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Rating Action:

Moody's changes Conseco Sr. Health review to direction uncertain

13 Aug 2008
Moody's changes Conseco Sr. Health review to direction uncertain

New York, August 13, 2008 -- Moody's Investors Service has changed the review of Conseco Senior Health Insurance Company ("CSHIC", Caa1 insurance financial strength (IFS) rating) to direction uncertain from possible downgrade. The action follows an announcement by Conseco Inc. (Conseco, NYSE: CNO; senior bank facility at Ba3) of a plan to transfer CSHIC to an independent trust. The rating agency said the revised direction of the review indicates the possibility that CSHICs IFS rating could now be downgraded, upgraded or confirmed depending on future developments at the company.

Under the plan, Conseco will transfer the stock of CSHIC for no consideration, along with $2.9 billion (on a statutory basis) of assets and related LTC liabilities to the trust, to be named Senior Health Care Oversight Trust (the "Independent Trust"), formed for the exclusive benefit of CSHIC long-term care policyholders. The company will contribute an additional $175 million in the form of Conseco notes and cash prior to close. Assuming the transaction proceeds according to Conseco's expectations, it would close during the fourth quarter of 2008, and CSHIC's name would change to Senior Health Insurance Company of Pennsylvania.

Conseco anticipates it will record charges of $1.2 billion (generally accepted accounting principles basis) related to the transaction. The charges consist of the equity basis of CSHIC, the capital contribution and an additional valuation allowance for deferred tax assets.

Moody's stated that its review of the ratings of CSHIC will focus on the capital adequacy of the company, the potential volatility of the liabilities, as well as the ability of the company to receive actuarially justified rate increases on its long term care policies. Post the transaction, CSHIC is expected to have a company action level risk based capital in excess of 300%, well above its reported level of 130% as of the end of 2007.

The ratings of Conseco and the IFS ratings of its insurance subsidiaries (other than CSHIC) remain under review for possible downgrade, which was initiated on April 17, 2008. The rating agency noted that if completed, the proposed transaction would help eliminate the earnings challenges and uncertainty associated with CSHIC. However, by reducing equity and adding debt, it also raises the company's financial leverage, providing it less room under the financial leverage covenant associated with the company's bank credit facility.

According to Scott Robinson, Moody's Vice President and Senior Credit Officer, "During our review of Conseco, Moody's will analyze the earnings power and cash flow generation capacity of the company on a pro forma basis." According to the company, financial leverage calculated on a pro forma basis in accordance with the bank credit facility (approximately 28%) leaves the company approximately $250 million of cushion.

Conseco reported second quarter net operating earnings before a valuation allowance for deferred tax assets of $54.1 million, up from a $46 million loss in the same period one year ago. The recent quarter's earnings, notably the results of the Bankers Life Segment, were below Moody's expectations. According to Robinson, "One-time charges, including a $26 million decrease in earnings related to long-term care policies at Bankers hurt earnings."

Moody's said that it expects to conclude its review of Conseco by the end of next week. The review of CSHIC will likely be concluded after the closing of the proposed transaction, should it close. If the transaction does not close, the rating agency commented that it is likely that the IFS rating will go down from its current Caa1 level, based on the expectation that Conseco would be unlikely to continue providing financial support to CSHIC.

Conseco is a specialized financial services holding company that operates primarily in the life and health insurance sectors through its subsidiaries. As of December 31, 2007, Conseco reported total assets of $33.5 billion and shareholder's equity of $4.2 billion.

Moody's insurance financial strength ratings are opinions of the ability of insurance companies to repay punctually senior policyholder claims and obligations.

For more information, visit our website at www.moodys.com/insurance.

New York
Robert Riegel
Managing Director
Financial Institutions Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Scott Robinson
VP - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

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