Conseco reinsurance deal swaps profits for cash

Carmel-based Conseco Inc., still a bit strapped for cash, brought in a reinsurance company to shoulder some of the risk
of its life insurance policies.

Minnesota-based Wilton Reassurance Co. will pay $57.5 million to Conseco as a ceding
commission to co-insure and administer 104,000 policies held by Conseco subsidiaries Washington National Insurance Co. and
Conseco Insurance Co.

The extra payment gives a big boost to Conseco, which had predicted its cash balance would
fall to $73 million by the end of the year, down from $104 million March 31.

The Conseco units will transfer to
Wilton money that does not count toward its corporate cash totals: $409 million in cash and policy loans and $466 million
in reserve funds.

The transaction, which is subject to the approval of insurance regulators in Illinois and Wisconsin,
is expected to be completed in the third quarter of 2009.

By co-insuring the policies, Conseco will give up $2.5
million in quarterly after-tax profits, excluding corporate overhead—about 3 percent of its first-quarter gross profits.

Massive investment losses that roiled the entire life insurance industry pushed Conseco into a cash crunch in March.
The company worked through it by renegotiating its bank loans to allow more wiggle room under the loan requirements. But in
exchange, the company will pay $45 million more this year in higher interest rates.

Those extra costs will now
be offset by the Wilton ceding commission. But Conseco also has other payments looming.

Conseco faces a $25 million
fourth-quarter payment on a senior-note agreement with the state of Pennsylvania, according to Credit Suisse analyst Tom Gallagher.
Also, Conseco has $291 million in bonds that can be converted into cash by the bondholders in September 2010. In an April
note, Gallagher set the odds of Conseco’s negotiating a deal with those bondholders at 50-50.