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CNO Financial Group, Inc. 10-Q 2010
form10q.htm







UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q

þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ende June 30, 2010

o
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



CNO Financial Group, 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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes [   ]  No [   ]
 
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  Large accelerated filer [   ]  Accelerated filer [ X ] Non-accelerated filer [   ] Smaller reporting company [   ]
 
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 [   ]  No [   ]

Shares of common stock outstanding as of July 27, 2010:  251,044,745

 

 
 

 


TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION
Page
     
Item 1.
Financial Statements
 
     
 
Consolidated Balance Sheet as of June 30, 2010 and December 31, 2009
3
 
Consolidated Statement of Operations for the three and six months ended June 30, 2010
and 2009
5
 
Consolidated Statement of Shareholders’ Equity for the six months ended June 30, 2010 and 2009
6
 
Consolidated Statement of Cash Flows for the six months ended June 30, 2010 and 2009
7
 
Notes to Consolidated Financial Statements
8
     
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
51
     
 
Cautionary Statement Regarding Forward-Looking Statements
51
 
Overview
53
 
Critical Accounting Policies
55
 
Results of Operations
55
 
Premium Collections
71
 
Liquidity and Capital Resources
75
 
Investments
85
 
Investment in Variable Interest Entities
93
 
New Accounting Standards
95
     
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
95
     
Item 4.
Controls and Procedures
95
     
PART II - OTHER INFORMATION
 
     
Item 1.
Legal Proceedings                                                                                                                 
96
     
Item 1A.
Risk Factors                                                                                                                 
96
     
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds                                                                                                                 
96
     
Item 5.
Other Information                                                                                                                 
97
     
Item 6.
Exhibits                                                                                                                 
97
     




 
2

 


PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Dollars in millions)

ASSETS

   
June 30,
   
December 31,
 
   
2010
   
2009
 
   
(unaudited)
       
Investments:
           
Actively managed fixed maturities at fair value (amortized cost:  June 30, 2010 - $19,280.3; December 31, 2009 - $18,998.0)
  $ 19,935.7     $ 18,528.4  
Equity securities at fair value (cost: June 30, 2010 - $30.7; December 31, 2009 - $30.7)
    31.0       31.0  
Mortgage loans
    1,948.1       1,965.5  
Policy loans
    292.9       295.2  
Trading securities
    360.7       293.3  
Investments held by variable interest entities
    478.4       -  
Securities lending collateral
    77.6       180.0  
Other invested assets                                                                                                           
    167.2        236.8  
                 
Total investments                                                                                                        
    23,291.6       21,530.2  
                 
Cash and cash equivalents - unrestricted
    323.7       523.4  
Cash and cash equivalents held by variable interest entities
    13.5       3.4  
Accrued investment income
    323.1       309.0  
Value of policies inforce at the Effective Date
    1,077.3       1,175.9  
Cost of policies produced
    1,700.0       1,790.9  
Reinsurance receivables
    3,357.2       3,559.0  
Income tax assets, net
    769.0       1,124.0  
Assets held in separate accounts
    15.6       17.3  
Other assets
    349.8       310.7  
                 
Total assets                                                                                                        
  $ 31,220.8     $ 30,343.8  


(continued on next page)













The accompanying notes are an integral part
of the consolidated financial statements.

 
3

 


CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET,> continued
(Dollars in millions)

LIABILITIES AND SHAREHOLDERS' EQUITY

   
June 30,
   
December 31,
 
   
2010
   
2009
 
   
(unaudited)
       
Liabilities:
           
Liabilities for insurance products:
           
Interest-sensitive products
  $ 13,177.8     $ 13,219.2  
Traditional products
    10,199.7       10,063.5  
Claims payable and other policyholder funds
    946.0       994.0  
Liabilities related to separate accounts
    15.6       17.3  
Other liabilities
    683.6       610.4  
Investment borrowings
    454.2       683.9  
Borrowings related to variable interest entities
    449.7       -  
Securities lending payable
    82.0       185.7  
Notes payable – direct corporate obligations
    1,029.4       1,037.4  
                 
Total liabilities
    27,038.0       26,811.4  
                 
Commitments and Contingencies
               
                 
Shareholders' equity:
               
Common stock ($0.01 par value, 8,000,000,000 shares authorized, shares issued and outstanding:  
     June 30, 2010 – 251,044,745; December 31, 2009 – 250,786,216)
    2.5       2.5  
Additional paid-in capital
    4,418.8       4,408.8  
Accumulated other comprehensive income (loss)
    318.8       (264.3 )
Accumulated deficit
    (557.3 )     (614.6 )
                 
Total shareholders' equity
    4,182.8       3,532.4  
Total liabilities and shareholders' equity
  $ 31,220.8     $ 30,343.8  



















The accompanying notes are an integral part
of the consolidated financial statements.

 
4

 

CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(Dollars in millions, except per share data)
(unaudited)

   
Three months ended
   
Six months ended
 
   
June 30,
   
June 30,
 
   
2010
   
2009
   
2010
   
2009
 
                         
Revenues:
                       
Insurance policy income
  $ 667.9     $ 791.3     $ 1,332.5     $ 1,574.1  
Net investment income (loss):
                               
General account assets
    321.1       308.5       636.3       617.3  
Policyholder and reinsurer accounts and other special- purpose portfolios
    (22.7 )     9.0       1.3       (9.2 )
Realized investment gains (losses):
                               
Net realized investment gains, excluding impairment losses
    11.2       20.3       26.6       105.4  
Other-than-temporary impairment losses:
                               
Total other-than-temporary impairment losses
    (29.3 )     (53.7 )     (47.0 )     (161.8 )
Change in other-than-temporary impairment losses recognized in accumulated other comprehensive income (loss)
    1.4       17.1       (1.2 )      33.2  
Net impairment losses recognized
    (27.9 )     (36.6 )     (48.2 )     (128.6 )
Total realized gains (losses)
    (16.7 )     (16.3 )     (21.6 )     (23.2 )
Fee revenue and other income
    3.6       3.1       7.1       6.1  
                                 
Total revenues
    953.2       1,095.6       1,955.6       2,165.1  
                                 
Benefits and expenses:
                               
Insurance policy benefits
    651.0       781.1       1,350.0       1,534.6  
Interest expense
    28.7       32.7       56.2       55.9  
Amortization
    96.6       101.8       199.2       222.6  
Loss on extinguishment or modification of debt
    .9       -       2.7       9.5  
Other operating costs and expenses
    124.2       130.4       242.6       250.7  
                                 
Total benefits and expenses
    901.4       1,046.0       1,850.7       2,073.3  
                                 
Income before income taxes
    51.8       49.6       104.9       91.8  
                                 
Income tax expense:
                               
Tax expense on period income
    18.7       17.4       37.9       32.7  
Valuation allowance for deferred tax assets
    -       4.6       -       7.0  
                                 
Net income
  $ 33.1     $ 27.6     $ 67.0     $ 52.1  
                                 
Earnings per common share:
                               
Basic:
                               
Weighted average shares outstanding
    250,994,000       184,820,000       250,891,000       184,787,000  
                                 
Net income
  $ .13     $ .15     $ .27     $ .28  
                                 
Diluted:
                               
Weighted average shares outstanding
    302,648,000       185,229,000       297,364,000       184,993,000  
                                 
Net income
  $ .12     $ .15     $ .25     $ .28  





The accompanying notes are an integral part
of the consolidated financial statements.

 
5

 

CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Dollars in millions)
(unaudited)

   
Common stock and additional
paid-in capital
   
Accumulated other comprehensive income (loss)
   
Retained earnings (accumulated deficit)
   
Total
 
                         
Balance, December 31, 2008                                                          
  $ 4,105.9     $ (1,770.7 )   $ (705.2 )   $ 1,630.0  
                                 
Comprehensive income, net of tax:
                               
Net income
    -       -       52.1       52.1  
Change in unrealized appreciation (depreciation) of investments (net of applicable income tax expense of $415.5)
    -       745.9       -       745.9  
Noncredit component of impairment losses on actively managed fixed maturities (net of applicable income tax benefit of $9.2)
    -       (17.2 )     -       (17.2 )
                                 
Total comprehensive income                                                
                            780.8  
                                 
Stock option and restricted stock plans
    4.2       -       -       4.2  
Effect of reclassifying noncredit component of previously recognized impairment losses on actively managed fixed maturities (net of applicable income tax benefit of $2.6)
    -       (4.9 )     4.9       -  
                                 
Balance, June 30, 2009
  $ 4,110.1     $ (1,046.9 )   $ (648.2 )   $ 2,415.0  
                                 
Balance, December 31, 2009
  $ 4,411.3     $ (264.3 )   $ (614.6 )   $ 3,532.4  
                                 
Comprehensive income, net of tax:
                               
Net income
    -       -       67.0       67.0  
Change in unrealized appreciation (depreciation) of investments (net of applicable income tax expense of $303.7)
    -       553.2       -       553.2  
Noncredit component of impairment losses on actively managed fixed maturities (net of applicable income tax expense of $20.2)
    -       36.1       -       36.1  
                                 
Total comprehensive income
                            656.3  
                                 
Cumulative effect of accounting change
    -       (6.2 )     (9.7 )     (15.9 )
Beneficial conversion feature related to the issuance of convertible debentures
    4.0       -       -       4.0  
Stock option and restricted stock plans
    6.0       -        -       6.0  
                                 
Balance, June 30, 2010
  $ 4,421.3     $ 318.8     $ (557.3 )   $ 4,182.8  

The accompanying notes are an integral part
of the consolidated financial statements.

 
6

 


CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in millions)
(unaudited)

   
Six months ended
 
   
June 30,
 
   
2010
   
2009
 
             
Cash flows from operating activities:
           
Insurance policy income
  $ 1,177.3     $ 1,386.5  
Net investment income
    667.4       584.3  
Fee revenue and other income
    7.1       6.1  
Insurance policy benefits
    (997.3 )     (1,218.4 )
Interest expense
    (54.1 )     (46.7 )
Policy acquisition costs
    (210.3 )     (205.0 )
Other operating costs
    (240.2 )     (231.9 )
Taxes
    (3.9 )     (5.7 )
                 
Net cash provided by operating activities
    346.0       269.2  
                 
Cash flows from investing activities:
               
Sales of investments
    4,572.6       5,221.8  
Maturities and redemptions of investments
    392.2       434.9  
Purchases of investments
    (5,406.2 )     (5,830.5 )
Net sales (purchases) of trading securities
    (41.5 )     57.4  
Change in cash and cash equivalents held by variable interest entities
    (6.3 )     1.1  
Other
    (9.2 )     (13.4 )
                 
Net cash used by investing activities                                                                                     
    (498.4 )     (128.7 )
                 
Cash flows from financing activities:
               
Issuance of notes payable, net
    110.8       -  
Payments on notes payable
    (116.5 )     (59.4 )
Expenses related to debt modification and extinguishment of debt
    -       (9.5 )
Amounts received for deposit products
    882.6       884.4  
Withdrawals from deposit products
    (862.0 )     (949.3 )
Investment borrowings and borrowings related to variable interest entities
    (62.2 )     (19.9 )
                 
Net cash used by financing activities
    (47.3 )     (153.7 )
                 
Net decrease in cash and cash equivalents
    (199.7 )     (13.2 )
                 
Cash and cash equivalents, beginning of period
    523.4       894.5  
                 
Cash and cash equivalents, end of period                                                                                             
  $ 323.7     $ 881.3  
                 
                 





The accompanying notes are an integral part
of the consolidated financial statements.


 
7

 
CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)
___________________



BUSINESS AND BASIS OF PRESENTATION

The following notes should be read together with the notes to the consolidated financial statements included in our 2009 Annual Report on Form 10-K.

CNO Financial Group, Inc., a Delaware corporation (“CNO”), (formerly known as Conseco, Inc. prior to its name change in May 2010) 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 (our “Predecessor”), in connection with our bankruptcy reorganization which became effective on September 10, 2003 (the “Effective Date”).  The terms “CNO Financial Group”, the “Company”, “we”, “us”, and “our” as used in this report refer to CNO and its subsidiaries or, when the context requires otherwise, our Predecessor and its subsidiaries.  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.

Our unaudited consolidated financial statements reflect normal recurring adjustments that, in the opinion of management, are necessary for a fair statement of our financial position, results of operations and cash flows for the periods presented.  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 accounting principles generally accepted in the United States of America (“GAAP”).  We have reclassified certain amounts from the prior periods to conform to the 2010 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, 2009, 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 (including derivatives), assets and liabilities related to income taxes, liabilities for insurance products, liabilities related to litigation and guaranty fund assessment accruals.  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.

OUT-OF-PERIOD ADJUSTMENTS

We recorded the net effects of certain out-of-period adjustments which:  (i) decreased our net income by $2.7 million (or one cent per diluted share) in the second quarter of 2010; and (ii) decreased our net income by $3.0 million (or one cent per diluted share) in the first six months of 2010.  We evaluated these errors taking into account both qualitative and quantitative factors and considered the impact of these errors in relation to the 2010 periods, as well as the materiality to the periods in which they originated.  The impact of correcting these errors in prior years was not significant to any individual period.  Management believes these errors are immaterial to the consolidated financial statements.

 
8

 
CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)
___________________


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 net investment income (classified as investment income from policyholder and reinsurer accounts and other special-purpose portfolios)); or (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.

Certain of our trading securities are held in an effort to offset the portion of the income statement volatility caused by the effect of interest rate fluctuations on the value of the 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 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 fair value of these securities, which is recognized currently in income from policyholder and reinsurer accounts and other special-purpose portfolios (a component of investment income), is substantially offset by the change in insurance policy benefits for these products.  Our trading securities totaled $360.7 million and $293.3 million at June 30, 2010 and December 31, 2009, respectively.

Accumulated other comprehensive income (loss) is primarily comprised of the net effect of unrealized appreciation (depreciation) on our investments.  These amounts, included in shareholders’ equity as of June 30, 2010 and December 31, 2009, were as follows (dollars in millions):

   
June 30,
   
December 31,
 
   
2010
   
2009
 
             
Net unrealized appreciation (depreciation) on actively managed fixed maturity securities on which an other-than-temporary impairment loss has been recognized
  $ (63.2 )   $ (133.5 )
Net unrealized gains (losses) on all other investments
    697.2       (339.9 )
Adjustment to value of policies inforce at the Effective Date
    (20.8 )     10.7  
Adjustment to cost of policies produced
    (109.3 )     59.8  
Unrecognized net loss related to deferred compensation plan
    (8.0 )     (8.2 )
Deferred income tax asset (liability)
    (177.1 )     146.8  
                 
Accumulated other comprehensive income (loss)
  $ 318.8     $ (264.3 )


 
9

 
CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)
___________________



At June 30, 2010, the amortized cost, gross unrealized gains and losses, other-than-temporary impairments in accumulated other comprehensive income (loss) and estimated fair value of actively managed fixed maturities were as follows (dollars in millions):

                           
Other-than-
                           
temporary
                           
impairments
                           
included in
         
Gross
   
Gross
         
accumulated other
   
Amortized
   
unrealized
   
unrealized
   
Estimated
   
comprehensive
   
cost
   
gains
   
losses
   
fair value
   
income (loss)
                             
Corporate securities
  $ 14,660.3     $ 907.3     $ (196.4 )   $ 15,371.2     $ -  
United States Treasury securities and obligations of United States government corporations and agencies
    155.0       6.9       -       161.9       -  
States and political subdivisions
    1,300.1       32.8       (43.4 )     1,289.5       -  
        Debt securities issued by foreign governments                                            
    .9       .1       -       1.0       -  
Asset-backed securities
    301.8       6.3       (14.6 )     293.5       (4.8 )
Collateralized debt obligations
    144.8       1.8       (3.6 )     143.0       -  
Commercial mortgage-backed securities
    1,171.8       45.1       (47.9 )     1,169.0       (3.4 )
Mortgage pass-through securities
    34.3       1.9       -       36.2       -  
Collateralized mortgage obligations
    1,511.3       40.1       (81.0 )     1,470.4       (103.5 )
                                         
Total actively managed fixed maturities
  $ 19,280.3     $ 1,042.3     $ (386.9 )   $ 19,935.7     $ (111.7 )

The following table sets forth the amortized cost and estimated fair value of those actively managed fixed maturities at June 30, 2010, by contractual maturity.  Actual maturities will differ from contractual maturities because certain borrowers may have the right to call or prepay obligations with or without penalties.  In addition, structured securities (such as asset-backed securities, collateralized debt obligations, commercial mortgage-backed securities, mortgage pass-through securities and collateralized mortgage obligations, collectively referred to as “structured securities”) frequently permit periodic unscheduled payments throughout their lives.

         
Estimated
 
   
Amortized
   
fair
 
   
cost
   
value
 
   
(Dollars in millions)
 
             
Due in one year or less                                                                             
  $ 134.5     $ 135.5  
Due after one year through five years                                                                             
    1,041.7       1,086.6  
Due after five years through ten years                                                                             
    4,617.7       4,866.0  
Due after ten years                                                                             
    10,322.4       10,735.5  
                 
Subtotal                                                                       
    16,116.3       16,823.6  
                 
Structured securities                                                                             
    3,164.0       3,112.1  
                 
Total                                                                       
  $ 19,280.3     $ 19,935.7  


 
10

 
CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)
___________________


Net Realized Investment Gains (Losses)

During the first six months of 2010, we recognized net realized investment losses of $21.6 million, which were comprised of $26.6 million of net gains from the sales of investments (primarily fixed maturities) with proceeds of $4.6 billion, and $48.2 million of writedowns of investments for other than temporary declines in fair value recognized through net income ($47.0 million, prior to the $(1.2) million of impairment losses recognized through accumulated other comprehensive income (loss)).

During the first six months of 2009, we recognized net realized investment losses of $23.2 million, which were comprised of $105.4 million of net gains from the sales of investments (primarily fixed maturities) with proceeds of $5.2 billion, and $128.6 million of writedowns of investments for other than temporary declines in fair value recognized through net income ($161.8 million, prior to the $33.2 million of impairment losses recognized through accumulated other comprehensive income (loss)).

At June 30, 2010, fixed maturity securities in default or considered nonperforming had an aggregate amortized cost of $4.6 million and a carrying value of $6.1 million.  We also had mortgage loans with an aggregate carrying value of $12.3 million that were in the process of foreclosure at June 30, 2010.

Our fixed maturity investments are generally purchased in the context of a long-term strategy to fund insurance liabilities, so we do not generally seek to purchase and sell such securities to generate short-term realized gains.  In certain circumstances, including those in which securities are selling at prices which exceed our view of their underlying economic value, and it is possible to reinvest the proceeds to better meet our long-term asset-liability objectives, we may sell certain securities.  During the six months ended June 30, 2010, we sold $.9 billion of fixed maturity investments which resulted in gross investment losses (before income taxes) of $78.8 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 asset class, an issuer or an industry; (iv) changes in credit quality; or (v) changes in expected liability cash flows.

The following summarizes the investments (excluding investments held by the variable interest entities (“VIEs”)) sold at a loss during the first six months of 2010 which had been continuously in an unrealized loss position exceeding 20 percent of the amortized cost basis prior to the sale for the period indicated (dollars in millions):

   
At date of sale
 
   
Number
   
Amortized
   
Fair
 
   
of issuers
   
cost
   
value
 
                   
Less than 6 months prior to sale                                                                               
    2     $ 18.3     $ 14.2  
Greater than 12 months prior to sale                                                                               
    15       127.5       69.0  
                         
      17     $ 145.8     $ 83.2  

We regularly evaluate our investments for possible impairment.  Our assessment of whether unrealized losses are “other than temporary” requires significant judgment.  Factors considered include:  (i) the extent to which fair value is less than the cost basis; (ii) the length of time that the fair 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 or risk premium; (iv) the near-term prospects for specific events, developments or circumstances likely to affect the value of the investment; (v) 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) whether we intend to sell the investment or it is more likely than not that circumstances will require us to sell the investment before recovery occurs; (viii) the underlying current and prospective asset and enterprise values of the issuer and the extent to which the recoverability of the carrying value of our investment may be affected by changes in such values; (ix) projections of, and unfavorable changes in, cash flows on structured securities including mortgage-backed and asset-backed securities; and (x) other subjective factors.

 
11

 
CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)
___________________



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 estimated fair values of our investments could have a material adverse effect on our earnings in future periods.

Impairment losses on equity securities are recognized in net income.  The manner in which impairment losses on actively managed fixed maturity securities are recognized in the financial statements is dependent on the facts and circumstances related to the specific security.  If we intend to sell a security or it is more likely than not that we would be required to sell a security before the recovery of its amortized cost, the security is other-than-temporarily impaired and the full amount of the impairment is recognized as a loss through earnings.  If we do not expect to recover the amortized cost basis, we do not plan to sell the security, and if it is not more likely than not that we would be required to sell a security before the recovery of its amortized cost, less any current period credit loss, the recognition of the other-than-temporary impairment is bifurcated.  We recognize the credit loss portion in net income and the noncredit loss portion in accumulated other comprehensive income (loss).

We estimate the amount of the credit loss component of a fixed maturity security impairment as the difference between amortized cost and the present value of the expected cash flows of the security.  The present value is determined using the best estimate of future cash flows discounted at the effective interest rate implicit to the security at the date of purchase or the current yield to accrete an asset-backed or floating rate security.  The methodology and assumptions for establishing the best estimate of future cash flows vary depending on the type of security.

For most structured securities, cash flow estimates are based on bond specific facts and circumstances that may include collateral characteristics, expectations of delinquency and default rates, loss severity, prepayment speeds and structural support, including excess spread, subordination and guarantees.  For corporate bonds, cash flow estimates are derived from scenario-based outcomes of expected corporate restructurings or the disposition of assets using bond specific facts and circumstances including timing, secured interest and loss severity.  The previous amortized cost basis less the impairment recognized in net income becomes the security’s new cost basis.  We accrete the new cost basis to the estimated future cash flows over the expected remaining life of the security.

The remaining non-credit impairment, which is recorded in accumulated other comprehensive income (loss), is the difference between the security’s estimated fair value and our best estimate of future cash flows discounted at the effective interest rate prior to impairment.  The remaining non-credit impairment typically represents changes in the market interest rates, current market liquidity and risk premiums.  As of June 30, 2010, other-than-temporary impairments included in accumulated other comprehensive income (loss) of $114.1 million (before taxes and related amortization) relate to structured securities.

 
12

 
CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)
___________________



The following table summarizes the amount of credit losses recognized in earnings on actively managed fixed maturity securities held at the beginning of the period, for which a portion of the other-than-temporary impairment was also recognized in accumulated other comprehensive income (loss) for the three and six months ended June 30, 2010 and 2009 (dollars in millions):

   
Three months ended
   
Six months ended
 
   
June 30,
   
June 30,
 
   
2010
   
2009
   
2010
   
2009
 
                         
Credit losses on actively managed fixed maturity securities, beginning of period
  $ (29.4 )   $ (7.4 )   $ (27.2 )   $ (.6 )
Add:  credit losses on other-than-temporary impairments not previously recognized
    (1.3 )     (1.6 )     (1.3 )     (8.4 )
Less:  credit losses on securities sold
    10.1       -       13.5       -  
Less:  credit losses on securities impaired due to intent to sell (a)
    1.1       -       1.1       -  
Add:  credit losses on previously impaired securities
    (4.5 )     (1.0 )     (10.1 )     (1.0 )
Less:  increases in cash flows expected on previously impaired securities
    -       -       -       -  
                                 
Credit losses on actively managed fixed maturity securities, end of period
  $ (24.0 )   $ (10.0 )   $ (24.0 )   $ (10.0 )
__________
(a)  
Represents securities for which the amount previously recognized in accumulated other comprehensive income (loss) was recognized in earnings because we intend to sell the security or we more likely than not will be required to sell the security before recovery of its amortized cost basis.

Gross Unrealized Investment Losses

Our investment strategy is to maximize, over a sustained period and within acceptable parameters of quality and 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 projected total return of the portfolio as market opportunities change, to reflect changing perceptions of risk, or to better match certain characteristics of our investment portfolio with the corresponding characteristics of our insurance liabilities.

 
13

 
CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)
___________________



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 had been in a continuous unrealized loss position, at June 30, 2010 (dollars in millions):

   
Less than 12 months
   
12 months or greater
   
Total
 
   
Estimated fair
   
Unrealized
   
Estimated fair
   
Unrealized
   
Estimated fair
   
Unrealized
 
Description of securities
 
value
   
losses
   
value
   
losses
   
value
   
losses
 
                                     
Corporate securities
  $ 1,138.7     $ (43.6 )   $ 1,774.1     $ (152.8 )   $ 2,912.8     $ (196.4 )
United States Treasury securities and obligations of United States government corporations and agencies
    1.0       -       -       -       1.0       -  
States and political subdivisions
    146.0       (3.3 )     262.0       (40.1 )     408.0       (43.4 )
Asset-backed securities
    60.7       (1.7 )     85.1       (12.9 )     145.8       (14.6 )
Collateralized debt obligations
    76.6       (3.6 )     -       -       76.6       (3.6 )
Commercial mortgage-backed securities
    132.6       (5.3 )     147.2       (42.6 )     279.8       (47.9 )
Mortgage pass-through securities
    .1       -       3.8       -       3.9       -  
Collateralized mortgage obligations
    202.2       (3.0 )     436.3       (78.0 )     638.5       (81.0 )
                                                 
Total actively managed fixed maturities
  $ 1,757.9     $ (60.5 )   $ 2,708.5     $ (326.4 )   $ 4,466.4     $ (386.9 )

Based on management’s current assessment of investments with unrealized losses at June 30, 2010, 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).  While we do not have the intent to sell securities with unrealized losses and it is not more likely than not that we will be required to sell securities with unrealized losses prior to their anticipated recovery, our intent on an individual security may change, based upon market or other unforeseen developments.  In such instances, we sell securities in the ordinary course of managing our portfolio to meet diversification, credit quality, yield, duration and liquidity requirements.  If a loss is recognized from a sale subsequent to a balance sheet date due to these unexpected developments, the loss is recognized in the period in which we had the intent to sell the security before its anticipated recovery.

 
14

 
CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)
___________________



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
   
Six months ended
 
   
June 30,
   
June 30,
 
   
2010
   
2009
   
2010
   
2009
 
                         
Net income for basic earnings per share
  $ 33.1     $ 27.6     $ 67.0     $ 52.1  
                                 
Add:  interest expense on 7.0% Convertible Senior Debentures due 2016 (the “7.0% Debentures”), net of income taxes
    3.4       -       6.0       -  
                                 
Net income for diluted earnings per share
  $ 36.5     $ 27.6     $ 73.0     $ 52.1  
                                 
Shares:
                               
Weighted average shares outstanding for basic earnings per share
    250,994       184,820       250,891       184,787  
                                 
Effect of dilutive securities on weighted average shares:
                               
7% Debentures
    49,793       -       44,663       -  
Stock option and restricted stock plans
    1,861       409       1,810       206  
                                 
Dilutive potential common shares
    51,654       409       46,473       206  
                                 
Weighted average shares outstanding for diluted earnings per share
    302,648       185,229       297,364       184,993  

Basic earnings per common share is computed by dividing net income by the weighted average number of common shares outstanding for the period.  Restricted shares (including our performance shares) are not included in basic earnings per share until vested.  Diluted earnings per share reflect 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).

BUSINESS SEGMENTS

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 businesses.

We measure segment performance by excluding realized investment gains (losses) because we believe that this performance measure is a better indicator of the ongoing business 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 the underlying business of our segments.  Realized investment gains (losses) may affect future earnings levels since our underlying business is long-term in nature and changes in our investment portfolio may impact our ability to earn the assumed interest rates needed to maintain the profitability of our business.


 
15

 
CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)
___________________



Operating information by segment was as follows (dollars in millions):

   
Three months ended
   
Six months ended
 
   
June 30,
   
June 30,
 
   
2010
   
2009
   
2010
   
2009
 
Revenues:
                       
Bankers Life:
                       
Insurance policy income:
                       
Annuities
  $ 10.7     $ 10.9     $ 19.0     $ 21.5  
Supplemental health
    342.4       436.5       688.3       875.2  
Life
    47.6       50.2       89.6       92.4  
Net investment income (a)
    160.5       163.6       346.4       305.8  
Fee revenue and other income (a)
     2.7       1.6       5.0       3.0  
                                 
Total Bankers Life revenues
    563.9       662.8       1,148.3       1,297.9  
                                 
Colonial Penn:
                               
Insurance policy income:
                               
Supplemental health
    1.6       2.0       3.4       4.1  
Life
    47.7       50.7       94.1       95.7  
Net investment income (a)
    9.7       9.8       19.4       19.6  
Fee revenue and other income (a)
    .1       .2       .3       .4  
                                 
Total Colonial Penn revenues
    59.1       62.7       117.2       119.8  
                                 
Conseco Insurance Group:
                               
Insurance policy income:
                               
Annuities
    2.4       10.1       4.9       23.0  
Supplemental health
    146.9       148.7       294.2       298.1  
Life
    66.7       80.1       135.2       159.9  
Other
    1.9       2.1       3.8       4.2  
Net investment income (a)
    126.3       141.1       264.3       275.4  
Fee revenue and other income (a)
    .2       .4       .5       1.1  
                                 
Total Conseco Insurance Group revenues
    344.4       382.5       702.9       761.7  
                                 
Corporate operations:
                               
Net investment income
    1.9       3.0       7.5       7.3  
Fee and other income
    .6       .9       1.3       1.6  
                                 
Total corporate revenues
    2.5       3.9       8.8       8.9  
                                 
Total revenues
     969.9       1,111.9       1,977.2       2,188.3  

(continued on next page)


 
16

 
CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)
___________________


(continued from previous page)

   
Three months ended
   
Six months ended
 
   
June 30,
   
June 30,
 
   
2010
   
2009
   
2010
   
2009
 
Expenses:
                       
Bankers Life: