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CNO Financial Group, Inc. 10-Q 2013
CNO 03.31.2013 10-Q


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 ended March 31, 2013
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 (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes [ X ]  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 [ X ]  Accelerated filer [   ] 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 ]

Shares of common stock outstanding as of April 17, 2013:  222,169,106





TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION
Page
 
 
 
Item 1.
Financial Statements
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
PART II - OTHER INFORMATION
 
 
 
 
Item 1.
Legal Proceedings                                                                                                  
 
 
 
Item 1A.
Risk Factors                                                                                                     
 
 
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds                                                                                                 
 
 
 
Item 5.
Other Information                                                                                                         
 
 
 
Item 6.
Exhibits                                                                                                      


2


PART I - FINANCIAL INFORMATION

ITEM 1.
FINANCIAL STATEMENTS.

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


ASSETS

 
March 31,
2013
 
December 31,
2012
Investments:
 
 
 
Fixed maturities, available for sale, at fair value (amortized cost:  March 31, 2013 - $22,115.0; December 31, 2012 - $21,626.8)
$
24,894.5

 
$
24,614.1

Equity securities at fair value (cost: March 31, 2013 - $206.0; December 31, 2012 - $167.1)
216.9

 
171.4

Mortgage loans
1,639.8

 
1,573.2

Policy loans
271.5

 
272.0

Trading securities
229.8

 
266.2

Investments held by variable interest entities
1,009.9

 
814.3

Other invested assets
309.7

 
248.1

Total investments
28,572.1

 
27,959.3

Cash and cash equivalents - unrestricted
251.6

 
582.5

Cash and cash equivalents held by variable interest entities
462.2

 
54.2

Accrued investment income
315.8

 
286.2

Present value of future profits
606.6

 
626.0

Deferred acquisition costs
654.4

 
629.7

Reinsurance receivables
2,879.5

 
2,927.7

Income tax assets, net
708.5

 
716.9

Assets held in separate accounts
15.5

 
14.9

Other assets
433.0

 
334.0

Total assets
$
34,899.2

 
$
34,131.4



(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)
(unaudited)


LIABILITIES AND SHAREHOLDERS' EQUITY

 
March 31,
2013
 
December 31,
2012
Liabilities:
 
 
 
Liabilities for insurance products:
 
 
 
Interest-sensitive products
$
12,867.1

 
$
12,893.2

Traditional products
11,130.9

 
11,196.3

Claims payable and other policyholder funds
996.3

 
985.1

Liabilities related to separate accounts
15.5

 
14.9

Other liabilities
903.0

 
570.6

Investment borrowings
1,880.2

 
1,650.8

Borrowings related to variable interest entities
1,143.4

 
767.0

Notes payable – direct corporate obligations
934.2

 
1,004.2

Total liabilities
29,870.6

 
29,082.1

Commitments and Contingencies


 


Shareholders' equity:
 

 
 

Common stock ($0.01 par value, 8,000,000,000 shares authorized, shares issued and outstanding: March 31, 2013 - 223,502,106; December 31, 2012 – 221,502,371)
2.2

 
2.2

Additional paid-in capital
4,173.2

 
4,174.7

Accumulated other comprehensive income
1,170.7

 
1,197.4

Accumulated deficit
(317.5
)
 
(325.0
)
Total shareholders' equity
5,028.6

 
5,049.3

Total liabilities and shareholders' equity
$
34,899.2

 
$
34,131.4




















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
 
March 31,
 
2013
 
2012
Revenues:
 
 
 
Insurance policy income
$
691.2

 
$
686.3

Net investment income (loss):
 

 
 

General account assets
351.9

 
345.2

Policyholder and reinsurer accounts and other special-purpose portfolios
77.7

 
65.6

Realized investment gains (losses):
 

 
 

Net realized investment gains, excluding impairment losses
15.3

 
30.8

Other-than-temporary impairment losses:
 

 
 

Total other-than-temporary impairment losses

 
(7.9
)
Portion of other-than-temporary impairment losses recognized in accumulated other comprehensive income

 

Net impairment losses recognized

 
(7.9
)
Total realized gains
15.3

 
22.9

Fee revenue and other income
6.5

 
3.9

Total revenues
1,142.6

 
1,123.9

Benefits and expenses:
 

 
 

Insurance policy benefits
754.1

 
689.0

Interest expense
27.3

 
28.8

Amortization
79.3

 
86.6

Loss on extinguishment of debt
57.7

 
.2

Other operating costs and expenses
189.6

 
227.0

Total benefits and expenses
1,108.0

 
1,031.6

Income before income taxes
34.6

 
92.3

Income tax expense (benefit):
 
 
 
Income tax expense on period income
33.2

 
33.2

Valuation allowance for deferred tax assets
(10.5
)
 

Net income
$
11.9

 
$
59.1

Earnings per common share:
 

 
 

Basic:
 

 
 

Weighted average shares outstanding
222,081,000

 
240,895,000

Net income
$
.05

 
$
.25

Diluted:
 

 
 

Weighted average shares outstanding
243,467,000

 
297,343,000

Net income
$
.05

 
$
.21




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


5


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

 
Three months ended
 
March 31,
 
2013
 
2012
 
 
 
 
Net income
$
11.9

 
$
59.1

Other comprehensive income, before tax:
 
 
 
Unrealized gains (losses) for the period
(183.3
)
 
51.9

Amortization of present value of future profits and deferred acquisition costs
20.7

 
(20.0
)
Amount related to premium deficiencies assuming the net unrealized gains had been realized
135.3

 
30.3

Reclassification adjustments:
 
 
 
For net realized investment gains included in net income
(14.8
)
 
(21.6
)
For amortization of the present value of future profits and deferred acquisition costs related to net realized investment gains included in net income
.8

 
1.1

Unrealized gains (losses) on investments
(41.3
)
 
41.7

Change related to deferred compensation plan
1.0

 
.8

Other comprehensive income (loss) before tax
(40.3
)
 
42.5

Income tax (expense) benefit related to items of accumulated other comprehensive income
13.6

 
(16.1
)
Other comprehensive income (loss), net of tax
(26.7
)
 
26.4

Comprehensive income (loss)
$
(14.8
)
 
$
85.5























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


6


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
 
Accumulated deficit
 
Total
Balance, December 31, 2011
$
4,364.3

 
$
781.6

 
$
(532.1
)
 
$
4,613.8

Net income

 

 
59.1

 
59.1

Change in unrealized appreciation (depreciation) of investments (net of applicable income tax expense of $14.3)

 
23.1

 

 
23.1

Change in noncredit component of impairment losses on fixed maturities, available for sale (net of applicable income tax expense of $1.8)

 
3.3

 

 
3.3

Cost of shares acquired
(18.9
)
 

 

 
(18.9
)
Stock options, restricted stock and performance units
2.6

 

 

 
2.6

Balance, March 31, 2012
$
4,348.0

 
$
808.0

 
$
(473.0
)
 
$
4,683.0

 
 
 
 
 
 
 
 
Balance, December 31, 2012
$
4,176.9

 
$
1,197.4

 
$
(325.0
)
 
$
5,049.3

Net income

 

 
11.9

 
11.9

Change in unrealized appreciation (depreciation) of investments (net of applicable income tax benefit of $13.8)

 
(27.0
)
 

 
(27.0
)
Change in noncredit component of impairment losses on fixed maturities, available for sale (net of applicable income tax expense of $.2)

 
.3

 

 
.3

Extinguishment of beneficial conversion feature related to the repurchase of convertible debentures
(12.6
)
 

 

 
(12.6
)
Dividends on common stock

 

 
(4.4
)
 
(4.4
)
Stock options, restricted stock and performance units
11.1

 

 

 
11.1

Balance, March 31, 2013
$
4,175.4

 
$
1,170.7

 
$
(317.5
)
 
$
5,028.6
















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



7


CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in millions)
(unaudited)
 
Three months ended
 
March 31,
 
2013
 
2012
Cash flows from operating activities:
 
 
 
Insurance policy income
$
622.4

 
$
602.5

Net investment income
314.4

 
306.7

Fee revenue and other income
6.5

 
3.9

Insurance policy benefits
(542.4
)
 
(565.3
)
Interest expense
(20.1
)
 
(26.5
)
Deferrable policy acquisition costs
(53.5
)
 
(46.2
)
Other operating costs
(212.0
)
 
(193.2
)
Taxes
(.7
)
 
(3.7
)
Net cash provided by operating activities
114.6

 
78.2

Cash flows from investing activities:
 

 
 

Sales of investments
547.4

 
670.3

Maturities and redemptions of investments
630.4

 
417.1

Purchases of investments
(1,656.7
)
 
(1,305.2
)
Net sales of trading securities
41.2

 
7.9

Change in cash and cash equivalents held by variable interest entities
(408.0
)
 
8.6

Other
(7.0
)
 
(9.8
)
Net cash used by investing activities
(852.7
)
 
(211.1
)
Cash flows from financing activities:
 

 
 

Payments on notes payable
(72.8
)
 
(59.4
)
Expenses related to extinguishment of debt
(54.7
)
 

Amount paid to extinguish the beneficial conversion feature associated with repurchase of convertible debentures
(12.6
)
 

Issuance of common stock
11.6

 
.1

Payments to repurchase common stock

 
(18.9
)
Common stock dividends paid
(4.4
)
 

Amounts received for deposit products
308.5

 
346.6

Withdrawals from deposit products
(374.1
)
 
(406.3
)
Issuance of investment borrowings:
 
 
 
Federal Home Loan Bank
200.0

 

Related to variable interest entities
376.3

 

Payments on investment borrowings:
 
 
 
Related to variable interest entities and other
(.1
)
 
(.3
)
Investment borrowings - repurchase agreements, net
29.5

 
8.6

Net cash provided (used) by financing activities
407.2

 
(129.6
)
Net decrease in cash and cash equivalents
(330.9
)
 
(262.5
)
Cash and cash equivalents, beginning of period
582.5

 
436.0

Cash and cash equivalents, end of period
$
251.6

 
$
173.5


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


8

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 2012 Annual Report on Form 10-K.

CNO Financial Group, Inc., a Delaware corporation ("CNO"), is a holding company for a group of insurance companies operating throughout the United States that develop, market and administer 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 terms "CNO Financial Group, Inc.", the "Company", "we", "us", and "our" as used in these financial statements refer to CNO and its subsidiaries or, when the context requires otherwise, our Predecessor and its subsidiaries.  Such terms, when used to describe insurance business and products, refer to the insurance business and products of CNO's insurance 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, 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 2013 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, 2012, 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 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 deferred acquisition costs, the present value of future profits, fair value measurements of certain investments (including derivatives), other-than-temporary impairments of investments, 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.

The accompanying financial statements include the accounts of the Company and its subsidiaries. Our consolidated financial statements exclude the results of material transactions between us and our consolidated affiliates, or among our consolidated affiliates.

OUT-OF-PERIOD ADJUSTMENT

We recorded the net effect of an out-of-period adjustment which increased our insurance policy benefits by $6.7 million, increased amortization expense by $2.5 million, decreased tax expense by $3.2 million and decreased our net income by $6.0 million (or 2 cents per diluted share) in the three months ended March 31, 2013. We evaluated this error taking into account both qualitative and quantitative factors and considered the impact of this error in relation to the 2013 period, as well as the materiality to the periods in which they originated. The impact of correcting this error in prior years was not significant to any individual period. Management believes this error is immaterial to the consolidated financial statements and all previously issued financial statements.



9

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

INVESTMENTS

We classify our fixed maturity securities into one of two categories: (i) "available for sale" (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); or (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)).

Our trading securities include: (i) investments purchased with the intent of selling in the near term to generate income on price changes; and (ii) investments supporting certain insurance liabilities (including investments backing the market strategies of our multibucket annuity products) and certain reinsurance agreements. The change in fair value of these securities is recognized in income from policyholder and reinsurer accounts and other special-purpose portfolios (a component of net investment income). Investment income from trading securities backing certain insurance liabilities and certain reinsurance agreements is substantially offset by the change in insurance policy benefits related to certain products and agreements.  The trading account also includes certain fixed maturity securities containing embedded derivatives for which we have elected the fair value option. The change in value of these securities is recognized in realized investment gain (losses). Our trading securities totaled $229.8 million and $266.2 million at March 31, 2013 and December 31, 2012, respectively.

Accumulated other comprehensive income is primarily comprised of the net effect of unrealized appreciation (depreciation) on our investments.  These amounts, included in shareholders' equity as of March 31, 2013 and December 31, 2012, were as follows (dollars in millions):

 
March 31,
2013
 
December 31,
2012
Net unrealized appreciation (depreciation) on fixed maturity securities, available for sale, on which an other-than-temporary impairment loss has been recognized
$
10.3

 
$
9.8

Net unrealized gains on all other investments
2,787.9

 
2,986.5

Adjustment to present value of future profits (a)
(184.6
)
 
(193.0
)
Adjustment to deferred acquisition costs
(430.2
)
 
(452.9
)
Adjustment to insurance liabilities
(364.1
)
 
(489.8
)
Unrecognized net loss related to deferred compensation plan
(6.9
)
 
(7.9
)
Deferred income tax liabilities
(641.7
)
 
(655.3
)
Accumulated other comprehensive income
$
1,170.7

 
$
1,197.4

_________
(a)
The present value of future profits is the value assigned to the right to receive future cash flows from contracts existing at September 10, 2003 (the date our Predecessor emerged from bankruptcy).

At March 31, 2013, adjustments to the present value of future profits, deferred acquisition costs, insurance liabilities and deferred tax assets included $(155.9) million, $(146.7) million, $(364.1) million and $240.0 million, respectively, for premium deficiencies that would exist on certain long-term health products if unrealized gains on the assets backing such products had been realized and the proceeds from the sales of such assets were invested at then current yields.


10

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

At March 31, 2013, the amortized cost, gross unrealized gains and losses, estimated fair value, other-than-temporary impairments in accumulated other comprehensive income of fixed maturities, available for sale, were as follows (dollars in millions):
 
Amortized
cost
 
Gross
unrealized
gains
 
Gross
unrealized
losses
 
Estimated
fair value
 
Other-than-
temporary
impairments
included in
accumulated other
comprehensive
income
Corporate securities
$
14,951.6

 
$
2,086.1

 
$
(33.6
)
 
$
17,004.1

 
$

United States Treasury securities and obligations of United States government corporations and agencies
93.6

 
5.2

 

 
98.8

 

States and political subdivisions
1,883.0

 
278.4

 
(4.8
)
 
2,156.6

 

Asset-backed securities
1,460.2

 
108.2

 
(3.4
)
 
1,565.0

 

Collateralized debt obligations
338.8

 
10.1

 
(.1
)
 
348.8

 

Commercial mortgage-backed securities
1,293.4

 
146.8

 
(.5
)
 
1,439.7

 

Mortgage pass-through securities
16.6

 
1.0

 

 
17.6

 

Collateralized mortgage obligations
2,077.8

 
186.6

 
(.5
)
 
2,263.9

 
(5.1
)
Total fixed maturities, available for sale
$
22,115.0

 
$
2,822.4

 
$
(42.9
)
 
$
24,894.5

 
$
(5.1
)

The following table sets forth the amortized cost and estimated fair value of fixed maturities, available for sale, at March 31, 2013, 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 include provisions for periodic principal payments and permit periodic unscheduled payments.
 
Amortized
cost
 
Estimated
fair
value
 
(Dollars in millions)
Due in one year or less
$
201.4

 
$
204.4

Due after one year through five years
1,696.6

 
1,853.2

Due after five years through ten years
4,302.4

 
4,854.5

Due after ten years
10,727.8

 
12,347.4

Subtotal
16,928.2

 
19,259.5

Structured securities
5,186.8

 
5,635.0

Total fixed maturities, available for sale
$
22,115.0

 
$
24,894.5


Net Realized Investment Gains (Losses)

During the first three months of 2013, we recognized net realized investment gains of $15.3 million, which were comprised of $19.8 million of net gains from the sales of investments (primarily fixed maturities) with proceeds of $.5 billion and the decrease in fair value of certain fixed maturity investments with embedded derivatives of $4.5 million.

During the first three months of 2012, we recognized net realized investment gains of $22.9 million, which were comprised of $27.4 million of net gains from the sales of investments (primarily fixed maturities) with proceeds of $.7 billion, the increase in fair value of certain fixed maturity investments with embedded derivatives of $3.4 million, and $7.9 million of writedowns of investments for other than temporary declines in fair value recognized through net income.

11

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


At March 31, 2013, fixed maturity securities in default or considered nonperforming had an aggregate amortized cost of $.4 million and a carrying value of $.5 million.

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 generate short-term realized gains through the purchase and sale of such securities.  In certain circumstances, including those in which securities are selling at prices which exceed our view of their underlying economic value, or when it is possible to reinvest the proceeds to better meet our long-term asset-liability objectives, we may sell certain securities.

During the three months ended March 31, 2013, we sold $121.3 million of fixed maturity investments which resulted in gross investment losses (before income taxes) of $2.0 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) prospective or actual changes in credit quality; or (v) changes in expected cash flows.

We regularly evaluate all of our investments with unrealized losses 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; (x) our best estimate of the value of any collateral; and (xi) other objective and subjective factors.

Future events may occur, or additional information may become available, which may necessitate future realized losses in our portfolio.  Significant losses could have a material adverse effect on our consolidated financial statements in future periods.

Impairment losses on equity securities are recognized in net income.  The manner in which impairment losses on fixed maturity securities, available for sale, 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.

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. The previous amortized cost basis less the impairment recognized in net income becomes the security's new cost basis.  We

12

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

accrete the new cost basis to the estimated future cash flows over the expected remaining life of the security, except when the security is in default or considered nonperforming.

The remaining noncredit impairment, which is recorded in accumulated other comprehensive income, 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 noncredit impairment typically represents changes in the market interest rates, current market liquidity and risk premiums.  As of March 31, 2013, other-than-temporary impairments included in accumulated other comprehensive income of $5.1 million (before taxes and related amortization) related to structured securities.

The following table summarizes the amount of credit losses recognized in earnings on fixed maturity securities, available for sale, 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 for the three months ended March 31, 2013 and 2012 (dollars in millions):
 
Three months ended
 
March 31,
 
2013
 
2012
Credit losses on fixed maturity securities, available for sale, beginning of period
$
(1.6
)
 
$
(2.0
)
Add:  credit losses on other-than-temporary impairments not previously recognized

 

Less:  credit losses on securities sold
.1

 
.1

Less:  credit losses on securities impaired due to intent to sell (a)

 

Add:  credit losses on previously impaired securities

 

Less:  increases in cash flows expected on previously impaired securities

 

Credit losses on fixed maturity securities, available for sale, end of period
$
(1.5
)
 
$
(1.9
)
__________
(a)
Represents securities for which the amount previously recognized in accumulated other comprehensive income 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 have been in a continuous unrealized loss position, at March 31, 2013 (dollars in millions):

 
 
Less than 12 months
 
12 months or greater
 
Total
Description of securities
 
Fair
value
 
Unrealized
losses
 
Fair
value
 
Unrealized
losses
 
Fair
value
 
Unrealized
losses
States and political subdivisions
 
$
45.8

 
$
(1.6
)
 
$
72.1

 
$
(3.2
)
 
$
117.9

 
$
(4.8
)
Corporate securities
 
777.9

 
(25.8
)
 
131.2

 
(7.8
)
 
909.1

 
(33.6
)
Asset-backed securities
 
183.3

 
(1.2
)
 
70.7

 
(2.2
)
 
254.0

 
(3.4
)
Collateralized debt obligations
 
14.7

 
(.1
)
 

 

 
14.7

 
(.1
)
Commercial mortgage-backed securities
 
9.1

 
(.1
)
 
3.7

 
(.4
)
 
12.8

 
(.5
)
Mortgage pass-through securities
 
.1

 

 
1.8

 

 
1.9

 

Collateralized mortgage obligations
 
55.9

 
(.4
)
 
20.5

 
(.1
)
 
76.4

 
(.5
)
Total fixed maturities, available for sale
 
$
1,086.8

 
$
(29.2
)
 
$
300.0

 
$
(13.7
)
 
$
1,386.8

 
$
(42.9
)
Equity securities
 
$

 
$

 
$

 
$

 
$

 
$


The following table summarizes the gross unrealized losses and fair values of our investments with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that such securities have been in a continuous unrealized loss position, at December 31, 2012 (dollars in millions):

 
 
Less than 12 months
 
12 months or greater
 
Total
Description of securities
 
Fair
value
 
Unrealized
losses
 
Fair
value
 
Unrealized
losses
 
Fair
value
 
Unrealized
losses
States and political subdivisions
 
$
48.3

 
$
(1.8
)
 
68.7

 
$
(3.4
)
 
$
117.0

 
$
(5.2
)
Corporate securities
 
338.1

 
(11.2
)
 
174.5

 
(9.0
)
 
512.6

 
(20.2
)
Asset-backed securities
 
41.7

 
(.3
)
 
111.6

 
(4.9
)
 
153.3

 
(5.2
)
Collateralized debt obligations
 
19.4

 
(.4
)
 
32.5

 
(.6
)
 
51.9

 
(1.0
)
Commercial mortgage-backed securities
 
4.9

 
(.1
)
 
6.2

 
(.5
)
 
11.1

 
(.6
)
Mortgage pass-through securities
 

 

 
1.9

 

 
1.9

 

Collateralized mortgage obligations
 
27.0

 
(.4
)
 
33.8

 
(.3
)
 
60.8

 
(.7
)
Total fixed maturities, available for sale
 
$
479.4

 
$
(14.2
)
 
$
429.2

 
$
(18.7
)
 
$
908.6

 
$
(32.9
)
Equity securities
 
$
17.8

 
$
(1.6
)
 
$

 
$

 
$
17.8

 
$
(1.6
)

Based on management's current assessment of investments with unrealized losses at March 31, 2013, 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, 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
 
March 31,
 
2013
 
2012
Net income for basic earnings per share
$
11.9

 
$
59.1

Add:  interest expense on 7.0% Convertible Senior Debentures due 2016 (the "7.0% Debentures"), net of income taxes
1.2

 
3.7

Net income for diluted earnings per share
$
13.1

 
$
62.8

Shares:
 

 
 

Weighted average shares outstanding for basic earnings per share
222,081

 
240,895

Effect of dilutive securities on weighted average shares:
 

 
 

7% Debentures
16,591

 
53,367

Stock options, restricted stock and performance units
2,828

 
2,582

Warrants
1,967

 
499

Dilutive potential common shares
21,386

 
56,448

Weighted average shares outstanding for diluted earnings per share
243,467

 
297,343



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 units) 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 and warrants were exercised and restricted stock was vested.  The dilution from options, warrants and restricted shares is calculated using the treasury stock method.  Under this method, we assume the proceeds from the exercise of the options and warrants (or the unrecognized compensation expense with respect to restricted stock and performance units) 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 and warrants (or the vesting of the restricted stock and performance units). Initially, the 7.0% Debentures were convertible into 182.1494 shares of our common stock for each $1,000 principal amount of 7.0% Debentures, which is equivalent to an initial conversion price of approximately $5.49 per share. The conversion rate is subject to adjustment following the occurrence of certain events (including the payment of dividends on our common stock) in accordance with the terms of an indenture dated as of October 16, 2009 (the "7.0% Indenture"). At March 31, 2013, the conversion rate was 183.8523 shares of our common stock for each $1,000 principal amount of 7.0% Debentures outstanding.

BUSINESS SEGMENTS

The Company manages its business through the following operating segments: Bankers Life, Washington National and Colonial Penn, which are defined on the basis of product distribution; Other CNO Business, comprised primarily of products we no longer sell actively; and corporate operations, comprised of holding company activities and certain noninsurance company businesses.  

We measure segment performance by excluding realized investment gains (losses), fair value changes in embedded derivative liabilities, equity in earnings of certain non-strategic investments and earnings attributable to non-controlling interests and loss on extinguishment of debt 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.


15

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

Realized investment gains (losses), fair value changes in embedded derivative liabilities, equity in earnings of certain non-strategic investments and earnings attributable to non-controlling interests and loss on extinguishment of debt depend on market conditions and do not necessarily relate to the underlying business of our segments.  Realized investment gains (losses), fair value changes in embedded derivative liabilities, equity in earnings of certain non-strategic investments and earnings attributable to non-controlling interests and loss on extinguishment of debt 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.

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

 
Three months ended
 
March 31,
 
2013
 
2012
Revenues:
 
 
 
Bankers Life:
 
 
 
Insurance policy income:
 
 
 
Annuities
$
7.9

 
$
7.2

Health
332.6

 
334.1

Life
77.5

 
65.2

Net investment income (a)
261.7

 
234.9

Fee revenue and other income (a)
3.7

 
2.9

Total Bankers Life revenues
683.4

 
644.3

Washington National:
 

 
 

Insurance policy income:
 

 
 

Health
144.6

 
142.4

Life
3.8

 
4.3

Other
.7

 
.7

Net investment income (a)
52.0

 
50.0

Fee revenue and other income (a)
.2

 
.2

Total Washington National revenues
201.3

 
197.6

Colonial Penn:
 

 
 

Insurance policy income:
 

 
 

Health
1.1

 
1.4

Life
55.8

 
52.0

Net investment income (a)
9.9

 
10.0

Fee revenue and other income (a)
.2

 
.2

Total Colonial Penn revenues
67.0

 
63.6

Other CNO Business:
 

 
 

Insurance policy income:
 

 
 

Annuities
1.7

 
2.5

Health
6.2

 
6.7

Life
59.1

 
69.6

Other
.2

 
.2

Net investment income (a)
89.7

 
92.7

Total Other CNO Business revenues
156.9

 
171.7

Corporate operations:
 

 
 

Net investment income
10.1

 
23.2

Fee and other income
1.7

 
.6

Total corporate revenues
11.8

 
23.8

Total revenues
1,120.4

 
1,101.0


(continued on next page)

16

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

(continued from previous page)
 
Three months ended
 
March 31,
 
2013
 
2012
Expenses:
 
 
 
Bankers Life:
 
 
 
Insurance policy benefits
$
470.5

 
$
420.9

Amortization
54.5

 
56.9

Interest expense on investment borrowings
1.4

 
1.4

Other operating costs and expenses
94.9

 
94.6

Total Bankers Life expenses
621.3

 
573.8

Washington National:
 

 
 

Insurance policy benefits
118.3

 
115.7

Amortization
13.7

 
12.7

Interest expense on investment borrowings
.5

 
.7

Other operating costs and expenses
39.4

 
43.8

Total Washington National expenses
171.9

 
172.9

Colonial Penn:
 

 
 

Insurance policy benefits
43.0

 
42.1

Amortization
3.7

 
3.7

Other operating costs and expenses
25.7

 
27.6

Total Colonial Penn expenses
72.4

 
73.4

Other CNO Business:
 

 
 

Insurance policy benefits
125.4

 
121.9

Amortization
5.6

 
7.5

Interest expense on investment borrowings
4.8

 
5.1

Other operating costs and expenses
17.5

 
39.5

Total Other CNO Business expenses
153.3

 
174.0

Corporate operations:
 

 
 

Interest expense on corporate debt
15.1

 
17.5

Interest expense on borrowings of variable interest entities

 
4.0

Interest expense on investment borrowings
.1

 
.1

Other operating costs and expenses
8.7

 
21.5

Total corporate expenses
23.9

 
43.1

Total expenses
1,042.8

 
1,037.2

Income (loss) before net realized investment gains (losses), fair value changes in embedded derivative liabilities (net of related amortization), equity in earnings of certain non-strategic investments and earnings attributable to non-controlling interests, loss on extinguishment of debt and income taxes:
 

 
 
Bankers Life
62.1

 
70.5

Washington National
29.4

 
24.7

Colonial Penn
(5.4
)
 
(9.8
)
Other CNO Business
3.6

 
(2.3
)
Corporate operations
(12.1
)
 
(19.3
)
Income before net realized investment gains (losses), fair value changes in embedded derivative liabilities (net of related amortization), equity in earnings of certain non-strategic investments and earnings attributable to non-controlling interests, loss on extinguishment of debt and income taxes
$
77.6

 
$
63.8

___________________
(a)
It is not practicable to provide additional components of revenue by product or services.

17

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


A reconciliation of segment revenues and expenses to consolidated revenues and expenses is as follows (dollars in millions):

 
Three months ended
 
March 31,
 
2013
 
2012
Total segment revenues
$
1,120.4

 
$
1,101.0

Net realized investment gains
15.3

 
22.9

Revenues related to certain non-strategic investments and earnings attributable to non-controlling interests
6.9

 

Consolidated revenues
$
1,142.6

 
$
1,123.9

 
 
 
 
Total segment expenses
$
1,042.8

 
$
1,037.2

Insurance policy benefits - fair value changes in embedded derivative liabilities
(3.1
)
 
(11.6
)
Amortization related to fair value changes in embedded derivative liabilities
1.0

 
4.7

Amortization related to net realized investment gains
.8

 
1.1

Expenses related to certain non-strategic investments and earnings attributable to non-controlling interests
8.8

 

Loss on extinguishment of debt
57.7

 
.2

Consolidated expenses
$
1,108.0

 
$
1,031.6


ACCOUNTING FOR DERIVATIVES

Our fixed index annuity products provide a guaranteed minimum rate of return and a higher potential return that is based on a percentage (the "participation rate") of the amount of increase in the value of a particular index, such as the Standard & Poor's 500 Index, over a specified period.  Typically, on each policy anniversary date, a new index period begins.  We are generally able to change the participation rate at the beginning of each index period during a policy year, subject to contractual minimums.  We typically buy call options (including call spreads) referenced to the applicable indices in an effort to offset or hedge potential increases to policyholder benefits resulting from increases in the particular index to which the policy's return is linked.  We reflect changes in the estimated fair value of these options in net investment income (classified as investment income from policyholder and reinsurer accounts and other special-purpose portfolios).  Net investment gains (losses) related to fixed index products were $57.9 million and $41.4 million in the three months ended March 31, 2013 and 2012, respectively. These amounts were substantially offset by a corresponding change to insurance policy benefits.  The estimated fair value of these options was $110.0 million and $54.4 million at March 31, 2013 and December 31, 2012, respectively.  We classify these instruments as other invested assets.

The Company accounts for the options attributed to the policyholder for the estimated life of the annuity contract as embedded derivatives.  The Company purchases options to hedge liabilities for the next policy period approximately on each policy anniversary date and must estimate the fair value of the forward embedded options related to the policies.  These accounting requirements often create volatility in the earnings from these products.  We record the changes in the fair values of the embedded derivatives in earnings as a component of insurance policy benefits.  The fair value of these derivatives, which are classified as "liabilities for interest-sensitive products", was $794.3 million at March 31, 2013 and $734.0 million at December 31, 2012. In the first three months of 2013 and 2012, we recognized a reduction to earnings of $2.1 million and $6.9 million, respectively, from the volatility caused by the accounting requirements to record embedded options at fair value.

If the counterparties for the call options we hold fail to meet their obligations, we may have to recognize a loss.  We limit our exposure to such a loss by diversifying among several counterparties believed to be strong and creditworthy.  At March 31, 2013, substantially all of our counterparties were rated "BBB+" or higher by Standard & Poor's Corporation ("S&P").


18

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

Certain of our reinsurance payable balances contain embedded derivatives.  Such derivatives had an estimated fair value of $5.1 million and $5.5 million at March 31, 2013 and December 31, 2012, respectively.  We record the change in the fair value of these derivatives as a component of investment income (classified as investment income from policyholder and reinsurer accounts and other special-purpose portfolios).  We maintain the investments related to these agreements in our trading securities account, which we carry at estimated fair value with changes in such value recognized as investment income (also classified as investment income from policyholder and reinsurer accounts and other special-purpose portfolios).  The change in value of these trading securities offsets the change in value of the embedded derivatives.

We purchase certain fixed maturity securities that contain embedded derivatives that are required to be bifurcated from the instrument and held at fair value on the consolidated balance sheet. For certain of these securities, we have elected the fair value option to carry the entire security at fair value with changes in fair value reported in net income for operational ease.

REINSURANCE

The cost of reinsurance ceded totaled $52.0 million and $57.2 million in the first quarters of 2013 and 2012, respectively. We deduct this cost from insurance policy income.  Reinsurance recoveries netted against insurance policy benefits totaled $53.6 million and $61.6 million in the first quarters of 2013 and 2012, respectively.

From time-to-time, we assume insurance from other companies.  Any costs associated with the assumption of insurance are amortized consistent with the method used to amortize deferred acquisition costs.  Reinsurance premiums assumed totaled $13.7 million and $15.9 million in the first quarters of 2013 and 2012, respectively.  Reinsurance premiums included amounts assumed pursuant to marketing and quota-share agreements with Coventry Health Care ("Coventry") of $8.9 million and $10.8 million in the first quarters of 2013 and 2012, respectively.

See the note entitled "Accounting for Derivatives" for a discussion of the derivative embedded in the payable related to certain modified coinsurance agreements.



19

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

INCOME TAXES

The Company's interim tax expense is based upon the estimated annual effective tax rate for the respective period. Under authoritative guidance, certain items are required to be excluded from the estimated annual effective tax rate calculation. Such items include changes in judgment about the realizability of deferred tax assets resulting from changes in projections of income expected to be available in future years, and items deemed to be unusual, infrequent, or that can not be reliably estimated. In these cases, the actual tax expense or benefit applicable to that item is treated discretely and is reported in the same period as the related item. The loss on extinguishment of debt of $57.7 million was treated as a discrete item in the three month period ended March 31, 2013. The components of income tax expense were as follows (dollars in millions):

 
Three months ended
 
March 31,
 
2013
 
2012
Current tax expense
$
2.7

 
$
3.3

Deferred tax expense
31.0

 
29.9

Income tax expense calculated based on estimated annual effective tax rate
33.7

 
33.2

Income tax benefit on discrete items:
 
 
 
Valuation allowance reduction applicable to utilization of capital loss carryforwards
(10.5
)
 

Deferred tax benefit related to loss on extinguishment of debt
(.5
)
 

Total income tax expense
$
22.7

 
$
33.2


A reconciliation of the U.S. statutory corporate tax rate to the estimated annual tax rate, before discrete items, reflected in the consolidated statement of operations is as follows:
 

Three months ended
 
March 31,
 
2013
 
2012
U.S. statutory corporate rate
35.0
%
 
35.0
 %
Nondeductible amounts
.1

 
(.1
)
State taxes
1.4

 
1.1

Estimated annual effective tax rate
36.5
%
 
36.0
 %


20

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

The components of the Company's income tax assets and liabilities were as follows (dollars in millions):
 
March 31,
2013
 
December 31,
2012
Deferred tax assets:
 
 
 
Net federal operating loss carryforwards
$
1,309.2

 
$
1,330.2

Net state operating loss carryforwards
16.4

 
16.2

Tax credits
41.6

 
39.2

Capital loss carryforwards
285.7

 
296.2

Deductible temporary differences:


 
 

Insurance liabilities
759.3

 
746.3

Other
59.0

 
86.0

Gross deferred tax assets
2,471.2

 
2,514.1

Deferred tax liabilities:
 

 
 

Investments
(23.5
)
 
(24.1
)
Present value of future profits and deferred acquisition costs
(313.4
)
 
(325.2
)
Accumulated other comprehensive income
(641.7
)
 
(655.3
)
Gross deferred tax liabilities
(978.6
)
 
(1,004.6
)
Net deferred tax assets before valuation allowance
1,492.6

 
1,509.5

Valuation allowance
(756.4
)
 
(766.9
)
Net deferred tax assets
736.2

 
742.6

Current income taxes accrued
(27.7
)
 
(25.7
)
Income tax assets, net
$
708.5

 
$
716.9


Our income tax expense includes deferred income taxes arising from temporary differences between the financial reporting and tax bases of assets and liabilities, capital loss carryforwards and net operating loss carryforwards ("NOLs"). Deferred tax assets and liabilities are measured using enacted tax rates expected to apply in the years in which temporary differences are expected to be recovered or paid.  The effect of a change in tax rates on deferred tax assets and liabilities is recognized in earnings in the period when the changes are enacted.

A reduction of the net carrying amount of deferred tax assets by establishing a valuation allowance is required if, based on the available evidence, it is more likely than not that such assets will not be realized. In assessing the need for a valuation allowance, all available evidence, both positive and negative, shall be considered to determine whether, based on the weight of that evidence, a valuation allowance for deferred tax assets is needed. This assessment requires significant judgment and considers, among other matters, the nature, frequency and severity of current and cumulative losses, forecasts of future profitability, the duration of carryforward periods, our experience with operating loss and tax credit carryforwards expiring unused, and tax planning strategies. We evaluate the need to establish a valuation allowance for our deferred income tax assets on an ongoing basis. The realization of our deferred tax assets depends upon generating sufficient future taxable income during the periods in which our temporary differences become deductible and before our capital loss carryforwards and NOLs expire.

In the first three months of 2013, we reduced our deferred tax valuation allowance by $10.5 million resulting from the utilization of capital loss carryforwards during the period. We will continue to assess the need for a valuation allowance in the future. If future results are less than projected, a valuation allowance may be required to reduce the deferred tax assets, which could have a material impact on our results of operations in the period in which it is recorded.

Recovery of our deferred tax assets is dependent on achieving the future taxable income used in our deferred tax valuation model and failure to do so would result in an increase in the valuation allowance in a future period.  Any future increase in the valuation allowance may result in additional income tax expense and reduce shareholders' equity, and such an increase could have a significant impact upon our earnings in the future.  In addition, the use of the Company's NOLs is dependent, in part, on whether the Internal Revenue Service (the "IRS") ultimately agrees with the tax positions we have taken in our tax returns with respect to the allocation of cancellation of indebtedness income ("CODI") resulting from the bankruptcy

21

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

of our Predecessor and the classification of the loss we recognized as a result of the transfer of the stock of Senior Health Insurance Company of Pennsylvania ("Senior Health") to Senior Health Care Oversight Trust, an independent trust (the "Independent Trust").

The Internal Revenue Code (the "Code") limits the extent to which losses realized by a non-life entity (or entities) may offset income from a life insurance company (or companies) to the lesser of:  (i) 35 percent of the income of the life insurance company; or (ii) 35 percent of the total loss of the non-life entities (including NOLs of the non-life entities).  There is no similar limitation on the extent to which losses realized by a life insurance entity (or entities) may offset income from a non-life entity (or entities).

Section 382 of the Code imposes limitations on a corporation's ability to use its NOLs when the company undergoes an ownership change.  Future transactions and the timing of such transactions could cause an ownership change for Section 382 income tax purposes.  Such transactions may include, but are not limited to, additional repurchases under our securities repurchase program, issuances of common stock (including upon conversion of our outstanding 7.0% Debentures), and acquisitions or sales of shares of CNO stock by certain holders of our shares, including persons who have held, currently hold or may accumulate in the future five percent or more of our outstanding common stock for their own account.  Many of these transactions are beyond our control.  If an additional ownership change were to occur for purposes of Section 382, we would be required to calculate an annual restriction on the use of our NOLs to offset future taxable income.  The annual restriction would be calculated based upon the value of CNO's equity at the time of such ownership change, multiplied by a federal long-term tax exempt rate (2.77 percent at March 31, 2013), and the annual restriction could effectively eliminate our ability to use a substantial portion of our NOLs to offset future taxable income.  We regularly monitor ownership change (as calculated for purposes of Section 382) and, as of March 31, 2013, we were below the 50 percent ownership change level that would trigger further impairment of our ability to utilize our NOLs.

As of March 31, 2013, we had $3.7 billion of federal NOLs and $.8 billion of capital loss carryforwards. The following table summarizes the expiration dates of our loss carryforwards assuming the IRS does not ultimately agree with the positions we have taken with respect to the allocation of CODI and the loss on our investment in Senior Health, both as further described below (dollars in millions):

Year of expiration
 
Net operating loss carryforwards (a)
 
Capital loss
 
Total loss
 
 
Life
 
Non-life
 
carryforwards
 
carryforwards
2013
 
$

 
 
 
$

 
 
 
$
778.5

 
(b)
 
$
778.5

2014
 

 
 
 

 
 
 
28.6

 
 
 
28.6

2016
 

 
 
 

 
 
 
9.1

 
 
 
9.1

2018
 
400.2

 
(a)
 

 
 
 

 
 
 
400.2

2021
 
29.5

 
 
 

 
 
 

 
 
 
29.5

2022
 
204.1

 
 
 

 
 
 

 
 
 
204.1

2023
 

 
(b)
 
2,603.1

 
(a)
 

 
 
 
2,603.1

2024
 

 
 
 
3.2

 
 
 

 
 
 
3.2

2025
 

 
 
 
118.8

 
 
 

 
 
 
118.8

2027
 

 
 
 
216.8

 
 
 

 
 
 
216.8

2028
 

 
 
 
.5

 
 
 

 
 
 
.5

2029
 

 
 
 
148.9

 
 
 

 
 
 
148.9

2032
 

 
 
 
.8

 
 
 

 
 
 
.8

2033
 

 
 
 
14.7

 
 
 

 
 
 
14.7

Total
 
$
633.8