billion of federal NOLs and $.7
billion of capital loss carryforwards, which expire as follows (dollars in
millions):



Net operating
loss carryforwards(a) Total loss carryforwards
--------------------- Capital loss Total loss ------------------------------------
Year of expiration Life Non-life carryforwards carryforwards Subject to ss.382 Not subject to ss.382
------------------ ---- -------- ------------- ------------- ----------------- ---------------------

2008 ...... $ - $ - $583.7 $ 583.7 $ 583.7 $ -
2009....... - .9 86.2 87.1 .9 86.2
2010....... - 1.0 - 1.0 1.0 -
2011....... - .1 - .1 .1 -
2012....... - 10.6 72.2 82.8 10.6 72.2
2016....... 16.9 - - 16.9 16.9 -
2017....... 33.2 - - 33.2 33.2 -
2018....... 2,170.6 (a) 20.3 - 2,190.9 64.4 2,126.5
2020....... - 2.5 - 2.5 2.5 -
2021....... 61.8 - - 61.8 - 61.8
2022....... 266.2 .6 - 266.8 - 266.8
2023....... - 2,092.9 (a) - 2,092.9 71.7 2,021.2
2024....... - 3.2 - 3.2 - 3.2
2025....... - 118.8 - 118.8 - 118.8
2026....... - 1.6 - 1.6 - 1.6
2027....... - 158.3 - 158.3 - 158.3
-------- -------- ------ -------- ------- --------

Total...... $2,548.7 $2,410.8 $742.1 $5,701.6 $ 785.0 $4,916.6
======== ======== ====== ======== ======= ========

--------------------
(a) The allocation of the NOLs summarized above assumes the IRS does not
take an adverse position in the future regarding the tax position we
plan to take in our tax returns with respect to the allocation of
cancellation of indebtedness income. If the IRS disagrees with the tax
position we plan to take with respect to the allocation of
cancellation of indebtedness income, and their position prevails,
approximately $631 million of the NOLs expiring in 2018 would be
characterized as non-life NOLs.



The Company adopted FASB Interpretation No. 48 "Accounting for Uncertainty
in Income Taxes - an interpretation of FASB Statement No. 109" ("FIN 48") on
January 1, 2007, which resulted in a $6 million increase to additional paid-in
capital. As of January 1, 2007 and December 31, 2007, the amount of unrecognized
tax benefits was not significant. While it is expected that the amount of
unrecognized tax benefits will change in the next twelve months, the Company
does not expect the change to have a significant impact on its results of
operations.

As more fully discussed below, the Company's interpretation of the tax law,
as it relates to the application of the cancellation of indebtedness income to
its NOLs, is an uncertain tax position. Since all other life NOLs must be
utilized prior to this portion of the NOL, it has not yet been utilized nor is
it expected to be utilized within the next twelve months. As a result, an
uncertain tax position has not yet been taken on the Company's tax return.

Although FIN 48 allowed a change in accounting, the Company has chosen to
continue its past accounting policy of classifying interest and penalties as
income tax expense in the consolidated statement of operations. No such amounts
were recognized in 2007. The liability for accrued interest and penalties was
not significant at December 31, 2007 or December 31, 2006.

Tax years 2004 through 2006 are open to examination by the IRS, and tax
year 2002 remains open only for potential adjustments related to certain
partnership investments. The Company does not anticipate any material
adjustments related to these partnership investments. The Company's various
state income tax returns are generally open for tax years 2004 through 2006
based on the individual state statutes of limitation.

The following paragraphs describe an open matter related to the
classification of our NOLs.

In July 2006, the Joint Committee of Taxation accepted the audit and the
settlement which characterized $2.1 billion of the tax losses on our
Predecessor's investment in Conseco Finance Corp. as life company losses and the
remaining amount

54


as non-life losses prior to the application of the cancellation of indebtedness
attribute reductions described below. As a result of the approval of the
settlement, we concluded it was appropriate to reduce our valuation allowance by
$260 million in the second quarter of 2006, which was accounted for as an
addition to paid-in capital.

The Code provides that any income realized as a result of the cancellation
of indebtedness in bankruptcy (cancellation of debt income or "CODI") must
reduce NOLs. We realized an estimated $2.5 billion of CODI when we emerged from
bankruptcy. Pursuant to the Company's interpretation of the tax law, the CODI
reductions were all used to reduce non-life NOLs. However, if the IRS were to
disagree with our interpretation and ultimately prevail, we believe
approximately $631 million of NOLs classified as life company NOLs would be
re-characterized as non-life NOLs and subject to the 35% limitation discussed
above. Such a re-characterization would also extend the year of expiration as
life company NOLs expire after 15 years whereas non-life NOLs expire after 20
years. The Company does not expect the IRS to consider this issue for a number
of years.

The Company adopted Statement of Financial Accounting Standards No. 123R
"Accounting for Stock-Based Compensation" ("SFAS 123R") in calendar year 2006.
Pursuant to this accounting rule, the Company is precluded from recognizing the
tax benefits of any tax windfall upon the exercise of a stock option or the
vesting of restricted stock unless such deduction resulted in actual cash
savings to the Company. Because of the Company's NOLs, no cash savings have
occurred. NOL carryforwards of $1.1 million related to deductions for stock
options and restricted stock will be reflected in additional paid-in capital if
realized.

Liabilities for Insurance Products

At December 31, 2007, the total balance of our liabilities for insurance
products was $26.7 billion. These liabilities are generally payable over an
extended period of time and the profitability of the related products is
dependent on the pricing of the products and other factors. Differences between
our expectations when we sold these products and our actual experience could
result in future losses.

We calculate and maintain reserves for the future payment of claims to our
policyholders based on actuarial assumptions. For all 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 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 numerous estimates and assumptions as well as 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. 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 the Other
Business in Run-off segment. 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, and 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.

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.

Accounting for Long-term Care Premium Rate Increases

Many of our long-term care policies were subject to premium rate increases
in 2006 and 2007. In some cases, these premium rate increases were reasonably
consistent with the assumptions we used to value the particular block of
business at the fresh-start date. In other cases, the premium rate increases
were materially different from that assumed at the fresh-start date, leading us
to change our best estimates of future actuarial assumptions. With respect to
the 2006 premium rate increases, some of our policyholders were provided an
option to cease paying their premiums and receive a non-forfeiture option in the
form of a paid-up policy with limited benefits. In addition, our policyholders
could choose to reduce their coverage amounts and premiums in the same
proportion, when permitted by our contracts or as required by regulators. The
following describes how we account for these premium rate increases and related
policyholder options:

o Premium rate increases - In November 2007, we were informed of a
request made by the SEC at a meeting on November 2, 2007 between the
insurance expert panel of the American Institute of Certified Public
Accountants

55


and the SEC staff. Representatives from Conseco did not attend the
meeting and there has been no formal communication from the SEC
regarding the matters that were discussed. However, it is our
understanding that during the meeting, the SEC staff requested that
companies communicate to the SEC their accounting practices if a
prospective revision methodology is used when premium rate changes are
made to guaranteed renewable health insurance contracts in a period
without a premium deficiency. In the critical accounting policies
section of our 2006 Form 10-K, we disclosed that we used a prospective
revision methodology (also known as "pivoting") to account for premium
rate increases on long-term care policies. Under this accounting
policy, we prospectively changed reserve assumptions for long-term
care policies when premium rate increases differed significantly from
our original assumptions. We based the use of this accounting policy
on our interpretation of GAAP, including specific reference to the use
of a prospective revision methodology when premium rate changes are
made to guaranteed renewable health insurance contracts in paragraph
20 of Statement of Position 05-1, "Accounting by Insurance Enterprises
for Deferred Acquisition Costs in Connection with Modifications or
Exchanges of Insurance Contracts" issued by the Accounting Standards
Executive Committee.

In accordance with the request of the SEC staff, we prepared a
document which summarized our use of the prospective revision
methodology and the authoritative guidance we followed in determining
our accounting policy. On February 28, 2008, the SEC staff informed
Conseco that the use of this method is not consistent with the
guidance of FASB Statement of Financial Accounting Standards No. 60,
"Accounting and Reporting by Insurance Enterprises."

As a result, we have restated our results reflecting the elimination
of the use of the prospective revision methodology. If premium rate
increases reflect a change in our previous rate increase assumptions,
the new assumptions are not reflected prospectively in our reserves.
Instead, the additional premium revenue resulting from the rate
increase is recognized as earned and original assumptions continue to
be used to determine changes to liabilities for insurance products
unless a premium deficiency exists.

Our restatement of previously issued financial statements for the year
ended December 31, 2006 and quarterly information for 2006 and the
first three quarters of 2007, includes adjustments to eliminate the
use of the prospective revision methodology. For further information
on these and other restatement adjustments, refer to the notes to the
consolidated financial statements entitled "Restatement of Previously
Issued Financial Statements" and "Restated Quarterly Financial Data
(Unaudited)."

o Benefit reductions - If there is a premium rate increase on one of our
long-term care policies, a policyholder may choose reduced coverage
with a proportionate reduction in premium, when permitted by our
contracts. This option does not require additional underwriting.
Benefit reductions are treated as a partial lapse of coverage, and the
balance of our reserves and deferred insurance acquisition costs is
reduced in proportion to the reduced coverage.

o Non-forfeiture benefits offered in conjunction with a rate increase -
In some cases, non-forfeiture benefits are offered to policyholders
who wish to lapse their policies at the time of a significant rate
increase. In these cases, exercise of this option is treated as an
extinguishment of the original contract and issuance of a new
contract. The balance of our reserves and deferred insurance
acquisition costs are released, and a reserve for the new contract is
established.

o Florida Order - In 2004, the Florida Office of Insurance Regulation
issued an order to our subsidiaries in the Other Business in Run-off
segment regarding their long-term care business in Florida. The order
required them to offer a choice of three alternatives to holders of
home health care policies in Florida subject to premium rate increases
as follows:

o retention of their current policy with a rate increase of 50
percent in the first year and actuarially justified increases in
subsequent years;

o receipt of a replacement policy with reduced benefits and a rate
increase in the first year of 25 percent and no more than 15
percent in subsequent years; or

o receipt of a paid-up policy, allowing the holder to file future
claims up to 100 percent of the amount of premiums paid since the
inception of the policy.

56




Reserves for all three groups of policies under the order were
prospectively adjusted using the prospective revision methodology
described above, as these alternatives were required by the Florida
Office of Insurance Regulation. These policies had no insurance
acquisition costs established at the Effective Date.

Some of our policyholders may receive a non-forfeiture benefit if they cease
paying their premiums pursuant to their original contract (or pursuant to
changes made to their original contract as a result of a litigation settlement
made prior to the Effective Date or an order issued by the Florida Office of
Insurance Regulation). In these cases, exercise of this option is treated as the
exercise of a policy benefit, and the reserve for premium paying benefits is
reduced, and the reserve for the non-forfeiture benefit is adjusted to reflect
the election of this benefit.

Liabilities for Loss Contingencies Related to Lawsuits and Our Guarantees
of Bank Loans and Related Interest Loans

We are involved on an ongoing basis in arbitrations and lawsuits, including
purported class actions. The ultimate outcome of these legal matters cannot be
predicted with certainty. We recognize an estimated loss from these loss
contingencies when we believe it is probable that a loss has been incurred and
the amount of the loss can be reasonably estimated. However, it is difficult to
measure the actual loss that might be incurred related to litigation. The
ultimate outcome of these lawsuits could have a significant impact on our
results of operations and financial position.

In conjunction with our bankruptcy reorganization in 2003, $481.3 million
principal amount of bank loans made to certain former directors and employees to
enable them to purchase common stock of Old Conseco were transferred to the
Company. These loans had been guaranteed by Old Conseco. We received all rights
to collect the balances due pursuant to the original terms of these loans. In
addition, we hold loans to participants for interest on the loans. The loans and
the interest loans are collectively referred to as the "D&O loans." We regularly
evaluate the collectibility of these loans in light of the credit worthiness of
the participants and the current status of various legal actions we have taken
to collect the D&O loans. At December 31, 2007, we have estimated that
approximately $19.2 million of the D&O loan balance (which is included in other
assets) is collectible (net of the costs of collection). An allowance has been
established to reduce the total D&O loan balance to the amount we estimated was
recoverable.

Pursuant to the settlement that was reached with the Official Committee of
the Trust Originated Preferred Securities ("TOPrS") Holders and the Official
Committee of Unsecured Creditors in connection with our bankruptcy
reorganization in 2003, the former holders of TOPrS (issued by Old Conseco's
subsidiary trusts and eliminated in our reorganization) who did not opt out of
the bankruptcy settlement will be entitled to receive 45 percent of any proceeds
from the collection of certain D&O loans in an aggregate amount not to exceed
$30 million. As of December 31, 2007, we had paid $13.7 million to the former
holders of TOPrS and we have established a liability of $10.2 million (which is
included in other liabilities), representing our estimate of the additional
amount which will be paid to the former holders of TOPrS pursuant to the
settlement.

57


RESULTS OF OPERATIONS:

We manage our business through the following: three primary operating
segments, Bankers Life, Conseco Insurance Group and Colonial Penn which are
defined on the basis of product distribution; a fourth segment comprised of
other business in run-off; and corporate operations, which consists of holding
company activities and certain noninsurance businesses.

Please read this discussion in conjunction with the consolidated financial
statements and notes included in this Form 10-K.

The following tables and narratives summarize the operating results of our
segments (dollars in millions):



2007 2006 2005
---- ---- ----
(Restated) (Restated)


Income (loss) before net realized investment gains (losses), net of related
amortization and income taxes (a non-GAAP measure) (a):
Bankers Life ...................................................... $ 241.8 $265.3 $224.9
Conseco Insurance Group............................................ (6.0) 32.6 233.4
Colonial Penn...................................................... 18.1 21.6 20.0
Other Business in Run-off.......................................... (185.9) (34.5) 90.9
Corporate operations............................................... (121.3) (80.7) (84.8)
------- ------ ------

(53.3) 204.3 484.4
------- ------ ------

Net realized investment gains (losses), net of related amortization:
Bankers Life ...................................................... (17.4) (16.3) (3.2)
Conseco Insurance Group............................................ (98.8) (12.6) 3.4
Colonial Penn...................................................... (.2) .2 .6
Other Business in Run-off.......................................... 2.9 (8.0) .5
Corporate operations............................................... (6.2) (.4) (1.4)
------- ------ ------

(119.7) (37.1) (.1)
------- ------ ------

Income (loss) before income taxes:
Bankers Life ...................................................... 224.4 249.0 221.7
Conseco Insurance Group............................................ (104.8) 20.0 236.8
Colonial Penn...................................................... 17.9 21.8 20.6
Other Business in Run-off.......................................... (183.0) (42.5) 91.4
Corporate operations............................................... (127.5) (81.1) (86.2)
------- ------ ------

Income (loss) before income taxes................................. $(173.0) $167.2 $484.3
======= ====== ======

--------------------
(a) These non-GAAP measures as presented in the above table and in the
following segment financial data and discussions of segment results exclude
net realized investment gains (losses), net of related amortization and
before income taxes. These are considered non-GAAP financial measures. A
non-GAAP measure is a numerical measure of a company's performance,
financial position, or cash flows that excludes or includes amounts that
are normally excluded or included in the most directly comparable measure
calculated and presented in accordance with GAAP.

These non-GAAP financial measures of "income (loss) before net realized
investment gains (losses), net of related amortization, and before income
taxes" differ from "income (loss) before income taxes" as presented in our
consolidated statement of operations prepared in accordance with GAAP due
to the exclusion of before tax realized investment gains (losses), net of
related amortization. We measure segment performance for purposes of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"), excluding realized
investment gains (losses) because we believe that this performance measure
is a better

58



indicator of the ongoing businesses and trends in our business. Our
investment focus is on investment income to support our liabilities for
insurance products as opposed to the generation of realized investment
gains (losses), and a long-term focus is necessary to maintain
profitability over the life of the business. Realized investment gains
(losses) depend on market conditions and do not necessarily relate to
decisions regarding the underlying business of our segments. However,
"income (loss) before net realized investment gains (losses), net of
related amortization, and before income taxes" does not replace "income
(loss) before income taxes" as a measure of overall profitability. We may
experience realized investment gains (losses), which will affect future
earnings levels since our underlying business is long-term in nature and we
need to earn the assumed interest rates on the investments backing our
liabilities for insurance products to maintain the profitability of our
business. In addition, management uses this non-GAAP financial measure in
its budgeting process, financial analysis of segment performance and in
assessing the allocation of resources. We believe these non-GAAP financial
measures enhance an investor's understanding of our financial performance
and allows them to make more informed judgments about the Company as a
whole. These measures also highlight operating trends that might not
otherwise be transparent. The table above reconciles the non-GAAP measure
to the corresponding GAAP measure.



General: Conseco is the top tier 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 distribute these products through our Bankers Life
segment, which utilizes a career agency force, through our Conseco Insurance
Group segment, which utilizes professional independent producers, and through
our Colonial Penn segment, which utilizes direct response marketing. Our Other
Business in Run-off segment consists of: (i) long-term care products sold in
prior years through independent agents; and (ii) a very small amount of major
medical insurance. Most of the long-term care business in run-off relates to
business written by certain subsidiaries prior to their acquisitions by Old
Conseco in 1996 and 1997.

59


Bankers Life (dollars in millions)


2007 2006 2005
---- ---- ----
(Restated) (Restated)

Premium collections:
Annuities........................................................... $ 885.5 $ 997.5 $ 951.1
Supplemental health................................................. 1,546.1 1,308.3 1,213.7
Life................................................................ 200.0 184.2 152.1
-------- -------- --------

Total collections................................................. $2,631.6 $2,490.0 $2,316.9
======== ======== ========

Average liabilities for insurance products:
Annuities:
Mortality based................................................. $ 266.0 $ 271.8 $ 263.0
Equity-indexed.................................................. 787.4 500.2 324.9
Deposit based................................................... 4,522.2 4,435.4 4,087.6
Health.............................................................. 3,569.7 3,310.2 3,044.7
Life:
Interest sensitive.............................................. 364.2 341.5 320.3
Non-interest sensitive.......................................... 299.1 246.7 196.5
-------- -------- --------

Total average liabilities for insurance
products, net of reinsurance ceded.......................... $9,808.6 $9,105.8 $8,237.0
======== ======== ========

Revenues:
Insurance policy income............................................. $1,780.0 $1,545.5 $1,405.7
Net investment income:
General account invested assets................................... 578.7 513.3 450.6
Equity-indexed products based on the change in value of options... (10.6) 12.3 (2.6)
Other special-purpose portfolios.................................. 4.2 - -
Fee revenue and other income.......................................... 12.0 6.0 1.1
-------- -------- --------

Total revenues.................................................. 2,364.3 2,077.1 1,854.8
-------- -------- --------

Expenses:
Insurance policy benefits........................................... 1,480.6 1,216.2 1,139.7
Amounts added to policyholder account balances:
Annuity products and interest-sensitive life
products other than equity-indexed products..................... 180.9 173.6 163.8
Equity-indexed products........................................... 23.2 20.8 1.7
Amortization related to operations.................................. 264.0 241.0 184.1
Interest expense on investment borrowings........................... - .1 1.3
Other operating costs and expenses.................................. 173.8 160.1 139.3
-------- -------- --------

Total benefits and expenses.................................... 2,122.5 1,811.8 1,629.9
-------- -------- --------

Income before net realized investment losses,
net of related amortization and income taxes........................ 241.8 265.3 224.9
-------- -------- --------

Net realized investment losses.................................... (19.9) (19.5) (4.2)
Amortization related to net realized investment losses............ 2.5 3.2 1.0
-------- -------- --------

Net realized investment losses,
net of related amortization................................ (17.4) (16.3) (3.2)
-------- -------- --------

Income before income taxes............................................... $ 224.4 $ 249.0 $ 221.7
======== ======== ========



(continued)

60


(continued from previous page)




2007 2006 2005
---- ---- ----
(Restated) (Restated)

Health benefit ratios:
All health lines:
Insurance policy benefits.......................................... $1,298.0 $1,058.8 $1,006.7
Benefit ratio (a).................................................. 84.4% 79.9% 82.9%

Medicare supplement:
Insurance policy benefits.......................................... $433.3 $436.6 $466.5
Benefit ratio (a).................................................. 67.2% 66.6% 71.5%

PDP and PFFS:
Insurance policy benefits.......................................... $231.1 $59.6 $ -
Benefit ratio (a).................................................. 85.1% 80.0% -

Long-term care:
Insurance policy benefits.......................................... $633.6 $562.6 $540.2
Benefit ratio (a).................................................. 102.0% 94.5% 96.1%
Interest-adjusted benefit ratio (b)................................ 70.8% 64.9% 67.6%

--------------------
(a) We calculate benefit ratios by dividing the related product's insurance
policy benefits by insurance policy income.
(b) We calculate the interest-adjusted benefit ratio (a non-GAAP measure) for
Bankers Life's long-term care products by dividing such product's insurance
policy benefits less interest income on the accumulated assets backing the
insurance liabilities by policy income. These are considered non-GAAP
financial measures. A non-GAAP measure is a numerical measure of a
company's performance, financial position, or cash flows that excludes or
includes amounts that are normally excluded or included in the most
directly comparable measure calculated and presented in accordance with
GAAP.

These non-GAAP financial measures of "interest-adjusted benefit ratios"
differ from "benefit ratios" due to the deduction of interest income on the
accumulated assets backing the insurance liabilities from the product's
insurance policy benefits used to determine the ratio. Interest income is
an important factor in measuring the performance of health products that
are expected to be inforce for a longer duration of time, are not subject
to unilateral changes in provisions (such as non-cancelable or guaranteed
renewable contracts) and require the performance of various functions and
services (including insurance protection) for an extended period of time.
The net cash flows from long-term care products generally cause an
accumulation of amounts in the early years of a policy (accounted for as
reserve increases) that will be paid out as benefits in later policy years
(accounted for as reserve decreases). Accordingly, as the policies age, the
benefit ratio will typically increase, but the increase in benefits will be
partially offset by interest income earned on the accumulated assets. The
interest-adjusted benefit ratio reflects the effects of the interest income
offset. Since interest income is an important factor in measuring the
performance of this product, management believes a benefit ratio that
includes the effect of interest income is useful in analyzing product
performance. We utilize the interest-adjusted benefit ratio in measuring
segment performance for purposes of SFAS 131 because we believe that this
performance measure is a better indicator of the ongoing businesses and
trends in the business. However, the "interest-adjusted benefit ratio" does
not replace the "benefit ratio" as a measure of current period benefits to
current period insurance policy income. Accordingly, management reviews
both "benefit ratios" and "interest-adjusted benefit ratios" when analyzing
the financial results attributable to these products. The investment income
earned on the accumulated assets backing Bankers Life's long-term care
reserves was $193.8 million, $175.9 million and $160.3 million in 2007,
2006 and 2005, respectively.



61


Total premium collections were $2,631.6 million in 2007, up 5.7 percent
from 2006, and $2,490.0 million in 2006, up 7.5 percent from 2005. Premium
collections include $277.8 million and $76.7 million in 2007 and 2006,
respectively, of premiums collected pursuant to the quota-share agreements with
Coventry described above under "Accounting for the marketing and reinsurance
agreements with Coventry". See "Premium Collections" for further analysis of
Bankers Life's premium collections.

Average liabilities for insurance products, net of reinsurance ceded were
$9.8 billion in 2007, up 7.7 percent from 2006, and $9.1 billion in 2006, up 11
percent from 2005. The increase in such liabilities was primarily due to
increases in annuity and health reserves resulting from new sales of these
products.

Insurance policy income is comprised of premiums earned on policies which
provide mortality or morbidity coverage and fees and other charges assessed on
other policies. Insurance policy income includes $271.4 million and $74.4
million in 2007 and 2006, respectively, of premium income from the quota-share
agreements with Coventry described above under "Accounting for the marketing and
reinsurance agreements with Coventry".

Net investment income on general account invested assets (which excludes
income on policyholder accounts) increased by 13 percent, to $578.7 million, in
2007 and by 14 percent, to $513.3 million, in 2006. The average balance of
general account invested assets was $10.0 billion, $9.2 billion and $8.2 billion
in 2007, 2006 and 2005, respectively. The yield on these assets was 5.79 percent
in 2007, 5.59 percent in 2006 and 5.49 percent in 2005. The increase in general
account invested assets is primarily due to sales of our annuity and health
products in recent periods. The increase in yield is primarily due to increases
in portfolio duration and changes in the investment allocation.

Net investment income related to equity-indexed products based on the
change in value of options represents the change in the estimated fair value of
options which are purchased in an effort to hedge certain potential benefits
accruing to the policyholders of our equity-indexed products. Our equity-indexed
products are designed so that the investment income spread earned on the related
insurance liabilities is more than adequate to cover the cost of the options and
other costs related to these policies. Net investment gains (losses) related to
equity-indexed products were $(11.2) million, $12.3 million and $(2.6) million
in 2007, 2006 and 2005, respectively. Also, during 2007, we recognized income on
trading securities which are held to act as hedges for embedded derivates
related to equity-indexed products. Such trading account income was $.6 million
in 2007. Such amounts are generally offset by the corresponding charge (credit)
to amounts added to policyholder account balances for equity-indexed products
based on the change in value of the indices. Such income and related charges
fluctuate based on the value of options embedded in the segment's equity-indexed
annuity policyholder account balances subject to this benefit and to the
performance of the index to which the returns on such products are linked.

Net investment income on other special-purpose portfolios includes the
income related to Company-owned life insurance ("COLI") which was purchased in
the fourth quarter of 2006 as an investment vehicle to fund the agent deferred
compensation plan. The COLI assets are not assets of the agent deferred
compensation plan, and as a result, are accounted for outside the plan and are
recorded in the consolidated balance sheet as other invested assets. Changes in
the cash surrender value (which approximates net realizable value) of the COLI
assets are recorded as net investment income and totaled $1.5 million in 2007.
We also recognized a death benefit of $2.7 million under the COLI in 2007.

Fee revenue and other income increased to $12.0 million in 2007, compared
to $6.0 million in 2006 and $1.1 million in 2005. We recognized fee income of
$11.0 million and $5.3 million in 2007 and 2006, respectively, pursuant to the
agreements described above under "Accounting for the marketing and reinsurance
agreements with Coventry".

Insurance policy benefits fluctuated as a result of the factors summarized
below for benefit ratios. Benefit ratios are calculated by dividing the related
insurance product's insurance policy benefits by insurance policy income.

The Medicare supplement business consists of both individual and group
policies. Government regulations generally require us to attain and maintain a
ratio of total benefits incurred to total premiums earned (excluding changes in
policy benefit reserves), after three years from the original issuance of the
policy and over the lifetime of the policy, of not less than 65 percent on
individual products and not less than 75 percent on group products, as
determined in accordance with statutory accounting principles. Since the
insurance product liabilities we establish for Medicare supplement business are
subject to significant estimates, the ultimate claim liability we incur for a
particular period is likely to be different than our initial estimate. Our
insurance policy benefits reflected the release of reserve redundancies
(deficiencies) from prior years of $3.7 million, $9.8 million and $(2.0) million
in 2007, 2006 and 2005, respectively. Excluding the effects of prior year claim
reserve redundancies (deficiencies), our benefit ratios would have been 67.8
percent, 68.3 percent, and 71.4 percent in 2007,

62


2006 and 2005, respectively. Such ratios are consistent with our expectations
considering premium rate increases implemented in recent periods.

The insurance policy benefits on our PDP and PFFS business result from our
quota-share reinsurance agreements with Coventry as described above under
"Accounting for marketing and reinsurance agreements with Coventry". We began
assuming the PDP business on January 1, 2006 and the PFFS business on January 1,
2007. Effective July 1, 2007, we entered into a new PFFS quota-share reinsurance
agreement to assume 50 percent of the business written by Coventry under one
large group policy. The benefit ratio related to the PDP and PFFS business
increased in 2007 due to the higher loss ratio on the group policy (which was
expected).

The net cash flows from our long-term care products generally cause an
accumulation of amounts in the early years of a policy (accounted for as reserve
increases) which will be paid out as benefits in later policy years (accounted
for as reserve decreases). Accordingly, as the policies age, the benefit ratio
typically increases, but the increase in reserves is partially offset by
investment income earned on the accumulated assets. The benefit ratio on this
business has increased over the last year, consistent with the aging of this
block. In addition, the older policies have not lapsed at the rate we assumed in
our pricing. In the first quarter of 2005, we began introducing several new
long-term care products to replace our previous lower-priced products. These new
products have been approved by the regulatory authorities in 49 states and the
District of Columbia. The benefit ratio on our entire block of long-term care
business in the Bankers Life segment was 102.0 percent, 94.5 percent and 96.1
percent in 2007, 2006 and 2005, respectively. The interest-adjusted benefit
ratio for long-term care products is calculated by dividing the insurance
product's insurance policy benefits less interest income on the accumulated
assets backing the insurance liabilities by insurance policy income. The
interest-adjusted benefit ratio on this business was 70.8 percent, 64.9 percent
and 67.6 percent in 2007, 2006 and 2005, respectively. Since the insurance
product liabilities we establish for long-term care business are subject to
significant estimates, the ultimate claim liability we incur for a particular
period is likely to be different than our initial estimate. Our insurance policy
benefits reflected reserve deficiencies from prior years of $7.4 million, $.5
million and $4.3 million in 2007, 2006 and 2005, respectively. Excluding the
effects of prior year claim reserve deficiencies, our benefit ratios would have
been 100.8 percent, 94.4 percent, and 95.3 percent in 2007, 2006 and 2005,
respectively. We experienced an increase in the number of incurred claims in
2007.

As a result of higher persistency 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 began a program in 2006 to seek approval from
regulatory authorities for rate increases on approximately 65 percent of this
block. As an alternative to the rate increase, policyholders were offered the
option: (i) to reduce their benefits to maintain their previous premium rates;
or (ii) to choose a nonforfeiture benefit equal to the sum of accumulated
premiums paid less claims received. We have received all expected regulatory
approvals and have implemented these rate increases. In addition, another round
of increases was filed during the second and third quarters of 2007 on newer
long-term care, home health care, and short-term care policies not included in
the first round of rate increases. The policies in this round represent
approximately 25 percent of the inforce block. As of December 31, 2007, all such
filings had been submitted for regulatory approval, and approximately 38 percent
of the rate increases had been approved by regulators and implemented. Remaining
approvals and implementations are expected to occur over the next nine months.

During the fourth quarter of 2007, we recognized additional insurance
policy benefits of $6.7 million to reflect changes in our estimates of future
surrender and premium persistency rates on our universal life insurance block of
business.

Amounts added to policyholder account balances for annuity products and
interest-sensitive life products were $180.8 million, $173.6 million and $163.8
million in 2007, 2006 and 2005, respectively. The increases were primarily due
to increases in annuity reserves (resulting from higher sales of these
products). The weighted average crediting rates for these products were 3.7
percent, 3.6 percent and 3.7 percent in 2007, 2006 and 2005, respectively.

Amounts added to equity-indexed products based on change in value of the
indices fluctuated with the corresponding related investment income accounts
described above.

Amortization related to operations includes amortization of the value of
policies inforce at the Effective Date and the cost of policies produced
(collectively referred to as "amortization of insurance acquisition costs").
Insurance acquisition costs are generally amortized either: (i) in relation to
the estimated gross profits for universal life and investment-type products; or
(ii) in relation to actual and expected premium revenue for other products. In
addition, for universal life and investment-type products, we are required to
adjust the total amortization recorded to date through the statement of
operations if actual experience or other evidence suggests that earlier
estimates of future gross profits should be revised. Accordingly, amortization
for universal life and investment-type products is dependent on the profits
realized during the

63


period and on our expectation of future profits. For other products, we amortize
insurance acquisition costs in relation to actual and expected premium revenue,
and amortization is only adjusted if expected premium revenue changes or if we
determine the balance of these costs is not recoverable from future profits.
Bankers Life's amortization expense was $264.0 million, $241.0 million and
$184.1 million in 2007, 2006 and 2005, respectively. During the first half of
2007 and 2006, we experienced higher lapses than we anticipated on our Medicare
supplement products. These lapses reduced our estimates of future expected
premium income and, accordingly, we recognized additional amortization expense
of $25.4 million in the first half of 2007 and $7.9 million in the first half of
2006. We believe such increases were partially related to competition from
Medicare Advantage products.

Other operating costs and expenses in our Bankers Life segment were $173.8
million in 2007, up 8.6 percent from 2006 and were $160.1 million in 2006, up 15
percent from 2005. The increase in expenses in 2007 and 2006 reflects the
expenses we incurred related to the marketing and quota-share agreements with
Coventry. Other operating costs and expenses include the following (dollars in
millions):



2007 2006 2005
---- ---- ----
(Restated) (Restated)

Expenses related to the marketing and quota-share
agreements with Coventry............................................ $ 24.5 $ 15.2 $ -
Commission expense..................................................... 20.8 20.7 18.9
Other operating expenses............................................... 128.5 124.2 120.4
------ ------ ------

Total............................................................... $173.8 $160.1 $139.3
====== ====== ======



Net realized investment losses fluctuated each period. During 2007, net
realized investment losses in this segment included $4.6 million of net losses
from the sales of investments (primarily fixed maturities), and $15.3 million of
writedowns of investments resulting from declines in fair values that we
concluded were other than temporary. During 2006, net realized investment losses
in this segment included $15.1 million of net losses from the sales of
investments (primarily fixed maturities), and $4.4 million of writedowns of
investments resulting from declines in fair values that we concluded were other
than temporary. During 2005, net realized investment losses in this segment
included $1.5 million of net losses from the sales of investments (primarily
fixed maturities), and $2.7 million of writedowns of investments resulting from
declines in fair values that we concluded were other than temporary.

Amortization related to net realized investment losses is the increase or
decrease in the amortization of insurance acquisition costs which results from
realized investment gains or losses. When we sell securities which back our
universal life and investment-type products at a gain (loss) and reinvest the
proceeds at a different yield, we increase (reduce) the amortization of
insurance acquisition costs in order to reflect the change in estimated gross
profits due to the gains (losses) realized and the resulting effect on estimated
future yields. Sales of fixed maturity investments resulted in a decrease in the
amortization of insurance acquisition costs of $2.5 million, $3.2 million and
$1.0 million in 2007, 2006 and 2005, respectively.

64


Conseco Insurance Group (dollars in millions)



2007 2006 2005
---- ---- ----
(Restated) (Restated)

Premium collections:
Annuities........................................................... $ 368.6 $ 433.3 $ 161.7
Supplemental health................................................. 594.4 611.6 661.5
Life................................................................ 287.3 314.6 335.0
--------- --------- ---------

Total collections................................................. $ 1,250.3 $ 1,359.5 $ 1,158.2
========= ========= =========

Average liabilities for insurance products:
Annuities:
Mortality based..................................................... $ 230.3 $ 241.2 $ 269.8
Equity-indexed.................................................... 1,435.3 1,376.4 1,349.0
Deposit based..................................................... 2,337.7 3,150.8 3,472.4
Separate accounts and investment trust liabilities................ 28.4 29.3 30.6
Health.............................................................. 2,457.2 2,424.7 2,407.0
Life:
Interest sensitive................................................ 3,044.9 3,061.2 3,124.9
Non-interest sensitive............................................ 1,380.2 1,416.8 1,431.0
--------- --------- ---------

Total average liabilities for insurance products,
net of reinsurance ceded...................................... $10,914.0 $11,700.4 $12,084.7
========= ========= =========
Revenues:
Insurance policy income............................................. $ 949.4 $ 994.8 $ 1,064.0
Net investment income:
General account invested assets................................... 700.5 699.6 718.6
Equity-indexed products based on the change in value of options... (1.3) 26.0 (16.3)
Trading account income related to policyholder and
reinsurer accounts.............................................. 1.4 6.9 (3.3)
Change in value of embedded derivatives related to
modified coinsurance agreements................................. 1.4 .8 3.0
Other trading accounts............................................ (12.8) - -
Fee revenue and other income........................................ .6 1.0 1.9
--------- --------- ---------

Total revenues.................................................... 1,639.2 1,729.1 1,767.9
--------- --------- ---------

Expenses:
Insurance policy benefits........................................... 779.8 769.4 831.8
Amounts added to policyholder account balances:
Annuity products and interest-sensitive life products
other than equity-indexed products.............................. 217.4 251.9 254.5
Equity-indexed products........................................... 60.7 55.8 12.6
Amortization related to operations.................................. 177.5 174.5 158.6
Interest expense on investment borrowings........................... 17.6 .8 4.9
Costs related to a litigation settlement............................ 32.2 165.8 9.2
Loss related to an annuity coinsurance transaction.................. 76.5 - -
Other operating costs and expenses.................................. 283.5 278.3 262.9
--------- --------- ---------

Total benefits and expenses....................................... 1,645.2 1,696.5 1,534.5
--------- --------- ---------

Income (loss) before net realized investment gains (losses),
net of related amortization and income taxes........................ (6.0) 32.6 233.4
--------- --------- ---------

Net realized investment gains (losses)............................ (132.0) (19.5) 1.6
Amortization related to net realized investment
(gains) losses.................................................. 33.2 6.9 1.8
--------- --------- ---------

Net realized investment gains (losses),
net of related amortization................................... (98.8) (12.6) 3.4
--------- --------- ---------

Income (loss) before income taxes........................................ $ (104.8) $ 20.0 $ 236.8
========= ========= =========



(continued)

65


(continued from previous page)



2007 2006 2005
---- ---- ----
(Restated) (Restated)

Health benefit ratios:
All health lines:
Insurance policy benefits.......................................... $443.8 $445.2 $476.3
Benefit ratio (a).................................................. 74.0% 71.2% 70.8%

Medicare supplement:
Insurance policy benefits.......................................... $156.4 $158.9 $178.5
Benefit ratio (a).................................................. 67.6% 61.9% 59.4%

Specified disease:
Insurance policy benefits.......................................... $279.4 $277.1 $287.9
Benefit ratio (a).................................................. 77.8% 77.4% 80.2%
Interest-adjusted benefit ratio (b)................................ 44.7% 45.4% 49.1%

Other:
Insurance policy benefits.......................................... $8.0 $9.2 $9.9
Benefit ratio (a).................................................. 84.7% 84.2% 75.9%


--------------------
(a) We calculate benefit ratios by dividing the related product's insurance
policy benefits by insurance policy income.
(b) We calculate the interest-adjusted benefit ratio (a non-GAAP measure) for
Conseco Insurance Group's specified disease products by dividing such
product's insurance policy benefits less interest income on the accumulated
assets backing the insurance liabilities by policy income. These are
considered non-GAAP financial measures. A non-GAAP measure is a numerical
measure of a company's performance, financial position, or cash flows that
excludes or includes amounts that are normally excluded or included in the
most directly comparable measure calculated and presented in accordance
with GAAP.

These non-GAAP financial measures of "interest-adjusted benefit ratios"
differ from "benefit ratios" due to the deduction of interest income on the
accumulated assets backing the insurance liabilities from the product's
insurance policy benefits used to determine the ratio. Interest income is
an important factor in measuring the performance of health products that
are expected to be inforce for a longer duration of time, are not subject
to unilateral changes in provisions (such as non-cancelable or guaranteed
renewable contracts) and require the performance of various functions and
services (including insurance protection) for an extended period of time.
In addition, interest income is an important factor in measuring the
performance of this product, since approximately three-fourths of these
policies have return of premium or cash value riders. The net cash flows
from specified disease products generally cause an accumulation of amounts
in the early years of a policy (accounted for as reserve increases) that
will be paid out as benefits in later policy years (accounted for as
reserve decreases). Accordingly, as the policies age, the benefit ratio
will typically increase, but the increase in benefits will be partially
offset by interest income earned on the accumulated assets. The
interest-adjusted benefit ratio reflects the effects of the interest income
offset. Since interest income is an important factor in measuring the
performance of this product, management believes a benefit ratio that
includes the effect of interest income is useful in analyzing product
performance. We utilize the interest-adjusted benefit ratio in measuring
segment performance for purposes of SFAS 131 because we believe that this
performance measure is a better indicator of the ongoing businesses and
trends in the business. However, the "interest-adjusted benefit ratio" does
not replace the "benefit ratio" as a measure of current period benefits to
current period insurance policy income. Accordingly, management reviews
both "benefit ratios" and "interest-adjusted benefit ratios" when analyzing
the financial results attributable to these products. The investment income
earned on the accumulated assets backing the specified disease reserves was
$118.9 million, $114.7 million and $111.7 million in 2007, 2006 and 2005,
respectively.



Annuity coinsurance agreement. On October 12, 2007, we completed a
transaction to coinsure 100 percent of most of the older inforce equity-indexed
annuity and fixed annuity business of three of our subsidiaries with REALIC. We
recognized a $76.5 million loss before income taxes on the transaction. Pursuant
to the terms of the agreement, the purchase price was based on the January 1,
2007, value of the business ceded. During 2007, we also recognized impairment
charges (net of amortization of insurance intangibles) of $40.6 million as a
result of our intent not to hold investments for a period of time sufficient to
allow for any anticipated recovery as a result of the assets to be transferred
upon the expected completion of

66


the coinsurance transaction. In addition to the 2007 effect of the coinsurance
agreement, our 2008 results will be affected since the revenue and expense in
this block will no longer be recorded in our consolidated statement of
operations. During the first nine months of 2007, the following revenues and
expenses were recognized on this block: net investment income of $120 million,
insurance policy benefits of $85 million; and amortization expense of $25
million.

Total premium collections were $1,250.3 million in 2007, down 8.0 percent
from 2006, and $1,359.5 million in 2006, up 17 percent from 2005. The decrease
in 2007 collected premiums was primarily due to lower annuity sales as we
changed the pricing of specific products and we no longer emphasized the sale of
certain products. Premium collections in 2006 increased primarily due to higher
premium collections from our equity-indexed products, partially offset by lower
premium collections from Medicare supplement and life insurance products. See
"Premium Collections" for further analysis of fluctuations in premiums collected
by product.

Average liabilities for insurance products, net of reinsurance ceded were
$10.9 billion in 2007, down 6.7 percent from 2006, and $11.7 billion in 2006,
down 3.2 percent from 2005. The decreases in such liabilities were primarily due
to a coinsurance transaction completed in the third quarter of 2007 and
policyholder redemptions and lapses exceeding new sales.

Insurance policy income is comprised of premiums earned on traditional
insurance policies which provide mortality or morbidity coverage and fees and
other charges assessed on other policies. The decrease in insurance policy
income is partially due to lower premiums from our life insurance block. The
lapses of these policies are exceeding new sales. In addition, we experienced
higher lapses than sales from Medicare supplement products in 2007. See "Premium
Collections" for further analysis.

Net investment income on general account invested assets (which excludes
income on policyholder and reinsurer accounts) increased by .1 percent, to
$700.5 million, in 2007 and decreased by 2.6 percent, to $699.6 million, in
2006. The average balance of general account invested assets decreased by 3.3
percent in 2007, to $11.8 billion, and by 3.1 percent in 2006, to $12.2 billion.
The average yield on these assets was 5.92 percent in 2007, 5.74 percent in 2006
and 5.71 percent in 2005. The increase in yield is primarily due to an increase
in portfolio duration and changes in investment allocation. The yield was also
impacted by income related to prepayments of securities (including prepayment
penalties on mortgages, call premiums on fixed maturities and acceleration of
discount amortization, net of premium amortization) of $6.8 million, $8.2
million and $22.8 million in 2007, 2006 and 2005, respectively. This additional
investment income was partially offset by approximately $1.1 million, $4.0
million and $9.4 million of additional amortization expense in 2007, 2006 and
2005, respectively, to reflect the higher resulting gross profits for universal
life and investment-type products.

Net investment income related to equity-indexed products based on the
change in value of options represents the change in the estimated fair value of
options which are purchased in an effort to hedge certain potential benefits
accruing to the policyholders of our equity-indexed products. Our equity-indexed
products are designed so that the investment income spread earned on the related
insurance liabilities is more than adequate to cover the cost of the options and
other costs related to these policies. Net investment gains (losses) related to
equity-indexed products were $2.7 million, $28.1 million and $(12.0) million in
2007, 2006 and 2005, respectively. Such amounts also include income on trading
securities which are designed to act as hedges for embedded derivatives related
to equity-indexed products. Such trading account income (loss) were $(4.0)
million, $(2.1) million and $(4.3) million in 2007, 2006 and 2005, respectively.
Such amounts were partially offset by the corresponding charge (credit) to
amounts added to policyholder account balances for equity-indexed products. Such
income and related charges fluctuate based on the value of options embedded in
the segment's equity-indexed annuity policyholder account balances subject to
this benefit and to the performance of the indices to which the returns on such
products are linked.

Trading account income related to policyholder and reinsurer accounts
represents the income on trading securities which are held to act as hedges for
embedded derivatives related to certain modified coinsurance agreements. In
addition, such income includes the income on investments backing the market
strategies of certain annuity products which provide for different rates of cash
value growth based on the experience of a particular market strategy. The income
on our trading account securities is designed to substantially offset: (i) the
change in value of embedded derivatives related to modified coinsurance
agreements described below; and (ii) certain amounts included in insurance
policy benefits related to the aforementioned annuity products.

Change in value of embedded derivatives related to modified coinsurance
agreements is described in the note to our consolidated financial statements
entitled "Summary of Significant Accounting Policies - Accounting for
Derivatives." We have transferred the specific block of investments related to
these agreements to our trading securities account, which we carry at estimated
fair value with changes in such value recognized as trading account income. The
change in the value of the

67


embedded derivatives has largely been offset by the change in value of the
trading securities.

Net investment income on other trading accounts includes: (i) the change in
the fair value of a trading securities portfolio; and (ii) the change in fair
value of interest rate swaps. The trading securities were carried at estimated
fair value with changes in such value recognized as trading income. The change
in the value of the interest rate swaps was recognized in trading income. Prior
to December 31, 2007, these fixed rate securities were sold and the associated
interest rate swaps were terminated.

Insurance policy benefits were affected by a number of items as summarized
below.

Insurance margins (insurance policy income less insurance policy benefits)
related to life products were $(.2) million, $28.9 million and $37.7 million in
2007, 2006 and 2005, respectively. Such declines were primarily due to increased
death claims.

Insurance policy benefits also fluctuated as a result of the factors
summarized below for benefit ratios. Benefit ratios are calculated by dividing
the related insurance product's insurance policy benefits by insurance policy
income.

In 2006 and 2005, the benefit ratios on Conseco Insurance Group's Medicare
supplement products were impacted by an increase in policyholder lapses
following our premium rate increase actions and competition from companies
offering Medicare Advantage products. We establish active life reserves for
these policies, which are in addition to amounts required for incurred claims.
When policies lapse, active life reserves for such lapsed policies are released,
resulting in decreased insurance policy benefits (although such decrease is
substantially offset by additional amortization expense). In addition, the
insurance product liabilities we establish for our Medicare supplement business
are subject to significant estimates and the ultimate claim liability we incur
for a particular period is likely to be different than our initial estimate. Our
insurance policy benefits reflected claim reserve redundancies from prior years
of $1.0 million, $5.4 million and $6.5 million in 2007, 2006 and 2005,
respectively. Excluding the effects of prior year claim reserve redundancies,
our benefit ratios for the Medicare supplement block would have been 68.0
percent, 64.1 percent and 61.5 percent in 2007, 2006 and 2005, respectively.
Governmental regulations generally require us to attain and maintain a ratio of
total benefits incurred to total premiums earned (excluding changes in policy
benefit reserves), after three years from the original issuance of the policy
and over the lifetime of the policy, of not less than 65 percent on these
products, as determined in accordance with statutory accounting principles.
Insurance margins (insurance policy income less insurance policy benefits) on
these products were $74.9 million, $97.6 million and $122.2 million in 2007,
2006 and 2005, respectively. Such decreases are primarily due to a higher
benefit ratio and a smaller inforce block of business.

Conseco Insurance Group's specified disease products generally provide
fixed or limited benefits. For example, 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.
Approximately three-fourths of our specified disease policies inforce (based on
policy count) are sold with return of premium or cash value riders. The return
of premium rider generally provides that after a policy has been inforce for a
specified number of years or upon the policyholder reaching a specified age, we
will pay to the policyholder, or 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. 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. Accordingly, the net cash flows from
these products generally result in the accumulation of amounts in the early
years of a policy (accounted for as reserve increases) which will be paid out as
benefits in later policy years (accounted for as reserve decreases). As the
policies age, the benefit ratio will typically increase, but the increase in
benefits will be partially offset by investment income earned on the accumulated
assets.

The benefit ratio will fluctuate depending on the claim experience during
the year. Insurance margins (insurance policy income less insurance policy
benefits) on these products were $79.7 million, $80.8 million and $71.1 million
in 2007, 2006 and 2005, respectively.

The benefit ratios on Conseco Insurance Group's other products are subject
to fluctuations due to the smaller size of these blocks of business. We no
longer actively market these products.

During the fourth quarter of 2007, we recognized additional insurance
policy benefits of $2.0 million to increase our insurance product liabilities.
This increase primarily affects our best estimate of the costs associated with
enhancing certain benefits related to a block of excess interest whole life
policies in response to various issues in how the policies had been
administered. We recognized additional insurance policy benefits of $8.0 million
during the fourth quarter of 2006 based on our

68


prior estimate of the enhanced benefits associated with these same policies and
administrative issues. The policies affected by the adjustments described above
were issued through a subsidiary prior to its acquisition by Conseco in 1997.

Amounts added to policyholder account balances for annuity products and
interest-sensitive life products were $217.4 million, $251.9 million and $254.5
million in 2007, 2006 and 2005, respectively. The fluctuations are primarily due
to a smaller block of annuity business inforce due to: (i) lapses exceeding new
sales in recent periods; and (ii) the completion of an annuity coinsurance
transaction in the third quarter of 2007 as further discussed in the note to the
consolidated financial statements entitled "Summary of Significant Accounting
Policies - Reinsurance". The weighted average crediting rates for these products
were 4.1 percent, 4.1 percent and 4.0 percent in 2007, 2006 and 2005,
respectively.

Amounts added to equity-indexed products generally fluctuate with the
corresponding related investment income accounts described above. In addition,
in 2006, we reduced such amounts by $8.5 million to reflect a change in the
assumptions for the cost of options underlying our equity-indexed products as
described below under amortization related to operations. Such decreases were
partially offset by a $4.7 million increase in amortization of insurance
acquisition costs related to the assumption changes.

Amortization related to operations includes amortization of insurance
acquisition costs. Insurance acquisition costs are generally amortized either:
(i) in relation to the estimated gross profits for universal life and
investment-type products; or (ii) in relation to actual and expected premium
revenue for other products. In addition, for universal life and investment-type
products, we are required to adjust the total amortization recorded to date
through the statement of operations if actual experience or other evidence
suggests that earlier estimates of future gross profits should be revised.
Accordingly, amortization for universal life and investment-type products is
dependent on the profits realized during the period and on our expectation of
future profits. For other products, we amortize insurance acquisition costs in
relation to actual and expected premium revenue, and amortization is only
adjusted if expected premium revenue changes or if we determine the balance of
these costs is not recoverable from future profits. Lapse rates on our Medicare
supplement products have impacted our estimates of future expected premium
income and, accordingly, we recognized increased (decreased) amortization
expense of $(3.9) million and $7.1 million in 2007 and 2006, respectively. The
assumptions we use to estimate our future gross profits and premiums involve
significant judgment. A revision to our current assumptions could result in
increases or decreases to amortization expense in future periods.

During 2007, we were required to accelerate the amortization of insurance
acquisition costs related to our universal life products because the prior
balance was not recoverable by the value of future estimated gross profits on
this block. This additional amortization was necessary so that our insurance
acquisition costs would not exceed the value of future estimated gross profits
and is expected to continue to be recognized in subsequent periods. Because our
insurance acquisition costs are now equal to the value of future estimated gross
profits, this block is expected to generate break-even earnings in the future.
We continue to hold insurance acquisition costs of approximately $140 million
related to these products, which we determined are recoverable by the value of
estimated gross profits. In addition, results for this block are expected to
exhibit increased volatility in the future, because the entire difference
between our assumptions and actual experience is expected to be reflected in
earnings in the period such differences occur.

During the fourth quarter of 2007, we recognized additional amortization
expense of $14.8 million to reflect changes in our estimates of future mortality
rates on our universal life business, net of planned increases to associated
policyholder charges.

During the fourth quarter of 2006, we recognized additional amortization
expense of $7.8 million to reflect a change in an actuarial assumption related
to a block of interest-sensitive life insurance policies based on a change in
management's intent on the administration of such policies. The policies
affected by the adjustments described above were issued through a subsidiary
prior to its acquisition by Conseco in 1996.

During the first quarter of 2006, we made certain adjustments to our
assumptions of expected future profits for the annuity and universal life blocks
of business in this segment related to investment returns, lapse rates, the cost
of options underlying our equity-indexed products and other refinements. We
recognized additional amortization expense of $12.4 million in the first quarter
of 2006 due to these changes. This increase to amortization expense was offset
by a reduction to insurance policy benefit expense of $11.5 million, to reflect
the effect of the changes in these assumptions on the calculation of certain
insurance liabilities, such as the liability to purchase future options
underlying our equity-indexed products. Also, during the second quarter of 2006,
we changed our estimates of the future gross profits of certain universal life
products, which under certain circumstances are eligible for interest bonuses in
addition to the declared base rate. These interest bonuses are not required in
the current crediting rate environment and our estimates of future gross profits
have been changed

69


to reflect the discontinuance of the bonus. We reduced amortization expense by
$4.0 million during the second quarter of 2006 as a result of this change.

Interest expense on investment borrowings includes $16.7 million of
interest expense on collateralized borrowings in 2007 as further described in
the note to the consolidated financial statements entitled "Summary of
Significant Accounting Policies - Investment Borrowings and Interest Rate
Swaps".

Costs related to a litigation settlement include legal fees and estimated
amounts related to a settlement in the class action case referred to as In Re
Conseco Life Insurance Company Cost of Insurance Litigation. The costs related
to the litigation settlement recognized in 2007 represent changes to our initial
estimates based on the ultimate cost of the settlement, including the effect of
the sale of shares of our common stock distributed for the benefit of the
plaintiffs pursuant to the bankruptcy plan of our Predecessor at lower market
prices than previously reflected. For further information related to this case,
refer to the caption entitled "Cost of Insurance Litigation" included in the
note to our consolidated financial statements entitled "Commitments and
Contingencies". A portion of the legal and other costs related to this
litigation were incurred by the Corporate Operations segment to defend the
non-insurance company allegations made in such lawsuits.

Loss related to an annuity coinsurance transaction resulted from the
completion of a transaction to coinsure 100 percent of most of the older inforce
equity-indexed annuity and fixed annuity business of three of our insurance
subsidiaries with REALIC, a subsidiary of Swiss Re Life & Health America, Inc.
Refer to the note to the consolidated financial statements entitled "Summary of
Significant Accounting Policies - Reinsurance" for further information about the
transaction.

Other operating costs and expenses were $283.5 million, $278.3 million and
$262.9 million in 2007, 2006 and 2005, respectively. Other operating costs and
expenses include commissions and other operating expenses. During 2007, the
Company recognized expenses of $7.3 million related to the decision to abandon
certain software that will not be used consistent with our current business plan
and $3.7 million of costs related to other operational initiatives and
consolidation activities. Other operating costs and expenses include the follow
(dollars in millions):



2007 2006 2005
---- ---- ----

Commission expenses...................................... $ 79.3 $ 87.1 $ 94.2
Other operating expense.................................. 204.2 191.2 185.1
Expense recoveries related to bankruptcy................. - - (7.6)
Amounts related to postretirement plan................... - - (8.8)
------ ------ ------

$283.5 $278.3 $262.9
====== ====== ======



Net realized investment gains (losses) fluctuate each period. During 2007,
net realized investment losses in this segment included: (i) $44.1 million from
the sales of investments (primarily fixed maturities); (ii) $14.2 million of
writedowns of investments resulting from declines in fair values that we
concluded were other than temporary; and (iii) $73.7 million of writedowns of
investments (which were subsequently transferred pursuant to a coinsurance
agreement as further discussed in the note to the consolidated financial
statements entitled "Summary of Significant Accounting Policies - Reinsurance")
as a result of our intent not to hold such investments for a period of time
sufficient to allow for any anticipated recovery in value. The net investment
losses realized on sales of investments in 2007 were primarily recognized on
securities collateralized by sub prime residential mortgage loans. We decided to
sell these securities given our concerns regarding the effect future adverse
developments could have on the future value of these securities. For further
information on our sub prime holdings, refer to the caption entitled "Structured
Securities Collateralized by Sub Prime Residential Mortgage Loans" in the
"Investments" section of Management's Discussion and Analysis of Financial
Condition and Results of Operations. During 2006, net realized investment losses
included $10.5 million of net losses from the sales of investments (primarily
fixed maturities), and $9.0 million of writedowns of investments resulting from
declines in fair values that we concluded were other than temporary. During
2005, net realized investment gains included $6.0 million of net gains from the
sales of investments (primarily fixed maturities), net of $4.4 million of
writedowns of investments resulting from declines in fair values that we
concluded were other than temporary.

Amortization related to net realized investment gains (losses) is the
increase or decrease in the amortization of insurance acquisition costs which
results from realized investment gains or losses. When we sell securities which
back our universal life and investment-type products at a gain (loss) and
reinvest the proceeds at a different yield, (or when we no longer have the
intent to hold impaired investments for a period of time sufficient to allow for
any anticipated recovery), we

70


increase (reduce) the amortization of insurance acquisition costs in order to
reflect the change in estimated gross profits due to the gains (losses) realized
and the resulting effect on estimated future yields. Sales of fixed maturity
investments resulted in a decrease in the amortization of insurance acquisition
costs of $33.2 million, $6.9 million and $1.8 million in 2007, 2006 and 2005,
respectively.

Colonial Penn (dollars in millions)



2007 2006 2005
---- ---- ----

Premium collections:
Life................................................................. $113.7 $ 97.2 $ 85.1
Supplemental health.................................................. 10.4 12.0 13.8
------- ------ ------

Total collections.................................................. $124.1 $109.2 $ 98.9
====== ====== ======

Average liabilities for insurance products:
Annuities:
Mortality based.................................................. $ 85.3 $ 86.9 $ 89.5
Deposit based.................................................... 4.2 3.9 4.2
Health............................................................... 22.9 25.6 29.0
Life:
Interest sensitive............................................... 25.9 27.6 29.0
Non-interest sensitive........................................... 558.9 553.6 555.7
------ ------ ------

Total average liabilities for insurance
products, net of reinsurance ceded............................ $697.2 $697.6 $707.4
====== ====== ======

Revenues:
Insurance policy income.............................................. $125.8 $112.1 $101.3
Net investment income:
General account invested assets.................................... 37.8 38.2 38.2
Trading account income related to reinsurer accounts............... (.2) (4.3) (6.1)
Change in value of embedded derivatives related
to modified coinsurance agreements............................... .2 4.3 6.1
Fee revenue and other income......................................... .7 .6 .7
------ ------ ------

Total revenues................................................... 164.3 150.9 140.2
------ ------ ------

Expenses:
Insurance policy benefits............................................ 101.0 95.1 88.1
Amounts added to annuity and interest-sensitive life product
account balances................................................. 1.2 1.3 1.6
Amortization related to operations................................... 20.3 17.3 15.1
Interest expense on investment borrowings............................ - - .4
Other operating costs and expenses................................... 23.7 15.6 15.0
------ ------ ------

Total benefits and expenses...................................... 146.2 129.3 120.2
------ ------ ------

Income before net realized investment gains (losses) and
income taxes......................................................... 18.1 21.6 20.0
Net realized investment gains (losses)............................. (.2) .2 .6
------ ------ ------

Income before income taxes................................................ $ 17.9 $ 21.8 $ 20.6
====== ====== ======



Reinsurance recapture: In the fourth quarter of 2007, we completed the
recapture of a block of traditional life insurance inforce that had been ceded
under a coinsurance agreement with REALIC. The recapture of this block resulted
in a $2.8 million gain accounted for as a reduction to insurance policy
benefits. During 2008, we expect to recognize net income before tax of
approximately $6.0 million on the business recaptured.

71


Total premium collections increased by 14 percent, to $124.1 million, in
2007 and by 10 percent, to $109.2 million in 2006. See "Premium Collections" for
further analysis of Colonial Penn's premium collections.

Average liabilities for insurance products, net of reinsurance ceded, did
not fluctuate significantly during the three years ended December 31, 2007.

Insurance policy income is comprised of premiums earned on policies which
provide mortality or morbidity coverage and fees and other charges assessed on
other policies. See "Premium Collections" for further analysis.

Net investment income on general account invested assets (which excludes
income on policyholder and reinsurer accounts) did not fluctuate significantly
during the three years ended December 31, 2007. The decrease in average invested
assets was offset by higher investment yields. The average balance of general
account invested assets was $660.6 million in 2007, $688.5 million in 2006 and
$726.9 million in 2005. The average yield on these assets was 5.72 percent in
2007, 5.55 percent in 2006 and 5.26 percent in 2005.

Trading account income related to reinsurer accounts represents the income
on trading securities, which are designed to act as hedges for embedded
derivatives related to certain modified coinsurance agreements. The income on
our trading account securities is designed to be substantially offset by the
change in value of embedded derivatives related to modified coinsurance
agreements described below.

Change in value of embedded derivatives related to modified coinsurance
agreements is described in the note to our consolidated financial statements
entitled "Summary of Significant Accounting Policies - Accounting for
Derivatives." We have transferred the specific block of investments related to
these agreements to our trading account, which we carry at estimated fair value
with changes in such value recognized as trading account income. We expect the
change in the value of the embedded derivatives to be largely offset by the
change in value of the trading securities. As a result of the recapture of the
modified coinsurance agreement in the fourth quarter of 2007 (as further
discussed below under insurance policy benefits), the embedded derivative
related to the agreement was eliminated. The trading account securities designed
to act as hedges for the embedded derivative are expected to be sold in 2008.

Insurance policy benefits fluctuated as a result of the growth in this
segment in recent periods. In addition, insurance policy benefits have been
reduced by $2.8 million in 2007 as a result of completing the recapture of a
block of traditional life insurance in force that had been ceded in 2002 to
REALIC. In the transaction, which had an effective date of October 1, 2007,
Colonial Penn paid REALIC a recapture fee of $63 million. Colonial Penn
recaptured 100 percent of the liability for the future benefits previously
ceded, and will recognize profits from the block as they emerge over time.
Colonial Penn already administers the policies that were recaptured.

Amortization related to operations includes amortization of insurance
acquisition costs. Insurance acquisition costs in the Colonial Penn segment are
amortized in relation to actual and expected premium revenue, and amortization
is only adjusted if expected premium revenue changes or if we determine the
balance of these costs is not recoverable from future profits. Such amounts were
generally consistent with the related premium revenue and gross profits for such
periods and the assumptions we made when we established the value of policies
inforce as of the Effective Date. A revision to our current assumptions could
result in increases or decreases to amortization expense in future periods.

Other operating costs and expenses in our Colonial Penn segment increased
by 52 percent, to $23.7 million, in 2007 as compared to 2006 primarily due to
the initial marketing costs associated with a pilot program involving the
distribution of Coventry's PFFS plan through our direct response distribution
channel. Excluding these costs, other operating costs and expenses were
comparable in 2007, 2006 and 2005.

Net realized investment gains fluctuated each period. During 2007, net
realized investment gains in this segment included $.4 million of net gains from
the sales of investments (primarily fixed maturities), net of $.6 million of
writedowns of investments resulting from declines in fair values that we
concluded were other than temporary. During 2006, net realized investment gains
in this segment included $.4 million of net gains from the sales of investments
(primarily fixed maturities), net of $.2 million of writedowns of investments
resulting from declines in fair values that we concluded were other than
temporary. During 2005, net realized investment gains in this segment included
$.6 million of net gains from the sales of investments (primarily fixed
maturities). There were no writedowns in the Colonial Penn segment in 2005.

72


Other Business in Run-off (dollars in millions)


2007 2006 2005
---- ---- ----
(Restated) (Restated)

Premium collections (all of which are renewal premiums):
Long-term care....................................................... $ 305.8 $ 323.0 $ 349.1
Major medical....................................................... 2.3 4.8 2.8
-------- -------- --------

Total collections............................................... $ 308.1 $ 327.8 $ 351.9
======== ======== ========

Average liabilities for insurance products:
Long-term care....................................................... $3,350.2 $3,232.6 $3,295.3
Major medical........................................................ 24.5 29.2 41.5
-------- -------- --------

Total average liabilities for insurance products,
net of reinsurance ceded...................................... $3,374.7 $3,261.8 $3,336.8
======== ======== ========

Revenues:
Insurance policy income.............................................. $ 312.1 $ 336.6 $ 359.1
Net investment income on general account
invested assets.................................................... 193.9 179.5 177.6
Fee revenue and other income......................................... .4 .4 .5
-------- -------- --------

Total revenues................................................... 506.4 516.5 537.2
-------- -------- --------

Expenses:
Insurance policy benefits............................................ 588.9 448.9 336.2
Amortization related to operations................................... 23.2 18.9 24.0
Other operating costs and expenses................................... 80.2 83.2 86.1
-------- -------- --------

Total benefits and expenses...................................... 692.3 551.0 446.3
-------- -------- --------

Income (loss) before net realized investment
gains (losses) and income taxes...................................... (185.9) (34.5) 90.9

Net realized investment gains (losses)............................... 2.9 (8.0) .5
-------- -------- --------

Income (loss) before income taxes...................................... $ (183.0) $ (42.5) $ 91.4
======== ======== ========

Health benefit ratios:
Insurance policy benefits.......................................... $588.9 $448.9 $336.2
Benefit ratio (a).................................................. 188.7% 133.4% 93.6%
Interest-adjusted benefit ratio (b)................................ 127.5% 80.7% 45.0%


--------------------
(a) We calculate benefit ratios by dividing the related product's insurance
policy benefits by insurance policy income.
(b) We calculate the interest-adjusted benefit ratio (a non-GAAP measure) for
long-term care products by dividing such product's insurance policy
benefits less interest income on the accumulated assets backing the
insurance liabilities by policy income. These are considered non-GAAP
financial measures. A non-GAAP measure is a numerical measure of a
company's performance, financial position, or cash flows that excludes or
includes amounts that are normally excluded or included in the most
directly comparable measure calculated and presented in accordance with
GAAP.

These non-GAAP financial measures of "interest-adjusted benefit ratios"
differ from "benefit ratios" due to the deduction of interest income on the
accumulated assets backing the insurance liabilities from the product's
insurance policy benefits used to determine the ratio. Interest income is
an important factor in measuring the performance of health products that
are expected to be inforce for a longer duration of time, are not subject
to unilateral changes in provisions (such as non-cancelable or guaranteed
renewable contracts) and require the performance of various functions and
services (including insurance protection) for an extended period of time.
The net cash flows from long-term care products generally cause an
accumulation of amounts in the early years of a policy (accounted for as
reserve

73



increases) that will be paid out as benefits in later policy years
(accounted for as reserve decreases). Accordingly, as the policies age, the
benefit ratio will typically increase, but the increase in benefits will be
partially offset by interest income earned on the accumulated assets. The
interest-adjusted benefit ratio reflects the effects of the interest income
offset. Since interest income is an important factor in measuring the
performance of this product, management believes a benefit ratio that
includes the effect of interest income is useful in analyzing product
performance. We utilize the interest-adjusted benefit ratio in measuring
segment performance for purposes of SFAS 131 because we believe that this
performance measure is a better indicator of the ongoing businesses and
trends in the business. However, the "interest-adjusted benefit ratio" does
not replace the "benefit ratio" as a measure of current period benefits to
current period insurance policy income. Accordingly, management reviews
both "benefit ratios" and "interest-adjusted benefit ratios" when analyzing
the financial results attributable to these products. The investment income
earned on the accumulated assets backing long-term care reserves in our
Other Business in Run-off segment was $190.9 million, $177.2 million and
$174.5 million in 2007, 2006 and 2005, respectively.



Total premium collections were $308.1 million in 2007, down 6.0 percent
from 2006 and $327.8 million in 2006, down 6.8 percent from 2005. In 2003, we
ceased marketing the long-term care business and major medical business in this
segment. Accordingly, collected premiums will decrease over time as policies
lapse, partially offset by premium rate increases. See "Premium Collections" for
further analysis.

Average liabilities for insurance products, net of reinsurance ceded were
approximately $3.4 billion in 2007 and $3.3 billion in both 2006 and 2005.

Insurance policy income is comprised of premiums earned on the segment's
long-term care and major medical policies. See "Premium Collections" for further
analysis.

Net investment income on general account invested assets increased by 8.0
percent, to $193.9 million, in 2007 and by 1.1 percent, to $179.5 million, in
2006. The average balance of general account invested assets was $3.3 billion,
$3.0 billion and $3.0 billion in 2007, 2006 and 2005, respectively. The average
yield on these assets was 5.93 percent, 5.89 percent and 5.95 percent in 2007,
2006 and 2005, respectively. The increase in yield in 2007 was primarily due to
the purchase of securities with longer durations. The yield in 2005 included
income of $2.3 million related to prepayments of securities (including
prepayment penalties on mortgages, call premiums on fixed maturities, and
acceleration of discount amortization, net of premium amortization). There was
no significant prepayment income in 2007 or 2006.

Insurance policy benefits fluctuated primarily as a result of the factors
summarized below.

Insurance policy benefits were $588.9 million in 2007, up 31 percent from
2006 and $448.9 million in 2006, up 34 percent from 2005.

The benefit ratio on our Other Business in Run-off segment (including the
long-term care block and the small remaining major medical block) was 188.7
percent, 133.4 percent and 93.6 percent in 2007, 2006 and 2005, respectively.
Benefit ratios are calculated by dividing the product's insurance policy
benefits by insurance policy income. Since the insurance product liabilities we
establish for long-term care business are subject to significant estimates, the
ultimate claim liability we incur for a particular period is likely to be
different than our initial estimate. Our insurance policy benefits reflected
reserve deficiencies from prior years of $130.1 million, $61.7 million and $58.0
million in 2007, 2006 and 2005, respectively. Excluding the effects of prior
year claim reserve deficiencies, our benefit ratios would have been 147.0
percent, 115.0 percent and 77.5 percent in 2007, 2006 and 2005, respectively.
These ratios reflect the significantly higher level of incurred claims
experienced in 2007 and 2006 resulting in increases in reserves for future
benefits as discussed below, adverse development on claims incurred in prior
periods as discussed below, and decreases in policy income. The prior period
deficiencies have resulted from the impact of paid claim experience being
different than prior estimates, changes in actuarial assumptions and refinements
to claimant data used to determine claim reserves.

The net cash flows from long-term care products generally cause an
accumulation of amounts in the early years of a policy (accounted for as reserve
increases) which will be paid out as benefits in later policy years (accounted
for as reserve decreases). Accordingly, as the policies age, the benefit ratio
will typically increase, but the increase in benefits will be partially offset
by investment income earned on the assets which have accumulated. The
interest-adjusted benefit ratio for long-term care products is calculated by
dividing the insurance product's insurance policy benefits less interest income
on the accumulated assets backing the insurance liabilities by insurance policy
income. The interest-adjusted benefit ratio on this business was 127.5 percent,
80.7 percent and 45.0 percent in 2007, 2006 and 2005, respectively. Excluding
the effects of prior year claim reserve deficiencies, our interest-adjusted
benefit ratios would have been 85.8 percent, 62.4 percent and 28.9

74


percent in 2007, 2006 and 2005, respectively.

This segment includes long-term care insurance inforce, which was primarily
issued through independent agents by certain subsidiaries prior to their
acquisitions by Old Conseco in 1996 and 1997. The loss experience on these
products has been worse than we originally expected. Although we anticipated a
higher level of benefits to be paid on these products as the policies aged, the
paid claims have exceeded our expectations. In addition, there has been an
increase in the incidence and duration of claims in recent periods. This adverse
experience is reflected in the higher insurance policy benefits experienced in
2007 and 2006.

In each quarterly period, we calculate our best estimate of claim reserves
based on all of the information available to us at that time, which necessarily
takes into account new experience emerging during the period. Our actuaries
estimate these claim reserves using various generally recognized actuarial
methodologies which are based on informed estimates and judgments that are
believed to be appropriate. Additionally, an external actuarial firm provides
consulting services which involve a review of the Company's judgments and
estimates for claim reserves on the long-term care block in the Other Business
in Run-off segment on a quarterly basis. As additional experience emerges and
other data become available, these estimates and judgments are reviewed and may
be revised. Significant assumptions made in estimating claim reserves for
long-term care policies include expectations about the: (i) future duration of
existing claims; (ii) cost of care and benefit utilization; (iii) interest rate
utilized to discount claim reserves; (iv) claims that have been incurred but not
yet reported; (v) claim status on the reporting date; (vi) claims that have been
closed but are expected to reopen; and (vii) correspondence that has been
received that will ultimately become claims that have payments associated with
them.

During the second quarter of 2007, we increased claim liabilities for the
long-term care insurance block in our Other Business in Run-off segment by $118
million as a result of changes in our estimates of claim reserves incurred in
prior periods. Approximately $20 million of this increase related to claims with
incurrence dates in the first quarter of 2007 and $98 million related to claims
with incurrence dates prior to 2007.

The $118 million increase in estimates of claims incurred in prior periods
included $110 million of adjustments related to updates to our reserve
assumptions and methodologies to reflect emerging trends in our claim
experience. The following assumption changes primarily contributed to the $110
million adjustment:

o We increased our reserves by $37 million for changes to our
assumptions regarding the future duration of existing claims. We
updated these assumptions to reflect our current expectation that
policyholders will receive benefits for a longer period based on
changing trends in the duration of our claims.

o We increased our reserves by $31 million related to a block of
long-term care policies originally sold by Transport Life Insurance
Company ("Transport") and acquired by Old Conseco. We estimate claim
reserves for this block of business using an aggregate paid loss
development method, which uses historical payment patterns to project
ultimate losses for all the claims in a given incurral period. We
refined our loss development assumptions by developing separate
assumption tables for claimants with and without lifetime benefit
periods and for claimants with and without inflationary benefits,
since this block's recent loss experience has been extremely sensitive
to the mix of its business. This adjustment further improves the
estimate that was made during the first quarter of 2007, which is
described in further detail below. This adjustment relates to our
assumption of future duration of existing claims.

o We increased our claim reserves by $23 million to better reflect
fluctuations in claim inventories related to certain blocks of
business. This increase relates to our estimate of claim status on the
reporting date.

o We increased our claim reserves by $17 million for our estimate of
incurred but not reported claims, reflecting recent experience and the
impact of the other adjustments.

During the first quarter of 2007, we recorded a pre-tax adjustment that
increased policy benefits for the Transport block by $22 million. We found that
our previous claim estimates on this block were deficient because claims on
policies with lifetime benefits and inflation benefits had increased
significantly in recent periods. Since the policies with these benefits will
have longer average claim payout periods than similar policies without such
benefits, a shift in the mix of claimants can have a significant impact on
incurred claims that is not immediately reflected using a completion factor
methodology. We improved our methodologies to address this and other
shortcomings of the aggregate loss development methodology, which resulted in
the pre-tax adjustment.

75

During the fourth quarter of 2006, we increased claim liabilities for the
long-term care insurance block in our Other Business in Run-off segment by $54.1
million as a result of changes in our estimates of claim reserves incurred in
prior periods. Approximately $24.5 million of this increase related to claims
with incurrence dates in the first three quarters of 2006 and $29.6 million
related to claims with incurrence dates prior to 2006.

The $54.1 million adjustment primarily related to two assumption changes
reflecting recent trends we noted in our claims experience in the fourth quarter
of 2006:

(i) Benefit utilization assumptions: Most of our long-term care policies
provide for the payment of covered benefits up to a maximum daily
benefit specified in the policy. When we estimate claim reserves for
these policies, we make an assumption regarding the percentage of the
maximum daily benefit that will be paid (since not all policyholders
will incur claims at the maximum daily benefit level). We base our
assumptions on studies of actual experience. Such assumptions are
periodically adjusted to reflect current trends. In the fourth quarter
of 2006, we updated our studies of benefit utilization. Recent
experience reflected a trend that we did not observe in previous
studies: policyholders are incurring claims closer to the maximum
benefit level, and the ratio of incurred claims to maximum benefits is
increasing faster as claims age.

Accordingly, we updated our assumptions to reflect these trends, which
had the effect of increasing our claim reserves by approximately $25
million.

(ii) Liabilities for incurred but not reported claims: In determining the
estimate of claims incurred in a particular period, we must make an
assumption regarding the ultimate liability for claims that have been
incurred but not yet reported to us. This assumption is based on
historical studies related to claims that are reported to us after the
date of our financial statements, but were incurred prior to the date
of our financial statements. For the most recent incurral periods, we
apply loss ratio adjustments to our estimates of liabilities for
incurred but not reported claims in an effort to ensure the ratio of
incurred claims to premiums (incurred loss ratio) related to these
estimated unreported claims, reflects recent trends in our experience.
During 2006, we experienced a significant increase in the incurred
loss ratio for 2005 and 2006 incurral periods. We increased the
aforementioned loss ratio adjustments in response to this experience,
which had the effect of increasing our claim reserves by approximately
$27 million.

In 2006, we experienced increases in our reserves for future benefits due
to higher than expected persistency in this block of business. A small variance
in persistency can have a significant impact on our earnings as reserves
accumulated over the life of a policy are released when coverage terminates. The
effect of changes in persistency will vary based on the mix of business that
persists. For example, if policies with higher reserves are persisting and
policies with lower reserves are lapsing, our earnings could be adversely
affected. We estimate that our income before income taxes would be adversely
affected by approximately $10 million in any period that persistency is 40 basis
points higher than our original assumptions and such variance is spread evenly
over the mix of business in this block. We also estimate that persistency, which
is 40 basis points lower than our assumptions, would favorably affect earnings
by a similar amount. If actual persistency rates continue to be higher than our
assumed rates, this will have an adverse effect on income in this segment.

We have been aggressively seeking actuarially justified rate increases and
pursuing other actions on our long-term care policies. During the third quarter
of 2006, we began a new program to file requests for rate increases on various
long-term care products in the Other Business in Run-off segment as we believe
the existing rates were too low to fund expected future benefits. These filings
are expected to be the first of three rounds of rate increase filings for many
of the same policies, and in some cases we requested three years of successive
rate increases. Based on recent experience, certain of the policies in this
segment will continue to be unprofitable even if we obtain the three rounds of
rate increases, and it is likely that we will request additional rate increases
when the current program is complete. We have chosen to request a series of
smaller rate increases, rather than a single large increase, to limit the impact
on a policyholder's premiums in any single year. The effects of the first round
of rate filings have been partially realized in our premium revenue with the
remaining impact expected to be realized by the end of 2008. In the second
quarter of 2007, we began filing requests for the second round of rate increases
on many of the same policies. As of December 31, 2007, almost all of the
expected second round filings had been submitted for regulatory approval, and
approximately 42 percent of the expected amounts had been approved by
regulators. The full effect of all three rounds of rate increases may not be
fully realized until 2011. It is possible that it will take more time than we
expect to prepare rate increase filings and obtain approval from the state
insurance regulators. In addition, it is likely that we will not be able to
obtain approval for some of the actuarially justified rate increases currently
pending or for the additional rate increases we plan to file especially in light
of the magnitude of some past premium rate increases and current consumer and
regulator sentiment. 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
76


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.

On April 20, 2004, the Florida Office of Insurance Regulation issued an
order to our subsidiary, Conseco Senior, that affected approximately 12,600 home
health care policies issued in Florida by Conseco Senior and its predecessor
companies. On July 1, 2004, the Florida Office of Insurance Regulation issued a
similar order impacting approximately 4,800 home health care policies issued in
Florida by our subsidiary, Washington National, and its predecessor companies.
Pursuant to the Orders, Conseco Senior and Washington National offered the
following three alternatives to holders of these policies subject to rate
increases as follows:

o retention of their current policy with a rate increase of 50 percent
in the first year and actuarially justified increases in subsequent
years (which is also the default election for policyholders who failed
to make an election by 30 days prior to the anniversary date of their
policies) ("option one");

o receipt of a replacement policy with reduced benefits and a rate
increase in the first year of 25 percent and no more than 15 percent
in subsequent years ("option two"); or

o receipt of a paid-up policy, allowing the holder to file future claims
up to 100 percent of the amount of premiums paid since the inception
of the policy ("option three").

Policyholders selecting option one or option two are entitled to receive a
contingent non-forfeiture benefit if their policy subsequently lapses. In
addition, policyholders could change their initial election any time up to 30
days prior to the anniversary date of their policies. We began to implement
premium adjustments with respect to policyholder elections in the fourth quarter
of 2005 and the implementation of these premium adjustments was completed in
2007. We did not make any adjustments to the insurance liabilities when these
elections were made. Reserves for all three groups of policies under the order
were prospectively adjusted using the prospective revision methodology described
in the "Critical Accounting Policies - Accounting for Long-term Care Premium
Rate Increases" in "Management's Discussion and Analysis of Consolidated
Financial Condition and Results of Operations".

The orders also require Conseco Senior and Washington National to pursue a
similar course of action with respect to approximately 24,000 home health care
policies in other states, subject to such actions being justified based on the
experience of the business and approval by the other state insurance
departments. If we are unsuccessful in obtaining rate increases or other forms
of relief in those states, or if the policy changes approved by the Florida
Office of Insurance Regulation prove inadequate, our future results of
operations could be adversely affected.

Amortization related to operations includes amortization of insurance
acquisition costs. Fluctuations in amortization of insurance acquisition costs
in this segment generally correspond with changes in lapse experience.

Other operating costs and expenses were $80.2 million in 2007, down 3.6
percent from 2006 and $83.2 million in 2006, down 3.4 percent from 2005. Other
operating costs and expenses, excluding commission expenses, for this segment
were $48.3 million in 2007, $47.0 million in 2006 and $46.3 million in 2005.

Net realized investment gains (losses) fluctuated each period. During 2007,
net realized investment gains in this segment included $4.2 million from the
sales of investments (primarily fixed maturities), net of $1.3 million of
writedowns of investments resulting from declines in fair values that we
concluded were other than temporary. During 2006, net realized investment gains
included $.8 million of net gains from the sales of investments (primarily fixed
maturities), net of $8.8 million of writedowns of investments resulting from
declines in fair values that we concluded were other than temporary. During
2005, net realized investment gains included $6.8 million of net gains from the
sales of investments (primarily fixed maturities), net of $6.3 million of
writedowns of investments resulting from declines in fair values that we
concluded were other than temporary.

77


Corporate Operations (dollars in millions)


2007 2006 2005
---- ---- ----

Corporate operations:
Interest expense on corporate debt................................... $ (72.3) $(52.9) $(48.1)
Investment income ................................................... 6.6 4.6 5.4
Fee revenue and other income......................................... 9.8 10.9 20.2
Net operating results of variable interest entity.................... 9.2 4.9 .1
Costs related to a litigation settlement............................. (32.2) (8.9) (9.1)
Other operating costs and expenses................................... (42.4) (38.6) (49.6)
Loss on extinguishment of debt....................................... - (.7) (3.7)
------- ------ ------

Loss before net realized investment losses
and income taxes................................................ (121.3) (80.7) (84.8)

Net realized investment losses....................................... (6.2) (.4) (1.4)
------- ------ ------

Loss before income taxes........................................... $(127.5) $(81.1) $(86.2)
======= ====== ======



Interest expense on corporate debt has been impacted by: (i) the repayment
or amendment of the Company's credit facilities during each of the last three
years; and (ii) the issuance in 2005 of $330 million of 3.5 percent convertible
debentures due September 30, 2035. These transactions are further discussed in
the note to the consolidated financial statements entitled "Notes Payable -
Direct Corporate Obligations". Our average corporate debt outstanding was
$1,111.8 million, $864.3 million and $773.4 million in 2007, 2006 and 2005,
respectively. The average interest rate on our debt was 6.2 percent, 5.7 percent
and 5.9 percent in 2007, 2006 and 2005, respectively.

Investment income primarily included income earned on short-term
investments held by the Corporate segment and miscellaneous other income and
fluctuated along with the change in the amount of invested assets in this
segment.

Fee revenue and other income includes: (i) revenues we receive for managing
investments for other companies; and (ii) fees received for marketing insurance
products of other companies. In 2007, our wholly owned investment management
subsidiary recognized performance-based fees of $2.4 million resulting from the
liquidation of two portfolios that were managed by the subsidiary. In 2005, our
wholly owned investment management subsidiary recognized a performance-based fee
of $8.1 million earned in conjunction with its management of a $510 million
portfolio of loans for an issuer of structured securities. This portfolio was
liquidated and the related securities were redeemed on September 1, 2005,
resulting in the receipt of this fee which was largely based on the market value
of the managed loan portfolio at the redemption date. Excluding such
performance-based fees, fee revenue and other income has decreased primarily as
a result of a decrease in the market value of investments managed for others,
upon which these fees are based.

Net operating results of variable interest entity represent the operating
results of a variable interest entity ("VIE"). The VIE is consolidated in
accordance with Financial Accounting Standards Board Interpretation No. 46
"Consolidation of Variable Interest Entities", revised December 2003. Although
we do not control this entity, we consolidate it because we are the primary
beneficiary. This entity was established to issue securities and use the
proceeds to invest in loans and other permitted assets.

Costs related to a litigation settlement include legal and other costs
incurred by the Corporate Operations segment to defend the non-insurance company
allegations made in the class action case referred to as In Re Conseco Life
Insurance Company Cost of Insurance Litigation. Refer to the captions entitled:
(i) "Costs related to the tentative litigation settlement" included in the
results of operations section for the Conseco Insurance Group segment; and (ii)
"Cost of Insurance Litigation" included in the note to our consolidated
financial statements entitled "Commitments and Contingencies" for further
information related to this case.

Other operating costs and expenses include general corporate expenses, net
of amounts charged to subsidiaries for services provided by the corporate
operations. These amounts fluctuate as a result of expenses such as consulting,
legal and severance costs which often vary from period to period. In 2006 and
2005, other operating costs and expenses are net of recoveries of $3.0 million
and $3.2 million, respectively, related to our evaluation of the collectibility
of the D&O loans.

78


In December 2004, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123 (revised 2004) "Share-Based Payment"
("SFAS 123R"), which revised SFAS 123 and superseded Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" and related
interpretations. SFAS 123R provided additional guidance on accounting for
share-based payments and required all such awards to be measured at fair value
with the related compensation cost recognized in the statement of operations
over the related service period. Conseco implemented SFAS 123R using the
modified prospective method on January 1, 2006. Under this method, the Company
began recognizing compensation cost for all awards granted on or after January
1, 2006. In addition, we are required to recognize compensation cost over the
remaining requisite service period for the portion of outstanding awards that
were not vested as of January 1, 2006 and were not previously expensed on a pro
forma basis pursuant to SFAS 123. In 2007 and 2006, we recognized compensation
expense related to stock options totaling $7.4 million and $6.5 million,
respectively. Refer to the note to our consolidated financial statements
entitled "Shareholders' Equity" for further discussion of our share-based
payments.

Loss on extinguishment of debt of $.7 million in 2006 resulted from the
write-off of certain issuance costs and other costs incurred related to the
Second Amended Credit Facility. The loss of $3.7 million in 2005 resulted from
the write-off of certain debt issuance costs related to the reduction of the
principal amount borrowed under the $447.0 million secured credit agreement (the
"Amended Credit Facility").

Net realized investment losses often fluctuate each period. During 2007,
net realized investment losses in this segment included $4.7 million from the
sale of investments (primarily fixed maturities) and $1.5 million of writedowns
due to other-than-temporary declines in value on certain securities. During
2006, net realized investment losses in this segment included $.4 million from
the sale of investments. During 2005, net realized investment losses in this
segment included $.1 million of net losses from the sale of investments
(primarily fixed maturities), and $1.3 million of writedowns due to
other-than-temporary declines in value on certain securities.

PREMIUM COLLECTIONS

In accordance with GAAP, insurance policy income in our consolidated
statement of operations consists of premiums earned for traditional insurance
policies that have life contingencies or morbidity features. For annuity and
universal life contracts, premiums collected are not reported as revenues, but
as deposits to insurance liabilities. We recognize revenues for these products
over time in the form of investment income and surrender or other charges.

Our insurance segments sell products through three primary distribution
channels -- career agents (our Bankers Life segment), independent producers (our
Conseco Insurance Group segment) and direct marketing (our Colonial Penn
segment). Our career agency force in the Bankers Life segment sells primarily
Medicare supplement and long-term care insurance policies, Medicare Part D
contracts, PFFS contracts, life insurance and annuities. These agents visit the
customer's home, which permits one-on-one contact with potential policyholders
and promotes strong personal relationships with existing policyholders. Our
independent producer distribution channel in the Conseco Insurance Group segment
consists of a general agency and insurance brokerage distribution system
comprised of independent licensed agents doing business in all fifty states, the
District of Columbia, and certain protectorates of the United States.
Independent producers are a diverse network of independent agents, insurance
brokers and marketing organizations. Our independent producer distribution
channel sells primarily specified disease and Medicare supplement insurance
policies, universal life insurance and annuities. Our direct marketing
distribution channel in the Colonial Penn segment is engaged primarily in the
sale of "graded benefit life" and simplified issue life insurance policies which
are sold directly to the policyholder.

Agents, insurance brokers and marketing companies who market our products
and prospective purchasers of our products use the financial strength ratings of
our insurance subsidiaries as an important factor in determining whether to
market or purchase. Ratings have the most impact on our annuity,
interest-sensitive life insurance and long-term care products. The current
financial strength ratings of our primary insurance subsidiaries (except Conseco
Senior) from A.M. Best, S&P and Moody's are "B+ (Good)", "BB+" and "Baa3",
respectively. The current financial strength ratings of Conseco Senior from A.M.
Best, S&P and Moody's are "C++ (Marginal)", "CCC-" and "Caa1", respectively. For
a description of these ratings and additional information on our ratings, see
"Management's Discussion and Analysis of Consolidated Financial Condition and
Results of Operations -- Liquidity for Insurance Operations."

We set premium rates on our health insurance policies based on facts and
circumstances known at the time we issue the policies using assumptions about
numerous variables, including the actuarial probability of a policyholder
incurring a claim, the probable size of the claim, and the interest rate earned
on our investment of premiums. We also consider historical claims information,
industry statistics, the rates of our competitors and other factors. If our
actual claims experience is less

79


favorable than we anticipated and we are unable to raise our premium rates, our
financial results may be adversely affected. We generally cannot raise our
health insurance premiums in any state until we obtain the approval of the state
insurance regulator. We review the adequacy of our premium rates regularly and
file rate increases on our products when we believe such rates are too low. It
is likely that we will not be able to obtain approval for all requested premium
rate increases. If such requests are denied in one or more states, our net
income may decrease. If such requests are approved, increased premium rates may
reduce the volume of our new sales and may cause existing policyholders to lapse
their policies. If the healthier policyholders allow their policies to lapse,
this would reduce our premium income and profitability in the future.

Total premiums collections were as follows:

Bankers Life (dollars in millions)



2007 2006 2005
---- ---- ----

Premiums collected by product:

Annuities:
Equity-indexed (first-year).......................................... $ 437.4 $ 276.5 $ 130.3
-------- -------- --------

Other fixed (first-year)............................................. 445.3 718.1 818.0
Other fixed (renewal)................................................ 2.8 2.9 2.8
-------- -------- --------
Subtotal - other fixed annuities................................... 448.1 721.0 820.8
-------- -------- --------

Total annuities.................................................... 885.5 997.5 951.1
-------- -------- --------

Supplemental health:
Medicare supplement (first-year)..................................... 82.5 97.8 74.1
Medicare supplement (renewal)........................................ 553.6 531.3 564.7
-------- -------- --------
Subtotal - Medicare supplement..................................... 636.1 629.1 638.8
-------- -------- --------
Long-term care (first-year).......................................... 47.0 51.2 65.4
Long-term care (renewal)............................................. 575.4 541.2 498.8
-------- -------- --------
Subtotal - long-term care.......................................... 622.4 592.4 564.2
-------- -------- --------
PDP and PFFS (first year)............................................ 206.4 76.7 -
PDP (renewal)........................................................ 71.4 - -
-------- -------- --------
Subtotal - PDP and PFFS............................................ 277.8 76.7 -
-------- -------- --------
Other health (first-year)............................................ .9 1.0 1.1
Other health (renewal)............................................... 8.9 9.1 9.6
-------- -------- --------
Subtotal - other health............................................ 9.8 10.1 10.7
-------- -------- --------

Total supplemental health.......................................... 1,546.1 1,308.3 1,213.7
-------- -------- --------

Life insurance:
First-year........................................................... 89.2 90.3 74.1
Renewal.............................................................. 110.8 93.9 78.0
-------- -------- --------

Total life insurance............................................... 200.0 184.2 152.1
-------- -------- --------

Collections on insurance products:

Total first-year premium collections on insurance
products.......................................................... 1,308.7 1,311.6 1,163.0
Total renewal premium collections on insurance
products........................................................... 1,322.9 1,178.4 1,153.9
-------- -------- --------

Total collections on insurance products............................ $2,631.6 $2,490.0 $2,316.9
======== ======== ========



Annuities in this segment include equity-indexed and other fixed annuities
sold to the senior market through our career agents. Annuity collections in this
segment decreased by 11 percent, to $885.5 million, in 2007 and increased by 4.9
percent to $997.5 million, in 2006. Premium collections from our equity-indexed
products were favorably impacted in 2007 by the

80


general stock market performance which has made these products attractive to
certain customers. Premium collections from our equity-indexed products were
favorably impacted in 2006 by: (i) the introduction of new equity-indexed
products in late 2005; and (ii) the general stock market performance which has
made these products attractive to certain customers. The increase in short-term
interest rates in recent periods resulted in lower first-year fixed annuity
sales as certain other competing products, such as certificates of deposits,
have become attractive.

Supplemental health products include Medicare supplement, Medicare Part D
contracts, PFFS contracts, long-term care and other insurance products
distributed through our career agents. Our profits on supplemental health
policies depend on the overall level of sales, the length of time the business
remains inforce, investment yields, claims experience and expense management.

Collected premiums on Medicare supplement policies in the Bankers Life
segment increased by 1.1 percent, to $636.1 million, in 2007 and decreased by
1.5 percent, to $629.1 million, in 2006. The increase in premium collections of
our Medicare supplement products in 2007 is primarily due to higher persistency,
partially offset by lower new sales. During the first half of 2006, we
experienced higher lapses than we anticipated. We believe such lapses were
partially due to the premium rate increases which had been implemented and
competition from companies offering Medicare Advantage products.

Premiums collected on Bankers Life's long-term care policies increased by
5.1 percent, to $622.4 million, in 2007 and by 5.0 percent, to $592.4 million,
in 2006. The increase in premium collections of our long-term care products in
2007 and 2006 is primarily due to higher premiums associated with the policies
that were impacted by the rate increases which became effective in 2007 and
2006.

Premiums collected on PDP and PFFS business relate to various quota-share
reinsurance agreements with Coventry. Effective July 1, 2007, we entered into a
new PFFS quota-share reinsurance agreement with Coventry pursuant to which we
received $97.3 million of first-year premiums in 2007. These agreements are
described in "Management's Discussion and Analysis of Consolidated Financial
Condition and Results of Operations - Critical Accounting Policies".

Other health products relate to collected premiums on other health products
which we no longer actively market.

Life products in this segment are sold primarily to the senior market
through our career agents. Life premiums collected in this segment increased by
8.6 percent, to $200.0 million, in 2007 and by 21 percent, to $184.2 million, in
2006. Collected premiums have been impacted by an increased focus on life
products.

81



Conseco Insurance Group (dollars in millions)



2007 2006 2005
---- ---- ----

Premiums collected by product:

Annuities:
Equity-indexed (first-year)......................................... $ 336.4 $ 369.4 $ 94.4
Equity-indexed (renewal)............................................ 8.2 9.1 10.0
-------- -------- --------
Subtotal - equity-indexed annuities............................... 344.6 378.5 104.4
-------- -------- --------
Other fixed (first-year)............................................ 18.0 46.1 47.5
Other fixed (renewal)............................................... 6.0 8.7 9.8
-------- -------- --------
Subtotal - other fixed annuities.................................. 24.0 54.8 57.3
-------- -------- --------

Total annuities................................................... 368.6 433.3 161.7
-------- -------- --------

Supplemental health:
Medicare supplement (first-year).................................... 19.4 30.6 15.8
Medicare supplement (renewal)....................................... 206.5 213.6 273.0
-------- -------- --------
Subtotal - Medicare supplement.................................... 225.9 244.2 288.8
-------- -------- --------
Specified disease (first-year)...................................... 31.4 28.1 30.6
Specified disease (renewal)......................................... 327.8 329.6 328.9
-------- -------- --------
Subtotal - specified disease...................................... 359.2 357.7 359.5
-------- -------- --------
Other health (first-year)........................................... .3 - -
Other health (renewal).............................................. 9.0 9.7 13.2
-------- -------- --------
Subtotal - other health........................................... 9.3 9.7 13.2
-------- -------- --------

Total supplemental health......................................... 594.4 611.6 661.5
-------- -------- --------

Life insurance:
First-year.......................................................... 4.7 6.7 8.2
Renewal............................................................. 282.6 307.9 326.8
-------- -------- --------

Total life insurance.............................................. 287.3 314.6 335.0
-------- -------- --------

Collections on insurance products:

Total first-year premium collections on
insurance products............................................... 410.2 480.9 196.5
Total renewal premium collections on
insurance products................................................ 840.1 878.6 961.7
-------- -------- --------

Total collections on insurance products........................... $1,250.3 $1,359.5 $1,158.2
======== ======== ========



Annuities in this segment include equity-indexed and other fixed annuities
sold through professional independent producers. Total annuity collected
premiums in this segment decreased by 15 percent, to $368.6 million, in 2007 and
increased by 168 percent, to $433.3 million, in 2006.

Our equity-indexed annuities have guaranteed minimum cash surrender values,
but have potentially higher returns based on a percentage of the change in one
of several equity market indices during each year of their term. We purchase
options in an effort to hedge increases to policyholder benefits resulting from
increases in the indices. Total collected premiums for these products decreased
by 9.0 percent, to $344.6 million, in 2007 and increased by 263 percent, to
$378.5 million, in 2006. During the second half of 2007, we changed the pricing
of specific products and we no longer emphasized the sale of certain products
resulting in a decrease in collected premiums, partially offset by the sales of
several new products distributed through our new national partners. Collected
premiums for these products increased in 2006 due to the introduction of several
new products. In addition, these products have become relatively attractive due
to general stock market conditions in recent periods.

Other fixed rate annuity products include SPDAs, FPDAs and SPIAs, which are
credited with a declared rate. SPDA

82


and FPDA policies typically have an interest rate that is guaranteed 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 interest
rate credited on SPIAs is based on market conditions existing when a policy is
issued and remains unchanged over the life of the SPIA. Annuity premiums on
these products decreased by 56 percent, to $24.0 million, in 2007 and by 4.4
percent, to $54.8 million, in 2006. The increase in short-term interest rates in
2007 resulted in lower first-year fixed annuity sales as certain other competing
products have become attractive. During the last six months of 2005, collected
premiums for these products were impacted by attractive crediting rates on
certain products.

Supplemental health products in the Conseco Insurance Group segment include
Medicare supplement, specified disease and other insurance products distributed
through professional independent producers. Our profits on supplemental health
policies depend on the overall level of sales, the length of time the business
remains inforce, investment yields, claim experience and expense management.

Collected premiums on Medicare supplement policies in the Conseco Insurance
Group segment decreased by 7.5 percent, to $225.9 million, in 2007 and by 15
percent, to $244.2 million, in 2006. We have experienced lower sales and higher
lapses of these products in 2007 and 2006 due to premium rate increases
implemented in recent periods and competition from companies offering Medicare
Advantage products.

Premiums collected on specified disease products have been comparable from
period to period.

First-year premiums collected on other health products are due to the
introduction of a new short-term disability product in the fourth quarter of
2007. Renewal premiums collected from other health products decreased by 7.2
percent, to $9.0 million, in 2007 and by 27 percent, to $9.7 million, in 2006.
Renewal premiums have decreased from period to period as we no longer actively
market many of these products.

Life products in the Conseco Insurance Group segment are sold through
professional independent producers. Life premiums collected decreased by 8.7
percent, to $287.3 million, in 2007 and by 6.1 percent, to $314.6 million, in
2006.

Colonial Penn (dollars in millions)



2007 2006 2005
---- ---- ----

Premiums collected by product:

Life insurance:
First-year........................................................... $ 28.7 $ 22.9 $19.4
Renewal.............................................................. 85.0 74.3 65.7
------ ------ -----

Total life insurance............................................... 113.7 97.2 85.1
------ ------ -----

Supplemental health (all of which are renewal premiums):
Medicare supplement.................................................. 9.4 10.9 12.4
Other health......................................................... 1.0 1.1 1.4
------ ------ -----

Total supplemental health.......................................... 10.4 12.0 13.8
------ ------ -----


Collections on insurance products:

Total first-year premium collections on insurance
products........................................................... 28.7 22.9 19.4
Total renewal premium collections on insurance
products........................................................... 95.4 86.3 79.5
------ ------ -----

Total collections on insurance products............................ $124.1 $109.2 $98.9
====== ====== =====



Life products in this segment are sold primarily to the senior market. Life
premiums collected in this segment increased by 17 percent, to $113.7 million,
in 2007 and by 14 percent, to $97.2 million, in 2006. Collected premiums have
been affected by increased advertising. Graded benefit life products sold
through our direct response marketing channel

83


accounted for $108.8 million, $92.3 million and $81.2 million of collected
premiums in 2007, 2006 and 2005, respectively.

Supplemental health products include Medicare supplement and other
insurance products. Our profits on supplemental health policies depend on the
overall level of sales, the length of time the business remains inforce,
investment yields, claims experience and expense management. Premiums collected
on these products have decreased as we do not currently market these products
through this segment.

Other Business in Run-Off (dollars in millions)



2007 2006 2005
---- ---- ----

Premiums collected by product (all of which are renewal premiums):

Long-term care............................................................. $305.8 $323.0 $349.1

Major medical.............................................................. 2.3 4.8 2.8
------ ------ ------

Total premium collections on
insurance products.................................................. $308.1 $327.8 $351.9
====== ====== ======



The Other Business in Run-off segment includes blocks of business that we
no longer market or underwrite and are managed separately from our other
businesses. This segment consists of: (i) long-term care insurance sold in prior
years through independent agents; and (ii) major medical insurance.

Long-term care premiums collected in this segment decreased by 5.3 percent,
to $305.8 million, in 2007 and by 7.5 percent, to $323.0 million, in 2006. Most
of the long-term care premiums in this segment relate to business written by
certain subsidiaries prior to their acquisitions by Old Conseco in 1996 and 1997
and was sold through the independent producer distribution channel. The
performance of this 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 expect this segment's long-term
care premiums to reflect additional policy lapses in the future, partially
offset by premium rate increases.

INVESTMENTS

Our investment strategy is to: (i) maintain a predominately
investment-grade fixed income portfolio; (ii) provide liquidity to meet our cash
obligations to policyholders and others; and (iii) generate stable and
predictable investment income through active investment management. Consistent
with this strategy, investments in fixed maturity securities, mortgage loans and
policy loans made up 96 percent of our $23.8 billion investment portfolio at
December 31, 2007. The remainder of the invested assets were trading securities,
equity securities and other invested assets.

The following table summarizes the composition of our investment portfolio
as of December 31, 2007 (dollars in millions):



Carrying Percent of
value total investments
-------- -----------------

Actively managed fixed maturities............................................... $20,510.9 86%
Equity securities............................................................... 34.5 -
Mortgage loans.................................................................. 2,086.0 9
Policy loans.................................................................... 370.4 1
Trading securities.............................................................. 665.8 3
Partnership investments......................................................... 28.3 -
Other invested assets........................................................... 106.0 1
--------- ---

Total investments............................................................ $23,801.9 100%
========= ===



Insurance statutes regulate the types of investments that our insurance
subsidiaries are permitted to make and limit the amount of funds that may be
used for any one type of investment. In light of these statutes and regulations
and our business and investment strategy, we generally seek to invest in United
States government and government-agency securities and

84


corporate securities rated investment grade by established nationally recognized
rating organizations or in securities of comparable investment quality, if not
rated.

The following table summarizes the estimated fair value of our fixed
maturity securities by category as of December 31, 2007 (dollars in millions):



Estimated Percent of
fair value fixed maturities
---------- ----------------

Structured securities................................................................ $ 4,668.1 22.8%
Manufacturing........................................................................ 3,603.4 17.6
Bank and finance..................................................................... 2,039.1 9.9
Utilities............................................................................ 1,766.2 8.6
Services............................................................................. 1,615.2 7.9
Communications....................................................................... 1,088.0 5.3
Agriculture, forestry and mining..................................................... 888.6 4.3
Retail and wholesale................................................................. 799.8 3.9
Holding and other investment offices................................................. 751.4 3.7
Transportation....................................................................... 643.9 3.1
U.S. Government...................................................................... 634.6 3.1
States and political subdivisions.................................................... 548.4 2.7
Asset-backed securities.............................................................. 440.2 2.1
Other................................................................................ 1,024.0 5.0
--------- -----

Total actively managed fixed maturities........................................... $20,510.9 100.0%
========= =====



Our fixed maturity securities consist predominantly of publicly traded
securities. We classify securities issued in the Rule 144A market as publicly
traded. Securities not publicly traded comprise less than 11 percent of our
total fixed maturity securities portfolio.

The following table sets forth fixed maturity investments at December 31,
2007, classified by rating categories. The category assigned is the highest
rating by a nationally recognized statistical rating organization or, as to
$1,485.3 million fair value of fixed maturities not rated by such firms, the
rating assigned by the NAIC. For purposes of the table, NAIC Class 1 is included
in the "A" rating; Class 2, "BBB-"; Class 3, "BB-"; and Classes 4-6, "B+ and
below" (dollars in millions):



Estimated fair value
--------------------------
Percent of
Amortized fixed
Investment rating cost Amount maturities
----------------- --------- ------ ----------

AAA...................................................................... $ 5,717.8 $ 5,657.6 28%
AA....................................................................... 1,577.0 1,528.5 7
A........................................................................ 5,767.3 5,607.2 27
BBB+..................................................................... 2,099.4 2,068.5 10
BBB...................................................................... 2,479.2 2,428.6 12
BBB-..................................................................... 1,673.2 1,629.9 8
--------- --------- ---

Investment grade..................................................... 19,313.9 18,920.3 92
--------- --------- ---

BB+ ..................................................................... 287.2 270.2 1
BB ..................................................................... 235.2 218.5 1
BB- ..................................................................... 588.2 569.6 3
B+ and below............................................................. 568.2 532.3 3
--------- --------- ---

Below-investment grade (a)........................................... 1,678.8 1,590.6 8
--------- --------- ---

Total fixed maturity securities................................... $20,992.7 $20,510.9 100%
========= ========= ===



85


---------------
(a) Below-investment grade fixed maturity securities with an amortized cost of
$480.3 million and an estimated fair value of $455.9 million are securities
held by a VIE that we are required to consolidate. These fixed maturity
securities are legally isolated and are not available to the Company. The
liabilities of such VIE will be satisfied from the cash flows generated by
these securities and are not obligations of the Company. Refer to the note
to the consolidated financial statements entitled "Investment in a Variable
Interest Entity" concerning the Company's commitment to provide additional
capital of up to $25 million to the VIE. At December 31, 2007, our total
investment in the VIE was $47.0 million and such investment was rated BBB.

The following table summarizes investment yields earned over the past three
years on the general account invested assets of our insurance subsidiaries.
General account investments exclude the value of options (dollars in millions).



2007 2006 2005
---- ---- ----

Weighted average general account invested assets as defined:
As reported ....................................................... $25,629.5 $24,738.6 $25,000.3
Excluding unrealized appreciation
(depreciation) (a)............................................... 25,746.5 25,112.2 24,491.6
Net investment income on general account
invested assets........................................................ 1,510.9 1,430.6 1,385.0

Yields earned:
As reported........................................................ 5.90% 5.78% 5.54%
Excluding unrealized appreciation
(depreciation) (a)............................................... 5.87% 5.70% 5.66%

--------------------
(a) Excludes the effect of reporting fixed maturities at fair value as
described in the note to our consolidated financial statements
entitled "Investments".



Although investment income is a significant component of total revenues,
the profitability of certain of our insurance products is determined primarily
by the spreads between the interest rates we earn and the rates we credit or
accrue to our insurance liabilities. At December 31, 2007 and 2006, the average
yield, computed on the cost basis of our actively managed fixed maturity
portfolio, was 6.0 percent and 5.7 percent, respectively, and the average
interest rate credited or accruing to our total insurance liabilities (excluding
interest rate bonuses for the first policy year only and excluding the effect of
credited rates attributable to variable or equity-indexed products) was 4.7
percent and 4.6 percent, respectively.

Actively Managed Fixed Maturities

Our actively managed fixed maturity portfolio at December 31, 2007,
included primarily debt securities of the United States government, public
utilities and other corporations, and structured securities. Structured
securities included mortgage-backed securities, CMOs and commercial
mortgage-backed securities.

At December 31, 2007, our fixed maturity portfolio had $149.1 million of
unrealized gains and $630.9 million of unrealized losses, for a net unrealized
loss of $481.8 million. Estimated fair values of fixed maturity investments were
determined based on estimates from: (i) nationally recognized pricing services
(88 percent of the portfolio); (ii) broker-dealer market makers (6 percent of
the portfolio); and (iii) internally developed methods (6 percent of the
portfolio).

At December 31, 2007, approximately 6.7 percent of our invested assets (7.8
percent of fixed maturity investments) were fixed maturities rated
below-investment grade by nationally recognized statistical rating organizations
(or, if not rated by such firms, with ratings below Class 2 assigned by the
NAIC). Our level of investments in below-investment-grade fixed maturities could
change if market conditions change. Below-investment grade securities have
different characteristics than investment grade corporate debt securities. The
risk of default by the borrower is significantly greater for below-investment
grade securities and in many cases, severity of loss is relatively greater as
such securities are generally unsecured and often subordinated to other
creditors of the issuer. Also, issuers of below-investment grade securities
usually have higher levels of debt and may be more sensitive to adverse economic
conditions, such as recession or increasing interest rates, than investment
grade issuers. The Company attempts to reduce the overall risk related to its
investment in below-investment grade securities, as in all investments, through
careful credit analysis, strict investment policy guidelines, and
diversification

86


by issuer and/or guarantor and by industry. At December 31, 2007, our
below-investment-grade fixed maturity investments had an amortized cost of
$1,678.8 million and an estimated fair value of $1,590.6 million.

We continually evaluate the creditworthiness of each issuer whose
securities we hold. We pay special attention to large investments and to those
securities whose market values have declined materially for reasons other than
changes in interest rates or other general market conditions. We evaluate the
realizable value of the investment, the specific condition of the issuer and the
issuer's ability to comply with the material terms of the security. We review
the recent operational results and financial position of the issuer, information
about its industry, information about factors affecting the issuer's performance
and other information. 40|86 Advisors employs experienced securities analysts in
a variety of specialty areas who compile and review such data. If evidence does
not exist to support a realizable value equal to or greater than the carrying
value of the investment, and such decline in market value is determined to be
other than temporary, we reduce the carrying amount to its fair value, which
becomes the new cost basis. We report the amount of the reduction as a realized
loss. We recognize any recovery of such reductions as investment income over the
remaining life of the investment (but only to the extent our current valuations
indicate such amounts will ultimately be collected), or upon the repayment of
the investment. During 2007, we recorded: (i) $33.0 million of writedowns of
fixed maturity investments and other invested assets; and (ii) $73.7 million of
writedowns of investments (which were subsequently transferred pursuant to a
coinsurance agreement as further discussed in the note to the consolidated
financial statements entitled "Summary of Significant Accounting Policies") as a
result of our intent not to hold such investments for a period of time
sufficient to allow for any anticipated recovery in value. 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.

Our investment strategy is to maximize, over a sustained period and within
acceptable parameters of risk, investment income and total investment return
through active investment management. Accordingly, we may sell securities at a
gain or a loss to enhance the total return of the portfolio as market
opportunities change or to better match certain characteristics of our
investment portfolio with the corresponding characteristics of our insurance
liabilities. While we have both the ability and intent to hold securities with
unrealized losses until they mature or recover in value, we may sell securities
at a loss in the future because of actual or expected changes in our view of the
particular investment, its industry, its asset class or the general investment
environment.

As of December 31, 2007, we had no investments in substantive default
(i.e., in default due to nonpayment of interest or principal). 40|86 Advisors
employs experienced professionals to manage non-performing and impaired
investments. There were no other fixed maturity investments about which we had
serious doubts as to the recoverability of the carrying value of the investment.

When a security defaults, our policy is to discontinue the accrual of
interest and eliminate all previous interest accruals, if we determine that such
amounts will not be ultimately realized in full. Investment income forgone due
to defaulted securities was nil, nil and $.8 million for the years ended
December 31, 2007, 2006 and 2005, respectively.

At December 31, 2007, fixed maturity investments included $4.7 billion of
structured securities (or 23 percent of all fixed maturity securities).
Structured securities include mortgage-backed securities, CMOs and commercial
mortgage-backed securities. The yield characteristics of structured securities
differ in some respects from those of traditional fixed-income securities. For
example, interest and principal payments on structured securities may occur more
frequently, often monthly. In many instances, we are subject to the risk that
the timing of principal payments may vary from expectations. For example,
prepayments may occur at the option of the issuer and prepayment rates are
influenced by a number of factors that cannot be predicted with certainty,
including: the relative sensitivity of the underlying assets backing the
security to changes in interest rates; a variety of economic, geographic and
other factors; and various security-specific structural considerations (for
example, the repayment priority of a given security in a securitization
structure).

In general, the rate of prepayments on structured securities increases when
prevailing interest rates decline significantly in absolute terms and also
relative to the interest rates on the underlying assets. The yields recognized
on structured securities purchased at a discount to par will increase (relative
to the stated rate) when the underlying assets prepay faster than expected. The
yield recognized on structured securities purchased at a premium will decrease
(relative to the stated rate) when the underlying assets prepay faster than
expected. When interest rates decline, the proceeds from prepayments may be
reinvested at lower rates than we were earning on the prepaid securities. When
interest rates increase, prepayments may decrease. When this occurs, the average
maturity and duration of the structured securities increase, which decreases the
yield on structured securities purchased at a discount because the discount is
realized as income at a slower rate, and it increases the yield on those
purchased at a premium because of a decrease in the annual amortization of the
premium.

87


For structured and asset-backed securities included in actively managed
fixed maturities that were purchased at a discount or premium, we recognize
investment income using an effective yield based on anticipated future
prepayments and the estimated final maturity of the securities. Actual
prepayment experience is periodically reviewed and effective yields are
recalculated when differences arise between the prepayments originally
anticipated and the actual prepayments received and currently anticipated. For
all other structured and asset-backed securities, the effective yield is
recalculated when changes in assumptions are made, and reflected in our income
on a retrospective basis. Under this method, the amortized cost basis of the
investment in the securities is adjusted to the amount that would have existed
had the new effective yield been applied since the acquisition of the
securities. Such adjustments were not significant in 2007.

The following table sets forth the par value, amortized cost and estimated
fair value of structured securities, summarized by interest rates on the
underlying collateral at December 31, 2007 (dollars in millions):



Par Amortized Estimated
value cost fair value
----- ---- ----------

Below 4 percent..................................................................... $ 128.0 $ 127.7 $ 124.8
4 percent - 5 percent............................................................... 557.6 539.8 541.6
5 percent - 6 percent............................................................... 3,315.6 3,261.6 3,189.4
6 percent - 7 percent............................................................... 779.3 749.0 722.2
7 percent - 8 percent............................................................... 66.3 68.0 68.5
8 percent and above................................................................. 23.6 24.0 21.6
-------- -------- --------

Total structured securities (a).............................................. $4,870.4 $4,770.1 $4,668.1
======== ======== ========

--------------------
(a) Includes below-investment grade structured securities with an
amortized cost and estimated fair value of $62.6 million and $55.5
million, respectively.



The amortized cost and estimated fair value of structured securities at
December 31, 2007, summarized by type of security, were as follows (dollars in
millions):



Estimated Fair Value
-----------------------
Percent of
Amortized fixed
Type Cost Amount maturities
---- --------- ------ ----------

Pass-throughs, sequential and equivalent securities......................... $2,076.0 $2,048.0 10%
Planned amortization classes, target amortization class and
accretion-directed bonds................................................. 1,633.1 1,596.1 8
Commercial mortgage-backed securities....................................... 994.0 965.5 5
Other....................................................................... 67.0 58.5 -
-------- -------- --

Total structured securities (a)...................................... $4,770.1 $4,668.1 23%
======== ======== ==

--------------------
(a) Includes below-investment grade structured securities with an
amortized cost and estimated fair value of $62.6 million and $55.5
million, respectively.



Pass-through securities and sequentials have unique prepayment variability
characteristics. Pass-through securities typically return principal to the
holders based on cash payments from the underlying mortgage obligations.
Sequential classes return principal to tranche holders in a detailed hierarchy.
Planned amortization classes, targeted amortization classes and
accretion-directed bonds adhere to fixed schedules of principal payments as long
as the underlying mortgage loans experience prepayments within certain estimated
ranges. Changes in prepayment rates are first absorbed by support or companion
classes insulating the timing of receipt of cash flows from the consequences of
both faster prepayments (average life shortening) and slower prepayments
(average life extension).

Commercial mortgage-backed securities are secured by commercial real estate
mortgages, generally income producing properties that are managed for profit.
Property types include multi-family dwellings including apartments, retail
centers, hotels, restaurants, hospitals, nursing homes, warehouses, and office
buildings. Most CMBS have call protection features whereby underlying borrowers
may not prepay their mortgages for stated periods of time without incurring
prepayment penalties.

88


During 2007, we sold $3.3 billion of fixed maturity investments which
resulted in gross investment losses (before income taxes) of $134.0 million. We
sell securities at a loss for a number of reasons including but not limited to:
(i) changes in the investment environment; (ii) expectation that the market
value could deteriorate further; (iii) desire to reduce our exposure to an
issuer or an industry; (iv) changes in credit quality; or (v) changes in
expected liability cash flows. As discussed in the notes to our consolidated
financial statements, the realization of gains and losses affects the timing of
the amortization of insurance acquisition costs related to universal life and
investment products.

Other Investments

Our investment portfolio includes structured securities collateralized by
sub prime residential loans with a market value of $123.1 million and a book
value of $150.5 million at December 31, 2007. These securities represent .5
percent of our consolidated investment portfolio. Of these securities, $39.9
million (32 percent) were rated AAA, $40.8 million (33 percent) were rated AA,
$41.9 million (34 percent) were rated A, and $.5 million (1 percent) were rated
BBB. Sub prime structured securities issued in 2006 and 2007 have experienced
higher delinquency and foreclosure rates than originally expected. The Company's
investment portfolio includes sub prime structured securities collateralized by
residential mortgage loans extended over several years, primarily from 2003 to
2007. At December 31, 2007, we held no sub prime securities collateralized by
loans extended in 2006 and we held $8.7 million extended in 2007.

At December 31, 2007, we held commercial mortgage loan investments with a
carrying value of $2,086.0 million (or 8.8 percent of total invested assets) and
a fair value of $2,137.0 million. The mortgage loan balance was primarily
comprised of commercial loans. Noncurrent commercial mortgage loans were
insignificant at December 31, 2007. Realized losses on commercial mortgage loans
were not significant in any of the past three years. Our allowance for loss on
mortgage loans was $2.4 million at both December 31, 2007 and 2006.
Approximately 7 percent, 6 percent, 6 percent, 6 percent and 5 percent of the
mortgage loan balance were on properties located in Minnesota, Florida, Arizona,
Ohio and Indiana, respectively. No other state comprised greater than 5 percent
of the mortgage loan balance.

The following table shows the distribution of our commercial mortgage loan
portfolio by property type as of December 31, 2007 (dollars in millions):



Number of Carrying
loans value
----- -----

Retail.......................................................................... 438 $1,093.2
Office building................................................................. 196 745.0
Industrial...................................................................... 61 164.2
Multi-family.................................................................... 37 67.7
Other........................................................................... 5 15.9
--- --------

Total commercial mortgage loans.............................................. 737 $2,086.0
=== ========



The following table shows our commercial mortgage loan portfolio by loan
size (dollars in millions):



Number Principal
of loans balance
-------- -------

Under $5 million................................................................ 635 $1,251.7
$5 million but less than $10 million............................................ 84 555.8
$10 million but less than $20 million........................................... 13 171.6
Over $20 million................................................................ 5 112.3
--- --------

Total commercial mortgage loans.............................................. 737 $2,091.4
=== ========



89




The following table summarizes the distribution of maturities of our
commercial mortgage loans (dollars in millions):



Number Principal
of loans balance
-------- -------

2008............................................................................ 10 $ 9.4
2009............................................................................ 25 76.5
2010............................................................................ 7 2.4
2011............................................................................ 25 80.9
2012............................................................................ 28 70.7
after 2012...................................................................... 642 1,851.5
--- --------

Total commercial mortgage loans.............................................. 737 $2,091.4
=== ========



At December 31, 2007, we held $665.8 million of trading securities. We
carry trading securities at estimated fair value; changes in fair value are
reflected in the statement of operations. Our trading securities are held to act
as hedges for embedded derivatives related to our equity-indexed annuity
products and certain modified coinsurance agreements. See the note to the
consolidated financial statements entitled "Summary of Significant Accounting
Policies - Accounting for Derivatives" for further discussion regarding the
embedded derivatives and the trading accounts. In addition, the trading account
includes investments backing the market strategies of our multibucket annuity
products.

Other invested assets also include options backing our equity-indexed
products, futures, credit default swaps, forward contracts and certain
nontraditional investments, including investments in limited partnerships,
promissory notes and real estate investments held for sale.

CONSOLIDATED FINANCIAL CONDITION

Changes in the Consolidated Balance Sheet

Changes in our consolidated balance sheet between December 31, 2007 and
December 31, 2006, primarily reflect: (i) our net loss for 2007; (ii) the effect
of an annuity coinsurance transaction which was completed in 2007; (iii) the
recapture of a block of traditional life insurance business that had previously
been ceded; (iv) an increase in amounts outstanding under our Second Amended
Credit Facility; (v) common stock repurchases; and (vi) changes in the fair
value of actively managed fixed maturity securities.

In accordance with GAAP, we record our actively managed fixed maturity
investments, equity securities and certain other invested assets at estimated
fair value with any unrealized gain or loss (excluding impairment losses, which
are recognized through earnings), net of tax and related adjustments, recorded
as a component of shareholders' equity. At December 31, 2007, we decreased the
carrying value of such investments by $481.3 million as a result of this fair
value adjustment.

90


Our capital structure as of December 31, 2007 and 2006, was as follows
(dollars in millions):



2007 2006
---- ----
(Restated)

Total capital:
Corporate notes payable ...................................... $1,193.7 $1,000.8

Shareholders' equity:
Preferred stock ........................................... - 667.8
Common stock............................................... 1.9 1.5
Additional paid-in capital................................. 4,068.6 3,468.0
Accumulated other comprehensive loss....................... (273.3) (72.6)
Retained earnings.......................................... 438.7 635.4
-------- --------

Total shareholders' equity............................. 4,235.9 4,700.1
-------- --------

Total capital.......................................... $5,429.6 $5,700.9
======== ========



The following table summarizes certain financial ratios as of and for the
years ended December 31, 2007 and 2006:



2007 2006
---- ----
(Restated)

Book value per common share................................................................... $22.94 $26.50
Book value per common share, excluding accumulated other
comprehensive income (loss) (a)............................................................ 24.42 26.98

Ratio of earnings to fixed charges............................................................ (b) 1.33x

Ratio of earnings to fixed charges and preferred dividends.................................... (c) 1.19x

Debt to total capital ratios:
Corporate debt to total capital.......................................................... 22% 18%
Corporate debt to total capital, excluding accumulated other
comprehensive income (loss) (a)........................................................ 21% 17%
Corporate debt and preferred stock to total capital...................................... 22% 29%
Corporate debt and preferred stock to total capital, excluding accumulated other
comprehensive income (loss) (a)........................................................ 21% 29%

--------------------
(a) This non-GAAP measure differs from the corresponding GAAP measure
presented immediately above, because accumulated other comprehensive
income (loss) has been excluded from the value of capital used to
determine this measure. Management believes this non-GAAP measure is
useful because it removes the volatility that arises from changes in
accumulated other comprehensive income (loss). Such volatility is
often caused by changes in the estimated fair value of our investment
portfolio resulting from changes in general market interest rates
rather than the business decisions made by management. However, this
measure does not replace the corresponding GAAP measure.

(b) For such ratio, earnings were $173.0 million less than fixed charges.

(c) For such ratio, earnings were $194.7 million less than fixed charges.



91




Contractual Obligations

The Company's significant contractual obligations as of December 31, 2007,
were as follows (dollars in millions):



Payment due in
-------------------------------------------------------
Total 2008 2009-2010 2011-2012 Thereafter
----- ---- --------- --------- ----------

Insurance liabilities (a)............ $57,278.3 $4,028.5 $7,564.3 $6,951.0 $38,734.5
Notes payable (b).................... 1,567.0 80.7 486.3 133.8 866.2
Investment borrowings (c)............ 1,334.0 53.9 99.6 202.1 978.4
Postretirement plans (d)............. 164.9 3.7 7.6 8.5 145.1
Operating leases and certain other
contractual commitments (e)...... 220.1 37.5 55.5 40.6 86.5
--------- -------- -------- -------- ---------

Total............................ $60,564.3 $4,204.3 $8,213.3 $7,336.0 $40,810.7
========= ======== ======== ======== =========

--------------------

(a) These cash flows represent our estimates of the payments we expect to
make to our policyholders, without consideration of future premiums or
reinsurance recoveries. These estimates are based on numerous
assumptions (depending on the product type) related to mortality,
morbidity, lapses, withdrawals, future premiums, future deposits,
interest rates on investments, credited rates, expenses and other
factors which affect our future payments. The cash flows presented are
undiscounted for interest. As a result, total outflows for all years
exceed the corresponding liabilities of $26.7 billion included in our
consolidated balance sheet as of December 31, 2007. As such payments
are based on numerous assumptions, the actual payments may vary
significantly from the amounts shown.

In estimating the payments we expect to make to our policyholders, we
considered the following:

o For products such as immediate annuities and structured
settlement annuities without life contingencies, the payment
obligation is fixed and determinable based on the terms of the
policy.

o For products such as universal life, ordinary life, long-term
care, specified disease and fixed rate annuities, the future
payments are not due until the occurrence of an insurable event
(such as death or disability) or a triggering event (such as a
surrender or partial withdrawal). We estimated these payments
using actuarial models based on historical experience and our
expectation of the future payment patterns.

o For short-term insurance products such as Medicare supplement
insurance, the future payments relate only to amounts necessary
to settle all outstanding claims, including those that have been
incurred but not reported as of the balance sheet date. We
estimated these payments based on our historical experience and
our expectation of future payment patterns.

o The average interest rate we assumed would be credited to our
total insurance liabilities (excluding interest rate bonuses for
the first policy year only and excluding the effect of credited
rates attributable to variable or equity-indexed products) over
the term of the contracts was 4.7 percent.

(b) Includes projected interest payments based on market rates, as
applicable, as of December 31, 2007. Refer to the notes to the
consolidated financial statements entitled "Notes Payable - Direct
Corporate Obligations" for additional information on notes payable.

(c) These borrowings primarily represent: (i) the securities issued by a
VIE and include projected interest payments based on market rates, as
applicable, as of December 31, 2007; and (ii) collateralized
borrowings from the Federal Home Loan Bank of Indianapolis ("FHLBI").

(d) Includes benefits expected to be paid pursuant to our deferred
compensation plan and postretirement plans based on numerous actuarial
assumptions and interest credited at 6.02 percent.

(e) Refer to the notes to the consolidated financial statements entitled
"Commitments and Contingencies" for additional information on
operating leases and certain other contractual commitments.



92


It is possible that the ultimate outcomes of various uncertainties could
affect our liquidity in future periods. For example, the following events could
have a material adverse effect on our cash flows:

o An adverse decision in pending or future litigation.

o An inability to obtain rate increases on certain of our insurance
products.

o Worse than anticipated claims experience.

o Lower than expected dividends and/or surplus debenture interest
payments from our insurance subsidiaries (resulting from inadequate
earnings or capital or regulatory requirements).

o An inability to meet and/or maintain the covenants in our Second
Amended Credit Facility.

o A significant increase in policy surrender levels.

o A significant increase in investment defaults.

o An inability of our reinsurers to meet their financial obligations.

While we seek to balance the duration and cash flows of our invested assets
with the estimated duration and cash flows of benefit payments arising from
contract liabilities, there could be significant variations in the timing of
such cash flows. The claim experience on our long-term care business in the
Other Business in Run-off segment has been worse than our original pricing
expectations. Although we believe our current estimates properly project future
claim experience, if these estimates prove to be wrong, and our experience
worsens (as it did in some prior periods), our future liquidity could be
adversely affected.

Liquidity for Insurance Operations

Our insurance companies (other than Conseco Senior) generally receive
adequate cash flows from premium collections and investment income to meet their
obligations. Life insurance and annuity liabilities are generally long-term in
nature. Policyholders may, however, withdraw funds or surrender their policies,
subject to any applicable penalty provisions. We seek to balance the duration of
our invested assets with the estimated duration of benefit payments arising from
contract liabilities.

In the first quarter of 2007, Conseco Life became a member of the FHLBI. As
a member of the FHLBI, Conseco Life has the ability to borrow on a
collateralized basis from FHLBI. Conseco Life is required to hold a certain
minimum amount of FHLBI common stock as a requirement of membership in the
FHLBI, and additional amounts based on the amount of collateralized borrowings.
At December 31, 2007, the carrying value of the FHLBI common stock was $22.5
million. Collateralized borrowings totaled $450.0 million as of December 31,
2007, and the proceeds were used to purchase fixed maturity securities. The
borrowings are classified as investment borrowings in the accompanying
consolidated balance sheet. The borrowings are collateralized by investments
with an estimated fair value of $509.0 million at December 31, 2007, which are
maintained in a custodial account for the benefit of the FHLBI. The following
summarizes the terms of the borrowings (dollars in millions):



Amount Maturity Interest rate
borrowed date at December 31, 2007
-------- ---- --------------------

$100.0 November 2015 Fixed rate - 4.890%
100.0 December 2015 Fixed rate - 4.710%
54.0 May 2012 Variable rate - 5.015%
146.0 November 2015 Fixed rate - 5.300%
37.0 July 2012 Fixed rate - 5.540%
13.0 July 2012 Variable rate - 5.308%



State laws generally give state insurance regulatory agencies broad
authority to protect policyholders in their jurisdictions. Regulators have used
this authority in the past to restrict the ability of our insurance subsidiaries
to pay any

93


dividends or other amounts to any non-insurance company parent without prior
approval. We cannot be assured that the regulators will not seek to assert
greater supervision and control over our insurance subsidiaries' businesses and
financial affairs.

In connection with monitoring the financial condition of insurers, certain
state insurance departments have requested additional information from two of
the Company's insurance subsidiaries, Conseco Senior and Conseco Life, because
each such insurance subsidiary has incurred statutory losses in a 12 month
period in excess of 50 percent of its capital and surplus. The statutory losses
of Conseco Life are primarily attributable to a litigation settlement. For
further information related to this case, refer to the caption entitled "Cost of
Insurance Litigation" included in the note to our consolidated financial
statements entitled "Commitments and Contingencies". The statutory losses of
Conseco Senior are primarily attributable to the adverse development of prior
period claim reserves, an increase in claims incurred in 2006 and 2007 and
strengthening of statutory active life reserves using the prospective unlocking
method (as permitted by insurance regulators), all of which related to long-term
care policies. Based on our discussions with state regulators, we do not expect
the regulators to take any actions against Conseco Senior or Conseco Life that
would have a material adverse effect on the financial position or results of
operations of these companies.

Conseco Senior has not generated sufficient income to cover its expenses
and, in the aggregate, Conseco has made more than $900 million of capital
contributions to Conseco Senior since its acquisition in 1996. During 2007, we
elected to make capital contributions to Conseco Senior totaling $202.0 million,
including $56.0 million which was accrued at December 31, 2007 and paid in
February 2008. We were under no obligation to make such capital contributions to
Conseco Senior, and we may determine not to make additional contributions in the
future. No assurances can be given that we will make future contributions or
otherwise make capital available to Conseco Senior. Absent additional capital
contributions, Conseco Senior will be reliant on actuarially justified premium
rate increases to provide it with sufficient capital.

Conseco Senior has been aggressively seeking actuarially justified rate
increases and pursuing other actions on our long-term care policies. During the
third quarter of 2006, we began a new program to file requests for rate
increases on various long-term care products in the Other Business in Run-off
segment as we believe the existing rates were too low to fund expected future
benefits. These filings are expected to be the first of three rounds of rate
increase filings for many of the same policies, and in some cases we requested
three years of successive rate increases. Based on recent experience, certain of
the policies in this segment will continue to be unprofitable even if we obtain
the three rounds of rate increases, and it is likely that we will request
additional rate increases when the current program is complete. We have chosen
to request a series of smaller rate increases, rather than a single large
increase, to limit the impact on a policyholder's premiums in any single year.
The effects of the first round of rate filings have been partially realized in
our premium revenue with the remaining impact expected to be realized by the end
of 2008. In the second quarter of 2007, we began filing requests for the second
round of rate increases on many of the same policies. As of December 31, 2007,
almost all of the expected second round filings had been submitted for
regulatory approval, and approximately 42 percent of the expected amounts had
been approved by regulators. The full effect of all three rounds of rate
increases may not be fully realized until 2011. It is possible that it will take
more time than we expect to prepare rate increase filings and obtain approval
from the state insurance regulators. In addition, it is likely that we will not
be able to obtain approval for some of the actuarially justified rate increases
currently pending or for the additional rate increases we plan to file
especially in light of the magnitude of some past premium rate increases and
current consumer and regulator sentiment. 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 2007, the financial statements of three of our subsidiaries prepared
in accordance with statutory accounting practices prescribed or permitted by
regulatory authorities reflected the establishment of asset adequacy and premium
deficiency reserves primarily related to long-term care and annuity policies.
Total asset adequacy and premium deficiency reserves for Washington National,
Conseco Insurance Company and Bankers Conseco Life Insurance Company were $63.8
million, $35.9 million and $30.6 million, respectively at December 31, 2007. 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.

Financial Strength Ratings of our Insurance Subsidiaries

Financial strength ratings provided by A.M. Best, S&P and Moody's are the
rating agency's opinions of the ability of our insurance subsidiaries to repay
policyholder claims and obligations when due.

94


On August 7, 2007, A.M. Best downgraded the financial strength ratings of
our primary insurance subsidiaries to "B+ (Good)" from "B++ (Good)", except
Conseco Senior, whose "B- (Fair)" rating was downgraded to "C++ (Marginal)".
A.M. Best also revised the outlook for the ratings of our primary insurance
subsidiaries, as well as Conseco Senior, to negative from stable. The "B+"
rating is assigned to companies that have a good ability, in A.M. Best's
opinion, to meet their ongoing obligations to policyholders. The "C++" rating is
assigned to companies which have a marginal ability, in A.M. Best's opinion, to
meet their ongoing 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. The "B+" rating and the "C++"
rating from A.M. Best are the sixth and ninth highest, respectively, of sixteen
possible ratings.

On August 7, 2007, S&P affirmed the financial strength ratings of "BB+" of
our primary insurance subsidiaries, except Conseco Senior, whose "CCC" rating
was downgraded to "CCC-". S&P also revised the outlook for the ratings of our
primary insurance subsidiaries to negative from stable, except for Conseco
Senior, whose outlook of negative was affirmed. 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. In S&P's view, an insurer rated "CCC" has very weak
financial security characteristics and is dependent on favorable business
conditions to meet financial commitments. The "BB+" rating and the "CCC-" rating
from S&P are the eleventh and nineteenth highest, respectively, of twenty-one
possible ratings.

The current financial strength ratings of our primary insurance
subsidiaries (except Conseco Senior) from Moody's are "Baa3" and Conseco
Senior's rating is "Caal". On September 7, 2007, Moody's affirmed the financial
strength ratings of our core insurance subsidiaries and Conseco Senior and
revised its outlook on all our insurance subsidiaries to negative from stable.
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 "Baa3" offers adequate financial
security, however, certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. In Moody's view, an
insurer rated "Caa" offers very poor financial security and may default on its
policyholder obligations or there may be elements of danger with respect to
punctual payment of policyholder obligations and claims. The "Baa3" rating and
the "Caa1" rating from Moody's are the tenth and seventeenth highest,
respectively, of twenty-one possible ratings.

Liquidity of the Holding Companies

At December 31, 2007, Conseco Inc. and CDOC held unrestricted cash of $84.3
million. Conseco Inc. and CDOC are holding companies with no business operations
of their own; they depend on their operating subsidiaries for cash to make
principal and interest payments on debt, and to pay administrative expenses and
income taxes. Conseco 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 non-insurance
subsidiaries consisting of dividends, distributions, loans and advances. The
principal non-insurance subsidiaries that provide cash to Conseco and CDOC are
40|86 Advisors, which receives fees from the insurance subsidiaries for
investment services, and Conseco Services, LLC which receives fees from the
insurance subsidiaries for providing administrative services. A deterioration in
the financial condition, earnings or cash flow of the material subsidiaries of
Conseco or CDOC for any reason could hinder such subsidiaries' ability to pay
cash dividends or other disbursements to Conseco and/or CDOC, which, in turn,
would limit Conseco's and/or CDOC's ability to meet debt service requirements
and satisfy other financial obligations. In addition, we may need to contribute
additional capital to certain insurance subsidiaries to strengthen their surplus
and this could affect the ability of our top tier insurance subsidiary to pay
dividends. We made capital contributions totaling $200.0 million to our top tier
insurance subsidiary in 2007.

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
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): (i) statutory net gain
from operations or net income for the prior year; or (ii) 10 percent of
statutory capital and surplus as of the end of the preceding year. Any dividends
in excess of these levels require the approval

95


of the director or commissioner of the applicable state insurance department.
During 2007, our top tier insurance subsidiary paid dividends of $50.0 million
to CDOC.

Our cash flow may be affected by a variety of factors, many of which are
outside of our control, including insurance and banking regulatory issues,
competition, financial markets and other general business conditions. We cannot
provide assurance that we will possess sufficient income and liquidity to meet
all of our liquidity requirements and other obligations.

If an insurance company subsidiary were to be liquidated, that liquidation
would be conducted following the insurance law of its state of domicile with
such state's insurance regulator as the receiver for such insurer's property and
business. In the event of a default on our debt or our insolvency, liquidation
or other reorganization, our creditors and stockholders would have no right to
proceed against the assets of our insurance subsidiaries or to cause their
liquidation under federal and state bankruptcy laws.

On June 12, 2007, Conseco amended its current credit facility. The
amendment of the credit facility provided for, among other things:

o an increase of $200.0 million in the principal amount of the facility;

o an increase in the general basket for restricted payments in an
aggregate amount of up to $300 million over the term of the facility
(of which, only $200 million may be paid in the year commencing June
12, 2007); and

o the Company to be able to request the addition of up to two new
facilities or up to two increases in the credit facility of up to $330
million (but with the commitment increases made between June 12, 2007
and June 12, 2008 limited to $130 million), subject to compliance with
certain financial covenants and other conditions. Such increases would
be effective as of a date that is at least 90 days prior to the
scheduled maturity date.

No changes were made to the interest rate or the maturity schedule of the
amounts borrowed under the credit facility. We are required to make minimum
quarterly principal payments of $2.2 million through September 30, 2013. The
remaining unpaid principal balance is due on October 10, 2013. There were no
changes to the various financial ratios and balances that are required to be
maintained by the Company. The additional borrowings were used for general
corporate purposes, including the repurchase of Conseco common stock and the
strengthening of the Company's insurance subsidiaries.

During 2007, we made scheduled principal payments totaling $7.8 million on
our Second Amended Credit Facility. The scheduled repayment of our direct
corporate obligations is as follows (dollars in millions):


2008.......................................... $ 8.7
2009.......................................... 8.7
2010.......................................... 338.8
2011.......................................... 8.7
2012.......................................... 8.8
Thereafter..................................... 821.8
--------

$1,195.5
========


The Second Amended Credit Facility includes an $80.0 million revolving
credit facility that can be used for general corporate purposes and that would
mature on June 22, 2009. There were no amounts outstanding under the revolving
credit facility at December 31, 2007. The Company pays a commitment fee equal to
.50 percent of the unused portion of the revolving credit facility on an
annualized basis.

Pursuant to the Second Amended Credit Facility, as long as the debt to
total capitalization ratio (as defined in the Second Amended Credit Facility) is
greater than 20 percent or certain insurance subsidiaries (as defined in the
Second Amended Credit Facility) have financial strength ratings of less than A-
from A.M. Best, the Company is required to make mandatory prepayments with all
or a portion of the proceeds from the following transactions or events
including: (i) the issuance of certain indebtedness; (ii) equity issuances;
(iii) certain asset sales or casualty events; and (iv) excess cash flows as
defined in the Second Amended Credit Facility (the first such payment, if
applicable, would not be paid prior to the first quarter of 2009). The Company
may make optional prepayments at any time in minimum amounts of $3.0 million or
any multiple of $1.0 million in excess thereof. As described in the Second
Amended Credit Facility, the Company may reinvest any portion of the proceeds
from asset sales in assets useful to its business, subject to certain
restrictions defined in the

96


Second Amended Credit Facility. The Company used the majority of the ceding
commission received from the annuity coinsurance transaction to fund the
recapture of a block of traditional life insurance inforce.

Under the Second Amended Credit Facility, we may pay cash dividends on our
common stock or repurchase our common stock in an aggregate amount of up to
$300.0 million over the term of the facility (of which, only $200.0 million may
be paid in the year beginning June 12, 2007). As further discussed in the note
to the consolidated financial statements entitled "Shareholders' Equity", we
repurchased 5.7 million shares of our common stock for $87.2 million in 2007 (of
which, $57.6 million was paid in the year beginning June 12, 2007).

Under our Second Amended Credit Facility, we have agreed to a number of
covenants and other provisions that restrict our ability to engage in various
financing transactions and pursue certain operating activities without the prior
consent of the lenders. We have also agreed to meet or maintain various
financial ratios. These requirements represent 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 requirements (subject to certain remedies), the lenders could
declare all outstanding borrowings, accrued interest and fees to be immediately
due and payable. If that were to occur, we cannot provide assurance that we
would have sufficient liquidity to repay or refinance this indebtedness.

The Second Amended Credit Facility is discussed in further detail in the
note to the consolidated financial statements entitled "Notes Payable - Direct
Corporate Obligations".

MARKET-SENSITIVE INSTRUMENTS AND RISK MANAGEMENT

Our spread-based insurance 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 on
customer deposits, thereby adversely affecting our results. Second, if interest
rate changes produce an unanticipated increase in surrenders of our spread-based
products, we may be forced to sell investment assets at a loss in order to fund
such surrenders. Many of our products include surrender charges, market interest
rate adjustments or other features to encourage persistency; however at December
31, 2007, approximately 18 percent of our total insurance liabilities, or
approximately $4.8 billion, could be surrendered by the policyholder without
penalty. Finally, changes in interest rates can have significant effects on the
performance of our structured securities portfolio as a result of changes in the
prepayment rate of the loans underlying such securities. We follow
asset/liability strategies that are designed to mitigate the effect of interest
rate changes on our profitability. However, there can be no assurance that
management will be successful in implementing such strategies and achieving
adequate investment spreads.

We seek to invest our available funds in a manner that will fund future
obligations to policyholders, subject to appropriate risk considerations. We
seek to meet this objective through investments that: (i) have similar cash flow
characteristics with the liabilities they support; (ii) are diversified among
industries, issuers and geographic locations; and (iii) are predominantly
investment-grade fixed maturity securities.

Our investment strategy is to maximize, over a sustained period and within
acceptable parameters of risk, investment income and total investment return
through active investment management. Accordingly, our entire portfolio of fixed
maturity securities is available to be sold in response to: (i) changes in
market interest rates; (ii) changes in relative values of individual securities
and asset sectors; (iii) changes in prepayment risks; (iv) changes in credit
quality outlook for certain securities; (v) liquidity needs; and (vi) other
factors. From time to time, we invest in securities for trading purposes,
although such investments are a relatively small portion of our total portfolio.

The profitability of many of our products depends on the spread between the
interest earned on investments and the rates credited on our insurance
liabilities. In addition, changes in competition and other factors, including
the level 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, 2007, approximately 38 percent of
our insurance liabilities had interest rates that may be reset annually; 47
percent had a fixed explicit interest rate for the duration of the contract; 11
percent had credited rates which approximate the income earned by the Company;
and the remainder had no explicit interest rates. At December 31, 2007, the
average yield, computed on the cost basis of our actively managed fixed maturity
portfolio, was 6.0 percent, and the average interest rate credited or accruing
to our total insurance liabilities (excluding interest rate bonuses for the
first policy year only and excluding the effect of credited rates attributable
to variable or equity-indexed products) was 4.7 percent.

97


We use computer models to simulate the cash flows expected from our
existing insurance business under various interest rate scenarios. These
simulations help us to measure the potential gain or loss in fair value of our
interest rate-sensitive financial instruments and 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, a change in
the value of assets should be largely offset by a change in the value of
liabilities. At December 31, 2007, the adjusted modified duration of our fixed
maturity investments (as modified to reflect payments and potential calls) was
approximately 7.6 years and the duration of our insurance liabilities was
approximately 7.9 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 $490 million if interest
rates were to increase by 10 percent from their levels at December 31, 2007.
This compares to a decline in fair value of $515 million based on amounts and
rates at December 31, 2006. Our computer simulated calculations include numerous
assumptions, require significant estimates and assume an immediate change in
interest rates without any management of the investment portfolio in reaction to
such change. Consequently, potential changes in value 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.

We are subject to the risk that our investments will decline in value. This
has occurred in the past and may occur again. During 2007, we recognized net
realized investment losses of $155.4 million, which were comprised of: (i) $48.7
million of net losses from the sales of investments (primarily fixed maturities)
with proceeds of $7.2 billion; (ii) $33.0 million of writedowns of investments
for other than temporary declines in the fair value; and (iii) $73.7 million of
writedowns of investments (which were subsequently transferred pursuant to a
coinsurance agreement as further discussed in the note to the consolidated
financial statements entitled "Summary of Significant Accounting Policies") as a
result of our intent not to hold such investments for a period of time
sufficient to allow for any anticipated recovery in value. During 2006, we
recognized net realized investment losses of $47.2 million, which were comprised
of $24.8 million of net losses from the sales of investments (primarily fixed
maturities) with proceeds of $6.4 billion, and $22.4 million of writedowns of
investments for other than temporary declines in the fair value. During 2005, we
recognized net realized investment losses of $2.9 million, which were comprised
of $11.8 million of net gains from the sales of investments (primarily fixed
maturities) with proceeds of $11.5 billion, net of $14.7 million of writedowns
of investments for other than temporary declines in the fair value.

The operations of the Company are subject to risk resulting from
fluctuations in market prices of our equity securities. In general, these
investments have more year-to-year price variability than our fixed maturity
investments. However, returns over longer time frames have been consistently
higher. We manage this risk by limiting our equity securities to a relatively
small portion of our total investments.

Our investment in options backing our equity-linked products is closely
matched with our obligation to equity-indexed annuity holders. Market value
changes associated with that investment are substantially offset by an increase
or decrease in the amounts added to policyholder account balances for
equity-indexed products.

Inflation

Inflation rates may impact the financial statements and operating results
in several areas. Inflation influences interest rates, which in turn impact the
market value of the investment portfolio and yields on new investments.
Inflation also impacts a portion of our insurance policy benefits affected by
increased medical coverage costs. Operating expenses, including payrolls, are
impacted to a certain degree by the inflation rate.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

The information included under the caption "Market-Sensitive Instruments
and Risk Management" in Item 7. "Management's Discussion and Analysis of
Consolidated Financial Condition and Results of Operations" is incorporated
herein by reference.

98



ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.


Index to Consolidated Financial Statements



Page
----

Report of Independent Registered Public Accounting Firm............................................................... 100

Consolidated Balance Sheet at December 31, 2007 and 2006.............................................................. 101

Consolidated Statement of Operations for the years ended December 31, 2007, 2006 and 2005............................. 103

Consolidated Statement of Shareholders' Equity for the years ended December 31, 2007, 2006 and 2005................... 104

Consolidated Statement of Cash Flows for the years ended December 31, 2007, 2006 and 2005............................. 106

Notes to Consolidated Financial Statements............................................................................ 107




99




Report of Independent Registered Public Accounting Firm

To the Shareholders and Board of Directors Conseco, Inc.:

In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of
Conseco Inc. and its subsidiaries at December 31, 2007 and 2006, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 2007 in conformity with accounting principles
generally accepted in the United States of America. Also in our opinion, the
Company did not maintain, in all material respects, effective internal control
over financial reporting as of December 31, 2007, based on criteria established
in Internal Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) because a material weakness in
internal control over financial reporting related to the accounting and
disclosure of insurance policy benefits, amortization expense, the liabilities
for insurance products and the value of policies inforce at the Effective Date
existed as of that date. A material weakness is a deficiency, or a combination
of deficiencies, in internal control over financial reporting, such that there
is a reasonable possibility that a material misstatement of the annual or
interim financial statements will not be prevented or detected on a timely
basis. The material weakness referred to above is described in Management's
Report on Internal Control Over Financial Reporting appearing under Item 9A. We
considered this material weakness in determining the nature, timing, and extent
of audit tests applied in our audit of the 2007 consolidated financial
statements, and our opinion regarding the effectiveness of the Company's
internal control over financial reporting does not affect our opinion on those
consolidated financial statements. The Company's management is responsible for
these financial statements, for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting included in management's report referred to
above. Our responsibility is to express opinions on these financial statements
and on the Company's internal control over financial reporting based on our
integrated audits. We conducted our audits in accordance with the standards of
the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audits to obtain reasonable assurance about
whether the financial statements are free of material misstatement and whether
effective internal control over financial reporting was maintained in all
material respects. Our audits of the financial statements included examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
Our audit of internal control over financial reporting included obtaining an
understanding of internal control over financial reporting, assessing the risk
that a material weakness exists, and testing and evaluating the design and
operating effectiveness of internal control based on the assessed risk. Our
audits also included performing such other procedures as we considered necessary
in the circumstances. We believe that our audits provide a reasonable basis for
our opinions.

As discussed in Note 2 to the consolidated financial statements, the Company has
restated its 2006 and 2005 consolidated financial statements.

A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (i) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (ii)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the
company's assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.

/s/ PricewaterhouseCoopers LLP
------------------------------

Indianapolis, Indiana
March 28, 2008

100

CONSECO, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET
December 31, 2007 and 2006
(Dollars in millions)


ASSETS


2007 2006
---- ----
(Restated)

Investments:
Actively managed fixed maturities at fair value (amortized cost:
2007 - $20,992.7; 2006 - $22,946.9)............................................... $20,510.9 $22,802.9
Equity securities at fair value (cost: 2007 - $34.0; 2006 - $23.9).................. 34.5 24.8
Mortgage loans...................................................................... 2,086.0 1,642.2
Policy loans........................................................................ 370.4 412.5
Trading securities.................................................................. 665.8 675.2
Other invested assets .............................................................. 134.3 178.8
--------- ---------

Total investments................................................................. 23,801.9 25,736.4

Cash and cash equivalents:
Unrestricted........................................................................ 407.5 385.9
Restricted.......................................................................... 21.1 24.0
Accrued investment income................................................................ 319.3 344.5
Value of policies inforce at the Effective Date.......................................... 1,722.8 2,136.5
Cost of policies produced................................................................ 1,423.0 1,106.7
Reinsurance receivables.................................................................. 3,592.8 850.8
Income tax assets, net................................................................... 1,909.4 1,794.3
Assets held in separate accounts......................................................... 27.4 28.9
Other assets............................................................................. 289.6 316.0
--------- ---------

Total assets...................................................................... $33,514.8 $32,724.0
========= =========





(continued on next page)










The accompanying notes are an integral part
of the consolidated financial statements.

101

CONSECO, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET (Continued)
December 31, 2007 and 2006
(Dollars in millions)

LIABILITIES AND SHAREHOLDERS' EQUITY


2007 2006
---- ----
(Restated)

Liabilities:
Liabilities for insurance products:
Interest-sensitive products........................................................ $13,169.4 $13,021.1
Traditional products............................................................... 12,537.4 12,108.0
Claims payable and other policyholder funds........................................ 928.0 835.0
Liabilities related to separate accounts........................................... 27.4 28.9
Other liabilities.................................................................... 510.0 611.8
Investment borrowings................................................................ 913.0 418.3
Notes payable - direct corporate obligations......................................... 1,193.7 1,000.8
--------- ---------

Total liabilities................................................................ 29,278.9 28,023.9
--------- ---------

Commitments and Contingencies (Note 9)

Shareholders' equity:
Preferred stock...................................................................... - 667.8
Common stock ($0.01 par value, 8,000,000,000 shares authorized,
shares issued and outstanding: 2007 - 184,652,017; 2006 - 152,165,108)............ 1.9 1.5
Additional paid-in capital........................................................... 4,068.6 3,468.0
Accumulated other comprehensive loss................................................. (273.3) (72.6)
Retained earnings.................................................................... 438.7 635.4
--------- ---------

Total shareholders' equity....................................................... 4,235.9 4,700.1
--------- ---------

Total liabilities and shareholders' equity....................................... $33,514.8 $32,724.0
========= =========











The accompanying notes are an integral part
of the consolidated financial statements.

102

CONSECO, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF OPERATIONS
for the years ended December 31, 2007, 2006 and 2005
(Dollars in millions, except per share data)


2007 2006 2005
---- ---- ----
(Restated) (Restated)

Revenues:
Insurance policy income.............................................. $3,167.3 $2,989.0 $2,930.1
Net investment income (loss):
General account assets............................................ 1,517.3 1,435.2 1,390.4
Policyholder and reinsurer accounts and other special-purpose
portfolios..................................................... 19.3 71.2 (15.8)
Net realized investment losses ...................................... (155.4) (47.2) (2.9)
Fee revenue and other income......................................... 23.8 19.2 24.7
-------- -------- --------

Total revenues.................................................... 4,572.3 4,467.4 4,326.5
-------- -------- --------

Benefits and expenses:
Insurance policy benefits............................................ 3,433.7 3,033.0 2,830.0
Interest expense..................................................... 117.3 73.5 58.3
Amortization......................................................... 449.3 441.6 379.0
Loss on extinguishment of debt....................................... - .7 3.7
Costs related to a litigation settlement............................. 64.4 174.7 18.3
Loss related to an annuity coinsurance transaction................... 76.5 - -
Other operating costs and expenses................................... 604.1 576.7 552.9
-------- -------- --------

Total benefits and expenses....................................... 4,745.3 4,300.2 3,842.2
-------- -------- --------

Income (loss) before income taxes................................. (173.0) 167.2 484.3

Income tax expense (benefit):

Tax expense (benefit) on period income............................... (61.1) 61.2 171.6
Valuation allowance for deferred tax assets.......................... 68.0 - -
-------- -------- --------

Net income (loss)................................................. (179.9) 106.0 312.7

Preferred stock dividends................................................ 14.1 38.0 38.0
-------- -------- --------

Net income (loss) applicable to common stock...................... $ (194.0) $ 68.0 $ 274.7
======== ======== ========

Earnings (loss) per common share:
Basic:
Weighted average shares outstanding............................. 173,374,000 151,690,000 151,160,000
=========== =========== ===========

Net income (loss)............................................... $(1.12) $.45 $1.82
====== ==== =====

Diluted:
Weighted average shares outstanding............................. 173,374,000 152,509,000 185,040,000
=========== =========== ===========

Net income (loss)............................................... $(1.12) $.45 $1.69
====== ==== =====





The accompanying notes are an integral part
of the consolidated financial statements.

103

CONSECO, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Dollars in millions)


Common stock Accumulated other
Preferred and additional comprehensive Retained
Total stock paid-in capital income earnings
----- ----- --------------- ------ --------


Balance, December 31, 2004 (Restated)................ $3,891.9 $667.8 $2,594.1 $ 337.3 $292.7

Comprehensive income, net of tax:
Net income...................................... 312.7 - - - 312.7
Change in unrealized appreciation of
investments (net of applicable income tax
benefit of $148.7)............................ (265.6) - - (265.6) -
--------

Total comprehensive income.................. 47.1

Reduction of deferred income tax valuation
allowance....................................... 585.8 - 585.8 - -
Stock option and restricted stock plans........... 9.1 - 9.1 - -
Reduction of tax liabilities related to various
contingencies recognized at the fresh-start
date............................................ 1.4 - 1.4 - -
Dividends on preferred stock...................... (38.0) - - - (38.0)
-------- ------ -------- ------- ------

Balance, December 31, 2005 (Restated)................ 4,497.3 667.8 3,190.4 71.7 567.4

Comprehensive loss, net of tax:
Net income...................................... 106.0 - - - 106.0
Change in unrealized appreciation (depreciation)
of investments (net of applicable income tax
benefit of $77.4)............................. (137.9) - - (137.9) -
--------

Total comprehensive loss.................... (31.9)

Adjustment to initially apply SFAS No. 158
related to the unrecognized net loss related
to deferred compensation plan (net of
applicable income tax benefit of $3.5).......... (6.4) - - (6.4) -
Reduction of deferred income tax valuation
allowance....................................... 260.0 - 260.0 - -
Stock option and restricted stock plans........... 12.4 - 12.4 - -
Reduction of tax liabilities related to various
contingencies recognized at the fresh-start
date............................................ 6.7 - 6.7 - -
Dividends on preferred stock...................... (38.0) - - - (38.0)
-------- ------ -------- ------- ------

Balance, December 31, 2006 (Restated)................ $4,700.1 $667.8 $3,469.5 $ (72.6) $635.4




(continued on following page)





The accompanying notes are an integral part
of the consolidated financial statements.

104

CONSECO, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (Continued)
(Dollars in millions)


Common stock Accumulated other
Preferred and additional comprehensive Retained
Total stock paid-in capital income (loss) earnings
----- ----- --------------- ------------- --------

Balance, December 31, 2006 (carried forward
from prior page) (Restated)....................... $4,700.1 $ 667.8 $3,469.5 $ (72.6) $ 635.4

Comprehensive loss, net of tax:
Net loss........................................ (179.9) - - - (179.9)
Change in unrealized appreciation (depreciation)
of investments (net of applicable income tax
benefit of $113.0)............................ (202.4) - - (202.4) -
--------

Total comprehensive loss.................... (382.3)

Cost of shares acquired........................... (87.2) - (87.2) - -
Stock option and restricted stock plans........... 14.4 - 14.4 - -
Change in unrecognized net loss related to
deferred compensation plan (net of applicable
income tax expense of $.9 million).............. 1.7 - - 1.7 -
Reduction of tax liabilities related to various
contingencies recognized at the fresh-start
date in conjunction with adoption of FIN 48..... 6.0 - 6.0 - -
Cumulative effect of accounting change pursuant
to SOP 05-1..................................... (2.7) - - - (2.7)
Conversion of preferred stock into common shares.. - (667.8) 667.8 - -
Dividends on preferred stock...................... (14.1) - - - (14.1)
-------- ------- -------- ------- -------

Balance, December 31, 2007........................... $4,235.9 $ - $4,070.5 $(273.3) $ 438.7
======== ======= ======== ======= =======






The accompanying notes are an integral part
of the consolidated financial statements.

105

CONSECO, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS
for the years ended December 31, 2007, 2006 and 2005
(Dollars in millions)



2007 2006 2005
---- ---- ----

Cash flows from operating activities:
Insurance policy income............................................... $ 2,818.0 $ 2,633.4 $ 2,565.3
Net investment income................................................. 1,610.0 1,500.5 1,461.0
Fee revenue and other income.......................................... 23.8 19.3 24.7
Net sales (purchases) of trading securities........................... (114.3) 36.0 165.8
Insurance policy benefits............................................. (2,339.6) (2,184.2) (2,044.8)
Interest expense...................................................... (114.7) (66.9) (40.6)
Policy acquisition costs.............................................. (545.9) (484.7) (400.9)
Other operating costs................................................. (631.3) (523.7) (596.8)
Taxes................................................................. (2.7) 1.5 28.4
--------- --------- ----------

Net cash provided by operating activities......................... 703.3 931.2 1,162.1
--------- --------- ----------

Cash flows from investing activities:
Sales of investments.................................................. 7,192.9 6,412.1 11,479.9
Maturities and redemptions of investments............................. 948.4 2,038.0 1,455.3
Purchases of investments.............................................. (9,248.7) (9,490.8) (14,438.0)
Change in restricted cash............................................. 2.9 11.2 (16.3)
Other................................................................. (24.2) (21.7) (31.6)
--------- --------- ----------

Net cash used by investing activities............................. (1,128.7) (1,051.2) (1,550.7)
--------- --------- ----------

Cash flows from financing activities:
Issuance of notes payable, net........................................ 200.0 196.7 853.7
Issuance of common stock.............................................. 3.4 1.0 .5
Payments to repurchase common stock................................... (87.2) - -
Payments on notes payable............................................. (7.8) (48.0) (770.4)
Amounts received for deposit products................................. 1,852.2 2,067.7 1,709.8
Withdrawals from deposit products..................................... (1,989.3) (2,014.5) (1,787.0)
Investment borrowings................................................. 494.7 103.2 (118.8)
Dividends paid on preferred stock..................................... (19.0) (38.0) (38.0)
--------- --------- ----------

Net cash provided (used) by financing activities.................. 447.0 268.1 (150.2)
--------- --------- ----------

Net increase (decrease) in cash and cash equivalents.............. 21.6 148.1 (538.8)

Cash and cash equivalents, beginning of year............................. 385.9 237.8 776.6
--------- --------- ----------

Cash and cash equivalents, end of year................................... $ 407.5 $ 385.9 $ 237.8
========= ========= ==========



The accompanying notes are an integral part
of the consolidated financial statements.

106

CONSECO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
------------------

1. DESCRIPTION OF BUSINESS

Conseco, Inc., a Delaware corporation ("CNO"), is 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. CNO became the successor
to Conseco, Inc., an Indiana corporation ("Old Conseco" or 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, Old Conseco and its subsidiaries. We
focus on serving the senior and middle-income markets, which we believe are
attractive, 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.

We manage our business through the following: three primary operating
segments, Bankers Life, Conseco Insurance Group and Colonial Penn, which are
defined on the basis of product distribution; a fourth segment comprised of
Other Business in Run-off; and corporate operations. Our segments are described
below:

o Bankers Life, which consists of the business of Bankers Life and
Casualty Company ("Bankers Life and Casualty"), markets and
distributes Medicare supplement insurance, life insurance, long-term
care insurance, Medicare Part D prescription drug program, Medicare
Advantage products and certain annuity products to the senior market
through approximately 5,100 career agents and sales managers. Bankers
Life and Casualty markets its products under its own brand name and
Medicare Part D and Medicare Advantage products primarily through
marketing agreements with Coventry Health Care ("Coventry").

o Conseco Insurance Group, which markets and distributes specified
disease insurance, Medicare supplement insurance, and certain life and
annuity products to the senior and middle-income markets through
approximately 350 independent marketing organizations that represent
over 5,200 producing independent agents. This segment markets its
products under the "Conseco" and "Washington National" (a wholly-owned
insurance subsidiary of Conseco) brand names. Conseco Insurance Group
includes primarily the business of Conseco Health Insurance Company
("Conseco Health"), Conseco Life Insurance Company ("Conseco Life")
Conseco Insurance Company and Washington National Insurance Company
("Washington National"), other than any run-off long-term care and
major medical insurance issued by those companies. Such run-off
business is included in the Other Business in Run-off segment.

o Colonial Penn, which consists of the business of Colonial Penn Life
Insurance Company ("Colonial Penn"), markets 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.

o Other Business in Run-off, which includes blocks of business that we
no longer market or underwrite and are managed separately from our
other businesses. This segment consists of: (i) long-term care
insurance sold in prior years through independent agents; and (ii)
major medical insurance. The Other Business in Run-off segment is
primarily comprised of long-term care business issued by Conseco
Senior Health Insurance Company ("Conseco Senior") and Washington
National, subsidiaries that were acquired in 1996 and 1997,
respectively. Long-term care collected premiums represented more than
99 percent of this segment's total collected premiums in 2007.

2. RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS

The Company's management and its audit committee concluded, on February 22,
2008, that we would restate our financial statements for the years ended
December 31, 2006 and 2005, along with affected Selected Consolidated Financial
Data for 2004 and 2003, and quarterly financial information for 2006 and the
first three quarters of 2007. Such conclusion was based on the significance of
errors identified in 2007 during the procedures performed in an effort to
remediate the material weakness in internal controls disclosed in our 2006 Form
10-K and subsequent quarterly filings with the U.S. Securities and Exchange
Commission (the "SEC").

The most significant errors relate to adjustments to insurance policy
benefits and the liabilities for insurance products in the specified disease and
life blocks in the Conseco Insurance Group segment and in the long-term care
block of business in the Other Business in Run-off segment identified in 2007
during the aforementioned remediation procedures.

107

CONSECO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
------------------

We reviewed certain actuarial valuation processes for approximately 2,400
types of policy forms, encompassing insurance products that accounted for more
than 80 percent of the total liabilities for the business subject to the
remediation procedures.

The errors we discovered through our remediation procedures had the effect
of reducing shareholders' equity at December 31, 2006 by $20.6 million, as
summarized below (dollars in millions):


Understatement
(overstatement) of
shareholders' equity
at December 31, 2006
--------------------

Coding errors in actuarial system related to specified disease
return of premium features..................................................... $ 25.6 (i)

Error related to certain specified disease policies for which return of
premium is payable upon first occurrence of claim.............................. (15.9) (ii)

Error in reserve factors for certain specified disease policies.................. (20.4) (iii)

Error related to certain specified disease policies for which return of
premium benefit is not reduced for claims...................................... (18.0) (iv)

Inconsistent performance of procedure to identify terminated long-term
care policies.................................................................. 10.7 (v)

Coding errors in actuarial system related to universal life policies............. 7.9 (vi)

Error related to certain universal life policies with bonus features............. (6.5) (vii)

Errors identified through outlier procedures..................................... (14.4) (viii)

Other errors..................................................................... (1.0) (ix)
------

Total errors before income tax effect........................................ (32.0)

Income tax effect................................................................ 11.4
------

Total errors after income tax................................................ $(20.6)
======

---------------------

(i) The coding in our administrative system related to specified disease
policies with a return of premium feature that had been subject to an
exchange in the past was inaccurate. This resulted in an overstatement
of insurance policy liabilities. This error relates to business in our
Conseco Insurance Group segment. The $25.6 million total for this item
includes the $19.3 million adjustment previously disclosed in
Management's Discussion and Analysis of Financial Condition and
Results of Operations - Conseco Insurance Group in our Form 10-Q for
the quarterly period ended March 31, 2007.

(ii) Insurance policy liabilities for certain specified disease policies
with a return of premium feature that is payable upon the earlier of
the first occurrence of a covered claim or a specified date had not
considered the first occurrence provision. This error resulted in an
understatement of these reserves. This error relates to business in
our Conseco Insurance Group segment.

(iii) A key factor used to determine specified disease insurance
liabilities for certain policies sold by one of our insurance
subsidiaries prior to its acquisition by Conseco was incorrectly set
to zero. This resulted in no insurance policy liability being
established for these policies. This error relates to business in our
Conseco



108

CONSECO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
------------------

Insurance Group segment. The $20.4 million total for this item
includes the $18.3 million adjustment previously disclosed in
Management's Discussion and Analysis of Financial Condition and
Results of Operations - Conseco Insurance Group in our Form 10-Q for
the quarterly period ended September 30, 2007.

(iv) Insurance policy liabilities for certain specified disease policies
with a return of premium provision had been calculated as if the
benefit would be reduced by claims paid during the term of the policy,
when such offset provision was not applicable to the policies. This
error resulted in an understatement of insurance policy liabilities
and relates to business in our Conseco Insurance Group segment.

(v) The procedures we had established to identify terminations of
long-term care policies due to the death of the insured were not being
performed in a consistent manner. This error resulted in an
overstatement of insurance policy liabilities and relates to business
in our Other Business in Run-off segment.

(vi) Certain coding errors in the actuarial valuation system for universal
life policies had resulted in an overstatement of insurance policy
liabilities. This error relates to business in our Bankers Life
segment.

(vii) Provisions in certain universal life products that provided for
future bonus credits were not being reflected in the amortization of
the value of policies inforce. These errors resulted in an
overstatement of the value of policies inforce and relates to our
Bankers Life segment.

(viii) We perform various procedures in an effort to identify potential
errors in our insurance policy liabilities by reviewing amounts that
had unusual reserve or benefit balances. These procedures resulted in
the identification of certain specified disease, long-term care and
life policies with incorrect insurance policy liabilities. The errors
include an understatement of reserves of $9.1 million in our Conseco
Insurance Group segment and $5.3 million in our Other Business in
Run-off segment.

(ix) Other miscellaneous errors that resulted in an misstatement of certain
insurance policy liabilities and insurance intangible balances. No
single error resulted in adjustments exceeding $5.0 million. The
errors relate to our Bankers Life, Conseco Insurance Group and Other
Business in Run-off segments.

In addition (as further described in the note to the consolidated financial
statements entitled "Summary of Significant Accounting Policies - Accounting for
Long-term Care Premium Rate Increases") on February 28, 2008, the SEC's Office
of the Chief Accountant (the "SEC staff") informed us that the use of a method
which prospectively changes reserve assumptions for long-term care policies when
premium rate increases differ significantly from original assumptions is not
consistent with the guidance of Statement of Financial Standards No. 60,
"Accounting and Reporting by Insurance Enterprises" ("SFAS 60").

As a result, if premium rate increases reflect a change in our previous
rate increase assumptions, the new assumptions are not reflected prospectively
in our reserves. Instead, the additional premium revenue resulting from the rate
increase is recognized as earned and original assumptions continue to be used to
determine changes to liabilities for insurance products unless a premium
deficiency exists.

Our restatement of previously issued financial statements for the year
ended December 31, 2006 and quarterly information for 2006 and the first three
quarters of 2007, includes adjustments to eliminate the use of the prospective
revision methodology. After the elimination of the additional reserves we
established based on the prospective revision methodology, our liabilities for
insurance products for long-term care policies in the two business segments with
these blocks (Bankers Life and Other Business in Run-off) were not deficient in
the aggregate, but our estimates of future earnings indicated that profits would
be recognized in early periods and losses in later periods. In accordance with
paragraph 37 of SFAS 60, we are increasing the liabilities for insurance
products over the period of profits, by an amount necessary to offset losses
that are expected to be recognized in later periods.

109

CONSECO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
------------------

During our process to restate our previously issued financial statements,
we also corrected previously identified errors, which had been recognized
through cumulative adjustments to previously issued financial statements. We
determined that these errors were immaterial, after considering the magnitude of
the adjustment in relationship to earnings in the period discovered, offsetting
adjustments and other factors. We described these adjustments in the
Management's Discussion and Analysis of Consolidated Financial Condition and
Results of Operations of our prior filings, including our 2006 Form 10-K. The
following is a summary of our prior disclosures:

o During 2006, we determined that we had been carrying insurance
liabilities for certain single premium annuities that were no longer
in force in the Bankers Life segment. The error resulted in an
overstatement of insurance policy liabilities of $7.4 million.

o During 2005, we determined the method that had been used to calculate
insurance policy liabilities for future long-term care benefits on
policies with inflation coverage was incorrect. The error resulted in
an overstatement of insurance policy liabilities of $6.4 million in
the Bankers Life segment.

o In 2005, we identified errors in the calculation of insurance
acquisition costs in the Bankers Life segment. The errors resulted in
an overstatement of insurance acquisition costs of $4.4 million.

o During 2006, we discovered that procedures to appropriately identify
deceased policyholders on a timely basis and release the related
insurance policy liabilities were not being performed in a consistent
manner. The error resulted in an overstatement of insurance policy
liabilities of $4.7 million in the Conseco Insurance Group segment.

o In 2006, we discovered that we had not been establishing insurance
policy liabilities for certain specified disease coverages and that
factors used to determine these liabilities were incorrect. The errors
resulted in an understatement of insurance policy liabilities of $13.3
million in the Conseco Insurance Group segment. This error was offset
by a $1.6 million understatement of insurance acquisition costs
related to the same policies.

o In 2006, we discovered that several errors had been made in estimating
claim reserve liabilities for our long-term care business in the Other
Business in Run-off segment. In the process of reviewing our claim
estimates, we discovered that some claim liabilities related to
policies with inflation riders had been estimated excluding inflation
benefits. We also discovered that some claim liabilities related to
policies providing lifetime benefits had been estimated based on the
assumption the benefit period was limited. We also discovered that
some claim liabilities for non-forfeiture benefits had been estimated
based on the original pool of money benefit, rather than pool amounts
reduced by benefits previously paid. These errors resulted in an
understatement of claim reserves of $7.1 million.

110

CONSECO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
------------------

The effects of the restatement adjustments on our consolidated financial
statements are as follows:

Consolidated Statement of Operations



Year ended December 31, 2006
-----------------------------------------------------------------------
Adjustments
--------------------------------------------
Accounting for Previously
As previously Remediation premium rate identified As
reported procedures increases errors restated
-------- ---------- --------- ------ --------
(Dollars in millions, except per share data)

Total revenues....................... $4,467.4 $ - $ - $ - $4,467.4
-------- ------- ------- ----- --------
Benefits and expenses:
Insurance policy benefits......... 3,068.4 (5.5) (30.6) .7 3,033.0
Interest expense.................. 73.5 - - - 73.5
Amortization...................... 423.4 1.5 16.5 .2 441.6
Loss on extinguishment of debt.... .7 - - - .7
Costs related to tentative
litigation settlement.......... 174.7 - - - 174.7
Other operating costs and
expenses....................... 574.4 - - 2.3 576.7
-------- ------- ------- ----- --------

Total benefits and expenses.... 4,315.1 (4.0) (14.1) 3.2 4,300.2
-------- ------ ------- ----- --------

Income before income taxes..... 152.3 4.0 14.1 (3.2) 167.2

Income tax expense................... 55.8 1.5 5.1 (1.2) 61.2
-------- ------ ------- ----- --------

Net income........................ $ 96.5 $ 2.5 $ 9.0 $(2.0) $ 106.0
======== ====== ======= ===== ========

Net income per share - basic......... $.39 $.45
==== ====

Net income per share - diluted....... $.38 $.45
==== ====




111

CONSECO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
------------------



Year ended December 31, 2005
-----------------------------------------------------------------------
Adjustments
--------------------------------------------
Accounting for Previously
As previously Remediation premium rate identified As
reported procedures increases errors restated
-------- ---------- --------- ------ --------
(Dollars in millions, except per share data)

Total revenues....................... $4,326.5 $ - $ - $ - $4,326.5
-------- ------ ------ ------- --------
Benefits and expenses:
Insurance policy benefits......... 2,800.6 20.8 - 8.6 2,830.0
Interest expense.................. 58.3 - - - 58.3
Amortization...................... 388.4 1.4 - (10.8) 379.0
Loss on extinguishment of debt.... 3.7 - - - 3.7
Costs related to tentative
litigation settlement.......... 18.3 - - - 18.3
Other operating costs and
expenses....................... 553.8 - - (.9) 552.9
-------- ------ ------ ------- --------

Total benefits and expense..... 3,823.1 22.2 - (3.1) 3,842.2
-------- ------ ------ ------- --------

Income before income taxes..... 503.4 (22.2) - 3.1 484.3

Income tax expense................... 178.5 (8.0) - 1.1 171.6
-------- ------ ------ ------- --------

Net income........................ $ 324.9 $(14.2) $ - $ 2.0 $ 312.7
======== ====== ====== ======= ========

Net income per share - basic......... $1.90 $1.82
===== =====

Net income per share - diluted....... $1.76 $1.69
===== =====





112

CONSECO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
------------------

Selected Consolidated Balance Sheet Accounts


December 31, 2006
-----------------------------------------------------------------------
Adjustments
--------------------------------------------
Accounting for Previously
As previously Remediation premium rate identified As
reported procedures increases errors restated
-------- ---------- --------- ------ --------
(Dollars in millions, except per share data)

Value of policies inforce at the
Effective Date.................... $ 2,137.2 $ 18.1 $(16.5) $(2.3) $ 2,136.5
Income tax assets, net............... 1,786.9 11.6 (5.1) .9 1,794.3
Total assets......................... 32,717.3 29.7 (21.6) (1.4) 32,724.0
Liabilities for insurance products... 25,973.3 50.3 (30.6) - 25,993.0
Additional paid-in capital........... 3,473.2 (4.8) (a) - (.4) 3,468.0
Retained earnings.................... 643.2 (15.8) (a) 9.0 (1.0) 635.4

---------
(a) The total effect of the errors discovered through our remediation
procedures was a decrease to shareholders' equity of $20.6 million.
See table above for details.




December 31, 2005
--------------------------------------------------------------------
Adjustments
--------------------------------------------
Accounting for Previously
As previously Remediation premium rate identified As
reported procedures increases errors restated
-------- ---------- --------- ------ --------
(Dollars in millions, except per share data)

Value of policies inforce at the
Effective Date.................... $ 2,382.0 $ 19.6 $ - $(2.1) $ 2,399.5
Income tax assets, net............... 1,496.6 13.0 - (.2) 1,509.4
Other assets......................... 341.0 - - 2.3 343.3
Total assets......................... 31,525.3 32.6 - - 31,557.9
Liabilities for insurance products... 25,398.9 55.8 - (.7) 25,454.0
Additional paid-in capital........... 3,194.1 (4.8) - (.4) 3,188.9
Retained earnings.................... 584.7 (18.4) - 1.1 567.4




December 31, 2004
-----------------------------------------------------------------------
Adjustments
--------------------------------------------
Accounting for Previously
As previously Remediation premium rate identified As
reported procedures increases errors restated
-------- ---------- --------- ------ --------
(Dollars in millions, except per share data)

Value of policies inforce at the
Effective Date.................... $ 2,629.6 $ 21.0 $ - $(15.9) $ 2,634.7
Cost of policies produced............ 409.1 - - 17.6 426.7
Income tax assets, net............... 967.2 5.0 - .9 973.1
Other assets......................... 339.9 - - 1.4 341.3
Total assets......................... 30,764.6 26.0 - 4.0 30,794.6
Liabilities for insurance products... 25,162.2 35.0 - 5.3 25,202.5
Additional paid-in capital........... 2,597.8 (4.8) - (.4) 2,592.6
Retained earnings.................... 297.8 (4.2) - (.9) 292.7




113

CONSECO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
------------------

Selected Consolidated Statement of Cash Flow Amounts


Year ended December 31, 2006
-----------------------------------------------------------------------
Adjustments
--------------------------------------------
Accounting for Previously
As previously Remediation premium rate identified As
reported procedures increases errors restated
-------- ---------- --------- ------ --------
(Dollars in millions, except per share data)

Cash flows from operating activities:
Net income......................... $ 96.5 $ 2.6 $ 9.0 $(2.1) $106.0
Amortization and depreciation...... 480.7 1.5 16.5 2.5 501.2
Income taxes....................... 57.2 1.4 5.1 (1.1) 62.6
Insurance liabilities.............. 528.6 (5.5) (30.6) .7 493.2

Net cash provided by operating
activities......................... 931.2 - - - 931.2




Year ended December 31, 2005
-----------------------------------------------------------------------
Adjustments
--------------------------------------------
Accounting for Previously
As previously Remediation premium rate identified As
reported procedures increases errors restated
-------- ---------- --------- ------ --------
(Dollars in millions, except per share data)

Cash flows from operating activities:
Net income......................... $ 324.9 $(14.2) $ - $ 2.0 $ 312.7
Amortization and depreciation...... 410.8 1.4 - (11.7) 400.5
Income taxes....................... 206.9 (8.0) - 1.1 200.0
Insurance liabilities.............. 391.0 20.8 - 8.6 420.4

Net cash provided by operating
activities......................... 1,162.1 - - - 1,162.1



3. BASIS OF PRESENTATION

We prepare our financial statements in accordance with accounting
principles generally accepted in the United States of America ("GAAP"). We
follow the accounting standards established by the Financial Accounting
Standards Board ("FASB"), the American Institute of Certified Public Accountants
and the SEC.

The accompanying financial statements include the accounts of the Company
and its subsidiaries. Our consolidated financial statements exclude the results
of material transactions between us and our consolidated affiliates, or among
our consolidated affiliates.

When we prepare financial statements in conformity with GAAP, we are
required to make estimates and assumptions that significantly affect reported
amounts of various assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements and revenues and
expenses during the reporting periods. For example, we use significant estimates
and assumptions to calculate values for the cost of policies produced, the value
of policies inforce at the Effective Date, certain investments (including
derivatives), assets and liabilities related to income taxes, liabilities for
insurance products, liabilities related to litigation, guaranty fund assessment
accruals and amounts recoverable from loans to certain former directors and
former employees. If our future experience differs from these estimates and
assumptions, our financial statements would be materially affected.

114

CONSECO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
------------------

4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The following summary explains the significant accounting policies we use
to prepare our financial statements.

Investments

We classify our fixed maturity securities into one of three categories: (i)
"actively managed" (which we carry at estimated fair value with any unrealized
gain or loss, net of tax and related adjustments, recorded as a component of
shareholders' equity); (ii) "trading" (which we carry at estimated fair value
with changes in such value recognized as trading income); or (iii) "held to
maturity" (which we carry at amortized cost). We had no fixed maturity
securities classified as held to maturity during the periods presented in these
financial statements.

Equity securities include investments in common stock and non-redeemable
preferred stock. We carry these investments at estimated fair value. We record
any unrealized gain or loss, net of tax and related adjustments, as a component
of shareholders' equity. When declines in value considered to be other than
temporary occur, we reduce the amortized cost to estimated fair value and
recognize a loss in the statement of operations.

Mortgage loans held in our investment portfolio are carried at amortized
unpaid balances, net of provisions for estimated losses. Interest income is
accrued on the principal amount of the loan based on the loan's contractual
interest rate. Payment terms specified for mortgage loans may include a
prepayment penalty for unscheduled payoff of the investment. Prepayment
penalties are recognized as investment income when received.

Policy loans are stated at current unpaid principal balances.

Certain of our trading securities are held in an effort to offset the
portion of the income statement volatility caused by the effect of interest rate
fluctuations on the value of certain embedded derivatives related to our
equity-indexed annuity products and certain modified coinsurance agreements. See
the sections of this note entitled "Accounting for Derivatives" and "Investment
Borrowings and Interest Rate Swaps" for further discussion regarding embedded
derivatives and the trading accounts. In addition, the trading account includes
investments backing the market strategies of our multibucket annuity products.
The change in market value of these securities, which is recognized currently in
income from policyholder and reinsurer accounts and other special-purpose
portfolios (a component of investment income), is substantially offset by the
change in insurance policy benefits for these products. Our trading securities
totaled $665.8 million and $675.2 million at December 31, 2007 and 2006,
respectively.

Other invested assets include: (i) certain call options purchased in an
effort to hedge the effects of certain policyholder benefits related to our
equity-indexed annuity and life insurance products; and (ii) certain
non-traditional investments. We carry the call options at estimated fair value
as further described in the section of this note entitled "Accounting for
Derivatives". Non-traditional investments include investments in certain limited
partnerships, which are accounted for using the equity method, and promissory
notes, which are accounted for using the cost method.

We defer any fees received or costs incurred when we originate investments.
We amortize fees, costs, discounts and premiums as yield adjustments over the
contractual lives of the investments without anticipation of prepayments. We
consider anticipated prepayments on mortgage-backed securities in determining
estimated future yields on such securities.

When we sell a security (other than trading securities), we report the
difference between the sale proceeds and amortized cost (determined based on
specific identification) as a realized investment gain or loss.

We regularly evaluate our investments for possible impairment. When we
conclude that a decline in a security's net realizable value is other than
temporary, the decline is recognized as a realized loss and the cost basis of
the security is reduced to its estimated fair value.

Cash and Cash Equivalents

Cash and cash equivalents include commercial paper, invested cash and other
investments purchased with original maturities of less than three months. We
carry them at amortized cost, which approximates estimated fair value.

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Cost of Policies Produced

The costs that vary with, and are primarily related to, producing new
insurance business subsequent to September 10, 2003 are referred to as cost of
policies produced. For universal life or investment products, we amortize these
costs in relation to the estimated gross profits using the interest rate
credited to the underlying policies. For other products, we amortize these costs
in relation to future anticipated premium revenue using the projected investment
earnings rate.

When we realize a gain or loss on investments backing our universal life or
investment-type products, we adjust the amortization to reflect the change in
estimated gross profits from the products due to the gain or loss realized and
the effect on future investment yields. We also adjust the cost of policies
produced for the change in amortization that would have been recorded if
actively managed fixed maturity securities had been sold at their stated
aggregate fair value and the proceeds reinvested at current yields. We include
the impact of this adjustment in accumulated other comprehensive income within
shareholders' equity.

As of January 1, 2007, we adopted Statement of Position 05-1, "Accounting
by Insurance Enterprises for Deferred Acquisition Costs in Connection with
Modifications or Exchanges of Insurance Contracts" ("SOP 05-1"). SOP 05-1
provides guidance on accounting by insurance enterprises for the cost of
policies produced on internal replacements of insurance and investment contracts
other than those specifically described in Statement of Financial Accounting
Standards No. 97, "Accounting and Reporting by Insurance Enterprises for Certain
Long-Duration Contracts and for Realized Gains and Losses from the Sale of
Investments". As a result of the adoption of SOP 05-1 and related guidance, if
an internal replacement modification substantially changes a contract, then the
cost of policies produced is written off immediately through the consolidated
statement of operations and any new definable cost associated with the new
replacement are deferred as the cost of policies produced. If a contract
modification does not substantially change the contract, the amortization of the
cost of policies produced on the original contract will continue and any
acquisition costs associated with the related modification are immediately
expensed.

We regularly evaluate the recoverability of the unamortized balance of the
cost of policies produced. We consider estimated future gross profits or future
premiums, expected mortality or morbidity, interest earned and credited rates,
persistency and expenses in determining whether the balance is recoverable. If
we determine a portion of the unamortized balance is not recoverable, it is
charged to amortization expense. In certain cases, the unamortized balance of
the cost of policies produced may not be deficient in the aggregate, but our
estimates of future earnings indicate that profits would be recognized in early
periods and losses in later periods. In this case, we increase the amortization
of the cost of policies produced over the period of profits, by an amount
necessary to offset losses that are expected to be recognized in the later
years.

Value of Policies Inforce at the Effective Date

The value assigned to the right to receive future cash flows from contracts
existing at September 10, 2003 is referred to as the value of policies inforce
at the Effective Date. We also defer renewal commissions paid in excess of
ultimate commission levels related to the existing policies in this account. The
balance of this account is amortized, evaluated for recovery, and adjusted for
the impact of unrealized gains (losses) in the same manner as described above
for the cost of policies produced.

The discount rate we used to determine the value of the value of policies
inforce at the Effective Date was 12 percent.

The Company expects to amortize the balance of the value of policies
inforce at the Effective Date as of December 31, 2007 as follows: 13 percent in
2008, 12 percent in 2009, 11 percent in 2010, 7 percent in 2011 and 6 percent in
2012.

Assets Held in Separate Accounts

Separate accounts are funds on which investment income and gains or losses
accrue directly to certain policyholders. The assets of these accounts are
legally segregated. They are not subject to the claims that may arise out of any
other business of Conseco. We report separate account assets at market value;
the underlying investment risks are assumed by the contractholders. We record
the related liabilities at amounts equal to the separate account assets. We
record the fees earned for administrative and contractholder services performed
for the separate accounts in insurance policy income.

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Recognition of Insurance Policy Income and Related Benefits and Expenses on
Insurance Contracts

For universal life and investment contracts that do not involve significant
mortality or morbidity risk, the amounts collected from policyholders are
considered deposits and are not included in revenue. Revenues for these
contracts consist of charges for policy administration, cost of insurance
charges and surrender charges assessed against policyholders' account balances.
Such revenues are recognized when the service or coverage is provided, or when
the policy is surrendered.

We establish liabilities for investment and universal life products equal
to the accumulated policy account values, which include an accumulation of
deposit payments plus credited interest, less withdrawals and the amounts
assessed against the policyholder through the end of the period. Sales
inducements provided to the policyholders of these products are recognized as
liabilities over the period that the contract must remain in force to qualify
for the inducement. The options attributed to the policyholder related to our
equity-indexed annuity products are accounted for as embedded derivatives as
described in the section of this note entitled "Accounting for Derivatives".

Traditional life and the majority of our accident and health products
(including long-term care, Medicare supplement and specified disease products)
are long duration insurance contracts. Premiums on these products are recognized
as revenues when due from the policyholders.

We also have a small block of short duration accident and health products.
Premiums on these products are recognized as revenue over the premium coverage
period.

We establish liabilities for traditional life, accident and health
insurance, and life contingent payment annuity products using mortality tables
in general use in the United States, which are modified to reflect the Company's
actual experience when appropriate. We establish liabilities for accident and
health insurance products using morbidity tables based on the Company's actual
or expected experience. These reserves are computed at amounts that, with
additions from estimated future premiums received and with interest on such
reserves at estimated future rates, are expected to be sufficient to meet our
obligations under the terms of the policy. Liabilities for future policy
benefits are computed on a net-level premium method based upon assumptions as to
future claim costs, investment yields, mortality, morbidity, withdrawals, policy
dividends and maintenance expenses determined when the policies were issued (or
with respect to policies inforce at August 31, 2003, the Company's best estimate
of such assumptions on the Effective Date). We make an additional provision to
allow for potential adverse deviation for some of our assumptions. Once
established, assumptions on these products are generally not changed unless a
premium deficiency exists. In that case, a premium deficiency reserve is
recognized and the future pattern of reserve changes are modified to reflect the
relationship of premiums to benefits based on the current best estimate of
future claim costs, investment yields, mortality, morbidity, withdrawals, policy
dividends and maintenance expenses, determined without an additional provision
for potential adverse deviation.

We establish claim reserves based on our estimate of the loss to be
incurred on reported claims plus estimates of incurred but unreported claims
based on our past experience.

Accounting for Long-term Care Premium Rate Increases

Many of our long-term care policies were subject to premium rate increases
in 2006 and 2007. In some cases, these premium rate increases were materially
consistent with the assumptions we used to value the particular block of
business at the fresh-start date. In other cases, the premium rate increases
were materially different from that assumed at the fresh-start date, leading us
to change our best estimates of future actuarial assumptions. With respect to
the 2006 premium rate increases, some of our policyholders were provided an
option to cease paying their premiums and receive a non-forfeiture option in the
form of a paid-up policy with limited benefits. In addition, our policyholders
could choose to reduce their coverage amounts and premiums in the same
proportion, when permitted by our contracts or as required by regulators. The
following describes how we account for these policyholder options:

o Premium rate increases - If premium rate increases reflect a change in
our previous rate increase assumptions, the new assumptions are not
reflected prospectively in our reserves. Instead, the additional
premium revenue resulting from the rate increase is recognized as
earned and original assumptions continue to be used to determine
changes to liabilities for insurance products unless a premium
deficiency exists.

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CONSECO, INC. AND SUBSIDIARIES
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o Benefit reductions - A policyholder may choose reduced coverage with a
proportionate reduction in premium, when permitted by our contracts.
This option does not require additional underwriting. Benefit
reductions are treated as a partial lapse of coverage, and the balance
of our reserves and deferred insurance acquisition costs is reduced in
proportion to the reduced coverage.

o Non-forfeiture benefits offered in conjunction with a rate increase -
In some cases, non-forfeiture benefits are offered to policyholders
who wish to lapse their policies at the time of a significant rate
increase. In these cases, exercise of this option is treated as an
extinguishment of the original contract and issuance of a new
contract. The balance of our reserves and deferred insurance
acquisition costs are released, and a reserve for the new contract is
established.

o Florida Order - In 2004, the Florida Office of Insurance Regulation
issued an order to our subsidiaries in the Other Business in Run-off
segment regarding their long-term care business in Florida. The order
required them to offer a choice of three alternatives to holders of
home health care policies in Florida subject to premium rate increases
as follows:

o retention of their current policy with a rate increase of 50
percent in the first year and actuarially justified
increases in subsequent years;

o receipt of a replacement policy with reduced benefits and a
rate increase in the first year of 25 percent and no more
than 15 percent in subsequent years; or

o receipt of a paid-up policy, allowing the holder to file
future claims up to 100 percent of the amount of premiums
paid since the inception of the policy.

Reserves for all three groups of policies under the order were
prospectively adjusted using a prospective revision methodology, as
these alternatives were required by the Florida Office of Insurance
Regulation. These policies had no insurance acquisition costs
established at the Effective Date.

Some of our policyholders may receive a non-forfeiture benefit if they
cease paying their premiums pursuant to their original contract (or
pursuant to changes made to their original contract as a result of a
litigation settlement made prior to the Effective Date or an order issued
by the Florida Office of Insurance Regulation). In these cases, exercise of
this option is treated as the exercise of a policy benefit, and the reserve
for premium paying benefits is reduced, and the reserve for the
non-forfeiture benefit is adjusted to reflect the election of this benefit.

Accounting for marketing and reinsurance agreements with Coventry

Prescription Drug Benefit

The Medicare Prescription Drug, Improvement and Modernization Act of 2003
provided for the introduction of a prescription drug benefit ("PDP"). In order
to offer this product to our current and potential future policyholders without
investing in management and infrastructure, we entered into a national
distribution agreement with Coventry to use our career and independent agents to
distribute Coventry's prescription drug plan, Advantra Rx. We receive a fee
based on the premiums collected on plans sold through our distribution channels.
In addition, Conseco has a quota-share reinsurance agreement with Coventry for
Conseco enrollees that provides Conseco with 50 percent of net premiums and
related policy benefits subject to a risk corridor. The Part D program was
effective January 1, 2006.

The following describes how we account for and report our PDP business:

Our accounting for the national distribution agreement

o We recognize distribution and licensing fee income from Coventry based
upon negotiated percentages of collected premiums on the underlying
Medicare Part D contracts. This fee income is recognized over the
calendar year term as premiums are collected.

o We also pay commissions to our agents who sell the plans on behalf of
Coventry. These payments are deferred and amortized over the remaining
term of the initial enrollment period (the one-year life of the
initial policy).

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Notes to Consolidated Financial Statements
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Our accounting for the quota-share agreement

o We recognize premium revenue evenly over the period of the underlying
Medicare Part D contracts.

o We recognize policyholder benefits and ceding commission expense as
incurred.

o We recognize risk-share premium adjustments consistent with Coventry's
risk-share agreement with the Centers for Medicare and Medicaid
Services.

Private-Fee-For-Service

Conseco expanded its strategic alliance with Coventry by entering into a
national distribution agreement under which our career agents began distributing
Coventry's Private-Fee-For-Service ("PFFS") plan, beginning January 1, 2007. The
Advantra Freedom product 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 receive a fee based on the number of PFFS plans sold through our distribution
channels. In addition, Conseco has a quota-share reinsurance agreement with
Coventry for Conseco enrollees that provides Conseco in 2007 with approximately
50 percent of the net premiums and related profits.

We receive distribution fees from Coventry and we pay sales commissions to
our agents for these enrollments. In addition, we participate at an
approximately 50 percent level in the income (loss) related to this business
pursuant to a quota-share agreement with Coventry.

The following summarizes our accounting and reporting practices for the
PFFS business.

Our accounting for the distribution agreement

o We receive distribution income from Coventry and other parties based
on a fixed fee per PFFS contract. This income is deferred and
recognized over the remaining calendar year term of the initial
enrollment period.

o We also pay commissions to our agents who sell the plans on behalf of
Coventry and other parties. These payments are deferred and amortized
over the remaining term of the initial enrollment period (the one-year
life of the initial policy).

Our accounting for the quota-share agreement

o We recognize revenue evenly over the period of the underlying PFFS
contracts.

o We recognize policyholder benefits and ceding commission expense as
incurred.

Large Group Private-Fee-For-Service Block

Effective July 1, 2007, Conseco entered into a quota-share reinsurance
agreement with Coventry related to the PFFS business written by Coventry under
one large group policy. Conseco receives 50 percent of the net premiums and
related profits associated with this business as long as the ceded revenue
margin (as defined in the quota-share reinsurance agreement) is less than or
equal to five percent. Conseco receives 25 percent of the net premiums and
related profits on the ceded margin in excess of five percent.

Reinsurance

In the normal course of business, we seek to limit our loss exposure on any
single insured or to certain groups of policies by ceding reinsurance to other
insurance enterprises. We currently retain no more than $.8 million of mortality
risk on any one policy. We diversify the risk of reinsurance loss by using a
number of reinsurers that have strong claims-paying ratings. In each case, the
ceding Conseco subsidiary is directly liable for claims reinsured even if the
assuming company is unable to pay.

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Notes to Consolidated Financial Statements
------------------

The cost of reinsurance on life and health coverages is recognized over the
life of the reinsured policies using assumptions consistent with those used to
account for the underlying policy. The cost of reinsurance ceded totaled $206.5
million, $213.3 million and $232.2 million in 2007, 2006 and 2005, respectively.
We deduct this cost from insurance policy income. Reinsurance recoveries netted
against insurance policy benefits totaled $353.4 million, $231.0 million and
$231.6 million in 2007, 2006 and 2005, respectively.

From time-to-time, we assume insurance from other companies. Any costs
associated with the assumption of insurance are amortized consistent with the
method used to amortize the cost of policies produced described above.
Reinsurance premiums assumed totaled $322.7 million, $130.3 million and $60.1
million in 2007, 2006 and 2005, respectively. Reinsurance premiums included
amounts assumed pursuant to marketing and quota-share agreements with Coventry
of $271.4 million and $74.4 million in 2007 and 2006, respectively. The increase
in premiums assumed under these agreements in 2007 resulted from two new
agreements: (i) we are assuming approximately 50 percent of the PFFS business
marketed by our career agents pursuant to a marketing and distribution agreement
with Coventry effective January 1, 2007; and (ii) we are assuming 50 percent of
the PFFS business written by Coventry under one large group policy effective
July 1, 2007.

See the section of this note entitled "Accounting for Derivatives" for a
discussion of the derivative embedded in the payable related to certain modified
coinsurance agreements.

On October 12, 2007, we completed a transaction to coinsure 100 percent of
most of the older inforce equity-indexed annuity and fixed annuity business of
three of our insurance subsidiaries with Reassure America Life Insurance Company
("REALIC"), a subsidiary of Swiss Re Life & Health America Inc. The transaction
was recorded in our financial statements on September 28, 2007, the date the
parties were bound by the coinsurance agreement and all regulatory approvals had
been obtained. In the transaction, REALIC: (i) paid a ceding commission of $76.5
million; and (ii) assumed the investment and persistency risk of these policies.
Our insurance subsidiaries ceded approximately $2.8 billion of policy and other
reserves to REALIC, as well as transferred the invested assets backing these
policies on October 12, 2007. Our insurance subsidiaries remain primarily liable
to the policyholders in the event REALIC does not fulfill its obligations under
the agreements. Accordingly, our insurance liabilities continue to include the
amounts ceded for these policies, which is offset by a corresponding amount in
reinsurance receivables. The increase in reinsurance receivables from December
31, 2006 to December 31, 2007 is largely attributable to this reinsurance
agreement. The coinsurance transaction has an effective date of January 1, 2007.

Pursuant to the terms of the annuity coinsurance agreement, the ceding
commission was based on the January 1, 2007 value of the assets and liabilities
related to the ceded block. The earnings (loss) after income taxes on the
business from January 1, 2007 through September 28, 2007, resulted in increases
(decreases) to the loss calculated as of January 1, 2007. Such after-tax
earnings (loss) include the market value declines on invested assets transferred
to the reinsurer occurring during the first three quarters of 2007.

The following summarizes the profits and losses recognized on this business
in 2007 (dollars in millions):


2007
----

Net earnings on the block before tax.................................................... $ 17.0

Realized investment losses, net of amortization of insurance intangibles................ (40.6)

Loss related to the annuity coinsurance transaction..................................... (76.5) (a)
-------

Net loss before income taxes............................................................ $(100.1)
=======




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Notes to Consolidated Financial Statements
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------------

(a) Amount represents the net loss before income taxes recognized on the
annuity coinsurance transaction during 2007, including the earnings
and losses on the block during that period and the loss recognized
upon completion of the transaction. The following summarizes the
components of the loss before income taxes (dollars in millions):


Assets received (transferred)
Investments.................................... $(2,560.8)
Accrued investment income...................... (28.7)
Value of policies inforce at the Effective Date (198.9)
Cost of policies produced...................... (20.5)
Reinsurance receivables........................ 2,764.3
Other.......................................... (31.9)
---------

Net loss before income taxes................ $ (76.5)
=========

In 2007, we completed the recapture of a block of traditional life
insurance in force that had been ceded in 2002 to REALIC. In the transaction,
which had an effective date of October 1, 2007, Colonial Penn paid REALIC a
recapture fee of $63 million. The recapture of this block resulted in a $2.8
million gain accounted for as a reduction to insurance policy benefits. Colonial
Penn recaptured 100 percent of the liability for the future benefits previously
ceded, and will recognize profits from the block as they emerge over time.
Colonial Penn already administers the policies that were recaptured.

As summarized above under "Accounting for marketing and reinsurance
agreements with Coventry", we assume reinsurance from Coventry related to a
portion of the PDP and PFFS business written through our distribution channels.
In addition, we have assumed 50 percent of the PFFS business written by Coventry
under one large group policy.

Income Taxes

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"). 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 carryforwards and NOLs expire. This assessment
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 and reduce shareholders' equity,
and such an increase could have a significant impact upon our earnings in the
future. In addition, the use of the Company's NOLs is dependent, in part, on
whether the Internal Revenue Service (the "IRS") does not take an adverse
position in the future regarding the tax position we have taken in our tax
returns with respect to the allocation of cancellation of indebtedness income,
which is further described in the note entitled "Income Taxes".

Based upon information existing at the time of our emergence from
bankruptcy, we established a valuation allowance against our entire balance of
net deferred income tax assets as we believed that the realization of such net
deferred income tax assets in future periods was uncertain. During 2005 and
2006, we concluded that it was no longer necessary to hold certain portions of
the previously established valuation allowance. Accordingly, we reduced our
valuation allowance by $585.8 million and $260.0 million in 2005 and 2006,
respectively. However, we are required to continue to hold a valuation allowance
of $672.9 million at December 31, 2007 because we have determined that it is
more likely than not that a portion of our deferred tax assets will not be
realized. This determination was made by evaluating each component of the
deferred tax asset and assessing the effects of limitations or interpretations
on the value of such component to be fully recognized in the future.

Investment Borrowings

In the first quarter of 2007, one of the Company's insurance subsidiaries
(Conseco Life) became a member of the Federal Home Loan Bank of Indianapolis
("FHLBI"). As a member of the FHLBI, Conseco Life has the ability to borrow on a
collateralized basis from FHLBI. Conseco Life is required to hold a certain
minimum amount of FHLBI common stock as

121

CONSECO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
------------------

a requirement of membership in the FHLBI, and additional amounts based on the
amount of the borrowings. At December 31, 2007, the carrying value of the FHLBI
common stock was $22.5 million. Collateralized borrowings from the FHLBI totaled
$450.0 million as of December 31, 2007, and the proceeds were used to purchase
fixed maturity securities. The borrowings are classified as investment
borrowings in the accompanying consolidated balance sheet. The borrowings are
collateralized by investments with an estimated fair value of $509.0 million at
December 31, 2007, which are maintained in a custodial account for the benefit
of the FHLBI. Conseco Life recognized interest expense of $16.7 million in 2007
related to the borrowings. The following summarizes the terms of the borrowings
(dollars in millions):


Amount Maturity Interest rate
borrowed date at December 31, 2007
-------- ---- --------------------


$100.0 November 2015 Fixed rate - 4.890%
100.0 December 2015 Fixed rate - 4.710%
54.0 May 2012 Variable rate - 5.015%
146.0 November 2015 Fixed rate - 5.300%
37.0 July 2012 Fixed rate - 5.540%
13.0 July 2012 Variable rate - 5.308%


At December 31, 2007, investment borrowings consisted of: (i)
collateralized borrowings from the FHLBI of $450.0 million; (ii) $452.3 million
of securities issued to other entities by a variable interest entity which is
consolidated in our financial statements as further discussed in the note to the
consolidated financial statements entitled "Investment in a Variable Interest
Entity"; and (iii) other borrowings of $10.7 million.

At December 31, 2006, investment borrowings consisted of: (i) $406.8
million of securities issued to other entities by a variable interest entity
which is consolidated in our financial statements; and (ii) other borrowings of
$11.5 million.

Accounting for Derivatives

Our equity-indexed annuity products provide a guaranteed base rate of
return and a higher potential return that is based on a percentage (the
"participation rate") of the amount of increase in the value of a particular
index, such as the Standard & Poor's 500 Index, over a specified period.
Typically, at the beginning of each policy year, a new index period begins. We
are able to change the participation rate at the beginning of each index period,
subject to contractual minimums. We typically buy call options on the applicable
indices in an effort to hedge potential increases to policyholder benefits
resulting from increases in the particular index to which the product's return
is linked. Policyholder account balances for these annuities fluctuate in
relation to changes in the values of these options. We reflect changes in the
estimated market value of these options in net investment income (classified as
investment income from policyholder and reinsurer accounts and other
special-purpose portfolios). Net investment income (loss) related to
equity-indexed products was $(8.5) million, $40.4 million and $(14.6) million
during 2007, 2006 and 2005, respectively. These amounts were substantially
offset by the corresponding charge to insurance policy benefits. The estimated
fair value of these options was $51.2 million and $93.7 million at December 31,
2007 and 2006, respectively. We classify these instruments as other invested
assets. Pursuant to the annuity coinsurance agreement described above, we
continue to hold $11.9 million of these options for the benefit of the assuming
company until such options expire. All future cash flows (including any
increases (decreases) in fair value) from these options are transferred to the
assuming company. Such options are included in other invested assets, and we
have established a liability for the amount due to the assuming company upon
their expiration, based on the December 31, 2007 estimated market value of these
options.

The Company accounts for the options attributed to the policyholder for the
estimated life of the annuity contract as embedded derivatives as defined by
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities", as amended by Statement of Financial
Accounting Standards No. 137, "Deferral of the Effective Date of FASB Statement
No. 133" and Statement of Financial Accounting Standards No. 138, "Accounting
for Certain Derivative Instruments and Certain Hedging Activities". We record
the changes in the fair values of the embedded derivatives in current earnings
as a component of policyholder benefits. The fair value of these derivatives,
which are classified as "liabilities for interest-sensitive products", was
$353.2 million (including $156.9 million which was ceded pursuant to an annuity
coinsurance transaction as further described above under the caption
"Coinsurance Transaction") and $275.3 million at December 31, 2007 and 2006,
respectively. We maintain a specific block of investments which are equal to the
balance of these liabilities in our trading securities account, which we carry
at estimated fair value with changes in such value recognized as investment
income (classified as investment income from policyholder and reinsurer accounts
and other

122

special-purpose portfolios). The change in value of these trading securities
attributable to interest fluctuations will generally offset the change in the
value of the embedded derivative provided corporate spreads remain constant.

If the counterparties for the derivatives we hold fail to meet their
obligations, we may have to recognize a loss. We limit our exposure to such a
loss by diversifying among several counterparties believed to be strong and
creditworthy. At December 31, 2007, all of our counterparties were rated "A" or
higher by Standard & Poor's Corporation ("S&P").

Certain of our reinsurance payable balances contain embedded derivatives as
defined in SFAS No. 133 Implementation Issue No. B36, "Embedded Derivatives:
Modified Coinsurance Arrangements and Debt Instruments that Incorporate Credit
Risk Exposures that are Unrelated or Only Partially Related to the
Creditworthiness of the Obligor of Those Instruments". Such derivatives had an
estimated fair value of $(1.0) million and $9.6 million at December 31, 2007 and
2006, respectively. We record the change in the fair value of these derivatives
as a component of investment income (classified as investment income from
policyholder and reinsurer accounts and other special-purpose portfolios). We
maintain a specific block of investments related to these agreements in our
trading securities account, which we carry at estimated fair value with changes
in such value recognized as investment income (also classified as investment
income from policyholder and reinsurer accounts and other special-purpose
portfolios). The change in value of these trading securities attributable to
interest rate fluctuations will generally offset the change in value of the
embedded derivatives provided corporate spreads remain constant.

Multibucket Annuity Product

The Company's multibucket annuity is a fixed annuity product that credits
interest based on the experience of a particular market strategy. Policyholders
allocate their annuity premium payments to several different market strategies
based on different asset classes within the Company's investment portfolio.
Interest is credited to this product based on the market return of the given
strategy, less management fees, and funds may be moved between different
strategies. The Company guarantees a minimum return of premium plus
approximately 3 percent per annum over the life of the contract. The investments
backing the market strategies of these products are designated by the Company as
trading securities. The change in the fair value of these securities is
recognized currently in investment income (classified as income from
policyholder and reinsurer accounts), which is substantially offset by the
change in insurance policy benefits for these products. As of December 31, 2007,
we hold insurance liabilities of $99.0 million related to multibucket annuity
products.

Stock Based Compensation

Prior to January 1, 2006, we measured compensation cost for our stock
option plans using the intrinsic value method pursuant to Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" and related
interpretations ("APB 25"). Under this method, compensation cost was recorded
when the quoted market price at the grant date exceeded the amount an employee
had to pay to acquire the stock. When the Company issued employee stock options
with an exercise price equal to or greater than the market price of our stock on
the grant date, no compensation cost was recorded. Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123") and Statement of Financial Accounting Standards No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure" required disclosures of
the pro forma effects of using the fair value method of accounting for stock
options.

In December 2004, the FASB issued Statement of Financial Accounting
Standards No. 123 (revised 2004) "Share-Based Payment" ("SFAS 123R"), which
revised SFAS 123 and superseded APB 25. SFAS 123R provided additional guidance
on accounting for share-based payments and required all such awards to be
measured at fair value with the related compensation cost recognized in the
statement of operations over the related service period. Conseco implemented
SFAS 123R using the modified prospective method on January 1, 2006. Under this
method, the Company began recognizing compensation cost for all awards granted
on or after January 1, 2006. In addition, we are required to recognize
compensation cost over the remaining requisite service period for the portion of
outstanding awards that were not vested as of January 1, 2006 and were not
previously expensed on a pro forma basis pursuant to SFAS 123. In accordance
with the modified prospective transition method, our consolidated financial
statements for prior periods have not been restated to reflect compensation cost
determined under the fair value method. SFAS 123R also requires the benefits of
tax deductions in excess of recognized compensation cost to be reported as a
financing cash flow rather than as an operating cash flow, as previously
required. During 2007 and 2006, we did not capitalize any stock-based
compensation expense as cost of policies produced or any other asset category.

123

CONSECO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
------------------

Fair Values of Financial Instruments

We use the following methods and assumptions to determine the estimated
fair values of financial instruments:

Investment securities. For fixed maturity securities (including redeemable
preferred stocks) and for equity and trading securities, we use quotes from
independent pricing services, where available. For investment securities
for which such quotes are not available, we use values obtained from
broker-dealer market makers or by discounting expected future cash flows
using a current market rate appropriate for the yield, credit quality, and,
for fixed maturity securities, the maturity of the investment being priced.

Cash and cash equivalents. The carrying amount for these instruments
approximates their estimated fair value.

Mortgage loans and policy loans. We discount future expected cash flows for
loans included in our investment portfolio based on interest rates
currently being offered for similar loans to borrowers with similar credit
ratings. We aggregate loans with similar characteristics in our
calculations. The market value of policy loans approximates their carrying
value.

Other invested assets. We use quoted market prices, where available. When
quotes are not available, we estimate the fair value based on discounted
future expected cash flows or independent transactions which establish a
value for our investment. When we are unable to estimate a fair value, we
assume a market value equal to carrying value.

Insurance liabilities for interest-sensitive products. We discount future
expected cash flows based on interest rates currently being offered for
similar contracts with similar maturities.

Investment borrowings and notes payable. For publicly traded debt, we use
current market values. For other notes, we use discounted cash flow
analyses based on our current incremental borrowing rates for similar types
of borrowing arrangements.

The estimated fair values of our financial instruments at December 31, 2007
and 2006, were as follows (dollars in millions):


2007 2006
--------------------- ---------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
(Restated)

Financial assets:
Actively managed fixed maturities............................... $20,510.9 $20,510.9 $22,802.9 $22,802.9
Equity securities .............................................. 34.5 34.5 24.8 24.8
Mortgage loans.................................................. 2,086.0 2,137.0 1,642.2 1,684.7
Policy loans.................................................... 370.4 370.4 412.5 412.5
Trading securities.............................................. 665.8 665.8 675.2 675.2
Other invested assets........................................... 134.3 134.3 178.8 178.8
Cash and cash equivalents....................................... 428.6 428.6 409.9 409.9

Financial liabilities:
Insurance liabilities for interest-sensitive
products (a).................................................. $13,169.4 $13,169.4 $13,021.1 $13,021.1
Investment borrowings........................................... 913.0 913.0 418.3 418.3
Notes payable - direct corporate obligations.................... 1,193.7 1,156.8 1,000.8 999.8

--------------------
(a) The estimated fair value of insurance liabilities for
interest-sensitive products was approximately equal to its carrying
value at December 31, 2007 and 2006. This was because interest rates
credited on the vast majority of account balances approximate current
rates paid on similar products and because these rates are not
generally guaranteed beyond one year.


Sales Inducements

Certain of our annuity products offer sales inducements to contract holders
in the form of enhanced crediting rates or bonus payments in the initial period
of the contract. Certain of our life insurance products offer persistency
bonuses credited

124

CONSECO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
------------------

to the contract holders balance after the policy has been outstanding for a
specified period of time. These enhanced rates and persistency bonuses are
considered sales inducements under Statement of Position 03-01 "Accounting and
Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration
Contracts and for Separate Accounts". Such amounts are deferred and amortized in
the same manner as the cost of policies produced. Sales inducements deferred
totaled $52.4 million, $64.0 million and $49.2 million in 2007, 2006 and 2005,
respectively. Amounts amortized totaled $18.4 million, $19.1 million and $17.8
million in 2007, 2006 and 2005, respectively. The unamortized balance of
deferred sales inducements was $149.0 million and $115.0 million at December 31,
2007 and 2006, respectively. The balance of insurance liabilities for
persistency bonus benefits was $252.8 million and $296.3 million at December 31,
2007 and 2006, respectively.

Recently Issued Accounting Standards

Pending Accounting Standards

In December 2007, the FASB issued Statement of Financial Accounting
Standards No. 160, "Noncontrolling Interests in Consolidated Financial
Statements, an amendment of ARB No. 51" ("SFAS 160"), which establishes new
standards governing the accounting for and reporting of noncontrolling interests
(previously referred to as minority interests). SFAS 160 establishes reporting
requirements which include, among other things, that noncontrolling interests be
reflected as a separate component of equity, not as a liability. It also
requires that the interests of the parent and the noncontrolling interest be
clearly identifiable. Additionally, increases and decreases in a parent's
ownership interest that leave control intact shall be reflected as equity
transactions, rather than step acquisitions or dilution gains or losses. SFAS
160 is effective for fiscal years beginning on or after December 15, 2008 and
early adoption is prohibited. We do not expect the initial adoption of SFAS 160
to be material to our financial position or results of operations.

In December 2007, the FASB issued Statement of Financial Accounting
Standards No. 141 (revised 2007), "Business Combinations" ("SFAS 141R"). SFAS
141R requires the acquiring entity in a business combination to recognize all
assets acquired and liabilities assumed in a transaction at the acquisition date
fair value, with certain exceptions. Additionally, SFAS 141R requires changes to
the accounting treatment of acquisition related items, including, among other
items, transaction costs, contingent consideration, restructuring costs,
indemnification assets and tax benefits. SFAS 141R also provides for a
substantial number of new disclosure requirements. SFAS 141R is effective for
business combinations initiated on or after the first annual reporting period
beginning after December 15, 2008 and early adoption is prohibited. We expect
that SFAS 141R will have an impact on our accounting for future business
combinations once the statement is adopted but the effect is dependent upon
acquisitions, if any, that are made in the future.

In February 2007, the FASB issued Statement of Financial Accounting
Standards No. 159, "The Fair Value Option for Financial Assets and Financial
Liabilities - Including an Amendment of FASB Statement No. 115" ("SFAS 159").
SFAS 159 allows entities to choose to measure many financial instruments and
certain other items, including insurance contracts, at fair value (on an
instrument-by-instrument basis) that are not currently required to be measured
at fair value. The objective is to improve financial reporting by providing
entities with the opportunity to mitigate volatility in reported earnings caused
by measuring related assets and liabilities differently without having to apply
complex hedge accounting provisions. SFAS 159 is effective for us on January 1,
2008. We do not expect to elect the fair value option for any of our financial
assets or liabilities.

In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements"
("SFAS 157"). SFAS 157 defines fair value, establishes a framework for measuring
fair value and expands disclosures of fair value measurements. SFAS 157 is
effective for financial statements issued for fiscal years beginning after
November 15, 2007. The adoption of SFAS 157 will not have a material effect on
our results of operations and financial condition.

Adopted Accounting Standards

In July 2006, the FASB issued FASB Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109" ("FIN
48"). FIN 48 creates a comprehensive model which addresses how a company should
recognize, measure, present and disclose in its financial statements uncertain
tax positions that the company has taken or expects to take on a tax return.
This guidance is effective for fiscal years beginning after December 15, 2006.
The adoption of FIN 48 resulted in a $6.0 million increase to additional paid-in
capital during 2007. The Company classifies interest and, if applicable,
penalties as income tax expense in the consolidated statement of operations. No
such amounts were recognized in 2007. The liability for accrued interest was not
significant at December 31, 2007 or 2006.

125

CONSECO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
------------------

In February 2006, the FASB issued SFAS No. 155, "Accounting for Certain
Hybrid Financial Instruments - an amendment of FASB Statements No. 133 and 140"
("SFAS 155"). SFAS 155 amends SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"), and SFAS 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities"
and resolves issues addressed in SFAS 133 Implementation Issue No. D1,
"Application of Statement 133 to Beneficial Interest in Securitized Financial
Assets". SFAS 155: (a) permits fair value remeasurement for any hybrid financial
instrument that contains an embedded derivative that otherwise would require
bifurcation; (b) clarifies which interest-only strips and principal-only strips
are not subject to the requirements of SFAS 133; (c) establishes a requirement
to evaluate beneficial interests in securitized financial assets to identify
interests that are freestanding derivatives or that are hybrid financial
instruments that contain an embedded derivative requiring bifurcation; (d)
clarifies that concentrations of credit risk in the form of subordination are
not embedded derivatives; and, (e) eliminates restrictions on a qualifying
special-purpose entity's ability to hold passive derivative financial
instruments that pertain to beneficial interests that are or contain a
derivative financial instrument. The standard also requires presentation within
the financial statements that identifies those hybrid financial instruments for
which the fair value election has been applied and information on the income
statement impact of the changes in fair value of those instruments. SFAS 155 was
effective for all financial instruments acquired or issued in a fiscal year that
begins after September 15, 2006. The initial adoption of SFAS 155 did not have a
material effect on our financial position or results of operations.

In September 2005, the Accounting Standards Executive Committee issued SOP
05-1. This statement provides guidance on accounting for deferred acquisition
costs on an internal replacement which is defined broadly as a modification in
product benefits, features, rights, or coverages that occurs by the exchange of
an existing contract for a new contract, or by amendment, endorsement, or rider
to an existing contract, or by the election of a benefit, feature, right, or
coverage within an existing contract. An internal replacement that is determined
to result in a replacement contract that is substantially unchanged from the
replaced contract should be accounted for as a continuation of the replaced
contract. Contract modifications resulting in a replacement contract that is
substantially changed from the replaced contract should be accounted for as an
extinguishment of the replaced contract and any unamortized deferred acquisition
costs, unearned revenue liabilities, and deferred sales inducement assets from
the replaced contract should not be deferred in connection with the replacement
contract. The provisions of SOP 05-1 are effective for internal replacements
beginning January 1, 2007. The initial adoption of SOP 05-1 did not have a
material impact on our results of operations or financial position. The adoption
of SOP 05-1 resulted in the shortening of the period over which the value of
policies inforce at the Effective Date and the cost of policies produced related
to a small block of our group health insurance business are amortized.
Transition to the shorter amortization period resulted in a January 1, 2007
cumulative effect adjustment to retained earnings of $2.7 million, net of tax.

In September 2006, the FASB issued SFAS No. 158, "Employers Accounting for
Defined Benefit and Other Retirement Plans - an amendment of FASB Statements No.
87, 88, 106 and 132(R)" ("SFAS 158"). SFAS 158 requires employers to recognize
the overfunded or underfunded status of defined benefit pension and other
postretirement benefit plans as an asset or liability in its statement of
financial position, measured as the difference between the fair value of plan
assets and the projected benefit obligation as of the end of our fiscal year
end. In addition, SFAS 158 requires employers to recognize changes in the funded
status of defined benefit pension and other post retirement plans in the year in
which the changes occur through other accumulated comprehensive income. SFAS 158
is effective for fiscal years ending after December 15, 2006.

The impact of the adoption of SFAS 158 on our consolidated balance sheet at
December 31, 2006, is as follows (dollars in millions):


Balance before Balance after
adoption of adoption of
SFAS 158 Adjustments SFAS 158
---------------- ----------- --------------
(Restated) (Restated)

Income tax assets, net.................... $1,790.8 $ 3.5 $1,794.3
Other liabilities......................... 601.9 9.9 611.8
Accumulated other comprehensive loss...... (66.2) (6.4) (72.6)



The FASB issued SFAS 123R in December 2004. SFAS 123R revises SFAS 123 and
supersedes APB 25. SFAS 123R provides additional guidance on accounting for
share-based payments and requires all such awards to be measured at fair value
with the related compensation cost recognized in the statement of operations
over the related service period. SFAS 123R is effective for all awards granted,
modified, repurchased or cancelled and requires the recognition of compensation
cost over the

126

CONSECO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
------------------

remaining requisite service period for the portion of outstanding awards that
were not vested as of January 1, 2006 and were not previously expensed on a pro
forma basis in the disclosure included under the caption entitled "Accounting
for Stock Options". SFAS 123R also requires the benefits of tax deductions in
excess of recognized compensation cost to be reported as a financing cash flow
rather than as an operating cash flow, as previously required. We previously
measured compensation expense for our stock option plans using the intrinsic
value method. Effective January 1, 2006, we were required to recognize expense
related to our stock option plans consistent with the requirements of SFAS 123R
described above. We implemented this requirement using the modified prospective
method. In March 2005, the SEC issued Staff Accounting Bulletin No. 107,
"Share-Based Payment" ("SAB 107") related to SFAS 123R. We have followed the
guidance in SAB 107 in our adoption of SFAS 123R.

5. INVESTMENTS

At December 31, 2007, the amortized cost and estimated fair value of
actively managed fixed maturities and equity securities were as follows (dollars
in millions):


Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
---- ----- ------ -----

Investment grade:
Corporate securities.......................................... $13,442.7 $110.2 $(420.1) $13,132.8
United States Treasury securities and obligations of
United States government corporations and agencies.......... 619.3 16.9 (1.6) 634.6
States and political subdivisions............................. 534.8 5.1 (9.4) 530.5
Debt securities issued by foreign governments................. 9.6 .2 - 9.8
Structured securities ........................................ 4,707.5 13.8 (108.7) 4,612.6
Below-investment grade (primarily corporate securities).......... 1,678.8 2.9 (91.1) 1,590.6
--------- ------ ------- ---------

Total actively managed fixed maturities..................... $20,992.7 $149.1 $(630.9) $20,510.9
========= ====== ======= =========

Equity securities................................................ $34.0 $.5 $ - $34.5
===== === ====== =====


At December 31, 2006, the amortized cost and estimated fair value of
actively managed fixed maturities and equity securities were as follows (dollars
in millions):


Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
---- ----- ------ -----

Investment grade:
Corporate securities.......................................... $13,179.2 $142.0 $(201.3) $13,119.9
United States Treasury securities and obligations of
United States government corporations and agencies.......... 1,428.6 16.8 (23.3) 1,422.1
States and political subdivisions............................. 675.7 5.2 (11.4) 669.5
Debt securities issued by foreign governments................. 117.3 3.6 (.2) 120.7
Structured securities ........................................ 5,984.7 7.7 (76.6) 5,915.8
Below-investment grade (primarily corporate securities).......... 1,561.4 23.0 (29.5) 1,554.9
---------- ------- ------- ----------

Total actively managed fixed maturities..................... $22,946.9 $198.3 $(342.3) $22,802.9
========= ====== ======= =========

Equity securities................................................ $23.9 $1.2 $(.3) $24.8
===== ==== ==== =====




127

CONSECO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
------------------

Accumulated other comprehensive loss is primarily comprised of the net
effect of unrealized appreciation (depreciation) on our investments. These
amounts, included in shareholders' equity as of December 31, 2007 and 2006 were
as follows (dollars in millions):


2007 2006
---- ----

Net unrealized depreciation on investments................................................ $(481.3) $(136.3)
Adjustment to value of policies inforce at the Effective Date............................. 18.3 20.1
Adjustment to cost of policies produced................................................... 43.7 12.3
Adjustment to initially apply SFAS No. 158 related to the unrecognized net loss related to
deferred compensation plan............................................................ - (9.9)
Unrecognized net loss related to deferred compensation plan............................... (7.3) -
Deferred income tax asset................................................................. 153.3 41.2
------- -------

Accumulated other comprehensive loss............................................... $(273.3) $ (72.6)
======= =======


Concentration of Actively Managed Fixed Maturity Securities

The following table summarizes the estimated fair value of our actively
managed fixed maturity securities by category as of December 31, 2007 (dollars
in millions):


Estimated Percent of
fair value fixed maturities
---------- ----------------

Structured securities................................................................ $ 4,668.1 22.8%
Manufacturing........................................................................ 3,603.4 17.6
Bank and finance..................................................................... 2,039.1 9.9
Utilities............................................................................ 1,766.2 8.6
Services............................................................................. 1,615.2 7.9
Communications....................................................................... 1,088.0 5.3
Agriculture, forestry and mining..................................................... 888.6 4.3
Retail and wholesale................................................................. 799.8 3.9
Holding and other investment offices................................................. 751.4 3.7
Transportation....................................................................... 643.9 3.1
U.S. Government...................................................................... 634.6 3.1
States and political subdivisions.................................................... 548.4 2.7
Asset-backed securities.............................................................. 440.2 2.1
Other................................................................................ 1,024.0 5.0
--------- -----

Total actively managed fixed maturities........................................... $20,510.9 100.0%
========= =====


Below-Investment Grade Securities

At December 31, 2007, the amortized cost of the Company's below-investment
grade fixed maturity securities was $1,678.8 million, or 8.0 percent of the
Company's fixed maturity portfolio. The estimated fair value of the
below-investment grade portfolio was $1,590.6 million, or 95 percent of the
amortized cost.

Below-investment grade fixed maturity securities with an amortized cost of
$480.3 million and an estimated fair value of $455.9 million are securities held
by a variable interest entity that we are required to consolidate. These fixed
maturity securities are legally isolated and are not available to the Company.
The liabilities of such variable interest entity will be satisfied from the cash
flows generated by these securities and are not obligations of the Company.
Refer to the note to the consolidated financial statements entitled "Investment
in a Variable Interest Entity" concerning the Company's commitment to provide
additional capital of up to $25 million to the variable interest entity. At
December 31, 2007, our total investment in the variable interest entity was
$47.0 million and such investment was rated BBB.

128

CONSECO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
------------------

Below-investment grade securities have different characteristics than
investment grade corporate debt securities. Based on historical performance,
risk of default by the borrower is significantly greater for below-investment
grade securities and in many cases, severity of loss is relatively greater as
such securities are generally unsecured and often subordinated to other
indebtedness of the issuer. Also, issuers of below-investment grade securities
usually have higher levels of debt and may be more financially leveraged, hence,
all other things being equal, more sensitive to adverse economic conditions,
such as recession or increasing interest rates. The Company attempts to reduce
the overall risk related to its investment in below-investment grade securities,
as in all investments, through careful credit analysis, strict investment policy
guidelines, and diversification by issuer and/or guarantor and by industry.

Contractual Maturity

The following table sets forth the amortized cost and estimated fair value
of actively managed fixed maturities at December 31, 2007, by contractual
maturity. Actual maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties. Most of the structured securities shown below provide
for periodic payments throughout their lives (dollars in millions):


Estimated
Amortized fair
cost value
---- -----

Due in one year or less...................................................................... $ 99.2 $ 99.2
Due after one year through five years........................................................ 1,613.9 1,610.7
Due after five years through ten years....................................................... 5,882.2 5,772.0
Due after ten years.......................................................................... 8,627.3 8,360.9
--------- ---------

Subtotal................................................................................. 16,222.6 15,842.8

Structured securities (a).................................................................... 4,770.1 4,668.1
--------- ---------

Total actively managed fixed maturities ............................................. $20,992.7 $20,510.9
========= =========

--------------------
(a) Includes below-investment grade structured securities with an
amortized cost and estimated fair value of $62.6 million and $55.5
million, respectively.


Net Investment Income

Net investment income consisted of the following (dollars in millions):


2007 2006 2005
---- ---- ----

Fixed maturities..................................................... $1,346.4 $1,293.6 $1,266.1
Trading income related to policyholder and
reinsurer accounts and other special-purpose portfolios........... 31.2 32.9 3.1
Equity securities.................................................... 1.6 1.8 .5
Mortgage loans....................................................... 123.3 101.9 92.4
Policy loans......................................................... 26.5 25.0 26.3
Change in value of options
related to equity-indexed products................................ (11.9) 38.3 (18.9)
Other invested assets................................................ 11.2 13.8 9.6
Cash and cash equivalents............................................ 27.0 19.1 18.2
-------- -------- --------

Gross investment income........................................... 1,555.3 1,526.4 1,397.3
Less investment expenses............................................. 18.7 20.0 22.7
-------- -------- --------

Net investment income............................................. $1,536.6 $1,506.4 $1,374.6
======== ======== ========




129

CONSECO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
------------------

At both December 31, 2007 and 2006, we had no fixed maturity investments or
mortgage loans that were not accruing investment income.

Net Realized Investment Gains (Losses)

Net realized investment gains (losses) were included in revenue as follows
(dollars in millions):



2007 2006 2005
---- ---- ----

Fixed maturities:
Gross gains.......................................................... $ 94.9 $ 70.1 $ 86.5
Gross losses......................................................... (134.0) (98.5) (82.3)
Other-than-temporary declines in fair value.......................... (99.5) (12.0) (4.5)
------- ------ ------

Net realized investment gains (losses) from
fixed maturities.............................................. (138.6) (40.4) (.3)

Equity securities........................................................ (5.0) .2 1.6
Mortgages................................................................ (.1) - 3.2
Other-than-temporary declines in fair value of
equity securities and other invested assets.......................... (7.2) (10.4) (10.2)
Other ................................................................... (4.5) 3.4 2.8
------- ------ ------

Net realized investment losses.................................. $(155.4) $(47.2) $ (2.9)
======= ====== ======


During 2007, net realized investment losses included: (i) $48.7 million of
net losses from the sales of investments (primarily fixed maturities) with
proceeds of $7.2 billion; (ii) $33.0 million of writedowns of investments for
other than temporary declines in fair value (no single investment accounted for
more than $5.0 million of such writedowns); and (iii) $73.7 million of
writedowns of investments (which were subsequently transferred pursuant to a
coinsurance agreement as further discussed in the note to the consolidated
financial statements entitled "Summary of Significant Accounting Policies -
Reinsurance") as a result of our intent not to hold such investments for a
period of time sufficient to allow for any anticipated recovery in value. During
2006, we recognized net realized investment losses of $47.2 million, which were
comprised of $24.8 million of net losses from the sales of investments
(primarily fixed maturities) with proceeds of $6.4 billion, and $22.4 million of
writedowns of investments for other than temporary declines in fair value.
During 2005, we recognized net realized investment losses of $2.9 million, which
were comprised of $11.8 million of net gains from the sales of investments
(primarily fixed maturities) with proceeds of $11.5 billion, net of $14.7
million of writedowns of investments for other than temporary declines in fair
value. At December 31, 2007, there were no investments in default as to the
payment of principal or interest.

During 2007, we sold $3.3 billion of fixed maturity investments which
resulted in gross investment losses (before income taxes) of $134.0 million. We
sell securities at a loss for a number of reasons including, but not limited to;
(i) changes in the investment environment; (ii) expectation that the market
value could deteriorate further; (iii) desire to reduce our exposure to an
issuer or an industry; (iv) changes in credit quality; or (v) changes in
expected liability cash flows. During 2007, we sold 10 investments at a loss
which had been continuously in an unrealized loss position exceeding 20 percent
of the amortized cost basis. Such investments were continuously in an unrealized
loss position for less than six months prior to sale and had an amortized cost
and estimated fair value of $52.3 million and $19.5 million, respectively.

We regularly evaluate our investments for possible impairment. When we
conclude that a decline in a security's net realizable value is other than
temporary, the decline is recognized as a realized loss and the cost basis of
the security is reduced to its estimated fair value.

Our assessment of whether unrealized losses are "other than temporary"
requires significant judgment. Factors considered include: (i) the extent to
which market value is less than the cost basis; (ii) the length of time that the
market value has been less than cost; (iii) whether the unrealized loss is event
driven, credit-driven or a result of changes in market interest rates or risk
premium; (iv) the near-term prospects for improvement of the issuer and/or its
industry; (v) the investment's rating and whether the investment is
investment-grade and/or has been downgraded since its purchase; (vi)

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CONSECO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
------------------

whether the issuer is current on all payments in accordance with the contractual
terms of the investment and is expected to meet all of its obligations under the
terms of the investment; (vii) our ability and intent to hold the investment for
a period of time sufficient to allow for any anticipated recovery; (viii) the
underlying current and prospective asset and enterprise values of the issuer and
the extent to which the recoverability of the carrying value of our investment
may be affected by changes in such values; (ix) unfavorable changes in cash
flows on mortgage-backed and asset-backed securities; and (x) other subjective
factors, including information from regulators and credit agencies.

Future events may occur, or additional information may become available,
which may necessitate future realized losses of securities in our portfolio.
Significant losses in the carrying values of our investments could have a
material adverse effect on our earnings in future periods.

Investments with Unrealized Losses

The following table sets forth the amortized cost and estimated fair value
of those actively managed fixed maturities with unrealized losses at December
31, 2007, by contractual maturity. Actual maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties. Most of the structured
securities shown below provide for periodic payments throughout their lives
(dollars in millions):


Estimated
Amortized fair
cost value
--------- ---------

Due in one year or less................................................................... $ 29.6 $ 29.3
Due after one year through five years..................................................... 614.3 591.1
Due after five years through ten years.................................................... 3,687.3 3,529.1
Due after ten years....................................................................... 5,958.7 5,625.4
--------- ---------

Subtotal............................................................................... 10,289.9 9,774.9

Structured securities..................................................................... 3,214.4 3,098.5
--------- ---------

Total.................................................................................. $13,504.3 $12,873.4
========= =========


The following summarizes the investments in our portfolio rated
below-investment grade which have been continuously in an unrealized loss
position exceeding 20 percent of the cost basis for the period indicated as of
December 31, 2007 (dollars in millions):


Number Cost Unrealized Estimated
Period of issuers basis loss fair value
------ ---------- ----- ---- ----------

Less than 6 months............................. 16 $51.5 $(13.5) $38.0

Greater than or equal to
6 months and less
than 12 months............................... 1 10.7 (3.6) 7.1


Our investment strategy is to maximize, over a sustained period and within
acceptable parameters of risk, investment income and total investment return
through active investment management. Accordingly, we may sell securities at a
gain or a loss to enhance the total return of the portfolio as market
opportunities change or to better match certain characteristics of our
investment portfolio with the corresponding characteristics of our insurance
liabilities. While we have both the ability and intent to hold securities with
unrealized losses until they mature or recover in value, we may sell securities
at a loss in the future because of actual or expected changes in our view of the
particular investment, its industry, its type or the general investment
environment.

131

CONSECO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
------------------

The following table summarizes the gross unrealized losses and fair values
of our investments with unrealized losses that are not deemed to be
other-than-temporarily impaired, aggregated by investment category and length of
time that such securities have been in a continuous unrealized loss position, at
December 31, 2007 (dollars in millions):



Less than 12 months 12 months or greater Total
---------------------- --------------------- -----------------
Fair Unrealized Fair Unrealized Fair Unrealized
Description of securities value losses value losses value losses
------------------------- ----- ------ ----- ------ ----- ------

United States Treasury securities
and obligations of United
States government
corporations and agencies...... $ 23.1 $ (.1) $ 52.3 $ (1.5) $ 75.4 $ (1.6)

States and political subdivisions. 151.1 (6.2) 140.9 (5.6) 292.0 (11.8)

Debt securities issued by
foreign governments............ 4.0 (.2) - - 4.0 (.2)

Corporate securities.............. 6,627.0 (284.0) 2,776.5 (217.4) 9,403.5 (501.4)

Structured securities............. 1,801.4 (76.1) 1,297.1 (39.8) 3,098.5 (115.9)
-------- ------- -------- ------- --------- -------

Total actively managed
fixed maturities............... $8,606.6 $(366.6) $4,266.8 $(264.3) $12,873.4 $(630.9)
======== ======= ======== ======= ========= =======


The following table summarizes the gross unrealized losses and fair values
of our investments with unrealized losses that are not deemed to be
other-than-temporarily impaired, aggregated by investment category and length of
time that such securities have been in a continuous unrealized loss position, at
December 31, 2006 (dollars in millions):


Less than 12 months 12 months or greater Total
---------------------- --------------------- -----------------
Fair Unrealized Fair Unrealized Fair Unrealized
Description of securities value losses value losses value losses
------------------------- ----- ------ ----- ------ ----- ------

United States Treasury securities
and obligations of United
States government
corporations and agencies........ $ 86.8 $ (1.2) $1,252.7 $ (22.1) $ 1,339.5 $ (23.3)

States and political subdivisions... 218.6 (3.1) 185.2 (8.3) 403.8 (11.4)

Debt securities issued by
foreign governments.............. 23.1 (.2) 6.9 (.1) 30.0 (.3)

Corporate securities................ 4,711.6 (75.2) 4,413.8 (155.5) 9,125.4 (230.7)

Structured securities............... 1,724.5 (13.2) 2,904.8 (63.4) 4,629.3 (76.6)
-------- ------ -------- ------- --------- -------

Total actively managed
fixed maturities................. $6,764.6 $(92.9) $8,763.4 $(249.4) $15,528.0 $(342.3)
======== ====== ======== ======= ========= =======

Equity securities................... $1.6 $(.2) $3.0 $(.1) $4.6 $(.3)
==== ==== ==== ==== ==== ====




132

CONSECO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
------------------

Based on management's current assessment of investments with unrealized
losses at December 31, 2007, the Company believes the issuers of the securities
will continue to meet their obligations (or with respect to equity-type
securities, the investment value will recover to its cost basis). We generally
intend to hold securities in unrealized loss positions until they recover.
However, from time to time, our intent on an individual security may change,
based upon market or other unforeseen developments. In such instances, we sell
securities in the ordinary course of managing our portfolio to meet
diversification, credit quality, yield, duration and liquidity requirements. If
a loss is recognized from a sale subsequent to a balance sheet date due to these
unexpected developments, the loss is recognized in the period in which the
intent to hold the securities to recovery no longer exists.

Structured Securities

At December 31, 2007, fixed maturity investments included $4.7 billion of
structured securities (or 23 percent of all fixed maturity securities).
Structured securities include mortgage-backed securities, collateralized
mortgage obligations and commercial mortgage-backed securities. The yield
characteristics of structured securities differ in some respects from those of
traditional fixed-income securities. For example, interest and principal
payments on structured securities may occur more frequently, often monthly. In
many instances, we are subject to the risk that the timing of principal payments
may vary from expectations. For example, prepayments may occur at the option of
the issuer and prepayment rates are influenced by a number of factors that
cannot be predicted with certainty, including: the relative sensitivity of the
underlying assets backing the security to changes in interest rates; a variety
of economic, geographic and other factors; and various security-specific
structural considerations (for example, the repayment priority of a given
security in a securitization structure).

In general, the rate of prepayments on structured securities increases when
prevailing interest rates decline significantly in absolute terms and also
relative to the interest rates on the underlying assets. The yields recognized
on structured securities purchased at a discount to par will increase (relative
to the stated rate) when the underlying assets prepay faster than expected. The
yields recognized on structured securities purchased at a premium will decrease
(relative to the stated rate) when the underlying assets prepay faster than
expected. When interest rates decline, the proceeds from prepayments may be
reinvested at lower rates than we were earning on the prepaid securities. When
interest rates increase, prepayments may decrease. When this occurs, the average
maturity and duration of the structured securities increase, which decreases the
yield on structured securities purchased at a discount because the discount is
realized as income at a slower rate, and it increases the yield on those
purchased at a premium because of a decrease in the annual amortization of the
premium.

For structured and asset-backed securities included in actively managed
fixed maturities that were purchased at a discount or premium, we recognize
investment income using an effective yield based on anticipated future
prepayments and the estimated final maturity of the securities. Actual
prepayment experience is periodically reviewed and effective yields are
recalculated when differences arise between the prepayments originally
anticipated and the actual prepayments received and currently anticipated. For
credit sensitive mortgage-backed and asset-backed securities, and for securities
that can be prepaid or settled in a way that we would not recover substantially
all of our investment, the effective yield is recalculated on a prospective
basis. Under this method, the amortized cost basis in the security is not
immediately adjusted and a new yield is applied prospectively. For all other
structured and asset-backed securities, the effective yield is recalculated when
changes in assumptions are made, and reflected in our income on a retrospective
basis. Under this method, the amortized cost basis of the investment in the
securities is adjusted to the amount that would have existed had the new
effective yield been applied since the acquisition of the securities. Such
adjustments were not significant in 2007.

The following table sets forth the par value, amortized cost and estimated
fair value of structured securities, summarized by interest rates on the
underlying collateral, at December 31, 2007 (dollars in millions):


Par Amortized Estimated
value cost fair value
----- ---- ----------

Below 4 percent..................................................................... $ 128.0 $ 127.7 $ 124.8
4 percent - 5 percent............................................................... 557.6 539.8 541.6
5 percent - 6 percent............................................................... 3,315.6 3,261.6 3,189.4
6 percent - 7 percent............................................................... 779.3 749.0 722.2
7 percent - 8 percent............................................................... 66.3 68.0 68.5
8 percent and above................................................................. 23.6 24.0 21.6
-------- -------- --------

Total structured securities (a).............................................. $4,870.4 $4,770.1 $4,668.1
======== ======== ========



133

CONSECO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
------------------

--------------------
(a) Includes below-investment grade structured securities with an
amortized cost and estimated fair value of $62.6 million and $55.5
million, respectively.

The amortized cost and estimated fair value of structured securities at
December 31, 2007, summarized by type of security, were as follows (dollars in
millions):


Estimated fair value
---------------------
Percent
Amortized of fixed
Type cost Amount maturities
---- ---- ------ ----------

Pass-throughs, sequential and equivalent securities..................... $2,076.0 $2,048.0 10%
Planned amortization classes, target amortization class and
accretion-directed bonds............................................. 1,633.1 1,596.1 8
Commercial mortgage-backed securities................................... 994.0 965.5 5
Other................................................................... 67.0 58.5 -
-------- -------- ---

Total structured securities (a).................................. $4,770.1 $4,668.1 23%
======== ======== ==

--------------------
(a) Includes below-investment grade structured securities with an
amortized cost and estimated fair value of $62.6 million and $55.5
million, respectively.



Pass-through securities and sequentials have unique prepayment variability
characteristics. Pass-through securities typically return principal to the
holders based on cash payments from the underlying mortgage obligations.
Sequential classes return principal to tranche holders in a detailed hierarchy.
Planned amortization classes, targeted amortization class and accretion-directed
bonds adhere to fixed schedules of principal payments as long as the underlying
mortgage loans experience prepayments within certain estimated ranges. Changes
in prepayment rates are first absorbed by support or companion classes
insulating the timing of receipt of cash flows from the consequences of both
faster prepayments (average life shortening) and slower prepayments (average
life extension).

Commercial mortgage-backed securities ("CMBS") are secured by commercial
real estate mortgages, generally income producing properties that are managed
for profit. Property types include multi-family dwellings including apartments,
retail centers, hotels, restaurants, hospitals, nursing homes, warehouses, and
office buildings. Most CMBS have call protection features whereby underlying
borrowers may not prepay their mortgages for stated periods of time without
incurring prepayment penalties.

Structured Securities Collateralized by Sub Prime Residential Loans

Our investment portfolio includes structured securities collateralized by
sub prime residential loans with a market value of $123.1 million and a book
value of $150.5 million at December 31, 2007. These securities represent .5
percent of our consolidated investment portfolio. Of these securities, $39.9
million (32 percent) were rated AAA, $40.8 million (33 percent) were rated AA,
$41.9 million (34 percent) were rated A, and $.5 million (1 percent) were rated
BBB. Sub prime structured securities issued in 2006 and 2007 have experienced
higher delinquency and foreclosure rates than originally expected. The Company's
investment portfolio includes sub prime structured securities collateralized by
residential loans extended over several years, primarily from 2003 to 2007. At
December 31, 2007, we held no sub prime securities collateralized by residential
loans extended in 2006 and we held $8.7 million extended in 2007.

Commercial Mortgage Loans

At December 31, 2007, the mortgage loan balance was primarily comprised of
commercial loans. Approximately 7 percent, 6 percent, 6 percent, 6 percent and 5
percent of the mortgage loan balance were on properties located in Minnesota,
Florida, Arizona, Ohio and Indiana, respectively. No other state comprised
greater than 5 percent of the mortgage loan balance. Substantially less than one
percent of the commercial mortgage loan balance was noncurrent at December 31,
2007. Our allowance for losses on mortgage loans was $2.4 million at both
December 31, 2007 and 2006.

134

CONSECO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
------------------

Other Investment Disclosures

Life insurance companies are required to maintain certain investments on
deposit with state regulatory authorities. Such assets had aggregate carrying
values of $104.8 million and $99.9 million at December 31, 2007 and 2006,
respectively.

Conseco had two fixed maturity investments in excess of 10 percent of
shareholders' equity at both December 31, 2007 and 2006 (other than investments
issued or guaranteed by the United States government or a United States
government agency), which are summarized below (dollars in millions):


2007 2006
--------------------------- -------------------------
Amortized Estimated Amortized Estimated
Issuer cost fair value cost fair value
------ ---- ---------- ---- ----------

Federal Home Loan Mortgage
Corporation....................... $1,400.1 $1,392.0 $2,426.4 $2,387.2
Federal National Mortgage
Association....................... 752.3 750.3 1,414.3 1,396.7


6. LIABILITIES FOR INSURANCE PRODUCTS

These liabilities consisted of the following (dollars in millions):


Interest
Withdrawal Mortality rate
assumption assumption assumption 2007 2006
---------- ---------- ---------- ---- ----
(Restated)

Future policy benefits:
Interest-sensitive products:
Investment contracts.................... N/A N/A (c) $ 9,389.7 $ 9,326.0
Universal life contracts................ N/A N/A N/A 3,779.7 3,695.1
--------- ---------

Total interest-sensitive products..... 13,169.4 13,021.1
--------- ---------

Traditional products:
Traditional life insurance contracts.... Company (a) 5% 2,289.0 2,264.2
experience

Limited-payment annuities............... Company (b) 5% 944.3 970.7
experience,
if applicable

Individual and group accident and
health ............................... Company Company 6% 9,304.1 8,873.1
experience experience --------- ---------

Total traditional products............ 12,537.4 12,108.0
--------- ---------

Claims payable and other
policyholder funds ....................... N/A N/A N/A 928.0 835.0
Liabilities related to separate accounts.... N/A N/A N/A 27.4 28.9
--------- ---------

Total................................. $26,662.2 $25,993.0
========= =========

--------------------
(a) Principally, modifications of the 1965 - 70 and 1975 - 80 Basic,
Select and Ultimate Tables.
(b) Principally, the 1984 United States Population Table and the NAIC 1983
Individual Annuitant Mortality Table.
(c) In 2007 and 2006, all of this liability represented account balances
where future benefits are not guaranteed.


135

CONSECO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
------------------

The Company establishes reserves for insurance policy benefits based on
assumptions as to investment yields, mortality, morbidity, withdrawals, lapses
and maintenance expenses. These reserves include amounts for estimated future
payment of claims based on actuarial assumptions. The balance is based on the
Company's best estimate of the future policyholder benefits to be incurred on
this business, given recent and expected future changes in experience.

Changes in the unpaid claims reserve (included in claims payable) and
disabled life reserves related to accident and health insurance (included in
individual and group accident and health liabilities) were as follows (dollars
in millions):


2007 2006 2005
---- ---- -----

Balance, beginning of the year....................................... $1,772.3 $1,636.0 $1,576.9

Incurred claims (net of reinsurance) related to:
Current year...................................................... 1,921.7 1,667.2 1,554.7
Prior years (a)................................................... 105.5 43.0 60.3
-------- -------- --------

Total incurred................................................. 2,027.2 1,710.2 1,615.0
-------- -------- --------

Interest on claim reserves........................................... 95.5 88.2 80.3
-------- -------- --------

Paid claims (net of reinsurance) related to:
Current year...................................................... 982.0 844.9 811.3
Prior years....................................................... 848.3 807.7 814.8
-------- -------- --------

Total paid..................................................... 1,830.3 1,652.6 1,626.1

Net change in balance for reinsurance assumed and ceded.............. (45.3) (9.5) (10.1)
-------- -------- --------

Balance, end of the year............................................. $2,019.4 $1,772.3 $1,636.0
======== ======== ========

--------------------
(a) The reserves and liabilities we establish are necessarily based on
estimates, assumptions and prior years' statistics. It is possible
that actual claims will 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 exceeding our initial estimates in the Other
Business in Run-off segment. For example, our insurance policy
benefits in that segment reflected reserve deficiencies from prior
years of $130.1 million, $61.7 million and $58.0 million in 2007, 2006
and 2005, respectively.



136

CONSECO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
------------------

7. INCOME TAXES

The components of income tax expense (benefit) were as follows (dollars
in millions):


2007 2006 2005
---- ---- ----
(Restated) (Restated)

Current tax expense...................................................... $ 2.7 $ 1.4 $ -
Deferred tax provision (benefit)......................................... (63.8) 59.8 171.6
------ ----- ------

Income tax expense (benefit) on period income................... (61.1) 61.2 171.6

Valuation allowance...................................................... 68.0 - -
------ ----- ------

Total income tax expense........................................ $ 6.9 $61.2 $171.6
====== ===== ======



A reconciliation of the U.S. statutory corporate tax rate to the effective
rate reflected in the consolidated statement of operations is as follows:



2007 2006 2005
---- ---- ----
(Restated) (Restated)

U.S. statutory corporate rate............................................ (35.0)% 35.0% 35.0%
Valuation allowance...................................................... 39.3 - -
Other nondeductible expenses (benefit)................................... .2 1.4 .4
State taxes.............................................................. (1.1) .3 .7
Provision for tax issues, tax credits and other.......................... .6 (.1) (.7)
----- ---- ----

Effective tax rate.............................................. 4.0% 36.6% 35.4%
===== ==== ====



137

CONSECO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
------------------

The components of the Company's income tax assets and liabilities were as
follows (dollars in millions):


2007 2006
---- ----
(Restated)

Deferred tax assets:
Net federal operating loss carryforwards attributable to:
Life insurance subsidiaries...................................................... $ 892.1 $ 800.4
Non-life companies............................................................... 843.8 780.0
Net state operating loss carryforwards.............................................. 32.1 29.7
Tax credits......................................................................... 13.7 14.2
Capital loss carryforwards.......................................................... 259.7 391.6
Deductible temporary differences:
Insurance liabilities............................................................ 1,074.6 1,327.1
Unrealized depreciation of investments........................................... 153.3 41.2
Reserve for loss on loan guarantees.............................................. 71.9 145.8
Other............................................................................ 4.4 -
-------- --------

Gross deferred tax assets...................................................... 3,345.6 3,530.0
-------- --------

Deferred tax liabilities:
Actively managed fixed maturities................................................... (32.8) (42.2)
Value of policies inforce at the Effective Date and cost of policies produced....... (732.9) (764.5)
Other............................................................................... - (147.3)
-------- --------

Gross deferred tax liabilities................................................. (765.7) (954.0)
-------- --------

Net deferred tax assets before valuation allowance............................. 2,579.9 2,576.0

Valuation allowance..................................................................... (672.9) (777.8)
-------- --------

Net deferred tax assets........................................................ 1,907.0 1,798.2

Current income taxes prepaid (accrued).................................................. 2.4 (3.9)
-------- --------

Income tax assets, net......................................................... $1,909.4 $1,794.3
======== ========



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 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 carryforwards and NOLs expire. This assessment 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 and reduce shareholders' equity, and such an
increase could have a significant impact upon our earnings in the future. In
addition, the use of the Company's NOLs is dependent, in part, on whether the
IRS does not take an adverse position in the future regarding the tax position
we have taken in our tax returns with respect to the allocation of cancellation
of indebtedness income.

The Internal Revenue Code (the "Code") limits the extent to which losses
realized by a non-life entity (or entities) may offset income from a life
insurance company (or companies) to the lesser of: (i) 35 percent of the income
of the life insurance company; or (ii) 35 percent of the total loss of the
non-life entities (including NOLs of the non-life entities). There is no
limitation on the extent to which losses realized by a life insurance entity (or
entities) may offset income from a non-life entity (or entities).

In addition, the timing and manner in which the Company will be able to
utilize some of its NOLs is limited by Section 382 of the Code. Section 382
imposes limitations on a corporation's ability to use its NOLs when the company
undergoes an ownership change. Because the Company underwent an ownership change
pursuant to its reorganization, this

138

CONSECO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
------------------

limitation applies to the Company. Any losses that are subject to the Section
382 limitation will only be utilized by the Company up to approximately $142
million per year with any unused amounts carried forward to the following year.
Our Section 382 limitation for 2008 will be approximately $587 million
(including $445 million of unused amounts carried forward from prior years).

Based upon information existing at the time of our emergence from
bankruptcy, we established a valuation allowance against our entire balance of
net deferred income tax assets as we believed that the realization of such net
deferred income tax assets in future periods was uncertain. During 2005 and
2006, we concluded that it was no longer necessary to hold certain portions of
the previously established valuation allowance. Accordingly, we reduced our
valuation allowance by $585.8 million in 2005 and $260.0 million in 2006.
However, we were required to continue to record a valuation allowance of $672.9
million at December 31, 2007 because we have determined that it is more likely
than not that a portion of our deferred tax assets will not be realized. This
determination was made by evaluating each component of the deferred tax asset
and assessing the effects of limitations or interpretations on the value of such
component to be fully recognized in the future.

Changes in our valuation allowance are summarized as follows (dollars in
millions):


Balance at December 31, 2004............................................. $1,629.6

Release of valuation allowance (a)..................................... (585.8)
--------

Balance at December 31, 2005............................................. 1,043.8

Expiration of NOL and capital loss carryforwards....................... (6.0)
Release of valuation allowance (a)..................................... (260.0)
--------

Balance at December 31, 2006............................................. 777.8

Increase in 2007....................................................... 68.0
Expiration of capital loss carryforwards............................... (157.6)
Write off of certain state NOLs (recovery is remote)................... (15.3)
--------

Balance at December 31, 2007............................................. $ 672.9
========

--------------------
(a) There is a corresponding increase to additional paid-in capital.



We have also evaluated the likelihood that we will have sufficient taxable
income to offset the available deferred tax assets. This assessment required
significant judgment. Based upon our current projections of future income that
we completed at December 31, 2007, we believe that we will more likely than not
recover $1.9 billion of our deferred tax assets through reductions of our tax
liabilities in future periods. 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 and reduce shareholders' equity,
and such an increase could have a significant impact upon our earnings in the
future.


139

CONSECO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
------------------

As of December 31, 2007, we had $5.0 billion of federal NOLs and $.7
billion of capital loss carryforwards, which expire as follows (dollars in
millions):



Net operating
loss carryforwards(a) Capital loss Total loss Total loss carryforwards
--------------------- -------------------------------------
Year of expiration Life Non-life carryforwards carryforwards Subject to ss.382 Not subject to ss.382
------------------ ---- -------- ------------- ------------- ----------------- ---------------------

2008 ...... $ - $ - $583.7 $ 583.7 $583.7 $ -
2009....... - .9 86.2 87.1 .9 86.2
2010....... - 1.0 - 1.0 1.0 -
2011....... - .1 - .1 .1 -
2012....... - 10.6 72.2 82.8 10.6 72.2
2016....... 16.9 - - 16.9 16.9 -
2017....... 33.2 - - 33.2 33.2 -
2018....... 2,170.6 (a) 20.3 - 2,190.9 64.4 2,126.5
2020....... - 2.5 - 2.5 2.5 -
2021....... 61.8 - - 61.8 - 61.8
2022....... 266.2 .6 - 266.8 - 266.8
2023....... - 2,092.9 (a) - 2,092.9 71.7 2,021.2
2024....... - 3.2 - 3.2 - 3.2
2025....... - 118.8 - 118.8 - 118.8
2026....... - 1.6 - 1.6 - 1.6
2027....... - 158.3 - 158.3 - 158.3
-------- -------- ------ -------- ------ --------

Total...... $2,548.7 $2,410.8 $742.1 $5,701.6 $785.0 $4,916.6
======== ======== ====== ======== ====== ========

--------------------
(a) The allocation of the NOLs summarized above assumes the IRS does not
take an adverse position in the future regarding the tax position we
plan to take in our tax returns with respect to the allocation of
cancellation of indebtedness income. If the IRS disagrees with the tax
position we plan to take with respect to the allocation of
cancellation of indebtedness income, and their position prevails,
approximately $631 million of the NOLs expiring in 2018 would be
characterized as non-life NOLs.



As of December 31, 2007, we had deferred tax assets related to NOLs for
state income taxes of $32.1 million. The related state NOLs are available to
offset future state taxable income in certain states through 2015.

The Company adopted FIN 48 on January 1, 2007, which resulted in a $6
million increase to additional paid-in capital. As of January 1, 2007 and
December 31, 2007, the amount of unrecognized tax benefits was not significant.
While it is expected that the amount of unrecognized tax benefits will change in
the next twelve months, the Company does not expect the change to have a
significant impact on its results of operations.

As more fully discussed below, the Company's interpretation of the tax law,
as it relates to the application of the cancellation of indebtedness income to
its NOLs, is an uncertain tax position. Since all other life NOLs must be
utilized prior to this portion of the NOL, it has not yet been utilized nor is
it expected to be utilized within the next twelve months. As a result, an
uncertain tax position has not yet been taken on the Company's tax return.

Although FIN 48 allowed a change in accounting, the Company has chosen to
continue its past accounting policy of classifying interest and penalties as
income tax expense in the consolidated statement of operations. No such amounts
were recognized in 2007. The liability for accrued interest and penalties was
not significant at December 31, 2007 or December 31, 2006.

Tax years 2004 through 2006 are open to examination by the IRS, and tax
year 2002 remains open only for potential adjustments related to certain
partnership investments. The Company does not anticipate any material
adjustments related to these partnership investments. The Company's various
state income tax returns are generally open for tax years 2004 through 2006
based on the individual state statutes of limitation.

The following paragraphs describe an open matter related to the
classification of our NOLs.

140

CONSECO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
------------------

In July 2006, the Joint Committee of Taxation accepted the audit and the
settlement which characterized $2.1 billion of the tax losses on our
Predecessor's investment in Conseco Finance Corp. as life company losses and the
remaining amount as non-life losses prior to the application of the cancellation
of indebtedness attribute reductions described below. As a result of the
approval of the settlement, we concluded it was appropriate to reduce our
valuation allowance by $260 million in the second quarter of 2006, which was
accounted for as an addition to paid-in capital.

The Code provides that any income realized as a result of the cancellation
of indebtedness in bankruptcy (cancellation of debt income or "CODI") must
reduce NOLs. We realized an estimated $2.5 billion of CODI when we emerged from
bankruptcy. Pursuant to the Company's interpretation of the tax law, the CODI
reductions were all used to reduce non-life NOLs. However, if the IRS were to
disagree with our interpretation and ultimately prevail, we believe $631 million
of NOLs classified as life company NOLs would be re-characterized as non-life
NOLs and subject to the 35% limitation discussed above. Such a
re-characterization would also extend the year of expiration as life company
NOLs expire after 15 years whereas non-life NOLs expire after 20 years. The
Company does not expect the IRS to consider this issue for a number of years.

The Company adopted SFAS 123R in calendar year 2006. Pursuant to this
accounting rule, the Company is precluded from recognizing the tax benefits of
any tax windfall upon the exercise of a stock option or the vesting of
restricted stock unless such deduction resulted in actual cash savings to the
Company. Because of the Company's NOLs, no cash savings have occurred. NOL
carryforwards of $1.1 million related to deductions for stock options and
restricted stock will be reflected in additional paid-in capital if realized.

Prior to January 1, 1984, life insurance subsidiaries of the Company were
entitled to exclude certain amounts from taxable income and accumulate such
amounts in a "Policyholders Surplus Account". The aggregate balance in this
account at December 31, 2005 was $150.7 million, which could have resulted in
federal income taxes payable of $52.7 million if such amounts had been
distributed or deemed distributed from the Policyholders Surplus Account. No
provision for taxes had ever been made for this item since the affected
subsidiaries had no intention of distributing such amounts. Pursuant to
provisions of the American Jobs Creation Act of 2004, our subsidiaries
distributed amounts from the Policyholders Surplus Account in 2006 without
incurring any tax liability, thereby permanently eliminating this potential tax
liability.

8. NOTES PAYABLE - DIRECT CORPORATE OBLIGATIONS

The following notes payable were direct corporate obligations of the
Company as of December 31, 2007 and 2006 (dollars in millions):


2007 2006
---- ----

3.50% convertible debentures............................................................ $ 330.0 $ 330.0
Secured credit agreement................................................................ 865.5 673.3
Unamortized discount on convertible debentures.......................................... (1.8) (2.5)
-------- --------

Direct corporate obligations....................................................... $1,193.7 $1,000.8
======== ========


In August 2005, we completed the private offering of $330 million of 3.50%
Convertible Debentures due September 30, 2035 (the "Debentures"). The net
proceeds from the offering of approximately $320 million were used to repay term
loans outstanding under the Company's $800.0 million secured credit facility
(the "Credit Facility"). The terms of the Debentures are governed by an
indenture dated as of August 15, 2005 between the Company and The Bank of New
York Trust Company, N.A., as trustee (the "Indenture"). At December 31, 2007 and
2006, unamortized issuance costs (classified as other assets) related to the
Debentures were $4.4 million and $5.9 million, respectively, and are amortized
as an increase to interest expense through September 30, 2010, which is the
earliest date the Debenture holders may require the Company to repurchase them.

The Debentures are senior, unsecured obligations and bear interest at a
rate of 3.50 percent per year, payable semi-annually, beginning on March 31,
2006 and ending on September 30, 2010. Thereafter, the principal balance of the
Debentures will accrete at a rate that provides holders with an aggregate yield
to maturity of 3.50 percent, computed on a semi-annual, bond-equivalent basis.
Beginning with the six-month interest period commencing September 30, 2010, the
Company will pay contingent interest on the Debentures if the average trading
price per Debenture for the five trading day period immediately preceding the
six-month interest period equals or exceeds a certain level, as described in the
Indenture.

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Upon the occurrence of certain specified events, the Debentures will be
convertible, at the option of the holders, into cash or, under certain
circumstances, cash and shares of the Company's common stock at an initial
conversion price of approximately $26.66 per share. The number of shares to be
received by a converting holder is subject to adjustment for certain dilutive
events. The amount of cash to be received upon conversion is equal to the lesser
of: (i) the accreted principal amount of the converting Debenture; or (ii) the
conversion value of such Debentures (as calculated in accordance with the
Indenture).

On or after October 5, 2010, the Company may redeem for cash all or a
portion of the Debentures at any time at a redemption price equal to 100 percent
of the accreted principal amount of the Debentures plus accrued and unpaid
interest, including additional interest and contingent interest, if any, to the
redemption date. Holders may require the Company to repurchase in cash all or
any portion of the Debentures on September 30, 2010, 2015, 2020, 2025 and 2030
at a repurchase price equal to 100 percent of the accreted principal amount of
the Debentures to be repurchased, plus accrued and unpaid interest, including
additional interest and contingent interest, if any, to the applicable
repurchase date.

If an event of default occurs and is continuing with respect to the
Debentures, either the trustee or the holders of at least 25 percent of the
aggregate accreted principal amount of the Debentures then outstanding may
declare the accreted principal amount, plus accrued and unpaid interest,
including additional interest and contingent interest, if any, on the Debentures
to be due and payable immediately. If an event of default relating to certain
events of bankruptcy, insolvency or reorganization occurs, the accreted
principal amount plus accrued and unpaid interest, including additional interest
and contingent interest, if any, on the Debentures will become immediately due
and payable. The following are events of default with respect to the Debentures:

o default for 30 days in payment of any interest, contingent interest or
additional interest due and payable on the Debentures;

o default in payment of accreted principal of the Debentures at
maturity, upon redemption, upon repurchase or following a fundamental
change, when the same becomes due and payable;

o default by the Company or any of its subsidiaries in the payment of
principal, interest or premium when due under any other instruments of
indebtedness having an aggregate outstanding principal amount of $50.0
million (or its equivalent in any other currency or currencies) or
more following a specified period for cure;

o default in the Company's conversion obligations upon exercise of a
holder's conversion right, following a specified period for cure;

o default in the Company's obligations to give notice of the occurrence
of a fundamental change within the time required to give such notice;

o acceleration of any of the Company's indebtedness or the indebtedness
of any of its subsidiaries under any instrument or instruments
evidencing indebtedness (other than the Debentures) having an
aggregate outstanding principal amount of $50.0 million (or its
equivalent in any other currency or currencies) or more, subject to
certain exceptions; and

o certain events of bankruptcy, insolvency and reorganization of the
Company or any of its subsidiaries.

The Company's credit facilities have been repaid or amended during each of
the last three years as further described below.

In August 2005, we entered into a $447.0 million secured credit agreement
(the "Amended Credit Facility"). The proceeds of the Amended Credit Facility
were used to repay the remaining principal amount of the Credit Facility. The
Company recognized a $3.7 million loss on the extinguishment of debt during 2005
for the write off of certain debt issuance

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Notes to Consolidated Financial Statements
------------------

costs related to the reduction of the principal amount borrowed under the
Amended Credit Facility. The Amended Credit Facility provided for a one-time
increase in the facility or the addition of a new facility of up to $325.0
million. In December 2005, we borrowed an additional $80.0 million pursuant to
this provision. The proceeds from the additional borrowing were used to increase
the capital and surplus of our insurance subsidiaries. During 2005, we made
principal payments totaling $2.4 million on our Amended Credit Facility as well
as a mandatory prepayment of $.9 million on the Credit Facility (after
consideration of a $28.0 million prepayment made in December 2004) based on the
Company's excess cash flows at December 31, 2004, as defined in the Credit
Facility. During 2006, we made scheduled principal payments totaling $1.3
million on our Amended Credit Facility as well as a mandatory prepayment of
$45.0 million based on the Company's excess cash flows at December 31, 2005, as
defined in the Amended Credit Facility.

On October 10, 2006, we entered into a $675.0 million secured credit
agreement (the "Second Amended Credit Facility"). As a result of the
refinancing, the principal amount outstanding under the credit facility was
increased from $478.3 million to $675.0 million. Approximately $195 million of
the proceeds were used to strengthen the capital of our insurance subsidiaries.
The Company recognized a $.7 million loss on the extinguishment of debt during
the fourth quarter of 2006 for the write off of certain debt issuance costs and
other costs incurred related to the transaction. The Second Amended Credit
Facility extends the maturity date from June 22, 2010 to October 10, 2013. On
June 12, 2007, Conseco amended its current credit facility. The amendment of the
credit facility provided for, among other things:

o an increase of $200.0 million in the principal amount of the facility;

o an increase in the general basket for restricted payments in an
aggregate amount of up to $300 million over the term of the facility
(of which only $200 million may be paid in the year commencing June
12, 2007); and

o the Company to be able to request the addition of up to two new
facilities or up to two increases in the credit facility of up to $330
million (but with the commitment increases made between June 12, 2007
and June 12, 2008 limited to $130 million), subject to compliance with
certain financial covenants and other conditions. Such increases would
be effective as of a date that is at least 90 days prior to the
scheduled maturity date.

No changes were made to the interest rate or the maturity schedule of the
amounts borrowed under the credit facility. We are required to make minimum
quarterly principal payments of $2.2 million through September 30, 2013. The
remaining unpaid principal balance is due on October 10, 2013. There were no
changes to the various financial ratios and balances that are required to be
maintained by the Company. The additional borrowings were used for general
corporate purposes, including the repurchase of Conseco common stock and the
strengthening of the Company's insurance subsidiaries.

During 2007, we made scheduled principal payments totaling $7.8 million on
our Second Amended Credit Facility. There were $6.8 million and $6.2 million of
unamortized issuance costs (classified as other assets) related to our Second
Amended Credit Facility at December 31, 2007 and 2006, respectively.

The amounts outstanding under the Second Amended Credit Facility bear
interest, payable at least quarterly, based on either a Eurodollar rate or a
base rate. The Eurodollar rate is equal to LIBOR plus 2 percent. The base rate
is equal to 1 percent plus the greater of: (i) the Federal funds rate plus .50
percent; or (ii) Bank of America's prime rate. Under the terms of the Second
Amended Credit Facility, if the Company's senior secured long-term debt is rated
at least "Ba2" by Moody's Investors Service, Inc. and "BB" by S&P, in each case
with a stable outlook, the margins on the Eurodollar rate or the base rate would
each be reduced by .25 percent. At December 31, 2007, the interest rate on our
Second Amended Credit Facility was 6.8 percent.

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The scheduled repayment of our direct corporate obligations is as follows
(dollars in millions):


2008.......................................... $ 8.7
2009.......................................... 8.7
2010.......................................... 338.8
2011.......................................... 8.7
2012.......................................... 8.8
Thereafter.................................... 821.8
--------

$1,195.5
========

Pursuant to the Second Amended Credit Facility, as long as the debt to
total capitalization ratio (as defined in the Second Amended Credit Facility) is
greater than 20 percent or certain insurance subsidiaries (as defined in the
Second Amended Credit Facility) have financial strength ratings of less than A-
from A.M. Best Company, the Company is required to make mandatory prepayments
with all or a portion of the proceeds from the following transactions or events
including: (i) the issuance of certain indebtedness; (ii) equity issuances;
(iii) certain asset sales or casualty events; and (iv) excess cash flows as
defined in the Second Amended Credit Facility (the first such payment, if
applicable, would not be paid prior to the first quarter of 2009). The Company
may make optional prepayments at any time in minimum amounts of $3.0 million or
any multiple of $1.0 million in excess thereof. As described in the Second
Amended Credit Facility, the Company may reinvest any portion of the proceeds
from asset sales in assets useful to its business, subject to certain
restrictions defined in the Second Amended Credit Facility. The Company used the
majority of the ceding commission received from REALIC in a coinsurance
transaction to fund the recapture of a block of traditional life insurance
inforce. Such reinsurance transactions are further described in the note to the
consolidated financial statements entitled "Summary of Significant Accounting
Policies - Reinsurance".

The Second Amended Credit Facility requires the Company to maintain various
financial ratios and balances, as defined in the agreement, including: (i) a
debt to total capitalization ratio of not more than 30 percent at all times
(such ratio was 21 percent at December 31, 2007); (ii) an interest coverage
ratio greater than or equal to 2.0 to 1 for each rolling four quarters (such
ratio exceeded the minimum requirement for the four quarters ending December 31,
2007); (iii) an aggregate risk-based capital ratio, as defined in the Second
Amended Credit Facility, greater than or equal to 250 percent for each quarter
(such ratio exceeded the minimum risk-based capital requirements at December 31,
2007); and (iv) a combined statutory capital and surplus level of greater than
$1,270.0 million (combined statutory capital and surplus at December 31, 2007
exceeded such requirement).

The Second Amended Credit Facility includes an $80.0 million revolving
credit facility that can be used for general corporate purposes and that would
mature on June 22, 2009. There were no amounts outstanding under the revolving
credit facility at December 31, 2007 or 2006. The Company pays a commitment fee
equal to .50 percent of the unused portion of the revolving credit facility on
an annualized basis. The revolving credit facility bears interest based on
either a Eurodollar rate or a base rate in the same manner as described above
for the Second Amended Credit Facility.

The Second Amended Credit Facility prohibits or restricts, among other
things: (i) the payment of cash dividends on our common stock; (ii) the
repurchase of our common stock; (iii) the issuance of additional debt or capital
stock; (iv) liens; (v) certain asset dispositions; (vi) affiliate transactions;
(vii) certain investment activities; (viii) change in business; and (ix)
prepayment of indebtedness (other than the Second Amended Credit Facility). The
obligations under our Second Amended Credit Facility are guaranteed by Conseco's
current and future domestic subsidiaries, other than: (i) its insurance
companies; (ii) subsidiaries of the insurance companies; or (iii) certain
immaterial subsidiaries as defined in the Second Amended Credit Facility. This
guarantee was secured by granting liens on substantially all the assets of the
guarantors, including the capital stock of our top tier insurance company,
Conseco Life Insurance Company of Texas. Under the Second Amended Credit
Facility, we may pay cash dividends on our common stock or repurchase our common
stock in an aggregate amount of up to $300.0 million over the term of the
facility (of which, only $200.0 million may be paid in the year beginning June
12, 2007). As further discussed in the note to the consolidated financial
statements entitled "Shareholders' Equity", we repurchased 5.7 million shares of
our common stock for $87.2 million in 2007 (of which, $57.6 million was paid in
the year beginning June 12, 2007).

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------------------

9. COMMITMENTS AND CONTINGENCIES

Litigation

Legal Proceedings

The Company and its subsidiaries are involved in various legal actions in
the normal course of business, in which claims for compensatory and punitive
damages are asserted, some for substantial amounts. Some of the pending matters
have been filed as purported class actions and some actions have been filed in
certain jurisdictions that permit punitive damage awards that are
disproportionate to the actual damages incurred. Although there can be no
assurances, at the present time the Company does not anticipate that the
ultimate liability from either pending or threatened legal actions, after
consideration of existing loss provisions, will have a material adverse effect
on the financial condition, operating results or cash flows of the Company. The
amounts sought in certain of these actions are often large or indeterminate and
the ultimate outcome of certain actions is difficult to predict. In the event of
an adverse outcome in one or more of these matters, the ultimate liability may
be in excess of the liabilities we have established and could have a material
adverse effect on our business, financial condition, results of operations and
cash flows. In addition, the resolution of pending or future litigation may
involve modifications to the terms of outstanding insurance policies, which
could adversely affect the future profitability of the related insurance
policies.

In the cases described below, we have disclosed any specific dollar amounts
sought in the complaints. In our experience, monetary demands in complaints bear
little relation to the ultimate loss, if any, to the Company. However, for the
reasons stated above, it is not possible to make meaningful estimates of the
amount or range of loss that could result from some of these matters at this
time. The Company reviews these matters on an ongoing basis and follows the
provisions of Statement of Financial Accounting Standards No. 5, "Accounting for
Contingencies", when making accrual and disclosure decisions. When assessing
reasonably possible and probable outcomes, the Company bases its decisions on
its assessment of the ultimate outcome following all appeals.

Securities Litigation

After our Predecessor announced its intention to restructure on August 9,
2002, eight purported securities fraud class action lawsuits were filed in the
United States District Court for the Southern District of Indiana. The
complaints named us as a defendant, along with certain of our former officers.
These lawsuits were filed on behalf of persons or entities who purchased our
Predecessor's common stock on various dates between October 24, 2001 and August
9, 2002. The plaintiffs allege claims under Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934, as amended, and allege material omissions and
dissemination of materially misleading statements regarding, among other things,
the liquidity of Old Conseco and alleged problems in Conseco Finance Corp.'s
manufactured housing division, allegedly resulting in the artificial inflation
of our Predecessor's stock price. These cases were consolidated into one case in
the United States District Court for the Southern District of Indiana, captioned
Franz Schleicher, et al. v. Conseco, Inc., Gary Wendt, William Shea, Charles
Chokel and James Adams, et al., Case No. 02-CV-1332 DFH-TAB. The complaint seeks
an unspecified amount of damages. The plaintiffs filed an amended consolidated
class action complaint with respect to the individual defendants on December 8,
2003. Our liability with respect to this lawsuit was discharged in our
Predecessor's plan of reorganization and our obligation to indemnify individual
defendants who were not serving as an officer or director on the Effective Date
is limited to $3 million in the aggregate under such plan. Our liability to
indemnify individual defendants who were serving as an officer or director on
the Effective Date, of which there is one such defendant, is not limited by such
plan. A motion to dismiss was filed on behalf of defendants Shea, Wendt and
Chokel and on July 14, 2005, this matter was dismissed. Plaintiffs filed a
second amended complaint on August 24, 2005. We filed a motion to dismiss the
second amended complaint on November 7, 2005. This motion was denied on
September 12, 2007. James S. Adams filed for bankruptcy on July 29, 2005, Case
No. 1:02-cv-1332-DFH-TAB (Southern District, Indiana). Plaintiffs are to file
their motion for class certification by April 18, 2008. The matter is scheduled
for a jury trial on May 10, 2010. We believe this lawsuit is without merit and
intend to defend it vigorously; however, the ultimate outcome cannot be
predicted with certainty. Our current estimate of the maximum loss that we could
reasonably incur on this case is approximately $2.0 million. We do not believe
that the potential loss related to the individual defendant who served as an
officer on the Effective Date is material.

Cost of Insurance Litigation

The Company and certain subsidiaries, including principally Conseco Life,
have been named in numerous purported

145

CONSECO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
------------------

class action and individual lawsuits alleging, among other things, breach of
contract, fraud and misrepresentation with regard to a change made in 2003 and
2004 in the way cost of insurance charges are calculated for life insurance
policies sold primarily under the names "Lifestyle" and "Lifetime".
Approximately 86,500 of these policies were subject to the change, which
resulted in increased monthly charges to the policyholders' accounts. Many of
the purported class action lawsuits were filed in Federal courts across the
United States. In June 2004, the Judicial Panel on Multidistrict Litigation
consolidated these lawsuits into the action now referred to as In Re Conseco
Life Insurance Co. Cost of Insurance Litigation, Cause No. MDL 1610 (Central
District, California). In September 2004, plaintiffs in the multi-district
action filed an amended consolidated complaint and, at that time, added Conseco,
Inc. as a defendant. The amended complaint alleged, among other things, that the
change enabled Conseco, Inc. to add $360 million to its balance sheet. The
amended complaint sought unspecified compensatory, punitive and exemplary
damages as well as an injunction that would require the Company to reinstate the
prior method of calculating cost of insurance charges and refund any increased
charges that resulted from the change. On April 26, 2005, the Judge in the
multi-district action certified a nationwide class on the claims for breach of
contract and injunctive relief. On April 27, 2005, the Judge issued an order
certifying a statewide California class for injunctive and restitutionary relief
pursuant to California Business and Professions Code Section 17200 and breach of
the duty of good faith and fair dealing, but denied certification on the claims
for fraud and intentional misrepresentation and fraudulent concealment. The
Company announced on August 1, 2006, that it had reached a proposed settlement
of this case. Under the proposed settlement, inforce policyholders were given an
option to choose a form of policy benefit enhancement and certain former
policyholders will share in a settlement fund by either receiving cash or
electing to reinstate their policies with enhanced benefits. The settlement was
subject to court review and approval, a fairness hearing, notice to all class
members, election of options by the class members, implementation of the
settlement and other conditions. At the May 21, 2007 fairness hearing, the court
granted final approval of the settlement and issued an order doing so on June 8,
2007. The Court entered final judgment in the case on July 5, 2007. We began
implementing the settlement with the inforce and certain former policyholders in
the last half of 2007.

We incurred total costs related to this litigation settlement of $64.4
million, $174.7 million and $18.3 million in 2007, 2006 and 2005, respectively.
The costs recognized in 2007 represent adjustments to our initial estimates
based on the ultimate cost of the settlement.

The implementation of the settlement includes enhanced benefits to the
inforce insurance policies, which eliminates the future estimated profits from
these policies in periods subsequent to the settlement date, if the experience
of the policies is consistent with our expectations. We recognized income before
income taxes on these policies of approximately $6.0 million in the six months
ended June 30, 2006.

Other cases that remain pending with respect to life insurance policies
sold primarily under the names "Lifestyle" and "Lifetime" include purported
nationwide class actions in Indiana and California state courts. Those cases
filed in Indiana state courts have been consolidated into the case now referred
to as Arlene P. Mangelson, et al. v. Conseco Life Insurance Company, Cause No.
29D01-0403-PL-211 (Superior Court, Hamilton County, Indiana). This case was
settled in connection with the In Re Conseco Life Insurance Co. Cost of
Insurance Litigation, Cause No. MDL 1610 (Central District, California), as
further described above. Four putative nationwide and/or statewide class-action
lawsuits filed in California state courts have been consolidated and are being
coordinated in the Superior Court of San Francisco County under the new caption
Cost of Insurance Cases, Judicial Council Coordination Proceeding No. 4384
(Judicial Council of California). In November 2007, this matter was settled,
with the exception of the claims of one plaintiff (who will be the sole
remaining plaintiff in this lawsuit). The amount recognized as expense in 2007
related to the settlement of this case was not significant to our business,
financial condition, results of operations or cash flows. On January 25, 2005 an
Amended Complaint making similar allegations was filed in the case captioned
William Schwartz v. Jeffrey Landerman, Diann P. Urbanek, Metro Insurance, Inc.,
Samuels Jacky Insurance Agency, Conseco Life Insurance Company, Successor to
Philadelphia Life Insurance Company, Case No. GD 00-011432 (Court of Common
Pleas, Allegheny County, Pennsylvania). Additionally, on February 11, 2005 Mr.
Schwartz filed a purported nationwide class action captioned William Schwartz
and Rebeca R. Frankel, Trustee of the Robert M. Frankel Irrevocable Insurance
Trust v. Conseco Life Ins. Co. et al., Case No. GD 05-3742 (Court of Common
Pleas, Allegheny County, Pennsylvania). On May 12, 2006 these two Schwartz cases
were consolidated under both original case numbers. The Schwartz matters were
settled in January 2008. The amount recognized as expense in 2007 related to the
settlement of these cases was not significant to our business, financial
condition, results of operations or cash flows. On May 24, 2005 a purported
class action lawsuit was filed in Illinois on behalf of a putative statewide
class captioned William J. Harte, individually and on behalf of all others
similarly situated v. Conseco Life Insurance Company, Case No. 05CH08925
(Circuit Court of Cook County, Illinois, Chancery Division), which has been
removed to the United States District Court for the Northern District of
Illinois, transferred to California and consolidated and coordinated with MDL
1610.

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Other non-class action cases regarding these policies include a lawsuit
filed on September 14, 2005 in Hawaii captioned AE Ventures for Archie Murakami,
et al. v. Conseco, Inc., Conseco Life Insurance Company; And Doe Defendants
1-100, Case No. CV05-00594 (United States District Court, District of Hawaii).
This suit involves approximately 800 plaintiffs all of whom purport to have
opted out of the In Re Conseco Life Insurance Co. Cost of Insurance Litigation
multi-district action. The complaint alleges nondisclosure, breach of fiduciary
duty, violations of HRS 480 (unfair and/or deceptive business practices),
declaratory and injunctive relief, insurance bad faith, punitive damages, and
seeks to impose alter ego liability.

The ultimate outcome of the cost of insurance lawsuits that have not been
settled cannot be predicted with certainty and an adverse outcome could exceed
the amount we have accrued and could have a material impact on the Company's
consolidated financial condition, cash flows or results of operations.

Agent Litigation

On September 18, 2006, a purported class action was filed in the Superior
Court of the State of California for the County of Los Angeles, Holly Walker,
individually, and on behalf of all others similarly situated, and on behalf of
the general public v. Bankers Life & Casualty Company, an insurance company
domiciled in the State of Illinois, and Does 1 to 100, Case No. BC358690. In her
complaint, plaintiff alleged Bankers Life and Casualty Company intentionally
misclassified its California insurance agents as independent contractors when
they should have been classified as employees. Plaintiff sought relief on behalf
of the class alleging claims for preliminary and permanent injunction,
misclassification, indemnification, conversion and unfair business practices.
Bankers Life and Casualty Company caused the case to be removed to the U.S.
District Court, Central District of California on October 18, 2006. An order was
entered on November 20, 2006 transferring the case to the U.S. District Court,
Northern District of Illinois, Case No. 06C6906. The Court has dismissed with
prejudice plaintiff's allegations of preliminary and permanent injunction and
misclassification. A first amended complaint was filed on June 12, 2007 adding
Carole Paradise as the new class representative and naming Holly Walker as an
individual plaintiff. This complaint alleges claims of indemnification,
conversion and unfair business practices. On October 1, 2007, the court granted
the plaintiff's motion for class certification. Bankers Life and Casualty
Company subsequently appealed to the 7th Circuit Court of Appeals, which denied
the appeal. This matter is set for trial on July 21, 2008. We believe the action
is without merit and we intend to defend the case vigorously. The ultimate
outcome of the action cannot be predicted with certainty.

Other Litigation

On November 17, 2005, a complaint was filed in the United States District
Court for the Northern District of California, Robert H. Hansen, an individual,
and on behalf of all others similarly situated v. Conseco Insurance Company, an
Illinois corporation f/k/a Conseco Annuity Assurance Company, Cause No.
C0504726. Plaintiff in this putative class action purchased an annuity in 2000
and is claiming relief on behalf of the proposed national class for alleged
violations of the Racketeer Influenced and Corrupt Organizations Act; elder
abuse; unlawful, deceptive and unfair business practices; unlawful, deceptive
and misleading advertising; breach of fiduciary duty; aiding and abetting of
breach of fiduciary duty; and unjust enrichment and imposition of constructive
trust. On January 27, 2006, a similar complaint was filed in the same court
entitled Friou P. Jones, on Behalf of Himself and All Others Similarly Situated
v. Conseco Insurance Company, an Illinois company f/k/a Conseco Annuity
Assurance Company, Cause No. C06-00537. Mr. Jones had purchased an annuity in
2003. Each case alleged that the annuity sold was inappropriate and that the
annuity products in question are inherently unsuitable for seniors age 65 and
older. On March 3, 2006 a first amended complaint was filed in the Hansen case
adding causes of action for fraudulent concealment and breach of the duty of
good faith and fair dealing. In an order dated April 14, 2006, the court
consolidated the two cases under the original Hansen cause number and retitled
the consolidated action: In re Conseco Insurance Co. Annuity Marketing & Sales
Practices Litig. A motion to dismiss the amended complaint was granted in part
and denied in part, and the plaintiffs filed a second amended complaint on April
27, 2007. The second amended complaint includes the same causes of action as the
prior complaint, but added as defendants Conseco, Inc., Conseco Services, LLC,
Conseco Marketing, LLC and 40|86 Advisors, Inc. while deleting Friou Jones as a
named plaintiff. We filed a motion to dismiss the second amended complaint and
it was granted in part and denied in part. A motion to dismiss Conseco, Inc.,
Conseco Services, LLC, Conseco Marketing, LLC and 40|86 Advisors, Inc. was filed
on September 14, 2007, and we await a ruling on the motion. The court has not
yet made a determination whether the case should go forward as a class action,
and we intend to oppose any form of class action treatment of these claims. We
believe the action is without merit, and intend to defend it vigorously. The
ultimate outcome of the action cannot be predicted with certainty.

On September 24, 2004, a purported statewide class action was filed in the
18th Judicial District Court, Parish of



147

CONSECO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
------------------

Iberville, Louisiana, Diana Doiron, Individually And On Behalf of All Others
Similarly Situated v. Conseco Health Insurance Company, Case No. 61,534. In her
complaint, plaintiff claims that she was damaged due to Conseco Health Insurance
Company's failure to pay claims made under her cancer policy, and seeks
compensatory and statutory damages in an unspecified amount along with
declaratory and injunctive relief. Conseco caused the case to be removed to the
United States District Court for the Middle District of Louisiana on November 3,
2004, and it was assigned Case No. 04-784-D-M2. An order was issued on February
15, 2007 granting plaintiff's motion for class certification. The order
specifically certifies two sub-classes identifying them as the radiation
treatment sub-class and the chemotherapy treatment sub-class. We have appealed
the certification order to the 5th Circuit Court of Appeals, and an oral
argument was heard by that court on March 3, 2008. We believe the action is
without merit, and we intend to defend the case vigorously. The ultimate outcome
of the action cannot be predicted with certainty.

Beneficial Standard Life Insurance Company, a predecessor company to
Conseco Insurance Company, filed suit for declaratory judgment against J.C.
Penney Life Insurance Company a/k/a Stonebridge Life Insurance Company
("Stonebridge") in a case captioned, Beneficial Standard Life Insurance Company
v. J.C. Penney Life Insurance Company and J.C. Penney Company, Inc., United
States District Court for the Central District of California, Case No.
CV-98-02792-SVW. This litigation arises from the 1967 sale of Beneficial Fire &
Casualty ("BF&C") by Beneficial Standard Life Insurance Company to J.C. Penney
Company, Inc. The subject of the case is whether Conseco Insurance Company must
indemnify Stonebridge for losses and expenses incurred as a result of claims
arising under presale BF&C insurance policies. Conseco Insurance Company filed
suit in April 1998 seeking a judicial declaration that: (1) it is not generally
obligated to indemnify Stonebridge under the terms of the agreement governing
the 1967 sale; and (2) that it is not obligated to indemnify Stonebridge for
losses or expenses incurred in connection with specific known claims. Penney
counterclaimed for breach of contract and declaratory relief. On July 25, 2006,
a second action was filed in the Circuit Court of Hamilton County, Indiana,
captioned Conseco Insurance Company v. Stonebridge Life Insurance Company and
J.C. Penney Life Insurance Company. Penney removed the case to federal court on
August 16, 2006, Case No. 1:06-CV-1229 SEB-VSS (Southern District, Indiana) and
filed a motion to dismiss. On September 27, 2007, the court transferred this
case to the State of California for consolidation with the pending matter there.
The subject of this second action is whether Conseco Insurance Company's
indemnification obligation with respect to specific known claims is excused by
Stonebridge's failure to pursue available reinsurance. The parties have reached
a settlement and the cases are to be dismissed with prejudice. The amount
recognized as expense in 2007 related to the settlement of this case was not
significant to our business, financial condition, results of operations or cash
flows.

On November 3, 2006, an action was filed in the U.S. District Court for the
Central District of California Ruth Ross v. Pioneer National Life Insurance
Company and Washington National Insurance Company, Case No. CV 06 7081. In that
case, the plaintiff alleges breach of contract, bad faith and violation of
California consumer protection laws in the handling of her claim for benefits
under a Washington National Insurance Company policy of long-term care
insurance. The Company paid out in excess of the $150,000 per occurrence maximum
benefit and declined to pay additional claims, but the plaintiff contends she
should receive the balance of a $250,000 lifetime maximum benefit. The parties
disagree as to whether the plaintiff's continuing confinement is caused by one
or more than one occurrence as defined under the policy. In her complaint, the
plaintiff claims loss of benefits of $.1 million, and compensatory damages for
mental anguish of $.9 million, together with punitive damages of $5 million plus
attorney fees, interest and costs of litigation. The parties were unable to
conclude the matter at a mediation which occurred June 22, 2007. The matter is
scheduled for jury trial May 27, 2008. The Company believes the claim is without
merit and intends to defend it vigorously. The ultimate outcome of the action
cannot be predicted with certainty.

On August 7, 2006, an action was filed in the United States District Court
for the Southern District of New York, Sheldon H. Solow v. Conseco, Inc. and
Carmel Fifth, LLC, Case No. 06-CV-5988 (BSJ). The plaintiff alleges breach of
duty to hold a fair auction, fraud, promissory estoppel, unjust enrichment and a
declaratory judgment with respect to the sale by defendants of the GM Building
in New York City in 2003. Plaintiff was a losing bidder on the building. In the
complaint, plaintiff seeks damages of $35 million on the unjust enrichment count
and damages in an amount to be determined at trial on the remaining counts.
Defendants filed a motion to dismiss the complaint on September 18, 2006. On
January 11, 2008, the court ruled on the motion to dismiss, granting the motion
with respect to the unjust enrichment and declaratory judgment counts, and
denying the motion with respect to the remaining three counts. Discovery will
now be proceeding in the matter. The Company believes the action is without
merit and intends to defend it vigorously. The ultimate outcome of the action
cannot be predicted with certainty.

In addition, the Company and its subsidiaries are involved on an ongoing
basis in other arbitrations and lawsuits, including purported class actions,
related to their operations. The ultimate outcome of all of these other legal
matters pending

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CONSECO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
------------------

against the Company or its subsidiaries cannot be predicted, and, although such
lawsuits are not expected individually to have a material adverse effect on the
Company, such lawsuits could have, in the aggregate, a material adverse effect
on the Company's consolidated financial condition, cash flows or results of
operations.

Director and Officer Loan Program Litigation

Collection efforts by the Company and Conseco Services related to the
1996-1999 director and officer loan programs are ongoing against two past board
members with outstanding loan balances, James D. Massey and Dennis E. Murray,
Sr. In addition, these directors have sued the companies for declaratory relief
concerning their liability for the loans. The specific lawsuits now pending
include: Murray and Massey v. Conseco, Case No. 1:03-CV-1701-LJM-VSS (Southern
District, Indiana); Conseco Services v. Murray, Case No. 29D02-0404-CC-381
(Superior Court, Hamilton County, Indiana); Conseco Services v. Massey, Case No.
29D01-0406-CC-477 (Superior Court, Hamilton County, Indiana); Conseco, Inc. v.
Massey, Case No. 2005-L-011316 (Circuit Court, Cook County, Illinois) and
Conseco and Conseco Services v. J. David Massey et al., Case No.
29D02-0611-PL-1169 (Superior Court, Hamilton County, Indiana). On June 21, 2006,
in the Hamilton County case, the Company obtained a partial summary judgment
against Mr. Massey in the sum of $4.4 million plus interest at 11.5 percent from
June 30, 2002. The trial court stayed execution of the judgment pending appeal.
The trial which was set for October 22, 2007, has been continued without date.
On January 22, 2008, the Indiana Court of Appeals, in Massey v. Conseco
Services, LLC Case No. 29A05-0610-CV-565, affirmed the judgment entered in the
Hamilton County case in favor of the Company and the dismissal of Massey's
counterclaims. Mr. Massey has filed a petition for rehearing with the Court of
Appeals. The Murray U.S. District Court case is currently set for trial on
February 2, 2009.

The Company and Conseco Services believe that all amounts due under the
director and officer loan programs, including all applicable interest, are valid
obligations owed to the companies. As part of our Predecessor's plan of
reorganization, we have agreed to pay 45 percent of any net proceeds recovered
in connection with these lawsuits, in an aggregate amount not to exceed $30
million, to former holders of our Predecessor's trust preferred securities that
did not opt out of a settlement reached with the committee representing holders
of these securities. As of December 31, 2007, we have paid $13.7 million to the
former holders of trust preferred securities under this arrangement. We intend
to prosecute these claims to obtain the maximum recovery possible. Further, with
regard to the various claims brought against the Company and Conseco Services by
certain former directors and officers, we believe that these claims are without
merit and intend to defend them vigorously. The ultimate outcome of the lawsuits
cannot be predicted with certainty. At December 31, 2007, we estimated that
approximately $19.2 million, net of collection costs, of the remaining amounts
due under the loan program will be collected (including amounts that remain to
be collected from borrowers with whom we have settled) and of that amount $10.2
million will be paid to the former holders of our Predecessor's trust preferred
securities.

Regulatory Examinations and Fines

Insurance companies face significant risks related to regulatory
investigations and actions. Regulatory investigations generally result from
matters related to sales or underwriting practices, payment of contingent or
other sales commissions, claim payments and procedures, product design, product
disclosure, additional premium charges for premiums paid on a periodic basis,
denial or delay of benefits, charging excessive or impermissible fees on
products, changing the way cost of insurance charges are calculated for certain
life insurance products or recommending unsuitable products to customers. We
are, in the ordinary course of our business, subject to various examinations,
inquiries and information requests from state, federal and other authorities.
The ultimate outcome of these regulatory actions 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 we could suffer significant reputational harm as a result of
these matters, which could also have a material adverse effect on our business,
financial condition, results of operations or cash flows.

Conseco received a letter from the Congressional Committee on Energy and
Commerce (the "Committee") dated May 23, 2007 indicating the Committee is
conducting an investigation of companies that underwrite, market, and sell
long-term nursing home and home health care insurance policies. In that letter,
the Committee requested various documents from Conseco with regard to long-term
care insurance. Representatives from Conseco subsequently met with the Committee
staffers and reached an agreement on the scope of the documents requested.
Conseco responded to all agreed upon document requests by June 27, 2007. Conseco
intends to continue to fully cooperate with regard to this investigation.

Conseco received a letter from Senator Grassley of the United States Senate
Finance Committee dated September 27, 2007 indicating his interest in learning
how long-term care insurance providers manage their policies, serve their
beneficiaries, and decide which claims to approve and which to deny. Senator
Grassley requested answers to questions

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CONSECO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
------------------

regarding Conseco's policies and practices and requested various documents.
Representatives from Conseco subsequently met with two of the Senator's staffers
and reached an agreement on the scope of the information requested. Conseco is
in the process of providing the information requested and intends to continue to
fully cooperate with regard to this inquiry.

The states of Pennsylvania, Illinois, Texas, Florida and Indiana are
leading a multistate examination of the long-term care claims administration and
complaint handling practices of Conseco Senior and Bankers Life and Casualty
Company, as well as the sales and marketing practices of Bankers Life and
Casualty Company. This examination commenced in July 2007. More than 35 other
states have joined or expressed an interest in joining the multistate
examination. This examination will cover the years 2005, 2006 and 2007.

Certain state insurance regulators have previously requested information
with respect to actions of the Company related to the cost of insurance charges
for life insurance policies sold primarily under the names "Lifestyle" and
"Lifetime". Such policies are subject to the litigation settlement described in
the section of this note entitled "Cost of Insurance Litigation".

Guaranty Fund Assessments

The balance sheet at December 31, 2007, included: (i) accruals of $7.0
million, representing our estimate of all known assessments that will be levied
against the Company's insurance subsidiaries by various state guaranty
associations based on premiums written through December 31, 2007; and (ii)
receivables of $3.4 million that we estimate will be recovered through a
reduction in future premium taxes as a result of such assessments. At December
31, 2006, such guaranty fund assessment accruals were $7.2 million and such
receivables were $3.4 million. These estimates are subject to change when the
associations determine more precisely the losses that have occurred and how such
losses will be allocated among the insurance companies. We recognized expense
for such assessments of $1.3 million, $2.5 million and $4.0 million in 2007,
2006 and 2005, respectively.

Guarantees

We hold bank loans made to certain former directors and employees to enable
them to purchase common stock of Old Conseco. These loans, with a principal
amount of $481.3 million, had been guaranteed by our Predecessor. We received
all rights to collect the balances due pursuant to the original terms of these
loans. In addition, we hold loans to participants for interest on the loans. The
loans and the interest loans are collectively referred to as the "D&O loans." We
regularly evaluate the collectibility of these loans in light of the credit
worthiness of the participants and the current status of various legal actions
we have taken to collect the D&O loans. At December 31, 2007, we have estimated
that approximately $19.2 million of the D&O loan balance (which is included in
other assets) is collectible (net of the costs of collection). An allowance has
been established to reduce the total D&O loan balance to the amount we estimated
was recoverable. In 2006 and 2005, other operating costs and expenses are net of
recoveries of $3.0 million and $3.2 million, respectively, related to our
evaluation of the collectibility of the D&O loans.

Pursuant to the settlement that was reached with the Official Committee of
the Trust Originated Preferred Securities ("TOPrS") Holders and the Official
Committee of Unsecured Creditors in the Plan, the former holders of TOPrS
(issued by Old Conseco's subsidiary trusts and eliminated in our reorganization)
who did not opt out of the bankruptcy settlement, will be entitled to receive 45
percent of any net proceeds from the collection of certain D&O loans in an
aggregate amount not to exceed $30 million. As of December 31, 2007, we had paid
$13.7 million to the former holders of TOPrS and we have established a liability
of $10.2 million (which is included in other liabilities), representing our
estimate of the amount which will be paid to the former holders of TOPrS
pursuant to the settlement.

In accordance with the terms of the employment agreements of two of the
Company's former chief executive officers, certain wholly-owned subsidiaries of
the Company are the guarantors of the former executives' nonqualified
supplemental retirement benefits. The liability for such benefits was $22.5
million at both December 31, 2007 and 2006, and is included in the caption
"Other liabilities" in the consolidated balance sheet.

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Notes to Consolidated Financial Statements
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Leases and Certain Other Long-Term Commitments

The Company rents office space, equipment and computer software under
noncancellable operating lease agreements. In addition, the Company has entered
into certain sponsorship agreements which require future payments. Total expense
pursuant to these lease and sponsorship agreements was $44.8 million, $43.3
million and $41.3 million in 2007, 2006 and 2005, respectively. Future required
minimum payments as of December 31, 2007, were as follows (dollars in millions):


2008 ........................................................................... $ 37.5
2009 ........................................................................... 30.8
2010 ........................................................................... 24.7
2011 ........................................................................... 21.4
2012 ........................................................................... 19.2
Thereafter........................................................................ 86.5
------

Total..................................................................... $220.1
======

10. OTHER DISCLOSURES

Agent Deferred Compensation Plan and Postretirement Plans

For our agent deferred compensation plan and postretirement plans, it is
our policy to immediately recognize changes in the actuarial benefit obligation
resulting from either actual experience being different than expected or from
changes in actuarial assumptions.

One of our insurance subsidiaries has a noncontributory, unfunded deferred
compensation plan for qualifying members of its career agency force. Benefits
are based on years of service and career earnings. The actuarial measurement
date of this deferred compensation plan is December 31. The liability recognized
in the consolidated balance sheet for the agents' deferred compensation plan was
$94.5 million and $94.6 million at December 31, 2007 and 2006, respectively.
Costs incurred on this plan were $5.8 million, $8.9 million and $11.3 million
during 2007, 2006 and 2005, respectively (including the recognition of gains
(losses) of $3.3 million, $(.1) million and $(4.0) million in 2007, 2006 and
2005, respectively, resulting from actual experience being different than
expected or from changes in actuarial assumptions). The estimated net loss for
the agent deferred compensation plan that will be amortized from accumulated
other comprehensive income into the net periodic benefit cost during 2008 is $.2
million. In 2006, we purchased Company-owned life insurance ("COLI") as an
investment vehicle to fund the agent deferred compensation plan. The COLI assets
are not assets of the agent deferred compensation plan, and as a result, are
accounted for outside the plan and are recorded in the consolidated balance
sheet as other invested assets. The carrying value of the COLI assets was $40.9
million and $19.7 million at December 31, 2007 and 2006, respectively. Changes
in the cash surrender value (which approximates net realizable value) of the
COLI assets are recorded as net investment income.

Effective December 31, 2005, the Company terminated certain postretirement
benefit plans. Prior to the termination of such plans, we provided certain
health care and life insurance benefits for certain eligible retired employees
under partially funded and unfunded plans in existence at the date on which
certain subsidiaries were acquired. Certain postretirement benefit plans were
contributory, with participants' contributions adjusted annually. Actuarial
measurement dates of September 30 and December 31 were used for those
postretirement benefit plans. In 2005, we recognized gains of $13.2 million on
the termination of these plans. The remaining liability at December 31, 2006,
related to benefits paid in 2007. Amounts related to the postretirement benefit
plans were as follows (dollars in millions):


2007 2006
---- ----

Benefit obligation, beginning of year............................ $ .3 $ .5
Benefits paid................................................ (.3) (.2)
---- ----

Benefit obligation, end of year.................................. $ - $ .3
==== ====

Funded status - accrued benefit cost............................. $ - $ .3
==== ====


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Notes to Consolidated Financial Statements
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We used the following assumptions for the deferred compensation plan to
calculate:



2007 2006
---- ----

Benefit obligations:
Discount rate................................................ 6.02% 5.75%

Net periodic cost:
Discount rate................................................ 5.75% 5.50%


The discount rate is based on the yield of a hypothetical portfolio of high
quality debt instruments which could effectively settle plan benefits on a
present value basis as of the measurement date. At both December 31, 2007 and
2006, for our deferred compensation plan for qualifying members of our career
agency force, we assumed a 5 percent annual increase in compensation until the
participant's normal retirement date (age 65 and completion of five years of
service).

There was no expense recognized in 2006 or 2007 related to the
postretirement benefit plans which were terminated in 2005. Components of the
cost (benefit) we recognized related to such postretirement plans in 2005 were
as follows (dollars in millions):



2005
----

Cost of postretirement benefits:
Interest cost.............................................. $ .6
Curtailment gains.......................................... (13.2)
Recognized net actuarial gain.............................. -
------

N