Conseco’s Long-Term Care Business: A Primer
September 2007
Conseco, Inc.
Forward-Looking Statements
Cautionary Statement Regarding Forward-Looking Statements. Our statements, trend analyses and other information contained in these
materials 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. 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: (i) our ability to obtain adequate and timely rate increases on our supplemental health products
including our long-term care business; (ii) 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; (iii) changes in our assumptions related to the cost of
policies produced or the value of policies inforce at the Effective Date; (iv) 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; (v)
performance of our investments; (vi) 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; (vii) the ultimate outcome of lawsuits filed
against us and other legal and regulatory proceedings to which we are subject; (viii) 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; (ix)
our ability to continue to recruit and retain productive agents and distribution partners and customer response to new products, distribution
channels and marketing initiatives; (x) our ability to achieve an upgrade of the financial strength ratings of our insurance company subsidiaries
as well as the potential impact of rating downgrades on our business; (xi) the risk factors or uncertainties listed from time to time in our filings
with the Securities and Exchange Commission; (xii) 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; (xiii) 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 (xiv) 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.
2
Provide benefits for care provided in a long-term care facility or assisted living
facility (but not a hospital), care received in one’s home (“home health care”), or
both
Premiums are generally determined based on the age of the insured at
issuance and are not scheduled to increase as insured ages
Cannot be canceled, but are subject to certain conditions (regulatory approval
and adverse morbidity experience), premium rates may be increased
(guaranteed renewable)
Policies that include coverage for long-term care facilities provide benefits for
confinement to licensed nursing facilities, and in some cases, assisted living
facilities
May be subject to a waiting period (such as 90 days) and a limit of covered
benefits (for a specified period, such as two years, or amount, such as
$200,000)
A refresher on the typical features of
long-term care policies
3
Eligibility for benefits generally requires that the insured need assistance with at
least two activities of daily living or have cognitive impairment that makes it unsafe
for the insured to live unsupervised. Alternatively, eligibility under many older
policies may be based on a physician’s determination that care is medically
necessary.
Benefits are generally paid on an expense-incurred basis, subject to a daily
maximum
Benefits are paid for as long as insured remains eligible, or until the policy’s
maximum benefit period or maximum benefit amount has been reached
Most policies include a waiver-of-premium benefit that waives the premium payable
for the duration of the claim once the insured has received benefits, generally
subject to a waiting period
Many policies include a restoration-of-benefit feature that permits policy benefits to
be replenished after the insured has recovered and has been independent for a
specified period
Some policies include an inflation feature, generally purchased as a rider to the
base policy, which is intended to allow the benefit amounts purchased to keep pace
with the rising cost of care
More details on benefits provided
under long-term care policies
4
Premiums are recognized as revenue when due
Incurred claims are expected to be small in the early policy years and grow as
policies age
A substantial part of premiums collected are required to fund benefits payable in
future periods and become part of the active life reserves
Active life reserves essentially hold back a portion of premiums that would
otherwise be reported as profits
Active life reserves grow over the early years of a block of policies, when
morbidity is low, and are released in the later years when morbidity is high
The interest income earned on the assets supporting the reserves is an
important factor in measuring the profitability of long-duration products
If the assumptions used to determine active life reserves are correct, the
increase in claim cost will be offset by a comparable reduction in active life
reserves, plus investment income on the reserves
The life cycle of a block of
long-term care policies
5
Incurred claims are very low in the early years of a policy
As policies age, the incurred claims ratio will increase, eventually exceeding 100%
Long-term care business life cycle:
Incurred claim ratios
Incurred Claim Ratio (Incurred Claims / Premium)
-150.0%
-100.0%
-50.0%
0.0%
50.0%
100.0%
150.0%
200.0%
250.0%
300.0%
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
Policy Year
6
A substantial part of the premium collected in early years is held back as active life reserves to
fund the claims that will be incurred in the future
Eventually, active life reserves begin to be released (Year 18 in this example). Such release will
offset a portion of the claims incurred, as shown in the next slide.
Long-term care business life cycle:
Change in active life reserve
7
When incurred claims and the change in active life reserves are combined, the increase
over time is less severe
However, the benefit ratio will increase over time, eventually exceeding 100%
This increase is substantially offset by investment income, as shown in the next slide
Long-term care business life cycle:
Total benefits incurred
8
Investment income is earned on the assets supporting the reserves
Such income becomes an increasingly important component of revenue over time
Long-term care business life cycle:
Investment income
9
The interest-adjusted benefit ratio, which includes the change in active life reserves and
investment income, is expected to be level over time
Long-term care business life cycle:
Interest-adjusted benefit ratio
10
Benefits are expected to increase over time as the insured ages, and actual profitability is sensitive
to experience relating to several assumptions made in pricing. All LTC business, including ours, has
experienced unfavorable development related to some of the following assumptions:
Incidence of claim – In some cases, more policyholders have received benefits than assumed in
pricing, in part due to people living longer
Duration of claim – In some cases, benefits are being provided for longer periods than assumed
in pricing, often because policyholders are living longer while receiving care
Persistency – In some cases, policyholders are not allowing their policies to lapse as frequently
as assumed in pricing. This results in higher-than-expected claims in later policy years
Medical inflation – The cost of care has risen faster than expected
Interest rates – Many products were priced in times with higher interest rates
As experience deteriorates, original expected profit margins decrease
Rate increases may be necessary to return the business to profitability (or, in some cases, break
even)
This change in experience has most materially affected the performance of the Other Business in
Run-off segment, as shown in the next slide
Changes in interest rates can also have an impact on earnings. However, interest rate changes
have not been a significant factor for our block in recent periods
Long-term care policies are subject
to changing experience
11
Segment
performance
Other Business in Run-off
*Operating earnings exclude net realized gains (losses). See Appendix for corresponding GAAP measure of
our consolidated results of operations.
Recent experience from this block reflects
significant increases to reserves related to prior-
period claim development
For example, the experience in Q2 2007 reflects
$118 million of increases to prior-period incurred
claim estimates
Such amount includes $110 million of strengthening
adjustments to claim reserve methods and
assumptions
The next several slides summarize how long-term
care reserves are determined
PTOI-Trailing 4 Quarters: $62.7 $33.3 ($41.9) ($96.8) ($234.4)
Revenues-Quarterly: $126.8 $128.1 $127.9 $126.6 $125.8
Pre-Tax Operating Income*
Revenues -Tr. 4 Quarters: $528.1 $519.6 $516.5 $509.4 $508.4
($ millions)
Collected Premiums-Quarterly: $82.4 $80.4 $76.6 $81.2 $76.2
12
There are two components of policyholder liabilities:
Active life reserves – Reserve for future policyholder benefits not yet
incurred (calculated as the present value of future benefits, less future
net premiums)
Claim reserves – Liability for all future payments for any claim
incurred as of the valuation date, as well as payments due on
valuation date (calculated as the present value of future payments on
known claims, plus a provision for amounts due, plus a provision for
unknown claims, referred to as incurred but not reported claims or
“IBNR”)
A refresher on how long-term care
reserves are determined
13
Balance Sheet
detail
Active life reserves account for the largest component of total reserves, but
have not been responsible for recent volatility
Reserve increases in the last four quarters have related to claim reserves
Q2 2007 claim reserve reflects expectation of continued adverse claim development
The claim reserve increase in Q2 2007 reflects $110 million of strengthening adjustments to
claim reserve methods and assumptions
Insurance acquisition cost balance is 5% of net liability and is declining rapidly
Balance remains recoverable under best-estimate assumptions
Other Business in Run-off
($ millions)
Insurance Liabilities and Intangible Assets, Net of Reinsurance
Reserve for Future Benefits
Claim Reserve
Insurance Acquisition Costs
Net Liability
Percent Change
Q2 2006
$2,413.3
731.4
(181.8)
$2,962.9
-
Q3 2006
$2,413.6
734.8
(176.2)
$2,972.2
0.3%
Q4 2006
$2,412.7
801.2
(170.9)
$3,043.0
2.4%
Q1 2007
$2,412.3
816.5
(165.2)
$3,063.6
0.7%
Q2 2007
$2,409.1
940.4
(159.5)
$3,190.0
4.1%
14
These reserves are calculated using assumptions estimated in the year a policy is issued (or, for
business in force as of August 31, 2003 – the “fresh-start date” – the assumptions developed on
that date)
Assumptions include estimates for persistency, claim costs, morbidity, interest rates,
expenses and premium rate increases
Once these assumptions are established, we are required under SFAS 60 to continue to use them
unless our assessment of reserve adequacy indicates that the net liability plus future premiums are
not adequate to cover future benefits and expenses; or when our premium rate increases deviate
materially from original assumptions
Our assessment of reserve adequacy is based on our most recent assumptions for persistency,
morbidity, interest rates, expenses and premium rate increases, all or any of which may be different
than the assumptions utilized in establishing our active life reserves. If premiums plus net liabilities
(active life reserves plus claims reserves less insurance intangibles) were determined to be
inadequate to fund future benefits and expenses, we would be required to write off all or a portion
of our insurance acquisition costs
When premium rate increases deviate materially from original assumptions, reserve assumptions
are updated using a prospective method, whereby the impact is graded in over time
Active life reserves
15
These reserves are for benefits to be paid in the future for our current claims (both
reported and incurred but not reported claims). These reserves are determined using
assumptions based on our current best estimate
The significant assumptions utilized in establishing claim reserves include expectations
about the duration, cost of care being reimbursed, the interest rate used to discount the
claim reserves, claims that have been incurred but not yet reported, claims that have been
closed but are expected to reopen, and assumptions about which claims that are currently
in their eligibility review stage will eventually become claims that have payments
associated with them
We review “verified claim reserves” to determine the accuracy of past estimates, as
described on the following page
Claim reserves
16
“Verified basis” normalizes all periods for the impact of claim reserve deficiencies
Expected incurred losses are paid out over subsequent periods
At each reporting date, the incurred claims estimate for a particular period is restated
or “verified” as the total payments to date, plus the current estimate of the claim
reserve for future payments (for claims incurred in that period)
Validation of claims incurred
during a period
17
The experience related to the run-off block has been very volatile. Most of this business was
written by certain subsidiaries prior to their acquisition by Conseco in 1996 and 1997.
Verified incurred
development*
Other Business in Run-off
Developed
Deficiencies
in Periods
Prior to
Q2 07
Q1 07
2006
2005
2004
2004
Reported Claims
221.5
119.7
433.4
396.0
370.8
Prior Period Development
(108.5)
(34.9)
(71.9)
(58.7)
(44.1)
Verified Claims as of Reporting Date
113.0
84.8
361.5
337.3
326.7
Developed through:
12/31/2004
326.7
44.1
12/31/2005
337.3
326.1
103.5
12/31/2006
361.5
365.0
337.6
136.1
3/31/2007
84.8
375.5
368.8
344.1
146.7
6/30/2007
113.0
104.2
418.1
388.9
356.2
160.9
Reporting Periods
Verified Claims
18
*Excludes waiver-of-premium and return-of-premium benefits.
The experience related to the Bankers Life long-term care block has not been as volatile as the
run-off block. This business was written through our career agency distribution channel.
Verified incurred
development
Bankers Life LTC
Developed
Deficiencies
in Periods
Prior to
Q2 07
Q1 07
2006
2005
2004
2004
Reported Claims
108.0
104.2
398.3
341.2
294.1
Prior Period Development
-
3.3
(0.5)
(4.3)
(1.0)
Verified Claims as of Reporting Date
108.0
107.5
397.8
336.9
293.1
Developed through:
12/31/2004
293.1
1.0
12/31/2005
336.9
296.6
1.8
12/31/2006
397.8
334.0
295.3
6.5
3/31/2007
107.5
394.8
333.0
295.8
6.7
6/30/2007
108.0
107.7
389.7
334.9
297.5
8.0
Reporting Periods
Verified Claims
19
Our Q2 2007 reported earnings were affected by prior-period claim reserve development.
Verified basis earnings normalizes the impact of prior-period deficiencies.
Q2 2007 earnings
Other Business in Run-off
($ millions)
As
Verified
Q2 2006
Reported
Basis
Insurance policy income
82.1
$
78.1
$
78.1
$
Net investment income
44.6
47.6
47.6
Fee revenue and other income
0.1
0.1
0.1
Total revenues
126.8
125.8
125.8
Insurance policy benefits
96.9
231.6
113.3
Amortization related to operations
3.5
5.8
5.8
Other operating costs and expenses
22.0
21.6
21.6
Total benefits and expenses
122.4
259.0
140.7
Income (loss) before net realized investment gains (losses)
and income taxes
4.4
$
(133.2)
$
(14.9)
$
Q2 2007
20
Management believes that an analysis of income (loss) before net realized investment gains (losses), net of
related amortization (a non-GAAP financial measure), is important to evaluate the financial performance of our
business, and is a measure commonly used in the life insurance industry. Management uses this measure to
evaluate performance because realized gains or losses can be affected by events that are unrelated to a
company’s underlying fundamentals. See Appendix for a reconciliation of the non-GAAP measure to the
corresponding GAAP measure.
Benefit detail
Incurred claims in all periods reflect
volatility due to development of out-of-
period incurred claim estimates
Includes reserve strengthening adjustments
of $110 million in Q2 2007
Increase (decrease) in active life
reserves varies with persistency; Q2
2006 included $9.4 million release of
redundant reserves
Total benefits equal incurred claims plus increase in reserve for future benefits. Verified basis incurred claims
adjust all periods for claim reserve redundancies and deficiencies.
Increase (Decrease) in Reserves for Future Benefits $(20.4) $(0.1) $(1.3) $3.3 $(3.3)
Verified Basis Incurred Claims $116.5 $119.6 $124.5 $114.4 $116.6
Other Business in Run-off
Total Benefits
($ millions)
$234.9
$126.7
$164.0
$113.5
$117.3
Incurred Claims
21
Interest-adjusted
benefit ratio*
Verified basis normalizes all periods for
impact of claim reserve deficiencies
Prior-period deficiencies increased benefit
ratio by 152 percentage points in Q2 2007
Q2 2006 benefit reserve adjustment
reduced benefit ratio by 11 percentage
points
Trailing 4 Quarter Avg.: 52.1% 60.1% 83.2% 99.0% 141.0%
Qtrly. non-int. adjusted: 118.0% 136.0% 198.2% 163.5% 296.7%
Other Business in Run-off
*We calculate interest-adjusted benefit ratios by dividing insurance policy benefits less interest income on
the accumulated assets backing the insurance liabilities by insurance policy income.
Qtrly. Verified Basis non-int. adjusted: 116.9% 143.5% 147.6% 148.1% 145.1%
22
Claimant count estimates remain around 12,000, with paid claims near $100 million (before
inventory adjustments)
Claim counts and
claims paid
Other Business in Run-off
23
Q2 05
Q3 05
Q4 05
Q1 06
Q2 06
Q3 06
Q4 06
Q1 07
Q2 07
Claims Paid ($ mils.)
95.4
$
107.4
$
83.1
$
90.4
$
101.2
$
96.1
$
81.6
$
102.0
$
96.8
$
Claimant Counts
12,240
12,449
12,290
11,805
12,536
12,288
12,048
11,870
12,424
Our termination rates have exceeded expectations in recent periods due to rate increases.
However, we expect lower termination rates in future periods due to the large level of non-
forfeiture elections that will be applicable. On the other hand, mortality, which currently
accounts for approximately half of the terminations, is expected to increase as the block
continues to age.
LTC persistency
Other Business in Run-off
24
Q3 05
Q4 05
Q1 06
Q2 06
Q3 06
Q4 06
Q1 07
Q2 07
Policy Counts
202,804
201,649
197,585
194,080
190,134
187,123
183,655
179,952
Annualized Termination Rates
10.7%
2.3%
7.8%
6.9%
7.9%
6.2%
7.2%
7.8%
Summary
Significant steps to reduce claims reserve volatility
Continued progress in business turnaround
$40 million – better claims management
Premium re-rates
$35 million (Round 1)
$22 million (Round 2)
We believe we will return the “Other Business in Run-off”
block to profitability in 2008
Other Business in Run-off
25
Questions and Answers
Appendix
Information Related to Certain Non-GAAP Financial Measures
The following provides additional information regarding certain non-GAAP measures used in this presentation. 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. While management believes these measures are useful to enhance understanding
and comparability of our financial results, these non-GAAP measures should not be considered as substitutes for the
most directly comparable GAAP measures. Additional information concerning non-GAAP measures is included in our
periodic filings with the Securities and Exchange Commission that are available in the “Investor – SEC Filings” section of
Conseco’s website, www.conseco.com.
28
Q2 Earnings
CNO Consolidated
*Management believes that an analysis of earnings before net realized investment gains (losses) and corporate
interest and taxes (“EBIT,” a non-GAAP financial measure) provides an alternative measure to compare the
operating results of the company quarter-over-quarter because it excludes: (1) corporate interest expense; and
(2) net realized gains (losses) that are unrelated to the company’s underlying fundamentals. The chart above
provides a reconciliation of EBIT to net loss applicable to common stock.
Q2 2006
Q2 2007
Bankers Life
$63.7
$65.5
Conseco Insurance Group
64.7
43.8
Colonial Penn
6.5
6.7
Other Business in Run-Off
4.4
(133.2)
Corporate operations, excluding interest expense
(5.0)
(8.0)
EBIT, excluding costs related to the proposed litigation settlement
134.3
(25.2)
Costs related to the proposed litigation settlement
(157.0)
(35.0)
Total EBIT*
(22.7)
(60.2)
Corporate interest expense
(12.0)
(16.9)
Loss before net realized investment losses and taxes
(34.7)
(77.1)
Tax benefit
12.5
27.3
Net loss before net realized investment losses
(22.2)
(49.8)
Preferred stock dividends
9.5
4.6
Net operating loss
(31.7)
(54.4)
Net realized investment losses, net of related amortization and taxes
(0.1)
(10.1)
Net loss applicable to common stock
($31.8)
($64.5)
29
($ millions)