-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, H1vqPh57pUxH31DLJucVbnzRdSgSiyRGCT/PDUPyDon5tupLvDZzIrwetbBU1vwz Ww26CtPxjVKvA45mve8Cxw== 0001224608-06-000041.txt : 20061107 0001224608-06-000041.hdr.sgml : 20061107 20061107132127 ACCESSION NUMBER: 0001224608-06-000041 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 14 CONFORMED PERIOD OF REPORT: 20060930 FILED AS OF DATE: 20061107 DATE AS OF CHANGE: 20061107 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CONSECO INC CENTRAL INDEX KEY: 0001224608 STANDARD INDUSTRIAL CLASSIFICATION: ACCIDENT & HEALTH INSURANCE [6321] IRS NUMBER: 753108137 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-31792 FILM NUMBER: 061193067 BUSINESS ADDRESS: STREET 1: 11825 N PENNSYLVANIA ST CITY: CARMEL STATE: IN ZIP: 46032 BUSINESS PHONE: 3178176100 MAIL ADDRESS: STREET 1: 11825 NORTH PENNSYLVANIA STREET CITY: CARMEL STATE: IN ZIP: 46032 10-Q 1 form10q.txt FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2006 [ ] 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 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 is a large accelerated filer, an accelerated filer or a non-accelerated filer (see definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act). Large accelerated filer [ X ] Accelerated filer [ ] Non-accelerated filer [ ] 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 30, 2006: 151,939,337 TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION Page ---- Item 1. Financial Statements Consolidated Balance Sheet as of September 30, 2006 and December 31, 2005............................. 3 Consolidated Statement of Operations for the three and nine months ended September 30, 2006 and 2005......................................................................... 5 Consolidated Statement of Shareholders' Equity for the nine months ended September 30, 2006 and 2005......................................................................... 6 Consolidated Statement of Cash Flows for the nine months ended September 30, 2006 and 2005............ 7 Notes to Consolidated Financial Statements............................................................ 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Cautionary Statement Regarding Forward-Looking Statements............................................. 34 Overview ............................................................................................. 35 Critical Accounting Policies ......................................................................... 35 Results of Operations................................................................................. 40 Premium Collections................................................................................... 56 Liquidity and Capital Resources....................................................................... 61 Investments........................................................................................... 66 Investment in Variable Interest Entity................................................................ 72 New Accounting Standards ............................................................................. 73 Item 3. Quantitative and Qualitative Disclosures About Market Risk ........................................... 73 Item 4. Controls and Procedures............................................................................... 73 PART II - OTHER INFORMATION Item 1. Legal Proceedings .................................................................................... 73 Item 1A. Risk Factors.......................................................................................... 74 Item 6. Exhibits ............................................................................................. 74
2 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. CONSECO, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (Dollars in millions) ASSETS
September 30, December 31, 2006 2005 ---- ---- (unaudited) Investments: Actively managed fixed maturities at fair value (amortized cost: September 30, 2006 - $22,818.8; December 31, 2005 - $22,380.2)....................... $22,662.4 $22,494.2 Equity securities at fair value (cost: September 30, 2006 - $23.7; December 31, 2005 - $25.6)........................................................... 26.7 27.1 Mortgage loans......................................................................... 1,480.8 1,264.2 Policy loans........................................................................... 415.0 429.8 Trading securities..................................................................... 680.9 716.3 Other invested assets ................................................................. 101.8 109.6 --------- --------- Total investments.................................................................. 25,367.6 25,041.2 Cash and cash equivalents: Unrestricted........................................................................... 236.7 237.8 Restricted............................................................................. 14.9 35.2 Accrued investment income................................................................. 342.2 315.4 Value of policies inforce at the Effective Date........................................... 2,239.8 2,414.0 Cost of policies produced................................................................. 1,025.8 758.8 Reinsurance receivables................................................................... 855.6 887.5 Income tax assets, net.................................................................... 1,785.1 1,496.6 Assets held in separate accounts.......................................................... 28.9 29.8 Other assets.............................................................................. 409.6 341.0 --------- --------- Total assets....................................................................... $32,306.2 $31,557.3 ========= =========
(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) LIABILITIES AND SHAREHOLDERS' EQUITY
September 30, December 31, 2006 2005 ---- ---- (unaudited) Liabilities: Liabilities for insurance products: Interest-sensitive products............................................................ $12,894.2 $12,686.8 Traditional products................................................................... 11,981.0 11,872.2 Claims payable and other policyholder funds............................................ 796.7 842.1 Liabilities related to separate accounts............................................... 28.9 29.8 Other liabilities........................................................................ 706.4 440.0 Investment borrowings.................................................................... 380.7 315.1 Notes payable - direct corporate obligations............................................. 805.6 851.5 --------- --------- Total liabilities.................................................................. 27,593.5 27,037.5 --------- --------- Commitments and Contingencies Shareholders' equity: Preferred stock.......................................................................... 667.8 667.8 Common stock ($0.01 par value, 8,000,000,000 shares authorized, shares issued and outstanding: September 30, 2006 - 151,923,582; December 31, 2005 - 151,513,434)....................................................... 1.5 1.5 Additional paid-in capital............................................................... 3,468.3 3,194.1 Accumulated other comprehensive income (loss)............................................ (71.8) 71.7 Retained earnings........................................................................ 646.9 584.7 --------- --------- Total shareholders' equity......................................................... 4,712.7 4,519.8 --------- --------- Total liabilities and shareholders' equity......................................... $32,306.2 $31,557.3 ========= =========
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, ------------------------- ----------------------- 2006 2005 2006 2005 ---- ---- ---- ---- Revenues: Insurance policy income........................ $ 748.5 $ 745.7 $2,242.9 $2,201.9 Net investment income (loss): General account assets....................... 360.6 356.9 1,069.2 1,042.7 Policyholder and reinsurer accounts.......... 26.2 5.4 26.6 (19.5) Net realized investment gains (losses)......... (21.8) (6.4) (28.6) 3.1 Fee revenue and other income................... 4.8 11.9 14.0 20.0 -------- -------- -------- -------- Total revenues............................. 1,118.3 1,113.5 3,324.1 3,248.2 -------- -------- -------- -------- Benefits and expenses: Insurance policy benefits...................... 772.6 725.2 2,204.6 2,099.6 Interest expense............................... 17.8 12.9 51.3 43.7 Amortization................................... 104.2 105.0 320.4 287.7 Loss on extinguishment of debt................. - 3.7 - 3.7 Costs related to the tentative litigation settlement................................... - 2.5 174.7 8.4 Other operating costs and expenses............. 147.0 142.8 430.2 416.6 -------- -------- -------- -------- Total benefits and expenses................ 1,041.6 992.1 3,181.2 2,859.7 -------- -------- -------- -------- Income before income taxes................. 76.7 121.4 142.9 388.5 Income tax expense on period income............... 28.3 43.5 52.2 140.7 -------- -------- -------- -------- Net income................................. 48.4 77.9 90.7 247.8 Preferred stock dividends......................... 9.5 9.5 28.5 28.5 -------- -------- -------- -------- Net income applicable to common stock............................. $ 38.9 $ 68.4 $ 62.2 $ 219.3 ======== ======== ======== ======== Earnings per common share: Basic: Weighted average shares outstanding.......... 151,663,000 151,114,000 151,566,000 151,077,000 =========== =========== =========== =========== Net income................................... $.26 $.45 $.41 $1.45 ==== ==== ==== ===== Diluted: Weighted average shares outstanding.......... 152,529,000 185,178,000 152,547,000 185,648,000 =========== =========== =========== =========== Net income................................... $.26 $.42 $.41 $1.33 ==== ==== ==== =====
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 Accumulated other Preferred and additional comprehensive Retained Total stock paid-in capital income (loss) earnings ----- ----- --------------- ------------- -------- Balance, January 1, 2006............................. $4,519.8 $667.8 $3,195.6 $ 71.7 $584.7 Comprehensive loss, net of tax: Net income...................................... 90.7 - - - 90.7 Change in unrealized appreciation (depreciation) of investments (net of applicable income tax benefit of $80.5)............................. (143.5) - - (143.5) - -------- Total comprehensive loss.................... (52.8) Reduction of deferred income tax valuation allowance..................................... 260.0 - 260.0 - - Stock option and restricted stock plans......... 12.1 - 12.1 - - Reduction of tax liabilities related to various contingencies recognized at the fresh-start date.......................................... 2.1 - 2.1 - - Dividends on preferred stock.................... (28.5) - - - (28.5) -------- ------ -------- ------ ------ Balance, September 30, 2006.......................... $4,712.7 $667.8 $3,469.8 $(71.8) $646.9 ======== ====== ======== ====== ====== Balance, January 1, 2005............................. $3,902.2 $667.8 $2,599.3 $337.3 $297.8 Comprehensive income, net of tax: Net income...................................... 247.8 - - - 247.8 Change in unrealized appreciation of investments (net of applicable income tax benefit of $96.4)............................. (174.6) - - (174.6) - -------- Total comprehensive income.................. 73.2 Stock option and restricted stock plans......... 7.3 - 7.3 - - Dividends on preferred stock.................... (28.5) - - - (28.5) -------- ------ -------- ------ ------ Balance, September 30, 2005.......................... $3,954.2 $667.8 $2,606.6 $162.7 $517.1 ======== ====== ======== ====== ======
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, ---------------------- 2006 2005 ---- ---- Cash flows from operating activities: Insurance policy income............................................................... $ 1,975.4 $ 1,924.3 Net investment income................................................................. 1,109.7 1,079.0 Fee revenue and other income.......................................................... 14.0 20.0 Net sales of trading securities....................................................... 28.3 161.1 Insurance policy benefits............................................................. (1,662.1) (1,540.8) Interest expense...................................................................... (45.1) (33.5) Policy acquisition costs.............................................................. (367.6) (305.3) Other operating costs................................................................. (395.7) (422.8) Loss on extinguishment of debt........................................................ - (.3) Taxes................................................................................. 1.8 27.4 --------- ---------- Net cash provided by operating activities......................................... 658.7 909.1 --------- ---------- Cash flows from investing activities: Sales of investments.................................................................. 4,082.8 9,526.5 Maturities and redemptions of investments............................................. 840.5 1,080.8 Purchases of investments.............................................................. (5,623.8) (11,503.0) Change in restricted cash............................................................. 20.3 3.5 Other................................................................................. (2.6) (24.4) --------- ---------- Net cash used by investing activities ............................................ (682.8) (916.6) --------- ---------- Cash flows from financing activities: Issuance of notes payable, net........................................................ - 773.7 Issuance of common stock.............................................................. 1.0 .2 Payments on notes payable............................................................. (46.3) (769.1) Amounts received for deposit products................................................. 1,547.2 1,233.3 Withdrawals from deposit products..................................................... (1,516.0) (1,369.1) Investment borrowings................................................................. 65.6 (420.6) Dividends paid on preferred stock..................................................... (28.5) (28.5) --------- ---------- Net cash (used) provided by financing activities.................................. 23.0 (580.1) --------- ---------- Net decrease in cash and cash equivalents......................................... (1.1) (587.6) Cash and cash equivalents, beginning of period........................................... 237.8 776.6 --------- ---------- Cash and cash equivalents, end of period................................................. $ 236.7 $ 189.0 ========= ==========
The accompanying notes are an integral part of the consolidated financial statements. 7 CONSECO, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements ------------------- The following notes should be read together with the notes to the consolidated financial statements included in the 2005 Form 10-K of Conseco, Inc. 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. 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 that of our prior audited consolidated financial statements. As permitted by rules and regulations of the Securities and Exchange Commission (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 generally accepted accounting principles ("GAAP"). We have also reclassified certain amounts from the prior periods to conform to the 2006 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, 2005, 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, 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. 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); and (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. Our trading securities are designed to act as hedges for 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 the 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 (a component of investment income), is substantially offset by the change in insurance policy benefits for these products. Our trading securities totaled $680.9 million and $716.3 million at September 30, 2006 and December 31, 2005, respectively. 8 CONSECO, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements ------------------- Accumulated other comprehensive income (loss) is comprised of the net effect of unrealized appreciation (depreciation) on our investments. These amounts, included in shareholders' equity as of September 30, 2006 and December 31, 2005, were as follows (dollars in millions):
September 30, December 31, 2006 2005 ---- ---- Net unrealized appreciation (depreciation) on investments............................. $(148.6) $120.9 Adjustment to value of policies inforce at the Effective Date......................... 24.6 (9.2) Adjustment to cost of policies produced............................................... 11.4 (.3) Deferred income tax asset (liability)................................................. 40.8 (39.7) ------- ------ Accumulated other comprehensive income (loss).................................... $ (71.8) $ 71.7 ======= ======
AMORTIZATION OF THE 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. For universal life or investment products, we amortize these costs using the interest rate credited to the underlying policies in relation to the established gross profits. For other products, we amortize these costs using the projected investment earnings rate in relation to future anticipated premium revenue. In accordance with Statement of Financial Accounting Standards No. 97 "Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and Realized Gains and Losses from the Sale of Investments" ("SFAS 97"), we are required to amortize the value of policies inforce in relation to estimated gross profits for universal life products and investment-type products. SFAS 97 also requires that estimates of expected gross profits used as a basis for amortization be evaluated regularly, and that the total amortization recorded to date be adjusted by a charge or credit to the statement of operations, if actual experience or other evidence suggests that earlier estimates should be revised. 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 value of policies inforce at the Effective Date 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 included the impact of this adjustment in accumulated other comprehensive income within shareholders' equity. 9 CONSECO, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements ------------------- EARNINGS PER SHARE A reconciliation of net income and shares used to calculate basic and diluted earnings per share is as follows (dollars in millions and shares in thousands):
Three months ended Nine months ended September 30, September 30, ---------------------- ----------------------- 2006 2005 2006 2005 ---- ---- ---- ---- Net income.................................................. $48.4 $77.9 $ 90.7 $247.8 Preferred stock dividends................................... (9.5) (9.5) (28.5) (28.5) ----- ----- ------ ------ Net income applicable to common stock for basic earnings per share......................... 38.9 68.4 62.2 219.3 Effect of dilutive securities: Preferred stock dividends................................ - 9.5 - 28.5 ----- ----- ------ ------ Net income applicable to common stock and assumed conversions for diluted earnings per share... $38.9 $77.9 $ 62.2 $247.8 ===== ===== ====== ====== Shares: Weighted average shares outstanding for basic earnings per share........................... 151,663 151,114 151,566 151,077 Effect of dilutive securities on weighted average shares: Class B mandatorily convertible preferred stock........ - 33,015 - 33,706 Stock option and restricted stock plans................ 866 1,049 981 865 ------- ------- ------- ------- Dilutive potential common shares....................... 866 34,064 981 34,571 ------- ------- ------- ------- Weighted average shares outstanding for diluted earnings per share.............................................. 152,529 185,178 152,547 185,648 ======= ======= ======= =======
The following summarizes the equivalent common shares for securities that were not included in the computation of diluted earnings per share during the three and nine months ended September 30, 2006, because doing so would have been antidilutive in such periods.
Three months Nine months ended ended September 30, 2006 September 30, 2006 ------------------ ------------------ (shares in thousands) Equivalent common shares that were antidilutive during the period: Class B mandatorily convertible preferred stock........................ 32,565 31,515 ====== ======
In August 2005, we completed the private offering of $330.0 million of 3.50% Convertible Debentures due September 30, 2035 (the "Debentures"). In future periods, our diluted shares outstanding may include incremental shares issuable upon conversion of all or part of such Debentures. Since the $330.0 million principal amount can only be redeemed for cash, it has no impact on the diluted earnings per share calculation. In accordance with the conversion feature of these 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. In accordance with the consensus from EITF No. 04-8, "The Effect of Contingently Convertible Instruments on Diluted Earnings per Share", we will include the dilutive effect of our Debentures in the calculation of diluted earnings per share when the impact is dilutive. As of September 30, 2006, the conversion feature of these Debentures did not have a dilutive effect because the weighted average market price of our common stock did not 10 CONSECO, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements ------------------- exceed the initial conversion price of $26.66. Therefore, the Debentures had no effect on our diluted shares outstanding or our diluted earnings per share for the three or nine months ended September 30, 2006. Basic earnings per common share is computed by dividing net income applicable to common stock by the weighted average number of common shares outstanding for the period. Restricted shares are not included in basic earnings per share until vested. Diluted earnings per share reflects 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). STOCK-BASED COMPENSATION The Company has a long-term incentive plan which permits the grant of CNO incentive or non-qualified stock options, restricted stock awards, stock appreciation rights, performance shares or units and certain other equity-based awards to certain directors, officers and employees of the Company and certain other individuals who perform services for the Company. A maximum of 10 million shares may be issued under the plan. Our stock option awards are generally granted with an exercise price equal to the market price of the Company's stock on the date of grant. Our stock option awards generally vest on a graded basis over a four year service term and expire ten years from the date of grant. Our restricted stock awards generally vest on a graded basis over a three year service term. 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 Financial Accounting Standards Board ("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 the first nine months of 2006, we did not capitalize any stock-based compensation expense as cost of policies produced or any other asset category. 11 CONSECO, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements ------------------- A summary of the Company's stock option activity and related information for the nine months ended September 30, 2006, is presented below (shares in thousands, dollars in millions):
Weighted Weighted average average Aggregate exercise remaining intrinsic Shares price life value ------ ----- ---- ----- Outstanding at the beginning of the period..................................................... 3,536 $19.89 Options granted................................................... 1,286 22.59 Exercised......................................................... (48) 20.80 $.3 Forfeited or terminated........................................... (336) 18.20 ----- Outstanding at the end of the period.............................. 4,438 7.9 years $28.6 ===== === Options exercisable at the end of the period..................................................... 1,788 6.8 years $11.8 ===== === Available for future grant........................................ 3,598 =====
We recognized compensation expense related to stock options totaling $1.9 million and $4.8 million ($1.1 million and $3.0 million after income taxes) in the three and nine months ended September 30, 2006, respectively. Compensation expense related to stock options reduced both basic and diluted earnings per share by: (i) less than 1 cent in the three months ended September 30, 2006; and (ii) less than 2 cents in the nine months ended September 30, 2006. At September 30, 2006, the unrecognized compensation expense for non-vested stock options totaled $13.7 million which is expected to be recognized over a weighted average period of 2.9 years. If compensation cost had been determined based on the fair value at the grant dates for all awards issued after January 1, 1995, the Company's pro forma net income and pro forma earnings per share would have been as follows (dollars in millions, except per share amounts):
Three months ended Nine months ended September 30, September 30, 2005 2005 ---- ---- Net income, as reported............................................... $77.9 $247.8 Less stock-based employee compensation expense determined under the fair value method for all awards, net of income taxes..................................................... .8 2.5 ----- ------ Pro forma net income.................................................. $77.1 $245.3 ===== ====== Earnings per share: Basic, as reported............................................... $.45 $1.45 Basic, pro forma................................................. .45 1.44 Diluted, as reported............................................. $.42 $1.33 Diluted, pro forma............................................... .42 1.32
12 CONSECO, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements ------------------- The following table summarizes information about stock options outstanding at September 30, 2006 (shares in thousands):
Options outstanding Options exercisable -------------------------------------------- --------------------------- Number Remaining Average exercise Number Average exercise Range of exercise prices outstanding life (in years) price exercisable price - ------------------------ ----------- --------------- ----- ----------- ----- $16.20 - $20.91................... 1,743 7.4 $19.19 981 $18.56 $21.00 - $25.45................... 2,695 8.3 21.83 807 21.06 ----- ----- 4,438 1,788 ===== =====
A summary of the Company's non-vested restricted stock activity for the nine months ended September 30, 2006, is presented below (shares in thousands):
Weighted average grant date Shares fair value ------ ---------- Non-vested shares, beginning of period.............................. 1,392 $18.57 Granted.......................................................... 58 22.68 Vested.......................................................... (486) 20.62 Forfeited....................................................... (277) 17.53 ----- Non-vested shares, end of period.................................... 687 20.00 =====
At September 30, 2006, the unrecognized compensation expense for non-vested restricted stock totaled $5.6 million which is expected to be recognized over a weighted average period of 1.4 years. We recognized compensation expense related to restricted stock awards totaling $3.1 million and $2.7 million in the three months ended September 30, 2006 and 2005, respectively, and $9.1 million and $7.8 million in the nine months ended September 30, 2006 and 2005, respectively. The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option valuation model with the following weighted average assumptions:
Nine months ended September 30, -------------------------------- 2006 Grants 2005 Grants ----------- ----------- Weighted average risk-free interest rates.................................. 5.0% 3.8% Weighted average dividend yields........................................... 0.0% 0.0% Volatility factors......................................................... 22% 25% Weighted average expected life............................................. 6.2 years 6.2 years Weighted average fair value per share...................................... $7.91 $7.25
The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant. The dividend yield is based on the Company's history and expectation of dividend payouts. Volatility factors are based on the weekly historical volatility of the Company's common stock since our emergence from bankruptcy in September 2003. The expected life is based on the average of the graded vesting period and the contractual terms of the option. SFAS 123R also requires us to estimate the amount of unvested stock-based awards that will be forfeited in future periods and reduce the amount of compensation expense recognized over the applicable service period to reflect this estimate. In accordance with SFAS 123R, we periodically evaluate our forfeiture assumptions to more accurately reflect our actual forfeiture experience. 13 CONSECO, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements ------------------- Cash received from the exercise of stock options was $1.0 million and $.2 million during the nine months ended September 30, 2006 and 2005, respectively. The Company does not currently recognize tax benefits resulting from tax deductions in excess of the compensation expense recognized because of net operating loss carryforwards ("NOLs") which are available to offset future taxable income. BUSINESS SEGMENTS We manage our business through the following: two primary operating segments, Bankers Life and Conseco Insurance Group, which are defined on the basis of product distribution; a third segment comprised of other business in run-off; and corporate operations, which consists of holding company activities and certain noninsurance businesses. Operating information by segment was as follows (dollars in millions):
Three months ended Nine months ended September 30, September 30, ---------------------- ----------------------- 2006 2005 2006 2005 ---- ---- ---- ---- Revenues: Bankers Life: Insurance policy income: Annuities...................................... $ 15.9 $ 18.2 $ 45.9 $ 43.7 Supplemental health............................ 313.5 304.8 936.3 910.9 Life........................................... 65.5 61.8 186.7 156.9 Other.......................................... 24.3 3.0 69.9 9.2 Net investment income (a)........................... 143.6 124.7 408.3 358.2 Fee revenue and other income (a).................... 1.5 .3 5.2 .7 Net realized investment losses (a).................. (6.4) (3.1) (8.1) (.6) -------- -------- -------- -------- Total Bankers Life revenues................ 557.9 509.7 1,644.2 1,479.0 -------- -------- -------- -------- Conseco Insurance Group: Insurance policy income: Annuities...................................... 3.7 4.3 12.2 15.0 Supplemental health............................ 151.0 163.8 462.2 499.5 Life........................................... 88.6 95.2 266.7 284.2 Other.......................................... 2.6 3.5 8.6 10.1 Net investment income (a)........................... 189.3 190.5 532.6 526.1 Fee revenue and other income (a).................... .8 .5 1.1 1.6 Net realized investment gains (losses) (a).......... (4.4) (3.0) (13.5) .8 -------- -------- -------- -------- Total Conseco Insurance Group revenues..... 431.6 454.8 1,269.9 1,337.3 -------- -------- -------- -------- Other Business in Run-off: Insurance policy income - supplemental health....... 83.4 91.1 254.4 272.4 Net investment income (a)........................... 44.6 45.4 133.9 133.4 Fee revenue and other income (a).................... .1 .1 .3 .4 Net realized investment gains (losses) (a).......... (10.8) (.3) (6.8) 4.2 -------- -------- -------- -------- Total Other Business in Run-off revenues... 117.3 136.3 381.8 410.4 -------- -------- -------- -------- Corporate: Net investment income............................... 9.3 1.7 21.0 5.5 Fee and other income................................ 2.4 11.0 7.4 17.3 Net realized investment losses...................... (.2) - (.2) (1.3) -------- -------- -------- -------- Total corporate revenues................... 11.5 12.7 28.2 21.5 -------- -------- -------- -------- Total revenues............................. $1,118.3 $1,113.5 $3,324.1 $3,248.2 -------- -------- -------- --------
(continued on next page) 14 CONSECO, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements ------------------- (continued from previous page)
Three months ended Nine months ended September 30, September 30, ---------------------- ----------------------- 2006 2005 2006 2005 ---- ---- ---- ---- Expenses: Bankers Life: Insurance policy benefits.......................... $ 390.6 $357.4 $1,140.5 $1,028.0 Amortization....................................... 56.6 53.9 178.1 145.8 Interest expense on investment borrowings.......... - .2 .1 1.7 Other operating costs and expenses................. 43.9 40.3 126.9 116.0 -------- ------ -------- -------- Total Bankers Life expenses................... 491.1 451.8 1,445.6 1,291.5 -------- ------ -------- -------- Conseco Insurance Group: Insurance policy benefits.......................... 268.6 277.2 769.5 806.8 Amortization....................................... 42.0 43.6 129.7 123.8 Interest expense on investment borrowings.......... .1 .6 .6 4.8 Costs related to the tentative litigation settlement....................................... - 1.2 165.8 4.2 Other operating costs and expenses................. 66.5 67.9 204.9 198.6 -------- ------ -------- -------- Total Conseco Insurance Group expenses........ 377.2 390.5 1,270.5 1,138.2 -------- ------ -------- -------- Other Business in Run-off: Insurance policy benefits.......................... 113.4 90.6 294.6 264.8 Amortization....................................... 5.6 7.5 12.6 18.1 Other operating costs and expenses................. 22.1 22.1 66.0 64.0 -------- ------ -------- -------- Total Other Business in Run-off expenses...... 141.1 120.2 373.2 346.9 -------- ------ -------- -------- Corporate: Interest expense on corporate debt................. 12.5 12.1 36.9 37.2 Interest expense on debt of variable interest entity........................................... 5.2 - 13.7 - Loss on extinguishment of debt..................... - 3.7 - 3.7 Costs related to the tentative litigation settlement....................................... - 1.3 8.9 4.2 Other operating costs and expenses................. 14.5 12.5 32.4 38.0 -------- ------ -------- -------- Total corporate expenses...................... 32.2 29.6 91.9 83.1 -------- ------ -------- -------- Total expenses................................ 1,041.6 992.1 3,181.2 2,859.7 -------- ------ -------- -------- Income (loss) before income taxes: Bankers Life.................................. 66.8 57.9 198.6 187.5 Conseco Insurance Group....................... 54.4 64.3 (.6) 199.1 Other Business in Run-off..................... (23.8) 16.1 8.6 63.5 Corporate operations.......................... (20.7) (16.9) (63.7) (61.6) -------- ------ -------- -------- Income before income taxes................ $ 76.7 $121.4 $ 142.9 $ 388.5 ======== ====== ======== ======== - ------------------- (a) It is not practicable to provide additional components of revenue by product or services.
15 CONSECO, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements ------------------- 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 a particular index, such as the Standard & Poor's 500 Index, over a specified period. 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 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). Net investment income (loss) related to equity-indexed products was $6.7 million and $(13.9) million in the nine months ended September 30, 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 $64.1 million and $44.5 million at September 30, 2006 and December 31, 2005, respectively. We classify these instruments as other invested assets. 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" (collectively referred to as "SFAS 138"). 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 $240.1 million and $210.7 million at September 30, 2006 and December 31, 2005, 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). The change in value of these trading securities should largely offset the portion of the change in the value of the embedded derivative that is caused by interest rate fluctuations. 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 September 30, 2006, 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 $10.6 million and $17.4 million at September 30, 2006 and December 31, 2005, 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). 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). The change in value of these trading securities should largely offset the change in value of the embedded derivatives. GUARANTEES We hold loans made to certain former directors and employees that enabled 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 September 30, 2006, we have estimated that approximately $22.8 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 the Plan, the former holders of TOPrS (issued by 16 CONSECO, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements ------------------- 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 September 30, 2006, we had paid $13.7 million to the former holders of TOPrS and we have established a liability of $10.3 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. 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 at September 30, 2006 and December 31, 2005 was $22.8 million and $23.2 million, respectively, and is included in the caption "Other liabilities" in the consolidated balance sheet. REINSURANCE The cost of reinsurance ceded totaled $165.0 million and $176.1 million in the first nine months of 2006 and 2005, respectively. We deduct this cost from insurance policy income. In each case, the ceding Conseco subsidiary is directly liable for claims reinsured even if the assuming company is unable to pay. Reinsurance recoveries netted against insurance policy benefits totaled $176.0 million and $183.4 million in the first nine months of 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. Reinsurance premiums assumed totaled $103.4 million and $43.3 million in the first nine months of 2006 and 2005, respectively. See the note entitled "Accounting for Derivatives" for a discussion of the derivatives embedded in the payable related to certain modified coinsurance agreements. INCOME TAXES The components of income tax expense (benefit) were as follows (dollars in millions):
Three months ended Nine months ended September 30, September 30, -------------------- ----------------------- 2006 2005 2006 2005 ---- ---- ---- ---- Current tax provision.......................................... $ - $ - $ - $ - Deferred tax provision......................................... 28.3 43.5 52.2 140.7 ----- ----- ----- ------ Income tax expense on period income................... $28.3 $43.5 $52.2 $140.7 ===== ===== ===== ======
A reconciliation of the U.S. statutory corporate tax rate to the effective rate reflected in the consolidated statement of operations is as follows:
Nine months ended September 30, ----------------------- 2006 2005 ---- ---- U.S. statutory corporate rate............................................................... 35.0% 35.0% Other nondeductible expenses................................................................ 1.3 .6 State taxes................................................................................. .8 .6 Provision for tax issues, tax credits and other............................................. (.6) - ---- ---- Effective tax rate................................................................. 36.5% 36.2% ==== ====
17 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):
September 30, December 31, 2006 2005 ---- ---- Deferred tax assets: Net operating loss carryforwards attributable to: Life insurance subsidiaries.................................................... $ 789.5 $ 812.8 Non-life companies............................................................. 788.2 796.5 Capital loss carryforwards........................................................ 393.4 397.3 Deductible temporary differences: Insurance liabilities.......................................................... 1,355.3 1,433.2 Unrealized depreciation of investments......................................... 40.8 - Reserve for loss on loan guarantees............................................ 143.1 155.5 -------- --------- Gross deferred tax assets.................................................... 3,510.3 3,595.3 -------- --------- Deferred tax liabilities: Actively managed fixed maturities.............................................. (48.2) (67.8) Value of policies inforce at the Effective Date and cost of policies produced.. (770.1) (752.7) Unrealized appreciation of investments......................................... - (39.7) Other.......................................................................... (118.4) (186.9) -------- --------- Gross deferred tax liabilities............................................... (936.7) (1,047.1) -------- --------- Net deferred tax assets before valuation allowance........................... 2,573.6 2,548.2 Valuation allowance................................................................... (779.6) (1,043.8) -------- --------- Net deferred tax assets...................................................... 1,794.0 1,504.4 Current income taxes accrued.......................................................... (8.9) (7.8) -------- --------- Net income tax assets, net................................................... $1,785.1 $ 1,496.6 ======== =========
The Internal Revenue Service ("IRS") is in the process of finalizing the audit of the Company's tax returns for the year ended December 31, 2003. We have recorded all proposed changes from the audit in our financial statements. In July 2006, the Joint Committee on Taxation accepted the audit and the settlement described in our previous filings with the SEC which characterized $2.1 billion of the tax losses on our Predecessor's investment in Conseco Finance Corp. ("CFC") (the "CFC loss") 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. 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 18 CONSECO, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements ------------------- 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 as we believed that the realization of such net deferred income tax assets in future periods was uncertain. We are required to continue to record a valuation allowance of $779.6 million at September 30, 2006 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 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 ability to utilize NOLs generated by a life insurance company. 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 $140 million per year with any unused amounts carried forward to the following year. As of September 30, 2006, we had $4.5 billion of NOLs and $1.1 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 - ------------------ ---- -------- ------------- ------------- ----------------- --------------------- 2006....... $ - $ .1 $ 5.0 $ 5.1 $ 5.1 $ - 2007....... - .1 449.0 449.1 449.1 - 2008 ...... - .1 583.7 583.8 583.8 - 2009....... - .9 86.2 87.1 .9 86.2 2010....... - 2.4 - 2.4 2.4 - 2011....... - .4 - .4 .4 - 2012....... - 4.4 - 4.4 4.4 - 2016....... 27.7 - - 27.7 27.7 - 2017....... 33.2 - - 33.2 33.2 - 2018....... 2,170.6 (a) 12.0 - 2,182.6 56.1 2,126.5 2019....... - .7 - .7 .7 - 2020....... - - - - - - 2021....... 24.2 - - 24.2 - 24.2 2023....... - 2,079.8 (a) - 2,079.8 61.9 2,017.9 2024....... - 3.2 - 3.2 - 3.2 2025....... - 118.8 - 118.8 - 118.8 2026....... - 29.1 - 29.1 - 29.1 -------- -------- -------- -------- -------- -------- Total...... $2,255.7 $2,252.0 $1,123.9 $5,631.6 $1,225.7 $4,405.9 ======== ======== ======== ======== ======== ========
19 CONSECO, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements ------------------- - ------------- (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, $631 million of the NOLs expiring in 2018 would be characterized as non-life NOLs. 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 has 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 $0.6 million related to deductions for stock options and restricted stock will be reflected in additional paid-in capital if realized. NOTES PAYABLE - DIRECT CORPORATE OBLIGATIONS The following notes payable were direct corporate obligations of the Company as of September 30, 2006 and December 31, 2005 (dollars in millions):
September 30, December 31, 2006 2005 ---- ---- 3.50% convertible debentures............................................................ $330.0 $330.0 Secured credit agreement................................................................ 478.3 524.6 Unamortized discount on convertible debentures.......................................... (2.7) (3.1) ------ ------ Direct corporate obligations....................................................... $805.6 $851.5 ====== ======
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 September 30, 2006, unamortized issuance costs (classified as other assets) related to the Debentures were $6.2 million 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. 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). In connection with the sale of the Debentures, the Company also entered into a Registration Rights Agreement (the "Registration Rights Agreement") with the initial purchasers. Pursuant to that agreement, the Company filed with the SEC a 20 CONSECO, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements ------------------- shelf registration statement with respect to the resale of the Debentures and the sale of our shares of common stock issuable upon conversion of the Debentures which became effective on March 16, 2006. 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 the third quarter of 2005 for the write-off of certain debt issuance 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 the first nine months of 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. There were $4.7 million and $5.6 million of unamortized issuance costs (classified as other assets) related to our Amended Credit Facility at September 30, 2006 and December 31, 2005, respectively. On October 10, 2006, we entered into a $675.0 million secured credit agreement (the "Second Amended Credit Facility"). The proceeds from the Second Amended Credit Facility were used to repay the remaining principal amount of the Amended Credit Facility and will be used to strengthen the capital of our insurance subsidiaries. The Company expects to recognize an immaterial loss on the extinguishment of debt during the fourth quarter of 2006 for the write-off of certain debt issuance costs. The Second Amended Credit Facility extends the maturity date from June 22, 2010 to October 10, 2013. Under the terms of the Second Amended Credit Facility, we are required to make minimum quarterly principal payments of $1.7 million, commencing December 31, 2006. The remaining unpaid principal balance is due on October 10, 2013. The amounts outstanding under the Second Amended Credit Facility and the Amended Credit Facility bear interest, payable at least quarterly, based on either a Eurodollar rate or a base rate. The Eurodollar rate on the Second Amended Credit Facility and the Amended Credit Facility is equal to LIBOR plus 2 percent, compared to LIBOR plus 3.5 percent under the Credit Facility. The base rate on the Second Amended Credit Facility and the Amended Credit Facility is equal to 1 percent (2.5 percent under the Credit Facility) 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 Amended Credit Facility, if the Company's senior secured long-term debt is rated at least Ba3 by Moody's Investors Service, Inc. ("Moody's") 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. In March 2006, Moody's upgraded our senior secured debt rating to "Ba3" from "B2", resulting in a .25 percent interest rate reduction. 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 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 September 30, 2006, the interest rate on our Amended Credit Facility was 7.1 percent. 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 and certain insurance subsidiaries (as defined in the Second Amended Credit Facility) have financial strength ratings of less than A- from A.M. Best Company ("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 2008). 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. 21 CONSECO, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements ------------------- The Second Amended Credit Facility and the Amended Credit Facility require the Company to maintain various financial ratios and balances, as defined in the agreements, including:
Second Amended Amended Credit Facility Credit Facility --------------- --------------- (i) debt to total capitalization ratio............... not more than 30% not more than 25% (ii) interest coverage ratio.......................... greater than or equal to greater than or equal to 2.00 to 1 for each rolling 2.00 to 1 for each rolling four quarters four quarters ending June 30, 2007, and 2.50 to 1 for each rolling four quarters thereafter (iii) an aggregate risk-based capital ratio............ greater than or equal to greater than or equal to 250% for each quarter 250% for each quarter (iv) combined statutory capital and surplus level..... greater than $1,270.0 greater than $1,270.0 million million
The Company was in compliance with all covenants as defined in the Amended Credit Facility at September 30, 2006. The Amended Credit Facility and the Second Amended Credit Facility both include 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 September 30, 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 provides for a one time increase in the facility or the addition of a new facility of up to $330.0 million. Such increase would be effective as of a date that is at least 90 days prior to the scheduled maturity date. 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 $150.0 million over the term of the facility (compared to a limitation of $50.0 million under the Amended Credit Facility). 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 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 $48.5 million and $15.7 million during the nine months ended September 30, 2006 and 2005, respectively. Amounts amortized totaled $14.1 million and $3.9 million during the nine months ended September 30, 2006 and 2005, respectively. The unamortized 22 CONSECO, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements ------------------- balance of deferred sales inducements at September 30, 2006 and December 31, 2005 was $104.5 million and $70.1 million, respectively. The balance of insurance liabilities for persistency bonus benefits was $304.3 million and $320.7 million at September 30, 2006 and December 31, 2005, respectively. RECENTLY ISSUED ACCOUNTING STANDARDS Pending Accounting Standards 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 Company is currently evaluating the impact of adopting SFAS 158, however, it is not expected to have a material impact on our consolidated financial position or results of operations. 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 Company is currently evaluating the effect SFAS 157 will have on our results of operations and financial condition. In September 2006, the SEC released Staff Accounting Bulletin No. 108, "Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements" ("SAB 108"). SAB 108 provides guidance on how the effects of prior year uncorrected financial statement misstatements should be considered in quantifying a current year misstatement. SAB 108 requires companies to quantify misstatements using both an income statement ("rollover") and balance sheet ("iron curtain") approach and evaluate whether either approach results in a misstatement that, when all relevant quantitative and qualitative factors are considered, is material. If prior year errors that had been previously considered immaterial now are considered material based on either approach, no restatement is required as long as the company properly applied its previous approach and all relevant facts and circumstances were considered. If prior years are not restated, the cumulative effect adjustment is recorded in retained earnings as of the beginning of the fiscal year of adoption. The provisions of SAB 108 must be applied no later than the annual financial statements of the Company for the year ended December 31, 2006. Our adoption of SAB 108 is not expected to have an effect on our results of operations or financial position because we currently use an approach consistent with the new requirement. 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. We are currently evaluating the impact of FIN 48 on our consolidated results of operations and financial position. 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 23 CONSECO, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements ------------------- statement impact of the changes in fair value of those instruments. SFAS 155 is effective for all financial instruments acquired or issued in a fiscal year that begins after September 15, 2006. Management is assessing the impact SFAS 155 will have on our results of operations or financial position. In September 2005, the Accounting Standards Executive Committee issued 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"). 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 occurring in fiscal years beginning after December 15, 2006. We are currently assessing the impact of SOP 05-1. Based on our initial assessment of the standard, we do not expect it to have a material impact on our results of operations or financial position. However, the insurance industry has identified several implementation issues during their evaluation of SOP 05-1. As a result, the standard is currently under review by an expert panel formed by the American Institute of Certified Public Accountants and clarifications or revisions may be issued which could affect our initial assessment. Adopted Accounting Standards 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 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. See the note entitled "Accounting for Stock Options" for further information on our adoption of SFAS 123R. LITIGATION AND OTHER LEGAL PROCEEDINGS 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. 24 CONSECO, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements ------------------- 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 CFC's manufactured housing division, allegedly resulting in the artificial inflation of our Predecessor's stock price. On March 13, 2003, all of 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. James S. Adams filed for bankruptcy on July 29, 2005, Case No. 1:02-cv-1332-DFH-TAB (Southern District, Indiana). 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 $1.5 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 Insurance Company, have been named in numerous purported 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 alleges, among other things, that the change enabled Conseco, Inc. to add $360 million to its balance sheet. The amended complaint seeks 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 has reached a tentative settlement of this case. Under the tentative settlement, inforce policyholders will have an option to choose a form of policy benefit enhancement and certain former policyholders will share in a settlement fund by either reinstating their policies with enhanced benefits, or electing to receive cash. Finalizing the settlement will require court review and approval, a fairness hearing, notice to all class members, 25 CONSECO, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements ------------------- election of options by the class members, implementation of the settlement and is subject to other conditions. We expect to implement the settlement with the inforce and certain former policyholders in the first quarter of 2007. As a result of the settlement, we recorded $157.0 million of costs (before income taxes) related to the tentative settlement in the second quarter of 2006. In addition, we had previously recognized costs related to this litigation of $17.7 million in the three months ended March 31, 2006, and $18.3 million and $9.8 million in the years ended December 31, 2005 and 2004, respectively. The liability we have established related to the tentative settlement at September 30, 2006, includes our best estimate of: (i) the cost of the benefits to be provided to inforce policyholders; (ii) the value of the settlement fund for former policyholders; (iii) plaintiff attorney fees; (iv) the cost to settle other cases pending with respect to the cost of insurance litigation; and (v) other costs and professional fees required to implement the settlement. While we believe the liabilities we have established are adequate to cover these costs, our estimates are subject to significant judgment (including the form of policy benefit enhancement chosen by the inforce policyholders) and it is possible that our estimates will prove to be insufficient to cover our actual costs. In addition, the actual cost we incur is dependent on: (i) the release of no less than 1,000,000 shares of our common stock which were reserved for distribution pursuant to the bankruptcy plan of our Predecessor to satisfy the prepetition claims of the plaintiffs; and (ii) the value of such shares realized by the plaintiffs. In determining our current estimate of the net costs related to the tentative settlement, these shares were valued based on the September 30, 2006 closing price of a share of our common stock. The implementation of the tentative settlement includes enhanced benefits to the inforce insurance policies, which eliminates the future estimated profits from these policies in periods subsequent to the tentative 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. We recognized a loss before income taxes on these policies of approximately $2.7 million in the three months ended September 30, 2006 (a post-tentative settlement date period), primarily due to adverse mortality experience. 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). 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). 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. 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. 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 724 plaintiffs all of who 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. Additionally, a lawsuit was filed on December 22, 2005 in Pennsylvania captioned Lisa M. Jordan v. Allen R. Shank and Conseco Life Insurance Company, Case No. 05-10204 (Court of Common Pleas, Chester County, Pennsylvania). 26 CONSECO, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements ------------------- The ultimate outcome of these cost of insurance lawsuits 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 In October 1997, an action was filed against Conseco Variable Insurance Company ("CVIC"), a former subsidiary of the Company, and general agent Glenn H. Guffey by nine South Carolina agents, who alleged that they had suffered losses as a result of defendants' breach of contract, fraud and misleading conduct relating to the sale of Flex II annuities. In the action, Molly Allen et al v. Great American Reserve Insurance Company, Glenn H. Guffey and American Home Assurance Company, Case Number 29C01-9709-CP751 in the Circuit Court of Hamilton County, Indiana, plaintiffs claim that Mr. Guffey told them that the annuities would have no initial administrative fees charged to the owner of the annuity (when in fact they did) and that as a result, they had been selling the annuities on that basis. Plaintiffs demanded unspecified compensatory and punitive damages, and allege that they have lost commissions and renewals and that their business reputations have been damaged as a result of Mr. Guffey's misrepresentations. They further contend that CVIC should be held liable as it negligently supervised Mr. Guffey and knew about his fraudulent conduct. Defendants were granted a Summary Judgment on February 9, 2000, but plaintiffs appealed the judgment, and the Indiana Supreme Court overturned it on April 2, 2002. Mr. Guffey has settled with plaintiffs, and the case against CVIC was set for a jury trial commencing July 31, 2006. However, plaintiffs filed a motion to add an additional count to the complaint and a motion for summary judgment on that new count. The court denied plaintiffs' motion for summary judgment, and plaintiffs are appealing that denial. As a result, the court continued the trial pending a ruling from the Indiana Court of Appeals. We retained liability for CVIC's involvement in this litigation in connection with the sale of CVIC. We believe this action is without merit, and intend to defend it vigorously. The ultimate outcome of the action cannot be predicted with certainty. On October 8, 2003, a complaint was filed in the United States District Court for South Carolina, Greenville Division, Consolidated Insured Benefits, Inc. and Ronald F. English v. Conseco Medical Insurance Company, Cause No. 6:03-3211-20. Plaintiffs are a former Conseco Medical Insurance Company ("CMIC") field marketing organization and its president and chief executive officer, and they allege in the complaint that they were damaged by CMIC's exit from the individual medical insurance market claiming damages in an unnamed amount for fraud, negligent misrepresentation and breach of fiduciary duty. CMIC has filed a motion for summary judgment and a motion requesting that the case be moved to the U.S. District Court in Indianapolis. The court refused to change the venue of the action, and CMIC's motion for summary judgment is still pending. The case is expected to be set for trial in 2007. 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 November 6, 2003, a Complaint was filed in State Court in Fulton County, Georgia, Reginald Martin Agency, Inc.; Comprehensive Insurance Marketing, Inc.; Design Benefits Inc.; Jim Jasnoski d/b/a Design Benefits, Inc.; Kenny Froug d/b/a Atlanta Brokerage Office; Brokerage One Agency, Inc.; Tri-State Brokerage, Inc.; Don Sepulveda d/b/a Sepulveda Insurance Group; Dean Vandersnick d/b/a Professional Insurance Brokerage and Whitewater Brokerage, Inc. v. Conseco Medical Insurance Company, Conseco Marketing LLC, Timothy F. O'Keefe and Edward M. Berube, Cause No. 03VC0587 B4Y. Plaintiffs are former CMIC Field Marketing Organizations that allege in the complaint that they were damaged by CMIC's exit from the individual medical insurance market claiming damages in an unnamed amount for breach of contract, fraud, negligent misrepresentation, breach of partnership agreements and fiduciary duty, breach of implied covenant of good faith and fair dealing, tortuous interference with business and contractual relationships, damage to goodwill and business reputation and bad faith. At CMIC's request, the case was removed to federal court and transferred to the United States District Court for the Southern District of Indiana, Indianapolis Division (Cause No. 1:04-CV-1587-TAB/RLY). CMIC filed a motion to dismiss, and all of the causes of action have been dismissed except the fraud count and the action for breach of fiduciary duty. CMIC has filed a motion for summary judgment that is currently pending. The case is set to go to trial on March 5, 2007. We believe the action is without merit, and intend to defend it vigorously. The ultimate outcome of the action cannot be predicted with certainty. Other Litigation On July 9, 1999, a complaint was filed in the Supreme Court of the State of New York, County of New York, PRG Planning & Development, LLC v. LateNite Magic, Inc., Daurio & Russo & Sons Construction Co., Inc., Specialized Audio Visual, Inc., Farmore Realty, Inc. f/k/a Sweetheart Theatres, Inc., The City of New York and the State of New York Cause No: 27 CONSECO, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements ------------------- 114077/99. The complaint seeks damages in the amount of $3.9 million with interest thereon from January 20, 1998. This is a lien foreclosure suit that is the result of an April 1996 lease agreement entered into by LateNite Magic and Farmore Realty, Inc. to develop a theme restaurant based on the magic of David Copperfield. CVIC and our subsidiary Conseco Annuity Assurance Company (now known as Conseco Insurance Company) purchased preferred stock of LateNite and acquired the right to an assignment of the April 1996 lease. An amended complaint was filed on December 2, 1999 naming CVIC and Conseco Annuity Assurance Company as co-defendants. The trial in this case commenced on March 10, 2005 and concluded on May 20, 2005. On August 25, 2006 the court awarded the plaintiff judgment in the sum of $3.8 million plus interest from December 16, 1997. We will be appealing the judgment. A civil complaint dated December 5, 2005 was filed with the Piraeus Court in Greece on December 22, 2005 by Blue Wave Maritime S.A., Adriatic Spirit S.A., Aegean Spirit S.A., and Ocean Challenger S.A., all companies which are part of the Adriatic Holding Corporation Ltd. group of companies ("Adriatic") which each owned one vessel, against United States Trust Company of New York, Teachers Insurance and Annuity Association of America, Nightingale & Associates, Fairwind Shipping Limited, Aegon USA Investment Management, CIGNA Investments Inc., Kemper Financial Services Inc., Conseco Capital Management Co., Northwestern Mutual Life Insurance Company, John Hancock Mutual Life Insurance Company, New England Mutual Life Insurance Company, Combined States Holding Corporation, Douglas Hopkins, executive of the company Nightingale & Associates, and Brad Scher, executive of the company Teachers Insurance and Annuity Association of America (collectively "Noteholders") alleging various tort claims arising out of the foreclosure and/or repossession in 1996 by the Noteholders of four vessels allegedly owned by the plaintiffs and seeking damages in the approximate amount of $32 million. Conseco was served on or about August 30, 2006. The suit concerns various Notes issued by Adriatic in April 1994 which were purchased by the Noteholders and secured in part by preferred ship mortgages on various vessels owned by Adriatic. In 1996, Adriatic defaulted on the Notes and the Noteholders exercised their rights pursuant to the applicable loan documentation to foreclose and/or take possession of the four vessels that secured Adriatic's obligations to the Noteholders. 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 December 10, 2004, a complaint was filed in the United States District Court for the Northern District of Oklahoma, Robin C. Willig, as Executrix of the Estate of Rhodes K. Scherer vs. Conseco Senior Health Insurance Company and Conseco, Inc., Case No. 04 CV 923E (M). The plaintiff alleges that the failure to pay long term care insurance policy proceeds has been a breach of contract and in violation of the duty to act in good faith, and seeks actual damages in a sum in excess of $75,000, punitive damages in a sum in excess of $75,000, her costs, attorneys' fees, and such other and further relief as the Court and jury determine to be just, equitable, and fair. On or about September 27, 2005, the plaintiff dismissed Conseco, Inc. as a defendant. Discovery is ongoing. The jury trial which was set for September 18, 2006 has been continued, and a new trial date has not been set by the court at this time. 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 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 (RICO); 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 Friou P. Jones as a named Plaintiff and 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 Marking & Sales Practices Litig. A motion to dismiss the amended complaint was filed on July 28, 2006 and was heard on October 27, 2006. The court has set plaintiff's motion for class certification for hearing on March 30, 2007, and the case is set for trial commencing November 13, 2007. 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. 28 CONSECO, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements ------------------- On May 10, 2000, a complaint was filed in the Court of Common Pleas of Lancaster County, Pennsylvania, Civil Action-Law No. CI-00-04822 captioned Frederick C. Wolf, Executor of the Estate of Louis P. Kretschman v. Bankers Life and Casualty Company, and Timothy O. Cochran. On September 12, 2001, the plaintiff filed an amended complaint. The amended complaint seeks damages for the alleged improper sale of a fixed annuity and a life insurance policy. The specific allegations are intentional misrepresentation, negligent misrepresentation, negligence, breach of contract, fraud, unfair trade practices and consumer law violations, and bad faith. On April 18, 2006, a bench trial was held. At the conclusion of the trial, the plaintiff asked the judge to find that Bankers Life and Casualty acted in bad faith and engaged in unfair trade practices and consumer protection law violations as defined by statute. The plaintiff asked the court to award treble damages, unspecified punitive damages, and attorney fees. Actual damages are less than $.1 million. The judge ordered the parties to submit proposed findings of facts and conclusions of law. Along with those filings, the plaintiff also filed an application for attorney fees in the amount of $.5 million. Bankers Life and Casualty filed motions asserting attorney fees should not be allowed because the plaintiff failed to present the appropriate evidence at trial or in the alternative that Bankers Life and Casualty be able to conduct discovery and present expert testimony as to the reasonableness of the amounts asserted. We believe the action is without merit and intend to defend it vigorously. The outcome of the action cannot be determined with certainty. On September 24, 2004, a purported statewide class action was filed in the 18th Judicial District Court, Parish of 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's failure to pay claims made under her cancer policy, and seeks compensatory and statutory damages 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 number 04-784-D-M2. This case is now in the discovery stage, and the court has not yet set a hearing for plaintiff's class certification motion. 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. On October 3, 2005, an action was filed in Superior Court for San Francisco County, California, Anita D. Paratley v. Conseco Health Insurance Company et al, Case No. C-05-44379. On Conseco Health Insurance Company's motion, the case was removed to the United States District Court for the Northern District of California and issued Case No. C-05-4312 (MMC). 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 punitive damages and her attorney's fees along with declaratory relief. These claims are based on plaintiff's allegation of breach of contract, bad faith and unfair business practices. The complaint was subsequently amended adding Conseco, Inc. as a defendant, but Conseco, Inc. was subsequently replaced by Conseco Services, LLC ("Conseco Services") as a party defendant. This case is now in the discovery stage. Plaintiff has filed a motion for summary judgment that is set to be heard on November 17, 2006, and the court has set the case for a jury trial commencing April 23, 2007. We believe the action without merit, and we intend to defend the case vigorously. The ultimate outcome of the action cannot be predicted with certainty. On March 22, 2006, the Company's subsidiary, CDOC, Inc. ("CDOC"), as the successor in interest to Statesman Insurance Company ("Statesman"), brought a complaint for declaratory judgment against Himco Waste-Away Services, Inc. ("Himco") CDOC, Inc. v. Himco Waste-Away Services, Inc., Case No. 29C01-0603-PL-296 (Hamilton Circuit Court, Indiana). CDOC seeks a court declaration to determine the rights and obligations of CDOC and Himco under certain general liability contracts Himco allegedly procured from Statesman during the period 1969 through 1975. The coverage dispute arises out of a U.S. Environmental Protection Agency ("EPA") claim against Himco, for which Himco sought reimbursement of investigation and defense costs and indemnification of its settlement with the EPA pursuant to the Statesman policies in the sum of $1.6 million. CDOC's complaint alleges that Himco failed to comply with conditions precedent to coverage under the Statesman policies because, among other things, Himco's late notice to CDOC of the EPA's claim was not immediate, as required by the policies, but rather was unreasonably late, and Himco failed and refused to cooperate in good faith with CDOC. The complaint also alleges that Himco's failure to provide immediate notice and cooperate precludes Himco from seeking and receiving any insurance coverage under the Statesman policies. On May 3, 2006, Himco answered the complaint and filed a counterclaim seeking unspecified damages and alleging breach of contract, breach of the duty of good faith and fair dealing, as well as seeking declaratory relief. In addition they sought a change of venue to Elkhart County, Indiana. The matter is now in Elkhart Circuit Court, Case No. 20CO1-2606-PL-46. The ultimate outcome of this action cannot be predicted with certainty. 29 CONSECO, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements ------------------- 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. The counterclaim did not specify the damages sought by Penney on the breach of contract claims. After a bench trial in 2002, certain rulings of the trial court were appealed to the United States Court of Appeals for the Ninth Circuit. In June 2005, the Ninth Circuit issued an opinion upholding a trial-court determination that the terms of the 1967 sale generally require Conseco Insurance Company to indemnify Stonebridge for net losses arising from pre-sale BF&C policies, but only after Stonebridge pursues and exhausts available reinsurance. The Ninth Circuit remanded the case to the trial court for further proceedings. The trial court had previously found against Stonebridge on its breach of contract claims, ruling that Stonebridge could not assert such claims until it pursued and exhausted available reinsurance. Stonebridge did not appeal that specific ruling. The remaining issue before the trial court is whether Conseco Insurance Company's indemnification obligation with respect to certain environmental claims asserted by the Port of Oakland is excused by Stonebridge's conduct in handling the claims. 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, Case No. 29 C0 10607 MI 765. 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. 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. Conseco Insurance Company alternatively seeks equitable relief requiring Stonebridge to take affirmative steps to preserve the availability of reinsurance on such claims. The ultimate outcomes of the actions cannot be predicted with certainty. On January 9, 2004, a six count complaint was filed against Conseco Life Insurance Company, styled Laura G. Bailey vs. Conseco Life Insurance Company, an Indiana corporation; Debbie L. Sipe; Does 1 through 15; and, Roe Corporations 1 through 15, inclusive. The suit is pending in the District Court of Clark County, Nevada, Cause No. A478843, Dept. No. VIII, and is set for a jury trial beginning on May 29, 2007. Ms. Bailey's suit centers around her request for disability benefits in the spring of 2003 and alleges breach of contract, bad faith, unfair claim settlement practices, breach of fiduciary relationship, misrepresentation, and punitive damages. When Ms. Bailey submitted her request, Conseco Life Insurance Company investigated and found that Ms. Bailey was only issued a life insurance policy. Conseco Life Insurance Company intends to file a summary judgment in this matter. We believe the action is without merit, and intend to defend it rigorously. The ultimate outcome of the action cannot be predicted with certainty. On February 13, 2004, a declaratory judgment action, RLI Insurance Company v. Conseco, Inc., et al 1:04-cv-00310-LJM-WTL, was filed in the United States District Court for the Southern District of Indiana by RLI Insurance Company ("RLI"), Conseco's fiduciary insurance carrier. RLI is asking the court to find that is has no liability under its policy for the claims made against Conseco in Roderick Russell, et al. v. Conseco, Inc., et al., Case No. 1:02-CV-1639 LJM. In this 2004 Declaratory Judgment action, RLI claims that releases provided to them pursuant to RLI's agreement to settle a prior case involving the Predecessor, RLI Insurance Company v. Conseco, Inc., Stephen Hilbert, et al., Case No. 1:04-CV-0310DFH-TAB (Southern District, Indiana), absolved it of any further liability for claims by Conseco. The Company is pursuing recovery from RLI of the $10 million paid to settle the Russell matter, and has filed counterclaims for declaratory judgment and breach of contract. The court stayed this case until the Russell matter was resolved; however, the stay was lifted as of November 15, 2005. We believe that RLI's position is without merit because the previous release is not applicable to the Russell matter. Conseco has filed a motion for partial summary judgment on the issue of whether RLI was obligated to provide it a defense in the Russell case. The case is set to be tried commencing April 2, 2007. We plan to vigorously pursue all claims against RLI, but the ultimate outcome of the lawsuit cannot be predicted with certainty. We expect to ultimately recover from RLI a substantial portion of the amount we paid in settlement of the Russell matter. 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 30 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 various past board members and executives with outstanding loan balances. In addition, certain former officers and directors have sued the companies for declaratory relief concerning their liability for the loans. Currently, we are involved in litigation with Stephen C. Hilbert, James D. Massey, Dennis E. Murray, Sr., James S. Adams and David R. Decatur. The specific lawsuits now pending include: Hilbert v. Conseco, Case No. 03CH 15330 (Circuit Court, Cook County, Illinois); Conseco Services v. Hilbert, Case No. 29C01-0310-MF-1296 (Circuit Court, Hamilton County, Indiana); Murray and Massey v. Conseco, Case No. 1:03-CV-1701-LJM-VSS (Southern District, Indiana); Stephen C. Hilbert v. Conseco, Inc. and Kroll Inc., Case No. 29D02-0312-PL-1026 (Superior Court, Hamilton County, Indiana); Conseco Services v. Adams, Case No. 29D02-0404-CC-000376 (Superior Court, Hamilton County, 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. Adams, et al., Case No. 04 L 012974 (Circuit Court, Cook County, Illinois); Conseco Services v. Decatur, Case No. 29D02-0404-CC-000379 (Superior Court, Hamilton County, Indiana); Conseco, Inc. v. Murray, Case No. 1:05-cv-01580-JDT-TAB (Southern District, Indiana); Conseco, Inc. v. Massey, Case No. 2005-L-011316 (Circuit court, Cook County, Illinois). David Decatur filed for bankruptcy on May 12, 2004, Case No. 04-08772-JKC-11 (Southern District, Indiana). James S. Adams filed for bankruptcy on July 29, 2005, Case No. 1:02-cv-1332-DFH-TAB (Southern District, Indiana). On July 17, 2006 a Chapter 7 Involuntary Bankruptcy Petition was filed by Conseco against James D. Massey, Case No. 06-03895-7 (Southern District, Indiana). On October 20, 2004, in Conseco Services v. Hilbert, Conseco Services was granted partial final summary judgment in the amount of $62.7 million plus interest. Mr. Hilbert appealed that ruling. The Court of Appeals ruled in our favor on November 8, 2005. Mr. Hilbert subsequently filed a petition to transfer with the Indiana Supreme Court, which was denied on March 16, 2006. On July 14, 2006 Mr. Hilbert filed a Petition for Writ of Certiorari in the Supreme Court of the United States. On October 2, 2006, the Supreme Court denied the petition. We are now proceeding to execute on our judgment. 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 September 30, 2006, 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 September 30, 2006, we estimated that approximately $22.8 million, net of collection costs, of the remaining amounts due under the loan program will be collected and that $10.3 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 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. 31 CONSECO, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements ------------------- In 2006, certain insurance subsidiaries (Conseco Insurance Company, Conseco Life Insurance Company, Washington National Insurance Company, Conseco Health Insurance Company and Conseco Senior Health Insurance Company) agreed to settle matters resulting from a market conduct examination by the Minnesota Commerce Department. A fine of $2.5 million was paid in April 2006. The terms of the settlement could result in additional benefits or options being offered to certain policyholders. Minnesota owners of equity-indexed annuities issued by Conseco Insurance Company purchased on or after January 1, 1998, will receive the opportunity to initiate a Conseco internal review and arbitration process to determine whether they adequately understood the renewal participation rate feature of their policy at the time the policy was originally sold. Policyholders who can prove they did not understand renewal participation rates at the time the policy was originally sold based on representations or omissions made by the Company or its agents may be provided relief in the form of adjusted participation rates. We have sent a notice to the approximately 2,000 affected policyholders and advised them of their options. To date, policyholders have not asserted claims with significant exposure to the Company related to the potential issues addressed in the settlement. However, management considers it probable that additional claims will be asserted and there is a reasonable possibility that the outcome will be unfavorable. Although the outcome of the procedures required by the settlement cannot be predicted with certainty, management currently believes the cost of resolving these matters will not result in a loss which exceeds the amount accrued by more than $5 million. Certain state insurance regulators have 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 tentative litigation settlement described above under "Cost of Insurance Litigation". The ultimate outcome of such inquiries and the effect any regulator actions could have on the tentative litigation settlement cannot be predicted with certainty. CONSOLIDATED STATEMENT OF CASH FLOWS The following disclosures supplement our consolidated statement of cash flows (dollars in millions):
Nine months ended September 30, ---------------------- 2006 2005 ---- ---- Cash flows from operating activities: Net income........................................................................... $ 90.7 $ 247.8 Adjustments to reconcile net income to net cash provided by operating activities: Amortization and depreciation.................................................... 337.1 303.1 Income taxes..................................................................... 54.0 168.1 Insurance liabilities............................................................ 275.0 281.2 Accrual and amortization of investment income.................................... 13.9 55.8 Deferral of policy acquisition costs............................................. (367.6) (305.3) Net realized investment (gains) losses........................................... 28.6 (3.1) Net sales of trading securities.................................................. 28.3 161.1 Loss on extinguishment of debt................................................... - 3.4 Other............................................................................ 198.7 (3.0) ------ ------- Net cash provided by operating activities...................................... $658.7 $ 909.1 ====== ======= Non-cash items not reflected in the investing and financing activities sections of the consolidated statement of cash flows: Stock option and restricted stock plans............................................ $11.1 $7.1 ===== ====
32 CONSECO, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements ------------------- At September 30, 2006 and December 31, 2005, restricted cash and cash equivalents consisted of: (i) $6.6 million and $33.3 million, respectively, held by a variable interest entity; (ii) $.1 million and $1.9 million, respectively, of segregated cash held for the benefit of the former holders of TOPrS; and (iii) $8.2 million and nil, respectively, held in an escrow account pursuant to a litigation settlement. SUBSEQUENT EVENT On October 10, 2006, the Company completed the refinancing of its Amended Credit Facility. Refer to the note entitled "Notes Payable - Direct Corporate Obligations" for further information related to the refinancing. 33 CONSECO, INC. AND SUBSIDIARIES ------------------- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. In this section, we review the consolidated financial condition of Conseco at September 30, 2006, and the consolidated results of operations for the three and nine months ended September 30, 2006 and 2005, and, where appropriate, factors that may affect future financial performance. Please read this discussion in conjunction with the accompanying consolidated financial statements and notes. 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" section of our 2005 Annual Report on Form 10-K provides 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 achieve an upgrade of the financial strength ratings of our insurance company subsidiaries and the impact of prior rating downgrades on our business; o the ultimate outcome of lawsuits filed against us and other legal and regulatory proceedings to which we are subject; 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 our ability to achieve anticipated expense reductions and levels of operational efficiencies; o the adverse impact of our Predecessor's bankruptcy proceedings on our business operations, and relationships with our customers, employees, regulators, distributors and agents; o performance of our investments; 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 the risk factors or uncertainties listed from time to time in our filings with the SEC; 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; 34 CONSECO, INC. AND SUBSIDIARIES ------------------- o changes in the Federal income tax laws and regulations which may affect or eliminate the relative tax advantages of some of our products; 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; and o our ability to realize our deferred income tax assets by generating sufficient future taxable income during the period in which our temporary differences become deductible and before the carryforward periods expire. 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, 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 conduct our business operations through two operating segments, which are defined on the basis of product distribution, and a third segment comprised of businesses in run-off, as follows: o Bankers Life, which consists of the businesses of Bankers Life and Casualty Company ("Bankers Life and Casualty") and Colonial Penn Life Insurance Company ("Colonial Penn"). Bankers Life and Casualty markets and distributes Medicare supplement insurance, life insurance, long-term care insurance, Medicare Part D prescription drug program and certain annuity products to the senior market through exclusive career agents and sales managers. Colonial Penn markets graded benefit and simplified issue life insurance directly to consumers through television advertising, direct mail, the internet and telemarketing. Both Bankers Life and Casualty and Colonial Penn market their products under their own brand names. 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 independent marketing organizations that represent independent agents. This segment markets its products under the "Conseco" and "Washington National" (a wholly-owned insurance subsidiary of Conseco) brand names. 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 long-term care insurance sold in prior years through independent agents and major medical insurance. We also have a corporate segment, which consists of holding company activities and certain noninsurance company businesses that are not related to our operating segments. CRITICAL ACCOUNTING POLICIES We have updated our critical accounting policy related to the value of policies inforce at the Effective Date and cost of policies produced to summarize our estimates of cumulative adjustments resulting from hypothetical revisions to certain 35 CONSECO, INC. AND SUBSIDIARIES ------------------- assumptions. In addition, we have added a critical accounting policy on the accounting for the marketing and quota-share agreements with Coventry Health Care ("Coventry"). These critical accounting policies are presented below. Refer to "Critical Accounting Policies" in Conseco's 2005 Annual Report on Form 10-K for information on our other accounting policies. 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 policies 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 manner described below. We expect to amortize approximately 12 percent of the December 31, 2005 balance of value of policies inforce in 2006, 11 percent in 2007, 10 percent in 2008, 8 percent in 2009 and 8 percent in 2010. The cost of policies produced are those costs that vary with, and are primarily related to, producing new insurance business in the period after the Effective Date. These costs include commissions in excess of ultimate renewal commissions, printing costs, sales materials, underwriting and policy issuance expenses. 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. 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. During 2004, differences between actual and expected investment income caused us to change our assumptions used to estimate gross profits for universal life and investment-type products. The changes we made primarily relate to the timing of investment income and had the effect of lowering near term expected profits and increasing longer term profits based on a more precise modeling of the investment portfolio. The changes we made did not affect our expectations for the total estimated profits to be earned on this business, but did affect how we expect these profits to emerge over time. The new assumptions resulted in a reduction to insurance amortization of approximately $4.6 million during 2004. There have been no other significant changes to assumptions used to amortize insurance acquisition costs during the first nine 36 CONSECO, INC. AND SUBSIDIARIES ------------------- months of 2006 or during 2005 and 2004. 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 $6.0 million and $1.2 million in the first nine months of 2006 and 2005, respectively. In addition, we increased (decreased) amortization expense for such changes by $(2.8) million, $13.4 million, $1.1 million and $(.4) million during the years ended December 31, 2005 and 2004, the four months ended December 31, 2003 and the eight months ended August 31, 2003, 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 $36.0 million at September 30, 2006. At September 30, 2006, the balance of insurance acquisition costs was $3.3 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. 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(1) revisions to certain assumptions - --------------------- -------------------------------- (dollars in millions) Universal life-type products(2): 5% increase to assumed mortality.................................. $(35.8) 5% decrease to assumed mortality.................................. 27.6 15% increase to assumed expenses.................................. (8.9) 15% decrease to assumed expenses.................................. 7.9 10 basis point decrease to assumed spread......................... (7.6) 10 basis point increase to assumed spread......................... 7.1 Investment-type products: 20% increase to assumed surrenders................................ $(8.7) 20% decrease to assumed surrenders................................ 10.3 15% increase to assumed expenses.................................. (2.4) 15% decrease to assumed expenses.................................. 2.3 10 basis point decrease to assumed spread......................... (7.1) 10 basis point increase to assumed spread......................... 6.6 - -------- (1) We have excluded the effect of reasonably likely changes in 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. (2) We have excluded the effect of reasonably likely changes in assumptions for universal life-type policy lapses. Our estimates indicate such changes would not have a significant effect on income before income taxes.
37 CONSECO, INC. AND SUBSIDIARIES ------------------- Accounting for marketing and quota-share agreements with Coventry The Medicare Modernization Act provided for the introduction of a prescription drug benefit (Part D). In order to offer this 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 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 in 2006 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 these activities: 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. 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 "CMS"), as if the quarter represented an entire contract period. 38 CONSECO, INC. AND SUBSIDIARIES ------------------- The following summarizes the income before income taxes recognized on this business (primarily in the Bankers Life segment) (dollars in millions):
Three months ended Nine months ended September 30, September 30, 2006 2006 ---- ---- Insurance policy income............................................. $21.5 (a) $61.3 (a) Fee revenue and other............................................... 1.2 4.1 ----- ----- Total revenues.................................................... 22.7 65.4 ----- ----- Insurance policy benefits........................................... 17.7 54.0 Amortization expense................................................ 2.4 6.4 Other operating expense (primarily ceding commissions)...................................................... 1.9 4.7 ----- ----- Total expense..................................................... 22.0 65.1 ----- ----- Income before income tax.......................................... $ .7 $ .3 ===== ===== - ----------- (a) Such amounts for the three and nine months ended September 30, 2006, include our quota-share of premiums collected by Coventry summarized as follows (dollars in millions): Three months ended Nine months ended September 30, September 30, 2006 2006 ---- ---- Premiums from the CMS............................................... $16.2 $39.3 CMS risk share premium.............................................. (2.8) 1.2 Premiums from the policyholders..................................... 8.1 20.8 ----- ----- $21.5 $61.3 ===== =====
Pursuant to the Coventry Medicare Part D Plan, the insurance plan covers 75 percent of the policyholder's prescription drug costs up to $2,250; zero percent from $2,251 to $5,100; and 95 percent over $5,100. 39 CONSECO, INC. AND SUBSIDIARIES ------------------- RESULTS OF OPERATIONS The following tables and narratives summarize the operating results of our segments for the periods presented (dollars in millions):
Three months ended Nine months ended September 30, September 30, ---------------------- ----------------------- 2006 2005 2006 2005 ---- ---- ---- ---- Income (loss) before net realized investment gains (losses), net of related amortization, and income taxes (a non-GAAP measure) (a): Bankers Life............................................. $ 73.0 $ 60.4 $205.5 $187.6 Conseco Insurance Group.................................. 58.5 67.1 8.1 197.6 Other Business in Run-off................................ (13.0) 16.4 15.4 59.3 Corporate operations..................................... (20.6) (16.9) (63.6) (60.3) ------ ------ ------ ------ 97.9 127.0 165.4 384.2 ------ ------ ------ ------ Net realized investment gains (losses), net of related amortization: Bankers Life............................................. (6.2) (2.5) (6.9) (.1) Conseco Insurance Group.................................. (4.1) (2.8) (8.7) 1.5 Other Business in Run-off................................ (10.8) (.3) (6.8) 4.2 Corporate operations..................................... (.1) - (.1) (1.3) ------ ------ ------ ------ (21.2) (5.6) (22.5) 4.3 ------ ------ ------ ------ Income (loss) before income taxes: Bankers Life............................................. 66.8 57.9 198.6 187.5 Conseco Insurance Group.................................. 54.4 64.3 (.6) 199.1 Other Business in Run-off................................ (23.8) 16.1 8.6 63.5 Corporate operations..................................... (20.7) (16.9) (63.7) (61.6) ------ ------ ------ ------ Income before income taxes............................ $ 76.7 $121.4 $142.9 $388.5 ====== ====== ====== ====== - ------------ (a) We believe that an analysis of income (loss) before net realized investment gains (losses), net of related amortization, and income taxes (a non-GAAP 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. However, the non-GAAP measure does not replace the corresponding GAAP measure. 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 and direct response marketing, and through our Conseco Insurance Group segment, which utilizes professional independent producers. Our Other Business in Run-off segment consists of: (i) long-term care products sold in prior years through independent agents; (ii) small group and individual major medical business which we stopped renewing in 2001; and (iii) other group major medical business which we no longer market. Most of the long-term care business in run-off relates to business written by certain subsidiaries prior to their acquisitions by Conseco in 1996 and 1997. Our results were significantly affected by $157.0 million of costs related to the tentative litigation settlement recognized by the Conseco Insurance Group segment in the second quarter of 2006. In addition, the earnings in the Other Business in Run-off segment reflected adverse development of prior period claim reserves and an increase in initial claims during the second and third quarters of 2006. Refer to the analysis which follows for more information. 40 CONSECO, INC. AND SUBSIDIARIES ------------------- Bankers Life (dollars in millions):
Three months ended Nine months ended September 30, September 30, ---------------------- ---------------------- 2006 2005 2006 2005 ---- ---- ---- ---- Premium collections: Annuities................................................ $ 278.2 $ 226.7 $ 749.9 $ 687.0 Supplemental health...................................... 318.1 302.9 989.7 921.0 Life..................................................... 73.2 65.8 208.0 170.1 -------- -------- -------- -------- Total collections...................................... $ 669.5 $ 595.4 $1,947.6 $1,778.1 ======== ======== ======== ======== Average liabilities for insurance products: Annuities: Mortality based...................................... $ 365.9 $ 357.9 $ 363.9 $ 356.2 Equity-indexed....................................... 527.9 326.3 468.6 312.4 Deposit based........................................ 4,469.2 4,147.3 4,407.0 4,037.1 Health................................................. 3,350.6 3,091.8 3,296.2 3,028.0 Life: Interest sensitive................................... 378.8 356.7 372.8 351.2 Non-interest sensitive............................... 805.7 754.9 793.8 747.0 -------- -------- -------- -------- Total average liabilities for insurance products, net of reinsurance ceded................. $9,898.1 $9,034.9 $9,702.3 $8,831.9 ======== ======== ======== ======== Revenues: Insurance policy income.................................. $ 419.2 $ 387.8 $1,238.8 $1,120.7 Net investment income: General account invested assets........................ 140.0 123.4 406.8 360.7 Equity-indexed products based on the change in value of options..................................... 3.6 1.3 1.5 (2.5) Trading account income related to policyholder and reinsurer accounts............................... 9.5 (7.0) (4.5) (4.2) Change in value of embedded derivatives related to modified coinsurance agreements................... (9.5) 7.0 4.5 4.2 Fee revenue and other income............................. 1.5 .3 5.2 .7 -------- -------- -------- -------- Total revenues....................................... 564.3 512.8 1,652.3 1,479.6 -------- -------- -------- -------- Expenses: Insurance policy benefits................................ 338.5 312.5 1,001.5 904.4 Amounts added to policyholder account balances: Annuity products and interest-sensitive life products other than equity-indexed products.......... 44.4 42.7 129.6 122.9 Equity-indexed products based on change in value of indices..................................... 7.7 2.2 9.4 .7 Amortization related to operations....................... 56.8 54.5 179.3 146.3 Interest expense on investment borrowings................ - .2 .1 1.7 Other operating costs and expenses....................... 43.9 40.3 126.9 116.0 -------- -------- -------- -------- Total expenses....................................... 491.3 452.4 1,446.8 1,292.0 -------- -------- -------- -------- Income before net realized investment losses, net of related amortization and income taxes............... 73.0 60.4 205.5 187.6 -------- -------- -------- -------- Net realized investment losses........................... (6.4) (3.1) (8.1) (.6) Amortization related to net realized investment losses................................................. .2 .6 1.2 .5 -------- -------- -------- -------- Net realized investment losses, net of related amortization....................................... (6.2) (2.5) (6.9) (.1) -------- -------- -------- -------- Income before income taxes.................................... $ 66.8 $ 57.9 $ 198.6 $ 187.5 ======== ======== ======== ========
(continued) 41 CONSECO, INC. AND SUBSIDIARIES ------------------- (continued from previous page)
Three months ended Nine months ended September 30, September 30, ---------------------- ----------------------- 2006 2005 2006 2005 ---- ---- ---- ---- Health benefit ratios: All health lines: Insurance policy benefits............................ $274.4 $251.9 $818.6 $748.4 Benefit ratio (a).................................... 81.2% 81.8% 81.4% 81.3% Medicare supplement: Insurance policy benefits............................ $106.7 $117.4 $331.0 $353.7 Benefit ratio (a).................................... 65.7% 71.8% 67.0% 72.0% Long-term care: Insurance policy benefits............................ $148.4 $132.6 $428.7 $389.2 Benefit ratio (a).................................... 98.2% 93.9% 97.0% 92.7% Interest-adjusted benefit ratio (b).................. 68.8% 65.1% 67.5% 64.4% Other: Insurance policy benefits............................ $19.3 $1.9 $58.9 $5.5 Benefit ratio (a).................................... 79.2% 61.4% 84.2% 59.1% ---------------- (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 insurance policy income. Interest income is an important factor in measuring the performance of this product. 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 the change in reserve 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 which includes the effect of interest income is useful in analyzing product performance. The investment income earned on the accumulated assets backing Bankers Life's long-term care reserves was $44.5 million and $40.7 million in the three months ended September 30, 2006 and 2005, respectively, and $130.3 million and $118.9 million in the nine months ended September 30, 2006 and 2005, respectively.
Total premium collections were $669.5 million in the third quarter of 2006, up 12 percent from 2005 and were $1,947.6 million in the first nine months of 2006, up 9.5 percent from 2005. Premium collections in the three and nine months ended September 30, 2006 include $20.8 million and $58.9 million, respectively, of premiums collected pursuant to the quota-share agreement with Coventry described above under "Accounting for the marketing and quota-share agreement with Coventry". See "Premium Collections" for further analysis of Bankers Life's premium collections. Average liabilities for insurance products, net of reinsurance ceded were $9.9 billion in the third quarter of 2006, up 9.6 percent from 2005. Average liabilities for insurance products, net of reinsurance ceded were $9.7 billion in the first nine months of 2006, up 9.9 percent from 2005. The increase in such liabilities was primarily due to increases in annuity reserves resulting from sales of these products in recent periods. 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. Insurance policy income in the three and nine months ended September 30, 2006 includes $21.5 million and $61.3 million, respectively, of premium income from the quota-share agreement with Coventry described above under "Accounting for the marketing and quota-share agreement with Coventry". Such amount in the three and nine months ended September 30, 2006 includes $(2.8) million and $1.2 million, 42 CONSECO, INC. AND SUBSIDIARIES ------------------- respectively, of risk-share premiums due (to) from Coventry consistent with the obligations under our quota-share agreement, as if the periods represented an entire contract period. See "Premium Collections" for further analysis. Net investment income on general account invested assets (which excludes income on policyholder and reinsurer accounts) was $140.0 million in the third quarter of 2006, up 13 percent from 2005 and was $406.8 million in the first nine months of 2006, up 13 percent from 2005. The average balance of general account invested assets was $9.7 billion and $8.7 billion in the third quarters of 2006 and 2005, respectively. The average yield on these assets was 5.8 percent and 5.7 percent in the third quarters of 2006 and 2005, respectively. The average balance of general account invested assets was $9.5 billion and $8.5 billion in the first nine months of 2006 and 2005, respectively. The average yield on these assets was 5.7 percent and 5.6 percent in the first nine months of 2006 and 2005, respectively. The increase in general account invested assets is primarily due to sales of our annuity products in recent periods. 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. Investment gains (losses) related to equity-indexed products were $3.6 million and $1.3 million in the third quarters of 2006 and 2005, respectively; and $1.5 million and $(2.5) million in the first nine months of 2006 and 2005, respectively. 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. Trading account income related to policyholder and 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 "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. Fee and other income increased to $1.5 million in the third quarter of 2006, compared to $.3 million in the same period of 2005 and increased to $5.2 million in the first nine months of 2006, compared to $.7 million in the same period of 2005. During the three and nine months ended September 30, 2006, we recognized fee income of $1.2 million and $4.1 million, respectively, pursuant to the agreements described above under "Accounting for the marketing and quota-share agreement 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. 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 individual products and not less than 75 percent on group products, as determined in accordance with statutory accounting principles. The benefit ratio in the first nine months of 2006 reflected a $10.1 million claim reserve redundancy while the 2005 period reflected a $2.3 million claim reserve deficiency resulting from the development of our prior period reserve estimates. Excluding the benefit recognized from the prior period redundancy of our claim reserves, our benefit ratio would have been 69.0 percent in the first nine months of 2006, consistent with our expectations as a result of the premium rate increases implemented in recent periods. 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 43 CONSECO, INC. AND SUBSIDIARIES ------------------- 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 98.2 percent and 93.9 percent in the third quarters of 2006 and 2005, respectively, and 97.0 percent and 92.7 percent in the first nine months of 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 68.8 percent and 65.1 percent in the third quarters of 2006 and 2005, respectively, and 67.5 percent and 64.4 percent in the first nine months of 2006 and 2005, respectively. We experienced an increase in the number of incurred claims in the second and third quarters of 2006. 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 to seek approval from regulatory authorities for rate increases on approximately 65 percent of this block. This rate increase process is proceeding according to plan and, to date, we have received approval for approximately 80 percent of the total dollar amount of our requested rate increases. The rate increases became effective for approximately 75 percent of the impacted inforce block through September 30, 2006. We expect the execution of our premium rate increases will continue for the next three quarters given the timing of the implementation as a result of the regulatory approvals. These rate increases are generally consistent with the assumptions used to determine the value of policies inforce at the Effective Date and the value of our insurance liabilities. During the second quarter of 2005, we made certain adjustments to the assumptions we use to calculate insurance liabilities for future long-term care benefits, resulting in a net reduction to insurance liabilities of $6.4 million. The primary change related to policies that provide for increased benefits to reflect inflation. Our previous assumptions had reflected the increased projected benefit costs for the inflation benefit in insurance liabilities at the time of billing immediately prior to the policy anniversary date which was earlier than the actual terms of the policy. Our new method calculates the increased projected benefit costs on the policy anniversary date which is in accordance with the actual terms of the policy. The loss ratio for other health products was affected by the experience on the Medicare Part D quota-share agreement described above under "Accounting for marketing and quota-share agreements with Coventry". During the three and nine months ended September 30, 2006, we recognized insurance policy income of $21.5 million and $61.3 million, respectively, related to the Part D program. The benefit ratio on this business was 82.1 percent and 88.1 percent in the three and nine months ended September 30, 2006, respectively, and is expected to decline throughout the remainder of the year. Amounts added to policyholder account balances for annuity products and interest-sensitive life products were $44.4 million in the third quarter of 2006, up 4.0 percent from 2005 and were $129.6 million in the first nine months of 2006, up 5.5 percent from 2005. The increase is 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 and 3.8 percent in the third quarters of 2006 and 2005, respectively, and 3.6 percent and 3.7 percent in the first nine months of 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 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. Bankers Life's amortization expense was $56.8 million and $54.5 million in the third quarters of 2006 and 2005, respectively, and $179.3 million and $146.3 million in the first nine months of 2006 and 2005, respectively. 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. However, 44 CONSECO, INC. AND SUBSIDIARIES ------------------- during the first six months of 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 $7.9 million in the first six months of 2006. The lapses of our Medicare supplement products in the first six months of 2006 were higher than our historical lapse experience. We believe such increases were partially related to the premium rate increases we implemented in recent periods and competition from companies offering Medicare Advantage products. Our lapse experience in the third quarter of 2006 was consistent with our expectations. A review of our traditional life business resulted in the recognition of additional amortization expense of $4.4 million in the third quarter of 2005 to reflect revisions to our calculations related to prior period amounts. 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. Other operating costs and expenses in our Bankers Life segment were $43.9 million in the third quarter of 2006, up 8.9 percent from 2005 and were $126.9 million in the first nine months of 2006, up 9.4 percent from 2005. Other operating costs and expenses include the following (dollars in millions):
Three months ended Nine months ended September 30, September 30, ---------------------- ----------------------- 2006 2005 2006 2005 ---- ---- ---- ---- Expenses related to distribution and quota-share reinsurance agreements with Coventry................ $ 4.3 $ - $ 11.1 $ - Commission expense..................................... 7.1 6.6 20.5 14.8 Other operating expenses............................... 32.5 33.7 95.3 101.2 ----- ----- ------ ------ Total............................................... $43.9 $40.3 $126.9 $116.0 ===== ===== ====== ======
Net realized investment losses fluctuate each period. During the nine months ended September 30, 2006, net realized investment losses in this segment included $7.7 million of net losses from the sales of investments (primarily fixed maturities), and $.4 million of writedowns of investments resulting from declines in fair values that we concluded were other than temporary. During the nine months ended September 30, 2005, net realized investment losses in this segment included $.6 million of net losses from the sales of investments (primarily fixed maturities). There were no writedowns of investments in the first nine months of 2005. 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 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 million and $.6 in the third quarters of 2006 and 2005, respectively, and $1.2 million and $.5 million in the first nine months of 2006 and 2005, respectively. 45 CONSECO, INC. AND SUBSIDIARIES ------------------- Conseco Insurance Group (dollars in millions):
Three months ended Nine months ended September 30, September 30, ---------------------- ----------------------- 2006 2005 2006 2005 ---- ---- ---- ---- Premium collections: Annuities.............................................. $ 182.8 $ 43.3 $ 311.4 $ 96.7 Supplemental health.................................... 145.5 160.2 458.4 500.8 Life................................................... 78.3 86.0 240.7 258.7 --------- --------- --------- --------- Total collections.................................... $ 406.6 $ 289.5 $ 1,010.5 $ 856.2 ========= ========= ========= ========= Average liabilities for insurance products: Annuities: Mortality based...................................... $ 240.1 $ 264.6 $ 242.4 $ 277.1 Equity-indexed....................................... 1,270.4 1,330.4 1,291.3 1,362.1 Deposit based........................................ 3,099.4 3,426.0 3,192.3 3,503.0 Separate accounts and investment trust liabilities... 28.9 30.0 29.4 30.9 Health................................................. 2,377.3 2,374.1 2,379.6 2,374.3 Life: Interest sensitive................................... 3,046.4 3,116.2 3,059.4 3,128.3 Non-interest sensitive............................... 1,407.3 1,422.0 1,428.8 1,427.1 --------- --------- --------- --------- Total average liabilities for insurance products, net of reinsurance ceded......................... $11,469.8 $11,963.3 $11,623.2 $12,102.8 ========= ========= ========= ========= Revenues: Insurance policy income.................................. $ 245.9 $ 266.8 $ 749.7 $ 808.8 Net investment income: General account invested assets........................ 174.9 186.4 525.6 543.1 Equity-indexed products................................ 12.1 2.8 3.1 (14.9) Trading account income related to policyholder and reinsurer accounts............................... 5.6 (1.0) 3.4 (3.4) Change in value of embedded derivatives related to modified coinsurance agreements................... (3.3) 2.3 .5 1.3 Fee revenue and other income............................. .8 .5 1.1 1.6 --------- --------- --------- --------- Total revenues....................................... 436.0 457.8 1,283.4 1,336.5 --------- --------- --------- --------- Expenses: Insurance policy benefits................................ 184.1 203.1 560.2 608.6 Amounts added to policyholder account balances: Annuity products and interest-sensitive life products other than equity-indexed products................... 62.0 64.3 183.4 193.2 Equity-indexed products................................ 22.5 9.8 25.9 5.0 Amortization related to operations....................... 42.3 43.8 134.5 124.5 Interest expense on investment borrowings................ .1 .6 .6 4.8 Costs related to the tentative litigation settlement............................................. - 1.2 165.8 4.2 Other operating costs and expenses....................... 66.5 67.9 204.9 198.6 --------- --------- --------- --------- Total expenses....................................... 377.5 390.7 1,275.3 1,138.9 --------- --------- --------- --------- Income before net realized investment gains (losses), net of related amortization, and income taxes............ 58.5 67.1 8.1 197.6 --------- --------- --------- --------- Net realized investment gains (losses)................... (4.4) (3.0) (13.5) .8 Amortization related to net realized investment gains (losses)......................................... .3 .2 4.8 .7 --------- --------- --------- --------- Net realized investment gains (losses), net of related amortization....................................... (4.1) (2.8) (8.7) 1.5 --------- --------- --------- --------- Income (loss) before income taxes........................... $ 54.4 $ 64.3 $ (.6) $ 199.1 ========= ========= ========= =========
(continued) 46 CONSECO, INC. AND SUBSIDIARIES ------------------- (continued from previous page)
Three months ended Nine months ended September 30, September 30, ---------------------- ----------------------- 2006 2005 2006 2005 ---- ---- ---- ---- Health benefit ratios: All health lines: Insurance policy benefits.............................. $109.9 $115.3 $332.7 $347.3 Benefit ratio (a)...................................... 71.5% 69.0% 70.7% 68.2% Medicare supplement: Insurance policy benefits.............................. $41.2 $45.3 $119.0 $137.2 Benefit ratio (a)...................................... 66.8% 60.9% 61.3% 59.6% Specified disease: Insurance policy benefits.............................. $65.7 $67.7 $206.3 $202.2 Benefit ratio (a)...................................... 73.6% 75.8% 77.0% 75.1% Interest-adjusted benefit ratio (b).................... 41.2% 44.5% 45.1% 44.1% Other: Insurance policy benefits.............................. $3.0 $2.3 $7.4 $7.9 Benefit ratio(a)....................................... 108.9% 64.5% 85.1% 77.8% - ------------- (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 insurance policy income. Interest income is an important factor in measuring the performance of this product. 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) 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 the change in reserve 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 which includes the effect of interest income is useful in analyzing product performance. The investment income earned on the accumulated assets backing the specified disease reserves was $28.9 million and $28.0 million in the three months ended September 30, 2006 and 2005, respectively, and $85.4 million and $83.5 million in the nine months ended September 30, 2006 and 2005, respectively.
Total premium collections were $406.6 million in the third quarter of 2006, up 40 percent from 2005 and were $1,010.5 million in the first nine months of 2006, up 18 percent from 2005. This increase was primarily due to higher premium collections from our equity-indexed products partially offset by lower premium collections from Medicare supplement products, due to lapses following rate increases in 2005 and 2006. See "Premium Collections" for further analysis. Average liabilities for insurance products, net of reinsurance ceded were $11.5 billion in the third quarter of 2006, down 4.1 percent from 2005. Average liabilities for insurance products, net of reinsurance ceded were $11.6 billion in the first nine months of 2006, down 4.0 percent from 2005. The decrease in such liabilities was due primarily to policyholder redemptions and lapses exceeding sales in this segment. 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 is primarily due to lower premium income from Medicare supplement products, due to lapses following rate increases in 2005 and 2006. See "Premium Collections" for further analysis. Net investment income on general account invested assets (which excludes income on policyholder and reinsurer accounts) was $174.9 million in the third quarter of 2006, down 6.2 percent from 2005 and was $525.6 million in the first 47 CONSECO, INC. AND SUBSIDIARIES ------------------- nine months of 2006, down 3.2 percent from 2005. The average balance of general account invested assets was $11.7 billion and $11.9 billion in the third quarters of 2006 and 2005, respectively. The average yield on these assets was 6.0 percent and 6.2 percent in the third quarters of 2006 and 2005, respectively. The average balance of general account invested assets was $11.8 billion and $12.2 billion in the first nine months of 2006 and 2005, respectively. The average yield on these assets was 6.0 percent in both the first nine months of 2006 and 2005. This segment's investment income in the first nine months of 2006 included the recognition in income of $5.6 million ($.4 million in the third quarter of 2006) related to: (i) investments (which had a par value in excess of the cost basis) which were called or prepaid by the issuer; and (ii) income on defaulted investments. Investment income in the first nine months of 2005 included the recognition in income of $17.5 million ($10.5 million in the third quarter of 2005) related to investments which were called or prepaid by the issuer. The yield in the 2006 periods also reflects general increases in investment interest rates in recent periods. The additional investment income was partially offset by approximately $2.7 million and $7.3 million of additional amortization expense in the first nine months of 2006 and 2005, respectively, ($.2 million and $5.0 million in the third quarters of 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 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 $7.8 million and $5.4 million in the third quarters of 2006 and 2005, respectively; and $5.2 million and $(11.4) million in the nine months ended September 30, 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 gains (losses) were $4.3 million and $(2.6) million in the third quarters of 2006 and 2005, respectively and were $(2.1) million and $(3.5) million in the first nine months of 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 designed 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. Change in value of embedded derivatives related to modified coinsurance agreements is described in the note to our consolidated financial statements entitled "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 embedded derivatives has largely been offset by the change in value of the trading securities. Insurance policy benefits fluctuated as a result of the factors summarized below for benefit ratios. In addition, insurance benefits in the first quarter of 2006 were reduced for the following items. We reduced insurance benefits by $11.5 million to reflect a change in the assumptions for the cost of options underlying our equity-indexed products and other assumptions described below under amortization related to operations. Such decreases were more than offset by increased amortization of insurance acquisition costs related to the assumption changes. We also reduced insurance benefits by $4.7 million for deceased policyholders to reflect the release of insurance liabilities for annuity policies which pay benefits only during the policyholders' lifetime. We have improved our procedures to confirm the reporting of the death of these policyholders to us in a more timely manner, resulting in this additional release that would have otherwise been recognized in future periods. Benefit ratios are calculated by dividing the related insurance product's insurance policy benefits by insurance policy income. The benefit ratios on Conseco Insurance Group's Medicare supplement products in the first six months of 2006 and in the 2005 periods were impacted by an increase in policyholder lapses. The release of the policy benefit reserve related to the lapsed business contributed to the lower benefit ratios in these periods (although such release was substantially offset by additional amortization of insurance acquisition costs). The lapse experience in the third quarter of 2006 returned to levels 48 CONSECO, INC. AND SUBSIDIARIES ------------------- that were in line with our expectations. Without the release of policy reserves for higher-than-expected lapses, the loss ratio increased in the three months ended September 30, 2006 (with a corresponding decrease in amortization of insurance acquisition costs). The benefit ratio in the first nine months of 2006 and 2005 reflected claim reserve redundancies of $5.4 million and $6.3 million, respectively, resulting from the favorable development of our prior period reserve estimates. 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. 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 in force 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). Accordingly, as the policies age, the benefit ratio will typically increase, but the increase in the change in reserve will be partially offset by investment income earned on the accumulated assets. The benefit ratio for the first six months of 2006 was unfavorably affected by higher persistency of older policies which have higher benefit ratios than newer policies. In addition, the benefit ratio in the first six months of 2006 reflects an increase in reported claims. We have reflected the new pattern of reported claims in the assumptions we use to estimate the reserves for claims that have occurred but have not yet been reported to the Company. During the third quarter of 2006, the benefit ratio decreased, reflecting lower paid claims. The interest-adjusted benefit ratio for specified disease 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 benefit ratios on Conseco Insurance Group's other products are subject to fluctuations due to the smaller size of these blocks of business. Amounts added to policyholder account balances for annuity products and interest-sensitive life products were $62.0 million in the third quarter of 2006, down 3.6 percent from 2005 and were $183.4 million in the first nine months of 2006, down 5.1 percent from 2005. The decrease was primarily due to a smaller block of annuity business inforce. The weighted average crediting rate for these products was 4.0 percent in both the first nine months of 2006 and 2005. Amounts added to equity-indexed products fluctuated with the corresponding related investment income accounts described above. Amortization related to operations includes amortization of insurance acquisition costs. Insurance acquisition costs are 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. 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 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. During the first three months 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 49 CONSECO, INC. AND SUBSIDIARIES ------------------- 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. 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. Costs related to the tentative litigation settlement include legal fees and estimated amounts related to the tentative settlement in the class action case referred to as In Re Conseco Life Insurance Company Cost of Insurance Litigation. The settlement is subject to a court fairness hearing and other conditions. 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 "Litigation and Other Legal Proceedings". 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. Other operating costs and expenses were $66.5 million in the third quarter of 2006, down 2.1 percent from 2005 and were $204.9 million in the first nine months of 2006, up 3.2 percent from 2005. Operating expenses in the first nine months of 2005 reflected reductions related to expense recoveries associated with the Predecessor's bankruptcy of $7.6 million. Other operating costs and expenses include commission expense of $21.8 million and $22.6 million in the three months ended September 30, 2006 and 2005, respectively and $65.9 million and $71.1 million in the nine months ended September 30, 2006 and 2005, respectively. Net realized investment gains (losses) fluctuate each period. During the first nine months of 2006, net realized investment losses included $10.3 million of net losses from the sales of investments (primarily fixed maturities), and $3.2 million of writedowns of investments resulting from declines in fair values that we concluded were other than temporary. During the nine months ended September 30, 2005, net realized investment gains included $3.6 million of net gains from the sales of investments (primarily fixed maturities), net of $2.8 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 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 $.3 million and $.2 million in the third quarters of 2006 and 2005, respectively and $4.8 million and $.7 million in the nine months ended September 30, 2006 and 2005, respectively. 50 CONSECO, INC. AND SUBSIDIARIES ------------------- Other Business in Run-off (dollars in millions):
Three months ended Nine months ended September 30, September 30, -------------------- ----------------------- 2006 2005 2006 2005 ---- ---- ---- ---- Premium collections: Long-term care........................................ $ 79.6 $ 86.4 $ 247.1 $ 266.4 Major medical......................................... .8 .7 4.1 2.0 -------- -------- -------- -------- Total collections................................. $ 80.4 $ 87.1 $ 251.2 $ 268.4 ======== ======== ======== ======== Average liabilities for insurance products: Long-term care......................................... $3,212.2 $3,285.2 $3,225.9 $3,297.4 Major medical.......................................... 29.4 37.8 29.4 44.9 -------- -------- -------- -------- Total average liabilities for insurance products, net of reinsurance ceded...................... $3,241.6 $3,323.0 $3,255.3 $3,342.3 ======== ======== ======== ======== Revenues: Insurance policy income................................ $ 83.4 $ 91.1 $ 254.4 $ 272.4 Net investment income on general account invested assets............................................... 44.6 45.4 133.9 133.4 Fee revenue and other income........................... .1 .1 .3 .4 -------- -------- -------- -------- Total revenues..................................... 128.1 136.6 388.6 406.2 -------- -------- -------- -------- Expenses: Insurance policy benefits.............................. 113.4 90.6 294.6 264.8 Amortization related to operations..................... 5.6 7.5 12.6 18.1 Other operating costs and expenses..................... 22.1 22.1 66.0 64.0 -------- -------- -------- -------- Total expenses..................................... 141.1 120.2 373.2 346.9 -------- -------- -------- -------- Income (loss) before net realized investment gains (losses) and income taxes.................. (13.0) 16.4 15.4 59.3 Net realized investment gains (losses)................. (10.8) (.3) (6.8) 4.2 -------- -------- -------- -------- Income (loss) before income taxes.................. $ (23.8) $ 16.1 $ 8.6 $ 63.5 ======== ======== ======== ======== Health benefit ratios: Insurance policy benefits............................ $113.4 $90.6 $294.6 $264.8 Benefit ratio (a).................................... 136.0% 99.5% 115.8% 97.2% Interest-adjusted benefit ratio (b).................. 83.1% 50.5% 63.8% 49.1% - ----------- (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 such insurance liabilities by insurance policy income. Interest income is an important factor in measuring the performance of this product. 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 the change in reserve will be partially offset by investment 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 which includes the effect of interest income is useful in analyzing product performance. The investment income earned on the accumulated assets backing long-term care reserves in our Other Business in Run-off segment was $44.1 million and $44.7 million in the three months ended September 30, 2006 and 2005, respectively and $132.3 million and $131.1 million in the nine months ended September 30, 2006 and 2005, respectively.
51 CONSECO, INC. AND SUBSIDIARIES ------------------- Total premium collections were $80.4 million in the third quarter of 2006, down 7.7 percent from 2005 and were $251.2 million in the first nine months of 2006, down 6.4 percent from 2005. We have ceased marketing the long-term care business and major medical business of 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 $3.2 billion in the third quarter of 2006, down 2.2 percent from 2005. Average liabilities of insurance products, net of reinsurance ceded were $3.3 billion in the first nine months of 2006, down 2.6 percent from 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 was $44.6 million and $45.4 million in the third quarters of 2006 and 2005, respectively, and was $133.9 million in the first nine months of 2006, up .4 percent from 2005. The average balance of general account invested assets was $3.0 billion and $2.9 billion in the third quarters of 2006 and 2005, respectively. The average yield on these assets was 5.9 percent and 6.2 percent in the third quarters of 2006 and 2005, respectively. The average balance of general account invested assets was $3.0 billion in both the first nine months of 2006 and 2005. The average yield on these assets was 5.9 percent and 6.0 percent in the first nine months of 2006 and 2005, respectively. The yield in 2006 was impacted by income of $.6 million ($.1 million in the third quarter of 2006) related to investments that were in default or which were called or prepaid by the issuer. The yield in the 2005 periods was impacted by income of $2.8 million ($2.1 million in the third quarter of 2005) for investments (which had a par value in excess of the cost basis) which were called or prepaid during the first nine months of 2005. Insurance policy benefits fluctuated primarily as a result of the factors summarized below related to benefit ratios in the blocks of long-term care business included in this segment. Benefit ratios are calculated by dividing the product's insurance policy benefits by insurance policy income. This segment includes long-term care insurance inforce, which was primarily issued through independent agents by certain subsidiaries prior to their acquisitions by 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 particular, we have experienced adverse developments on home health care policies issued in certain areas of Florida and other states. This adverse experience is reflected in the higher insurance policy benefits experienced in the second and third quarters of 2006. In addition, we experienced higher than expected persistency in this block of business in the third quarter of 2006. A small variance in persistency can have a significant impact on our earnings during a quarter, 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. The increase in insurance policy benefits in the third quarter of 2006 reflected: (i) The lapse experience on this block of business has been less than our expectations, resulting in approximately $9 million less reserve releases for terminated policies than expected. (ii) Prior period estimates of claim reserves proved to be deficient (net of the positive impact of certain refinements to estimates of approximately $6 million), resulting in an increase to insurance policy benefits of approximately $11 million. (iii) An increased number of initial claims were incurred in the third quarter of 2006, resulting in an increase to insurance policy benefits of approximately $2 million. 52 CONSECO, INC. AND SUBSIDIARIES ------------------- We have been aggressively seeking rate increases and pursuing other actions on such long-term care policies. We have filed, or plan to file, approximately 350 requests for rate increases on various long-term care products in this segment as we believe the existing rates are too low. In many instances, we are requesting three years of consecutive rate increases. We estimate that our revenue could ultimately increase by approximately $35 million per year as a result of the first round of rate increases, if the rate increases are approved and the policyholders accept the increases as we expect (some policyholders will choose to reduce benefits (and therefore their premiums) and others will choose to allow their policies to lapse). The impact of the second and third year rate increases will be somewhat smaller as the block continues to run off. To date, we have received approvals to increase rates equivalent to approximately 20 percent of our $35 million estimate. The effects of the approved rate increases are expected to be realized over the next year, as we are only able to increase rates on a policy's anniversary date. The remaining first round rate increase filings are expected to be filed and approved over the next 15 months, and the full effect of the first year of rate increases will take approximately two years to be fully realized. The full effect of all three years of rate increases will take as long as five years to be fully realized. 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 possible that we will not be able to obtain approval for rate increases currently pending or for the additional rate increases we plan to file. Most of our long-term care business is guaranteed renewable, and, if necessary rate increases are not approved, we may be required to establish a premium deficiency reserve. If, however, we are successful in obtaining regulatory approval to raise premium rates, the increased premium rates may 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. We believe that the series of smaller rate increases we are seeking could mitigate these effects. We have recently started several projects that we believe will improve our claim adjudication procedures and could improve the profitability of this block over time. On April 20, 2004, the Florida Office of Insurance Regulation issued an Order to our subsidiary, Conseco Senior Health Insurance Company ("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 Insurance Company ("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: 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 fail to make an election by the deadline) ("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 may 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. The implementation of these premium adjustments will be substantially complete at December 31, 2006. We did not make any adjustments to the insurance liabilities when these elections were made. The changes in reserves due to the structural changes arising from such elections are being recognized prospectively over the expected remaining life of the policies pursuant to the lock-in concept of Statement of Financial Accounting Standards No. 60, "Accounting and Reporting by Insurance Enterprises" and related interpretive accounting and actuarial guidance. 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 consideration 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. 53 CONSECO, INC. AND SUBSIDIARIES ------------------- The benefit ratio on our Other Business in Run-off segment was 136.0 percent and 99.5 percent in the third quarters of 2006 and 2005, respectively, and 115.8 percent and 97.2 percent in the first nine months of 2006 and 2005, respectively. These ratios reflect the significantly higher level of incurred claims experienced in the second and third quarters of 2006 resulting from an increase in the number of new claims reported to the Company during the quarter and adverse development of prior period claim reserves. During the second quarter of 2006, we recognized additional expense of approximately $4 million related to an increase in new claims over our expectations and approximately $20 million for the adverse development of prior period reserves. During the second quarter of 2006, we recognized a non-recurring benefit of $9.4 million related to the release of certain other redundant reserve liabilities. During the first quarter of 2006, we upgraded the prior version of the valuation system used to determine reserves for the long-term care block of business in run-off. The new version includes enhancements to more precisely estimate insurance liabilities for policies with return of premium benefits. The effect of this refinement and certain other reserve adjustments resulted in decreases to our insurance liabilities of approximately $14 million in the first quarter of 2006. 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 the change in reserve 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. 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 in the third quarter of 2006 were comparable to the same period in 2005 and were $66.0 million in the first nine months of 2006, up 3.1 percent from 2005. Other operating costs and expenses include commission expense of $8.9 million and $10.0 million in the three months ended September 30, 2006 and 2005, respectively, and $27.6 million and $30.0 million in the nine months ended September 30, 2006 and 2005, respectively. Net realized investment gains (losses) fluctuate each period. During the first nine months of 2006, net realized investment gains included $.9 million of net gains from the sales of investments (primarily fixed maturities), net of $7.7 million of writedowns of investments resulting from declines in fair values that we concluded were other than temporary. During the nine months ended September 30, 2005, we recognized net realized investment gains in this segment of $4.2 million from the sales of investments (primarily fixed maturities). There were no such writedowns in the first nine months of 2005. Corporate Operations (dollars in millions):
Three months ended Nine months ended September 30, September 30, ------------------- ------------------- 2006 2005 2006 2005 ---- ---- ---- ---- Corporate operations: Interest expense on corporate debt........................ $(12.5) $(12.1) $(36.9) $(37.2) Net investment income .................................... 1.1 1.7 2.9 5.5 Fee revenue and other income.............................. 2.3 11.0 7.2 17.3 Net operating results of variable interest entity......... 2.8 - 3.8 - Costs related to the tentative litigation settlement...... - (1.3) (8.9) (4.2) Loss on extinguishment of debt............................ - (3.7) - (3.7) Other operating costs and expenses........................ (14.3) (12.5) (31.7) (38.0) ------ ------ ------ ------ Loss before net realized investment losses and income taxes.......................................... (20.6) (16.9) (63.6) (60.3) Net realized investment losses............................ (.1) - (.1) (1.3) ------ ------ ------ ------- Loss before income taxes................................ $(20.7) $(16.9) $(63.7) $(61.6) ====== ====== ====== ======
54 CONSECO, INC. AND SUBSIDIARIES ------------------- Interest expense on corporate debt was impacted by the issuance of the Debentures and our Amended Credit Facility in August 2005. Our average corporate debt outstanding was $823.4 million and $769.1 million during the first nine months of 2006 and 2005, respectively. The average interest rate on our debt was 5.5 percent and 6.1 percent during the first nine months of 2006 and 2005, respectively. Net 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. During the third quarter of 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 fee, fee revenue and other income 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 represents 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 ("FIN 46R"). 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. Such consolidation requirements did not have a material impact on our financial condition or results of operations. Costs related to the tentative 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. The Company announced on August 1, 2006, that it has reached a tentative settlement of this case. 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 "Litigation and Other Legal Proceedings" for further information related to this case. Loss on extinguishment of debt of $3.7 million in the three and nine months ended September 30, 2005, resulted from the write-off of certain debt issuance costs related to the reduction of the principal amount borrowed under the Amended Credit Facility. 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 December 2004, the FASB issued 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 the three and nine months ended September 30, 2006, we recognized compensation expense related to stock options totaling $1.9 million and $4.8 million, respectively. Refer to the note to our consolidated financial statements entitled "Stock-Based Compensation" for further discussion of our share-based payments. Net realized investment losses in the first nine months of 2006 and 2005 included $.1 million of losses from the sale of an investment and $1.3 million of writedowns due to an other-than-temporary decline in value of certain investments, respectively. 55 CONSECO, INC. AND SUBSIDIARIES ------------------- 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 and direct marketing (our Bankers Life segment) and independent producers (our Conseco Insurance Group segment). Our career agency force in the Bankers Life segment sells primarily Medicare supplement and long-term care insurance policies, Medicare Part D 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. Bankers Life's direct marketing distribution channel is engaged primarily in the sale of "graded benefit life" and simplified issue life insurance policies which are sold directly to the policyholder. 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. 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. Our insurance companies' financial strength ratings were downgraded by all of the major rating agencies beginning in July 2002, in connection with the financial distress that ultimately led to our Predecessor's bankruptcy. In the second quarter of 2004, such ratings of our primary insurance subsidiaries (except Conseco Senior) were upgraded by A.M. Best, S&P and Moody's. Moody's again upgraded the ratings of our primary insurance subsidiaries (except Conseco Senior) in the third quarter of 2004 and the first quarter of 2006. The current financial strength ratings of our primary insurance subsidiaries (except Conseco Senior) from A.M. Best, S&P and Moody's are "B++ (Very Good)", "BB+" and "Baa3", respectively. The current financial strength ratings of Conseco Senior from A.M. Best, S&P and Moody's are "B (Fair)", "CCC" and "Caa1", respectively. On October 2, 2006, A.M. Best affirmed the financial strength ratings of our primary insurance subsidiaries and indicated the likely timeframe for an upgrade was 18-24 months. A.M. Best also provided likely metrics Conseco would need to meet to: (i) maintain a positive outlook; or (ii) receive an upgrade. For a description of these ratings and additional information on our ratings, see "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 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 possible 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. 56 CONSECO, INC. AND SUBSIDIARIES ------------------- Total premium collections by segment were as follows: Bankers Life (dollars in millions):
Three months ended Nine months ended September 30, September 30, -------------------- --------------------- 2006 2005 2006 2005 ---- ---- ---- ---- Premiums collected by product: Annuities: Equity-indexed (first-year)............................. $ 81.8 $ 29.7 $ 210.4 $ 69.8 ------ ------ -------- -------- Other fixed (first-year)................................ 195.5 197.0 536.7 614.9 Other fixed (renewal)................................... .9 - 2.8 2.3 ------ ------ -------- -------- Subtotal - other fixed annuities...................... 196.4 197.0 539.5 617.2 ------ ------ -------- -------- Total annuities....................................... 278.2 226.7 749.9 687.0 ------ ------ -------- -------- Supplemental health: Medicare supplement (first-year)........................ 23.2 18.2 72.5 53.5 Medicare supplement (renewal)........................... 126.2 140.9 407.6 435.2 ------ ------ -------- -------- Subtotal - Medicare supplement........................ 149.4 159.1 480.1 488.7 ------ ------ -------- -------- Long-term care (first-year)............................. 12.0 15.9 39.3 50.1 Long-term care (renewal)................................ 133.0 124.9 402.9 373.0 ------ ------ -------- -------- Subtotal - long-term care............................. 145.0 140.8 442.2 423.1 ------ ------ -------- -------- Other health (first-year)............................... 21.2 .3 59.7 .8 Other health (renewal).................................. 2.5 2.7 7.7 8.4 ------ ------ -------- -------- Subtotal - other health............................... 23.7 3.0 67.4 9.2 ------ ------ -------- -------- Total supplemental health............................. 318.1 302.9 989.7 921.0 ------ ------ -------- -------- Life insurance: First-year.............................................. 30.2 27.4 85.4 66.5 Renewal................................................. 43.0 38.4 122.6 103.6 ------ ------ -------- -------- Total life insurance.................................. 73.2 65.8 208.0 170.1 ------ ------ -------- -------- Collections on insurance products: Total first-year premium collections on insurance products................................... 363.9 288.5 1,004.0 855.6 Total renewal premium collections on insurance products.................................... 305.6 306.9 943.6 922.5 ------ ------ -------- -------- Total collections on insurance products............... $669.5 $595.4 $1,947.6 $1,778.1 ====== ====== ======== ========
Annuities in this segment include equity-indexed and other fixed annuities sold to the senior market through our career agents. Annuity collections increased 23 percent, to $278.2 million, in the third quarter of 2006, and 9.2 percent, to $749.9 million, in the first nine months of 2006, as compared to the same periods in 2005. 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 in recent periods which has made these products attractive to certain customers. Supplemental health products include Medicare supplement, long-term care and other insurance products distributed through our career agents. 57 CONSECO, INC. AND SUBSIDIARIES ------------------- Collected premiums on Medicare supplement policies in the Bankers Life segment decreased 6.1 percent, to $149.4 million, in the third quarter of 2006, and 1.8 percent, to $480.1 million, in the first nine months of 2006, as compared to the same periods in 2005. During the first six months of 2006, we experienced higher lapses than we anticipated. We believe the increase was partially due to the premium rate increases implemented in recent periods and competition from companies offering Medicare Advantage products. Our lapse experience in the third quarter of 2006 was consistent with our expectations. Premiums collected on Bankers Life's long-term care policies increased 3.0 percent, to $145.0 million, in the third quarter of 2006, and 4.5 percent, to $442.2 million, in the first nine months of 2006, compared to the same periods in 2005 primarily due to higher premiums associated with the policies that were impacted by the rate increases which became effective in the second and third quarters of 2006. Other health products in the three and nine months ended September 30, 2006 include $20.8 million and $58.9 million, respectively, of first-year premiums collected pursuant to the quota-share reinsurance agreement with Coventry described above under "Accounting for the marketing and quota-share agreement with Coventry." The remaining collected premiums relate to 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 and our direct response distribution channel. Life premiums collected in this segment increased 11 percent, to $73.2 million, in the third quarter of 2006, and 22 percent, to $208.0 million, in the first nine months of 2006, compared to the same periods in 2005, due to an increased focus on life products, including the introduction in the first quarter of 2005 of a new single premium whole life product and increased advertising in our direct response marketing. The new single premium whole life products accounted for $11.0 million and $13.0 million of our collected premiums in the third quarters of 2006 and 2005, respectively, and $32.9 million and $24.1 million, in the first nine months of 2006 and 2005, respectively. Graded benefit life products sold through our direct response marketing channel accounted for $24.3 million and $21.5 million of our total collected premiums in the third quarters of 2006 and 2005, respectively, and $66.7 million and $58.1 million, in the first nine months of 2006 and 2005, respectively. 58 CONSECO, INC. AND SUBSIDIARIES ------------------- Conseco Insurance Group (dollars in millions):
Three months ended Nine months ended September 30, September 30, ---------------------- ----------------------- 2006 2005 2006 2005 ---- ---- ---- ---- Premiums collected by product: Annuities: Equity-indexed (first-year).............................. $166.3 $ 24.9 $ 264.2 $ 64.7 Equity-indexed (renewal)................................. 1.9 2.1 7.2 7.7 ------ ------ -------- ------ Subtotal - equity-indexed annuities.................... 168.2 27.0 271.4 72.4 ------ ------ -------- ------ Other fixed (first-year)................................. 12.5 14.4 33.2 16.5 Other fixed (renewal).................................... 2.1 1.9 6.8 7.8 ------ ------ -------- ------ Subtotal - other fixed annuities....................... 14.6 16.3 40.0 24.3 ------ ------ -------- ------ Total annuities........................................ 182.8 43.3 311.4 96.7 ------ ------ -------- ------ Supplemental health: Medicare supplement (first-year)......................... 6.5 4.1 22.7 10.5 Medicare supplement (renewal)............................ 48.1 64.4 159.7 209.9 ------ ------ -------- ------ Subtotal - Medicare supplement......................... 54.6 68.5 182.4 220.4 ------ ------ -------- ------ Specified disease (first-year)........................... 6.8 7.2 21.0 23.2 Specified disease (renewal).............................. 81.3 81.3 247.3 247.8 ------ ------ -------- ------ Subtotal - specified disease........................... 88.1 88.5 268.3 271.0 ------ ------ -------- ------ Other health (renewal)................................... 2.8 3.2 7.7 9.4 ------ ------ -------- ------ Total supplemental health.............................. 145.5 160.2 458.4 500.8 ------ ------ -------- ------ Life insurance: First-year............................................... 1.7 1.7 5.1 6.6 Renewal.................................................. 76.6 84.3 235.6 252.1 ------ ------ -------- ------ Total life insurance................................... 78.3 86.0 240.7 258.7 ------ ------ -------- ------ Collections on insurance products: Total first-year premium collections on insurance products.................................... 193.8 52.3 346.2 121.5 Total renewal premium collections on insurance products..................................... 212.8 237.2 664.3 734.7 ------ ------ -------- ------ Total collections on insurance products................ $406.6 $289.5 $1,010.5 $856.2 ====== ====== ======== ======
Annuities in this segment include equity-indexed and other fixed annuities sold through professional independent producers. Total annuity premiums collected in this segment increased 322 percent, to $182.8 million, in the third quarter of 2006, and 222 percent, to $311.4 million, in the first nine months of 2006, compared to the same periods in 2005, due to: (i) increased sales efforts in this segment; (ii) expanded product offerings; (iii) attractive crediting rates on certain products; and (iv) the general stock market performance in recent periods which has made these products attractive to certain customers. The accumulation value of equity-indexed annuities is credited with interest at an annual guaranteed minimum rate of 3 percent (or, including the effect of applicable sales loads, a 1.7 percent compound average interest rate over the term of the contracts). These annuities provide for 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 increased 523 percent, to $168.2 million, in the third quarter of 2006, and 275 percent, to $271.4 million, in the first nine months of 2006, compared to the same periods in 2005 due to the recent introduction of several new products. 59 CONSECO, INC. AND SUBSIDIARIES ------------------- Other fixed rate annuity products include SPDAs, FPDAs and SPIAs, which are credited with a declared rate. SPDA 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 10 percent, to $14.6 million, in the third quarter of 2006, and increased 65 percent to $40.0 million in the first nine months of 2006, compared to the same periods in 2005. During the last six months of 2005, sales of these products increased primarily due to attractive crediting rates on certain products. Sales of these products in the first nine months of 2006 increased over the comparable period in 2005 primarily due to increased sales efforts. Supplemental health products in the Conseco Insurance Group segment include Medicare supplement, specified disease and other insurance products distributed through professional independent producers. Collected premiums on Medicare supplement policies in the Conseco Insurance Group segment decreased 20 percent, to $54.6 million, in the third quarter of 2006, and 17 percent to $182.4 million in the first nine months of 2006, compared to the same periods in 2005. We have experienced higher lapses of these products due to premium rate increases implemented in recent periods and competition from companies offering Medicare Advantage products. Premiums collected on specified disease products in the 2006 periods were slightly lower than the comparable periods in 2005. Premiums collected from other health products decreased 13 percent, to $2.8 million, in the third quarter of 2006, and 18 percent to $7.7 million in the first nine months of 2006, compared to the same periods in 2005 because 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 9.0 percent, to $78.3 million, in the third quarter of 2006, and 7.0 percent to $240.7 million in the first nine months of 2006, compared to the same periods in 2005. Other Business in Run-off (dollars in millions):
Three months ended Nine months ended September 30, September 30, -------------------- -------------------- 2006 2005 2006 2005 ---- ---- ---- ---- Premiums collected by product: Long-term care (renewal).................................... $79.6 $86.4 $247.1 $266.4 Major medical (renewal)..................................... .8 .7 4.1 2.0 ----- ----- ------ ------ Total renewal premium collections on insurance products... $80.4 $87.1 $251.2 $268.4 ===== ===== ====== ======
The Other Business in Run-off segment includes: (i) long-term care products written in prior years through independent agents; and (ii) group and individual major medical business in run-off. Long-term care premiums collected in this segment decreased 7.9 percent, to $79.6 million, in the third quarter of 2006, and 7.2 percent to $247.1 million in the first nine months of 2006, compared to the same periods in 2005. Most of the long-term care premiums in this segment relate to business written by certain subsidiaries prior to their acquisitions by Conseco in 1996 and 1997. We ceased selling new long-term care policies through professional independent producers in the second quarter of 2003. We expect this segment's long-term care premiums to reflect additional policy lapses in the future, partially offset by premium rate increases. See "Results of Operations - Other Business in Run-off" for additional discussion related to orders issued by the Florida Office of Insurance Regulation regarding certain blocks of our long-term care business. 60 CONSECO, INC. AND SUBSIDIARIES ------------------- LIQUIDITY AND CAPITAL RESOURCES Changes in our consolidated balance sheet between September 30, 2006 and December 31, 2005, primarily reflect: (i) our net income for the nine months ended September 30, 2006; (ii) a reduction to our deferred income tax valuation allowance recorded in additional paid-in capital; and (iii) 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 September 30, 2006, we decreased the carrying value of such investments by $148.6 million as a result of this fair value adjustment. Our capital structure as of September 30, 2006, and December 31, 2005, was as follows (dollars in millions):
September 30, December 31, 2006 2005 ---- ---- Total capital: Corporate notes payable................................................ $ 805.6 $ 851.5 Shareholders' equity: Preferred stock..................................................... 667.8 667.8 Common stock........................................................ 1.5 1.5 Additional paid-in capital.......................................... 3,468.3 3,194.1 Accumulated other comprehensive income (loss)....................... (71.8) 71.7 Retained earnings................................................... 646.9 584.7 -------- -------- Total shareholders' equity....................................... 4,712.7 4,519.8 -------- -------- Total capital.................................................... $5,518.3 $5,371.3 ======== ========
The following table summarizes certain financial ratios as of and for the nine months ended September 30, 2006, and as of and for the year ended December 31, 2005:
September 30, December 31, 2006 2005 ---- ---- Book value per common share................................................................... $26.62 $25.42 Book value per common share, excluding accumulated other comprehensive income (loss) (a).......................................................................... 27.10 24.95 Ratio of earnings to fixed charges............................................................ 1.38x 2.03x Ratio of earnings to fixed charges and preferred dividends.................................... 1.23x 1.81x Debt to total capital ratios: Corporate debt to total capital............................................................ 15% 16% Corporate debt to total capital, excluding accumulated other comprehensive income (loss) (a)........................................................................ 14% 16% Corporate debt and preferred stock to total capital........................................ 27% 28% Corporate debt and preferred stock to total capital, excluding accumulated other comprehensive income (loss) (a).......................................................... 26% 29% - -------------------- (a) This non-GAAP measure differs from the corresponding GAAP measure presented immediately above, because accumulated other comprehensive income 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. 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.
61 CONSECO, INC. AND SUBSIDIARIES ------------------- Liquidity for insurance operations Our insurance operating companies 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. The Company announced on August 1, 2006, that it has reached a tentative settlement in the class action case referred to as In Re Conseco Life Insurance Company Cost of Insurance Litigation. The settlement is subject to a court fairness hearing and other conditions. Based on our estimates of the ultimate cash payments required to implement the tentative settlement, we believe there are adequate sources of liquidity to satisfy such requirements. Such estimates are subject to significant judgment, including the form of policy benefit enhancement chosen by the inforce policyholders. 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 "Litigation and Other Legal Proceedings". On October 2, 2006, A.M. Best affirmed the financial strength rating of "B++ (Very Good)" of our primary insurance subsidiaries, except Conseco Senior, whose "B (Fair)" rating was affirmed by A.M. Best. A.M. Best also affirmed the outlook for the ratings of our primary insurance subsidiaries is positive, except for Conseco Senior, whose outlook of stable was affirmed. A.M. Best also noted that the likely timeframe for a potential upgrade of our primary insurance subsidiaries would be 18 to 24 months. A.M. Best also provided likely metrics Conseco would need to meet to: (i) maintain a positive outlook; or (ii) receive an upgrade. A.M. Best stated they would likely revise our current positive outlook rating to stable if one or more of the following occur: - The long-term care business in the Business in Run-off segment generates GAAP operating earnings less than $40 million in 2006 or 2007, or requires aggregate capital infusions greater than $50 million over the next two years. (The pre-tax operating earnings for this segment were $15.4 million for the nine months ended September 30, 2006). - Failure to achieve combined pre-tax statutory operating earnings growth (excluding surplus note interest) of at least 15 percent in 2007. - A decline in the Conseco Insurance Group segment's GAAP operating earnings (excluding the one-time litigation settlement charge) below $200 million for 2006 and $220 million for 2007. (The pre-tax operating earnings for this segment (excluding the one-time litigation settlement charge) were $165.1 million for the nine months ended September 30, 2006). A.M. Best stated they would likely upgrade Conseco's ratings if the following occur: - Consolidated and stand-alone statutory capitalization levels generally meet or exceed present levels (including planned capital contributions from the refinancing transactions which occurred in October 2006). This assumes positive statutory earnings trends on an aggregate basis. - The long-term care business in the Business in Run-off segment continues to generate GAAP operating earnings in excess of $50 million with no material (greater than $50 million) statutory capital infusions required over the next two years. (The pre-tax operating earnings for this segment were $15.4 million for the nine months ended September 30, 2006). 62 CONSECO, INC. AND SUBSIDIARIES ------------------- - GAAP operating earnings for the Bankers Life segment of at least $270 million for 2006 and 2007. (The pre-tax operating earnings for this segment were $205.5 million for the nine months ended September 30, 2006). - GAAP operating earnings for the Conseco Insurance Group segment of at least $220 million for 2006 (excluding the one-time litigation settlement charge) and $240 million for 2007 with improving expense ratios. (The pre-tax operating earnings for this segment (excluding the one-time litigation settlement charge) were $165.1 million for the nine months ended September 30, 2006). - Overall annual sales growth of 8 to 10 percent with positive sales trends in the Bankers Life and Conseco Insurance Group segments. (Our overall sales growth exceeded this metric in the third quarter of 2006). - Maintain financial leverage below 25 percent with EBIT interest coverage of at least five times. (We are exceeding these requirements at September 30, 2006). On August 3, 2005, A.M. Best revised its outlook on our primary insurance subsidiaries to positive from stable, except Conseco Senior (the issuer of most of our long-term care business in our Other Business in Run-off segment), for which the outlook remains stable. On June 25, 2004, A.M. Best upgraded the financial strength ratings of our primary insurance subsidiaries from "B (Fair)" to "B++ (Very Good)", except Conseco Senior, whose "B (Fair)" rating was affirmed by A.M. Best. According to A.M. Best, these rating actions reflected the substantial recapitalization of our balance sheet, improved absolute and risk-adjusted capital on a statutory basis and improving operating fundamentals. 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 "B" rating is assigned to companies which have a fair 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 "B" rating from A.M. Best are the fifth and seventh highest, respectively, of sixteen possible ratings. On August 2, 2005, S&P revised its outlook on our primary insurance subsidiaries to positive from stable, except Conseco Senior, for which the outlook remains stable. On May 27, 2004, S&P upgraded the financial strength ratings of our primary insurance companies from "BB-" to "BB+", except Conseco Senior, which was assigned a "CCC" rating. 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 eighteenth highest, respectively, of twenty-one possible ratings. On March 8, 2006, Moody's upgraded the financial strength rating of our primary insurance companies from "Ba1" to "Baa3" except Conseco Senior, which was affirmed at "Caa1". In addition, all of Moody's ratings on our insurance subsidiaries now have a positive outlook. On July 29, 2005, the ratings for our primary insurance subsidiaries were placed on review for upgrade by Moody's, except Conseco Senior, for which the rating was affirmed with a developing outlook. On May 27, 2004, Moody's upgraded the financial strength ratings of our primary insurance companies from "Ba3" to "Ba2", except Conseco Senior, which was assigned a "Caa1" rating. On August 9, 2004, Moody's again upgraded the financial strength ratings of our primary insurance companies from "Ba2" to "Ba1" and reaffirmed the "Caa1" rating of Conseco Senior. 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 positive outlook by Moody's is an opinion regarding the likely direction of a rating over the medium term. State laws generally give state insurance regulatory agencies broad authority to protect policyholders in their 63 CONSECO, INC. AND SUBSIDIARIES ------------------- jurisdictions. Regulators have used this authority in the past to restrict the ability of our insurance subsidiaries to pay any 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. Liquidity of the Holding Companies At September 30, 2006, Conseco Inc. and CDOC held unrestricted cash of $75.7 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, 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 $37.0 million to our top tier insurance subsidiary in the first nine months of 2006. 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 of the director or commissioner of the applicable state insurance department. During the first nine months of 2006, our top tier insurance subsidiary paid dividends of $37.5 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. During the first nine months of 2006, we made principal payments totaling $46.3 million on our Amended Credit Facility, including 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. As further described in the note to the consolidated financial statements entitled "Notes Payable - Direct Corporate Obligations", we entered into the Second Amended Credit Facility in October 2006. As a result of the refinancing, the principal amount outstanding under the credit facility was increased from $478.3 million to $675.0 million and the maturity extended from 2010 to 2013. The interest rate on the Second Amended Credit Facility will be 200 basis points over LIBOR, an increase of 25 basis points over the Amended Credit Facility. Approximately $195 million of the proceeds will be used to strengthen the capital of our insurance subsidiaries. 64 CONSECO, INC. AND SUBSIDIARIES ------------------- The scheduled repayment of our Second Amended Credit Facility is as follows (dollars in millions): 2006.......................................... $ 1.7 2007.......................................... 6.8 2008.......................................... 6.7 2009.......................................... 6.8 2010.......................................... 6.7 2011.......................................... 6.8 2012.......................................... 6.7 2013.......................................... 632.8 ------ $675.0 ======
The Amended Credit Facility and the Second Amended Credit Facility both include 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 September 30, 2006. 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 and 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 2008). 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. 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 $150.0 million over the term of the facility (compared to a limitation of $50.0 million under the Amended Credit Facility). 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. 65 CONSECO, INC. AND SUBSIDIARIES ------------------- INVESTMENTS At September 30, 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................................................ $13,298.7 $141.2 $203.5 $13,236.4 United States Treasury securities and obligations of United States government corporations and agencies................. 1,447.5 17.2 20.3 1,444.4 States and political subdivisions................................... 738.2 6.3 11.3 733.2 Debt securities issued by foreign governments....................... 117.7 3.1 .6 120.2 Structured securities .............................................. 6,059.8 10.2 92.2 5,977.8 Below-investment grade (primarily corporate securities)................ 1,156.9 17.6 24.1 1,150.4 --------- ------ ------ --------- Total actively managed fixed maturities............................. $22,818.8 $195.6 $352.0 $22,662.4 ========= ====== ====== ========= Equity securities...................................................... $23.7 $3.1 $.1 $26.7 ===== ==== === =====
Concentration of Actively Managed Fixed Maturity Securities The following table summarizes the carrying values of our actively managed fixed maturity securities by category as of September 30, 2006 (dollars in millions):
Percent of Carrying value fixed maturities -------------- ---------------- Structured securities................................................................ $ 5,992.2 26.4% Manufacturing........................................................................ 2,779.8 12.3 Bank and finance..................................................................... 2,278.4 10.1 Services............................................................................. 1,768.5 7.8 Utilities............................................................................ 1,574.0 6.9 U.S. Government...................................................................... 1,444.4 6.4 Communications....................................................................... 1,168.0 5.2 Holding and other investment offices................................................. 1,059.3 4.7 Agriculture, forestry and mining..................................................... 845.4 3.7 States and political subdivisions.................................................... 744.7 3.3 Retail and wholesale................................................................. 683.0 3.0 Transportation....................................................................... 656.4 2.9 Asset-backed securities.............................................................. 576.3 2.5 Other................................................................................ 1,092.0 4.8 --------- ----- Total actively managed fixed maturities........................................... $22,662.4 100.0% ========= =====
Below-Investment Grade Securities At September 30, 2006, the amortized cost of the Company's below-investment grade fixed maturity securities was $1,156.9 million, or 5.1 percent of the Company's fixed maturity portfolio. The estimated fair value of the below-investment grade portfolio was $1,150.4 million, or 99 percent of the amortized cost. Below-investment grade fixed maturity securities with an amortized cost of $401.1 million and an estimated fair value of $398.3 million are securities held by a VIE that we are required to consolidate. These fixed maturity securities are legally 66 CONSECO, INC. AND SUBSIDIARIES ------------------- isolated and are not available to the Company. The liabilities of such VIE will be satisfied from the cash flows generated by these securities. At September 30, 2006, our total investment in the VIE was $48.9 million, and $47.0 million of such investment was rated BBB. Below-investment grade securities have different characteristics than investment grade corporate debt securities. 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. 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. Net Realized Investment Gains (Losses) During the first nine months of 2006, we recognized net realized investment losses of $28.6 million, which were comprised of $17.3 million of net losses from the sales of investments (primarily fixed maturities) with proceeds of $4.1 billion, and $11.3 million of writedowns of investments for other than temporary declines in fair value. During the nine months ended September 30, 2005, we recognized net realized investment gains of $3.1 million, which were comprised of $7.2 million of net gains from the sales of investments (primarily fixed maturities) with proceeds of $9.5 billion, net of $4.1 million of writedowns of investments resulting from a decline in the fair value of investments that we concluded were other than temporary. At September 30, 2006, investments in default as to the payment of principal or interest had an aggregate amortized cost of $18.0 million and a carrying value of $19.1 million. During the nine months ended September 30, 2006, we sold $2.0 billion of fixed maturity investments which resulted in gross investment losses (before income taxes) of $64.3 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; (v) identification of a superior investment alternative; or (vi) changes in expected liability cash flows. 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; (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. 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. During the first nine months of 2006, we recorded writedowns of fixed maturity securities and other invested assets totaling $11.3 million as a result of analysis that led us to conclude that the declines in the values of these investments were other than temporary. 67 CONSECO, INC. AND SUBSIDIARIES ------------------- The following table sets forth the amortized cost and estimated fair value of those actively managed fixed maturities with unrealized losses at September 30, 2006, 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................................................................... $ 251.0 $ 249.3 Due after one year through five years..................................................... 1,995.0 1,966.8 Due after five years through ten years.................................................... 4,369.0 4,281.9 Due after ten years....................................................................... 4,662.1 4,519.3 --------- --------- Subtotal............................................................................... 11,277.1 11,017.3 Structured securities..................................................................... 5,145.1 5,052.9 --------- --------- Total.................................................................................. $16,422.2 $16,070.2 ========= =========
At September 30, 2006, we held one investment in our fixed maturity portfolio which was rated below-investment grade and had an unrealized loss position exceeding 20 percent of its cost basis. At September 30, 2006, such investment had an amortized cost and estimated fair value of $.2 million and $.1 million, respectively. 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. 68 CONSECO, INC. AND SUBSIDIARIES ------------------- 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 September 30, 2006 (dollars in millions):
Less than 12 months 12 months or greater Total ------------------------- -------------------------- ---------------------- Estimated Estimated Estimated 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...... $ 207.0 $ (2.0) $1,151.5 $ (18.3) $ 1,358.5 $ (20.3) States and political subdivisions. 205.4 (2.9) 198.7 (8.4) 404.1 (11.3) Debt securities issued by foreign governments............ 46.1 (.5) 8.8 (.3) 54.9 (.8) Corporate securities.............. 5,254.3 (80.9) 3,945.5 (146.5) 9,199.8 (227.4) Structured securities............. 2,252.7 (23.9) 2,800.2 (68.3) 5,052.9 (92.2) -------- ------- -------- ------- --------- ------- Total actively managed fixed maturities............... $7,965.5 $(110.2) $8,104.7 $(241.8) $16,070.2 $(352.0) ======== ======= ======== ======= ========= ======= Equity securities................. $ - $ - $3.5 $(.1) $3.5 $(.1) ======= ======= ==== ==== ==== ====
Based on management's current assessment of investments with unrealized losses at September 30, 2006, 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). The Company has no current plans to sell these securities and has the ability to hold them to maturity. If the Company concludes in future periods that the unrealized loss is other than temporary, a charge to earnings would be recognized. 69 CONSECO, INC. AND SUBSIDIARIES ------------------- Structured Securities At September 30, 2006, fixed maturity investments included $6.0 billion of structured securities (or 26 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 mortgage-backed securities 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, prepayment rates are influenced by a number of factors that cannot be predicted with certainty, including: the relative sensitivity of the underlying mortgages backing the assets 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 loans. The yield recognized on structured securities purchased at a discount to par will increase (relative to the stated rate) when the underlying mortgages prepay faster than expected. The yield recognized on structured securities purchased at a premium will decrease (relative to the stated rate) when the underlying mortgages 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 as fewer underlying mortgages are refinanced. 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. 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 September 30, 2006 (dollars in millions):
Par Amortized Estimated value cost fair value ----- ---- ---------- Below 4 percent..................................................................... $ 213.3 $ 213.2 $ 209.6 4 percent - 5 percent............................................................... 1,373.8 1,331.7 1,308.2 5 percent - 6 percent............................................................... 3,914.2 3,865.8 3,811.1 6 percent - 7 percent............................................................... 467.0 480.2 479.3 7 percent - 8 percent............................................................... 150.5 155.3 155.4 8 percent and above................................................................. 27.2 27.9 28.6 -------- -------- -------- Total structured securities (a).............................................. $6,146.0 $6,074.1 $5,992.2 ======== ======== ======== - -------------------- (a) Includes below-investment grade structured securities with an amortized cost and estimated fair value of $14.3 million and $14.4 million, respectively.
70 CONSECO, INC. AND SUBSIDIARIES ------------------- The amortized cost and estimated fair value of structured securities at September 30, 2006, summarized by type of security, were as follows (dollars in millions):
Estimated fair value -------------------- Percent Amortized of fixed Type cost Amount maturities - ---- ---- ------ ---------- Pass-throughs and sequential and targeted amortization classes............ $3,556.0 $3,501.5 15% Planned amortization classes and accretion-directed bonds................. 1,000.3 986.2 4 Commercial mortgage-backed securities..................................... 1,501.4 1,488.1 7 Other..................................................................... 16.4 16.4 - -------- -------- -- Total structured securities (a).................................... $6,074.1 $5,992.2 26% ======== ======== == - ---------------------- (a) Includes below-investment grade structured securities with an amortized cost and estimated fair value of $14.3 million and $14.4 million, respectively.
Pass-through securities and sequential and targeted amortization class securities have different 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. Targeted amortization classes, planned 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. This insulates 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. CMBS generally offer higher yields than corporate bonds with similar credit ratings. Most CMBS have call protection features whereby underlying borrowers may not prepay their mortgages for stated periods of time without incurring prepayment penalties. 71 CONSECO, INC. AND SUBSIDIARIES ------------------- INVESTMENTS IN VARIABLE INTEREST ENTITY Fall Creek CLO Ltd. ("Fall Creek") is a collateralized loan trust that was established to issue securities and use the proceeds to invest in loans and other permitted investments. The assets held by the trust are legally isolated and are not available to the Company. The liabilities of Fall Creek will be satisfied from the cash flows generated by the underlying loans, not from the assets of the Company, which has no legal obligation to satisfy those liabilities. Repayment of the principal balance of the investment borrowings of Fall Creek begin in 2012 based on available cash flows from the assets and such borrowings mature in 2017. At September 30, 2006, our total investment in Fall Creek was $48.9 million. The following tables provide supplemental information about the assets, liabilities, revenues and expenses of Fall Creek which have been consolidated in accordance with FIN 46R, after giving effect to the elimination of our investment in Fall Creek and investment management fees earned by a subsidiary of the Company (dollars in millions):
September 30, 2006 ------------- Assets: Actively managed fixed maturities............................ $406.3 Cash and cash equivalents - restricted....................... 6.6 Accrued investment income.................................... 3.5 Other assets................................................. 9.6 ------ Total assets............................................. $426.0 ====== Liabilities: Other liabilities............................................ $ 9.8 Investment borrowings due to others.......................... 363.7 Investment borrowings due to the Company..................... 47.0 ------ Total liabilities........................................ 420.5 ------ Equity: Capital provided by the Company.............................. 1.9 Capital provided by others................................... 5.2 Accumulated other comprehensive loss......................... (2.9) Retained earnings............................................ 1.3 ------ Total equity............................................. 5.5 ------ Total liabilities and equity............................. $426.0 ======
Three months ended Nine months ended September 30, September 30, 2006 2006 ------------------ ------------------ Revenues: Net investment income - deposit accounts..................... $8.2 $18.1 Net realized investment losses............................... (.1) (.1) Fee revenue and other income................................. .1 .2 ---- ----- Total revenues........................................... 8.2 18.2 ---- ----- Expenses: Interest expense............................................. 5.2 13.7 Other operating expenses..................................... .2 .7 ---- ----- Total expenses........................................... 5.4 14.4 ---- ----- Income before income taxes............................... $2.8 $ 3.8 ==== =====
72 CONSECO, INC. AND SUBSIDIARIES ------------------- NEW ACCOUNTING STANDARDS See "Recently Issued Accounting Standards" in the notes to consolidated financial statements for a discussion of recently issued accounting standards. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Our market risks, and the ways we manage them, are summarized in "Management's Discussion and Analysis of Financial Condition and Results of Operations", included in Conseco's Annual Report on Form 10-K for the year ended December 31, 2005. There have been no material changes in the first nine months of 2006 to such risks or our management of such risks. ITEM 4. CONTROLS AND PROCEDURES. Evaluation of Interim Disclosure Controls and Procedures. Conseco's management, under the supervision and with the participation of the Chief Executive Officer and the Chief Financial Officer, evaluated the effectiveness of Conseco's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended). Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2006, Conseco's disclosure controls and procedures were effective to ensure that information required to be disclosed by Conseco in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. Changes to Internal Controls and Procedures for Financial Reporting. We have implemented several initiatives to streamline our administrative procedures and improve our actuarial valuation systems at our insurance subsidiaries. Our efforts include improvements to our policy administrative procedures and significant system conversions. During the first nine months of 2006, we implemented new actuarial valuation systems for our long-term care products in our Other Business in Run-off segment, our traditional life, equity-indexed and Medicare supplement products in our Bankers Life segment, and certain universal life products in our Conseco Insurance Group segment. In addition, we implemented a new mortgage loan processing system. We expect to implement additional system conversions in the future. We believe that the new systems will provide better information and will enhance our operational efficiencies. As part of the new system implementations, we expect to make further adjustments to our operating procedures in an effort to gain additional efficiencies and effectiveness. We believe the changes will also result in improvements to our internal controls over financial reporting. Other than the changes described above, no significant changes in Conseco's internal controls over financial reporting have occurred during the nine months ended September 30, 2006, that have materially affected, or are reasonably likely to materially affect, Conseco's internal controls over financial reporting. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. Information required for Part II, Item 1 is incorporated by reference to the discussion under the heading "Litigation and Other Legal Proceedings" in the footnotes to our consolidated financial statements included in Part I, Item 1 of this Form 10-Q. 73 CONSECO, INC. AND SUBSIDIARIES ------------------- 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. Refer to "Risk Factors" in Conseco's 2005 Annual Report on Form 10-K for further discussion of such risk factors. There have been no material changes in the first nine months of 2006 to such risks. ITEM 6. EXHIBITS. 10.1 Second Amended and Restated Credit Agreement dated as of October 10, 2006 among Conseco, Inc., Bank of America, N.A., as Agent, JPMorgan Chase Bank, N.A., as Syndication Agent, and other parties, incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K filed October 11, 2006. 10.23 Employment Agreement dated as of August 9, 2006 between Conseco, Inc. and C. James Prieur, incorporated by reference to Exhibit 10.23 of our Current Report on Form 8-K filed August 9, 2006. 10.24 Conseco Inc. Deferred Compensation Plan effective January 1, 2007. 10.25 Employment Agreement dated as of May 3, 2005 between Conseco Services, LLC and Susan L. Menzel. 10.26 Employment Agreement dated as of January 17, 2006 between Conseco Services, LLC and William D. Fritts, Jr. 10.27 Employment Agreement dated as of September 8, 2005 between Conseco Services, LLC and Chris Nickele. 10.28 Employment Agreement dated as of October 1, 2004 between Conseco Services, LLC and Scott Perry. 10.29 Employment Agreement dated as of April 1, 2006 between Conseco Services, LLC and Daniel G. Walseth. 10.30 Employment Agreement dated as of November 6, 2006 between Conseco Services, LLC and Michael Dubes. 10.31 Employment Agreement dated as of March 7, 2005 between Conseco Services, LLC and Russell M. Bostick. 12.1 Computation of Ratio of Earnings to Fixed Charges and Preferred Dividends. 31.1 Certification Pursuant to the Securities Exchange Act Rule 13a-14(a)/15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification Pursuant to the Securities Exchange Act Rule 13a-14(a)/15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 74 CONSECO, INC. AND SUBSIDIARIES ------------------- SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CONSECO, INC. Dated: November 7, 2006 By: /s/ Eugene M. Bullis -------------------- Eugene M. Bullis Executive Vice President and Chief Financial Officer (authorized officer and principal financial officer) 75 EX-10 2 exhibit1024.txt EXHIBIT 10.24 Exhibit 10.24 Conseco Deferred Compensation Plan Master Plan Document - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Effective January 1, 2007 Copyright (C) 2006 By Clark Consulting, Inc. All Rights Reserved Conseco Deferred Compensation Plan Master Plan Document - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- TABLE OF CONTENTS
Page ---- ARTICLE 1 Definitions....................................................................................1 ARTICLE 2 Selection, Enrollment, Eligibility.............................................................5 2.1 Selection by Committee.........................................................................5 2.2 Enrollment and Eligibility Requirements; Commencement of Participation.........................6 ARTICLE 3 Deferral Commitments/Company Contribution Amounts/Supplemental Contribution Amounts /Vesting/Crediting/Taxes..................................................6 3.1 Minimum Deferrals..............................................................................6 3.2 Maximum Deferral...............................................................................7 3.3 Election to Defer; Effect of Election Form.....................................................7 3.4 Withholding and Crediting of Annual Deferral Amounts...........................................8 3.5 Company Contribution Amount....................................................................9 3.6 Supplemental Contribution Amount...............................................................9 3.7 Crediting of Amounts after Benefit Distribution................................................9 3.8 Vesting.......................................................................................10 3.9 Crediting/Debiting of Account Balances........................................................11 3.10 FICA and Other Taxes..........................................................................12 ARTICLE 4 Scheduled Distribution; Unforeseeable Emergencies.............................................13 4.1 Scheduled Distribution........................................................................13 4.2 Postponing Scheduled Distributions............................................................13 4.3 Other Benefits Take Precedence Over Scheduled Distributions...................................14 4.4 Unforeseeable Emergencies.....................................................................14 ARTICLE 5 Change In Control Benefit.....................................................................15 5.1 Change in Control Benefit.....................................................................15 5.2 Payment of Change in Control Benefit..........................................................15 ARTICLE 6 Retirement Benefit............................................................................15 6.1 Retirement Benefit............................................................................15 6.2 Payment of Retirement Benefit.................................................................15 ARTICLE 7 Termination Benefit...........................................................................16 7.1 Termination Benefit...........................................................................16 7.2 Payment of Termination Benefit................................................................16
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Page ---- ARTICLE 8 Disability Benefit............................................................................16 8.1 Disability Benefit............................................................................16 8.2 Payment of Disability Benefit.................................................................16 ARTICLE 9 Death Benefit.................................................................................16 9.1 Death Benefit.................................................................................16 9.2 Payment of Death Benefit......................................................................17 ARTICLE 10 Beneficiary Designation.......................................................................17 10.1 Beneficiary...................................................................................17 10.2 Beneficiary Designation; Change; Spousal Consent..............................................17 10.3 Acknowledgement...............................................................................17 10.4 No Beneficiary Designation....................................................................17 10.5 Doubt as to Beneficiary.......................................................................17 10.6 Discharge of Obligations......................................................................17 ARTICLE 11 Leave of Absence..............................................................................18 11.1 Paid Leave of Absence.........................................................................18 11.2 Unpaid Leave of Absence.......................................................................18 11.3 Leaves Resulting in Separation from Service...................................................18 ARTICLE 12 Termination of Plan, Amendment or Modification................................................18 12.1 Termination of Plan...........................................................................18 12.2 Amendment.....................................................................................19 12.3 Plan Agreement................................................................................19 12.4 Effect of Payment.............................................................................19 ARTICLE 13 Administration................................................................................19 13.1 Committee Duties..............................................................................19 13.2 Administration Upon Change In Control.........................................................20 13.3 Agents........................................................................................20 13.4 Binding Effect of Decisions...................................................................20 13.5 Indemnity of Committee........................................................................20 13.6 Employer Information..........................................................................20 ARTICLE 14 Other Benefits and Agreements.................................................................20 14.1 Coordination with Other Benefits..............................................................20 ARTICLE 15 Claims Procedures.............................................................................21
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Page ---- 15.1 Presentation of Claim.........................................................................21 15.2 Notification of Decision......................................................................21 15.3 Review of a Denied Claim......................................................................21 15.4 Decision on Review............................................................................22 15.5 Legal Action..................................................................................22 ARTICLE 16 Trust.........................................................................................22 16.1 Establishment of the Trust....................................................................22 16.2 Interrelationship of the Plan and the Trust...................................................22 16.3 Distributions From the Trust..................................................................23 ARTICLE 17 Miscellaneous.................................................................................23 17.1 Status of Plan................................................................................23 17.2 Unsecured General Creditor....................................................................23 17.3 Employer's Liability..........................................................................23 17.4 Nonassignability..............................................................................23 17.5 Not a Contract of Employment..................................................................23 17.6 Furnishing Information........................................................................23 17.7 Terms.........................................................................................24 17.8 Captions......................................................................................24 17.9 Governing Law.................................................................................24 17.10 Notice........................................................................................24 17.11 Successors....................................................................................24 17.12 Spouse's Interest.............................................................................24 17.13 Validity......................................................................................24 17.14 Incompetent...................................................................................24 17.15 Court Order...................................................................................25 17.16 Distribution in the Event of Income Inclusion Under 409A......................................25 17.17 Deduction Limitation on Benefit Payments......................................................25 17.18 Insurance.....................................................................................25
- ------------------------------------------------------------------------------- -iii- Conseco Deferred Compensation Plan Master Plan Document - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- CONSECO DEFERRED COMPENSATION PLAN Effective January 1, 2007 Purpose ------- The purpose of this Plan is to provide specified benefits to a select group of management or highly compensated Employees who contribute materially to the continued growth, development and future business success of Conseco Services, LLC, an Indiana limited liability company, and its subsidiaries, if any, that sponsor this Plan. This Plan shall be unfunded for tax purposes and for purposes of Title I of ERISA. ARTICLE 1 Definitions ----------- For the purposes of this Plan, unless otherwise clearly apparent from the context, the following phrases or terms shall have the following indicated meanings: 1.1 "Account Balance" shall mean, with respect to a Participant, an entry on the records of the Employer equal to the sum of the Participant's Annual Accounts. The Account Balance shall be a bookkeeping entry only and shall be utilized solely as a device for the measurement and determination of the amounts to be paid to a Participant, or his or her designated Beneficiary, pursuant to this Plan. 1.2 "Annual Account" shall mean, with respect to a Participant, an entry on the records of the Employer equal to the following amount: (i) the sum of the Participant's Annual Deferral Amount, Company Contribution Amount and Supplemental Contribution Amount for any one Plan Year, plus (ii) amounts credited or debited to such Annual Account pursuant to this Plan, less (iii) all distributions made to the Participant or his or her Beneficiary pursuant to this Plan that relate to the Annual Account for such Plan Year. The Annual Account shall be a bookkeeping entry only and shall be utilized solely as a device for the measurement and determination of the amounts to be paid to a Participant, or his or her designated Beneficiary, pursuant to this Plan. 1.3 "Annual Deferral Amount" shall mean that portion of a Participant's Base Salary, Bonus, Commissions and LTIP Amounts that a Participant defers in accordance with Article 3 for any one Plan Year, without regard to whether such amounts are withheld and credited during such Plan Year. In the event of a Participant's Retirement, Disability, death or Termination of Employment prior to the end of a Plan Year, such year's Annual Deferral Amount shall be the actual amount withheld prior to such event. 1.4 "Annual Installment Method" shall mean, for an Annual Account being paid, annual installment payments over the number of years selected by the Participant in accordance with this Plan, calculated as follows: (i) for the first annual installment, the vested portion of the Annual Account being paid shall be calculated as of the close of business on or as soon as practicable following the Participant's Benefit Distribution Date, and (ii) for remaining annual installments, the vested portion of that Annual Account shall be calculated on every anniversary of such - ------------------------------------------------------------------------------- -1- Conseco Deferred Compensation Plan Master Plan Document - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- calculation date, as applicable. Each annual installment shall be calculated by multiplying the unpaid vested balance by a fraction, the numerator of which is one and the denominator of which is the remaining number of annual payments due to the Participant. By way of example, if the Participant elects a ten (10) year Annual Installment Method as the form of Retirement Benefit for an Annual Account, the first payment shall be 1/10 of the vested balance of such Annual Account, calculated as described in this definition. The following year, the payment shall be 1/9 of the vested balance of such Annual Account, calculated as described in this definition. 1.5 "Base Salary" shall mean the annual cash compensation relating to services performed during any calendar year, excluding distributions from nonqualified deferred compensation plans, bonuses, commissions, overtime, fringe benefits, stock options, relocation expenses, incentive payments, non-monetary awards, director fees and other fees, and automobile and other allowances paid by an Employer to a Participant for employment services rendered (whether or not such allowances are included in the Employee's gross income). Base Salary shall be calculated before reduction for compensation voluntarily deferred or contributed by the Participant pursuant to all qualified or nonqualified plans of the Employer and shall be calculated to include amounts not otherwise included in the Participant's gross income under Code Sections 125, 402(e)(3), 402(h), or 403(b) pursuant to plans established by the Employer; provided, however, that all such amounts will be included in compensation only to the extent that had there been no such plan, the amount would have been payable in cash to the Employee. 1.6 "Beneficiary" shall mean one or more persons, trusts, estates or other entities, designated in accordance with Article 10, that are entitled to receive benefits under this Plan upon the death of a Participant. 1.7 "Beneficiary Designation Form" shall mean the form established from time to time by the Committee that a Participant completes, signs and returns to the Committee to designate one or more Beneficiaries. 1.8 "Benefit Distribution Date" shall mean a date that triggers distribution of a Participant's vested benefits. The Benefit Distribution Date for a Participant shall be the occurrence of any of the following: (a) If the Participant Retires, the Benefit Distribution Date for his or her vested Account Balance shall be the last day of the six-month period immediately following the date on which the Participant Retires; provided, however, in the event the Participant changes the Retirement Benefit election for one or more Annual Accounts in accordance with Section 6.2(b), the Benefit Distribution Date for such Annual Account(s) shall be postponed in accordance with such section 6.2(b); or (b) If the Participant experiences a Termination of Employment, the Benefit Distribution Date for his or her vested Account Balance shall be the last day of the six-month period immediately following the date on which the Participant experiences a Termination of Employment; or (c) If the Participant dies prior to the complete distribution of his or her vested Account Balance, the Participant's Benefit Distribution Date shall be the date on which the Committee is provided with proof that is satisfactory to the Committee of the Participant's death; or - ------------------------------------------------------------------------------- -2- Conseco Deferred Compensation Plan Master Plan Document - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- (d) If the Participant becomes Disabled, the Participant's Benefit Distribution Date shall be the date on which the Participant becomes Disabled; or (e) If (i) a Change in Control occurs prior to the Participant's Termination of Employment, Retirement, death or Disability, and (ii) the Participant has elected to receive a Change in Control Benefit, as set forth in Section 5.1 below, the Participant's Benefit Distribution Date shall be the date on which the Company experiences a Change in Control, as determined by the Committee in its sole discretion. No distribution may be made or commenced prior to a Benefit Distribution Date. 1.9 "Board" shall mean the board of directors of the Company. 1.10 "Bonus" shall mean any compensation, in addition to Base Salary, Commissions and LTIP Amounts, earned by a Participant for services rendered during a Plan Year, under an Employer's annual bonus, cash incentive plan or other arrangement designated by the Committee, as further specified on an Election Form. 1.11 "Change in Control" shall mean any "change in control event" as defined in accordance with Code Section 409A and related Treasury guidance and Regulations. 1.12 "Change in Control Benefit" shall have the meaning set forth in Article 5. 1.13 "Claimant" shall have the meaning set forth in Section 15.1. 1.14 "Code" shall mean the Internal Revenue Code of 1986, as it may be amended from time to time. 1.15 "Commissions" shall mean the cash commissions earned by a Participant from an Employer for services rendered during a Plan Year, excluding Bonus, LTIP Amounts or other additional incentives or awards earned by the Participant. 1.16 "Committee" shall mean the committee described in Article 13. 1.17 "Company" shall mean Conseco Services, LLC, an Indiana limited liability company, and any successor to all or substantially all of the Company's assets or business. 1.18 "Company Contribution Amount" shall mean, for any one Plan Year, the amount determined in accordance with Section 3.5. 1.19 "Death Benefit" shall mean the benefit set forth in Article 9. 1.20 "Disability" or "Disabled" shall mean that a Participant is (i) unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than 12 months, or (ii) by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than 12 months, receiving income replacement benefits for a period of not less than 3 months under an accident or health plan covering employees of the Participant's Employer. For purposes of this Plan, a Participant shall be deemed Disabled if determined to be totally disabled by the Social Security Administration, or if determined to be disabled in accordance with the applicable disability insurance program of such Participant's Employer, provided that the definition of "disability" applied under such disability insurance program complies with the requirements in the preceding sentence. - ------------------------------------------------------------------------------- -3- Conseco Deferred Compensation Plan Master Plan Document - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 1.21 "Disability Benefit" shall mean the benefit set forth in Article 8. 1.22 "Election Form" shall mean the form, which may be in electronic format, established from time to time by the Committee that a Participant completes, signs and returns to the Committee to make an election under the Plan. 1.23 "Employee" shall mean a person who is an employee of an Employer. 1.24 "Employer(s)" shall mean the Company and/or any of its subsidiaries (now in existence or hereafter formed or acquired) that have been selected by the Board to participate in the Plan and have adopted the Plan as a sponsor. 1.25 "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as it may be amended from time to time. 1.26 "401(k) Plan" shall mean, with respect to an Employer, a plan qualified under Code Section 401(a) that contains a cash or deferral arrangement described in Code Section 401(k), adopted by the Employer, as it may be amended from time to time, or any successor thereto. 1.27 "LTIP Amounts" shall mean any portion of the cash compensation attributable to a Plan Year that is earned by a Participant as an Employee under an Employer's long-term incentive plan or arrangement designated by the Committee. 1.28 "Participant" shall mean any Employee (i) who is selected to participate in the Plan and (ii) who has not been removed from participation by the Committee. 1.29 "Plan" shall mean the Conseco Deferred Compensation Plan, which shall be evidenced by this instrument and by each Plan Agreement, as they may be amended from time to time. 1.30 "Plan Agreement" shall mean a written agreement, as may be amended from time to time, which is entered into by and between an Employer and a Participant. Each Plan Agreement executed by a Participant and the Participant's Employer shall provide for the entire benefit to which such Participant is entitled under the Plan; should there be more than one Plan Agreement, the Plan Agreement bearing the latest date of acceptance by the Employer shall supersede all previous Plan Agreements in their entirety and shall govern such entitlement. The terms of any Plan Agreement may be different for any Participant, and any Plan Agreement may provide additional benefits not set forth in the Plan or limit the benefits otherwise provided under the Plan; provided, however, that any such additional benefits or benefit limitations must be agreed to by both the Employer and the Participant. In the event no Plan Agreement is entered into by a Participant, the Plan shall serve as the Plan Agreement for that Participant. 1.31 "Plan Year" shall mean a period beginning on January 1 of each calendar year and continuing through December 31 of such calendar year. 1.32 "Retirement", "Retire(s)" or "Retired" shall mean the separation from service with all Employers for any reason other than death or Disability, as determined in accordance with Code Section 409A and related Treasury guidance and Regulations, on or after the earlier of the attainment of (a) age sixty-five (65) or (b) age fifty-five (55) with ten (10) Years of Service. 1.33 "Retirement Benefit" shall mean the benefit set forth in Article 6. 1.34 "Scheduled Distribution" shall mean the distribution set forth in Section 4.1. - ------------------------------------------------------------------------------- -4- Conseco Deferred Compensation Plan Master Plan Document - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 1.35 "Supplemental Contribution Amount" shall mean, for any one Plan Year, the amount determined in accordance with Section 3.6. 1.36 "Terminate the Plan", "Termination of the Plan" shall mean a determination by an Employer's board of directors, or similar governing body, that (i) all of its Participants shall no longer be eligible to participate in the Plan, (ii) no new deferral elections for such Participants shall be permitted, and (iii) such Participants shall no longer be eligible to receive company contributions under this Plan. 1.37 "Termination Benefit" shall mean the benefit set forth in Article 7. 1.38 "Termination of Employment" shall mean the separation from service with all Employers, voluntarily or involuntarily, for any reason other than Retirement, Disability or death, as determined in accordance with Code Section 409A and related Treasury guidance and Regulations. 1.39 "Trust" shall mean one or more trusts established by the Company in accordance with Article 16. 1.40 "Unforeseeable Emergency" shall mean a severe financial hardship of the Participant or his or her Beneficiary resulting from (i) an illness or accident of the Participant or Beneficiary, the Participant's or Beneficiary's spouse, or the Participant's or Beneficiary's dependent (as defined in Code Section 152(a)), (ii) a loss of the Participant's or Beneficiary's property due to casualty, or (iii) such other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Participant or the Participant's Beneficiary, all as determined in the sole discretion of the Committee. 1.41 "Years of Plan Participation" shall mean the total number of full Plan Years a Participant has been a Participant in the Plan prior to his or her Termination of Employment (determined without regard to whether deferral elections have been made by the Participant for any Plan Year). Any partial year shall not be counted. Notwithstanding the previous sentence, a Participant's first Plan Year of participation and the First Plan Year of the Plan itself shall be treated as a full Plan Year for purposes of this definition, even if it is only a partial Plan Year of participation. 1.42 "Years of Service" shall mean the total number of full years in which a Participant has been employed by one or more Employers. For purposes of this definition, a year of employment shall be a 365 day period (or 366 day period in the case of a leap year) that, for the first year of employment, commences on the Employee's date of hiring and that, for any subsequent year, commences on an anniversary of that hiring date. The Committee shall make a determination as to whether any partial year of employment shall be counted as a Year of Service. ARTICLE 2 Selection, Enrollment, Eligibility ---------------------------------- 2.1 Selection by Committee. Participation in the Plan shall be limited to a select group of management or highly compensated Employees, as determined by the Committee in its sole discretion. From that group, the Committee shall select, in its sole discretion, those individuals who may actually participate in this Plan. A Participant may be removed as an active Participant by the Committee in its sole discretion as of any date, so that the Participant will not be entitled to make deferrals or receive benefit accruals under the Plan on or after that date. - ------------------------------------------------------------------------------- -5- Conseco Deferred Compensation Plan Master Plan Document - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 2.2 Enrollment and Eligibility Requirements; Commencement of Participation. (a) The Committee shall establish from time to time such enrollment requirements as it determines, in its sole discretion, are necessary. (b) A selected Employee who becomes eligible to participate in this Plan must complete, execute and return to the Committee a Plan Agreement, an Election Form, and a Beneficiary Designation Form within thirty (30) days after he or she first becomes eligible to participate in the Plan, or within such other deadline as may be established by the Committee, in its sole discretion, in order to participate. A Participant shall not be permitted to defer under this Plan any portion of his or her Base Salary, Bonus, LTIP Amounts and/or Commissions that are paid with respect to services performed prior to his or her participation commencement date, except to the extent permissible under Code Section 409A and related Treasury guidance or Regulations. (c) Each selected Employee who is eligible to participate in the Plan shall commence participation in the Plan on the date that the Committee determines, in its sole discretion, that the Employee has met all enrollment requirements required by the Committee, including returning all required documents to the Committee within the specified time period. Notwithstanding the foregoing, the Committee shall process such Participant's deferral election as soon as administratively practicable after such deferral election is submitted to and accepted by the Committee if such election is timely made under Article 3. ARTICLE 3 Deferral Commitments/Company Contribution Amounts/ -------------------------------------------------- Supplemental Contribution Amounts / Vesting/Crediting/Taxes ----------------------------------------------------------- 3.1 Minimum Deferrals. (a) Annual Deferral Amount. For each Plan Year, a Participant may elect to defer, as his or her Annual Deferral Amount, Base Salary, Bonus, Commissions and/or LTIP Amounts in the following minimum amounts for each deferral elected:
---------------------------------------- ---------------------------------------- Deferral Minimum Amount ---------------------------------------- ---------------------------------------- ---------------------------------------- ---------------------------------------- Base Salary, Bonus, Commissions $3,000 aggregate and/or LTIP Amounts ---------------------------------------- ----------------------------------------
If the Committee determines, in its sole discretion, prior to the beginning of a Plan Year that a Participant has made an election for less than the stated minimum amounts, or if no election is made, the amount deferred shall be zero. If the Committee determines, in its sole discretion, at any time after the beginning of a Plan Year that a Participant has deferred less than the stated minimum amounts for that Plan Year, any amount credited to the Participant's applicable Annual Account as the Annual Deferral Amount for that Plan Year shall be distributed to the Participant within sixty (60) days after that Plan Year. - ------------------------------------------------------------------------------- -6- Conseco Deferred Compensation Plan Master Plan Document - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- (b) Short Plan Year. Notwithstanding the foregoing, if a Participant first becomes a Participant after the first day of a Plan Year, the minimum Annual Deferral Amount shall be an amount equal to the minimum set forth above, multiplied by a fraction, the numerator of which is the number of complete months remaining in the Plan Year and the denominator of which is 12. 3.2 Maximum Deferral. (a) Annual Deferral Amount. For each Plan Year, a Participant may elect to defer, as his or her Annual Deferral Amount, Base Salary, Bonus, Commissions and/or LTIP Amounts up to the following maximum percentages for each deferral elected:
---------------------------------------- ---------------------------------------- Deferral Maximum Percentage ---------------------------------------- ---------------------------------------- ---------------------------------------- ---------------------------------------- Base Salary 75% ---------------------------------------- ---------------------------------------- ---------------------------------------- ---------------------------------------- Bonus 100% ---------------------------------------- ---------------------------------------- ---------------------------------------- ---------------------------------------- Commissions 100% ---------------------------------------- ---------------------------------------- ---------------------------------------- ---------------------------------------- LTIP Amounts 100% ---------------------------------------- ----------------------------------------
(b) Short Plan Year. Notwithstanding the foregoing, if a Participant first becomes a Participant after the first day of a Plan Year, the maximum Annual Deferral Amount shall be limited to the amount of compensation not yet earned by the Participant as of the date the Participant submits an Election Form to the Committee for acceptance, except to the extent permissible under Code Section 409A and related Treasury guidance or Regulations. For compensation that is earned based upon a specified performance period, the Participant's deferral election will apply to the portion of such compensation that is equal to (i) the total amount of compensation for the performance period, multiplied by (ii) a fraction, the numerator of which is the number of days remaining in the service period after the Participant's deferral election is made, and the denominator of which is the total number of days in the performance period. 3.3 Election to Defer; Effect of Election Form. (a) First Plan Year. In connection with a Participant's commencement of participation in the Plan, the Participant shall make an irrevocable deferral election for the Plan Year in which the Participant commences participation in the Plan, along with such other elections as the Committee deems necessary or desirable under the Plan on an Election Form. For these elections to be valid, the Election Form must be completed and signed by the Participant, delivered to the Committee within thirty (30) days of the Participant's participation commencement date and accepted by the Committee. If the Participant is or has been a Participant in a deferred compensation plan required to be aggregated with this Plan under Code Section 409A, the election must be filed in accordance with Sections 3.3(b), (c) or (d) below. (b) Subsequent Plan Years. For each succeeding Plan Year, a Participant may elect to defer Base Salary, Bonus, Commissions and LTIP Amounts, and make such other elections as the Committee deems necessary or desirable under the Plan by timely delivering a new - ------------------------------------------------------------------------------- -7- Conseco Deferred Compensation Plan Master Plan Document - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Election Form to the Committee, in accordance with its rules and procedures, by the December 31st preceding the Plan Year in which the services giving rise to such compensation are performed, or before such other deadline established by the Committee in accordance with the requirements of Code Section 409A and related Treasury guidance or Regulations. Any deferral election(s) made in accordance with this Section 3.3(b) shall be irrevocable; provided, however, that if the Committee requires Participants to make a deferral election for "performance-based compensation" by the deadline(s) described above, it may, in its sole discretion, and in accordance with Code Section 409A and related Treasury guidance or Regulations, permit a Participant to subsequently change his or her deferral election for such compensation by submitting an Election Form to the Committee no later than the deadline established by the Committee pursuant to Section 3.3(c) below. (c) Performance-Based Compensation. Notwithstanding the foregoing, the Committee may, in its sole discretion, determine that an irrevocable deferral election pertaining to "performance-based compensation" based on services performed over a period of at least twelve (12) months may be made by timely delivering an Election Form to the Committee, in accordance with its rules and procedures, no later than six (6) months before the end of the performance service period. "Performance-based compensation" shall be compensation, the payment or amount of which is contingent on pre-established organizational or individual performance criteria, which satisfies the requirements of Code Section 409A and related Treasury guidance or Regulations. In order to be eligible to make a deferral election for "performance-based compensation," a Participant must perform services continuously from a date no later than the date upon which the performance criteria for such compensation are established through the date upon which the Participant makes a deferral election for such compensation. In no event shall an election to defer "performance-based compensation" be permitted after such compensation has become both substantially certain to be paid and readily ascertainable. (d) Compensation Subject to Risk of Forfeiture. With respect to compensation (i) to which a Participant has a legally binding right to payment in a subsequent year, and (ii) that is subject to a forfeiture condition requiring the Participant's continued services for a period of at least twelve (12) months from the date the Participant obtains the legally binding right, the Committee may, in its sole discretion, determine that an irrevocable deferral election for such compensation may be made by timely delivering an Election Form to the Committee in accordance with its rules and procedures, no later than the 30th day after the Participant obtains the legally binding right to the compensation, provided that the election is made at least twelve (12) months in advance of the earliest date at which the forfeiture condition could lapse. 3.4 Withholding and Crediting of Annual Deferral Amounts. For each Plan Year, the Base Salary portion of the Annual Deferral Amount shall be withheld from each regularly scheduled Base Salary payroll in equal amounts, as adjusted from time to time for increases and decreases in Base Salary. The Bonus, Commissions and/or LTIP Amounts portion of the Annual Deferral Amount shall be withheld at the time the Bonus, Commissions or LTIP Amounts are or otherwise would be paid to the Participant, whether or not this occurs during the Plan Year itself. - ------------------------------------------------------------------------------- -8- Conseco Deferred Compensation Plan Master Plan Document - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Annual Deferral Amounts shall be credited to the Participant's Annual Account for such Plan Year at the time such amounts would otherwise have been paid to the Participant. For example, the deferred portion of a Bonus attributable to Plan Year One that would have been paid in Plan Year Two will be credited to the Annual Account for Plan Year One, but will not be credited to the account until Plan Year Two. 3.5 Company Contribution Amount. (a) For each Plan Year, an Employer may be required to credit amounts to a Participant's Annual Account in accordance with employment or other agreements entered into between the Participant and the Employer, which amounts shall be part of the Participant's Company Contribution Amount for that Plan Year. Such amounts shall be credited to the Participant's Annual Account for the applicable Plan Year on the date or dates prescribed by such agreements. (b) For each Plan Year, an Employer, in its sole discretion, may, but is not required to, credit any amount it desires to any Participant's Annual Account under this Plan, which amount shall be part of the Participant's Company Contribution Amount for that Plan Year. The amount so credited to a Participant may be smaller or larger than the amount credited to any other Participant, and the amount credited to any Participant for a Plan Year may be zero, even though one or more other Participants receive a Company Contribution Amount for that Plan Year. The Company Contribution Amount described in this Section 3.5(b), if any, shall be credited to the Participant's Annual Account for the applicable Plan Year on a date or dates to be determined by the Committee, in its sole discretion. 3.6 Supplemental Contribution Amount. For each Plan Year, an Employer, in its sole discretion, may, but is not required to, credit any amount it desires to a Participant's Annual Account under this Plan, which amount shall be the Participant's Supplemental Contribution Amount for that Plan Year. The amount so credited to a Participant may be smaller or larger than the amount credited to any other Participant, and the amount credited to any Participant for a Plan Year may be zero, even though one or more other Participants receive a Supplemental Contribution Amount for that Plan Year. Furthermore, in no event shall the crediting of a Supplemental Contribution Amount to a Participant in any Plan Year be interpreted to mean that such Participant shall receive a Supplemental Contribution Amount in any other Plan Year. The Supplemental Contribution Amount described in this Section 3.6, if any, shall be credited to the Participant's Annual Account for the applicable Plan Year on a date or dates to be determined by the Committee, in its sole discretion. 3.7 Crediting of Amounts after Benefit Distribution. Notwithstanding any provision in this Plan to the contrary, should the complete distribution of a Participant's vested Account Balance occur prior to the date on which any portion of (i) the Annual Deferral Amount that a Participant has elected to defer in accordance with Section 3.3, (ii) the Company Contribution Amount, or (iii) the Supplemental Contribution Amount, would otherwise be credited to the Participant's Account Balance, such amounts shall not be credited to the Participant's Account Balance, but shall be paid to the Participant in accordance with the applicable payment terms for the underlying compensation, as determined by the Committee, in its sole discretion. - ------------------------------------------------------------------------------- -9- Conseco Deferred Compensation Plan Master Plan Document - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 3.8 Vesting. (a) A Participant shall at all times be 100% vested in the portion of his or her Account Balance attributable to deferrals of Base Salary, Bonus, Commissions and LTIP Amounts, plus amounts credited or debited on such amounts (pursuant to Section 3.9). (b) A Participant shall be vested in the portion of his or her Account Balance attributable to any Company Contribution Amounts, plus amounts credited or debited on such amounts (pursuant to Section 3.9), in accordance with the vesting schedule(s) set forth in the employment agreement in effect between the Participant and his or her Employer at the time of the Participant's Benefit Distribution Date. If not addressed in such employment agreement, a Participant shall vest in the portion of his or her Account Balance attributable to any Company Contribution Amounts, plus amounts credited or debited on such amounts (pursuant to Section 3.9), in accordance with the vesting schedule declared by the Committee, in its sole discretion. (c) A Participant shall be vested in the portion of his or her Account Balance attributable to any Supplemental Contribution Amounts, plus amounts credited or debited on such amounts (pursuant to Section 3.9), in accordance with the vesting schedule(s) set forth the employment agreement in effect between the Participant and his or her Employer at the time of the Participant's Benefit Distribution Date. If not addressed in such employment agreement, a Participant shall vest in the portion of his or her Account Balance attributable to any Supplemental Contribution Amounts, plus amounts credited or debited on such amounts (pursuant to Section 3.9), on the basis of the Participant's Years of Plan Participation, in accordance with the following schedule:
------------------------------------------------------- -------------------------------------------- Years of Plan Participation Vested Percentage ------------------------------------------------------- -------------------------------------------- ------------------------------------------------------- -------------------------------------------- Less than 5 years 0% ------------------------------------------------------- -------------------------------------------- ------------------------------------------------------- -------------------------------------------- 5 years or more 100% ------------------------------------------------------- --------------------------------------------
(d) Notwithstanding anything to the contrary contained in this Section 3.8, in the event of a Change in Control, or upon a Participant's Retirement, death while employed by an Employer, or Disability, any amounts that are not vested in accordance with Sections 3.8(b) or 3.8(c) above, shall immediately become 100% vested (if not already vested in accordance with the above vesting schedules). (e) Notwithstanding subsection 3.8(d) above, the vesting schedules described in Sections 3.8(b) and 3.8(c) shall not be accelerated upon a Change in Control to the extent that the Committee determines that such acceleration would cause the deduction limitations of Section 280G of the Code to become effective. In the event of such a determination, the Participant may request independent verification of the Committee's calculations with respect to the application of Section 280G. In such case, the Committee must provide to the Participant within ninety (90) days of such a request an opinion from a nationally recognized accounting firm selected by the Participant (the "Accounting Firm"). The opinion shall state the Accounting Firm's opinion that any limitation in the vested - ------------------------------------------------------------------------------- -10- Conseco Deferred Compensation Plan Master Plan Document - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- percentage hereunder is necessary to avoid the limits of Section 280G and contain supporting calculations. The cost of such opinion shall be paid for by the Company. (f) Section 3.8(e) shall not prevent the acceleration of the vesting schedules described in Sections 3.8(b) and 3.8(c) if such Participant is entitled to a "gross-up" payment, to eliminate the effect of the Code section 4999 excise tax, pursuant to his or her employment agreement or other agreement entered into between such Participant and the Employer. 3.9 Crediting/Debiting of Account Balances. In accordance with, and subject to, the rules and procedures that are established from time to time by the Committee, in its sole discretion, amounts shall be credited or debited to a Participant's Account Balance in accordance with the following rules: (a) Measurement Funds. The Participant may elect one or more of the measurement funds selected by the Committee, in its sole discretion, which are based on certain mutual funds (the "Measurement Funds"), for the purpose of crediting or debiting additional amounts to his or her Account Balance. As necessary, the Committee may, in its sole discretion, discontinue, substitute or add a Measurement Fund. Each such action will take effect as of the first day of the first calendar quarter that begins at least thirty (30) days after the day on which the Committee gives Participants advance written notice of such change. (b) Election of Measurement Funds. A Participant, in connection with his or her initial deferral election in accordance with Section 3.3(a) above, shall elect, on the Election Form, one or more Measurement Fund(s) (as described in Section 3.9(a) above) to be used to determine the amounts to be credited or debited to his or her Account Balance. If a Participant does not elect any of the Measurement Funds as described in the previous sentence, the Participant's Account Balance shall automatically be allocated into the lowest-risk Measurement Fund, as determined by the Committee, in its sole discretion. The Participant may (but is not required to) elect, by submitting an Election Form to the Committee that is accepted by the Committee, to add or delete one or more Measurement Fund(s) to be used to determine the amounts to be credited or debited to his or her Account Balance, or to change the portion of his or her Account Balance allocated to each previously or newly elected Measurement Fund. If an election is made in accordance with the previous sentence, it shall apply as of the first business day deemed reasonably practicable by the Committee, in its sole discretion, and shall continue thereafter for each subsequent day in which the Participant participates in the Plan, unless changed in accordance with the previous sentence. Notwithstanding the foregoing, the Committee, in its sole discretion, may impose limitations on the frequency with which one or more of the Measurement Funds elected in accordance with this Section 3.9(b) may be added or deleted by such Participant; furthermore, the Committee, in its sole discretion, may impose limitations on the frequency with which the Participant may change the portion of his or her Account Balance allocated to each previously or newly elected Measurement Fund. (c) Proportionate Allocation. In making any election described in Section 3.9(b) above, the Participant shall specify on the Election Form, in increments of one percent (1%), the - ------------------------------------------------------------------------------- -11- Conseco Deferred Compensation Plan Master Plan Document - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- percentage of his or her Account Balance or Measurement Fund, as applicable, to be allocated/reallocated. (d) Crediting or Debiting Method. The performance of each Measurement Fund (either positive or negative) will be determined on a daily basis based on the manner in which such Participant's Account Balance has been hypothetically allocated among the Measurement Funds by the Participant. (e) No Actual Investment. Notwithstanding any other provision of this Plan that may be interpreted to the contrary, the Measurement Funds are to be used for measurement purposes only, and a Participant's election of any such Measurement Fund, the allocation of his or her Account Balance thereto, the calculation of additional amounts and the crediting or debiting of such amounts to a Participant's Account Balance shall not be considered or construed in any manner as an actual investment of his or her Account Balance in any such Measurement Fund. In the event that the Company or the Trustee (as that term is defined in the Trust), in its own discretion, decides to invest funds in any or all of the investments on which the Measurement Funds are based, no Participant shall have any rights in or to such investments themselves. Without limiting the foregoing, a Participant's Account Balance shall at all times be a bookkeeping entry only and shall not represent any investment made on his or her behalf by the Company or the Trust; the Participant shall at all times remain an unsecured creditor of the Company. 3.10 FICA and Other Taxes. (a) Annual Deferral Amounts. For each Plan Year in which an Annual Deferral Amount is being withheld from a Participant, the Participant's Employer(s) shall withhold from that portion of the Participant's Base Salary, Bonus, Commissions and/or LTIP Amounts that is not being deferred, in a manner determined by the Employer(s), the Participant's share of FICA and other employment taxes on such Annual Deferral Amount. If necessary, the Committee may reduce the Annual Deferral Amount in order to comply with this Section 3.10. (b) Company Contribution Amounts and Supplemental Contribution Amounts. When a Participant becomes vested in a portion of his or her Account Balance attributable to any Company Contribution Amounts and/or Supplemental Contribution Amounts, the Participant's Employer(s) shall withhold from that portion of the Participant's Base Salary, Bonus, Commissions and/or LTIP Amounts that is not deferred, in a manner determined by the Employer(s), the Participant's share of FICA and other employment taxes on such amounts. If necessary, the Committee may reduce the vested portion of the Participant's Company Contribution Amount or Supplemental Contribution Amount, as applicable, in order to comply with this Section 3.10. (c) Distributions. The Participant's Employer(s), or the trustee of the Trust, shall withhold from any payments made to a Participant under this Plan all federal, state and local income, employment and other taxes required to be withheld by the Employer(s), or the trustee of the Trust, in connection with such payments, in amounts and in a manner to be determined in the sole discretion of the Employer(s) and the trustee of the Trust. - ------------------------------------------------------------------------------- -12- Conseco Deferred Compensation Plan Master Plan Document - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- ARTICLE 4 Scheduled Distribution; Unforeseeable Emergencies ------------------------------------------------- 4.1 Scheduled Distribution. In connection with each election to defer an Annual Deferral Amount, a Participant may irrevocably elect to receive a Scheduled Distribution, in the form of a lump sum payment, from the Plan with respect to all or a portion of the Annual Deferral Amount. The Scheduled Distribution shall be a lump sum payment in an amount that is equal to the portion of the Annual Deferral Amount the Participant elected to have distributed as a Scheduled Distribution, plus amounts credited or debited in the manner provided in Section 3.9 above on that amount, calculated as of the close of business on or as soon as reasonably practicable following the date on which the Scheduled Distribution becomes payable. Subject to the other terms and conditions of this Plan, each Scheduled Distribution elected shall be paid out during a sixty (60) day period commencing immediately after the first day of the Plan Year designated by the Participant (the "Scheduled Distribution Date"). The Plan Year designated by the Participant must be at least three (3) Plan Years after the end of the Plan Year to which the Participant's deferral election described in Section 3.3 relates, unless otherwise provided on an Election Form approved by the Committee in its sole discretion. By way of example, if a Scheduled Distribution is elected for Annual Deferral Amounts that are earned in the Plan Year commencing January 1, 2007, the earliest Scheduled Distribution Date that may be designated by a Participant would be January 1, 2011, and the Scheduled Distribution would become payable during the sixty (60) day period commencing immediately after such Scheduled Distribution Date. 4.2 Postponing Scheduled Distributions. A Participant may elect to postpone a Scheduled Distribution described in Section 4.1 above, and have such amount paid out during a sixty (60) day period commencing immediately after an allowable alternative distribution date designated by the Participant in accordance with this Section 4.2. In order to make this election, the Participant must submit a new Scheduled Distribution Election Form to the Committee in accordance with the following criteria: (a) Such Scheduled Distribution Election Form must be submitted to and accepted by the Committee in its sole discretion at least twelve (12) months prior to the Participant's previously designated Scheduled Distribution Date; (b) The new Scheduled Distribution Date selected by the Participant must be the first day of a Plan Year, and must be at least five years after the previously designated Scheduled Distribution Date; and (c) The election of the new Scheduled Distribution Date shall have no effect until at least twelve (12) months after the date on which the election is made. - ------------------------------------------------------------------------------- -13- Conseco Deferred Compensation Plan Master Plan Document - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 4.3 Other Benefits Take Precedence Over Scheduled Distributions. Should a Benefit Distribution Date occur that triggers a benefit under Articles 5, 6, 7, 8 or 9, any Annual Deferral Amount that is subject to a Scheduled Distribution election under Section 4.1 shall not be paid in accordance with Section 4.1, but shall be paid in accordance with the other applicable Article. Notwithstanding the foregoing, the Committee shall interpret this Section 4.3 in a manner that is consistent with Code Section 409A and related Treasury guidance and Regulations. 4.4 Unforeseeable Emergencies. (a) If the Participant experiences an Unforeseeable Emergency, the Participant may petition the Committee to receive a partial or full payout from the Plan, subject to the provisions set forth below. (b) The payout, if any, from the Plan shall not exceed the lesser of (i) the Participant's vested Account Balance, calculated as of the close of business on or around the date on which the amount becomes payable, as determined by the Committee in its sole discretion, or (ii) the amount necessary to satisfy the Unforeseeable Emergency, plus amounts necessary to pay Federal, state, or local income taxes or penalties reasonably anticipated as a result of the distribution. Notwithstanding the foregoing, a Participant may not receive a payout from the Plan to the extent that the Unforeseeable Emergency is or may be relieved (A) through reimbursement or compensation by insurance or otherwise, (B) by liquidation of the Participant's assets, to the extent the liquidation of such assets would not itself cause severe financial hardship, or (C) by cessation of deferrals under this Plan. (c) If the Committee, in its sole discretion, approves a Participant's petition for payout from the Plan, the Participant shall receive a payout from the Plan within sixty (60) days of the date of such approval, and the Participant's deferrals under the Plan shall be terminated as of the date of such approval. (d) In addition, a Participant's deferral elections under this Plan shall be terminated to the extent the Committee determines, in its sole discretion, that termination of such Participant's deferral elections is required pursuant to Treas. Reg. ss.1.401(k)-1(d)(3) for the Participant to obtain a hardship distribution from an Employer's 401(k) Plan. If the Committee determines, in its sole discretion, that a termination of the Participant's deferrals is required in accordance with the preceding sentence, the Participant's deferrals shall be terminated as soon as administratively practicable following the date on which such determination is made. (e) Notwithstanding the foregoing, the Committee shall interpret all provisions relating to payout and/or termination of deferrals under this Section 4.4 in a manner that is consistent with Code Section 409A and related Treasury guidance and Regulations. - ------------------------------------------------------------------------------- -14- Conseco Deferred Compensation Plan Master Plan Document - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- ARTICLE 5 Change in Control Benefit ------------------------- 5.1 Change in Control Benefit. A Participant, in connection with his or her commencement of participation in the Plan, shall irrevocably elect on an Election Form whether to (i) receive a Change in Control Benefit upon the occurrence of a Change in Control, which shall be equal to the Participant's vested Account Balance, calculated as of the close of business on or as soon as reasonably practicable following the Participant's Benefit Distribution Date, or (ii) to have his or her Account Balance remain in the Plan upon the occurrence of a Change in Control and to have his or her Account Balance remain subject to the terms and conditions of the Plan. If a Participant does not make any election with respect to the payment of the Change in Control Benefit, then such Participant's Account Balance shall remain in the Plan upon a Change in Control and shall be subject to the terms and conditions of the Plan. 5.2 Payment of Change in Control Benefit. The Change in Control Benefit, if any, shall be paid to the Participant in a lump sum no later than sixty (60) days after the Participant's Benefit Distribution Date. Notwithstanding the foregoing, the Committee shall interpret all provisions in this Plan relating to a Change in Control Benefit in a manner that is consistent with Code Section 409A and related Treasury guidance and Regulations. ARTICLE 6 Retirement Benefit ------------------ 6.1 Retirement Benefit. A Participant who Retires shall receive, as a Retirement Benefit, his or her vested Account Balance, calculated as of the close of business on or as soon as reasonably practicable following the Participant's Benefit Distribution Date. 6.2 Payment of Retirement Benefit. (a) The Participant shall elect the form in which his or her Annual Accounts will be paid by filing an Election Form with the Committee. The Participant may elect to receive each Annual Account in the form of a lump sum or pursuant to an Annual Installment Method of up to ten (10) years. If a Participant does not make any election with respect to the payment of an Annual Account by the required deferral election date for deferrals credited to that Annual Account, then the Participant shall be deemed to have elected to receive such Annual Account as a lump sum. (b) A Participant may change the form of payment for an Annual Account by submitting an Election Form to the Committee in accordance with the following criteria: (i) The election to modify the form of payment for such Annual Account shall have no effect until at least twelve (12) months after the date on which the election is made; and (ii) The first payment related to such Annual Account shall be delayed at least five (5) years from the originally scheduled Benefit Distribution Date for such Annual Account, as described in Section 1.8(a). - ------------------------------------------------------------------------------- -15- Conseco Deferred Compensation Plan Master Plan Document - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- For purposes of applying the requirements above, the right to receive an Annual Account in installment payments shall be treated as the entitlement to a single payment. The Committee shall interpret all provisions relating to an election described in this Section 6.2 in a manner that is consistent with Code Section 409A and related Treasury guidance or Regulations. The Election Form most recently accepted by the Committee that has become effective shall govern the payout of the applicable Annual Account. (c) The lump sum payment shall be made, or installment payments shall commence, no later than sixty (60) days after the Benefit Distribution Date. Except as provided below, remaining installments, if any, shall continue in accordance with the Participant's election for each Annual Account and shall be paid no later than sixty (60) days after each anniversary of the Benefit Distribution Date. (d) If the Participant dies prior to the payment of all of the installments payable under this Article 6, no further installment payments shall be made. Instead, the remaining vested Account Balance shall be paid in a lump sum as provided in Article 9. ARTICLE 7 Termination Benefit ------------------- 7.1 Termination Benefit. A Participant who experiences a Termination of Employment shall receive, as a Termination Benefit, his or her vested Account Balance, calculated as of the close of business on or as soon as reasonably practicable following the Participant's Benefit Distribution Date. 7.2 Payment of Termination Benefit. The Termination Benefit shall be paid to the Participant in a lump sum payment no later than sixty (60) days after the Participant's Benefit Distribution Date. ARTICLE 8 Disability Benefit ------------------ 8.1 Disability Benefit. Upon a Participant's Disability, the Participant shall receive a Disability Benefit, which shall be equal to the Participant's vested Account Balance, calculated as of the close of business on or as soon as reasonably practicable following the Participant's Benefit Distribution Date. 8.2 Payment of Disability Benefit. The Disability Benefit shall be paid to the Participant in a lump sum payment no later than sixty (60) days after the Participant's Benefit Distribution Date. ARTICLE 9 Death Benefit ------------- 9.1 Death Benefit. The Participant's Beneficiary(ies) shall receive a Death Benefit upon the Participant's death, which will be equal to the Participant's vested Account Balance, calculated as - ------------------------------------------------------------------------------- -16- of the close of business on or as soon as reasonably practicable following the Participant's Benefit Distribution Date, as determined in accordance with Section 1.8(c). 9.2 Payment of Death Benefit. The Death Benefit shall be paid to the Participant's Beneficiary(ies) in a lump sum payment no later than sixty (60) days after the Participant's Benefit Distribution Date. ARTICLE 10 Beneficiary Designation ----------------------- 10.1 Beneficiary. Each Participant shall have the right, at any time, to designate his or her Beneficiary(ies) (both primary as well as contingent) to receive any benefits payable under the Plan to a beneficiary upon the death of a Participant. The Beneficiary designated under this Plan may be the same as or different from the Beneficiary designation under any other plan of an Employer in which the Participant participates. 10.2 Beneficiary Designation; Change; Spousal Consent. A Participant shall designate his or her Beneficiary by completing and signing the Beneficiary Designation Form, and returning it to the Committee or its designated agent. A Participant shall have the right to change a Beneficiary by completing, signing and otherwise complying with the terms of the Beneficiary Designation Form and the Committee's rules and procedures, as in effect from time to time. If the Participant names someone other than his or her spouse as a Beneficiary, the Committee may, in its sole discretion, determine that spousal consent is required to be provided in a form designated by the Committee, executed by such Participant's spouse and returned to the Committee. Upon the acceptance by the Committee of a new Beneficiary Designation Form, all Beneficiary designations previously filed shall be canceled. The Committee shall be entitled to rely on the last Beneficiary Designation Form filed by the Participant and accepted by the Committee prior to his or her death. 10.3 Acknowledgment. No designation or change in designation of a Beneficiary shall be effective until received and acknowledged in writing by the Committee or its designated agent. 10.4 No Beneficiary Designation. If a Participant fails to designate a Beneficiary as provided in Sections 10.1, 10.2 and 10.3 above or, if all designated Beneficiaries predecease the Participant or die prior to complete distribution of the Participant's benefits, then the Participant's designated Beneficiary shall be deemed to be his or her surviving spouse. If the Participant has no surviving spouse, the benefits remaining under the Plan to be paid to a Beneficiary shall be payable to the executor or personal representative of the Participant's estate. 10.5 Doubt as to Beneficiary. If the Committee has any doubt as to the proper Beneficiary to receive payments pursuant to this Plan, the Committee shall have the right, exercisable in its discretion, to cause the Participant's Employer to withhold such payments until this matter is resolved to the Committee's satisfaction. 10.6 Discharge of Obligations. The payment of benefits under the Plan to a Beneficiary shall fully and completely discharge all Employers and the Committee from all further obligations under this Plan with respect to the Participant, and that Participant's Plan Agreement shall terminate upon such full payment of benefits. - ------------------------------------------------------------------------------- -17- Conseco Deferred Compensation Plan Master Plan Document - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- ARTICLE 11 Leave of Absence ---------------- 11.1 Paid Leave of Absence. If a Participant is authorized by the Participant's Employer to take a paid leave of absence from the employment of the Employer, and such leave of absence does not constitute a separation from service, as determined by the Committee in accordance with Code Section 409A and related Treasury guidance and Regulations, (i) the Participant shall continue to be considered eligible for the benefits provided in Articles 4, 5, 6, 7, 8 or 9 in accordance with the provisions of those Articles, and (ii) the Annual Deferral Amount shall continue to be withheld during such paid leave of absence in accordance with Section 3.3. 11.2 Unpaid Leave of Absence. If a Participant is authorized by the Participant's Employer to take an unpaid leave of absence from the employment of the Employer for any reason, and such leave of absence does not constitute a separation from service, as determined by the Committee in accordance with Code Section 409A and related Treasury guidance and Regulations, such Participant shall continue to be eligible for the benefits provided in Articles 4, 5, 6, 7, 8 or 9 in accordance with the provisions of those Articles. However, the Participant shall be excused from fulfilling his or her Annual Deferral Amount commitment that would otherwise have been withheld during the remainder of the Plan Year in which the unpaid leave of absence is taken. During the unpaid leave of absence, the Participant shall not be allowed to make any additional deferral elections. However, if the Participant returns to employment, the Participant may elect to defer an Annual Deferral Amount for the Plan Year following his or her return to employment and for every Plan Year thereafter while a Participant in the Plan, provided such deferral elections are otherwise allowed and an Election Form is delivered to and accepted by the Committee for each such election in accordance with Section 3.3 above. 11.3 Leaves Resulting in Separation from Service. In the event that a Participant's leave of absence from his or her Employer constitutes a separation from service, as determined by the Committee in accordance with Code Section 409A and related Treasury guidance and Regulations, the Participant's vested Account Balance shall be distributed to the Participant in accordance with Article 6 or 7 of this Plan, as applicable. ARTICLE 12 Termination of Plan, Amendment or Modification ---------------------------------------------- 12.1 Termination of Plan. Although each Employer anticipates that it will continue the Plan for an indefinite period of time, there is no guarantee that any Employer will continue the Plan or will not terminate the Plan at any time in the future. Accordingly, each Employer reserves the right to Terminate the Plan. In the event of a Termination of the Plan, the Measurement Funds available to Participants following the Termination of the Plan shall be comparable in number and type to those Measurement Funds available to Participants in the Plan Year preceding the Plan Year in which the Termination of the Plan is effective. Following a Termination of the Plan, Participant Account Balances shall remain in the Plan until the Participant becomes eligible for the benefits provided in Articles 4, 5, 6, 7, 8 or 9 in accordance with the provisions of those Articles. The Termination of the Plan shall not adversely affect any Participant or Beneficiary who has become entitled to the payment of any benefits under the Plan as of the date of termination. - ------------------------------------------------------------------------------- -18- Conseco Deferred Compensation Plan Master Plan Document - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Notwithstanding the foregoing, to the extent permissible under Code Section 409A and related Treasury guidance or Regulations, during the thirty (30) days preceding or within twelve (12) months following a Change in Control, an Employer shall be permitted to (i) terminate the Plan by action of its board of directors, and (ii) distribute the vested Account Balances to Participants in a lump sum no later than twelve (12) months after the Change in Control, provided that all other substantially similar arrangements sponsored by such Employer are also terminated and all balances in such arrangements are distributed within twelve (12) months of the termination of such arrangements. 12.2 Amendment. (a) Any Employer may, at any time, amend or modify the Plan in whole or in part with respect to that Employer. Notwithstanding the foregoing, (i) no amendment or modification shall be effective to decrease the value of a Participant's vested Account Balance in existence at the time the amendment or modification is made, and (ii) no amendment or modification of this Section 12.2 or Section 13.2 of the Plan shall be effective. (b) Notwithstanding any provision of the Plan to the contrary, in the event that the Company determines that any provision of the Plan may cause amounts deferred under the Plan to become immediately taxable to any Participant under Code Section 409A and related Treasury guidance or Regulations, the Company may (i) adopt such amendments to the Plan and appropriate policies and procedures, including amendments and policies with retroactive effect, that the Company determines necessary or appropriate to preserve the intended tax treatment of the Plan benefits provided by the Plan and/or (ii) take such other actions as the Company determines necessary or appropriate to comply with the requirements of Code Section 409A and related Treasury guidance or Regulations. 12.3 Plan Agreement. Despite the provisions of Sections 12.1 and 12.2 above, if a Participant's Plan Agreement contains benefits or limitations that are not in this Plan document, the Employer may only amend or terminate such provisions with the written consent of the Participant. 12.4 Effect of Payment. The full payment of the Participant's vested Account Balance under Articles 4, 5, 6, 7, 8 or 9 of the Plan shall completely discharge all obligations to a Participant and his or her designated Beneficiaries under this Plan, and the Participant's Plan Agreement shall terminate. ARTICLE 13 Administration -------------- 13.1 Committee Duties. Except as otherwise provided in this Article 13, this Plan shall be administered by a Committee, which shall consist of the members of the Human Resources and Compensation Committee of the Board, or such other committee as the Board shall appoint. Members of the Committee may be Participants under this Plan. The Committee shall also have the discretion and authority to (i) make, amend, interpret, and enforce all appropriate rules and regulations for the administration of this Plan, and (ii) decide or resolve any and all questions, including benefit entitlement determinations and interpretations of this Plan, as may arise in connection with the Plan. Consequently, any individual serving on the Committee who is a - ------------------------------------------------------------------------------- -19- Conseco Deferred Compensation Plan Master Plan Document - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Participant shall not vote or act on any matter relating solely to himself or herself. When making a determination or calculation, the Committee shall be entitled to rely on information furnished by a Participant or the Company. 13.2 Administration Upon Change In Control. Within one hundred and twenty (120) days following a Change in Control, the individuals who comprised the Committee immediately prior to the Change in Control (whether or not such individuals are members of the Committee following the Change in Control) may, by written consent of the majority of such individuals, appoint an independent third party administrator (the "Administrator") to perform any or all of the Committee's duties described in Section 13.1 above, including without limitation, the power to determine any questions arising in connection with the administration or interpretation of the Plan, and the power to make benefit entitlement determinations. Upon and after the effective date of such appointment, (i) the Company must pay all reasonable administrative expenses and fees of the Administrator, and (ii) the Administrator may only be terminated with the written consent of the majority of Participants with an Account Balance in the Plan as of the date of such proposed termination. 13.3 Agents. In the administration of this Plan, the Committee or the Administrator, as applicable, may, from time to time, employ agents and delegate to them such administrative duties as it sees fit (including acting through a duly appointed representative) and may from time to time consult with counsel. 13.4 Binding Effect of Decisions. The decision or action of the Committee or Administrator, as applicable, with respect to any question arising out of or in connection with the administration, interpretation and application of the Plan and the rules and regulations promulgated hereunder shall be final and conclusive and binding upon all persons having any interest in the Plan. 13.5 Indemnity of Committee. All Employers shall indemnify and hold harmless the members of the Committee, any Employee to whom the duties of the Committee may be delegated, and the Administrator against any and all claims, losses, damages, expenses or liabilities arising from any action or failure to act with respect to this Plan, except in the case of willful misconduct by the Committee, any of its members, any such Employee or the Administrator. 13.6 Employer Information. To enable the Committee and/or Administrator to perform its functions, the Company and each Employer shall supply full and timely information to the Committee and/or Administrator, as the case may be, on all matters relating to the Plan, the Trust, the Participants and their Beneficiaries, the Account Balances of the Participants, the compensation of its Participants, the date and circumstances of the Retirement, Disability, death or Termination of Employment of its Participants, and such other pertinent information as the Committee or Administrator may reasonably require. ARTICLE 14 Other Benefits and Agreements ----------------------------- 14.1 Coordination with Other Benefits. The benefits provided for a Participant and Participant's Beneficiary under the Plan are in addition to any other benefits available to such Participant under any other plan or program for employees of the Participant's Employer. The Plan shall - ------------------------------------------------------------------------------- -20- Conseco Deferred Compensation Plan Master Plan Document - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- supplement and shall not supersede, modify or amend any other such plan or program except as may otherwise be expressly provided. ARTICLE 15 Claims Procedures ----------------- 15.1 Presentation of Claim. Any Participant or Beneficiary of a deceased Participant (such Participant or Beneficiary being referred to below as a "Claimant") may deliver to the Committee a written claim for a determination with respect to the amounts distributable to such Claimant from the Plan. If such a claim relates to the contents of a notice received by the Claimant, the claim must be made within sixty (60) days after such notice was received by the Claimant. All other claims must be made within 180 days of the date on which the event that caused the claim to arise occurred. The claim must state with particularity the determination desired by the Claimant. 15.2 Notification of Decision. The Committee shall consider a Claimant's claim within a reasonable time, but no later than ninety (90) days after receiving the claim. If the Committee determines that special circumstances require an extension of time for processing the claim, written notice of the extension shall be furnished to the Claimant prior to the termination of the initial ninety (90) day period. In no event shall such extension exceed a period of ninety (90) days from the end of the initial period. The extension notice shall indicate the special circumstances requiring an extension of time and the date by which the Committee expects to render the benefit determination. The Committee shall notify the Claimant in writing: (a) that the Claimant's requested determination has been made, and that the claim has been allowed in full; or (b) that the Committee has reached a conclusion contrary, in whole or in part, to the Claimant's requested determination, and such notice must set forth in a manner calculated to be understood by the Claimant: (i) the specific reason(s) for the denial of the claim, or any part of it; (ii) specific reference(s) to pertinent provisions of the Plan upon which such denial was based; (iii) a description of any additional material or information necessary for the Claimant to perfect the claim, and an explanation of why such material or information is necessary; (iv) an explanation of the claim review procedure set forth in Section 15.3 below; and (v) a statement of the Claimant's right to bring a civil action under ERISA Section 502(a) following an adverse benefit determination on review. 15.3 Review of a Denied Claim. On or before sixty (60) days after receiving a notice from the Committee that a claim has been denied, in whole or in part, a Claimant (or the Claimant's duly authorized representative) may file with the Committee a written request for a review of the denial of the claim. The Claimant (or the Claimant's duly authorized representative): - ------------------------------------------------------------------------------- -21- Conseco Deferred Compensation Plan Master Plan Document - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- (a) may, upon request and free of charge, have reasonable access to, and copies of, all documents, records and other information relevant (as defined in applicable ERISA regulations) to the claim for benefits; (b) may submit written comments or other documents; and/or (c) may request a hearing, which the Committee, in its sole discretion, may grant. 15.4 Decision on Review. The Committee shall render its decision on review promptly, and no later than sixty (60) days after the Committee receives the Claimant's written request for a review of the denial of the claim. If the Committee determines that special circumstances require an extension of time for processing the claim, written notice of the extension shall be furnished to the Claimant prior to the termination of the initial sixty (60) day period. In no event shall such extension exceed a period of sixty (60) days from the end of the initial period. The extension notice shall indicate the special circumstances requiring an extension of time and the date by which the Committee expects to render the benefit determination. In rendering its decision, the Committee shall take into account all comments, documents, records and other information submitted by the Claimant relating to the claim, without regard to whether such information was submitted or considered in the initial benefit determination. The decision must be written in a manner calculated to be understood by the Claimant, and it must contain: (a) specific reasons for the decision; (b) specific reference(s) to the pertinent Plan provisions upon which the decision was based; (c) a statement that the Claimant is entitled to receive, upon request and free of charge, reasonable access to and copies of, all documents, records and other information relevant (as defined in applicable ERISA regulations) to the Claimant's claim for benefits; and (d) a statement of the Claimant's right to bring a civil action under ERISA Section 502(a). 15.5 Legal Action. A Claimant's compliance with the foregoing provisions of this Article 15 is a mandatory prerequisite to a Claimant's right to commence any legal action with respect to any claim for benefits under this Plan. ARTICLE 16 Trust ----- 16.1 Establishment of the Trust. In order to provide assets from which to fulfill its obligations to the Participants and their beneficiaries under the Plan, the Company may establish a so-called "rabbi" trust by a trust agreement with a third party, the trustee, to which each Employer may, in its discretion, contribute cash or other property, including securities issued by the Company, to provide for the benefit payments under the Plan, (the "Trust"). 16.2 Interrelationship of the Plan and the Trust. The provisions of the Plan and the Plan Agreement shall govern the rights of a Participant to receive distributions pursuant to the Plan. The provisions of the Trust shall govern the rights of the Employers, Participants and the creditors of the Employers to the assets transferred to the Trust. Each Employer shall at all times remain liable to carry out its obligations under the Plan. - ------------------------------------------------------------------------------- -22- 16.3 Distributions From the Trust. Each Employer's obligations under the Plan may be satisfied with Trust assets distributed pursuant to the terms of the Trust, and any such distribution shall reduce the Employer's obligations under this Plan. ARTICLE 17 Miscellaneous ------------- 17.1 Status of Plan. The Plan is intended to be a plan that is not qualified within the meaning of Code Section 401(a) and that "is unfunded and is maintained by an employer primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees" within the meaning of ERISA Sections 201(2), 301(a)(3) and 401(a)(1). The Plan shall be administered and interpreted (i) to the extent possible in a manner consistent with the intent described in the preceding sentence, and (ii) in accordance with Code Section 409A and related Treasury guidance and Regulations. 17.2 Unsecured General Creditor. Participants and their Beneficiaries, heirs, successors and assigns shall have no legal or equitable rights, interests or claims in any property or assets of an Employer. For purposes of the payment of benefits under this Plan, any and all of an Employer's assets shall be, and remain, the general, unpledged unrestricted assets of the Employer. An Employer's obligation under the Plan shall be merely that of an unfunded and unsecured promise to pay money in the future. 17.3 Employer's Liability. An Employer's liability for the payment of benefits shall be defined only by the Plan and the Plan Agreement, as entered into between the Employer and a Participant. An Employer shall have no obligation to a Participant under the Plan except as expressly provided in the Plan and his or her Plan Agreement. 17.4 Nonassignability. Neither a Participant nor any other person shall have any right to commute, sell, assign, transfer, pledge, anticipate, mortgage or otherwise encumber, transfer, hypothecate, alienate or convey in advance of actual receipt, the amounts, if any, payable hereunder, or any part thereof, which are, and all rights to which are expressly declared to be, unassignable and non-transferable. No part of the amounts payable shall, prior to actual payment, be subject to seizure, attachment, garnishment or sequestration for the payment of any debts, judgments, alimony or separate maintenance owed by a Participant or any other person, be transferable by operation of law in the event of a Participant's or any other person's bankruptcy or insolvency or be transferable to a spouse as a result of a property settlement or otherwise. 17.5 Not a Contract of Employment. The terms and conditions of this Plan shall not be deemed to constitute a contract of employment between any Employer and the Participant. Such employment is hereby acknowledged to be an "at will" employment relationship that can be terminated at any time for any reason, or no reason, with or without cause, and with or without notice, unless expressly provided in a written employment agreement. Nothing in this Plan shall be deemed to give a Participant the right to be retained in the service of any Employer, or to interfere with the right of any Employer to discipline or discharge the Participant at any time. 17.6 Furnishing Information. A Participant or his or her Beneficiary will cooperate with the Committee by furnishing any and all information requested by the Committee and take such other actions as may be requested in order to facilitate the administration of the Plan and the - ------------------------------------------------------------------------------- -23- Conseco Deferred Compensation Plan Master Plan Document - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- payments of benefits hereunder, including but not limited to taking such physical examinations as the Committee may deem necessary. 17.7 Terms. Whenever any words are used herein in the masculine, they shall be construed as though they were in the feminine in all cases where they would so apply; and whenever any words are used herein in the singular or in the plural, they shall be construed as though they were used in the plural or the singular, as the case may be, in all cases where they would so apply. 17.8 Captions. The captions of the articles, sections and paragraphs of this Plan are for convenience only and shall not control or affect the meaning or construction of any of its provisions. 17.9 Governing Law. Subject to ERISA, the provisions of this Plan shall be construed and interpreted according to the internal laws of the State of Delaware without regard to its conflicts of laws principles. 17.10 Notice. Any notice or filing required or permitted to be given to the Committee under this Plan shall be sufficient if in writing and hand-delivered, or sent by registered or certified mail, to the address below: Conseco Services LLC ------------------------------------------------------- ------------------------------------------------------- Attn: Vice President - Compensation and Benefits ------------------------------------------------------- ------------------------------------------------------- 11825 North Pennsylvania Street ------------------------------------------------------- ------------------------------------------------------- P.O. Box 194 ------------------------------------------------------- ------------------------------------------------------- Carmel, Indiana 46032 ------------------------------------------------------- Such notice shall be deemed given as of the date of delivery or, if delivery is made by mail, as of the date shown on the postmark on the receipt for registration or certification. Any notice or filing required or permitted to be given to a Participant under this Plan shall be sufficient if in writing and hand-delivered, or sent by mail, to the last known address of the Participant. 17.11 Successors. The provisions of this Plan shall bind and inure to the benefit of the Participant's Employer and its successors and assigns and the Participant and the Participant's designated Beneficiaries. 17.12 Spouse's Interest. The interest in the benefits hereunder of a spouse of a Participant who has predeceased the Participant shall automatically pass to the Participant and shall not be transferable by such spouse in any manner, including but not limited to such spouse's will, nor shall such interest pass under the laws of intestate succession. 17.13 Validity. In case any provision of this Plan shall be illegal or invalid for any reason, said illegality or invalidity shall not affect the remaining parts hereof, but this Plan shall be construed and enforced as if such illegal or invalid provision had never been inserted herein. 17.14 Incompetent. If the Committee determines in its discretion that a benefit under this Plan is to be paid to a minor, a person declared incompetent or to a person incapable of handling the disposition of that person's property, the Committee may direct payment of such benefit to the guardian, legal representative or person having the care and custody of such minor, incompetent or incapable person. The Committee may require proof of minority, incompetence, incapacity or - ------------------------------------------------------------------------------- -24- Conseco Deferred Compensation Plan Master Plan Document - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- guardianship, as it may deem appropriate prior to distribution of the benefit. Any payment of a benefit shall be a payment for the account of the Participant and the Participant's Beneficiary, as the case may be, and shall be a complete discharge of any liability under the Plan for such payment amount. 17.15 Court Order. The Committee is authorized to comply with any court order in any action in which the Plan or the Committee has been named as a party, including any action involving a determination of the rights or interests in a Participant's benefits under the Plan. Notwithstanding the foregoing, the Committee shall interpret this provision in a manner that is consistent with Code Section 409A and other applicable tax law. In addition, if necessary to comply with a qualified domestic relations order, as defined in Code Section 414(p)(1)(B), pursuant to which a court has determined that a spouse or former spouse of a Participant has an interest in the Participant's benefits under the Plan, the Committee, in its sole discretion, shall have the right to immediately distribute the spouse's or former spouse's interest in the Participant's benefits under the Plan to such spouse or former spouse. 17.16 Distribution in the Event of Income Inclusion Under 409A. If any portion of a Participant's Account Balance under this Plan is required to be included in income by the Participant prior to receipt due to a failure of this Plan to meet the requirement of Code Section 409A and related Treasury guidance or Regulations, the Participant may petition the Committee or Administrator, as applicable, for a distribution of that portion of his or her Account Balance that is required to be included in his or her income. Upon the grant of such a petition, which grant shall not be unreasonably withheld, the Participant's Employer shall distribute to the Participant immediately available funds in an amount equal to the portion of his or her Account Balance required to be included in income as a result of the failure of the Plan to meet the requirements of Code Section 409A and related Treasury guidance or Regulations, which amount shall not exceed the Participant's unpaid vested Account Balance under the Plan. If the petition is granted, such distribution shall be made within ninety (90) days of the date when the Participant's petition is granted. Such a distribution shall affect and reduce the Participant's benefits to be paid under this Plan. 17.17 Deduction Limitation on Benefit Payments. If an Employer reasonably anticipates that the Employer's deduction with respect to any distribution from this Plan would be limited or eliminated by application of Code Section 162(m), then to the extent deemed necessary by the Employer to ensure that the entire amount of any distribution from this Plan is deductible, the Employer may delay payment of any amount that would otherwise be distributed from this Plan. Any amounts for which distribution is delayed pursuant to this Section shall continue to be credited/debited with additional amounts in accordance with Section 3.9 above. The delayed amounts (and any amounts credited thereon) shall be distributed to the Participant (or his or her Beneficiary in the event of the Participant's death) at the earliest date the Employer reasonably anticipates that the deduction of the payment of the amount will not be limited or eliminated by application of Code Section 162(m). 17.18 Insurance. The Employers, on their own behalf or on behalf of the trustee of the Trust, and, in their sole discretion, may apply for and procure insurance on the life of the Participant, in such amounts and in such forms as the Trust may choose. The Employers or the trustee of the Trust, as the case may be, shall be the sole owner and beneficiary of any such insurance. The - ------------------------------------------------------------------------------- -25- Conseco Deferred Compensation Plan Master Plan Document - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Participant shall have no interest whatsoever in any such policy or policies, and at the request of the Employers shall submit to medical examinations and supply such information and execute such documents as may be required by the insurance company or companies to whom the Employers have applied for insurance. IN WITNESS WHEREOF, the Company has signed this Plan document as of August 2, 2006. "Company" Conseco Services, LLC. an Indiana limited liability company By:/s/Daniel J. Murphy ------------------------------------------- Title: President - ------------------------------------------------------------------------------- -26- EX-10 3 exhibit1025.txt EXHIBIT 10.25 Exhibit 10.25 EMPLOYMENT AGREEMENT This EMPLOYMENT AGREEMENT, dated as of the 3rd day of May, 2005 is between Conseco Services, LLC, an Indiana limited liability company ("Company"), and Susan L. Menzel ("Executive"). WHEREAS, the services of Executive and her managerial and professional experience are of value to the Company. WHEREAS, the Company desires to have the benefit and advantage of the services of Executive for an extended period to assist the Company and its parent, Conseco, Inc. ("Conseco") upon the terms and conditions set forth herein. NOW, THEREFORE, in consideration of the foregoing and the mutual covenants contained herein, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: 1. Employment. The Company hereby employs Executive and Executive hereby accepts employment upon the terms and conditions hereinafter set forth. 2. Term. The effective date of this agreement (the "Agreement") shall be May 30, 2005 (the "Effective Date"). Subject to the provisions for termination as provided in Section 10 hereof, the term of Executive's employment under this Agreement shall be the period beginning on the Effective Date and ending on the first anniversary of the Effective Date. The term of Executive's employment shall be automatically renewed for successive one-year terms on May 30, 2006 and each succeeding May 30 unless either party elects not to renew this Agreement by serving written notice of such election not to renew on the other party at least 60 days prior to such May 30. As used in this Agreement, the "Term" is the period ending on May 30, 2006 or, if this Agreement has been renewed, the one-year period relating to the last renewal. The Term shall end upon the termination of Executive's employment with the Company. 3. Duties. During the Term, Executive shall be engaged by the Company in the capacity of Executive Vice President, Human Resources. Executive shall report to the President and Chief Executive Officer of Conseco. 4. Extent of Services. During the Term, subject to the direction and control of the President of Conseco, Executive shall have the power and authority commensurate with her executive status and necessary to perform her duties hereunder. Executive shall devote her entire employable time, attention and best efforts to the business of the Company and, during the Term, shall not, without the consent of the Company, be actively engaged in any other business activity, whether or not such business activity is pursued for gain, profit or other pecuniary advantage; provided, however, that, subject to Section 9 hereof, this shall not be construed as preventing Executive from serving on boards of professional, community, civic, education, charitable and corporate organizations on which she presently serves or may choose to serve or investing her assets in such form or manner as will not require any services on the part of Executive in the operation of the affairs of the companies in which such investments are made (to the extent not in violation of the nonsolicitation provisions of Section 9 hereof); provided, however, that for-profit corporate organizations shall be limited to those mutually agreed upon by Executive and the Company. 5. Compensation. During the Term: (a) As compensation for services hereunder rendered during the Term hereof, Executive shall receive an initial base salary ("Base Salary") of Three Hundred Thousand Dollars ($300,000) per year payable in equal installments in accordance with the Company's payroll procedure for its salaried executives. Salary payments and other payments under this Agreement shall be subject to withholding of taxes and other appropriate and customary amounts. The Base Salary shall be reviewed at least annually at the same time as other senior executives, and Executive may receive increases in her Base Salary from time to time, based upon her performance, subject to approval of the Company. The Base Salary, as in effect from time to time, may not be decreased. (b) In addition to Base Salary, Executive will have an opportunity to earn a bonus each year as determined by the Company, with a target annual bonus equal to 50% of Executive's Base Salary (the "Target Bonus") and a maximum annual bonus of 100% of Executive's Base Salary with respect to any calendar year, with such bonus payable at such time that other similar payments are made to other Company executives. For purposes of clarification, annual executive bonuses are generally paid in March of the year following the year with respect to which such bonuses are payable, if Executive remains employed with the Company through such date. Notwithstanding the above, (i) Executive is guaranteed a minimum bonus for the calendar year 2005 performance period equal to One Hundred Fifty Thousand ($150,000) and (ii) Executive's pro-rata bonus for her final year of employment will be paid at the same time that similar payments are made to other Company executives if Executive remains employed through the end of the Term ending on May 30 of any year. The Target Bonus will be based on financial and other objective targets that the Company reasonably believes are reasonably attainable at the time that they are set. (c) As soon as reasonably practicable, Executive will receive an award of (i) options to purchase 50,000 shares of common stock with an exercise price equal to the fair market value on the date of the grant and (ii) 10,000 shares of restricted stock. One hundred percent (100%) of the options will vest over a 4-year period beginning on the date of the grant of the equity awards, with one-fourth vesting on each anniversary of such grant date. Fifty percent (50%) of the restricted stock will vest on the second anniversary of the date of grant of the restricted stock, with the other fifty percent (50%) vesting on the third anniversary of such grant date. Executive shall also be eligible to participate in and receive future grants under any stock option or equity-based program offered by Conseco to senior executives, subject to the discretion of the board of directors of Conseco, Inc. (the "Board"). 2 6. Fringe Benefits. During the Term: (a) Executive shall be entitled to participate in such existing executive benefit plans and insurance programs offered by the Company, or which it may adopt from time to time, for its executive management or supervisory personnel generally, in accordance with the eligibility requirements for participation therein. Nothing herein shall be construed so as to prevent the Company from modifying or terminating any executive benefit plans or programs, or executive fringe benefits, that it may adopt from time to time. (b) Executive shall be entitled to four weeks of vacation with pay each year. (c) Executive may incur reasonable expenses for promoting the Company's business, including expenses for entertainment, travel, and similar items. The Company shall reimburse Executive for all such reasonable expenses upon Executive's periodic presentation of an itemized account of such expenditures on a timely basis in accordance with the Company's reimbursement policy. The Company agrees to pay Executive an additional amount to cover the incremental additional income taxes incurred by Executive, if any, with respect to payment or reimbursement of any reasonable business expenses pursuant to this subsection (c). (d) Executive shall be entitled to reimbursement of the legal fees incurred by Executive in connection with this Agreement. 7. Disability. If Executive shall become physically or mentally disabled during the Term to the extent that her ability to perform her duties and services hereunder is materially and adversely impaired, her Base Salary, bonus and other compensation provided herein shall continue while she remains employed by the Company; provided, that if such disability (as confirmed by competent medical evidence) continues for at least six (6) consecutive months, the Company may terminate Executive's employment hereunder, in which case the Company immediately shall pay Executive a cash payment equal to (i) her annual Base Salary as provided in Section 5(a) hereof to the extent earned but unpaid as of the date of termination and (ii) a pro-rata portion of the Target Bonus for the year in which her disability occurs plus the Target Bonus for the preceding year if her disability occurs after year-end but before such bonuses are paid. However, any options or restricted stock held by Executive on the date of termination shall vest only through the date of termination according to the normal vesting schedule applicable to such options or restricted stock and Executive shall not receive any accelerated or additional vesting of such stock or options due to termination under this Section 7 on or after such date. No payments or vesting under this paragraph will be made if such disability arose primarily from (a) chronic use of intoxicants, drugs or narcotics (other than drugs prescribed to Executive by a physician and used by Executive for their intended purpose for which they had been prescribed) or (b) intentionally self-inflicted injury or intentionally self-induced illness. 8. Disclosure of Information. Executive acknowledges that, in and as a result of her employment with the Company, she has been and will be making use of, acquiring and/or adding to confidential information of the Company and its affiliates of a special and unique nature and value. As a material inducement to the Company to enter into this Agreement and to pay to 3 Executive the compensation stated in Section 5, as well as any additional benefits stated herein, Executive covenants and agrees that she shall not, at any time while she is employed by the Company or at any time thereafter, directly or indirectly, divulge or disclose for any purpose whatsoever, any confidential information (whether or not specifically labeled or identified as "confidential information"), in any form or medium, that has been obtained by or disclosed to her as a result of her employment with the Company and which the Company or any of its affiliates has taken appropriate steps to safeguard, except to the extent that such confidential information (a) becomes a matter of public record or is published in a newspaper, magazine or other periodical available to the general public, other than as a result of any act or omission of Executive, (b) is required to be disclosed by any law, regulation or order of any court or regulatory commission, department or agency, in which event Executive shall give prompt notice of such requirement to the Company to enable the Company to seek an appropriate protective order or confidential treatment, or (c) must be disclosed to enable Executive properly to perform her duties under this Agreement. Upon the termination of Executive's employment, Executive shall return such information (in whatever form) obtained from or belonging to the Company or any of its affiliates which she may have in her possession or control. 9. Covenants Against Solicitation. Executive acknowledges that the services she is to render to the Company and its affiliates are of a special and unusual character, with a unique value to the Company and its affiliates, the loss of which cannot adequately be compensated by damages or an action at law. In view of the unique value to the Company and its affiliates of the services of Executive for which the Company has contracted hereunder, because of the confidential information to be obtained by, or disclosed to, Executive as set forth in Section 8 above, and as a material inducement to the Company to enter into this Agreement and to pay to Executive the compensation stated in Section 5 hereof, as well as any additional benefits stated herein, and other good and valuable consideration, Executive covenants and agrees that throughout the period Executive remains employed or compensated hereunder and for one year (or 18 months in the event that Executive is receiving salary continuation pursuant to Section 11(d)) thereafter, Executive shall not, directly or indirectly, anywhere in the United States of America (i) solicit or attempt to convert to other insurance carriers or other corporations, persons or other entities providing these same or similar products or services provided by the Company and its affiliates, any customers or policyholders of the Company or any of its affiliates or (ii) solicit for employment or employ any individual who was employed by the Company or any of its affiliates during the Term of this Agreement. Should any particular covenant or provision of this Section 9 be held unreasonable or contrary to public policy for any reason, including, without limitation, the time period, geographical area, or scope of activity covered by any restrictive covenant or provision, the Company and Executive acknowledge and agree that such covenant or provision shall automatically be deemed modified such that the contested covenant or provision shall have the closest effect permitted by applicable law to the original form and shall be given effect and enforced as so modified to whatever extent would be reasonable and enforceable under applicable law. 4 10. Termination. (a) Either the Company or Executive may terminate her employment at any time for any reason upon written notice to the other. The Company may terminate Executive's employment for Just Cause pursuant to Section 10(b) below or in a Control Termination pursuant to Section 10(c) below. Executive's employment shall also terminate (i) upon nonrenewal of the agreement, (ii) upon the death of Executive, (iii) after disability of Executive pursuant to Section 7 hereof or (iv) by Executive's termination of employment With Reason. (b) The Company may terminate Executive's employment at any time for Just Cause. For purposes of this Agreement, "Just Cause" shall mean: (i) (A) a material breach by Executive of this Agreement not cured to the Company's reasonable satisfaction within 15 days after written notice to Executive by the Company, (B) a material breach of Executive's duty of loyalty to the Company or its affiliates, or (C) willful malfeasance or fraud or dishonesty of a substantial nature in performing Executive's services on behalf of the Company or its affiliates, which in each case is willful and deliberate on Executive's part and committed in bad faith or without reasonable belief that such breach or action is in the best interests of the Company or its affiliates; (ii) Executive's use of alcohol or drugs (other than drugs prescribed to Executive by a physician and used by Executive for their intended purposes for which they had been prescribed) or other repeated conduct which materially and repeatedly interferes with the performance of her duties hereunder, which materially compromises the integrity or the reputation of the Company or its affiliates, or which results in other substantial economic harm to the Company or its affiliates; (iii) Executive's conviction by a court of law, admission that she is guilty, or entry of a plea of nolo contendere with regard to a felony or other crime involving moral turpitude; (iv) Executive's unscheduled absence from her employment duties other than as a result of illness or disability, for whatever cause, for a period of more than ten (10) consecutive days, without consent from the Company prior to the expiration of the ten (10) day period; or (v) Executive's failure to take action or to abstain from taking action, as directed in writing by a member of the board or a higher ranking executive of the Company or Conseco, where such failure continues after Executive has been given written notice of such failure and at least five (5) business days thereafter to cure such failure. No termination shall be deemed to be a termination by the Company for Just Cause if the termination is as a result of Executive refusing to act in a manner that would be a violation of applicable law or where Executive acts (or refrains from taking action) in good faith in accordance with directions of a member of the board or higher ranking executive but was unable to attain the desired results because such results were inherently unreasonable or unattainable. (c) The Company may terminate Executive's employment in a Control Termination. A "Control Termination" shall mean any termination by the Company (or its successor) of Executive's employment for any reason within six months in anticipation of or within two years following a Change in Control of the Company. 5 The term "Change in Control" shall mean the occurrence of any of the following: (i) the acquisition (other than an acquisition in connection with a "Non-Control Transaction") by any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "1934 Act")) of "beneficial ownership" (as such term is defined in Rule 13d-3 promulgated under the 1934 Act), directly or indirectly, of securities of the Company or its Ultimate Parent representing 51% or more of the combined voting power of the then outstanding securities of Conseco or its Ultimate Parent entitled to vote generally with respect to the election of the board of directors of Conseco or its Ultimate Parent; or (ii) as a result of or in connection with a tender or exchange offer or contest for election of directors, individual board members of Conseco (identified as of the date of commencement of such tender or exchange offer, or the commencement of such election contest, as the case may be) cease to constitute at least a majority of the board of directors of Conseco; or (iii) the consummation of a merger, consolidation or reorganization with or into Conseco unless (x) the stockholders of Conseco immediately before such transaction beneficially own, directly or indirectly, immediately following such transaction securities representing 51% or more of the combined voting power of the then outstanding securities entitled to vote generally with respect to the election of the board of directors of Conseco (or its successor) or, if applicable, the Ultimate Parent and (y) individual board members of Conseco (identified as of the date that a binding agreement providing for such transaction is signed) constitute at least a majority of the board of directors of Conseco (or its successor) or, if applicable, the Ultimate Parent (a transaction to which clauses (x) and (y) apply, a "Non-Control Transaction"). For purposes of this Agreement, "Ultimate Parent" shall mean the parent corporation (or if there is more than one parent corporation, the ultimate parent corporation) that, following a transaction, directly or indirectly beneficially owns a majority of the voting power of the outstanding securities entitled to vote with respect to the election of the board of directors of Conseco (or its successor). (d) At Executive's option, she may terminate employment with the Company "With Reason" provided one or more of the following conditions are met: (i) her role or duties have been materially diminished by changes in responsibilities or authority; (ii) Executive is required to report to anyone other than the President of Conseco; (iii) Executive is required to relocate her residence without her consent (recognizing that a significant portion of her time will be spent at the Company's offices in Carmel, Indiana and in Philadelphia, Pennsylvania); (iv) any reduction in Executive's Base Salary or Target Bonus; (v) any change in Executive's title without her prior written consent; (vi) a material breach by the Company of this Agreement not cured to Executive's reasonable satisfaction within 15 days after written notice to the Company by Executive; or (vii) 6 there is a "Change in Control" as defined in Section 10(c) and, following Executive's written request made prior to the Change in Control, the ultimate parent entity or entities directly or indirectly gaining control of a majority of Conseco's board of directors or outstanding securities entitled to vote with respect to Conseco's board of directors fails to affirm and guarantee the Company's current and future obligations under this Agreement. (e) Upon termination of Executive's employment with the Company for any reason (whether voluntary or involuntary), Executive shall be deemed to have voluntarily resigned from all positions that Executive may then hold with the Company and any of its affiliates; provided that such deemed resignation shall not adversely affect Executive's rights to compensation or benefits under Section 11 of this Agreement and shall not affect the determination of whether Executive's termination was for Just Cause. 11. Payments Following Termination. (a) In the event that Executive's employment is terminated by the Company for Just Cause (as defined herein), upon non-renewal by the Company or Executive, upon expiration of the Term of this Agreement or Executive voluntarily resigns, then the Company immediately shall pay Executive a cash payment of her Base Salary as provided in Section 5(a) hereof that was earned but unpaid as of the date of termination. Any options or restricted stock held by Executive on the date of termination shall vest only through the date of termination according to the normal vesting schedule applicable to such options or restricted stock, and Executive shall not receive any accelerated or additional vesting of such stock or options on or after such date. (b) In the event Executive's employment is terminated by the death of Executive, then the Company shall pay Executive's estate a cash lump sum of the sum of (i) the remaining payments of Base Salary described in Section 5(a) that would have been payable to Executive through the date of death and (ii) a pro-rata portion of the Target Bonus for the year in which her death occurs plus the Target Bonus for the preceding year if her death occurs after year-end but before such bonuses are paid. Any options or restricted stock held by Executive on the date of termination shall vest only through the date of termination according to the normal vesting schedule applicable to such options or restricted stock, and Executive shall not receive any accelerated or additional vesting of such stock or options on or after such date. (c) In the event that Executive is terminated by the Company without Just Cause (and other than non-renewal, death, disability or a Control Termination) or by Executive With Reason or by non-renewal of this Agreement by the Company, then the Company shall pay Executive (i) on a basis consistent with the timing of the Company's normal payroll processing, the remaining payments of Base Salary described in Section 5(a) that would have been payable to Executive through the date of her termination of employment, (ii) a cash lump sum equal to her Base Salary and Target Bonus and (iii) a cash lump sum equal to a pro-rata portion of the Target Bonus for the year in which the date of termination occurs plus the Target Bonus for the preceding year if termination occurs after year-end but before such bonuses are paid. Executive shall also be entitled to medical benefits for 12 months at active employee contribution rates and senior executive 7 level outplacement services by a firm selected by Executive and reasonably approve d by the Company. Any options or restricted stock held by Executive on the date of termination shall vest only through the date of termination according to the normal vesting schedule applicable to such options or restricted stock, and Executive shall not receive any accelerated or additional vesting of such stock or options on or after such date. (d) In the event that Executive is terminated by the Company (or its successor) in a Control Termination as so defined, then the Company shall pay Executive (i) on a basis consistent with the timing of the Company's normal payroll processing, the remaining payments of Base Salary described in Section 5(a) that would have been payable to Executive through the date of her termination of employment, (ii) a cash lump sum equal to one and one-half times her Base Salary and Target Bonus and (iii) a cash lump sum equal to a pro-rata portion of the Target Bonus for the year in which the date of termination occurs plus the Target Bonus for the preceding year if termination occurs after year-end but before such bonuses are paid. Executive shall also be entitled to medical benefits for 18 months at active employee contribution rates and senior executive level outplacement services by a firm selected by Executive and reasonably approved by the Company. To the extent that Executive is terminated in a Control Termination that occurs in anticipation of a Change in Control, any options or restricted stock held by Executive shall fully vest, retroactive to the date of termination, upon the occurrence of the Change in Control. (e) Notwithstanding anything to the contrary, in the event that Executive's employment terminates, the Company shall pay or provide to Executive (i) in accordance with its standard payroll practice, Executive's accrued vacation, (ii) any expenses for which she is entitled to reimbursement, (iii) vested benefits under the Company's employee benefit plans and (iv) continuation or conversion rights under the Company's employee benefit plans, to the extent Executive would otherwise be entitled to such rights under the terms of such plans. (f) Notwithstanding anything to the contrary, payment of severance under this Agreement is conditioned upon the execution by Executive of a separation and release agreement in a form acceptable to Executive and the Company and the observation of such waiting or revocation periods, if any, before and after execution of the agreement by Executive as are required by law, such as, for example, the waiting or revocation periods required for a waiver and release to be effective with respect to claims under the Age Discrimination in Employment Act, provided that the Company delivers to Executive such agreement within seven days of the date of her termination. 12. Change in Control. In the event of a Change in Control, Executive will be entitled to the full vesting of any options and restricted stock held by Executive on the date of such Change in Control. 13. Character of Termination Payments. The amounts payable to Executive upon any termination of her employment shall be considered severance pay in consideration of past 8 services rendered on behalf of the Company and her continued service from the date hereof to the date she becomes entitled to such payments and shall be the sole amount of severance pay to which Executive is entitled from the Company and its affiliates upon termination of her employment during the Term. Executive shall have no duty to mitigate her damages by seeking other employment. 14. Representations of the Parties. (a) The Company represents and warrants to Executive that (i) this Agreement has been duly authorized, executed and delivered by the Company and constitutes valid and binding obligations of the Company; and (ii) the employment of Executive on the terms and conditions contained in this Agreement will not conflict with, result in a breach or violation of, constitute a default under, or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company pursuant to: (A) the certificate of formation, (B) the terms of any indenture, contract, lease, mortgage, deed of trust, note, loan agreement or other agreement, obligation, condition, covenant or instrument to which the Company is a party or bound or to which its property is subject, or (C) any statute, law, rule, regulation, judgment, order or decree applicable to the Company, or any regulatory body, administrative agency, governmental body, arbitrator or other authority having jurisdiction over the Company. (b) Executive represents and warrants to the Company that: (i) this Agreement has been duly executed and delivered by Executive and constitutes a valid and binding obligation of Executive; and (ii) neither the execution of this Agreement by Executive nor her employment by the Company on the terms and conditions contained herein will conflict with, result in a breach or violation of, or constitute a default under any agreement, obligation, condition, covenant or instrument to which Executive is a party or bound or to which her property is subject, or any statute, law, rule, regulation, judgment, order or decree applicable to Executive of any court, regulatory body, administrative agency, governmental body, arbitrator or other authority having jurisdiction over Executive or any of her property. 15. Arbitration of Disputes; Injunctive Relief. (a) Except as provided in subsection (b) below, any controversy or claim arising out of or relating to this Agreement or the breach thereof shall be settled by binding arbitration in the City of Indianapolis, Indiana, in accordance with the laws of the State of Indiana by three arbitrators, one of whom shall be appointed by the Company, one by Executive, and the third of whom shall be appointed by the first two arbitrators. If the first two arbitrators cannot agree on the appointment of a third arbitrator, then the third arbitrator shall be appointed by the Chief Judge of the United States District Court for the Southern District of Indiana. The arbitration shall be conducted in accordance with the American Arbitration Association's National Rules For The Resolution of Employment Disputes, except with respect to the selection of arbitrators, which shall be as provided in this Section. Judgment upon the award rendered by the arbitrators may be entered in any court having jurisdiction thereof. The arbitrators shall have the discretionary authority to award costs, expenses and fees, including reasonable legal fees, 9 to the prevailing party. Except as otherwise awarded by the arbitrators, each party shall pay its own costs and expenses incurred in connection with the enforcement of this Agreement, regardless of the final outcome. (b) Executive acknowledges that a breach or threatened breach by Executive of Sections 8 or 9 of this Agreement will give rise to irreparable injury to the Company and that money damages will not be adequate relief for such injury. Notwithstanding paragraph (a) above, the Company and Executive agree that the Company may seek and obtain injunctive relief, including, without limitation, temporary restraining orders, preliminary injunctions and/or permanent injunctions, in a court of proper jurisdiction to restrain or prohibit a breach or threatened breach of Section 8 or 9 of this Agreement. Nothing herein shall be construed as prohibiting the Company from pursuing any other remedies available to the Company for such breach or threatened breach, including the recovery of damages from Executive. 16. Notices. Any notice required or permitted to be given under this Agreement shall be sufficient if in writing and if sent by registered mail to her residence, in the case of Executive, or to the business office of its General Counsel, in the case of the Company. 17. Waiver of Breach and Severability. The waiver by either party of a breach of any provision of this Agreement by the other party shall not operate or be construed as a waiver of any subsequent breach by either party. In the event any provision of this Agreement is found to be invalid or unenforceable, it may be severed from the Agreement, and the remaining provisions of the Agreement shall continue to be binding and effective. 18. Entire Agreement. Other than any equity award agreements entered into pursuant to an applicable long-term incentive plan, this instrument contains the entire agreement of the parties and, as of the Effective Date, supersedes all other obligations of the Company and its affiliates under other agreements or otherwise. The compensation and benefits to be paid under the terms of this Agreement are in lieu of all other compensation or benefits to which Executive is entitled from Conseco, the Company, and its affiliates. This Agreement may not be changed orally, but only by an instrument in writing signed by the party against whom enforcement of any waiver, change, modification, extension or discharge is sought. 19. Binding Agreement and Governing Law; Assignment Limited. This Agreement shall be binding upon and shall inure to the benefit of the parties and their lawful successors in interest (including, without limitation, Executive's estate, heirs and personal representatives) and, except for issues or matters as to which federal law is applicable, shall be construed in accordance with and governed by the laws of the State of Indiana. This Agreement is personal to each of the parties hereto, and neither party may assign or delegate any of its rights or obligations hereunder without the prior written consent of the other. 20. Indemnification. If Executive was or is made a party or is threatened to be made a party to or is otherwise involved (including involvement as a witness) in any action, suit or proceeding, whether civil, criminal, administrative or investigative (a "Proceeding"), by reason of the fact that she is or was an officer or employee of the Company or any of its affiliates, Executive shall be indemnified and held harmless by the Company to the fullest extent authorized by the Delaware General Corporation Law, as the same exists or may hereafter be 10 amended (but, in the case of any such amendment, only to the extent that such amendment permits the Company to provide broader indemnification rights than permitted prior thereto), against all expense, liability and loss (including attorneys' fees, judgments, fines, excise taxes or penalties and amounts paid in settlement) reasonably incurred or suffered by Executive in connection therewith and such indemnification shall continue as to Executive if she ceases to be an officer or employee and shall inure to the benefit of Executive's heirs, executors and administrators; provided, however, that the Company shall indemnify Executive in connection with a proceeding (or part thereof) initiated by Executive only if such Proceeding (or part thereof) was authorized by the board of directors of the Company. The right to indemnification conferred in this paragraph shall include the obligation of the Company to pay the expenses incurred in defending any such proceeding in advance of its final disposition (an "Advance of Expenses"); provided, however, that, if and to the extent that the Delaware General Corporation Law requires, an Advance of Expenses incurred by Executive in her capacity as an officer or employee shall be made only upon delivery to the Company of an undertaking, by or on behalf of Executive, to repay all amounts so advanced if it shall ultimately be determined by final judicial decision from which there is no further right to appeal that Executive is not entitled to be indemnified for such expenses under this paragraph or otherwise. 21. No Third Party Beneficiaries. The terms and provisions of this Agreement are intended solely for the benefit of each party hereto and their respective successors or permitted assigns, and it is not intended to confer third-party beneficiary rights upon any other person. 22. Survival. This Agreement shall survive the end of the Term for as long as necessary to carry out the provisions of this Agreement. 23. Construction. Each and every provision of this Agreement shall be construed as though both parties participated equally in the drafting of this Agreement. 24. Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one and the same instrument. * * * 11 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written, effective as of the Effective Date. COMPANY: CONSECO SERVICES, LLC /s/Daniel J. Murphy ------------------------------------ Daniel J. Murphy President EXECUTIVE: /s/Susan L. Menzel ------------------------------------ Susan L. Menzel 12 EX-10 4 exhibit1026.txt EXHIBIT 10.26 Exhibit 10.26 EMPLOYMENT AGREEMENT This EMPLOYMENT AGREEMENT, dated as of the 17th day of January, 2006 is between Conseco Services, LLC, an Indiana limited liability company ("Company"), and William D. Fritts, Jr. ("Executive"). WHEREAS, the services of Executive and his managerial and professional experience are of value to the Company. WHEREAS, the Company desires to continue to have the benefit and advantage of the services of Executive for an extended period to assist the Company and Conseco, Inc. ("Conseco") upon the terms and conditions set forth herein. NOW, THEREFORE, in consideration of the foregoing and the mutual covenants contained herein, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: 1. Employment. The Company hereby employs Executive and Executive hereby accepts employment upon the terms and conditions hereinafter set forth. 2. Term. The effective date of this agreement (the "Agreement") shall be the date set forth above (the "Effective Date"). Subject to the provisions for termination as provided in Section 10 hereof, the term of Executive's employment under this Agreement shall be the period beginning on the Effective Date and ending on January 31, 2007. As used in this Agreement, the "Term" is the period ending on January, 2007. The Term shall end upon the termination of Executive's employment with the Company. 3. Duties. During the Term, Executive shall be engaged by the Company in the capacity of Executive Vice President, Government Relations of the Company. Executive shall report to the Executive Vice President and Chief Administrative Officer of Conseco (or such other senior officer of Conseco designated by the President or the Chief Administrative Officer of Conseco) regarding the performance of his duties. Executive acknowledges that the performance of his duties will require frequent travel to the Company's various offices as well as other locations. 4. Extent of Services. During the Term, subject to the direction and control of the Executive Vice President and Chief Administrative Officer (or his designee) and, the President of Conseco, Executive shall have the power and authority commensurate with his executive status and necessary to perform his duties hereunder. Executive shall devote his entire employable time, attention and best efforts to the business of the Company and, during the Term, shall not, without the consent of the Company, be actively engaged in any other business activity, whether or not such business activity is pursued for gain, profit or other pecuniary advantage; provided, however, that, subject to Section 9 hereof, this shall not be construed as preventing Executive from serving on boards of professional, community, civic, education, charitable and corporate organizations on which he presently serves or may choose to serve or investing his assets in such form or manner as will not require any services on the part of 1 Executive in the operation of the affairs of the companies in which such investments are made (to the extent not in violation of the noncompete and nonsolicitation provisions of Section 9 hereof); provided, however, that corporate organizations shall be limited to those which Executive presently serves, if any, as listed on Exhibit A and such others as mutually agreed upon by Executive and the Company. 5. Compensation. During the Term: (a) As compensation for services hereunder rendered during the Term hereof, Executive shall receive a base salary ("Base Salary") of Two Hundred Fifty Thousand Dollars ($250,000) per year payable in equal installments in accordance with the Company's payroll procedure for its salaried executives. Salary payments and other payments under this Agreement shall be subject to withholding of taxes and other appropriate and customary amounts. Executive may receive increases in his Base Salary from time to time, based upon his performance, subject to approval of the Company. (b) In addition to Base Salary, Executive will have an opportunity to earn a bonus each year as determined by the Company, with a target annual bonus equal to 50% of Executive's Base Salary (the "Target Bonus") and a maximum annual bonus of 100% of Executive's Base Salary with respect to any calendar year, with such bonus payable at such time that other similar payments are made to other Company executives. For purposes of clarification, annual executive bonuses are generally paid in March of the year following the year with respect to which such bonuses are payable, if Executive remains employed with the Company through such date or as otherwise payable under Section 11 of this Agreement. Executive's 2006 bonus payable pursuant to this paragraph in 2007 shall be prorated based on the number of days that Executive was employed by the Company in 2006. Notwithstanding the above, a pro-rata portion of the 2007 bonus will be paid at the same time that similar payments are made to other Company executives if Executive remains employed through the end of the Term. The Target Bonuses will be based on financial and other objective targets that the Company believes are reasonably attainable at the time that they are set. (c) As soon as reasonably practicable, Executive will receive an award of options to purchase 15,000 shares of common stock with an exercise price equal to the fair market value on the date of the grant and an award of 10,000 shares of performance restricted stock. One hundred percent (100%) of the options will vest over a 4-year period beginning on the date of the grant of the equity awards (the "Grant Date"), with one-fourth vesting on each anniversary of the Grant Date. The performance restricted stock will be based on performance measures to be agreed upon by the President of Conseco and the Human Resources and Compensation Committee of the Board of Directors of Conseco. Executive shall also be eligible to participate in and receive future grants under any stock option or equity-based program offered by Conseco to executives of similar title and responsibility, if any, subject to the discretion of the Board of Directors of Conseco (the "Board"). (d) Executive shall receive a signing bonus of $25,000, payable within 60 days of the Effective Date. In the event that, prior to December 31, 2006, Executive resigns (other than With Reason) or the Company terminates Executive with Just Cause, 2 Executive will repay such bonus to the Company within five business days of such resignation or termination. 6. Fringe Benefits. During the Term: (a) Executive shall be entitled to participate in such existing executive benefit plans and insurance programs offered by the Company, or which it may adopt from time to time, for its executive management or supervisory personnel generally, in accordance with the eligibility requirements for participation therein. Nothing herein shall be construed so as to prevent the Company from modifying or terminating any executive benefit plans or programs, or executive fringe benefits, that it may adopt from time to time. (b) Executive shall be entitled to four weeks of vacation with pay each year. (c) Executive may incur reasonable expenses for promoting the Company's business, including expenses for entertainment, travel, and similar items. The Company shall reimburse Executive for all such reasonable expenses upon Executive's presentation of an itemized account of such expenditures. 7. Disability. If Executive shall become physically or mentally disabled during the Term to the extent that his ability to perform his duties and services hereunder is materially and adversely impaired, his Base Salary, bonus and other compensation provided herein shall continue while he remains employed by the Company; provided, that if such disability (as confirmed by competent medical evidence) continues for at least six (6) consecutive months, the Company may terminate Executive's employment hereunder, in which case the Company immediately shall pay Executive a cash payment equal to (i) his annual Base Salary as provided in Section 5(a) hereof to the extent earned but unpaid as of the date of termination, (ii) a pro-rata portion of the Target Bonus for the year in which his disability occurs plus the Target Bonus for the preceding year if his disability occurs after year-end but before such bonuses are paid and the bonus payable pursuant to Section 5(d) hereof (to the extent not already paid). However, any options or restricted stock held by Executive on the date of termination shall vest only through the date of termination according to the normal vesting schedule applicable to such options or restricted stock and Executive shall not receive any accelerated or additional vesting of such stock or options due to termination under this Section 7 on or after such date. No payments or vesting under this paragraph will be made if such disability arose primarily from (a) chronic use of intoxicants, drugs or narcotics (other than drugs prescribed to Executive by a physician and used by Executive for their intended purpose for which they had been prescribed) or (b) intentionally self-inflicted injury or intentionally self-induced illness. 8. Disclosure of Information. Executive acknowledges that, in and as a result of his employment with the Company, he has been and will be making use of, acquiring and/or adding to confidential information of the Company and its affiliates of a special and unique nature and value. As a material inducement to the Company to enter into this Agreement and to pay to Executive the compensation stated in Section 5, as well as any additional benefits stated herein, Executive covenants and agrees that he shall not, at any time while he is employed by the Company or at any time thereafter, directly or indirectly, divulge or disclose for any purpose 3 whatsoever, any confidential information (whether or not specifically labeled or identified as "confidential information"), in any form or medium, that has been obtained by or disclosed to him as a result of his employment with the Company and which the Company or any of its affiliates has taken appropriate steps to safeguard, except to the extent that such confidential information (a) becomes a matter of public record or is published in a newspaper, magazine or other periodical available to the general public, other than as a result of any act or omission of Executive, (b) is required to be disclosed by any law, regulation or order of any court or regulatory commission, department or agency, in which event Executive shall give prompt notice of such requirement to the Company to enable the Company to seek an appropriate protective order or confidential treatment, or (c) must be disclosed to enable Executive properly to perform his duties under this Agreement. Upon the termination of Executive's employment, Executive shall return such information (in whatever form) obtained from or belonging to the Company or any of its affiliates which he may have in his possession or control. 9. Covenants Against Solicitation. Executive acknowledges that the services he is to render to the Company and its affiliates are of a special and unusual character, with a unique value to the Company and its affiliates, the loss of which cannot adequately be compensated by damages or an action at law. In view of the unique value to the Company and its affiliates of the services of Executive for which the Company has contracted hereunder, because of the confidential information to be obtained by, or disclosed to, Executive as set forth in Section 8 above, and as a material inducement to the Company to enter into this Agreement and to pay to Executive the compensation stated in Section 5 hereof, as well as any additional benefits stated herein, and other good and valuable consideration, Executive covenants and agrees that throughout the period Executive remains employed or compensated hereunder and for one year thereafter, Executive shall not, directly or indirectly, anywhere in the United States of America (i) solicit or attempt to convert to other insurance carriers or other corporations, persons or other entities providing these same or similar products or services provided by the Company and its affiliates, any customers or policyholders of the Company or any of its affiliates or (ii) solicit for employment or employ any employee of the Company or any of its affiliates. Should any particular covenant or provision of this Section 9 be held unreasonable or contrary to public policy for any reason, including, without limitation, the time period, geographical area, or scope of activity covered by any restrictive covenant or provision, the Company and Executive acknowledge and agree that such covenant or provision shall automatically be deemed modified such that the contested covenant or provision shall have the closest effect permitted by applicable law to the original form and shall be given effect and enforced as so modified to whatever extent would be reasonable and enforceable under applicable law. 10. Termination. (a) Either the Company or Executive may terminate his employment at any time for any reason upon written notice to the other. The Company may terminate Executive's employment for Just Cause pursuant to Section 10(b) below or in a Control Termination pursuant to Section 10(c) below. Executive's employment shall also terminate (i) upon the death of Executive or (ii) after disability of Executive pursuant to Section 7 hereof. 4 (b) The Company may terminate Executive's employment at any time for Just Cause. For purposes of this Agreement, "Just Cause" shall mean: (i) (A) a material breach by Executive of this Agreement, (B) a material breach of Executive's duty of loyalty to the Company or its affiliates, or (C) willful malfeasance or fraud or dishonesty of a substantial nature in performing Executive's services on behalf of the Company or its affiliates, which in each case is willful and deliberate on Executive's part and committed in bad faith or without reasonable belief that such breach or action is in the best interests of the Company or its affiliates; (ii) Executive's use of alcohol or drugs (other than drugs prescribed to Executive by a physician and used by Executive for their intended purposes for which they had been prescribed) or other repeated conduct which materially and repeatedly interferes with the performance of his duties hereunder, which materially compromises the integrity or the reputation of the Company or its affiliates, or which results in other substantial economic harm to the Company or its affiliates; (iii) Executive's conviction by a court of law, admission that he is guilty, or entry of a plea of nolo contendere with regard to a felony or other crime involving moral turpitude; (iv) Executive's unscheduled absence from his employment duties other than as a result of illness or disability, for whatever cause, for a period of more than ten (10) consecutive days, without consent from the Company prior to the expiration of the ten (10) day period; or (v) Executive's failure to take action or to abstain from taking action, as directed in writing by a member of the Board or a higher ranking executive of the Company or Conseco, where such failure continues after Executive has been given written notice of such failure and at least five (5) business days thereafter to cure such failure. No termination shall be deemed to be a termination by the Company for Just Cause if the termination is as a result of Executive refusing to act in a manner that would be a violation of applicable law or where Executive acts (or refrains from taking action) in good faith in accordance with directions of a member of the Board or higher ranking executive but was unable to attain the desired results because such results were inherently unreasonable or unattainable. (c) The Company may terminate Executive's employment in a Control Termination. A "Control Termination" shall mean any termination by the Company (or its successor) of Executive's employment for any reason within six months in anticipation of or within two years following a Change in Control of the Company. The term "Change in Control" shall mean the occurrence of any of the following: (i) the acquisition (other than an acquisition in connection with a "Non-Control Transaction") by any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "1934 Act")) of "beneficial ownership" (as such term is defined in Rule 13d-3 promulgated under the 1934 Act), directly or indirectly, of securities of Conseco or its Ultimate Parent representing 51% or more of the combined voting power of the then outstanding securities of Conseco or its Ultimate Parent entitled to vote generally 5 with respect to the election of the board of directors of Conseco or its Ultimate Parent; or (ii) as a result of or in connection with a tender or exchange offer or contest for election of directors, individual board members of Conseco (identified as of the date of commencement of such tender or exchange offer, or the commencement of such election contest, as the case may be) cease to constitute at least a majority of the board of directors of Conseco; or (iii) the consummation of a merger, consolidation or reorganization with or into Conseco unless (x) the stockholders of Conseco immediately before such transaction beneficially own, directly or indirectly, immediately following such transaction securities representing 51% or more of the combined voting power of the then outstanding securities entitled to vote generally with respect to the election of the board of directors of Conseco (or its successor) or, if applicable, the Ultimate Parent and (y) individual board members of Conseco (identified as of the date that a binding agreement providing for such transaction is signed) constitute at least a majority of the board of directors of Conseco (or its successor) or, if applicable, the Ultimate Parent (a transaction to which clauses (x) and (y) apply, a "Non-Control Transaction"). For purposes of this Agreement, "Ultimate Parent" shall mean the parent corporation (or if there is more than one parent corporation, the ultimate parent corporation) that, following a transaction, directly or indirectly beneficially owns a majority of the voting power of the outstanding securities entitled to vote with respect to the election of the board of directors of Conseco (or its successor). (d) At Executive's option, he may terminate employment with the Company "With Reason" provided one or more of the following conditions are met: (i) his role or duties have been materially diminished by changes in responsibilities or authority; (ii) any reduction in Executive's Base Salary or Target Bonus; or (iii) there is a "Change in Control" of the Company as defined in Section 10(c) and, following Executive's written request made prior to the Change in Control, the ultimate parent entity or entities directly or indirectly gaining control of a majority of the Board or outstanding securities entitled to vote with respect to the Board fails to affirm and guarantee the Company's current and future obligations under this Agreement. (e) Upon termination of Executive's employment with the Company for any reason (whether voluntary or involuntary), Executive shall be deemed to have voluntarily resigned from all positions that Executive may then hold with the Company and any of its affiliates; provided that such deemed resignation shall not adversely affect Executive's rights to compensation or benefits under Section 11 of this Agreement and shall not affect the determination of whether Executive's termination was for Just Cause. 6 11. Payments Following Termination. (a) In the event that Executive's employment is terminated by the Company for Just Cause (as defined herein), upon expiration of the Term of this Agreement or Executive voluntarily resigns, then the Company immediately shall pay Executive a cash payment of his Base Salary as provided in Section 5(a) hereof that was earned but unpaid as of the date of termination. Any options or restricted stock held by Executive on the date of termination shall vest only through the date of termination according to the normal vesting schedule applicable to such options or restricted stock, and Executive shall not receive any accelerated or additional vesting of such stock or options on or after such date. (b) In the event Executive's employment is terminated by the death of Executive, then the Company shall pay Executive's estate a cash lump sum of the sum of (i) the remaining payments of Base Salary described in Section 5(a) that would have been payable to Executive through the date of death, (ii) a pro-rata portion of the Target Bonus for the year in which his death occurs plus the Target Bonus for the preceding year if his death occurs after year-end but before such bonuses are paid and (iii) the bonus payable pursuant to Section 5(d) hereof (to the extent not already paid). Any options or restricted stock held by Executive on the date of termination shall vest only through the date of termination according to the normal vesting schedule applicable to such options or restricted stock, and Executive shall not receive any accelerated or additional vesting of such stock or options on or after such date expiration of the Term. (c) In the event that Executive is terminated by the Company without Just Cause (and other than expiration of the Term, death, disability or a Control Termination) or by Executive With Reason, then the Company shall pay Executive (i) on a basis consistent with the timing of the Company's normal payroll processing, the remaining payments of Base Salary described in Section 5(a) that would have been payable to Executive through the date of his termination of employment, (ii) his Base Salary (in the form of salary continuation on a pro-rata basis with or without medical and dental benefits, at the Executive's election and cost) for the 12-month period following his termination of employment, (iii) a cash lump sum equal to a pro-rata portion of the Target Bonus for the year in which the date of termination occurs plus the Target Bonus for the preceding year if termination occurs after year-end but before such bonuses are paid and (iv) the bonus payable pursuant to Section 5(d) hereof (to the extent not already paid). Any options or restricted stock held by Executive on the date of termination shall vest only through the date of termination according to the normal vesting schedule applicable to such options or restricted stock, and Executive shall not receive any accelerated or additional vesting of such stock or options on or after such date. (d) In the event that Executive is terminated by the Company (or its successor) in a Control Termination as so defined, then the Company shall pay Executive (i) on a basis consistent with the timing of the Company's normal payroll processing, the remaining payments of Base Salary described in Section 5(a) that would have been payable to Executive through the date of his termination of employment, (ii) his Base 7 Salary and Target Bonus (in the form of salary continuation on a pro-rata basis with or without medical and dental benefits at the cost charged to active employees) for the 12-month period following his termination of employment, (iii) a cash lump sum equal to a pro-rata portion of the Target Bonus for the year in which the date of termination occurs plus the Target Bonus for the preceding year if termination occurs after year-end but before such bonuses are paid and (iv) the bonus payable pursuant to Section 5(d) hereof (to the extent not already paid). To the extent that Executive is terminated in a Control Termination that occurs in anticipation of a Change in Control, any options or restricted stock held by Executive shall fully vest, retroactive to the date of termination, upon the occurrence of the Change in Control. (e) Notwithstanding anything to the contrary, in the event that Executive's employment terminates, the Company shall pay to Executive, in accordance with its standard payroll practice, Executive's accrued vacation. (f) Notwithstanding anything to the contrary, payment of severance under this Agreement is conditioned upon the execution by Executive of a separation and release agreement in a form acceptable to the Company and the observation of such waiting or revocation periods, if any, before and after execution of the agreement by Executive as are required by law, such as, for example, the waiting or revocation periods required for a waiver and release to be effective with respect to claims under the Age Discrimination in Employment Act, provided that the Company delivers to Executive such agreement within seven days of the date of his termination. 12. Change in Control. In the event of a Change in Control, Executive will be entitled to the full vesting of any options and restricted stock held by Executive on the date of such Change in Control. 13. Character of Termination Payments. The amounts payable to Executive upon any termination of his employment shall be considered severance pay in consideration of past services rendered on behalf of the Company and his continued service from the date hereof to the date he becomes entitled to such payments and shall be the sole amount of severance pay to which Executive is entitled from the Company and its affiliates upon termination of his employment during the Term. Executive shall have no duty to mitigate his damages by seeking other employment. 14. Representations of the Parties. (a) The Company represents and warrants to Executive that (i) this Agreement has been duly authorized, executed and delivered by the Company and constitutes valid and binding obligations of the Company; and (ii) the employment of Executive on the terms and conditions contained in this Agreement will not conflict with, result in a breach or violation of, constitute a default under, or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company pursuant to: (A) the certificate of formation, (B) the terms of any indenture, contract, lease, mortgage, deed of trust, note, loan agreement or other agreement, obligation, condition, covenant or 8 instrument to which the Company is a party or bound or to which its property is subject, or (C) any statute, law, rule, regulation, judgment, order or decree applicable to the Company, or any regulatory body, administrative agency, governmental body, arbitrator or other authority having jurisdiction over the Company. (b) Executive represents and warrants to the Company that: (i) this Agreement has been duly executed and delivered by Executive and constitutes a valid and binding obligation of Executive; and (ii) neither the execution of this Agreement by Executive nor his employment by the Company on the terms and conditions contained herein will conflict with, result in a breach or violation of, or constitute a default under any agreement, obligation, condition, covenant or instrument to which Executive is a party or bound or to which his property is subject, or any statute, law, rule, regulation, judgment, order or decree applicable to Executive of any court, regulatory body, administrative agency, governmental body, arbitrator or other authority having jurisdiction over Executive or any of his property. 15. Arbitration of Disputes; Injunctive Relief. (a) Except as provided in subsection (b) below, any controversy or claim arising out of or relating to this Agreement or the breach thereof shall be settled by binding arbitration in the City of Indianapolis, Indiana, in accordance with the laws of the State of Indiana by three arbitrators, one of whom shall be appointed by the Company, one by Executive, and the third of whom shall be appointed by the first two arbitrators. If the first two arbitrators cannot agree on the appointment of a third arbitrator, then the third arbitrator shall be appointed by the Chief Judge of the United States District Court for the Southern District of Indiana. The arbitration shall be conducted in accordance with the rules of the American Arbitration Association, except with respect to the selection of arbitrators, which shall be as provided in this Section. Judgment upon the award rendered by the arbitrators may be entered in any court having jurisdiction thereof. Each party shall pay its own costs and expenses incurred in connection with the enforcement of this Agreement, regardless of the final outcome. (b) Executive acknowledges that a breach or threatened breach by Executive of Sections 8 or 9 of this Agreement will give rise to irreparable injury to the Company and that money damages will not be adequate relief for such injury. Notwithstanding paragraph (a) above, the Company and Executive agree that the Company may seek and obtain injunctive relief, including, without limitation, temporary restraining orders, preliminary injunctions and/or permanent injunctions, in a court of proper jurisdiction to restrain or prohibit a breach or threatened breach of Section 8 or 9 of this Agreement. Nothing herein shall be construed as prohibiting the Company from pursuing any other remedies available to the Company for such breach or threatened breach, including the recovery of damages from Executive. 16. Notices. Any notice required or permitted to be given under this Agreement shall be sufficient if in writing and if sent by registered mail to his residence, in the case of Executive, or to the business office of its General Counsel, in the case of the Company. 9 17. Waiver of Breach and Severability. The waiver by either party of a breach of any provision of this Agreement by the other party shall not operate or be construed as a waiver of any subsequent breach by either party. In the event any provision of this Agreement is found to be invalid or unenforceable, it may be severed from the Agreement, and the remaining provisions of the Agreement shall continue to be binding and effective. 18. Entire Agreement. Other than any equity award agreements entered into pursuant to an applicable long-term incentive plan, this instrument contains the entire agreement of the parties and, as of the Effective Date, supersedes all other obligations of the Company and its affiliates under other agreements or otherwise. The compensation and benefits to be paid under the terms of this Agreement are in lieu of all other compensation or benefits to which Executive is entitled from Conseco, the Company, and its affiliates. This Agreement may not be changed orally, but only by an instrument in writing signed by the party against whom enforcement of any waiver, change, modification, extension or discharge is sought. 19. Binding Agreement and Governing Law; Assignment Limited. This Agreement shall be binding upon and shall inure to the benefit of the parties and their lawful successors in interest (including, without limitation, Executive's estate, heirs and personal representatives) and, except for issues or matters as to which federal law is applicable, shall be construed in accordance with and governed by the laws of the State of Indiana. This Agreement is personal to each of the parties hereto, and neither party may assign or delegate any of its rights or obligations hereunder without the prior written consent of the other. 20. Indemnification. If Executive was or is made a party or is threatened to be made a party to or is otherwise involved (including involvement as a witness) in any action, suit or proceeding, whether civil, criminal, administrative or investigative (a "Proceeding"), by reason of the fact that he or she is or was an officer or employee of the Company or any of its affiliates, Executive shall be indemnified and held harmless by the Company to the fullest extent authorized by the Delaware General Corporation Law, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Company to provide broader indemnification rights than permitted prior thereto), against all expense, liability and loss (including attorneys' fees, judgments, fines, excise taxes or penalties and amounts paid in settlement) reasonably incurred or suffered by Executive in connection therewith and such indemnification shall continue as to Executive if he ceases to be an officer or employee and shall inure to the benefit of Executive's heirs, executors and administrators; provided, however, that the Company shall indemnify Executive in connection with a proceeding (or part thereof) initiated by Executive only if such Proceeding (or part thereof) was authorized by the Board of Directors of the Company. The right to indemnification conferred in this paragraph shall include the obligation of the Company to pay the expenses incurred in defending any such proceeding in advance of its final disposition (an "Advance of Expenses"); provided, however, that, if and to the extent that the Delaware General Corporation Law requires, an Advance of Expenses incurred by Executive in his capacity as an officer or employee shall be made only upon delivery to the Company of an undertaking, by or on behalf of Executive, to repay all amounts so advanced if it shall ultimately be determined by final judicial decision from which there is no further right to appeal that Executive is not entitled to be indemnified for such expenses under this paragraph or otherwise. 10 21. No Third Party Beneficiaries. The terms and provisions of this Agreement are intended solely for the benefit of each party hereto and their respective successors or permitted assigns, and it is not intended to confer third-party beneficiary rights upon any other person. 22. Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written, effective as of the Effective Date. COMPANY: CONSECO SERVICES, LLC /s/Daniel J. Murphy ------------------------------------ Daniel J. Murphy President EXECUTIVE: /s/William D. Fritts, Jr. ------------------------------------ William D. Fritts, Jr. 11 Exhibit A --------- Minnesota Self Insured Security Fund West 1430 First National Bank Building 332 Minnesota Street St. Paul, MN 55101 651-291-9155 12 EX-10 5 exhibit1027.txt EXHIBIT 10.27 Exhibit 10.27 EMPLOYMENT AGREEMENT This EMPLOYMENT AGREEMENT, dated as of the 8th day of September, 2005, is between Conseco Services, LLC, an Indiana limited liability company ("Company"), and Chris Nickele ("Executive"). WHEREAS, the services of Executive and his managerial and professional experience are of value to the Company. WHEREAS, the Company desires to continue to have the benefit and advantage of the services of Executive for an extended period to assist the Company and Conseco, Inc. ("Conseco") upon the terms and conditions set forth herein. NOW, THEREFORE, in consideration of the foregoing and the mutual covenants contained herein, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: 1. Employment. The Company hereby employs Executive and Executive hereby accepts employment upon the terms and conditions hereinafter set forth. 2. Term. The effective date of this agreement (the "Agreement") shall be October 10, 2005 (the "Effective Date"). Subject to the provisions for termination as provided in Section 10 hereof, the term of Executive's employment under this Agreement shall be the period beginning on the Effective Date and ending on October 31, 2009. As used in this Agreement, the "Term" is the period ending on October 31, 2009. The Term shall end upon the termination of Executive's employment with the Company. Unless the Company otherwise notifies Executive, after the end of the Term Executive may continue as an at will employee of the Company. 3. Duties. During the Term, Executive shall be engaged by the Company in the capacity of Executive Vice President, New Product Development. Executive shall report to the Executive Vice President and Chief Administrative Officer of Conseco (or such other senior officer of Conseco designated by the President of Conseco). 4. Extent of Services. During the Term, subject to the direction and control of the Executive Vice President and Chief Administrative Officer of Conseco (or his designee) and the President of Conseco, Executive shall have the power and authority commensurate with his executive status and necessary to perform his duties hereunder. Executive shall devote his entire employable time, attention and best efforts to the business of the Company and, during the Term, shall not, without the consent of the Company, be actively engaged in any other business activity, whether or not such business activity is pursued for gain, profit or other pecuniary advantage; provided, however, that, subject to Section 9 hereof, this shall not be construed as preventing Executive from serving on boards of professional, community, civic, education, charitable and corporate organizations on which he presently serves or may choose to serve or investing his assets in such form or manner as will not require any services on the part of Executive in the operation of the affairs of the companies in which such investments are made (to the extent not in violation of the nonsolicitation provisions of Section 9 hereof); provided, however, that corporate organizations shall be limited to those which Executive presently serves, if any, as listed on Exhibit A and such others as mutually agreed upon by Executive and the Company. 5. Compensation. During the Term: (a) As compensation for services hereunder rendered during the Term hereof, Executive shall receive a base salary ("Base Salary") of Two Hundred Seventy-Five Thousand Dollars ($275,000) per year payable in equal installments in accordance with the Company's payroll procedure for its salaried executives. Salary payments and other payments under this Agreement shall be subject to withholding of taxes and other appropriate and customary amounts. The Base Salary shall be reviewed at least annually at the same time as other senior executives, and Executive may receive increases in his Base Salary from time to time, based upon his performance, subject to approval of the Company. (b) In addition to Base Salary, Executive will have an opportunity to earn a bonus each year as determined by the Company, with a target annual bonus equal to 50% of Executive's Base Salary (the "Target Bonus") and a maximum annual bonus of 100% of Executive's Base Salary with respect to any calendar year, with such bonus payable at such time that other similar payments are made to other Company executives. The bonus for 2005 shall be One Hundred Thirty-Seven Thousand Five Hundred Dollars ($137,500). For purposes of clarification, annual executive bonuses are generally paid in March of the year following the year with respect to which such bonuses are payable, if Executive remains employed with the Company through such date or as otherwise payable under Section 11 of this Agreement. Notwithstanding the above, a pro-rata portion of the bonus for the year in which his employment terminates will be paid at the same time that similar payments are made to other Company executives if Executive remains employed through the end of the Term. The Target Bonuses will be based on financial and other objective targets that the Company reasonably believes are reasonably attainable at the time that they are set. (c) As soon as reasonably practicable, Executive will receive an award of options to purchase 35,000 shares of common stock with an exercise price equal to the fair market value on the date of the grant and (ii) 10,000 shares of restricted stock. One hundred percent (100%) of the options will vest over a 4-year period beginning on the date of the grant of the equity awards (the "Grant Date"), with one-fourth vesting on each anniversary of the Grant Date. Fifty percent (50%) of the restricted stock will vest on the second anniversary of the date of grant of the restricted stock, with the other fifty percent (50%) vesting on the third anniversary of such grant. Executive shall also be eligible to participate in and receive future grants under any stock option or equity-based program offered by Conseco to executives of similar title and responsibility, if any, subject to the discretion of the Board. (d) A bonus of $50,000 shall be paid to Executive as soon as reasonably practicable after the Effective Date. In the event that Executive voluntarily resigns (other than With Reason) or the Company terminates Executive with Just Cause before the first anniversary of the Effective Date, Executive will repay a pro rata portion of such bonus to the Company within 5 business days of such resignation or termination. 2 6. Fringe Benefits. During the Term: (a) Executive shall be entitled to participate in such existing executive benefit plans and insurance programs offered by the Company, or which it may adopt from time to time, for its executive management or supervisory personnel generally, in accordance with the eligibility requirements for participation therein. Nothing herein shall be construed so as to prevent the Company from modifying or terminating any executive benefit plans or programs, or executive fringe benefits, that it may adopt from time to time. (b) Executive shall be entitled to four weeks of vacation with pay each year. (c) Executive may incur reasonable expenses for promoting the Company's business, including expenses for entertainment, travel, lodging and meals while working at other Company locations and similar items. The Company shall reimburse Executive for all such reasonable expenses upon Executive's periodic presentation of an itemized account of such expenditures. The Company agrees to pay Executive an additional amount to cover the incremental additional income taxes incurred by Executive, if any, with respect to payment or reimbursement of any reasonable business expenses pursuant to this subsection (c). 7. Disability. If Executive shall become physically or mentally disabled during the Term to the extent that even with accommodation his ability to perform his duties and services hereunder is materially and adversely impaired, his Base Salary, bonus and other compensation provided herein shall continue while he remains employed by the Company; provided, that if such disability (as confirmed by competent medical evidence) continues for at least six (6) consecutive months, the Company may terminate Executive's employment hereunder, in which case the Company immediately shall pay Executive a cash payment equal to (i) his annual Base Salary as provided in Section 5(a) hereof to the extent earned but unpaid as of the date of termination, (ii) a pro-rata portion of the Target Bonus for the year in which his disability occurs plus the Target Bonus for the preceding year if his disability occurs after year-end but before such bonuses are paid and the bonus payable pursuant to Section 5(d) hereof (to the extent not already paid). However, any options or restricted stock held by Executive on the date of termination shall vest only through the date of termination according to the normal vesting schedule applicable to such options or restricted stock and Executive shall not receive any accelerated or additional vesting of such stock or options due to termination under this Section 7 on or after such date. No payments or vesting under this paragraph will be made if such disability arose primarily from (a) chronic use of intoxicants, drugs or narcotics (other than drugs prescribed to Executive by a physician and used by Executive for their intended purpose for which they had been prescribed) or (b) intentionally self-inflicted injury or intentionally self-induced illness. 8. Disclosure of Information. Executive acknowledges that, in and as a result of his employment with the Company, he has been and will be making use of, acquiring and/or adding to confidential information of the Company and its affiliates of a special and unique nature and value. As a material inducement to the Company to enter into this Agreement and to pay to 3 Executive the compensation stated in Section 5, as well as any additional benefits stated herein, Executive covenants and agrees that he shall not, at any time while he is employed by the Company or at any time thereafter, directly or indirectly, divulge or disclose for any purpose whatsoever, any confidential information (whether or not specifically labeled or identified as "confidential information"), in any form or medium, that has been obtained by or disclosed to him as a result of his employment with the Company and which the Company or any of its affiliates has taken appropriate steps to safeguard, except to the extent that such confidential information (a) becomes a matter of public record or is published in a newspaper, magazine or other periodical available to the general public, other than as a result of any act or omission of Executive, (b) is required to be disclosed by any law, regulation or order of any court or regulatory commission, department or agency, in which event Executive shall give prompt notice of such requirement to the Company to enable the Company to seek an appropriate protective order or confidential treatment, or (c) must be disclosed to enable Executive properly to perform his duties under this Agreement. Upon the termination of Executive's employment, Executive shall return such information (in whatever form) obtained from or belonging to the Company or any of its affiliates which he may have in his possession or control. 9. Covenants Against Solicitation. Executive acknowledges that the services he is to render to the Company and its affiliates are of a special and unusual character, with a unique value to the Company and its affiliates, the loss of which cannot adequately be compensated by damages or an action at law. In view of the unique value to the Company and its affiliates of the services of Executive for which the Company has contracted hereunder, because of the confidential information to be obtained by, or disclosed to, Executive as set forth in Section 8 above, and as a material inducement to the Company to enter into this Agreement and to pay to Executive the compensation stated in Section 5 hereof, as well as any additional benefits stated herein, and other good and valuable consideration, Executive covenants and agrees that throughout the period Executive remains employed or compensated hereunder and for one year thereafter, Executive shall not, directly or indirectly, anywhere in the United States of America (i) solicit or attempt to convert to other insurance carriers or other corporations, persons or other entities providing these same or similar products or services provided by the Company and its affiliates, any customers or policyholders of the Company or any of its affiliates or (ii) solicit for employment or employ any employee of the Company or any of its affiliates. Should any particular covenant or provision of this Section 9 be held unreasonable or contrary to public policy for any reason, including, without limitation, the time period, geographical area, or scope of activity covered by any restrictive covenant or provision, the Company and Executive acknowledge and agree that such covenant or provision shall automatically be deemed modified such that the contested covenant or provision shall have the closest effect permitted by applicable law to the original form and shall be given effect and enforced as so modified to whatever extent would be reasonable and enforceable under applicable law. 4 10. Termination. (a) Either the Company or Executive may terminate his employment at any time for any reason upon written notice to the other. The Company may terminate Executive's employment for Just Cause pursuant to Section 10(b) below or in a Control Termination pursuant to Section 10(c) below. Executive's employment shall also terminate (i) upon the death of Executive or (ii) after disability of Executive pursuant to Section 7 hereof. (b) The Company may terminate Executive's employment at any time for Just Cause. For purposes of this Agreement, "Just Cause" shall mean: (i) (A) a material breach by Executive of this Agreement, (B) a material breach of Executive's duty of loyalty to the Company or its affiliates, or (C) willful malfeasance or fraud or dishonesty of a substantial nature in performing Executive's services on behalf of the Company or its affiliates, which in each case is willful and deliberate on Executive's part and committed in bad faith or without reasonable belief that such breach or action is in the best interests of the Company or its affiliates; (ii) Executive's use of alcohol or drugs (other than drugs prescribed to Executive by a physician and used by Executive for their intended purposes for which they had been prescribed) or other repeated conduct which materially and repeatedly interferes with the performance of his duties hereunder, which materially compromises the integrity or the reputation of the Company or its affiliates, or which results in other substantial economic harm to the Company or its affiliates; (iii) Executive's conviction by a court of law, admission that he is guilty, or entry of a plea of nolo contendere with regard to a felony or other crime involving moral turpitude; (iv) Executive's unscheduled absence from his employment duties other than as a result of illness or disability, for whatever cause, for a period of more than ten (10) consecutive days, without consent from the Company prior to the expiration of the ten (10) day period; or (v) Executive's failure to take action or to abstain from taking action, as directed in writing by a member of the board or a higher ranking executive of the Company or Conseco, where such failure continues after Executive has been given written notice of such failure and at least five (5) business days thereafter to cure such failure. No termination shall be deemed to be a termination by the Company for Just Cause if the termination is as a result of Executive refusing to act in a manner that would be a violation of applicable law or where Executive acts (or refrains from taking action) in good faith in accordance with directions of a member of the board or higher ranking executive but was unable to attain the desired results because such results were inherently unreasonable or unattainable. (c) The Company may terminate Executive's employment in a Control Termination. A "Control Termination" shall mean any termination by the Company (or its successor) of Executive's employment for any reason within six months in anticipation of or within two years following a Change in Control of the Company. The term "Change in Control" shall mean the occurrence of any of the following: 5 (i) the acquisition (other than an acquisition in connection with a "Non-Control Transaction") by any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "1934 Act")) of "beneficial ownership" (as such term is defined in Rule 13d-3 promulgated under the 1934 Act), directly or indirectly, of securities of Conseco or its Ultimate Parent representing 51% or more of the combined voting power of the then outstanding securities of Conseco or its Ultimate Parent entitled to vote generally with respect to the election of the board of directors of Conseco or its Ultimate Parent; or (ii) as a result of or in connection with a tender or exchange offer or contest for election of directors, individual board members of Conseco (identified as of the date of commencement of such tender or exchange offer, or the commencement of such election contest, as the case may be) cease to constitute at least a majority of the board of directors of Conseco; or (iii) the consummation of a merger, consolidation or reorganization with or into Conseco unless (x) the stockholders of Conseco immediately before such transaction beneficially own, directly or indirectly, immediately following such transaction securities representing 51% or more of the combined voting power of the then outstanding securities entitled to vote generally with respect to the election of the board of directors of Conseco (or its successor) or, if applicable, the Ultimate Parent and (y) individual board members of Conseco (identified as of the date that a binding agreement providing for such transaction is signed) constitute at least a majority of the board of directors of Conseco (or its successor) or, if applicable, the Ultimate Parent (a transaction to which clauses (x) and (y) apply, a "Non-Control Transaction"). For purposes of this Agreement, "Ultimate Parent" shall mean the parent corporation (or if there is more than one parent corporation, the ultimate parent corporation) that, following a transaction, directly or indirectly beneficially owns a majority of the voting power of the outstanding securities entitled to vote with respect to the election of the board of directors of Conseco (or its successor). (d) At Executive's option, he may terminate employment with the Company "With Reason" provided one or more of the following conditions are met: (i) his role or duties have been materially diminished by changes in responsibilities or authority; (ii) Executive is required to report to anyone other than the Chief Administrative Officer of Conseco (or such other senior officer of Conseco designated by the President of Conseco); (iii) any reduction in Executive's Base Salary or Target Bonus; (iv) Executive is required by the Company to relocate his residence or is required to spend a majority of his time at a Company location outside of the metropolitan Chicago area; or (v) there is a "Change in Control" of the company as defined in Section 10(c) and, following Executive's written request made prior to the Change in Control, the ultimate parent entity or entities directly or indirectly gaining control of a majority of Conseco's Board or 6 outstanding securities entitled to vote with respect to the Company's Board fails to affirm and guarantee Conseco's current and future obligations under this Agreement. (e) Upon termination of Executive's employment with the Company for any reason (whether voluntary or involuntary), Executive shall be deemed to have voluntarily resigned from all positions that Executive may then hold with the Company and any of its affiliates; provided that such deemed resignation shall not adversely affect Executive's rights to compensation or benefits under Section 11 of this Agreement and shall not affect the determination of whether Executive's termination was for Just Cause. 11. Payments Following Termination. (a) In the event that Executive's employment is terminated by the Company for Just Cause (as defined herein), upon expiration of the Term of this Agreement or Executive voluntarily resigns, then the Company immediately shall pay Executive the remaining payments of his Base Salary as provided in Section 5(a) hereof that would have been payable to Executive through the date of termination. Any options or restricted stock held by Executive on the date of termination shall vest only through the date of termination according to the normal vesting schedule applicable to such options or restricted stock, and Executive shall not receive any accelerated or additional vesting of such stock or options on or after such date. (b) In the event Executive's employment is terminated by the death of Executive, then the Company shall pay Executive's estate a cash lump sum of the sum of (i) the remaining payments of Base Salary described in Section 5(a) that would have been payable to Executive through the date of death and (ii) a pro-rata portion of the Target Bonus for the year in which his death occurs plus the Target Bonus for the preceding year if his death occurs after year-end but before such bonuses are paid. Any options or restricted stock held by Executive on the date of termination shall vest only through the date of termination according to the normal vesting schedule applicable to such options or restricted stock, and Executive shall not receive any accelerated or additional vesting of such stock or options on or after such date. (c) In the event that Executive is terminated by the Company without Just Cause (and other than upon death, expiration of the Term, disability or a Control Termination) or by Executive With Reason, then the Company shall pay Executive (i) on a basis consistent with the timing of the Company's normal payroll processing, the remaining payments of Base Salary described in Section 5(a) that would have been payable to Executive through the date of his termination of employment, (ii) his Base Salary and Target Bonus (in the form of salary continuation on a pro-rata basis with or without medical and dental benefits, at the Executive's election and cost) for the 12-month period following his termination of employment and (iii) a cash lump sum equal to a pro-rata portion of the Target Bonus for the year in which the date of termination occurs plus the Target Bonus for the preceding year if termination occurs after year-end but before such bonuses are paid. Any options or restricted stock held by Executive on the date of termination shall vest only through the date of termination according to the normal vesting schedule applicable to such options or restricted stock, and Executive 7 shall not receive any accelerated or additional vesting of such stock or options on or after such date. (d) In the event that Executive is terminated by the Company (or its successor) in a Control Termination as so defined, then the Company shall pay Executive (i) on a basis consistent with the timing of the Company's normal payroll processing, the remaining payments of Base Salary described in Section 5(a) that would have been payable to Executive through the date of his termination of employment, (ii) one and one- half time his Base Salary and one and one-half times his Target Bonus (in the form of salary continuation on a pro-rata basis with or without medical and dental benefits at the cost charged to active employees) for the 12-month period following his termination of employment and (iii) a cash lump sum equal to a pro-rata portion of the Target Bonus for the year in which the date of termination occurs plus the Target Bonus for the preceding year if termination occurs after year-end but before such bonuses are paid. To the extent that Executive is terminated in a Control Termination that occurs in anticipation of a Change in Control, any options or restricted stock held by Executive shall fully vest, retroactive to the date of termination, upon the occurrence of the Change in Control. (e) Notwithstanding anything to the contrary, in the event that Executive's employment terminates, the Company shall pay to Executive, in accordance with its standard payroll practice, Executive's accrued vacation. (f) Notwithstanding anything to the contrary, payment of severance under this Agreement is conditioned upon the execution by Executive of a separation and release agreement in a form acceptable to the Company and the observation of such waiting or revocation periods, if any, before and after execution of the agreement by Executive as are required by law, such as, for example, the waiting or revocation periods required for a waiver and release to be effective with respect to claims under the Age Discrimination in Employment Act, provided that the Company delivers to Executive such agreement within seven days of the date of his termination. 12. Change in Control. In the event of a Change in Control, Executive will be entitled to the full vesting of any options and restricted stock held by Executive on the date of such Change in Control. 13. Character of Termination Payments. The amounts payable to Executive upon any termination of his employment shall be considered severance pay in consideration of past services rendered on behalf of the Company and his continued service from the date hereof to the date he becomes entitled to such payments and shall be the sole amount of severance pay to which Executive is entitled from the Company and its affiliates upon termination of his employment during the Term. Executive shall have no duty to mitigate his damages by seeking other employment. 8 14. Representations of the Parties. (a) The Company represents and warrants to Executive that (i) this Agreement has been duly authorized, executed and delivered by the Company and constitutes valid and binding obligations of the Company; and (ii) the employment of Executive on the terms and conditions contained in this Agreement will not conflict with, result in a breach or violation of, constitute a default under, or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company pursuant to: (A) the certificate of formation, (B) the terms of any indenture, contract, lease, mortgage, deed of trust, note, loan agreement or other agreement, obligation, condition, covenant or instrument to which the Company is a party or bound or to which its property is subject, or (C) any statute, law, rule, regulation, judgment, order or decree applicable to the Company, or any regulatory body, administrative agency, governmental body, arbitrator or other authority having jurisdiction over the Company. (b) Executive represents and warrants to the Company that: (i) this Agreement has been duly executed and delivered by Executive and constitutes a valid and binding obligation of Executive; and (ii) neither the execution of this Agreement by Executive nor his employment by the Company on the terms and conditions contained herein will conflict with, result in a breach or violation of, or constitute a default under any agreement, obligation, condition, covenant or instrument to which Executive is a party or bound or to which his property is subject, or any statute, law, rule, regulation, judgment, order or decree applicable to Executive of any court, regulatory body, administrative agency, governmental body, arbitrator or other authority having jurisdiction over Executive or any of his property. 15. Arbitration of Disputes; Injunctive Relief. (a) Except as provided in subsection (b) below, any controversy or claim arising out of or relating to this Agreement or the breach thereof shall be settled by binding arbitration in the City of Indianapolis, Indiana, in accordance with the laws of the State of Indiana by three arbitrators, one of whom shall be appointed by the Company, one by Executive, and the third of whom shall be appointed by the first two arbitrators. If the first two arbitrators cannot agree on the appointment of a third arbitrator, then the third arbitrator shall be appointed by the Chief Judge of the United States District Court for the Southern District of Indiana. The arbitration shall be conducted in accordance with the rules of the American Arbitration Association, except with respect to the selection of arbitrators, which shall be as provided in this Section. Judgment upon the award rendered by the arbitrators may be entered in any court having jurisdiction thereof. Each party shall pay its own costs and expenses incurred in connection with the enforcement of this Agreement, regardless of the final outcome. (b) Executive acknowledges that a breach or threatened breach by Executive of Sections 8 or 9 of this Agreement will give rise to irreparable injury to the Company and that money damages will not be adequate relief for such injury. Notwithstanding paragraph (a) above, the Company and Executive agree that the Company may seek and obtain injunctive relief, including, without limitation, temporary restraining orders, 9 preliminary injunctions and/or permanent injunctions, in a court of proper jurisdiction to restrain or prohibit a breach or threatened breach of Section 8 or 9 of this Agreement. Nothing herein shall be construed as prohibiting the Company from pursuing any other remedies available to the Company for such breach or threatened breach, including the recovery of damages from Executive. 16. Notices. Any notice required or permitted to be given under this Agreement shall be sufficient if in writing and if sent by registered mail to his residence, in the case of Executive, or to the business office of its General Counsel, in the case of the Company. 17. Waiver of Breach and Severability. The waiver by either party of a breach of any provision of this Agreement by the other party shall not operate or be construed as a waiver of any subsequent breach by either party. In the event any provision of this Agreement is found to be invalid or unenforceable, it may be severed from the Agreement, and the remaining provisions of the Agreement shall continue to be binding and effective. 18. Entire Agreement. Other than any equity award agreements entered into pursuant to an applicable long-term incentive plan, this instrument contains the entire agreement of the parties and, as of the Effective Date, supersedes all other obligations of the Company and its affiliates under other agreements or otherwise. The compensation and benefits to be paid under the terms of this Agreement are in lieu of all other compensation or benefits to which Executive is entitled from Conseco, the Company, and its affiliates. This Agreement may not be changed orally, but only by an instrument in writing signed by the party against whom enforcement of any waiver, change, modification, extension or discharge is sought. 19. Binding Agreement and Governing Law; Assignment Limited. This Agreement shall be binding upon and shall inure to the benefit of the parties and their lawful successors in interest (including, without limitation, Executive's estate, heirs and personal representatives) and, except for issues or matters as to which federal law is applicable, shall be construed in accordance with and governed by the laws of the State of Indiana. This Agreement is personal to each of the parties hereto, and neither party may assign or delegate any of its rights or obligations hereunder without the prior written consent of the other. 20. Indemnification. If Executive was or is made a party or is threatened to be made a party to or is otherwise involved (including involvement as a witness) in any action, suit or proceeding, whether civil, criminal, administrative or investigative (a "Proceeding"), by reason of the fact that he or she is or was an officer or employee of the Company or any of its affiliates, Executive shall be indemnified and held harmless by the Company to the fullest extent authorized by the Delaware General Corporation Law, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Company to provide broader indemnification rights than permitted prior thereto), against all expense, liability and loss (including attorneys' fees, judgments, fines, excise taxes or penalties and amounts paid in settlement) reasonably incurred or suffered by Executive in connection therewith and such indemnification shall continue as to Executive if he ceases to be an officer or employee and shall inure to the benefit of Executive's heirs, executors and administrators; provided, however, that the Company shall indemnify Executive in connection with a proceeding (or part thereof) initiated by Executive only if such Proceeding (or part thereof) was authorized by the Board of Directors of the Company. The right to indemnification 10 conferred in this paragraph shall include the obligation of the Company to pay the expenses incurred in defending any such proceeding in advance of its final disposition (an "Advance of Expenses"); provided, however, that, if and to the extent that the Delaware General Corporation Law requires, an Advance of Expenses incurred by Executive in his capacity as an officer or employee shall be made only upon delivery to the Company of an undertaking, by or on behalf of Executive, to repay all amounts so advanced if it shall ultimately be determined by final judicial decision from which there is no further right to appeal that Executive is not entitled to be indemnified for such expenses under this paragraph or otherwise. 21. No Third Party Beneficiaries. The terms and provisions of this Agreement are intended solely for the benefit of each party hereto and their respective successors or permitted assigns, and it is not intended to confer third-party beneficiary rights upon any other person. 22. Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written, effective as of the Effective Date. COMPANY: CONSECO SERVICES, LLC /s/Daniel J. Murphy ------------------------------------ Daniel J. Murphy President EXECUTIVE: /s/Chris Nickele ------------------------------------ Chris Nickele 11 Exhibit A --------- to -- Employment Agreement dated September 8, 2005 between Conseco Services, LLC -------------------------------------------------------------------------- and Chris Nickele ----------------- None 12 EX-10 6 exhibit1028.txt EXHIBIT 10.28 Exhibit 10.28 EMPLOYMENT AGREEMENT The EMPLOYMENT AGREEMENT, dated as of the 1st day of October, 2004, is between Conseco Services, LLC, an Indiana limited liability company ("Company"), and Scott Perry ("Executive"). WHEREAS, the services of Executive and his managerial and professional experience are of value to the Company. WHEREAS, the Company desires to continue to have the benefit and advantage of the services of Executive for an extended period to assist the Company and Bankers Life and Casualty Company ("Bankers") upon the terms and conditions set forth herein. NOW, THEREFORE, in consideration of the foregoing and the mutual covenants contained herein, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: 1. Employment. The Company hereby employs Executive and Executive hereby accepts employment upon the terms and conditions hereinafter set forth. 2. Term. The effective date of this agreement (the "Agreement") shall be the date set forth above (the "Effective Date"). Subject to the provisions for termination as provided in Section 10 hereof, the term of Executive's employment under this Agreement shall be the period beginning on the Effective Date and ending on the fourth anniversary of the Effective Date. The term of Executive's employment shall not be automatically renewed. The term ending on the fourth anniversary of the Effective Date is hereinafter referred to as the "Term." The Term shall end upon the termination of Executive's employment with the Company. 3. Duties. During the Term, Executive shall be engaged by the Company in the capacity of Executive Vice President, Sales and Distribution of Bankers. Executive shall report to the Chief Executive Officer of Bankers regarding the performance of his duties. 4. Extent of Services. During the Term, subject to the direction and control of the Chief Executive Officer of Bankers, Executive shall have the power and authority commensurate with his executive status and necessary to perform his duties hereunder. Executive shall devote his entire employable time, attention and best efforts to the business of the Company and Bankers and, during the Term, shall not, without the consent of the Company, be actively engaged in any other business activity, whether or not such business activity is pursued for gain, profit or other pecuniary advantage; provided, however, that, subject to Section 9 hereof, this shall not be construed as preventing Executive from serving on boards of professional, community, civic, education, charitable and corporate organizations on which he presently serves or may choose to serve or investing his assets in such form or manner as will not require any services on the part of Executive in the operation of the affairs of the companies in which such investments are made (to the extent not in violation of the nonsolicitation provisions of Section 9 hereof); provided, however, that corporate organizations shall be limited to those which Executive presently serves, if any, as listed on Exhibit A and such others as mutually agreed upon by Executive and the Company. 5. Compensation. During the Term: (a) As compensation for services hereunder rendered during the Term hereof, Executive shall receive a base salary ("Base Salary") of Four Hundred Thousand Dollars ($400,000) per year payable in equal installments in accordance with the Company's payroll procedure for its salaried executives. Salary payments and other payments under this Agreement shall be subject to withholding of taxes and other appropriate and customary amounts. Executive may receive increases in his Base Salary from time to time, based upon his performance, subject to approval of the Company. (b) In addition to Base Salary, Executive will have an opportunity to earn a bonus each year as determined by the Company, with a target annual bonus equal to 100% of Executive's Base Salary (the "Target Bonus") and a maximum annual bonus opportunity of 200% of Executive's Base Salary with respect to any calendar year, with such bonus payable at such time that other similar payments are made to other Company executives. For purposes of clarification, annual executive bonuses are generally paid in March of the year following the year with respect to which such bonuses are payable, if Executive remains employed with the Company through such date or as otherwise payable under Section 11 of this Agreement. Notwithstanding the above, a pro-rata portion of the 2008 bonus will be paid at the same time that similar payments are made to other Company executives if Executive remains employed through the end of the Term. The Target Bonuses for 2004 and thereafter will be based on financial and other objective targets that the Company believes are attainable at the time that they are set. The 2004 actual Bonus to be paid based on a salary of $312,500 and will be a minimum of 100% of that base salary. (c) In addition to the Target Bonus described in the preceding paragraph, Executive participates in the Bankers Long-Term Incentive Plan and will receive a total award in the amount of Six Hundred Thousand Dollars ($600,000). This award will be paid in four installments, the first upon the signing of this agreement in the amount of Two Hundred Thousand ($200,000), the second in March 2005 when payments are made to all participants in the amount of Two Hundred Thousand ($200,000), and the third and fourth payments on October 1, 2005 and October 1, 2006 in the amount of One Hundred Thousand for each payment. (d) Subject to approval by the Human Resources and Compensation Committee of the Board of Directors (the "Board") of Conseco, Inc. ("Conseco"), Executive shall receive (i) a 2004 award of 25,000 shares of restricted stock under the Conseco, Inc. 2003 Long-Term Equity Incentive Plan (the "Plan"), with fifty percent (50%) of those shares vesting on October 1, 2006, 25% vesting on October 1, 2007 and 25% vesting on October 1, 2008, and (ii) in 2005, at such time as awards are made to other officers, 25,000 shares of restricted stock and options to purchase 25,000 shares of Conseco common stock at a price equal to the closing sales price of such stock on the date of grant, with one hundred percent (100%) of such restricted stock and options to vest on October 1, 2008 (collectively, the awards described in this sentence shall be the "Initial Awards"). Executive shall also be eligible to participate in and receive future 2 grants under any stock option or equity-based program offered by Conseco to executives of similar title and responsibility, if any, subject to the discretion of the Board. 6. Fringe Benefits. During the Term: (a) Executive shall be entitled to participate in such existing executive benefit plans and insurance programs offered by the Company, or which it may adopt from time to time, for its executive management or supervisory personnel generally, in accordance with the eligibility requirements for participation therein. Nothing herein shall be construed so as to prevent the Company from modifying or terminating any executive benefit plans or programs, or executive fringe benefits, that it may adopt from time to time. (b) Executive shall be entitled to four weeks of vacation with pay each year. (c) Executive may incur reasonable expenses for promoting the Company's business, including expenses for entertainment, travel, and similar items. The Company shall reimburse Executive for all such reasonable expenses upon Executive's periodic presentation of an itemized account of such expenditures. The Company agrees to pay Executive an additional amount to cover the incremental additional income taxes incurred by Executive, if any, with respect to payment or reimbursement of any reasonable business expenses pursuant to this subsection (c). 7. Disability. If Executive shall become physically or mentally disabled during the Term to the extent that his ability to perform his duties and services hereunder is materially and adversely impaired, his Base Salary, bonus and other compensation provided herein shall continue while he remains employed by the Company; provided, that if such disability (as confirmed by competent medical evidence) continues for at least six (6) consecutive months, the Company may terminate Executive's employment hereunder, in which case the Company immediately shall pay Executive a cash payment equal to (i) his annual Base Salary as provided in Section 5(a) hereof to the extent earned but unpaid as of the date of termination plus (ii) a pro-rata portion of the Target Bonus for the year in which the disability occurs plus the Target Bonus for the preceding year if his disability occurs after year-end but before such bonuses are paid. However, any options or restricted stock held by Executive on the date of termination shall vest only through the date of termination according to the normal vesting schedule applicable to such options or restricted stock and Executive shall not receive any accelerated or additional vesting of such stock or options due to termination under this Section 7 on or after such date. No payments or vesting under this paragraph will be made if such disability arose primarily from (a) chronic use of intoxicants, drugs or narcotics (other than drugs prescribed to Executive by a physician and used by Executive for their intended purpose for which they had been prescribed) or (b) intentionally self-inflicted injury or intentionally self-induced illness. 8. Disclosure of Information. Executive acknowledges that, in and as a result of his employment with the Company, he has been and will be making use of, acquiring and/or adding to confidential information of the Company and its affiliates of a special and unique nature and value. As a material inducement to the Company to enter into this Agreement and to pay to Executive the compensation stated in Section 5, as well as any additional benefits stated herein, 3 Executive covenants and agrees that he shall not, at any time while he is employed by the Company or at any time thereafter, directly or indirectly, divulge or disclose for any purpose whatsoever, any confidential information (whether or not specifically labeled or identified as "confidential information"), in any form or medium, that has been obtained by or disclosed to him as a result of his employment with the Company and which the Company or any of its affiliates has taken appropriate steps to safeguard, except to the extent that such confidential information (a) becomes a matter of public record or is published in a newspaper, magazine or other periodical available to the general public, other than as a result of any act or omission of Executive, (b) is required to be disclosed by any law, regulation or order of any court or regulatory commission, department or agency, in which event Executive shall give prompt notice of such requirement to the Company to enable the Company to seek an appropriate protective order or confidential treatment, or (c) must be disclosed to enable Executive properly to perform his duties under this Agreement. Upon the termination of Executive's employment, Executive shall return such information (in whatever form) obtained from or belonging to the Company or any of its affiliates which he may have in his possession or control. 9. Covenants against Competition and Solicitation. (a) Executive acknowledges that the services he is to render to the Company and its affiliates are of a special and unusual character, with a unique value to the Company and its affiliates, the loss of which cannot adequately be compensated by damages or an action at law. In view of the unique value to the Company and its affiliates of the services of Executive for which the Company has contracted hereunder, because of the confidential information to be obtained by, or disclosed to, Executive as set forth in Section 8 above, and as a material inducement to the Company to enter into this Agreement and to pay to Executive the compensation stated in Section 5 hereof, as well as any additional benefits stated herein, and other good and valuable consideration, Executive covenants and agrees that throughout the period Executive remains employed or compensated hereunder and during the applicable "Restricted Period" (as defined in Section 9(b)) thereafter, Executive shall not, directly or indirectly, anywhere in the United States of America (i) render any services, as an agent, independent contractor, consultant or otherwise, or become employed or compensated by any other corporation, person or entity that derives a non-incidental portion of its revenue from the business of selling or providing annuity, life, accident or health insurance products or services; (ii) in any manner compete with the Company, Bankers or any of their affiliates with respect to lines of business that the Company, Bankers and their respective affiliates derive more than a non-incidental portion of their revenue from or with respect to which the Company, Bankers and their respective affiliates have made a significant investment in; (iii) solicit or attempt to convert to other insurance carriers or other corporations, persons or other entities providing the same or similar products or services provided by the Company, Bankers and their respective affiliates, any customers or policyholders of the Company or any of its affiliates or (iv) solicit for employment or employ any employee of the Company or any of its affiliates. (b) The Restricted Period shall be, with respect to Section 9(a)(iii) and (iv), two years following termination of employment for any reason, other than death. With respect to Section 9(a)(i) and (ii), the Restricted Period shall be as follows: 4 (i) in the case of a termination of employment described in Section 11(a) or (d) or Section 7, one year following termination of employment; (ii) in the case of a termination of employment described in Section 11(c), two years following termination of employment, unless Executive elects in writing after termination of employment to reduce the Restricted Period, both for purposes of this Section 9 and for purposes of Section 11(c), to a period of no less than one year following termination of employment; and (iii) in the case of a termination of employment as a result of the expiration of this Agreement after its original four-year term, one year following termination of employment, but only if the Company pays Executive his Base Salary for such period on a basis consistent with the timing of the Company's normal payroll processing. (c) Should any particular covenant or provision of this Section 9 be held unreasonable or contrary to public policy for any reason, including, without limitation, the time period, geographical area, or scope of activity covered by any restrictive covenant or provision, the Company and Executive acknowledge and agree that such covenant or provision shall automatically be deemed modified such that the contested covenant or provision shall have the closest effect permitted by applicable law to the original form and shall be given effect and enforced as so modified to whatever extent would be reasonable and enforceable under applicable law. 10. Termination. (a) Either the Company or Executive may terminate his employment at any time for any reason upon written notice to the other. The Company may terminate Executive's employment for Just Cause pursuant to Section 10(b) below or in a Control Termination pursuant to Section 10(c) below. Executive's employment shall also terminate (i) upon the death of Executive or (ii) after disability of Executive pursuant to Section 7 hereof. (b) The Company may terminate Executive's employment at any time for Just Cause. For purposes of this Agreement, "Just Cause" shall mean: (i) (A) a material breach by Executive of this Agreement, (B) a material breach of Executive's duty of loyalty to the Company or its affiliates, or (C) willful malfeasance or fraud or dishonesty of a substantial nature in performing Executive's services on behalf of the Company or its affiliates, which breach or action described in (A), (B) or (C) is willful and deliberate on Executive's part and committed in bad faith or without reasonable belief that such breach or action is in the best interests of the Company or its affiliates; (ii) Executive's use of alcohol or drugs (other than drugs prescribed to Executive by a physician and used by Executive for their intended purposes for which they had been prescribed) or other repeated conduct which materially and repeatedly interferes with the performance of his duties hereunder, which materially compromises the integrity or the reputation of the Company or its affiliates, or which results in other substantial economic harm to the Company or its affiliates; (iii) Executive's conviction by a court of law, admission that he 5 is guilty, or entry of a plea of nolo contendere with regard to a felony or other crime involving moral turpitude; (iv) Executive's unscheduled absence from his employment duties other than as a result of illness or disability, for whatever cause, for a period of more than ten (10) consecutive days, without consent from the Company prior to the expiration of the ten (10) day period; or (v) Executive's failure to take action or to abstain from taking action, as directed in writing by a higher ranking executive of the Company or Bankers, where such failure continues after Executive has been given written notice of such failure and at least five (5) business days thereafter to cure such failure. No termination shall be deemed to be a termination by the Company for Just Cause if the termination is as a result of Executive refusing to act in a manner that would be a violation of applicable law or where Executive acts (or refrains from taking action) in good faith in accordance with directions of a higher ranking executive but was unable to attain the desired results because such results were inherently unreasonable or unattainable. (c) The Company may terminate Executive's employment in a Control Termination. A "Control Termination" shall mean any termination by the Company (or its successor) of Executive's employment for any reason within six months in anticipation of or within two years following a Change in Control of the Company. The term "Change in Control" shall mean the occurrence of any of the following: (i) the acquisition (other than an acquisition in connection with a "Non-Control Transaction") by any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "1934 Act")) of "beneficial ownership" (as such term is defined in Rule 13d-3 promulgated under the 1934 Act), directly or indirectly, of securities of Conseco or its Ultimate Parent representing 51% or more of the combined voting power of the then outstanding securities of Conseco or its Ultimate Parent entitled to vote generally with respect to the election of the board of directors of Conseco or its Ultimate Parent; or (ii) as a result of or in connection with a tender or exchange offer or contest for election of directors, individual board members of Conseco (identified as of the date of commencement of such tender or exchange offer, or the commencement of such election contest, as the case may be) cease to constitute at least a majority of the board of directors of Conseco; or (iii) the consummation of a merger, consolidation or reorganization with or into Conseco unless (x) the stockholders of Conseco immediately before such transaction beneficially own, directly or indirectly, immediately following such transaction securities representing 51% or more of the combined voting power of the then outstanding securities entitled to vote generally with respect to the election of the board of directors of Conseco (or its successor) or, if applicable, the Ultimate Parent and (y) individual board members of Conseco (identified as of the date that a binding agreement providing for such transaction 6 is signed) constitute at least a majority of the board of directors of Conseco (or its successor) or, if applicable, the Ultimate Parent (a transaction to which clauses (x) and (y) apply, a "Non-Control Transaction"). For purposes of this Agreement, "Ultimate Parent" shall mean the parent corporation (or if there is more than one parent corporation, the ultimate parent corporation) that, following a transaction, directly or indirectly beneficially owns a majority of the voting power of the outstanding securities entitled to vote with respect to the election of the board of directors of Conseco (or its successor). (d) Upon termination of Executive's employment with the Company for any reason (whether voluntary or involuntary), Executive shall be deemed to have voluntarily resigned from all positions that Executive may then hold with the Company and any of its affiliates; provided that such deemed resignation shall not adversely affect Executive's rights to compensation or benefits under Section 11 of this Agreement and shall not affect the determination of whether Executive's termination was for Just Cause. 11. Payments Following Termination. (a) In the event Executive's employment is terminated by the Company for Just Cause as so defined, or if Executive voluntarily resigns, then the Company immediately shall pay Executive a cash payment of his Base Salary as provided in Section 5(a) hereof that was earned but unpaid as of the date of termination. Any options or restricted stock held by Executive on the date of termination shall vest only through the date of termination according to the normal vesting schedule applicable to such options or restricted stock, and Executive shall not receive any accelerated or additional vesting of such stock or options on or after such date. (b) In the event Executive's employment is terminated by the death of Executive, then the Company shall pay Executive's estate a cash lump sum of the sum of (i) the remaining payments of Base Salary described in Section 5(a) that would have been payable to Executive through the date of death plus (ii) a pro-rata portion of the Target Bonus for the year in which his death occurs plus the Target Bonus for the preceding year if his death occurs after year-end but before such bonuses are paid. Any options or restricted stock held by Executive on the date of termination shall vest only through the date of termination according to the normal vesting schedule applicable to such options or restricted stock, and Executive shall not receive any accelerated or additional vesting of such stock or options on or after such date. (c) In the event that Executive is terminated by the Company without Just Cause, then the Company shall pay Executive (i) on a basis consistent with the timing of the Company's normal payroll processing, the remaining payments of Base Salary described in Section 5(a) that would have been payable to Executive through the date of his termination of employment, (ii) his Base Salary and Target Bonus (in the form of salary continuation on a pro-rata basis with or without medical and dental benefits, at the Executive's election and cost) for the Restricted Period (as set forth in Section 9(b)(ii)) following his termination of employment and (iii) a cash lump sum equal to a pro-rata 7 portion of the Target Bonus for the year in which the date of termination occurs plus the Target Bonus for the preceding year if termination occurs after year-end but before such bonuses are paid. Any options or restricted stock held by Executive on the date of termination shall, unless otherwise provided in this Section 11(c), vest only through the date of termination according to the normal vesting schedule applicable to such options or restricted stock, and Executive shall not receive any accelerated or additional vesting of such stock or options on or after such date. Notwithstanding the foregoing, if Executive is terminated pursuant to this Section 11(c) on or after October 1, 2005 but before October 1, 2007 each Initial Award, to the extent not then at least 25% vested, shall upon such termination become 25% vested, and if Executive is terminated pursuant to this Section 11(c) on or after October 1, 2007 but before October 1, 2008, each Initial Award, to the extent not then at least 50% vested, shall upon such termination become 50% vested. (d) In the event that Executive is terminated by the Company (or its successor) in a Control Termination as so defined, then the Company shall pay Executive (i) on a basis consistent with the timing of the Company's normal payroll processing, the remaining payments of Base Salary described in Section 5(a) that would have been payable to Executive through the date of his termination of employment, (ii) his Base Salary and Target Bonus (in the form of salary continuation on a pro-rata basis with or without medical and dental benefits at the cost charged to active employees) for the 12-month period following his termination of employment and (iii) a cash lump sum equal to a pro-rata portion of the Target Bonus for the year in which the date of termination occurs plus the Target Bonus for the preceding year if termination occurs after year-end but before such bonuses are paid. To the extent that Executive is terminated in a Control Termination that occurs in anticipation of a Change in Control, any options or restricted stock held by Executive shall fully vest, retroactive to the date of termination, upon the occurrence of the Change in Control. (e) Notwithstanding anything to the contrary, in the event that Executive's employment terminates, the Company shall pay to Executive, in accordance with its standard payroll practice, Executive's accrued vacation. (f) Notwithstanding anything to the contrary, payment of severance under this Agreement is conditioned upon the execution by Executive of a separation and release agreement in a form acceptable to the Company and the observation of such waiting or revocation periods, if any, before and after execution of the agreement by Executive as are required by law, such as, for example, the waiting or revocation periods required for a waiver and release to be effective with respect to claims under the Age Discrimination in Employment Act, provided that the Company delivers to Executive such agreement within seven days of the date of his termination. 12. Change in Control. In the event of a Change in Control, Executive will be entitled to the full vesting of any options and restricted stock held by Executive on the date of such Change in Control. 8 13. Character of Termination Payments. The amounts payable to Executive upon any termination of his employment shall be considered severance pay in consideration of past services rendered on behalf of the Company and his continued service from the date hereof to the date he becomes entitled to such payments and shall be the sole amount of severance pay to which Executive is entitled from the Company and its affiliates upon termination of his employment during the Term. Executive shall have no duty to mitigate his damages by seeking other employment. 14. Representations of the Parties. (a) The Company represents and warrants to Executive that (i) this Agreement has been duly authorized, executed and delivered by the Company and constitutes valid and binding obligations of the Company; and (ii) the employment of Executive on the terms and conditions contained in this Agreement will not conflict with, result in a breach or violation of, constitute a default under, or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company pursuant to: (A) the certificate of formation, (B) the terms of any indenture, contract, lease, mortgage, deed of trust, note, loan agreement or other agreement, obligation, condition, covenant or instrument to which the Company is a party or bound or to which its property is subject, or (C) any statute, law, rule, regulation, judgment, order or decree applicable to the Company, or any regulatory body, administrative agency, governmental body, arbitrator or other authority having jurisdiction over the Company. (b) Executive represents and warrants to the Company that: (i) this Agreement has been duly executed and delivered by Executive and constitutes a valid and binding obligation of Executive; and (ii) neither the execution of this Agreement by Executive nor his employment by the Company on the terms and conditions contained herein will conflict with, result in a breach or violation of, or constitute a default under any agreement, obligation, condition, covenant or instrument to which Executive is a party or bound or to which his property is subject, or any statute, law, rule, regulation, judgment, order or decree applicable to Executive of any court, regulatory body, administrative agency, governmental body, arbitrator or other authority having jurisdiction over Executive or any of his property. 15. Arbitration of Disputes; Injunctive Relief. (a) Except as provided in subsection (b) below, any controversy or claim arising out of or relating to this Agreement or the breach thereof shall be settled by binding arbitration in the City of Indianapolis, Indiana, in accordance with the laws of the State of Indiana by three arbitrators, one of whom shall be appointed by the Company, one by Executive, and the third of whom shall be appointed by the first two arbitrators. If the first two arbitrators cannot agree on the appointment of a third arbitrator, then the third arbitrator shall be appointed by the Chief Judge of the United States District Court for the Southern District of Indiana. The arbitration shall be conducted in accordance with the rules of the American Arbitration Association, except with respect to the selection of arbitrators, which shall be as provided in this Section. Judgment upon the award rendered by the arbitrators may be entered in any court having jurisdiction thereof. 9 In any action to enforce this Agreement, attorney's fees incurred by Executive will be paid by the Company if the Executive is the prevailing party. The Company shall pay its own costs and expenses incurred in connection with the enforcement of this Agreement and shall pay the cost of arbitration, regardless of the final outcome. (b) Executive acknowledges that a breach or threatened breach by Executive of Sections 8 or 9 of this Agreement will give rise to irreparable injury to the Company and that money damages will not be adequate relief for such injury. Notwithstanding paragraph (a) above, the Company and Executive agree that the Company may seek and obtain injunctive relief, including, without limitation, temporary restraining orders, preliminary injunctions and/or permanent injunctions, in a court of proper jurisdiction to restrain or prohibit a breach or threatened breach of Section 8 or 9 of this Agreement. Nothing herein shall be construed as prohibiting the Company from pursuing any other remedies available to the Company for such breach or threatened breach, including the recovery of damages from Executive. 16. Notices. Any notice required or permitted to be given under this Agreement shall be sufficient if in writing and if sent by registered mail to his residence, in the case of Executive, or to the business office of its General Counsel, in the case of the Company. 17. Waiver of Breach and Severability. The waiver by either party of a breach of any provision of this Agreement by the other party shall not operate or be construed as a waiver of any subsequent breach by either party. In the event any provision of this Agreement is found to be invalid or unenforceable, it may be severed from the Agreement, and the remaining provisions of the Agreement shall continue to be binding and effective. 18. Entire Agreement. Other than any equity award agreements entered into pursuant to the Conseco, Inc. 2003 Long-Term Equity Incentive Plan, this instrument contains the entire agreement of the parties and, as of the Effective Date, supersedes all other obligations of the Company and its affiliates under other agreements or otherwise, including, without limitation, severance provided under the Senior Officer Key Employee Retention Program approved by the Bankruptcy Court. The compensation and benefits to be paid under the terms of this Agreement are in lieu of all other compensation or benefits to which Executive is entitled from Conseco, the Company, Bankers and their affiliates. This Agreement may not be changed orally, but only by an instrument in writing signed by the party against whom enforcement of any waiver, change, modification, extension or discharge is sought. 19. Binding Agreement and Governing Law; Assignment Limited. This Agreement shall be binding upon and shall inure to the benefit of the parties and their lawful successors in interest (including, without limitation, Executive's estate, heirs and personal representatives) and, except for issues or matters as to which federal law is applicable, shall be construed in accordance with and governed by the laws of the State of Indiana. This Agreement is personal to each of the parties hereto, and neither party may assign or delegate any of its rights or obligations hereunder without the prior written consent of the other. 20. Indemnification. If Executive was or is made a party or is threatened to be made a party to or is otherwise involved (including involvement as a witness) in any action, suit or 10 proceeding, whether civil, criminal, administrative or investigative (a "Proceeding"), by reason of the fact that he or she is or was an officer or employee of the Company or any of its affiliates, Executive shall be indemnified and held harmless by the Company to the fullest extent authorized by Indiana law, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Company to provide broader indemnification rights than permitted prior thereto), against all expense, liability and loss (including attorneys' fees, judgments, fines, excise taxes or penalties and amounts paid in settlement) reasonably incurred or suffered by Executive in connection therewith and such indemnification shall continue as to Executive if he ceases to be an officer or employee and shall inure to the benefit of Executive's heirs, executors and administrators; provided, however, that the Company shall indemnify Executive in connection with a proceeding (or part thereof) initiated by Executive only if such Proceeding (or part thereof) was authorized by the Company. The right to indemnification conferred in this paragraph shall include the obligation of the Company to pay the expenses incurred in defending any such proceeding in advance of its final disposition (an "Advance of Expenses"); provided, however, that, if and to the extent that Indiana law requires, an Advance of Expenses incurred by Executive in his capacity as an officer or employee shall be made only upon delivery to the Company of an undertaking, by or on behalf of Executive, to repay all amounts so advanced if it shall ultimately be determined by final judicial decision from which there is no further right to appeal that Executive is not entitled to be indemnified for such expenses under this paragraph or otherwise. 21. No Third Party Beneficiaries. The terms and provisions of this Agreement are intended solely for the benefit of each party hereto and their respective successors or permitted assigns, and it is not intended to confer third-party beneficiary rights upon any other person. 22. Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one and the same instrument. 11 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written, effective as of the Effective Date. COMPANY: CONSECO SERVICES, LLC By:/s/Dewette Ingham --------------------------------- Name: Its: EXECUTIVE: /s/Scott Perry ---------------------------------------- Scott Perry 12 EX-10 7 exhibit1029.txt EXHIBIT 10.29 Exhibit 10.29 EMPLOYMENT AGREEMENT This EMPLOYMENT AGREEMENT, dated as of the 1st day of April, 2006 is between Conseco Services, LLC, an Indiana limited liability company ("Company"), and Daniel G. Walseth ("Executive"). WHEREAS, the services of Executive and his managerial and professional experience are of value to the Company. WHEREAS, the Company desires to have the benefit and advantage of the services of Executive to assist the Company and Conseco, Inc. ("Conseco") upon the terms and conditions set forth herein. NOW, THEREFORE, in consideration of the foregoing and the mutual covenants contained herein, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: 1. Employment. The Company hereby employs Executive and Executive hereby accepts employment upon the terms and conditions hereinafter set forth. 2. Term. The effective date of this agreement (the "Agreement") shall be the date set forth above (the "Effective Date"). Subject to the provisions for termination as provided in Section 10 hereof, the term of Executive's employment under this Agreement shall be the period beginning on the Effective Date and ending on December 31, 2007. As used in this Agreement, the "Term" is the period ending on December 31, 2007. The Term shall end upon the termination of Executive's employment with the Company. 3. Duties. During the Term, Executive shall be engaged by the Company in the capacity of Executive Vice President, General Counsel and Secretary of Conseco. Executive's primary office shall be at the Company's offices in either Chicago, Illinois or Carmel, Indiana. After commencement of his employment, Executive and the Company shall agree upon the location of his principal office. Executive acknowledges that the performance of his duties will require travel on a regular basis to the Company's other offices as well as to other locations for Company business. 4. Extent of Services. During the Term, Executive shall have the power and authority commensurate with his executive status and necessary to perform his duties hereunder. Executive shall devote his entire employable time, attention and best efforts to the business of the Company and Conseco and, during the Term, shall not, without the consent of the Company, be actively engaged in any other business activity, whether or not such business activity is pursued for gain, profit or other pecuniary advantage; provided, however, that, subject to Section 9 hereof, this shall not be construed as preventing Executive from serving on boards of professional, community, civic, education, charitable and corporate organizations on which he presently serves or may choose to serve or investing his assets in such form or manner as will not require any services on the part of Executive in the operation of the affairs of the companies in which such investments are made (to the extent not in violation of the non-solicitation provisions of Section 9 hereof); provided, however, that corporate organizations shall be limited to those which Executive presently serves, if any, as listed on Exhibit A and such others as mutually agreed upon by Executive and the Company. 5. Compensation. During the Term: (a) As compensation for services hereunder rendered during the Term hereof, Executive shall receive a base salary ("Base Salary") of Three Hundred Thousand Dollars ($300,000) per year payable in equal installments in accordance with the Company's payroll procedure for its salaried executives. Salary payments and other payments under this Agreement shall be subject to withholding of taxes and other appropriate and customary amounts. Executive may receive increases in his Base Salary from time to time, based upon his performance, subject to approval of the Company. (b) In addition to Base Salary, Executive will have an opportunity to earn a bonus each year as determined by the Company, with a target annual bonus equal to 50% of Executive's Base Salary (the "Target Bonus") and a maximum annual bonus of 100% of Executive's Base Salary with respect to any calendar year, with such bonus payable at such time that other similar payments are made to other Company executives. For purposes of clarification, annual executive bonuses are generally paid in March of the year following the year with respect to which such bonuses are payable, if Executive remains employed with the Company through such date or as otherwise payable under Section 11 of this Agreement. Executive's 2006 bonus payable pursuant to this paragraph in 2007 shall be prorated based on the number of days that Executive was employed by the Company in 2006. Notwithstanding the above, the 2007 bonus will be paid at the same time that similar payments are made to other Company executives if Executive remains employed through the end of the Term. The Target Bonuses will be based on financial and other objective targets that the Company believes are reasonably attainable at the time that they are set. (c) As soon as reasonably practicable, Executive will receive an award of options to purchase 25,000 shares of Conseco common stock with an exercise price equal to the fair market value on the date of the grant and an award of 10,000 shares of performance restricted stock. One hundred percent (100%) of the options will vest over a 4-year period beginning on the date of the grant of the equity awards (the "Grant Date"), with one-fourth vesting on each anniversary of the Grant Date. The performance restricted stock will be based on performance measures to be agreed upon by the President of Conseco and the Human Resources and Compensation Committee of the Board of Directors of Conseco. Executive shall also be eligible to participate in and receive future grants under any stock option or equity-based program offered by Conseco to executives of similar title and responsibility, if any, subject to the discretion of the Board of Directors of Conseco (the "Board"). 2 6. Fringe Benefits. During the Term: (a) Executive shall be entitled to participate in such existing executive benefit plans and insurance programs offered by the Company, or which it may adopt from time to time, for its executive management or supervisory personnel generally, in accordance with the eligibility requirements for participation therein. Nothing herein shall be construed so as to prevent the Company from modifying or terminating any executive benefit plans or programs, or executive fringe benefits, that it may adopt from time to time. (b) Executive shall be entitled to four weeks of vacation with pay each year. (c) Executive may incur reasonable expenses for promoting the Company's business, including expenses for entertainment, travel, and similar items. The Company shall reimburse Executive for all such reasonable expenses upon Executive's presentation of an itemized account of such expenditures. (d) Executive shall be entitled to reimbursement of relocation expenses for moving his family to Chicago, Illinois or Carmel, Indiana (as determined pursuant to Section 3 of this Agreement) in accordance with the Company's relocation policy; provided that his relocation has been completed by the date to be agreed upon by the Company and Executive. Executive agrees to repay such amount to the Company if his employment is terminated for Just Cause (as such term is defined in Section 10(b) of this Agreement) or if he terminates his employment other than With Reason (as defined on Section 10(d) of this Agreement) prior to March 31, 2007. (e) The Company shall reimburse Executive for, or provide at its expense, (i) up to six months of temporary housing in Chicago, Illinois at a location selected by the Company and (ii) two round trip airline tickets per month between Chicago or Indianapolis and Minneapolis - St. Paul. Executive shall be entitled to a tax gross-up on any taxable income arising from this Section 6(e). 7. Disability. If Executive shall become physically or mentally disabled during the Term to the extent that his ability to perform his duties and services hereunder is materially and adversely impaired, his Base Salary, bonus and other compensation provided herein shall continue while he remains employed by the Company; provided, that if such disability (as confirmed by competent medical evidence) continues for at least six (6) consecutive months, the Company may terminate Executive's employment hereunder, in which case the Company immediately shall pay Executive a cash payment equal to (i) his annual Base Salary as provided in Section 5(a) hereof to the extent earned but unpaid as of the date of termination and (ii) a pro-rata portion of the Target Bonus for the year in which his disability occurs plus the Target Bonus for the preceding year if his disability occurs after year-end but before such bonuses are paid. However, any options or restricted stock held by Executive on the date of termination shall vest only through the date of termination according to the normal vesting schedule applicable to such options or restricted stock and Executive shall not receive any accelerated or additional vesting of such stock or options due to termination under this Section 7 on or after such date. No payments or vesting under this paragraph will be made if such disability arose primarily from (a) 3 chronic use of intoxicants, drugs or narcotics (other than drugs prescribed to Executive by a physician and used by Executive for their intended purpose for which they had been prescribed) or (b) intentionally self-inflicted injury or intentionally self-induced illness. 8. Disclosure of Information. Executive acknowledges that, in and as a result of his employment with the Company, he has been and will be making use of, acquiring and/or adding to confidential information of the Company and its affiliates of a special and unique nature and value. As a material inducement to the Company to enter into this Agreement and to pay to Executive the compensation stated in Section 5, as well as any additional benefits stated herein, Executive covenants and agrees that he shall not, at any time while he is employed by the Company or at any time thereafter, directly or indirectly, divulge or disclose for any purpose whatsoever, any confidential information (whether or not specifically labeled or identified as "confidential information"), in any form or medium, that has been obtained by or disclosed to him as a result of his employment with the Company and which the Company or any of its affiliates has taken appropriate steps to safeguard, except to the extent that such confidential information (a) becomes a matter of public record or is published in a newspaper, magazine or other periodical available to the general public, other than as a result of any act or omission of Executive, (b) is required to be disclosed by any law, regulation or order of any court or regulatory commission, department or agency, in which event Executive shall give prompt notice of such requirement to the Company to enable the Company to seek an appropriate protective order or confidential treatment, or (c) must be disclosed to enable Executive properly to perform his duties under this Agreement. Upon the termination of Executive's employment, Executive shall return such information (in whatever form) obtained from or belonging to the Company or any of its affiliates which he may have in his possession or control. 9. Covenants Against Solicitation. Executive acknowledges that the services he is to render to the Company and its affiliates are of a special and unusual character, with a unique value to the Company and its affiliates, the loss of which cannot adequately be compensated by damages or an action at law. In view of the unique value to the Company and its affiliates of the services of Executive for which the Company has contracted hereunder, because of the confidential information to be obtained by, or disclosed to, Executive as set forth in Section 8 above, and as a material inducement to the Company to enter into this Agreement and to pay to Executive the compensation stated in Section 5 hereof, as well as any additional benefits stated herein, and other good and valuable consideration, Executive covenants and agrees that throughout the period Executive remains employed or compensated hereunder and for one year thereafter, Executive shall not, directly or indirectly, anywhere in the United States of America (i) solicit or attempt to convert to other insurance carriers or other corporations, persons or other entities providing these same or similar products or services provided by the Company and its affiliates, any customers or policyholders of the Company or any of its affiliates or (ii) solicit for employment or employ any employee of the Company or any of its affiliates. Should any particular covenant or provision of this Section 9 be held unreasonable or contrary to public policy for any reason, including, without limitation, the time period, geographical area, or scope of activity covered by any restrictive covenant or provision, the Company and Executive acknowledge and agree that such covenant or provision shall automatically be deemed modified such that the contested covenant or provision shall have the closest effect permitted by applicable 4 law to the original form and shall be given effect and enforced as so modified to whatever extent would be reasonable and enforceable under applicable law. 10. Termination. (a) Either the Company or Executive may terminate his employment at any time for any reason upon written notice to the other. The Company may terminate Executive's employment for Just Cause pursuant to Section 10(b) below or in a Control Termination pursuant to Section 10(c) below. Executive's employment shall also terminate (i) upon the death of Executive or (ii) after disability of Executive pursuant to Section 7 hereof. (b) The Company may terminate Executive's employment at any time for Just Cause. For purposes of this Agreement, "Just Cause" shall mean: (i) (A) a material breach by Executive of this Agreement, (B) a material breach of Executive's duty of loyalty to the Company or its affiliates, or (C) willful malfeasance or fraud or dishonesty of a substantial nature in performing Executive's services on behalf of the Company or its affiliates, which in each case is willful and deliberate on Executive's part and committed in bad faith or without reasonable belief that such breach or action is in the best interests of the Company or its affiliates; (ii) Executive's use of alcohol or drugs (other than drugs prescribed to Executive by a physician and used by Executive for their intended purposes for which they had been prescribed) or other repeated conduct which materially and repeatedly interferes with the performance of his duties hereunder, which materially compromises the integrity or the reputation of the Company or its affiliates, or which results in other substantial economic harm to the Company or its affiliates; (iii) Executive's conviction by a court of law, admission that he is guilty, or entry of a plea of nolo contendere with regard to a felony or other crime involving moral turpitude; (iv) Executive's unscheduled absence from his employment duties other than as a result of illness or disability, for whatever cause, for a period of more than ten (10) consecutive days, without consent from the Company prior to the expiration of the ten (10) day period; or (v) Executive's failure to take action or to abstain from taking action, as directed in writing by a member of the Board or a higher ranking executive of the Company or Conseco, where such failure continues after Executive has been given written notice of such failure and at least five (5) business days thereafter to cure such failure. No termination shall be deemed to be a termination by the Company for Just Cause if the termination is as a result of Executive refusing to act in a manner that would be a violation of applicable law or where Executive acts (or refrains from taking action) in good faith in accordance with directions of a member of the Board or higher ranking executive but was unable to attain the desired results because such results were inherently unreasonable or unattainable. (c) The Company may terminate Executive's employment in a Control Termination. A "Control Termination" shall mean any termination by the Company (or 5 its successor) of Executive's employment for any reason within six months in anticipation of or within two years following a Change in Control. The term "Change in Control" shall mean the occurrence of any of the following: (i) the acquisition (other than an acquisition in connection with a "Non-Control Transaction") by any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "1934 Act")) of "beneficial ownership" (as such term is defined in Rule 13d-3 promulgated under the 1934 Act), directly or indirectly, of securities of Conseco or its Ultimate Parent representing 51% or more of the combined voting power of the then outstanding securities of Conseco or its Ultimate Parent entitled to vote generally with respect to the election of the board of directors of Conseco or its Ultimate Parent; or (ii) as a result of or in connection with a tender or exchange offer or contest for election of directors, individual board members of Conseco (identified as of the date of commencement of such tender or exchange offer, or the commencement of such election contest, as the case may be) cease to constitute at least a majority of the board of directors of Conseco; or (iii) the consummation of a merger, consolidation or reorganization with or into Conseco unless (x) the stockholders of Conseco immediately before such transaction beneficially own, directly or indirectly, immediately following such transaction securities representing 51% or more of the combined voting power of the then outstanding securities entitled to vote generally with respect to the election of the board of directors of Conseco (or its successor) or, if applicable, the Ultimate Parent and (y) individual board members of Conseco (identified as of the date that a binding agreement providing for such transaction is signed) constitute at least a majority of the board of directors of Conseco (or its successor) or, if applicable, the Ultimate Parent (a transaction to which clauses (x) and (y) apply, a "Non-Control Transaction"). For purposes of this Agreement, "Ultimate Parent" shall mean the parent corporation (or if there is more than one parent corporation, the ultimate parent corporation) that, following a transaction, directly or indirectly beneficially owns a majority of the voting power of the outstanding securities entitled to vote with respect to the election of the board of directors of Conseco (or its successor). (d) At Executive's option, he may terminate employment with the Company "With Reason" provided one or more of the following conditions are met: (i) his role or duties have been materially diminished by changes in responsibilities or authority; (ii) any reduction in Executive's Base Salary or Target Bonus; or (iii) there is a "Change in Control" of the Company as defined in Section 10(c) and, following Executive's written request made prior to the Change in Control, the ultimate parent entity or entities directly or indirectly gaining control of a majority of the Board or outstanding securities entitled 6 to vote with respect to the Board fails to affirm and guarantee the Company's current and future obligations under this Agreement. (e) Upon termination of Executive's employment with the Company for any reason (whether voluntary or involuntary), Executive shall be deemed to have voluntarily resigned from all positions that Executive may then hold with the Company and any of its affiliates; provided that such deemed resignation shall not adversely affect Executive's rights to compensation or benefits under Section 11 of this Agreement and shall not affect the determination of whether Executive's termination was for Just Cause. 11. Payments Following Termination. (a) In the event that Executive's employment is terminated by the Company for Just Cause (as defined herein), upon expiration of the Term of this Agreement or Executive voluntarily resigns, then the Company immediately shall pay Executive a cash payment of his Base Salary as provided in Section 5(a) hereof that was earned but unpaid as of the date of termination. Any options or unvested restricted stock held by Executive on the date of termination for Just Cause shall be forfeited. (b) In the event Executive's employment is terminated by the death of Executive, then the Company shall pay Executive's estate a cash lump sum of the sum of (i) the remaining payments of Base Salary described in Section 5(a) that would have been payable to Executive through the date of death and (ii) a pro-rata portion of the Target Bonus for the year in which his death occurs plus the Target Bonus for the preceding year if his death occurs after year-end but before such bonuses are paid. Any options or restricted stock held by Executive on the date of termination shall vest only through the date of termination according to the normal vesting schedule applicable to such options or restricted stock, and Executive shall not receive any accelerated or additional vesting of such stock or options on or after such date expiration of the Term. (c) In the event that Executive is terminated by the Company without Just Cause (and other than expiration of the Term, death, disability or a Control Termination) or by Executive With Reason, then the Company shall pay Executive (i) on a basis consistent with the timing of the Company's normal payroll processing, the remaining payments of Base Salary described in Section 5(a) that would have been payable to Executive through the date of his termination of employment, (ii) his Base Salary (in the form of salary continuation on a pro-rata basis with or without medical and dental benefits, at the Executive's election and cost) for the 12-month period following his termination of employment and (iii) a cash lump sum equal to a pro-rata portion of the Target Bonus for the year in which the date of termination occurs plus the Target Bonus for the preceding year if termination occurs after year-end but before such bonuses are paid. Any options or restricted stock held by Executive on the date of termination shall vest only through the date of termination according to the normal vesting schedule applicable to such options or restricted stock, and Executive shall not receive any accelerated or additional vesting of such stock or options on or after such date. 7 (d) In the event that Executive is terminated by the Company (or its successor) in a Control Termination as so defined, then the Company shall pay Executive (i) on a basis consistent with the timing of the Company's normal payroll processing, the remaining payments of Base Salary described in Section 5(a) that would have been payable to Executive through the date of his termination of employment, (ii) his Base Salary and Target Bonus (in the form of salary continuation on a pro-rata basis with or without medical and dental benefits at the cost charged to active employees) for the 12-month period following his termination of employment and (iii) a cash lump sum equal to a pro-rata portion of the Target Bonus for the year in which the date of termination occurs plus the Target Bonus for the preceding year if termination occurs after year-end but before such bonuses are paid. To the extent that Executive is terminated in a Control Termination that occurs in anticipation of a Change in Control, any options or restricted stock held by Executive shall fully vest, retroactive to the date of termination, upon the occurrence of the Change in Control. (e) Notwithstanding anything to the contrary, in the event that Executive's employment terminates, the Company shall pay to Executive, in accordance with its standard payroll practice, Executive's accrued vacation. (f) Notwithstanding anything to the contrary, payment of severance under this Agreement is conditioned upon the execution by Executive of a separation and release agreement in a form acceptable to the Company and the observation of such waiting or revocation periods, if any, before and after execution of the agreement by Executive as are required by law, such as, for example, the waiting or revocation periods required for a waiver and release to be effective with respect to claims under the Age Discrimination in Employment Act, provided that the Company delivers to Executive such agreement within seven days of the date of his termination. (g) Notwithstanding the foregoing timing provisions of Section 11(c) of this Agreement, no payments otherwise due Executive pursuant to Section 11(c) shall be due or paid to Executive until after the expiration of six months following the date of termination if an earlier obligation or payment would fail to meet or fail to operate in accordance with paragraphs (2), (3) or (4) of Section 409A of the Internal Revenue Code. 12. Character of Termination Payments. The amounts payable to Executive upon any termination of his employment shall be considered severance pay in consideration of past services rendered on behalf of the Company and his continued service from the date hereof to the date he becomes entitled to such payments and shall be the sole amount of severance pay to which Executive is entitled from the Company and its affiliates upon termination of his employment during the Term. Executive shall have no duty to mitigate his damages by seeking other employment. 13. Representations of the Parties. (a) The Company represents and warrants to Executive that (i) this Agreement has been duly authorized, executed and delivered by the Company and constitutes valid 8 and binding obligation of the Company; and (ii) the employment of Executive on the terms and conditions contained in this Agreement will not conflict with, result in a breach or violation of, constitute a default under, or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company pursuant to: (A) the certificate of formation, (B) the terms of any indenture, contract, lease, mortgage, deed of trust, note, loan agreement or other agreement, obligation, condition, covenant or instrument to which the Company is a party or bound or to which its property is subject, or (C) any statute, law, rule, regulation, judgment, order or decree applicable to the Company, or any regulatory body, administrative agency, governmental body, arbitrator or other authority having jurisdiction over the Company. (b) Executive represents and warrants to the Company that: (i) this Agreement has been duly executed and delivered by Executive and constitutes a valid and binding obligation of Executive; and (ii) neither the execution of this Agreement by Executive nor his employment by the Company on the terms and conditions contained herein will conflict with, result in a breach or violation of, or constitute a default under any agreement, obligation, condition, covenant or instrument to which Executive is a party or bound or to which his property is subject, or any statute, law, rule, regulation, judgment, order or decree applicable to Executive of any court, regulatory body, administrative agency, governmental body, arbitrator or other authority having jurisdiction over Executive or any of his property. 14. Arbitration of Disputes; Injunctive Relief. (a) Except as provided in subsection (b) below, any controversy or claim arising out of or relating to this Agreement or the breach thereof shall be settled by binding arbitration in the City of Indianapolis, Indiana, (unless Executive's principal office is in Chicago, Illinois, in which case the binding arbitration shall be in Chicago, Illinois), in accordance with the laws of the State of Indiana by three arbitrators, one of whom shall be appointed by the Company, one by Executive, and the third of whom shall be appointed by the first two arbitrators. If the first two arbitrators cannot agree on the appointment of a third arbitrator, then the third arbitrator shall be appointed by the Chief Judge of the United States District Court for the Southern District of Indiana (or the Chief Judge of the United States District Court for the Northern District of Illinois if the arbitration is in Chicago). The arbitration shall be conducted in accordance with the rules of the American Arbitration Association, except with respect to the selection of arbitrators, which shall be as provided in this Section. Judgment upon the award rendered by the arbitrators may be entered in any court having jurisdiction thereof. Each party shall pay its own costs and expenses incurred in connection with the enforcement of this Agreement, regardless of the final outcome; provided, however, that the Company shall pay or reimburse Executive for such costs and expenses, including reasonable attorney fees, if Executive prevails in such proceedings. (b) Executive acknowledges that a breach or threatened breach by Executive of Sections 8 or 9 of this Agreement will give rise to irreparable injury to the Company and that money damages will not be adequate relief for such injury. Notwithstanding paragraph (a) above, the Company and Executive agree that the Company may seek and 9 obtain injunctive relief, including, without limitation, temporary restraining orders, preliminary injunctions and/or permanent injunctions, in a court of proper jurisdiction to restrain or prohibit a breach or threatened breach of Section 8 or 9 of this Agreement. Nothing herein shall be construed as prohibiting the Company from pursuing any other remedies available to the Company for such breach or threatened breach, including the recovery of damages from Executive. 15. Notices. Any notice required or permitted to be given under this Agreement shall be sufficient if in writing and if sent by registered mail to his residence, in the case of Executive, or to the business office of its President, in the case of the Company. 16. Waiver of Breach and Severability. The waiver by either party of a breach of any provision of this Agreement by the other party shall not operate or be construed as a waiver of any subsequent breach by either party. In the event any provision of this Agreement is found to be invalid or unenforceable, it may be severed from the Agreement, and the remaining provisions of the Agreement shall continue to be binding and effective. 17. Entire Agreement. Other than any equity award agreements entered into pursuant to an applicable long-term incentive plan, this instrument contains the entire agreement of the parties and, as of the Effective Date, supersedes all other obligations of the Company and its affiliates under other agreements or otherwise. The compensation and benefits to be paid under the terms of this Agreement are in lieu of all other compensation or benefits to which Executive is entitled from Conseco, the Company, and its affiliates. This Agreement may not be changed orally, but only by an instrument in writing signed by the party against whom enforcement of any waiver, change, modification, extension or discharge is sought. 18. Binding Agreement and Governing Law; Assignment Limited. This Agreement shall be binding upon and shall inure to the benefit of the parties and their lawful successors in interest (including, without limitation, Executive's estate, heirs and personal representatives) and, except for issues or matters as to which federal law is applicable, shall be construed in accordance with and governed by the laws of the State of Indiana. This Agreement is personal to each of the parties hereto, and neither party may assign or delegate any of its rights or obligations hereunder without the prior written consent of the other. 19. Indemnification. If Executive was or is made a party or is threatened to be made a party to or is otherwise involved (including involvement as a witness) in any action, suit or proceeding, whether civil, criminal, administrative or investigative (a "Proceeding"), by reason of the fact that he or she is or was an officer or employee of the Company or any of its affiliates, Executive shall be indemnified and held harmless by the Company to the fullest extent authorized by the Delaware General Corporation Law, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Company to provide broader indemnification rights than permitted prior thereto), against all expense, liability and loss (including attorneys' fees, judgments, fines, excise taxes or penalties and amounts paid in settlement) reasonably incurred or suffered by Executive in connection therewith and such indemnification shall continue as to Executive if he ceases to be an officer or employee and shall inure to the benefit of Executive's heirs, executors and administrators; provided, however, that the Company shall indemnify Executive in connection with a proceeding (or part thereof) initiated by Executive only if such Proceeding (or part 10 thereof) was authorized by the Board. The right to indemnification conferred in this paragraph shall include the obligation of the Company to pay the expenses incurred in defending any such proceeding in advance of its final disposition (an "Advance of Expenses"); provided, however, that, if and to the extent that the Delaware General Corporation Law requires, an Advance of Expenses incurred by Executive in his capacity as an officer or employee shall be made only upon delivery to the Company of an undertaking, by or on behalf of Executive, to repay all amounts so advanced if it shall ultimately be determined by final judicial decision from which there is no further right to appeal that Executive is not entitled to be indemnified for such expenses under this paragraph or otherwise. 20. No Third Party Beneficiaries. The terms and provisions of this Agreement are intended solely for the benefit of each party hereto and their respective successors or permitted assigns, and it is not intended to confer third-party beneficiary rights upon any other person. 21. Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written, effective as of the Effective Date. COMPANY: CONSECO SERVICES, LLC /s/Daniel J. Murphy ------------------------------------ Daniel J. Murphy President EXECUTIVE: /s/Daniel G. Walseth ------------------------------------ Daniel G. Walseth 11 Exhibit A --------- None. 12 EX-10 8 exhibit1030.txt EXHIBIT 10.30 Exhibit 10.30 AMENDED AND RESTATED EMPLOYMENT AGREEMENT This AMENDED AND RESTATED EMPLOYMENT AGREEMENT, dated as of the 6th day of November, 2006 is between Conseco Services, LLC, an Indiana limited liability company ("Company"), and Michael Dubes ("Executive"). WHEREAS, the Company and Executive entered into an Employment Agreement dated June 20, 2005 and they now desire to amend and restate such agreement. WHEREAS, the services of Executive and his managerial and professional experience are of value to the Company. WHEREAS, the Company desires to continue to have the benefit and advantage of the services of Executive to assist the Company and Conseco, Inc. ("Conseco") upon the terms and conditions set forth herein. NOW, THEREFORE, in consideration of the foregoing and the mutual covenants contained herein, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: 1. Employment. The Company hereby employs Executive and Executive hereby accepts employment upon the terms and conditions hereinafter set forth. 2. Term. The effective date of this amended agreement (the "Agreement") shall be the date set forth above (the "Effective Date"). Subject to the provisions for termination as provided in Section 10 hereof, the term of Executive's employment under this Agreement shall be the period beginning on the Effective Date and ending on December 31, 2007 ("the Term"). The Term shall not be automatically renewed and shall end upon any earlier termination of Executive's employment with the Company. 3. Duties. During the Term, Executive shall be engaged by the Company in the capacity of President, Conseco Insurance Group (with responsibility for the overall management of Conseco Insurance Group), or in such other capacity as the Chief Executive Officer of Conseco shall specify. Executive shall report to the Chief Executive Officer of Conseco or such other executive of the Company or Conseco as the Chief Executive Officer of Conseco may specify regarding the performance of his duties. 4. Extent of Services. During the Term, subject to the direction and control of the Chief Executive Officer of Conseco and the board of directors of Conseco (the "Board"), Executive shall have the power and authority commensurate with his executive status and necessary to perform his duties hereunder. Executive shall devote his entire employable time, attention and best efforts to the business of the Company and, during the Term, shall not, without the consent of the Company, be actively engaged in any other business activity, whether or not such business activity is pursued for gain, profit or other pecuniary advantage; provided, however, that, subject to Section 9 hereof, this shall not be construed as preventing Executive from serving on boards of professional, community, civic, education, charitable and corporate organizations on which he presently serves or may choose to serve or investing his assets in such form or manner as will not require any services on the part of Executive in the operation of the affairs of the companies in which such investments are made (to the extent not in violation of the noncompete and nonsolicitation provisions of Section 9 hereof); provided, however, that corporate organizations shall be limited to those mutually agreed upon by Executive and the Company. 5. Compensation. During the Term: (a) As compensation for services hereunder rendered during the Term hereof, Executive shall receive a base salary ("Base Salary") of Four Hundred Fifty-five Thousand Dollars ($455,000) per year payable in equal installments in accordance with the Company's payroll procedure for its salaried executives. Salary payments and other payments under this Agreement shall be subject to withholding of taxes and other appropriate and customary amounts. Executive may receive increases in his Base Salary from time to time, based upon his performance, subject to approval of the Company. (b) In addition to Base Salary, Executive will have an opportunity to earn a bonus each year as determined by the Company, with a target annual bonus equal to 100% of Executive's Base Salary (the "Target Bonus") and a maximum annual bonus of 200% of Executive's Base Salary with respect to any calendar year, with such bonus payable at such time that other similar payments are made to other Company executives but in no event later than March 15 of the year following the year with respect to which such bonus was payable. For purposes of clarification, annual executive bonuses are generally paid on or before March 15 of the year following the year with respect to which such bonuses are payable, if Executive remains employed with the Company through such date or as otherwise payable under Section 11 of this Agreement. Notwithstanding the above, the 2007 bonus will be paid at the same time that similar payments are made to other Company executives but in no event later than March 15 of the year following the year with respect to which such bonus was payable if Executive remains employed through the end of the Term. The performance requirements for Target Bonuses will be based on financial and other objective targets that the Board believes are reasonably attainable at the time that they are set. (c) In connection with his original employment agreement, Executive received an award of options to purchase 40,000 shares of common stock and an award of 10,000 shares of restricted stock. Executive will also receive an award of an additional 25,000 shares of restricted stock with the restrictions on all 25,000 shares to lapse on December 31, 2007, subject to continued employment by the Company. By entering into this Agreement, Executive relinquishes any and all rights to receive an award of 25,000 shares of performance restricted stock as provided in the Employment Agreement between the Company and Executive dated June 20, 2005. (d) Executive previously secured residential housing in the Indianapolis/Carmel area, which he utilizes as his primary residence. In lieu of reimbursement of costs to sell Executive's home and in addition to reimbursement of other relocation expenses, a bonus of $100,000 was previously paid to Executive. In the event that Executive voluntary resigns (other than With Reason) or the Company 2 terminates Executive with Just Cause, Executive will repay such bonus to the Company within 5 business days of such resignation or termination except to the extent Executive is vested in such bonus. The bonus shall vest as follows: 50% vested at the time Executive purchased a residence in the Indianapolis/Carmel area which is used as his primary residence and 50% shall vest on December 31, 2006 if Executive remains employed by the Company as of such date. (e) In addition to any bonus payable to him for 2007 pursuant to Section 5(b) of this Agreement, Executive shall receive a bonus of $600,000 payable on January 2, 2008 if he remains employed by the Company through the end of the Term. 6. Fringe Benefits. During the Term: (a) Executive shall be entitled to participate in such existing executive benefit plans and insurance programs offered by the Company, or which it may adopt from time to time, for its executive management or supervisory personnel generally, in accordance with the eligibility requirements for participation therein. Nothing herein shall be construed so as to prevent the Company from modifying or terminating any executive benefit plans or programs, or executive fringe benefits, that it may adopt from time to time. (b) Executive shall be entitled to four weeks of vacation with pay each year and will not be eligible for any other paid time-off program (other than paid holidays). (c) Executive may incur reasonable expenses for promoting the Company's business, including expenses for entertainment, travel, and similar items. The Company shall reimburse Executive for all such reasonable expenses upon Executive's periodic presentation of an itemized account of such expenditures. The Company agrees to pay Executive an additional amount to cover the incremental additional income taxes incurred by Executive, if any, with respect to payment or reimbursement of any reasonable business expenses pursuant to this subsection (c). 7. Disability. (a) If Executive shall become physically or mentally disabled during the Term to the extent that his ability to perform his duties and services hereunder is materially and adversely impaired, his Base Salary, bonus and other compensation provided herein shall continue while he remains employed by the Company; provided, that if such disability (as determined in the Board's reasonable judgment, exercised in good faith) continues for at least three (3) consecutive months, the Company may terminate Executive's employment hereunder, in which case the Company within 10 business days shall pay Executive a cash payment equal to (i) his annual Base Salary as provided in Section 5(a) hereof to the extent earned but unpaid as of the date of termination ("Unpaid Salary"), (ii) the bonus payable pursuant to Section 5(b) for the fiscal year of the Company ending prior to the date of termination (to the extent earned based on performance under the goals and objectives of the applicable plan but not previously paid) ("Unpaid Bonus"), (iii) Executive's then accrued but unused vacation ("Unpaid Vacation") (the Unpaid Salary, 4 Unpaid Bonus and Unpaid Vacation referred to sometimes together as the "Accrued Amounts"), (iv) a pro-rata portion of the Target Bonus for the year in which the termination for disability occurs, (v) the bonus payable pursuant to Section 5(d) hereof (to the extent not already paid) and (vi) one times his Base Salary). All options or restricted stock held by Executive on the date of termination for disability shall vest only through the date of termination according to the normal vesting schedule applicable to such options or restricted stock and Executive shall not receive any accelerated or additional vesting of such stock or options due to termination under this Section 7 on or after such date. (b) No payments or vesting under this Section 7 will be made if such disability arose primarily from (a) chronic use of intoxicants, drugs or narcotics (other than drugs prescribed to Executive by a physician and used by Executive for their intended purpose for which they had been prescribed) or (b) intentionally self-inflicted injury or intentionally self-induced illness. 8. Disclosure of Information. Executive acknowledges that, in and as a result of his employment with the Company, he has been and will be making use of, acquiring and/or adding to confidential information of the Company and its affiliates of a special and unique nature and value. As a material inducement to the Company to enter into this Agreement and to pay to Executive the compensation stated in Section 5, as well as any additional benefits stated herein, Executive covenants and agrees that he shall not, at any time while he is employed by the Company or at any time thereafter, directly or indirectly, divulge or disclose for any purpose whatsoever, any confidential information (whether or not specifically labeled or identified as "confidential information"), in any form or medium, that has been obtained by or disclosed to him as a result of his employment with the Company and which the Company or any of its affiliates has taken appropriate steps to safeguard, except to the extent that such confidential information (a) becomes a matter of public record or is published in a newspaper, magazine or other periodical available to the general public, other than as a result of any act or omission of Executive, (b) is required to be disclosed by any law, regulation or order of any court or regulatory commission, department or agency, in which event Executive shall give prompt notice of such requirement to the Company to enable the Company to seek an appropriate protective order or confidential treatment, (c) must be disclosed to enable Executive properly to perform his duties under this Agreement or (d) was developed by Executive prior to his employment by the Company. Upon the termination of Executive's employment, Executive shall return such information (in whatever form) obtained from or belonging to the Company or any of its affiliates which he may have in his possession or control. 9. Covenants Against Competition and Solicitation. Executive acknowledges that the services he is to render to the Company and its affiliates are of a special and unusual character, with a unique value to the Company and its affiliates, the loss of which cannot adequately be compensated by damages or an action at law. In view of the unique value to the Company and its affiliates of the services of Executive for which the Company has contracted hereunder, because of the confidential information to be obtained by, or disclosed to, Executive as set forth in Section 8 above, and as a material inducement to the Company to enter into this Agreement and to pay to Executive the compensation stated in Section 5 hereof, as well as any 3 additional benefits stated herein, and other good and valuable consideration, Executive covenants and agrees that throughout the period Executive remains employed or compensated hereunder and for one year thereafter, Executive shall not, directly or indirectly, anywhere in the United States of America (i) render any services, as an agent, independent contractor, consultant or otherwise, or become employed or compensated by any other corporation, person or entity that derives a non-incidental portion of its revenue from the business of selling or providing annuity, life, accident or health insurance products or services; (ii) in any manner compete with the Company or any of its affiliates with respect to lines of business that the Company and its affiliates derive more than a non-incidental portion of their revenue from or with respect to which the Company and its affiliates have made a significant investment in; (iii) solicit or attempt to convert to other insurance carriers or other corporations, persons or other entities providing these same or similar products or services provided by the Company and its affiliates, any customers or policyholders of the Company or any of its affiliates or (iv) solicit for employment or employ any employee of the Company or any of its affiliates. Should any particular covenant or provision of this Section 9 be held unreasonable or contrary to public policy for any reason, including, without limitation, the time period, geographical area, or scope of activity covered by any restrictive covenant or provision, the Company and Executive acknowledge and agree that such covenant or provision shall automatically be deemed modified such that the contested covenant or provision shall have the closest effect permitted by applicable law to the original form and shall be given effect and enforced as so modified to whatever extent would be reasonable and enforceable under applicable law. 10. Termination. During the Term: (a) Either the Company or Executive may terminate his employment at any time for any reason upon written notice to the other. The Company may terminate Executive's employment for Just Cause pursuant to Section 10(b) below or in a Control Termination pursuant to Section 10(c) below. Executive's employment shall also terminate (i) upon the death of Executive or, (ii) after disability of Executive pursuant to Section 7 hereof. (b) The Company may terminate Executive's employment at any time for Just Cause. For purposes of this Agreement, "Just Cause" shall mean: (i) (A) material breach by Executive of this Agreement not cured within 15 days after written notice to Executive by the Company, (B) a material breach of Executive's duty of loyalty to the Company or its affiliates not cured within 15 days after written notice to Executive by the Company, or (C) willful malfeasance or fraud or dishonesty of a substantial nature in performing Executive's services on behalf of the Company or its affiliates, which in each case is willful and deliberate on Executive's part and committed in bad faith or without reasonable belief that such breach or action is in the best interests of the Company or its affiliates; (ii) Executive's use of alcohol or drugs (other than drugs prescribed to Executive by a physician and used by Executive for their intended purposes for 5 which they had been prescribed) or other repeated conduct which materially and repeatedly interferes with the performance of his duties hereunder, which materially compromises the integrity or the reputation of the Company or its affiliates, or which results in other substantial economic harm to the Company or its affiliates; (iii) Executive's conviction by a court of law, admission that he is guilty, or entry of a plea of nolo contendere with regard to a felony or other crime involving moral turpitude; (iv) Executive's unscheduled absence from his employment duties other than as a result of illness or disability, for whatever cause, for a period of more than three (3) consecutive days, without consent from the Company prior to the expiration of the three (3) day period; (v) Executive's failure to take action or to abstain from taking action, as directed in writing by a member of the Board or a higher ranking executive of the Company or Conseco, where such failure continues after Executive has been given written notice of such failure and at least five (5) business days thereafter to cure such failure; or (vi) Any intentional wrongful act or omission by Executive that results in the restatement of Conseco's financial statements due to a violation of the Sarbanes-Oxley Act of 2002. No termination shall be deemed to be a termination by the Company for Just Cause if the termination is as a result of Executive refusing to act in a manner that would be a violation of applicable law or where Executive acts (or refrains from taking action) in good faith in accordance with directions of a member of the board or higher ranking executive but was unable to attain the desired results because such results were inherently unreasonable or unattainable. (c) The Company may terminate Executive's employment in a Control Termination. A "Control Termination" shall mean any termination by the Company (or its successor) of Executive's employment for any reason within six months in anticipation of or within two years following a Change in Control. The term "Change in Control" shall mean the occurrence of any of the following: (i) the acquisition (other than an acquisition in connection with a "Non-Control Transaction") by any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "1934 Act")) of "beneficial ownership" (as such term is defined in Rule 13d-3 promulgated under the 1934 Act), directly or indirectly, of securities of Conseco or its Ultimate Parent representing 51% or more of the combined voting power of the then outstanding securities of Conseco or its Ultimate Parent entitled to vote generally 6 with respect to the election of the board of directors of Conseco or its Ultimate Parent; or (ii) as a result of or in connection with a tender or exchange offer or contest for election of directors, individual board members of Conseco (identified as of the date of commencement of such tender or exchange offer, or the commencement of such election contest, as the case may be) cease to constitute at least a majority of the board of directors of Conseco; or (iii) the consummation of a merger, consolidation or reorganization with or into Conseco unless (x) the stockholders of Conseco immediately before such transaction beneficially own, directly or indirectly, immediately following such transaction securities representing 51% or more of the combined voting power of the then outstanding securities entitled to vote generally with respect to the election of the board of directors of Conseco (or its successor) or, if applicable, the Ultimate Parent and (y) individual board members of Conseco (identified as of the date that a binding agreement providing for such transaction is signed) constitute at least a majority of the board of directors of Conseco (or its successor) or, if applicable, the Ultimate Parent (a transaction to which clauses (x) and (y) apply, a "Non-Control Transaction"). For purposes of this Agreement, "Ultimate Parent" shall mean the parent corporation (or if there is more than one parent corporation, the ultimate parent corporation) that, following a transaction, directly or indirectly beneficially owns a majority of the voting power of the outstanding securities entitled to vote with respect to the election of the board of directors of Conseco (or its successor). (d) At Executive's option, he may terminate employment with the Company "With Reason" provided one or more of the following conditions are met: (i) Executive is required to report to anyone other than the Chief Executive Officer of Conseco (or such other executive of the Company or Conseco as the Chief Executive Officer of Conseco may specify) or the Board; (ii) any reduction in Executive's Base Salary or Target Bonus without his consent, or (iii) there is a "Change in Control" as defined in Section 10(c) and, following Executive's written request made prior to the Change in Control, the ultimate parent entity or entities directly or indirectly gaining control of a majority of the Board or outstanding securities entitled to vote with respect to the Board fails to affirm and guarantee the Company's current and future obligations under this Agreement. (e) Upon termination of Executive's employment with the Company for any reason (whether voluntary or involuntary), Executive shall be deemed to have voluntarily resigned from all positions that Executive may then hold with the Company and any of its affiliates; provided that such deemed resignation shall not adversely affect Executive's rights to compensation or benefits under this Agreement and shall not affect the determination of whether Executive's termination was for Just Cause or With Reason. 11. Payments Following Termination. 7 (a) In the event that Executive's employment is terminated by the Company for Just Cause or if Executive voluntarily resigns, then the Company within 10 business days shall pay Executive a cash payment of his Base Salary as provided in Section 5(a) hereof that was earned but unpaid as of the date of termination. Any options or restricted stock held by Executive on the date of termination shall vest only through the date of termination according to the normal vesting schedule applicable to such options or restricted stock, and Executive shall not receive any accelerated or additional vesting of such stock or options on or after such date. (b) In the event Executive's employment is terminated by the death of Executive, then the Company shall pay Executive's estate within 30 days (i) a cash lump sum of the remaining payments of Base Salary described in Section 5(a) that would have been payable to Executive through the date of death, (ii) a pro-rata portion of the Target Bonus for the year in which his death occurs plus the Target Bonus for the preceding year if his death occurs after year-end but before such bonuses are paid and (iii) the bonus payable pursuant to Section 5(d) hereof (to the extent not already paid). Any options or restricted stock held by Executive on the date of termination shall vest only through the date of termination according to the normal vesting schedule applicable to such options or restricted stock, and Executive shall not receive any accelerated or additional vesting of such stock or options on or after such date. (c) In the event that Executive is terminated by the Company without Just Cause (and other than a termination due to expiration of the Term, death, disability or a Control Termination) or by Executive With Reason, then the Company shall pay Executive within 10 business days (i) on a basis consistent with the timing of the Company's normal payroll processing, the remaining payments of Base Salary described in Section 5(a) that would have been payable to Executive through the date of his termination of employment, (ii) the bonus payable pursuant to Section 5(e) hereof (to the extent not already paid) and (iii) the bonus payable pursuant to Section 5(d) hereof (to the extent not already paid). In addition, (i) any options or restricted stock granted to Executive in 2005 that would otherwise have vested within 12 months after the date of termination if Executive had remained employed for such period shall also vest as of the date of termination and (ii) the restricted stock granted to Executive in 2006 shall vest as of the date of termination. (d) In the event that Executive is terminated by the Company (or its successor) in a Control Termination as so defined, then the Company shall pay Executive within 30 days (i) on a basis consistent with the timing of the Company's normal payroll processing, the remaining payments of Base Salary described in Section 5(a) that would have been payable to Executive through the date of his termination of employment, (ii) his Target Bonus and two times his Base Salary (in the form of salary continuation on a pro-rata basis with or without medical and dental benefits at the cost charged to active employees) for the 12-month period following his termination of employment, (iii) a cash lump sum equal to a pro-rata portion of the Target Bonus for the year in which the date of termination occurs plus the Target Bonus for the preceding year if termination occurs after year-end but before such bonuses are paid and (iv) the bonus payable pursuant to 8 Section 5(d) hereof (to the extent not already paid). To the extent that Executive is terminated in a Control Termination that occurs in anticipation of a Change in Control, any options or restricted stock held by Executive shall fully vest, retroactive to the date of termination, upon the occurrence of the Change in Control. (e) Notwithstanding anything to the contrary, in the event that Executive's employment terminates, the Company shall pay to Executive, in accordance with its standard payroll practice, Executive's accrued vacation. (f) Notwithstanding anything to the contrary, payment of any severance under this Agreement is conditioned upon the execution by Executive of a separation and release agreement in a form acceptable to the Company and the observation of such waiting or revocation periods, if any, before and after execution of the agreement by Executive as are required by law, such as, for example, the waiting or revocation periods required for a waiver and release to be effective with respect to claims under the Age Discrimination in Employment Act, provided that the Company delivers to Executive such agreement within seven days of the date of his termination. 12. Character of Termination Payments. The amounts payable to Executive upon any termination of his employment shall be considered severance pay in consideration of past services rendered on behalf of the Company and his continued service from the date hereof to the date he becomes entitled to such payments and shall be the sole amount of severance pay to which Executive is entitled from the Company and its affiliates upon termination of his employment during the Term. Executive shall have no duty to mitigate his damages by seeking other employment and, should Executive actually receive compensation from any such other employment, the payments required hereunder shall not be reduced or offset by any such other compensation. 13. Representations of the Parties. (a) The Company represents and warrants to Executive that (i) this Agreement has been duly authorized, executed and delivered by the Company and constitutes valid and binding obligations of the Company; and (ii) the employment of Executive on the terms and conditions contained in this Agreement will not conflict with, result in a breach or violation of, constitute a default under, or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company pursuant to: (A) the certificate of formation, (B) the terms of any indenture, contract, lease, mortgage, deed of trust, note, loan agreement or other agreement, obligation, condition, covenant or instrument to which the Company is a party or bound or to which its property is subject, or (C) any statute, law, rule, regulation, judgment, order or decree applicable to the Company, or any regulatory body, administrative agency, governmental body, arbitrator or other authority having jurisdiction over the Company. (b) Executive represents and warrants to the Company that: (i) this Agreement has been duly executed and delivered by Executive and constitutes a valid and binding 9 obligation of Executive; and (ii) neither the execution of this Agreement by Executive nor his employment by the Company on the terms and conditions contained herein will conflict with, result in a breach or violation of, or constitute a default under any agreement, obligation, condition, covenant or instrument to which Executive is a party or bound or to which his property is subject, or any statute, law, rule, regulation, judgment, order or decree applicable to Executive of any court, regulatory body, administrative agency, governmental body, arbitrator or other authority having jurisdiction over Executive or any of his property. 14. Arbitration of Disputes; Injunctive Relief. (a) Arbitration. Except as provided in subsection (b) below, any controversy or claim arising out of or relating to this Agreement or the breach thereof shall be settled by binding arbitration in the City of Indianapolis, Indiana, in accordance with the laws of the State of Indiana by three arbitrators, one of whom shall be appointed by the Company, one by Executive, and the third of whom shall be appointed by the first two arbitrators. If the first two arbitrators cannot agree on the appointment of a third arbitrator, then the third arbitrator shall be appointed by the Chief Judge of the United States District Court for the Southern District of Indiana. The arbitration shall be conducted in accordance with the rules of the American Arbitration Association, except with respect to the selection of arbitrators, which shall be as provided in this Section. Judgment upon the award rendered by the arbitrators may be entered in any court having jurisdiction thereof. All reasonable costs and expenses (including fees and disbursements of counsel) incurred by Executive pursuant to this Section 14 shall be paid on behalf of or reimbursed to Executive promptly by the Company; provided, however, that in the event the Company prevails in such proceedings, Executive shall immediately repay all such amounts to the Company. (b) Executive acknowledges that a breach or threatened breach by Executive of Sections 8 or 9 of this Agreement will give rise to irreparable injury to the Company and that money damages will not be adequate relief for such injury. Notwithstanding paragraph (a) above, the Company and Executive agree that the Company may seek and obtain injunctive relief, including, without limitation, temporary restraining orders, preliminary injunctions and/or permanent injunctions, in a court of proper jurisdiction to restrain or prohibit a breach or threatened breach of Section 8 or 9 of this Agreement. Nothing herein shall be construed as prohibiting the Company from pursuing any other remedies available to the Company for such breach or threatened breach, including the recovery of damages from Executive. 15. Notices. Any notice required or permitted to be given under this Agreement shall be sufficient if in writing and if sent by registered mail to his residence, in the case of Executive, or to the business office of its General Counsel, in the case of the Company. 16. Waiver of Breach and Severability. The waiver by either party of a breach of any provision of this Agreement by the other party shall not operate or be construed as a waiver of any subsequent breach by either party. In the event any provision of this Agreement is found to be invalid or unenforceable, it may be severed from the Agreement, and the remaining provisions of the Agreement shall continue to be binding and effective. 10 17. Entire Agreement. Other than any equity award agreements entered into pursuant to the Conseco, Inc. 2003 Amended and Restated Long-Term Incentive Plan or any subsequent incentive plan, this instrument contains the entire agreement of the parties and, as of the Effective Date, supersedes all other obligations of the Company and its affiliates under other agreements or otherwise. The compensation and benefits to be paid under the terms of this Agreement are in lieu of all other compensation or benefits to which Executive is entitled from Conseco, the Company, and its affiliates, and upon termination of Executive's employment with the Company Executive will not be entitled to receive any severance or other payments beyond those specified in this Agreement. This Agreement may not be changed orally, but only by an instrument in writing signed by the party against whom enforcement of any waiver, change, modification, extension or discharge is sought. 18. Binding Agreement and Governing Law; Assignment Limited. This Agreement shall be binding upon and shall inure to the benefit of the parties and their lawful successors in interest (including, without limitation, Executive's estate, heirs and personal representatives) and, except for issues or matters as to which federal law is applicable, shall be construed in accordance with and governed by the laws of the State of Indiana. This Agreement is personal to each of the parties hereto, and neither party may assign or delegate any of its rights or obligations hereunder without the prior written consent of the other. 19. Indemnification. If Executive was or is made a party or is threatened to be made a party to or is otherwise involved (including involvement as a witness) in any action, suit or proceeding, whether civil, criminal, administrative or investigative (a "Proceeding"), by reason of the fact that he or she is or was an officer or employee of the Company or any of its affiliates, Executive shall be indemnified and held harmless by the Company to the fullest extent authorized by the Delaware General Corporation Law, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Company to provide broader indemnification rights than permitted prior thereto), against all expense, liability and loss (including attorneys' fees, judgments, fines, excise taxes or penalties and amounts paid in settlement) reasonably incurred or suffered by Executive in connection therewith and such indemnification shall continue as to Executive if he ceases to be an officer or employee and shall inure to the benefit of Executive's heirs, executors and administrators; provided, however, that the Company shall indemnify Executive in connection with a proceeding (or part thereof) initiated by Executive only if such Proceeding (or part thereof) was authorized by the Board of Directors of the Company. The right to indemnification conferred in this paragraph shall include the obligation of the Company to pay the expenses incurred in defending any such proceeding in advance of its final disposition (an "Advance of Expenses"); provided, however, that, if and to the extent that the Delaware General Corporation Law requires, an Advance of Expenses incurred by Executive in his capacity as an officer or employee shall be made only upon delivery to the Company of an undertaking, by or on behalf of Executive, to repay all amounts so advanced if it shall ultimately be determined by final judicial decision from which there is no further right to appeal that Executive is not entitled to be indemnified for such expenses under this paragraph or otherwise. 20. No Third Party Beneficiaries. The terms and provisions of this Agreement are intended solely for the benefit of each party hereto and their respective successors or permitted assigns, and it is not intended to confer third-party beneficiary rights upon any other person. 11 21. Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one and the same instrument. 12 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written, effective as of the Effective Date. COMPANY: CONSECO SERVICES, LLC /s/Daniel J. Murphy ------------------------------------ Daniel J. Murphy President EXECUTIVE: /s/Michael Dubes ------------------------------------ Michael Dubes 13 EX-10 9 exhibit1031.txt EXHIBIT 10.31 Exhibit 10.31 EMPLOYMENT AGREEMENT This EMPLOYMENT AGREEMENT, dated as of the 7th day of March, 2005 is between Conseco Services, LLC, an Indiana limited liability company ("Company"), and Russell M. Bostick ("Executive"). WHEREAS, the services of Executive and his managerial and professional experience are of value to the Company. WHEREAS, the Company desires to continue to have the benefit and advantage of the services of Executive for an extended period to assist the Company and Conseco, Inc. ("Conseco") upon the terms and conditions set forth herein. NOW, THEREFORE, in consideration of the foregoing and the mutual covenants contained herein, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: 1. Employment. The Company hereby employs Executive and Executive hereby accepts employment upon the terms and conditions hereinafter set forth. 2. Term. The effective date of this agreement (the "Agreement") shall be the date set forth above (the "Effective Date"). Subject to the provisions for termination as provided in Section 10 hereof, the term of Executive's employment under this Agreement shall be the period beginning on the Effective Date and ending on the third anniversary of the Effective Date. The term of Executive's employment shall be automatically renewed for successive one-year terms on March 7, 2008 and each succeeding March 7th unless either party elects not to renew this Agreement by serving written notice of such election not to renew on the other party at least 90 days prior to such March 7th. As used in this Agreement, the "Term" is the period ending on March 6, 2008 or, if this Agreement has been renewed, the one-year period relating to the last renewal. The Term shall end upon the termination of Executive's employment with the Company. 3. Duties. During the Term, Executive shall be engaged by the Company in the capacity of Executive Vice President, Chief Information Officer, and shall have responsibility for Information Technology on an enterprise-wide basis. Executive shall report to the Chief Administrative Officer of Conseco (or such other senior officer of Conseco designated by the President of Conseco). 4. Extent of Services. During the Term, subject to the direction and control of the Chief Administrative Officer of Conseco (or such other senior officer of Conseco designated by the President of Conseco), Executive shall have the power and authority commensurate with his executive status and necessary to perform his duties hereunder. Executive shall devote his entire employable time, attention and best efforts to the business of the Company and, during the Term, shall not, without the consent of the Company, be actively engaged in any other business activity, whether or not such business activity is pursued for gain, profit or other pecuniary advantage; provided, however, that, subject to Section 9 hereof, this shall not be construed as preventing Executive from serving on boards of professional, community, civic, education, charitable and corporate organizations on which he presently serves or may choose to serve or investing his assets in such form or manner as will not require any services on the part of Executive in the operation of the affairs of the companies in which such investments are made (to the extent not in violation of the nonsolicitation provisions of Section 9 hereof); provided, however, that corporate organizations shall be limited to those which Executive presently serves, if any, as listed on Exhibit A and such others as mutually agreed upon by Executive and the Company. 5. Compensation. During the Term: (a) As compensation for services hereunder rendered during the Term hereof, Executive shall receive a base salary ("Base Salary") of Three Hundred Thousand Dollars ($300,000) per year payable in equal installments in accordance with the Company's payroll procedure for its salaried executives. Salary payments and other payments under this Agreement shall be subject to withholding of taxes and other appropriate and customary amounts. Executive may receive increases in his Base Salary from time to time, based upon his performance, subject to approval of the Company. (b) In addition to Base Salary, Executive will have an opportunity to earn a bonus each year as determined by the Company, with a target annual bonus equal to 50% of Executive's Base Salary (the "Target Bonus") and a maximum annual bonus of 100% of Executive's Base Salary with respect to any calendar year, with such bonus payable at such time that other similar payments are made to other Company executives. For purposes of clarification, annual executive bonuses are generally paid in March of the year following the year with respect to which such bonuses are payable, if Executive remains employed with the Company through such date or as otherwise payable under Section 11 of this Agreement. Notwithstanding the above, Executive's 2007 bonus (payable in 2008) will be paid at the same time that similar payments are made to other Company executives if Executive remains employed through the end of the Term. The Target Bonus will be based on financial and other objective targets that the Company reasonably believes are reasonably attainable at the time that they are set. (c) As soon as reasonably practicable, Executive will receive an award of options to purchase 20,000 shares of common stock with an exercise price equal to the fair market value on the date of the grant and an award of 10,000 shares of restricted stock. One hundred percent (100%) of the options will vest over a 4-year period beginning on the date of the grant of the equity awards (the "Grant Date"), with one-fourth vesting on each anniversary of the Grant Date. Fifty percent (50%) of the restricted stock will vest on the second anniversary of the Grant Date, with the other fifty percent (50%) vesting on the third anniversary of the Grant Date. Executive shall also be eligible to participate in and receive future grants under any stock option or equity-based program offered by Conseco to senior executives, if any, subject to the discretion of the board of directors of Conseco, Inc. (the "Board"). 2 6. Fringe Benefits. During the Term: (a) Executive shall be entitled to participate in such existing executive benefit plans and insurance programs offered by the Company, or which it may adopt from time to time, for its executive management or supervisory personnel generally, in accordance with the eligibility requirements for participation therein. Nothing herein shall be construed so as to prevent the Company from modifying or terminating any executive benefit plans or programs, or executive fringe benefits, that it may adopt from time to time. (b) Executive shall be entitled to four weeks of vacation with pay each year. (c) Executive may incur reasonable expenses for promoting the Company's business, including expenses for entertainment, travel, and similar items. The Company shall reimburse Executive for all such reasonable expenses upon Executive's periodic presentation of an itemized account of such expenditures. The Company agrees to pay Executive an additional amount to cover the incremental additional income taxes incurred by Executive, if any, with respect to payment or reimbursement of any reasonable business expenses pursuant to this subsection (c). (d) Although Executive will be required to perform a substantial portion of his duties in the Carmel, Indiana area, Executive shall not be required to relocate to the Carmel, Indiana area. If Executive decides to relocate to the Carmel, Indiana area within the first 24 months of his employment, the Company shall reimburse Executive for relocation expenses incurred in the first 24 months of his employment in accordance with the Company's relocation policy; provided, however, if Executive voluntarily resigns from employment with the Company prior to the second anniversary of his employment, Executive shall repay the Company all such relocation expenses reimbursed or otherwise paid by the Company (including any amounts paid by the Company to "gross-up" such relocation expenses). 7. Disability. If Executive shall become physically or mentally disabled during the Term to the extent that his ability to perform his duties and services hereunder is materially and adversely impaired, his Base Salary, bonus and other compensation provided herein shall continue while he remains employed by the Company; provided, that if such disability (as confirmed by competent medical evidence) continues for at least six(6) consecutive months, the Company may terminate Executive's employment hereunder, in which case the Company immediately shall pay Executive a cash payment equal to (i) his annual Base Salary as provided in Section 5(a) hereof to the extent earned but unpaid as of the date of termination and (ii) a pro-rata portion of the Target Bonus for the year in which his disability occurs plus the Target Bonus for the preceding year if his disability occurs after year-end but before such bonuses are paid. However, any options or restricted stock held by Executive on the date of termination shall vest only through the date of termination according to the normal vesting schedule applicable to such options or restricted stock and Executive shall not receive any accelerated or additional vesting of such stock or options due to termination under this Section 7 on or after such date. No payments or vesting under this paragraph will be made if such disability arose primarily from (a) chronic use of intoxicants, drugs or narcotics (other than drugs prescribed to Executive by a 3 physician and used by Executive for their intended purpose for which they had been prescribed) or (b) intentionally self-inflicted injury or intentionally self-induced illness. 8. Disclosure of Information. Executive acknowledges that, in and as a result of his employment with the Company, he has been and will be making use of, acquiring and/or adding to confidential information of the Company and its affiliates of a special and unique nature and value. As a material inducement to the Company to enter into this Agreement and to pay to Executive the compensation stated in Section 5, as well as any additional benefits stated herein, Executive covenants and agrees that he shall not, at any time while he is employed by the Company or at any time thereafter, directly or indirectly, divulge or disclose for any purpose whatsoever, any confidential information (whether or not specifically labeled or identified as "confidential information"), in any form or medium, that has been obtained by or disclosed to him as a result of his employment with the Company and which the Company or any of its affiliates has taken appropriate steps to safeguard, except to the extent that such confidential information (a) becomes a matter of public record or is published in a newspaper, magazine or other periodical available to the general public, other than as a result of any act or omission of Executive, (b) is required to be disclosed by any law, regulation or order of any court or regulatory commission, department or agency, in which event Executive shall give prompt notice of such requirement to the Company to enable the Company to seek an appropriate protective order or confidential treatment, or (c) must be disclosed to enable Executive properly to perform his duties under this Agreement. Upon the termination of Executive's employment, Executive shall return such information (in whatever form) obtained from or belonging to the Company or any of its affiliates which he may have in his possession or control. 9. Covenants Against Solicitation. Executive acknowledges that the services he is to render to the Company and its affiliates are of a special and unusual character, with a unique value to the Company and its affiliates, the loss of which cannot adequately be compensated by damages or an action at law. In view of the unique value to the Company and its affiliates of the services of Executive for which the Company has contracted hereunder, because of the confidential information to be obtained by, or disclosed to, Executive as set forth in Section 8 above, and as a material inducement to the Company to enter into this Agreement and to pay to Executive the compensation stated in Section 5 hereof, as well as any additional benefits stated herein, and other good and valuable consideration, Executive covenants and agrees that throughout the period Executive remains employed or compensated hereunder and for one year thereafter, Executive shall not, directly or indirectly, anywhere in the United States of America (i) solicit or attempt to convert to other insurance carriers or other corporations, persons or other entities providing these same or similar products or services provided by the Company and its affiliates, any customers or policyholders of the Company or any of its affiliates or (ii) solicit for employment or employ any individual who was employed by the Company or any of its affiliates during the Term of this Agreement. Should any particular covenant or provision of this Section 9 be held unreasonable or contrary to public policy for any reason, including, without limitation, the time period, geographical area, or scope of activity covered by any restrictive covenant or provision, the Company and Executive acknowledge and agree that such covenant or provision shall automatically be deemed modified such that the contested covenant or provision shall have the closest effect permitted by applicable law to the original form and shall be given effect and 4 enforced as so modified to whatever extent would be reasonable and enforceable under applicable law. 10. Termination. (a) Either the Company or Executive may terminate his employment at any time for any reason upon written notice to the other. The Company may terminate Executive's employment for Just Cause pursuant to Section 10(b) below or in a Control Termination pursuant to Section 10(c) below. Executive's employment shall also terminate (i) upon nonrenewal of the agreement, (ii) upon the death of Executive, (iii) after disability of Executive pursuant to Section 7 hereof or (iv) by Executive's termination of employment With Reason. (b) The Company may terminate Executive's employment at any time for Just Cause. For purposes of this Agreement, "Just Cause" shall mean: (i) (A) a material breach by Executive of this Agreement, (B) a material breach of Executive's duty of loyalty to the Company or its affiliates, or (C) willful malfeasance or fraud or dishonesty of a substantial nature in performing Executive's services on behalf of the Company or its affiliates, which in each case is willful and deliberate on Executive's part and committed in bad faith or without reasonable belief that such breach or action is in the best interests of the Company or its affiliates; (ii) Executive's use of alcohol or drugs (other than drugs prescribed to Executive by a physician and used by Executive for their intended purposes for which they had been prescribed) or other repeated conduct which materially and repeatedly interferes with the performance of his duties hereunder, which materially compromises the integrity or the reputation of the Company or its affiliates, or which results in other substantial economic harm to the Company or its affiliates; (iii) Executive's conviction by a court of law, admission that he is guilty, or entry of a plea of nolo contendere with regard to a felony or other crime involving moral turpitude; (iv) Executive's unscheduled absence from his employment duties other than as a result of illness or disability, for whatever cause, for a period of more than ten (10) consecutive days, without consent from the Company prior to the expiration of the ten (10) day period; or (v) Executive's failure to take action or to abstain from taking action, as directed in writing by a member of the board or a higher ranking executive of the Company or Conseco, where such failure continues after Executive has been given written notice of such failure and at least five (5) business days thereafter to cure such failure. No termination shall be deemed to be a termination by the Company for Just Cause if the termination is as a result of Executive refusing to act in a manner that would be a violation of applicable law or where Executive acts (or refrains from taking action) in good faith in accordance with directions of a member of the board or higher ranking executive but was unable to attain the desired results because such results were inherently unreasonable or unattainable. (c) The Company may terminate Executive's employment in a Control Termination. A "Control Termination" shall mean any termination by the Company (or 5 its successor) of Executive's employment for any reason within six months in anticipation of or within two years following a Change in Control of the Company. The term "Change in Control" shall mean the occurrence of any of the following: (i) the acquisition (other than an acquisition in connection with a "Non-Control Transaction") by any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "1934 Act")) of "beneficial ownership" (as such term is defined in Rule 13d-3 promulgated under the 1934 Act), directly or indirectly, of securities of the Company or its Ultimate Parent representing 51% or more of the combined voting power of the then outstanding securities of Conseco or its Ultimate Parent entitled to vote generally with respect to the election of the board of directors of Conseco or its Ultimate Parent; or (ii) as a result of or in connection with a tender or exchange offer or contest for election of directors, individual board members of Conseco (identified as of the date of commencement of such tender or exchange offer, or the commencement of such election contest, as the case may be) cease to constitute at least a majority of the board of directors of Conseco; or (iii) the consummation of a merger, consolidation or reorganization with or into Conseco unless (x) the stockholders of Conseco immediately before such transaction beneficially own, directly or indirectly, immediately following such transaction securities representing 51% or more of the combined voting power of the then outstanding securities entitled to vote generally with respect to the election of the board of directors of Conseco (or its successor) or, if applicable, the Ultimate Parent and (y) individual board members of Conseco (identified as of the date that a binding agreement providing for such transaction is signed) constitute at least a majority of the board of directors of Conseco (or its successor) or, if applicable, the Ultimate Parent (a transaction to which clauses (x) and (y) apply, a "Non-Control Transaction"). For purposes of this Agreement, "Ultimate Parent" shall mean the parent corporation (or if there is more than one parent corporation, the ultimate parent corporation) that, following a transaction, directly or indirectly beneficially owns a majority of the voting power of the outstanding securities entitled to vote with respect to the election of the board of directors of Conseco (or its successor). (d) At Executive's option, he may terminate employment with the Company "With Reason" provided one or more of the following conditions are met: (i) his role or duties have been materially diminished by changes in responsibilities or authority; (ii) Executive is required to report to anyone other than the Chief Administrative Officer of Conseco (or such other senior officer of Conseco designated by the President of Conseco); (iv) any reduction in Executive's Base Salary or Target Bonus, or (v) there is a "Change in Control" as defined in Section 10(c) and, following Executive's written request made prior to the Change in Control, the ultimate parent entity or entities directly 6 or indirectly gaining control of a majority of Conseco's board of directors or outstanding securities entitled to vote with respect to Conseco's board of directors fails to affirm and guarantee the Company's current and future obligations under this Agreement. (e) Upon termination of Executive's employment with the Company for any reason (whether voluntary or involuntary), Executive shall be deemed to have voluntarily resigned from all positions that Executive may then hold with the Company and any of its affiliates; provided that such deemed resignation shall not adversely affect Executive's rights to compensation or benefits under Section 11 of this Agreement and shall not affect the determination of whether Executive's termination was for Just Cause. 11. Payments Following Termination. (a) In the event that Executive's employment is terminated by the Company for Just Cause (as defined herein), upon non-renewal by the Company or Executive, upon expiration of the Term of this Agreement or Executive voluntarily resigns, then the Company immediately shall pay Executive a cash payment of his Base Salary as provided in Section 5(a) hereof that was earned but unpaid as of the date of termination. Any options or restricted stock held by Executive on the date of termination shall vest only through the date of termination according to the normal vesting schedule applicable to such options or restricted stock, and Executive shall not receive any accelerated or additional vesting of such stock or options on or after such date. (b) In the event Executive's employment is terminated by the death of Executive, then the Company shall pay Executive's estate a cash lump sum of the sum of (i) the remaining payments of Base Salary described in Section 5(a) that would have been payable to Executive through the date of death and (ii) a pro-rata portion of the Target Bonus for the year in which his death occurs plus the Target Bonus for the preceding year if his death occurs after year-end but before such bonuses are paid. Any options or restricted stock held by Executive on the date of termination shall vest only through the date of termination according to the normal vesting schedule applicable to such options or restricted stock, and Executive shall not receive any accelerated or additional vesting of such stock or options on or after such date. (c) In the event that Executive is terminated by the Company without Just Cause (and other than non-renewal, death, disability or a Control Termination) or by Executive With Reason, then the Company shall pay Executive (i) on a basis consistent with the timing of the Company's normal payroll processing, the remaining payments of Base Salary described in Section 5(a) that would have been payable to Executive through the date of his termination of employment, (ii) his Base Salary (in the form of salary continuation on a pro-rata basis with or without medical and dental benefits, at the Executive's election and cost) for the 24-month period following his termination of employment and (iii) a cash lump sum equal to a pro-rata portion of the Target Bonus for the year in which the date of termination occurs plus the Target Bonus for the preceding year if termination occurs after year-end but before such bonuses are paid. Salary continuation pursuant to the preceding sentence will cease if Executive obtains other employment (including self-employment) during such 24-month period. Any options or 7 restricted stock held by Executive on the date of termination shall vest only through the date of termination according to the normal vesting schedule applicable to such options or restricted stock, and Executive shall not receive any accelerated or additional vesting of such stock or options on or after such date. (d) In the event that Executive is terminated by the Company (or its successor) in a Control Termination as so defined, then the Company shall pay Executive (i) on a basis consistent with the timing of the Company's normal payroll processing, the remaining payments of Base Salary described in Section 5(a) that would have been payable to Executive through the date of his termination of employment, (ii) his Base Salary and Target Bonus (in the form of salary continuation on a pro-rata basis with or without medical and dental benefits at the cost charged to active employees) for the 24-month period following his termination of employment and (iii) a cash lump sum equal to a pro-rata portion of the Target Bonus for the year in which the date of termination occurs plus the Target Bonus for the preceding year if termination occurs after year-end but before such bonuses are paid. Salary continuation pursuant to the preceding sentence will cease if Executive obtains other employment (including self-employment) during such 24-month period. To the extent that Executive is terminated in a Control Termination that occurs in anticipation of a Change in Control, any options or restricted stock held by Executive shall fully vest, retroactive to the date of termination, upon the occurrence of the Change in Control. (e) Notwithstanding anything to the contrary, in the event that Executive's employment terminates, the Company shall pay to Executive, in accordance with its standard payroll practice, Executive's accrued vacation. (f) Notwithstanding anything to the contrary, payment of severance under this Agreement is conditioned upon the execution by Executive of a separation and release agreement in a form acceptable to the Company and the observation of such waiting or revocation periods, if any, before and after execution of the agreement by Executive as are required by law, such as, for example, the waiting or revocation periods required for a waiver and release to be effective with respect to claims under the Age Discrimination in Employment Act, provided that the Company delivers to Executive such agreement within seven days of the date of his termination. 12. Change in Control. In the event of a Change in Control, Executive will be entitled to the full vesting of any options and restricted stock held by Executive on the date of such Change in Control. 13. Character of Termination Payments. The amounts payable to Executive upon any termination of his employment shall be considered severance pay in consideration of past services rendered on behalf of the Company and his continued service from the date hereof to the date he becomes entitled to such payments and shall be the sole amount of severance pay to which Executive is entitled from the Company and its affiliates upon termination of his employment during the Term. Executive shall have no duty to mitigate his damages by seeking other employment. 8 14. Representations of the Parties. (a) The Company represents and warrants to Executive that (i) this Agreement has been duly authorized, executed and delivered by the Company and constitutes valid and binding obligations of the Company; and (ii) the employment of Executive on the terms and conditions contained in this Agreement will not conflict with, result in a breach or violation of, constitute a default under, or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company pursuant to: (A) the certificate of formation, (B) the terms of any indenture, contract, lease, mortgage, deed of trust, note, loan agreement or other agreement, obligation, condition, covenant or instrument to which the Company is a party or bound or to which its property is subject, or (C) any statute, law, rule, regulation, judgment, order or decree applicable to the Company, or any regulatory body, administrative agency, governmental body, arbitrator or other authority having jurisdiction over the Company. (b) Executive represents and warrants to the Company that: (i) this Agreement has been duly executed and delivered by Executive and constitutes a valid and binding obligation of Executive; and (ii) neither the execution of this Agreement by Executive nor his employment by the Company on the terms and conditions contained herein will conflict with, result in a breach or violation of, or constitute a default under any agreement, obligation, condition, covenant or instrument to which Executive is a party or bound or to which his property is subject, or any statute, law, rule, regulation, judgment, order or decree applicable to Executive of any court, regulatory body, administrative agency, governmental body, arbitrator or other authority having jurisdiction over Executive or any of his property. 15. Arbitration of Disputes; Injunctive Relief. (a) Except as provided in subsection (b) below, any controversy or claim arising out of or relating to this Agreement or the breach thereof shall be settled by binding arbitration in the City of Indianapolis, Indiana, in accordance with the laws of the State of Indiana by three arbitrators, one of whom shall be appointed by the Company, one by Executive, and the third of whom shall be appointed by the first two arbitrators. If the first two arbitrators cannot agree on the appointment of a third arbitrator, then the third arbitrator shall be appointed by the Chief Judge of the United States District Court for the Southern District of Indiana. The arbitration shall be conducted in accordance with the rules of the American Arbitration Association, except with respect to the selection of arbitrators, which shall be as provided in this Section. Judgment upon the award rendered by the arbitrators may be entered in any court having jurisdiction thereof. Each party shall pay its own costs and expenses incurred in connection with the enforcement of this Agreement, regardless of the final outcome. (b) Executive acknowledges that a breach or threatened breach by Executive of Sections 8 or 9 of this Agreement will give rise to irreparable injury to the Company and that money damages will not be adequate relief for such injury. Notwithstanding paragraph (a) above, the Company and Executive agree that the Company may seek and 9 obtain injunctive relief, including, without limitation, temporary restraining orders, preliminary injunctions and/or permanent injunctions, in a court of proper jurisdiction to restrain or prohibit a breach or threatened breach of Section 8 or 9 of this Agreement. Nothing herein shall be construed as prohibiting the Company from pursuing any other remedies available to the Company for such breach or threatened breach, including the recovery of damages from Executive. 16. Notices. Any notice required or permitted to be given under this Agreement shall be sufficient if in writing and if sent by registered mail to his residence, in the case of Executive, or to the business office of its General Counsel, in the case of the Company. 17. Waiver of Breach and Severability. The waiver by either party of a breach of any provision of this Agreement by the other party shall not operate or be construed as a waiver of any subsequent breach by either party. In the event any provision of this Agreement is found to be invalid or unenforceable, it may be severed from the Agreement, and the remaining provisions of the Agreement shall continue to be binding and effective. 18. Entire Agreement. Other than any equity award agreements entered into pursuant to an applicable long-term incentive plan, this instrument contains the entire agreement of the parties and, as of the Effective Date, supersedes all other obligations of the Company and its affiliates under other agreements or otherwise. The compensation and benefits to be paid under the terms of this Agreement are in lieu of all other compensation or benefits to which Executive is entitled from Conseco, the Company, and its affiliates. This Agreement may not be changed orally, but only by an instrument in writing signed by the party against whom enforcement of any waiver, change, modification, extension or discharge is sought. 19. Binding Agreement and Governing Law; Assignment Limited. This Agreement shall be binding upon and shall inure to the benefit of the parties and their lawful successors in interest (including, without limitation, Executive's estate, heirs and personal representatives) and, except for issues or matters as to which federal law is applicable, shall be construed in accordance with and governed by the laws of the State of Indiana. This Agreement is personal to each of the parties hereto, and neither party may assign or delegate any of its rights or obligations hereunder without the prior written consent of the other. 20. Indemnification. If Executive was or is made a party or is threatened to be made a party to or is otherwise involved (including involvement as a witness) in any action, suit or proceeding, whether civil, criminal, administrative or investigative (a "Proceeding"), by reason of the fact that he or she is or was an officer or employee of the Company or any of its affiliates, Executive shall be indemnified and held harmless by the Company to the fullest extent authorized by the Delaware General Corporation Law, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Company to provide broader indemnification rights than permitted prior thereto), against all expense, liability and loss (including attorneys' fees, judgments, fines, excise taxes or penalties and amounts paid in settlement) reasonably incurred or suffered by Executive in connection therewith and such indemnification shall continue as to Executive if he ceases to be an officer or employee and shall inure to the benefit of Executive's heirs, executors and administrators; provided, however, that the Company shall indemnify Executive in connection with a proceeding (or part thereof) initiated by Executive only if such Proceeding (or part 10 thereof) was authorized by the board of directors of the Company. The right to indemnification conferred in this paragraph shall include the obligation of the Company to pay the expenses incurred in defending any such proceeding in advance of its final disposition (an "Advance of Expenses"); provided, however, that, if and to the extent that the Delaware General Corporation Law requires, an Advance of Expenses incurred by Executive in his capacity as an officer or employee shall be made only upon delivery to the Company of an undertaking, by or on behalf of Executive, to repay all amounts so advanced if it shall ultimately be determined by final judicial decision from which there is no further right to appeal that Executive is not entitled to be indemnified for such expenses under this paragraph or otherwise. 21. No Third Party Beneficiaries. The terms and provisions of this Agreement are intended solely for the benefit of each party hereto and their respective successors or permitted assigns, and it is not intended to confer third-party beneficiary rights upon any other person. 22. Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one and the same instrument. * * * 11 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written, effective as of the Effective Date. COMPANY: CONSECO, INC. /s/James E. Hohmann ------------------------------- James E. Hohmann EVP, Chief Administrative Officer COMPANY: CONSECO SERVICES, LLC /s/Daniel J. Murphy ------------------------------- Daniel J. Murphy President EXECUTIVE: /s/Russell M. Bostick ------------------------------- Russell M. Bostick 12 EX-12 10 exhibit121.txt EXHIBIT 12.1 Exhibit 12.1 Computation of Ratio of Earnings to Fixed Charges and Preferred Dividends (Dollars in millions)
Nine months ended Year ended September 30, December 31, 2006 2005 ---- ---- Pretax income from operations: Net income........................................................................... $ 90.7 $324.9 Add income tax expense............................................................... 52.2 178.5 ------ ------ Pretax income from operations..................................................... 142.9 503.4 ------ ------ Add fixed charges: Interest expense on corporate debt................................................... 36.9 48.1 Interest expense on investment borrowings............................................ 14.4 10.2 Interest added to policyholder account balances ..................................... 313.0 419.9 Portion of rental (a)................................................................ 9.8 12.6 ------ ------ Fixed charges..................................................................... 374.1 490.8 ------ ------ Adjusted earnings................................................................. $517.0 $994.2 ====== ====== Ratio of earnings to fixed charges............................................ 1.38X 2.03X ===== ===== Fixed charges.......................................................................... $374.1 $490.8 Add dividends on preferred stock, including dividends on preferred stock of subsidiaries (divided by the ratio of income to pretax income).................................... 44.9 58.9 ------ ------ Fixed charges plus preferred dividends............................................ $419.0 $549.7 ====== ====== Adjusted earnings................................................................. $517.0 $994.2 ====== ====== Ratio of earnings to fixed charges and preferred dividends.................... 1.23X 1.81X ===== ===== - -------------------- (a) Interest portion of rental is estimated to be 33 percent.
EX-31 11 exhibit311.txt EXHIBIT 31.1 Exhibit 31.1 CERTIFICATION I, C. James Prieur, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Conseco, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 7, 2006 /s/ C. James Prieur - ------------------- C. James Prieur Chief Executive Officer EX-31 12 exhibit312.txt EXHIBIT 31.2 Exhibit 31.2 CERTIFICATION I, Eugene M. Bullis, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Conseco, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 7, 2006 /s/ Eugene M. Bullis - --------------------- Eugene M. Bullis, Executive Vice President and Chief Financial Officer EX-32 13 exhibit321.txt EXHIBIT 32.1 Exhibit 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Conseco, Inc. (the "Company") on Form 10-Q for the period ending September 30, 2006 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, C. James Prieur, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my actual knowledge: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ C. James Prieur - ------------------- C. James Prieur Chief Executive Officer November 7, 2006 A signed original of this written statement required by Section 906 has been provided to Conseco, Inc. and will be retained by Conseco, Inc. and furnished to the Securities and Exchange Commission upon request. EX-32 14 exhibit322.txt EXHIBIT 32.2 Exhibit 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Conseco, Inc. (the "Company") on Form 10-Q for the period ending September 30, 2006 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Eugene M. Bullis, Executive Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my actual knowledge: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Eugene M. Bullis - --------------------- Eugene M. Bullis Executive Vice President and Chief Financial Officer November 7, 2006 A signed original of this written statement required by Section 906 has been provided to Conseco, Inc. and will be retained by Conseco, Inc. and furnished to the Securities and Exchange Commission upon request. -----END PRIVACY-ENHANCED MESSAGE-----