Best, S&P Lower Conseco’s Ratings as Run-off Losses Continue

August 8, 2007

A.M. Best Co. and Standard & Poor’s Ratings Services have both lowered their respective ratings on Conseco Inc., following the Company’s announcement of further losses in its Conseco Senior Health Insurance (CSH) that required $110 million in reserve strengthening.

S&P lowered its counterparty credit and senior debt ratings on Conseco Inc. to ‘B+’ from ‘BB-‘ and reconfirmed their negative outlook. S&P also lowered its counterparty credit and financial strength ratings on CSH to ‘CCC-‘ from ‘CCC’, with a negative outlook. While S&P affirmed its ratings on Conseco’s core insurance companies, it also revised its outlook on them to negative from stable.

Best downgraded Conseco’s core insurance subsidiaries financial strength rating (FSR) to “B+” (Good) from B++ (Good) and the issuer credit ratings (ICR) to “bbb-“from “bbb+”. Best also downgraded Conseco’s ICR and senior debt rating to “bb-” from “bb+”, and CSH’s FSR to “C++” (Marginal) from “B-” (Fair) and the ICR to “b” from “bb-“. Best also revised its outlook for all ratings to negative from stable.

Conseco’s run-off business continues to cause the Group major problems. S&P credit analyst Neal Freedman explained that the “ratings actions are based on Conseco’s announcement that second-quarter operating earnings were impaired by significant continued losses in its run-off segment, the bulk of which is housed in CSH.” He added that S&P expects the problem to continue “through the remainder of 2007.” S&P’s assignment of a negative outlook on the ratings reflects that expectation. It also indicates that the ratings “on Conseco Inc. and the core operating companies will likely be lowered.”

Best noted that “CSH houses the majority of Conseco’s run-off long-term care (LTC) block and continues to exhibit volatile operating results, exemplified by the second quarter 2007 claim reserve strengthening of $110 million. This was Conseco’s second significant run-off LTC claim reserve strengthening in six months, following the fourth quarter 2006 charge of $54 million. CSH’s ratings recognize that it is capitalized at regulatory minimums, incorporating substantial capital infusions from Conseco over the last two years.”

Best acknowledged that the scope of the losses had exceeded its expectations. As a result the rating agency said it “remains cautious regarding the future performance of the run-off LTC block given the significance of the most recent reserve strengthening. In addition, the recent reoccurrence of ‘one-time’ charges related to cost of insurance litigation, data refinements, valuation error corrections and back office consolidation/reorganization has diminished A.M. Best’s confidence with respect to Conseco’s ability to generate consistent, sustainable earnings in the near to medium term.”

Best also noted that “these factors, coupled with unfavorable operating trends at Conseco Insurance Group, reduced holding company flexibility and elevated regulatory risk erode Conseco’s overall business profile, a key contributor to a company’s long-term financial strength. ”

Best listed the following companies as subject to its rating actions:
— Bankers Life and Casualty Company
— Colonial Penn Life Insurance Company
— Conseco Health Insurance Company
— Conseco Insurance Company
— Bankers Conseco Life Insurance Company
— Conseco Life Insurance Company
— Washington National Insurance Company

Source: A.M. Best, S&P

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