Annual Reports

 
Quarterly Reports

  • 10-Q (Nov 1, 2017)
  • 10-Q (Aug 4, 2017)
  • 10-Q (May 3, 2017)
  • 10-Q (Nov 7, 2016)
  • 10-Q (May 4, 2016)
  • 10-Q (Nov 3, 2015)

 
8-K

 
Other

CNO Financial Group, Inc. 10-Q 2013
CNO 06.30.2013 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 June 30, 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 July 19, 2013:  222,305,817





TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION
Page
 
 
 
Item 1.
Financial Statements (unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
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 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

 
June 30,
2013
 
December 31,
2012
Investments:
 
 
 
Fixed maturities, available for sale, at fair value (amortized cost:  June 30, 2013 - $22,023.7; December 31, 2012 - $21,626.8)
$
23,623.0

 
$
24,614.1

Equity securities at fair value (cost: June 30, 2013 - $230.8; December 31, 2012 - $167.1)
241.3

 
171.4

Mortgage loans
1,692.2

 
1,573.2

Policy loans
269.1

 
272.0

Trading securities
241.0

 
266.2

Investments held by variable interest entities
1,087.9

 
814.3

Other invested assets
312.6

 
248.1

Total investments
27,467.1

 
27,959.3

Cash and cash equivalents - unrestricted
280.0

 
582.5

Cash and cash equivalents held by variable interest entities
210.7

 
54.2

Accrued investment income
294.8

 
286.2

Present value of future profits
591.6

 
626.0

Deferred acquisition costs
762.1

 
629.7

Reinsurance receivables
2,838.0

 
2,927.7

Income tax assets, net
931.2

 
716.9

Assets held in separate accounts
15.0

 
14.9

Other assets
385.1

 
334.0

Total assets
$
33,775.6

 
$
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

 
June 30,
2013
 
December 31,
2012
Liabilities:
 
 
 
Liabilities for insurance products:
 
 
 
Interest-sensitive products
$
12,784.2

 
$
12,893.2

Traditional products
10,834.4

 
11,196.3

Claims payable and other policyholder funds
1,006.4

 
985.1

Liabilities related to separate accounts
15.0

 
14.9

Other liabilities
626.8

 
570.6

Investment borrowings
1,878.0

 
1,650.8

Borrowings related to variable interest entities
1,143.7

 
767.0

Notes payable – direct corporate obligations
905.7

 
1,004.2

Total liabilities
29,194.2

 
29,082.1

Commitments and Contingencies


 


Shareholders' equity:
 

 
 

Common stock ($0.01 par value, 8,000,000,000 shares authorized, shares issued and outstanding: June 30, 2013 - 219,378,666; December 31, 2012 – 221,502,371)
2.2

 
2.2

Additional paid-in capital
4,128.2

 
4,174.7

Accumulated other comprehensive income
698.1

 
1,197.4

Accumulated deficit
(247.1
)
 
(325.0
)
Total shareholders' equity
4,581.4

 
5,049.3

Total liabilities and shareholders' equity
$
33,775.6

 
$
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
 
Six months ended
 
June 30,
 
June 30,
 
2013
 
2012
 
2013
 
2012
Revenues:
 
 
 
 
 
 
 
Insurance policy income
$
691.3

 
$
694.8

 
$
1,382.5

 
$
1,381.1

Net investment income (loss):
 

 
 

 
 
 
 
General account assets
348.8

 
351.1

 
700.7

 
696.3

Policyholder and reinsurer accounts and other special-purpose portfolios
31.8

 
(17.3
)
 
109.5

 
48.3

Realized investment gains (losses):
 

 
 

 
 
 
 
Net realized investment gains, excluding impairment losses
3.8

 
35.4

 
19.1

 
66.2

Other-than-temporary impairment losses:
 

 
 

 
 
 
 
Total other-than-temporary impairment losses
(.6
)
 
(3.5
)
 
(.6
)
 
(11.4
)
Portion of other-than-temporary impairment losses recognized in accumulated other comprehensive income

 

 

 

Net impairment losses recognized
(.6
)
 
(3.5
)
 
(.6
)
 
(11.4
)
Total realized gains
3.2

 
31.9

 
18.5

 
54.8

Fee revenue and other income
6.4

 
4.5

 
12.9

 
8.4

Total revenues
1,081.5

 
1,065.0

 
2,224.1

 
2,188.9

Benefits and expenses:
 

 
 

 
 
 
 
Insurance policy benefits
673.2

 
689.7

 
1,427.3

 
1,378.7

Interest expense
26.9

 
28.7

 
54.2

 
57.5

Amortization
79.2

 
68.3

 
158.5

 
154.9

Loss on extinguishment of debt
7.7

 
.5

 
65.4

 
.7

Other operating costs and expenses
179.8

 
173.3

 
369.4

 
400.3

Total benefits and expenses
966.8

 
960.5

 
2,074.8

 
1,992.1

Income before income taxes
114.7

 
104.5

 
149.3

 
196.8

Income tax expense (benefit):
 
 
 
 
 
 
 
Income tax expense on period income
42.6

 
38.8

 
75.8

 
72.0

Valuation allowance for deferred tax assets
(5.0
)
 

 
(15.5
)
 

Net income
$
77.1

 
$
65.7

 
$
89.0

 
$
124.8

Earnings per common share:
 

 
 

 
 
 
 
Basic:
 

 
 

 
 
 
 
Weighted average shares outstanding
220,498,000

 
237,289,000

 
221,290,000

 
239,092,000

Net income
$
.35

 
$
.28

 
$
.40

 
$
.52

Diluted:
 

 
 

 
 
 
 
Weighted average shares outstanding
230,893,000

 
293,475,000

 
237,180,000

 
295,409,000

Net income
$
.34

 
$
.24

 
$
.38

 
$
.45




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
 
Six months ended
 
June 30,
 
June 30,
 
2013
 
2012
 
2013
 
2012
Net income
$
77.1

 
$
65.7

 
$
89.0

 
$
124.8

Other comprehensive income, before tax:
 
 
 
 
 
 
 
Unrealized gains (losses) for the period
(1,179.7
)
 
511.5

 
(1,363.0
)
 
563.4

Amortization of present value of future profits and deferred acquisition costs
113.4

 
(56.2
)
 
134.1

 
(76.2
)
Amount related to premium deficiencies assuming the net unrealized gains had been realized
342.7

 
(143.4
)
 
478.0

 
(113.1
)
Reclassification adjustments:
 
 
 
 
 
 
 
For net realized investment gains included in net income
(8.9
)
 
(31.0
)
 
(23.7
)
 
(52.6
)
For amortization of the present value of future profits and deferred acquisition costs related to net realized investment gains included in net income
.4

 
3.1

 
1.2

 
4.2

Unrealized gains (losses) on investments
(732.1
)
 
284.0

 
(773.4
)
 
325.7

Change related to deferred compensation plan
1.4

 
.8

 
2.4

 
1.6

Other comprehensive income (loss) before tax
(730.7
)
 
284.8

 
(771.0
)
 
327.3

Income tax (expense) benefit related to items of accumulated other comprehensive income
258.1

 
(102.0
)
 
271.7

 
(118.1
)
Other comprehensive income (loss), net of tax
(472.6
)
 
182.8

 
(499.3
)
 
209.2

Comprehensive income (loss)
$
(395.5
)
 
$
248.5

 
$
(410.3
)
 
$
334.0























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

 

 
124.8

 
124.8

Change in unrealized appreciation (depreciation) of investments (net of applicable income tax expense of $115.9)

 
205.2

 

 
205.2

Change in noncredit component of impairment losses on fixed maturities, available for sale (net of applicable income tax expense of $2.2)

 
4.0

 

 
4.0

Cost of shares acquired
(58.2
)
 

 

 
(58.2
)
Dividends on common stock

 

 
(4.7
)
 
(4.7
)
Stock options, restricted stock and performance units
8.2

 

 

 
8.2

Balance, June 30, 2012
$
4,314.3

 
$
990.8

 
$
(412.0
)
 
$
4,893.1

 
 
 
 
 
 
 
 
Balance, December 31, 2012
$
4,176.9

 
$
1,197.4

 
$
(325.0
)
 
$
5,049.3

Net income

 

 
89.0

 
89.0

Change in unrealized appreciation (depreciation) of investments (net of applicable income tax benefit of $270.9)

 
(497.9
)
 

 
(497.9
)
Change in noncredit component of impairment losses on fixed maturities, available for sale (net of applicable income tax benefit of $.8)

 
(1.4
)
 

 
(1.4
)
Extinguishment of beneficial conversion feature related to the repurchase of convertible debentures
(12.6
)
 

 

 
(12.6
)
Cost of shares acquired
(50.0
)
 

 

 
(50.0
)
Dividends on common stock

 

 
(11.1
)
 
(11.1
)
Stock options, restricted stock and performance units
16.1

 

 

 
16.1

Balance, June 30, 2013
$
4,130.4

 
$
698.1

 
$
(247.1
)
 
$
4,581.4













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)
 
Six months ended
 
June 30,
 
2013
 
2012
Cash flows from operating activities:
 
 
 
Insurance policy income
$
1,230.1

 
$
1,216.6

Net investment income
685.1

 
660.0

Fee revenue and other income
12.9

 
8.4

Insurance policy benefits
(1,070.1
)
 
(1,108.8
)
Interest expense
(48.9
)
 
(52.6
)
Deferrable policy acquisition costs
(107.2
)
 
(94.7
)
Other operating costs
(409.1
)
 
(385.6
)
Taxes
(2.9
)
 
(4.3
)
Net cash provided by operating activities
289.9

 
239.0

Cash flows from investing activities:
 

 
 

Sales of investments
943.5

 
1,332.2

Maturities and redemptions of investments
1,335.3

 
824.5

Purchases of investments
(2,992.8
)
 
(2,614.5
)
Net sales of trading securities
25.3

 
29.2

Change in cash and cash equivalents held by variable interest entities
(156.5
)
 
(14.2
)
Other
(10.6
)
 
(16.7
)
Net cash used by investing activities
(855.8
)
 
(459.5
)
Cash flows from financing activities:
 

 
 

Payments on notes payable
(101.9
)
 
(81.4
)
Expenses related to extinguishment of debt
(61.3
)
 

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

Issuance of common stock
12.7

 
1.0

Payments to repurchase common stock
(50.0
)
 
(58.2
)
Common stock dividends paid
(11.1
)
 
(4.7
)
Amounts received for deposit products
634.0

 
674.4

Withdrawals from deposit products
(749.9
)
 
(814.6
)
Issuance of investment borrowings:
 
 
 
Federal Home Loan Bank
400.0

 

Related to variable interest entities
376.3

 
246.8

Payments on investment borrowings:
 
 
 
Federal Home Loan Bank
(200.2
)
 

Related to variable interest entities and other
(.2
)
 
(.6
)
Investment borrowings - repurchase agreements, net
27.6

 
12.0

Net cash provided (used) by financing activities
263.4

 
(25.3
)
Net decrease in cash and cash equivalents
(302.5
)
 
(245.8
)
Cash and cash equivalents, beginning of period
582.5

 
436.0

Cash and cash equivalents, end of period
$
280.0

 
$
190.2


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 pre-retiree and retired middle-income American 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 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 3 cents per diluted share) in the six months ended June 30, 2013 (none of which was recognized in the second quarter of 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 gains (losses). Our trading securities totaled $241.0 million and $266.2 million at June 30, 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 June 30, 2013 and December 31, 2012, were as follows (dollars in millions):

 
June 30,
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
$
7.5

 
$
9.8

Net unrealized gains on all other investments
1,602.1

 
2,986.5

Adjustment to present value of future profits (a)
(176.5
)
 
(193.0
)
Adjustment to deferred acquisition costs
(320.1
)
 
(452.9
)
Adjustment to insurance liabilities
(25.8
)
 
(489.8
)
Unrecognized net loss related to deferred compensation plan
(5.5
)
 
(7.9
)
Deferred income tax liabilities
(383.6
)
 
(655.3
)
Accumulated other comprehensive income
$
698.1

 
$
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 June 30, 2013, adjustments to the present value of future profits, deferred acquisition costs, insurance liabilities and deferred tax assets included $(151.4) million, $(146.8) million, $(25.8) million and $116.6 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 June 30, 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
$
14,952.8

 
$
1,294.4

 
$
(143.4
)
 
$
16,103.8

 
$

United States Treasury securities and obligations of United States government corporations and agencies
127.9

 
3.6

 
(.4
)
 
131.1

 

States and political subdivisions
1,945.0

 
162.8

 
(20.6
)
 
2,087.2

 

Asset-backed securities
1,389.0

 
79.1

 
(12.7
)
 
1,455.4

 

Collateralized debt obligations
319.4

 
9.2

 
(.8
)
 
327.8

 

Commercial mortgage-backed securities
1,302.6

 
101.8

 
(6.7
)
 
1,397.7

 

Mortgage pass-through securities
14.8

 
.8

 

 
15.6

 

Collateralized mortgage obligations
1,972.2

 
135.0

 
(2.8
)
 
2,104.4

 
(4.8
)
Total fixed maturities, available for sale
$
22,023.7

 
$
1,786.7

 
$
(187.4
)
 
$
23,623.0

 
$
(4.8
)

The following table sets forth the amortized cost and estimated fair value of fixed maturities, available for sale, at June 30, 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
$
246.1

 
$
250.1

Due after one year through five years
1,823.0

 
1,974.9

Due after five years through ten years
4,131.4

 
4,468.3

Due after ten years
10,825.2

 
11,628.8

Subtotal
17,025.7

 
18,322.1

Structured securities
4,998.0

 
5,300.9

Total fixed maturities, available for sale
$
22,023.7

 
$
23,623.0


Net Realized Investment Gains (Losses)

During the first six months of 2013, we recognized net realized investment gains of $18.5 million, which were comprised of $29.6 million of net gains from the sales of investments (primarily fixed maturities) with proceeds of $.9 billion and the decrease in fair value of certain fixed maturity investments with embedded derivatives of $10.5 million and $.6 million of writedowns of investments for other than temporary declines in fair value recognized through net income.

During the first six months of 2012, we recognized net realized investment gains of $54.8 million, which were comprised of $61.2 million of net gains from the sales of investments (primarily fixed maturities) with proceeds of $1.3 billion, the

11

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

increase in fair value of certain fixed maturity investments with embedded derivatives of $5.0 million, and $11.4 million of writedowns of investments for other than temporary declines in fair value recognized through net income.

At June 30, 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 various long-term strategies, including funding 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 six months ended June 30, 2013, we sold $181.3 million of fixed maturity investments which resulted in gross investment losses (before income taxes) of $3.4 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 June 30, 2013, other-than-temporary impairments included in accumulated other comprehensive income of $4.8 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 and six months ended June 30, 2013 and 2012 (dollars in millions):
 
Three months ended
 
Six months ended
 
June 30,
 
June 30,
 
2013
 
2012
 
2013
 
2012
Credit losses on fixed maturity securities, available for sale, beginning of period
$
(1.5
)
 
$
(1.9
)
 
$
(1.6
)
 
$
(2.0
)
Add:  credit losses on other-than-temporary impairments not previously recognized

 

 

 

Less:  credit losses on securities sold

 
.2

 
.1

 
.3

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
)
 
$
(1.7
)
 
$
(1.5
)
 
$
(1.7
)
__________
(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 June 30, 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
United States Treasury securities and obligations of United States government corporations and agencies
 
$
24.0

 
$
(.4
)
 
$

 
$

 
$
24.0

 
$
(.4
)
States and political subdivisions
 
276.8

 
$
(14.0
)
 
63.4

 
(6.6
)
 
340.2

 
(20.6
)
Corporate securities
 
2,388.2

 
(135.5
)
 
71.7

 
(7.9
)
 
2,459.9

 
(143.4
)
Asset-backed securities
 
297.3

 
(10.6
)
 
42.5

 
(2.1
)
 
339.8

 
(12.7
)
Collateralized debt obligations
 
46.5

 
(.8
)
 

 

 
46.5

 
(.8
)
Commercial mortgage-backed securities
 
107.0

 
(6.4
)
 
3.3

 
(.3
)
 
110.3

 
(6.7
)
Mortgage pass-through securities
 
1.8

 

 
1.8

 

 
3.6

 

Collateralized mortgage obligations
 
151.2

 
(2.8
)
 
2.8

 

 
154.0

 
(2.8
)
Total fixed maturities, available for sale
 
$
3,292.8

 
$
(170.5
)
 
$
185.5

 
$
(16.9
)
 
$
3,478.3

 
$
(187.4
)
Equity securities
 
$
31.7

 
$
(1.3
)
 
$

 
$

 
$
31.7

 
$
(1.3
)

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 June 30, 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
 
Six months ended
 
June 30,
 
June 30,
 
2013
 
2012
 
2013
 
2012
Net income for basic earnings per share
$
77.1

 
$
65.7

 
$
89.0

 
$
124.8

Add:  interest expense on 7.0% Convertible Senior Debentures due 2016 (the "7.0% Debentures"), net of income taxes
.4

 
3.7

 
1.6

 
7.4

Net income for diluted earnings per share
$
77.5

 
$
69.4

 
$
90.6

 
$
132.2

Shares:
 

 
 

 
 

 
 

Weighted average shares outstanding for basic earnings per share
220,498

 
237,289

 
221,290

 
239,092

Effect of dilutive securities on weighted average shares:
 

 
 

 
 

 
 

7% Debentures
5,692

 
53,377

 
11,141

 
53,372

Stock options, restricted stock and performance units
2,412

 
2,367

 
2,620

 
2,475

Warrants
2,291

 
442

 
2,129

 
470

Dilutive potential common shares
10,395

 
56,186

 
15,890

 
56,317

Weighted average shares outstanding for diluted earnings per share
230,893

 
293,475

 
237,180

 
295,409



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 June 30, 2013, the conversion rate was 184.3127 shares of our common stock for each $1,000 principal amount of 7.0% Debentures outstanding. On July 1, 2013, the Company issued a conversion right termination notice to holders of the 7.0% Debentures as further discussed in the note to the consolidated financial statements entitled "Notes Payable - Direct Corporate Obligations".

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 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 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

15

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

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.

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 and loss on extinguishment of debt depend on market conditions and do not necessarily relate to the underlying business of our segments.  Net realized investment gains (losses) and fair value changes in embedded derivative liabilities (net of related amortization) 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
 
Six months ended
 
June 30,
 
June 30,
 
2013
 
2012
 
2013
 
2012
Revenues:
 
 
 
 
 
 
 
Bankers Life:
 
 
 
 
 
 
 
Insurance policy income:
 
 
 
 
 
 
 
Annuities
$
8.6

 
$
7.9

 
$
16.5

 
$
15.1

Health
334.1

 
341.4

 
666.7

 
675.5

Life
76.4

 
69.7

 
153.9

 
134.9

Net investment income (a)
226.6

 
185.6

 
488.3

 
420.5

Fee revenue and other income (a)
4.0

 
3.3

 
7.7

 
6.2

Total Bankers Life revenues
649.7

 
607.9

 
1,333.1

 
1,252.2

Washington National:
 

 
 

 
 

 
 

Insurance policy income:
 

 
 

 
 

 
 

Health
145.6

 
143.9

 
290.9

 
287.0

Life
3.6

 
3.7

 
7.4

 
8.0

Net investment income (a)
51.3

 
51.0

 
103.3

 
101.0

Fee revenue and other income (a)
.2

 
.3

 
.4

 
.5

Total Washington National revenues
200.7

 
198.9

 
402.0

 
396.5

Colonial Penn:
 

 
 

 
 

 
 

Insurance policy income:
 

 
 

 
 

 
 

Health
1.1

 
1.3

 
2.2

 
2.7

Life
56.9

 
53.3

 
112.7

 
105.3

Net investment income (a)
9.9

 
10.2

 
19.8

 
20.2

Fee revenue and other income (a)
.2

 
.2

 
.4

 
.4

Total Colonial Penn revenues
68.1

 
65.0

 
135.1

 
128.6

Other CNO Business:
 

 
 

 
 

 
 

Insurance policy income:
 

 
 

 
 

 
 

Annuities
1.8

 
3.5

 
3.7

 
6.2

Health
6.1

 
6.4

 
12.3

 
13.1

Life
57.1

 
63.7

 
116.2

 
133.3

Net investment income (a)
80.6

 
79.8

 
170.3

 
172.5

Total Other CNO Business revenues
145.6

 
153.4

 
302.5

 
325.1

Corporate operations:
 

 
 

 
 

 
 

Net investment income
4.5

 
7.2

 
14.6

 
30.4

Fee and other income
1.5

 
.7

 
3.2

 
1.3

Total corporate revenues
6.0

 
7.9

 
17.8

 
31.7

Total revenues
1,070.1

 
1,033.1

 
2,190.5

 
2,134.1


(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,
 
2013
 
2012
 
2013
 
2012
Expenses:
 
 
 
 
 
 
 
Bankers Life:
 
 
 
 
 
 
 
Insurance policy benefits
$
434.1

 
$
396.7

 
$
904.6

 
$
817.6

Amortization
45.7

 
50.5

 
100.2

 
107.4

Interest expense on investment borrowings
1.7

 
1.4

 
3.1

 
2.8

Other operating costs and expenses
89.1

 
83.2

 
184.0

 
177.8

Total Bankers Life expenses
570.6

 
531.8

 
1,191.9

 
1,105.6

Washington National:
 

 
 

 
 

 
 

Insurance policy benefits
117.3

 
113.7

 
235.6

 
229.4

Amortization
13.0

 
10.8

 
26.7

 
23.5

Interest expense on investment borrowings
.5

 
.8

 
1.0

 
1.5

Other operating costs and expenses
38.1

 
39.7

 
77.5

 
83.5

Total Washington National expenses
168.9

 
165.0

 
340.8

 
337.9

Colonial Penn:
 

 
 

 
 

 
 

Insurance policy benefits
41.2

 
39.6

 
84.2

 
81.7

Amortization
3.7

 
3.9

 
7.4

 
7.6

Other operating costs and expenses
22.0

 
20.9

 
47.7

 
48.5

Total Colonial Penn expenses
66.9

 
64.4

 
139.3

 
137.8

Other CNO Business:
 

 
 

 
 

 
 

Insurance policy benefits
109.6

 
122.0

 
235.0

 
243.9

Amortization
5.9

 
7.1

 
11.5

 
14.6

Interest expense on investment borrowings
4.8

 
5.0

 
9.6

 
10.1

Other operating costs and expenses
22.7

 
17.4

 
40.2

 
56.9

Total Other CNO Business expenses
143.0

 
151.5

 
296.3

 
325.5

Corporate operations:
 

 
 

 
 

 
 

Interest expense on corporate debt
13.1

 
16.6

 
28.2