Conseco Issues Memo No. 13.

Business Editors

INDIANAPOLIS--(BUSINESS WIRE)--July 19, 2001

Conseco, Inc. (NYSE:CNC) issued the attached "NEW Conseco Memo No. 13" from CEO Gary Wendt. The memo was posted on Conseco's web site for shareholders and/or electronically distributed to them today. This memo contains various charts that will not transmit over the wire service. To view these charts, please visit the About Us section of our web site (www.conseco.com) where you will be able to download a PDF file of the memo or call our fax-on-demand service at 1.800.344.6452 and request document number 9100 for a fax copy of the memo. You may also call investor relations at 317.817.2893 to request a copy be mailed to you.

Note on forward-looking statements: All statements, trend analyses and other information contained in this release and elsewhere (such as in filings by Conseco with the Securities and Exchange Commission, 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 including words such as "anticipate," "believe," "plan," "estimate," "expect," "intend," "should," "could," "goal," "target," "on track," "comfortable with," "optimistic" and other similar expressions, constitute forward-looking statements under the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to known and unknown risks, uncertainties and other factors which may cause actual results to be materially different from those contemplated by the forward-looking statements. Such factors include, among other things: (1) 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) Conseco's ability to sell its products, its ability to make loans and access capital resources and the costs associated therewith, the market value of Conseco's investments, the lapse rate and profitability of policies, and the level of defaults and prepayments of loans made by Conseco; (2) Conseco's ability to achieve anticipated synergies and levels of operational efficiencies; (3) customer response to new products, distribution channels and marketing initiatives; (4) mortality, morbidity, usage of health care services and other factors which may affect the profitability of Conseco's insurance products; (5) performance of our investments; (6) changes in the Federal income tax laws and regulations which may affect the relative tax advantages of some of Conseco's products; (7) increasing competition in the sale of insurance and annuities and in the finance business; (8) regulatory changes or actions, including those relating to 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; (9) the outcome of Conseco's efforts to sell assets and reduce, refinance or modify indebtedness and the availability and cost of capital in connection with this process; (10) actions by rating agencies and the effects of past or future actions by these agencies on Conseco's business; and (11) the risk factors or uncertainties listed from time to time in Conseco's filings with the Securities and Exchange Commission.

                           NEW Conseco Memo
                                No. 13

To:      Conseco Shareholders
From:    Gary Wendt, Chairman & CEO
Date:    July 19, 2001

A few weeks ago we said we'd like to take an opportunity to provide a new installment in understanding our business activities at Conseco. We think it's important for our shareholders to understand the businesses we're in and how we got there. That way, as events occur over time, you will have a better foundation on which to understand our actions and judge our performance.

Shown below is a chart of these activities grouped in our two major categories, Finance and Insurance, plus two fledgling activities, Capital Management and our imminent acquisition, exlServices. Within Finance and Insurance, the categories shown represent separately organized parts or "SBUs". Selling and managing the products that serve the millions of Conseco customers is done at the SBU level.

(Chart showing business structure)

Originally, I had intended to use this memo to discuss both the Finance company and the Insurance group. But my comments on Finance ended up being extensive, so I thought that it would be more digestible if I did a separate memo on the Insurance group at a later time. We'll aim for mid-September on that, so that in addition to a detailed description of the Businesses, we can examine sales results through August, or 2/3 of the year.

Conseco Finance Corp. (CFC) - formerly Green Tree Financial Corporation (Green Tree) - was acquired by Conseco in mid 1998. It manages receivables of $44 billion and has strong market positions in its core products (private label credit cards for home improvement retailers, home equity loans, manufactured housing (MH) loans, and MH dealer inventory financing).

Green Tree was started in 1975 when Midwest Federal Savings and Loan decided to add a new product line, the financing of manufactured houses. This under-served market was growing throughout America, and it proved such a good business that in 1983, the company was partially "spun off" in a public offering. In 1985, during what has become known as the "savings and loan crisis," Midwest suffered the same plight as other S&Ls and spun off the entire Green Tree operation, which remained as an independent public company until 1998, when Conseco acquired it.

So, CFC's experience in financing manufactured housing goes back 25 plus years, a tremendous asset that is and will be important to the business.

Along the way in its 25 year history, Green Tree broadened its product mix. In 1989, it began offering home improvement loans leveraging knowledge of both the housing industry and dealer management. In 1994, the business added dealer inventory floorplan financing as a product thereby strengthening its position with the 4,000 MH dealers with which it does business. Also in the mid 90s, a number of personnel were brought in from Household Finance to further diversify the company's earnings base by entering the private label credit card business and penetrating the home equity market through retail branch distribution. Although the private label credit card business is a relatively small part of its total portfolio, Conseco Finance has cards with 3.5 million customers. It focuses on retailers in the home improvement business such as Menard's, Ace Hardware, Bryant Air Conditioning and Lennox Heating & Air to name a few. Today, the home equity loan business model is built on generating "leads" from home improvement contractors and the private label credit card business to solicit customers for real estate secured home improvement and debt consolidation loans.

This successful product diversification has resulted in the MH financing business accounting for a decreasing share of total managed receivables because other segments have grown more rapidly. Conseco Finance remains the industry leader in MH, and we intend to maintain our position, but we are not a "one trick pony."

(Chart showing managed receivables components)

Since our on-balance-sheet receivables are less than two years old, a look there shows the product diversification trend even more clearly. In the chart below, you see that less than 40% of CFC's current on-balance-sheet receivables are on manufactured homes owned by individuals. ("On-balance-sheet" receivables relate to loans made since 4Q99 when we switched from "gain on sale" accounting to "on-balance-sheet" accounting. More on "gain on sale" in a minute. The term "managed receivables" includes both categories of loans.)

(Chart showing on-balance-sheet receivables components)

The experience in these other business lines has been excellent, as seen by their low delinquency, now and in the past.

(Chart showing Mortgage Services 60+ delinquency)

(Chart showing Private Label Credit Card 60+ delinquency)

Unfortunately for former or longstanding Conseco shareholders, Green Tree was acquired at a time when an accounting convention known as "gain on sale" was in vogue throughout the finance industry. As you know from my previous memos, this accounting treatment permitted companies to book future expected profits as current period income. The use of this accounting convention required that Conseco - after its acquisition of Green Tree - invest heavily to generate new financing receivables, a requirement which it met by borrowing. Additionally, gain on sale accounting had a second negative element: previously booked income is continuously subject to write-downs, through the income statement, if assumptions made when booking the income prove too optimistic. (In the converse, however, if the assumptions prove too conservative, accounting convention does not permit a write-up to flow through the income statement.)

Those two factors - a requirement to invest heavily (which Conseco satisfied by borrowing $4 billion between mid 1998 and mid 2000) and significant write downs converged after the acquisition and led eventually to the stock price fall and serious financial condition which the business faced during mid 2000.

Consequently, CFC has been seen as the demon of Conseco, despite the fact that the underlying business operation of CFC remained intact and performed well during this entire financial crisis period at Conseco. Let us look back at how this business started, what it does, and why it represents a strong asset for the future now that the "gain on sale" accounting convention has been abandoned.

Thus far, I have mentioned two elements - our long history in financing manufactured housing and our strong market share - which are truly unique benefits for CFC's activities in manufactured housing. Both history and size have allowed the employees of CFC to develop much better customer understanding and strong dealer relationships. In fact CFC's long history and dealer relationships have resulted in a very rich database of customer, dealer, and even park level credit performance (CFC recently hired 20 additional credit risk modelers and statisticians to further enhance its use of data). The long history, dealer relationships and use of data are highly critical elements when dealing with any customer block, but are of particular importance when dealing with the manufactured housing market place as a whole. In my opinion, it is the lack of both history and size which has caused many other companies (e.g. Associates, Access, United Companies, etc.) to leave the business while CFC continues to find it profitable.

(In fact, I have an admission to make. CFC - then Green Tree - drove GE Capital out of the Manufactured housing business in 1985. GECC found that its lack of relationship with the dealers and its smaller size caused it to take undue risks and, after a significant write off, waved the white flag and gave whatever share of the market it had back to the then Green Tree).

A strong understanding of the customer is crucial to making correct credit decisions, and it is essential for delinquency management, collateral utilization, and pricing. These factors, all working together, determine profitability in the manufactured housing lending market. A failure to understand any one aspect, or a failure to manage the linkages between them, can result in disastrous consequences, as many of our former competitors have learned.

One of CFC's basic business strategies is to keep people in a home whenever it makes economic sense to do so. For years, the company has used loan extensions and transfers of equity (loan assumption) tactics to allow people to regain their financial footing and keep payments flowing. The statistics for this activity show that approximately 70% of loans are current two years after renegotiated terms are put in place. Obviously, the use of extensions and transfers of equity are highly effective tools to minimize credit losses.

Even though our delinquency rates in MH lending are among the best in the industry, we have set stretch goals to be even better. Years of experience tell us that delinquencies peak during the third and fourth years of an MH loan. Therefore, because of the enormous number of loans made in the industry from 1996 to 1999, we are fighting our way through a very difficult period.

As you know our goal was to drive 60+ delinquencies below 2% by now. However, several external factors have coincided to keep this goal temporarily out of reach. We believe the imminent change in the bankruptcy laws has artificially inflated bankruptcy filings. And, most importantly, we have seen an economic slowdown in some of our most important geographic markets. In the six Southern states (NC, SC, GA, FL, AL and MS), which account for approximately 30% of our MH retail business, first time unemployment claims were up 59% in the first 6 months of 2001 compared with 2000.

(Chart showing Manufactured Housing 60+ delinquency)

It is important to remember that the delinquency, by itself, is not the bottom line. The bottom line is the actual credit loss. This is why our pricing and credit selection decisions, as well as financial plans, incorporate expected credit losses. And, this is why we work so hard on loss mitigation and recovery rates. The result of our systematic approach is what we believe to be the lowest credit loss ratio in the industry.

Maximizing recovery rates on repossessed assets is also important to the management of the business. For many years, CFC has had a strategy of "actively" managing approximately 70% of its repossessed units. By "actively" managing, we mean repossessing, refurbishing, removing, and reselling on a retail basis. (The other 30% of the units are wholesaled.) This has resulted in a much higher recovery rate - approximately 50% - than if the units are wholesaled - approximately 20%. This active approach towards repossessions is facilitated by the strong dealer relationships that have been built up over the years and by several recently created Conseco "owned" or Conseco "exclusive" sales lots. CFC has approximately 60 contractually exclusive or owned lots and over 1,000 dealers aiding in its disposition efforts.

(Chart showing MH repo recovery rates)

Now, what about credit losses? As you read almost anywhere, losses are higher this year throughout the industry. But the important point that is frequently not made is that our financial plans incorporate this expected increase in credit losses. Furthermore, pricing on current lending is based on these expectations. (For example, the larger concentration of "repo-refis" in our current mix of loan originations has resulted in higher pricing and historically large spreads.)

Below you will see a graph which plots the manufactured housing portfolio cumulative loss assumptions for Gain On Sale (GOS) receivables (those booked prior to 4Q99, and, therefore classified by us as "Legacy".) You can see several things in this picture. First, you can see that our GOS receivables are modeled for considerable future losses. As of the June valuation, you can see that we have experienced approximately 40% of the losses we expect to incur on MH loans made in 1997. Second, for the 1998-1999 period of high loan production in the industry, you can see that our loss expectations increased - 10.69% for 1997 loans; 10.93% for 1998 loans; 12.60% for 1999 loans. These projected future losses on gain-on-sale loans are contained in the models that generate changes in the value of our IO accounts. And as I noted at the outset, when actual performance against these assumptions is worse than expected, we must write down the value of the IO asset and take the loss through the income statement. When the actual performance is better than expected, we must write up the value of the IO asset, but are prohibited from taking the write-up into income until the income is actually realized.

(Chart showing GOS loss assumptions)

The chart below shows loan loss provision expense for the on-balance-sheet receivables. The important point here is that our provision expense for credit losses this year is less than the amount we anticipated in our budget.

(Chart showing MH cumulative loan loss provision expense)

There is risk involved in financing of any kind. Given average annual income and unemployment experience, the risk in financing many MH customers is higher than in other forms of financing (i.e. single family permanent housing). Because of that, CFC knows that it must price at a higher rate. Shown below are the improvements made recently in pricing for risk. As you can see, the net spread we are receiving has been steadily increasing although interest rates in general have fallen. "Pricing for risk" is a fundamental strategy for managing the manufactured housing portfolio.

(Chart showing MH securitization spreads)

Recent securitization spreads are at record levels, which somewhat compensates for lower-than-planned originations. Going forward, we would expect spreads to narrow a bit, but still cover future losses as well as provide a handsome profit to Conseco Finance.

To summarize, the financing of manufactured housing is touted by the "shorts" as the Achilles heel of Conseco. We beg to differ. The very long experience which the company has, the strong relationship with its dealers, its ability to understand the customer, to price for risk, to mitigate losses after delinquency, and to minimize losses on repossessed units are all proven approaches toward managing a manufactured housing loan portfolio. Moreover, while we intend to remain major participants in the industry, the percentage of our portfolio dedicated to manufactured housing is expected to decline as the home mortgage and private label credit card businesses continue to gain momentum.

This is the longest NEW Conseco Memo I've done so far, too long in my opinion. But these things are important for you to understand in order to appreciate the long term value of your investment in Conseco. The problem is there is still more to say! Therefore, I have asked Bruce Crittenden if he and his senior managers will conduct an investor briefing on Conseco Finance later in the year. That way, we can produce a longer briefing book and provide an opportunity for you to have any and all questions answered. We will get a date selected for that and give enough advance notice that many of you can attend.

One final word: in response to many of you who have asked that we give you more time to digest the earnings release before we conduct our conference call, we will be releasing earnings after the market close on August 6, and holding the conference call on the following day.