Annual Reports

 
Quarterly Reports

  • 10-Q (Nov 1, 2017)
  • 10-Q (Aug 4, 2017)
  • 10-Q (May 3, 2017)
  • 10-Q (Nov 7, 2016)
  • 10-Q (May 4, 2016)
  • 10-Q (Nov 3, 2015)

 
8-K

 
Other

CNO Financial Group, Inc. 10-Q 2009
form10q.htm






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

Form 10-Q

þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ende September 30, 2009

o
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 color logo
Conseco, Inc.

Delaware
 
75-3108137
State of Incorporation
 
IRS Employer Identification No.
     
11825 N. Pennsylvania Street
   
Carmel, Indiana  46032
 
(317) 817-6100
Address of principal executive offices
 
Telephone
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:  Yes [ X ]  No [   ] 
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes [ X ]  No [  ] 
 
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 ] 
 
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court:  Yes   [ X ]  No [   ]

Shares of common stock outstanding as of October 26, 2009:  184,886,216
 

 

 



TABLE OF CONTENTS

PART I  -
FINANCIAL INFORMATION
Page
     
Item 1.
Financial Statements
 
     
 
Consolidated Balance Sheet as of September 30, 2009 and December 31, 2008
3
 
Consolidated Statement of Operations for the three and nine months ended September 30, 2009 and 2008
5
 
Consolidated Statement of Shareholders’ Equity for the nine months ended September 30, 2009 and 2008
6
 
Consolidated Statement of Cash Flows for the nine months ended September 30, 2009 and 2008
7
 
8
     
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
53
     
 
Cautionary Statement Regarding Forward-Looking Statements
53
 
54
 
55
 
57
 
72
 
77
 
91
 
100
 
102
 
104
     
Item 3.
104
     
Item 4.
104
     
PART II -
OTHER INFORMATION
 
     
Item 1.
105
     
Item 1A.
105
     
Item 5.
106
     
Item 6.
106





 
-2-

 
 


PART I - FINANCIAL INFORMATION

ITEM 1.
FINANCIAL STATEMENTS.

CONSECO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Dollars in millions)
(unaudited)

ASSETS

   
September 30,
   
December 31,
 
   
2009
   
2008
 
             
Investments:
           
Actively managed fixed maturities at fair value (amortized cost:
September 30, 2009 - $18,801.3; December 31, 2008 - $18,276.3)
 
$
18,568.0
   
$
15,277.0
 
Equity securities at fair value (cost: September 30, 2009 - $30.7;
December 31, 2008 - $31.0)
   
30.7
     
32.4
 
Mortgage loans
   
2,030.8
     
2,159.4
 
Policy loans
   
299.2
     
363.5
 
Trading securities
   
275.8
     
326.5
 
Securities lending collateral
   
207.0
     
393.7
 
Other invested assets
   
192.4
     
95.0
 
                 
Total investments
   
21,603.9
     
18,647.5
 
                 
Cash and cash equivalents - unrestricted
   
532.3
     
894.5
 
Cash and cash equivalents - restricted
   
12.0
     
4.8
 
Accrued investment income
   
317.4
     
298.7
 
Value of policies inforce at the Effective Date
   
1,220.5
     
1,477.8
 
Cost of policies produced
   
1,779.1
     
1,812.6
 
Reinsurance receivables
   
3,444.8
     
3,284.8
 
Income tax assets, net
   
1,057.4
     
2,047.7
 
Assets held in separate accounts
   
19.5
     
18.2
 
Other assets
   
 282.1
     
276.7
 
                 
Total assets
 
$
30,269.0
   
$
28,763.3
 


(continued on next page)
















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


 
 
 
 
 
-3-

 
 



CONSECO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET,> continued
(Dollars in millions)
(unaudited)

LIABILITIES AND SHAREHOLDERS' EQUITY

   
September 30,
   
December 31,
 
   
2009
   
2008
 
             
Liabilities:
           
Liabilities for insurance products:
           
Interest-sensitive products
 
$
13,208.7
   
$
13,332.8
 
Traditional products
   
10,006.8
     
9,828.7
 
Claims payable and other policyholder funds
   
945.8
     
1,008.4
 
Liabilities related to separate accounts
   
19.5
     
18.2
 
Other liabilities
   
565.0
     
457.4
 
Investment borrowings
   
714.9
     
767.5
 
Securities lending payable
   
212.7
     
408.8
 
Notes payable – direct corporate obligations
   
1,261.9
     
1,311.5
 
                 
Total liabilities
   
26,935.3
     
27,133.3
 
                 
Commitments and Contingencies
               
                 
Shareholders' equity:
               
Common stock ($0.01 par value, 8,000,000,000 shares authorized, shares issued and
outstanding: September 30, 2009 – 184,886,216; December 31, 2008 – 184,753,758)
   
1.9
     
1.9
 
Additional paid-in capital
   
4,110.6
     
4,104.0
 
Accumulated other comprehensive loss
   
(146.0
)
   
(1,770.7
)
Accumulated deficit
   
(632.8
)
   
(705.2
)
                 
Total shareholders' equity
   
3,333.7
     
1,630.0
 
                 
Total liabilities and shareholders' equity
 
$
30,269.0
   
$
28,763.3
 



















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

 
 
 
 
 
-4-

 
 


CONSECO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(Dollars in millions, except per share data)
(unaudited)

   
Three months ended
   
Nine months ended
 
   
September 30,
   
September 30,
 
   
2009
   
2008
   
2009
   
2008
 
         
(as adjusted)
         
(as adjusted)
 
Revenues:
                       
Insurance policy income
 
$
772.0
   
$
821.8
   
$
2,346.1
   
$
2,436.9
 
Net investment income (loss):
                               
General account assets
   
306.8
     
312.8
     
923.4
     
934.7
 
Policyholder and reinsurer accounts and other special-
   purpose portfolios
   
56.0
     
(24.3
)
   
47.5
     
(71.9
)
Realized investment gains (losses):
                               
Net realized investment gains (losses), excluding impairment
losses
   
15.4
     
(43.2
)
   
120.8
     
(52.0
)
Other-than-temporary impairment losses:
                               
Total other-than-temporary impairment losses
   
(162.4
)
   
(50.1
)
   
(324.2
)
   
(117.4
)
Other-than-temporary impairment losses  recognized in
other comprehensive loss
   
126.7
     
 -
     
159.9
     
 -
 
Net impairment losses recognized
   
(35.7
)
   
(50.1
)
   
(164.3
)
   
(117.4
)
Total realized gains (losses)
   
(20.3
)
   
(93.3
)
   
(43.5
)
   
(169.4
)
Fee revenue and other income
   
4.1
     
4.9
     
10.2
     
13.8
 
Total revenues
   
1,118.6
     
1,021.9
     
3,283.7
     
3,144.1
 
Benefits and expenses:
                               
Insurance policy benefits
   
782.7
     
797.0
     
2,317.3
     
2,380.6
 
Interest expense
   
31.9
     
24.6
     
87.8
     
80.5
 
Amortization
   
113.3
     
77.6
     
335.9
     
288.9
 
Expenses related to debt modification
   
-
     
-
     
9.5
     
-
 
Other operating costs and expenses
   
126.6
     
117.0
     
377.3
     
384.2
 
Total benefits and expenses
   
1,054.5
     
1,016.2
     
3,127.8
     
3,134.2
 
Income before income taxes and discontinued operations
   
64.1
     
5.7
     
155.9
     
9.9
 
                                 
Income tax expense:
                               
Tax expense on period income
   
22.0
     
1.6
     
54.7
     
5.7
 
Valuation allowance for deferred tax assets
   
26.7
     
30.0
     
33.7
     
328.0
 
Income (loss) before discontinued operations
   
15.4
     
(25.9
)
   
67.5
     
(323.8
)
Discontinued operations, net of income taxes
   
-
     
(157.4
)
   
 -
     
(355.2
)
Net income (loss)
 
$
15.4
   
$
(183.3
)
 
$
67.5
   
$
(679.0
)
Earnings (loss) per common share:
                               
Basic:
                               
Weighted average shares outstanding
   
184,886,000
     
184,726,000
     
184,820,000
     
184,688,000
 
Income (loss) before discontinued operations
 
$
.08
   
$
(.14
)
 
$
.37
   
$
(1.76
)
Discontinued operations
   
-
     
(.85
)
   
-
     
(1.92
)
Net income (loss)
 
$
.08
   
$
(.99
)
 
$
.37
   
$
(3.68
)
Diluted:
                               
Weighted average shares outstanding
   
185,846,000
     
184,726,000
     
185,277,000
     
184,688,000
 
Income (loss) before discontinued operations
 
$
.08
   
$
(.14)
   
$
.36
   
$
(1.76
)
Discontinued operations
   
-
     
(.85)
     
-
     
(1.92
)
Net income (loss)
 
$
.08
   
$
(.99)
   
$
.36
   
$
(3.68
)

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

 
 
 
 
 
-5-

 
 



CONSECO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Dollars in millions)
(unaudited)

   
Common stock and additional paid-in capital
   
Accumulated other comprehensive loss
   
Retained earnings (accumulated deficit)
   
Total
 
                         
Balance, December 31, 2007
 
$
4,098.5
   
$
(273.3
)
 
$
427.1
   
$
4,252.3
 
                                 
Comprehensive loss, net of tax:
                               
Net loss
   
-
     
-
     
(679.0
)
   
(679.0
)
Change in unrealized appreciation (depreciation) of investments
(net of applicable income tax benefit of $482.1)
   
-
     
(864.4
)
   
-
     
(864.4
)
                                 
Total comprehensive loss
                           
(1,543.4
)
                                 
Stock option and restricted stock plans
   
7.4
     
-
     
-
     
7.4
 
                                 
Balance, September 30, 2008 (as adjusted)
 
$
4,105.9
   
$
(1,137.7
)
 
$
(251.9
)
 
$
2,716.3
 
                                 
Balance, December 31, 2008
 
$
4,105.9
   
$
(1,770.7
)
 
$
(705.2
)
 
$
1,630.0
 
                                 
Comprehensive income, net of tax:
                               
Net income
   
-
     
-
     
67.5
     
67.5
 
Change in unrealized appreciation (depreciation) of
investments (net of applicable income tax expense of $949.8)
   
-
     
1,711.3
     
-
     
1,711.3
 
Noncredit component of impairment losses on actively managed fixed maturities
(net of applicable income tax benefit of $41.4)
   
-
     
(81.7
)
   
-
     
(81.7
)
                                 
Total comprehensive income
                           
1,697.1
 
                                 
Stock option and restricted stock plans
   
6.6
     
-
     
-
     
6.6
 
Effect of reclassifying noncredit component of previously recognized impairment losses on actively managed fixed maturities (net of applicable income tax benefit of $2.6)
   
-
     
(4.9
)
   
4.9
     
-
 
                                 
Balance, September 30, 2009
 
$
4,112.5
   
$
(146.0
)
 
$
(632.8
)
 
$
3,333.7
 




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


 
 
 
 
 
-6-

 
 


CONSECO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in millions)
(unaudited)

   
Nine months ended
 
   
September 30,
 
   
2009
   
2008
 
Cash flows from operating activities:
           
Insurance policy income
 
$
2,074.9
   
$
2,380.7
 
Net investment income
   
860.7
     
992.5
 
Fee revenue and other income
   
10.2
     
13.8
 
Net sales of trading securities
   
55.3
     
373.6
 
Insurance policy benefits
   
(1,781.8
)
   
(2,095.6
)
Interest expense
   
(76.5
)
   
(77.9
)
Policy acquisition costs
   
(309.5
)
   
(357.1
)
Other operating costs
   
(352.5
)
   
(452.8
)
Expenses related to debt modification
   
(9.5
)
   
-
 
Taxes
   
(6.3
)
   
(.7
)
                 
Net cash provided by operating activities
   
465.0
     
776.5
 
                 
Cash flows from investing activities:
               
Sales of investments
   
8,140.1
     
5,472.8
 
Maturities and redemptions of investments
   
779.5
     
633.5
 
Purchases of investments
   
(9,613.8
)
   
(6,986.3
)
Change in restricted cash
   
(7.2
)
   
9.1
 
Change in cash held by discontinued operations
   
-
     
1.2
 
Other
   
(16.8
)
   
(20.8
)
                 
Net cash used by investing activities
   
(718.2
)
   
(890.5
)
                 
Cash flows from financing activities:
               
Payments on notes payable
   
(61.6
)
   
(6.5
)
Amounts received for deposit products
   
1,338.7
     
1,308.7
 
Withdrawals from deposit products
   
(1,333.5
)
   
(1,153.1
)
Investment borrowings
   
(52.6
)
   
(89.1
)
                 
Net cash provided (used) by financing activities
   
(109.0
)
   
60.0
 
                 
Net decrease in cash and cash equivalents
   
(362.2
)
   
(54.0
)
                 
Cash and cash equivalents, beginning of period
   
894.5
     
361.9
 
                 
Cash and cash equivalents, end of period
 
$
532.3
   
$
307.9
 









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


.

 
 
 
 
 
-7-

 
 
CONSECO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)



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 (our “Predecessor”), in connection with our bankruptcy reorganization which became effective on September 10, 2003 (the “Effective Date”).  The terms “Conseco”, the “Company”, “we”, “us”, and “our” as used in this report refer to CNO and its subsidiaries or, when the context requires otherwise, our Predecessor and its subsidiaries.  We focus on serving the senior and middle-income markets, which we believe are attractive, 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.

The following notes should be read together with the notes to the consolidated financial statements included in our 2008 Form 10-K as retrospectively adjusted by our Current Report on Form 8-K filed on October 13, 2009, which updates Items 6, 7 and 8 of our 2008 Form 10-K.

TRANSFER OF SENIOR HEALTH INSURANCE COMPANY OF PENNSYLVANIA TO AN INDEPENDENT TRUST

On November 12, 2008, Conseco and CDOC, Inc. (“CDOC”), a wholly owned subsidiary of Conseco (and together with Conseco, the “Conseco Parties”), completed the transfer (the “Transfer”) of the stock of Senior Health Insurance Company of Pennsylvania (“Senior Health”, formerly known as Conseco Senior Health Insurance Company prior to its name change in October 2008) to Senior Health Care Oversight Trust, an independent trust (the “Independent Trust”) for the exclusive benefit of Senior Health’s long-term care policyholders.  Consummation of the transaction was subject to the approval of the Pennsylvania Insurance Department.

As a result of the Transfer, Senior Health’s long-term care business is presented as a discontinued operation in prior periods.  The operating results from the discontinued operations are as follows (dollars in millions):

   
Three months ended
   
Nine months ended
 
   
September 30, 2008
   
September 30, 2008
 
             
Revenues:
           
Insurance policy income
 
$
65.0
   
$
197.2
 
Net investment income
   
46.7
     
134.6
 
Net realized investment losses
   
(177.3
)
   
(380.1
)
                 
Total revenues
   
(65.6
)
   
(48.3
)
                 
Benefits and expenses:
               
Insurance policy benefits
   
88.1
     
259.0
 
Amortization
   
3.9
     
14.6
 
Gain on reinsurance recapture (a)
   
(29.7
)
   
(29.7
)
Other operating costs and expenses
   
17.1
     
49.3
 
                 
Total benefits and expenses
   
79.4
     
293.2
 
                 
Loss before income taxes
   
(145.0
)
   
(341.5
)
                 
Income tax expense on period income
   
12.4
     
13.7
 
                 
Net loss from discontinued operations
 
$
(157.4
)
 
$
(355.2
)
____________
(a)  
In the third quarter of 2008, Senior Health recaptured a block of previously reinsured long-term care business which was included in the business transferred to the Independent Trust.

 
 
 
-8-

 
 
CONSECO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)



BASIS OF PRESENTATION

Our unaudited consolidated financial statements reflect normal recurring adjustments that are necessary for a fair statement of our financial position and results of operations on a basis consistent with reporting interim financial information in accordance with instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission (the “SEC”).  As permitted by rules and regulations of the SEC applicable to quarterly reports on Form 10-Q, we have condensed or omitted certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).  We have reclassified certain amounts from the prior periods to conform to the 2009 presentation.  These reclassifications have no effect on net income or shareholders’ equity.  Results for interim periods are not necessarily indicative of the results that may be expected for a full year.

The balance sheet at December 31, 2008, presented herein, has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by GAAP in the United States for complete financial statements.

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.

Our consolidated financial statements exclude the results of material transactions between us and our consolidated affiliates, or among our consolidated affiliates.

We have evaluated subsequent events for recognition or disclosure through November 9, 2009 (the date our financial statements are issued).

OUT-OF-PERIOD ADJUSTMENTS

We recorded the net effects of certain out-of-period adjustments which:  (i) increased our net income by $3.8 million (or two cents per diluted share) in the third quarter of 2009; and (ii) decreased our net income by $1.4 million (or one cent per diluted share) in the first nine months of 2009.  The impact of correcting these errors in prior years was not significant to any individual period.  We evaluated these errors taking into account both qualitative and quantitative factors and considered the impact of these errors in relation to the 2009 periods, as well as the periods in which they originated.  Management believes these errors are immaterial to both the consolidated quarterly and annual financial statements.  

ACCOUNTING FOR 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.

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 note entitled “Accounting for Derivatives” 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 $275.8 million and $326.5 million at September 30, 2009 and December 31, 2008, respectively.



 
 
 
-9-

 
 
CONSECO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)



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 September 30, 2009 and December 31, 2008, were as follows (dollars in millions):

   
September 30,
   
December 31,
 
   
2009
   
2008
 
             
Net unrealized depreciation on actively managed fixed maturity securities on which an
other-than-temporary impairment loss has been recognized
 
$
(148.5
)
 
$
-
 
Net unrealized losses on all other investments
   
(89.5
)
   
(3,015.9
)
Adjustment to value of policies inforce at the Effective Date
   
2.0
     
111.0
 
Adjustment to cost of policies produced
   
16.3
     
154.8
 
Unrecognized net loss related to deferred compensation plan
   
(7.9
)
   
(8.0
)
Deferred income tax asset
   
81.6
     
987.4
 
                 
Accumulated other comprehensive loss
 
$
(146.0
)
 
$
(1,770.7
)

EARNINGS PER SHARE

A reconciliation of net income (loss) and shares used to calculate basic and diluted earnings (loss) per share is as follows (dollars in millions and shares in thousands):

   
Three months ended
   
Nine months ended
 
   
September 30,
 
September 30,
 
   
2009
   
2008
   
2009
   
2008
 
                         
Income (loss) before discontinued operations
 
$
15.4
   
$
(25.9
)
 
$
67.5
   
$
(323.8
)
Discontinued operations
   
 -
     
(157.4
)
   
 -
     
(355.2
)
                                 
Net income (loss) for basic and diluted earnings per share
 
$
15.4
   
$
(183.3
)
 
$
67.5
   
$
(679.0
)
                                 
Shares:
                               
Weighted average shares outstanding for basic earnings per share
   
184,886
     
184,726
     
184,820
     
184,688
 
Effect of dilutive securities on weighted average shares:
                               
Stock option and restricted stock plans
   
960
     
-
     
457
     
-
 
                                 
Dilutive potential common shares
   
960
     
-
     
457
     
-
 
                                 
Weighted average shares outstanding for diluted earnings per share
   
185,846
     
184,726
     
185,277
     
184,688
 

There were no dilutive common stock equivalents during the 2008 periods because of the net loss recognized by the Company during such period.  Therefore, all potentially dilutive shares are excluded in the weighted average shares outstanding for diluted earnings per share.




 
 
 
-10-

 
 
CONSECO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)



The following summarizes the equivalent common shares for securities that were not included in the computation of diluted earnings per share, because doing so would have been antidilutive in such period (shares in thousands):

 
Three months ended
 
Nine months ended
 
September 30, 2008
 
September 30, 2008
       
Equivalent common shares that were antidilutive during the period:
     
Stock option and restricted stock plans
35
 
42

As further discussed in the note to the consolidated financial statements entitled “Recently Issued Accounting Standards”, the Financial Accounting Standards Board (the “FASB”) issued authoritative guidance in May 2008 which is effective for fiscal years beginning after December 15, 2008.  This guidance requires unvested share based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) to be treated as participating securities prior to vesting and, therefore, must be included in the earnings allocation in calculating earnings per share under the two-class method.  Our adoption of this guidance did not have a significant impact on our earnings per share calculations due to the immateriality of unvested restricted stock that are considered to be participating securities.

In August 2005, we completed the private offering of $330.0 million of 3.50% Convertible Debentures due September 30, 2035 (the “Existing Debentures”).  In future periods, our diluted shares outstanding may include incremental shares issuable upon conversion of all or part of such Existing Debentures.  Since the remaining $293.0 million principal amount of outstanding Existing Debentures can only be redeemed for cash, it has no impact on the diluted earnings per share calculation.  However, in accordance with the conversion feature of these Existing Debentures, we may be required to pay a stock premium along with redeeming the accreted principal amount for cash, if our common stock reaches a certain market price.  We will include the dilutive effect of our Existing Debentures in the calculation of diluted earnings per share when the impact is dilutive.  During the three and nine months ended September 30, 2009 and 2008, the conversion feature of these Existing Debentures did not have a dilutive effect because the weighted average market price of our common stock did not exceed the initial conversion price of $26.66.  Therefore, the Existing Debentures had no effect on our diluted shares outstanding or our diluted earnings (loss) per share for the three or nine months ended September 30, 2009 and 2008.

Basic earnings (loss) per common share is computed by dividing net income (loss) applicable to common stock by the weighted average number of common shares outstanding for the period.  Restricted shares (including our performance shares) are not included in basic earnings (loss) per share until vested.  Diluted earnings (loss) per share reflect the potential dilution that could occur if outstanding stock options were exercised and restricted stock was vested.  The dilution from options and restricted shares is calculated using the treasury stock method.  Under this method, we assume the proceeds from the exercise of the options (or the unrecognized compensation expense with respect to restricted stock) will be used to purchase shares of our common stock at the average market price during the period, reducing the dilutive effect of the exercise of the options (or the vesting of the restricted stock).

BUSINESS SEGMENTS

We manage our business through the following:  three primary operating segments, Bankers Life, Colonial Penn and Conseco Insurance Group, which are defined on the basis of product distribution; and corporate operations, which consists of holding company activities and certain noninsurance businesses.  Prior to the fourth quarter of 2008, we had a fourth operating segment comprised of other business in run-off.  The other business in run-off segment had included blocks of business that we no longer market or underwrite and were managed separately from our other businesses.  Such segment had consisted of:  (i) long-term care insurance sold in prior years through independent agents; and (ii) major medical insurance.  As a result of the Transfer, as further discussed in the note entitled “Transfer of Senior Health Insurance Company of Pennsylvania to an Independent Trust”, a substantial portion of the long-term care business in the other business in run-off segment is presented as discontinued operations in our consolidated financial statements.  Accordingly, we have restated prior period segment disclosures to conform to the Company’s current operating segments.

 
 
 
 
 
-11-

 
 
CONSECO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)



We measure segment performance by excluding realized investment gains (losses) because we believe that this performance measure is a better indicator of the ongoing business and trends in our business.  Our primary 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 the underlying business of our segments.  Realized investment gains (losses) may affect future earnings levels since our underlying business is long-term in nature and changes in our investment portfolio may impact our ability to earn the assumed interest rates needed to maintain the profitability of our business.

Operating information by segment was as follows (dollars in millions):

   
Three months ended
   
Nine months ended
 
   
September 30,
   
September 30,
 
   
2009
   
2008
   
2009
   
2008
 
Revenues:
                       
Bankers Life:
                       
Insurance policy income:
                       
Annuities
 
$
13.1
   
$
8.9
   
$
33.9
   
$
36.2
 
Supplemental health
   
423.6
     
481.7
     
1,298.8
     
1,403.6
 
Life
   
56.4
     
47.1
     
149.5
     
138.3
 
Net investment income (a)
   
199.6
     
138.3
     
505.4
     
402.8
 
Fee revenue and other income (a)
   
2.4
     
3.1
     
5.4
     
6.8
 
                                 
Total Bankers Life revenues
   
695.1
     
679.1
     
1,993.0
     
1,987.7
 
                                 
Colonial Penn:
                               
Insurance policy income:
                               
Supplemental health
   
2.1
     
2.3
     
6.2
     
7.2
 
Life
   
46.3
     
44.1
     
142.0
     
131.1
 
Net investment income (a)
   
9.5
     
10.1
     
29.1
     
29.4
 
Fee revenue and other income (a)
   
.2
     
.5
     
.6
     
1.3
 
                                 
Total Colonial Penn revenues
   
58.1
     
57.0
     
177.9
     
169.0
 
                                 
Conseco Insurance Group:
                               
Insurance policy income:
                               
Annuities
   
3.1
     
3.5
     
26.1
     
9.6
 
Supplemental health
   
148.0
     
151.3
     
446.1
     
457.7
 
Life
   
77.3
     
80.3
     
237.2
     
245.3
 
Other
   
2.1
     
2.6
     
6.3
     
7.9
 
Net investment income (a)
   
150.2
     
134.0
     
425.6
     
408.8
 
Fee revenue and other income (a)
   
.5
     
.1
     
1.6
     
1.4
 
                                 
Total Conseco Insurance Group revenues
   
381.2
     
371.8
     
1,142.9
     
1,130.7
 
                                 
Corporate:
                               
Net investment income
   
3.5
     
6.1
     
10.8
     
21.8
 
Fee and other income
   
1.0
     
1.2
     
2.6
     
4.3