In this section, we review the consolidated financial condition of Conseco at September 30, 2009, and the consolidated results of operations for the three and nine months ended September 30, 2009 and 2008, 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 2008 Annual Report on Form 10-K as well as the risk factors included in Exhibit 99.4 to our Current Report on Form 8-K dated October 13, 2009, provide 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:

• our ability to continue to satisfy the financial ratio and balance requirements and other covenants of our debt agreements;

• liquidity issues associated with the right of holders of our Existing Debentures to require us to repurchase Existing Debentures on September 30, 2010;

• general economic, market and political conditions, including the performance and fluctuations of the financial markets which may affect our ability to raise capital or refinance our existing indebtedness and the cost of doing so;

• our ability to continue to satisfy the financial ratio and balance requirements and other covenants of our debt agreements;

• our ability to generate sufficient liquidity to meet our debt service obligations and other cash needs;

• our ability to obtain adequate and timely rate increases on our supplemental health products, including our long-term care business;

• the receipt of required regulatory approvals for dividend and surplus debenture interest payments from our insurance subsidiaries;

• mortality, morbidity, the increased cost and 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;

• changes in our assumptions related to the cost of policies produced or the value of policies inforce at the Effective Date;

• the recoverability of our deferred tax assets and the effect of potential ownership changes and tax rate changes on its value;

• our assumption that the positions we take on our tax return filings, including our position that our New Debentures will not be treated as stock for purposes of Section 382 of the Code and will not trigger an ownership change, will not be successfully challenged by the IRS;

• changes in accounting principles and the interpretation thereof;

• our ability to achieve anticipated expense reductions and levels of operational efficiencies including improvements in claims adjudication and continued automation and rationalization of operating systems;

• performance and valuation of our investments, including the impact of realized losses (including other-than-temporary impairment charges);

• our ability to identify products and markets in which we can compete effectively against competitors with greater market share, higher ratings, greater financial resources and stronger brand recognition;

• the ultimate outcome of lawsuits filed against us and other legal and regulatory proceedings to which we are subject;

• our ability to complete the remediation of the material weakness in internal controls over our actuarial reporting process and to maintain effective controls over financial reporting;

• our ability to continue to recruit and retain productive agents and distribution partners and customer response to new products, distribution channels and marketing initiatives;

• our ability to achieve eventual upgrades of the financial strength ratings of Conseco and our insurance company subsidiaries as well as the impact of rating downgrades on our business and our ability to access capital;

• the risk factors or uncertainties listed from time to time in our filings with the SEC;

• regulatory changes or actions, including those relating to regulation of the financial affairs of our insurance companies, such as the payment of dividends and surplus debenture interest 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

• changes in the Federal income tax laws and regulations which may affect or eliminate the relative tax advantages of some of our products.

Other factors and assumptions not identified above are also relevant to the forward-looking statements, and if they prove incorrect, could also cause actual results to differ materially from those projected.

All written or oral forward-looking statements attributable to us are expressly qualified in their entirety by the foregoing cautionary statement. Our forward-looking statements speak only as of the date made. We assume no obligation to update or to publicly announce the results of any revisions to any of the forward-looking statements to reflect actual results, future events or developments, changes in assumptions or changes in other factors affecting the forward-looking statements.

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, underserved, 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 manage our business through the following: three primary operating segments, Bankers Life, Colonial Penn and Conseco Insurance Group, which are defined on the basis of product distribution; and corporate operations, which consists of holding company activities and certain noninsurance company businesses that are not part of our other segments. Prior to the fourth quarter of 2008, we had a fourth operating segment comprised of other business in run-off. The other business in run-off segment had included blocks of business that we no longer market or underwrite and were managed separately from our other businesses. Such segment had consisted primarily of long-term care insurance sold in prior years through independent agents. As a result of the Transfer, as further discussed in the note to the consolidated financial statements entitled "Transfer of Senior Health Insurance Company of Pennsylvania to an Independent Trust", a substantial portion of the long-term care business in the former other business in run-off segment is presented as discontinued operations in our consolidated financial statements for the three and nine months ended September 30, 2008. Accordingly, we have restated all prior year segment disclosures to conform to the Company's current operating segments. Our segments are described below:

• Bankers Life, which consists of the business of Bankers Life and Casualty Company, markets and distributes Medicare supplement insurance, life insurance, long-term care insurance, Medicare Part D prescription drug program, Medicare Advantage products and certain annuity products to the senior market through career agents and sales managers. Bankers Life and Casualty Company markets its products under its own brand name. Medicare Part D products are marketed primarily through an agreement with Coventry, and Medicare Advantage products are marketed through an agreement with Humana Inc.

• Colonial Penn, which consists of the business of Colonial Penn Life Insurance Company ("Colonial Penn"), markets primarily graded benefit and simplified issue life insurance directly to customers through television advertising, direct mail, the internet and telemarketing. Colonial Penn markets its products under its own brand name.

• 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 professional independent producers (some of whom sell one or more of Conseco Insurance Group's product lines exclusively). This segment markets its products under the "Conseco" and "Washington National" brand names. Conseco Insurance Group includes primarily the business of Conseco Health Insurance Company ("Conseco Health"), Conseco Life, Conseco Insurance Company and Washington National. This segment also includes blocks of long-term care and other health business of these companies that we no longer market or underwrite.

CRITICAL ACCOUNTING POLICIES

Refer to "Critical Accounting Policies" in our 2008 Annual Report on Form 10-K as retrospectively adjusted by our Current Report on Form 8-K filed on October 13, 2009, which updates Items 6, 7 and 8 of our 2008 Form 10-K for information on our accounting policies that we consider critical in preparing our consolidated financial statements. The following is provided to supplement and update the previously provided disclosures:

Value of Policies Inforce at the Effective Date and Cost of Policies Produced - persistency rates related to our major blocks of business

The following summarizes the persistency of our major blocks of insurance business summarized by segment and line of business:

                              Years ended December 31,      Nine months ended
                                  2007          2008      September 30, 2009 (3)

Bankers Life:
Medicare supplement (1)            83.5 %         83.7 %        83.8 %    (4)
Long-term care (1)                 91.0 %         90.4 %        87.7 %    (5)
Equity-indexed annuities (2)       87.1 %         88.0 %        86.8 %    (6)
Other annuities (2)                84.0 %         84.3 %        86.1 %    (7)
Life (1)                           87.7 %         87.3 %        87.5 %    (8)

Colonial Penn:
Life (1)                           87.3 %         86.0 %        86.2 %    (8)

Conseco Insurance Group:
Medicare supplement (1)            75.6 %         77.8 %        78.5 %    (4)
Long-term care (1)                 92.7 %         92.1 %        92.2 %    (8)
Specified disease (1)              91.9 %         90.3 %        89.8 %    (8)
Equity-indexed annuities (2)       91.4 %         86.5 %        80.5 %    (9)
Other annuities (2)                89.5 %         80.6 %        93.3 %    (8)
Life (1)                           93.7 %         93.4 %        93.0 %    (8)


____________

(2) Based on the percentage of the inforce block persisting.

(3) Annualized rate.

(4) Persistency rates on Medicare supplement business are typically lower in the first six months of each calendar year, as policyholders more frequently change insurance companies during the early part of each year. Adjusting for seasonality, the persistency rates during the first nine months of 2009 are slightly higher than our expectations for these blocks.

(5) Bankers Life has been implementing premium rate increases on certain policies in this block. Some policyholders have chosen to lapse their policies rather than pay the increased premium rate. Refer to "Management's Discussion and Analysis of Financial Condition and Results of Operations - Bankers Life - Insurance Policy Benefits" for additional information.

(6) We have noted a slight decrease in persistency rates for Bankers Life's equity-indexed annuity products during the first nine months of 2009. We believe this decrease is related to a change in consumer preference to fixed rate annuities given volatility in the equity markets in recent periods. This decrease was more than offset by increased persistency in other annuity products. (See note 7 below). These equity-indexed annuity policies do not have the market value adjustment ("MVA") feature included in certain equity-indexed annuities sold by our Conseco Insurance Group segment. (See note 9 below).

(7) We have noted an increase in persistency rates for other annuity products (consisting primarily of fixed rate annuity policies). We believe this increase is related to the lack of competing investment products which would offer higher returns for consumers.

(8) These persistency rates are generally in line with our expectations.

(9) This block of business has experienced higher than anticipated surrenders during the first nine months of 2009 and we expect higher surrenders in future periods. The annuities which are experiencing higher surrenders have a MVA feature, which effectively reduced (or in some cases eliminated) the charges paid upon the surrender of these policies as the 10-year treasury rate dropped to historic lows. The impact of both the historical experience and projected increased surrender activity and higher MVA benefits has reduced our expectations on the profitability of the annuity block of Conseco Insurance Group to approximately break-even. Refer to "Management's Discussion and Analysis of Financial Condition and Results of Operations - Conseco Insurance Group - Amortization Related to Operations" for additional information.

Liabilities for Insurance Products - reserves for the future payment of long-term care policy claims

We calculate and maintain reserves for the future payment of claims to our policyholders based on actuarial assumptions. For all our insurance products, we establish an active life reserve, a liability for due and unpaid claims, claims in the course of settlement and incurred but not reported claims. In addition, for our supplemental health insurance business, we establish a reserve for the present value of amounts not yet due on claims. Many factors can affect these reserves and liabilities, such as economic and social conditions, inflation, hospital and pharmaceutical costs, changes in doctrines of legal liability and extra-contractual damage awards. Therefore, our reserves and liabilities are necessarily based on numerous estimates and assumptions as well as historical experience. Establishing reserves is an uncertain process, and it is possible that actual claims will materially exceed our reserves and have a material adverse effect on our results of operations and financial condition. For example, our long-term care policy claims may be paid over a long period of time and, therefore, loss estimates have a higher degree of uncertainty. We have incurred significant losses beyond our estimates as a result of actual claim costs and persistency of our long-term care business of Senior Health and Washington National. The long-term care business of Senior Health was transferred to an independent trust in 2008 and Conseco no longer has any liability for this business. Estimates of unpaid losses related to long-term care business have a higher degree of uncertainty than estimates for our other products due to the range of ultimate duration of these claims and the resulting variability in their cost (in addition to the variations in the lag time in reporting claims). We would not consider a variance of 5-10 percentage points from the initial expected loss ratio to be unusual. As an example, an increase in the initial loss ratio of 5-10 percentage points for claims incurred in the third quarter of 2009 related to our long-term care business (in both our Bankers Life and Conseco Insurance Group segments) would result in a decrease in our earnings of approximately $9 to $17 million. Our financial results depend significantly upon the extent to which our actual claims experience is consistent with the assumptions we used in determining our reserves and pricing our products. If our assumptions with respect to future claims are incorrect, and our reserves are insufficient to cover our actual losses and expenses, we would be required to increase our liabilities, which would negatively affect our operating results.

Valuation Allowance for Deferred Taxes

Concluding that a valuation allowance is not required is difficult when there has been significant negative evidence, such as cumulative losses in recent years. We utilize a three year rolling calculation of actual income before income taxes as our primary measure of cumulative losses in recent years. Our analysis of whether there needs to be further increases to the deferred tax valuation allowance recognizes that as of December 31, 2008, we have incurred a cumulative loss over the evaluation period, resulting from the substantial loss during 2008 primarily related to the transfer of Senior Health to an independent trust as described in the note to these consolidated financial statements entitled "Transfer of Senior Health Insurance Company of Pennsylvania to an Independent Trust". As a result of the cumulative losses recognized in recent years, our evaluation of the need to increase the valuation allowance for deferred tax assets was primarily based on our historical earnings. However, because a substantial portion of the cumulative losses for the three-year period ended December 31, 2008, relates to transactions to dispose of blocks of businesses, we have adjusted the three-year cumulative results for the income and losses from the blocks of business disposed of in the past and the business transferred as further described in the note to these financial statements entitled "Transfer of Senior Health Insurance Company of Pennsylvania to an Independent Trust". In addition, we have adjusted the three-year cumulative results for a significant litigation settlement and the worthlessness of certain loans made by our Predecessor. We consider these to be non-recurring matters and have reflected our best estimates of when temporary differences will reverse over the carryforward periods.

In order to support the utilization of the tax benefits of NOLs that do not have an offsetting valuation allowance, we project future taxable income based on our historical earnings adjusted for the items described in the previous paragraph. Based on these projections, we must generate approximately $160 million of taxable income in 2009 and approximately $200 million for each year thereafter through 2018 in order to utilize the tax benefits of our NOLs which expire through that date. The taxable income requirements are substantially comprised of life insurance income, as the potential tax benefits related to our non-life NOLs are substantially offset by a valuation allowance. Our taxable income for the nine months ended September 30, 2009 was $212 million before deductions related to the worthlessness of certain loans made by our Predecessor, and we expect our future taxable income to be adequate to utilize the remaining NOLs. The projections of future taxable income used to support the recovery of our NOLs do not anticipate the use of any tax planning strategies that we would consider to avoid a tax benefit from expiring.

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,
                                              2009           2008           2009          2008

Income (loss) before net realized
investment gains (losses), net of
  related amortization and income taxes
(a non-GAAP measure) (a):
Bankers Life                               $     85.4      $    67.8     $    193.4     $   131.5
Colonial Penn                                     7.4            6.5           23.5          18.5
Conseco Insurance Group                          21.6           34.2           74.0          89.8
Corporate operations                            (31.4 )        (19.5 )        (96.0 )       (77.0 )

                                                 83.0           89.0          194.9         162.8
Net realized investment gains (losses),
net of related amortization:
Bankers Life                                    (16.6 )        (40.4 )        (32.3 )       (67.4 )
Colonial Penn                                     1.5           (1.5 )          2.7          (1.4 )
Conseco Insurance Group                            .6          (36.8 )           .6         (59.0 )
Corporate operations                             (4.4 )         (4.6 )        (10.0 )       (25.1 )

                                                (18.9 )        (83.3 )        (39.0 )      (152.9 )
Income (loss) before income taxes:
Bankers Life                                     68.8           27.4          161.1          64.1
Colonial Penn                                     8.9            5.0           26.2          17.1
Conseco Insurance Group                          22.2           (2.6 )         74.6          30.8
Corporate operations                            (35.8 )        (24.1 )       (106.0 )      (102.1 )

Income before income taxes                 $     64.1      $     5.7     $    155.9     $     9.9

These non-GAAP financial measures of "income (loss) before net realized investment gains (losses), net of related amortization, and before income taxes" differ from "income (loss) before income taxes" as presented in our consolidated statement of operations prepared in accordance with GAAP due to the exclusion of before tax realized investment gains (losses), net of related amortization. We measure segment performance excluding realized investment gains (losses) because we believe that this performance measure is a better indicator of the ongoing businesses and trends in our business. Our primary investment focus is on investment income to support our liabilities for insurance products as opposed to the generation of realized investment gains (losses), and a long-term focus is necessary to maintain profitability over the life of the business. Realized investment gains (losses) depend on market conditions and do not necessarily relate to decisions regarding the underlying business of our segments. However, "income (loss) before net realized investment gains (losses), net of related amortization, and before income taxes" does not replace "income (loss) before income taxes" as a measure of overall profitability. We may experience realized investment gains (losses), which will affect future earnings levels since our underlying business is long-term in nature and we need to earn the assumed interest rates on the investments backing our liabilities for insurance products to maintain the profitability of our business. In addition, management uses this non-GAAP financial measure in its budgeting process, financial analysis of segment performance and in assessing the allocation of resources. We believe these non-GAAP financial measures enhance an investor's understanding of our financial performance and allows them to make more informed judgments about the Company as a whole. These measures also highlight operating trends that might not otherwise be transparent. 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, through our Colonial Penn segment, which utilizes direct response marketing and through our Conseco Insurance Group segment, which utilizes professional independent producers.

                         CONSECO, INC. AND SUBSIDIARIES



Bankers Life (dollars in millions):

                                              Three months ended             Nine months ended
                                                 September 30,                 September 30,
                                              2009           2008           2009           2008

Premium collections:
Annuities                                  $    284.7     $    323.1     $    862.2     $    812.9
Supplemental health                             440.7          478.7        1,286.5        1,385.0
Life                                             63.2           51.9          167.4          153.7

Total collections                          $    788.6     $    853.7     $  2,316.1     $  2,351.6

Average liabilities for insurance
products:
Annuities:
Mortality based                            $    249.3     $    254.2     $    251.0     $    252.6
. . .