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CNO Financial Group, Inc. 10-Q 2015

Documents found in this filing:

  1. 10-Q
  2. Ex-12.1
  3. Ex-31.1
  4. Ex-32.1
  5. Graphic
  6. Graphic
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 September 30, 2015
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 October 22, 2015:  185,960,817








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.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 6.


2


PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.



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

ASSETS

 
September 30,
2015
 
December 31,
2014
 
 
 
 
Investments:
 
 
 
Fixed maturities, available for sale, at fair value (amortized cost:  September 30, 2015 - $18,772.7; December 31, 2014 - $18,408.1)
$
20,144.5

 
$
20,634.9

Equity securities at fair value (cost: September 30, 2015 - $429.7; December 31, 2014 - $400.5)
437.3

 
419.0

Mortgage loans
1,712.6

 
1,691.9

Policy loans
109.5

 
106.9

Trading securities
257.5

 
244.9

Investments held by variable interest entities
1,488.1

 
1,367.1

Other invested assets
395.6

 
443.6

Total investments
24,545.1

 
24,908.3

Cash and cash equivalents - unrestricted
613.8

 
611.6

Cash and cash equivalents held by variable interest entities
106.9

 
68.3

Accrued investment income
260.7

 
242.9

Present value of future profits
454.4

 
489.4

Deferred acquisition costs
909.1

 
770.6

Reinsurance receivables
2,903.3

 
2,991.1

Income tax assets, net
862.3

 
758.7

Assets held in separate accounts
5.0

 
5.6

Other assets
350.6

 
337.7

Total assets
$
31,011.2

 
$
31,184.2


(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

 
September 30,
2015
 
December 31,
2014
 
 
 
 
Liabilities:
 
 
 
Liabilities for insurance products:
 
 
 
Policyholder account balances
$
10,728.0

 
$
10,707.2

Future policy benefits
10,691.6

 
10,835.4

Liability for policy and contract claims
484.1

 
468.7

Unearned and advanced premiums
281.4

 
291.8

Liabilities related to separate accounts
5.0

 
5.6

Other liabilities
739.1

 
587.6

Investment borrowings
1,543.7

 
1,519.2

Borrowings related to variable interest entities
1,442.3

 
1,286.1

Notes payable – direct corporate obligations
925.0

 
794.4

Total liabilities
26,840.2

 
26,496.0

Commitments and Contingencies


 


Shareholders' equity:
 

 
 

Common stock ($0.01 par value, 8,000,000,000 shares authorized, shares issued and outstanding:  September 30, 2015 – 186,741,760; December 31, 2014 – 203,324,458)
1.9

 
2.0

Additional paid-in capital
3,435.8

 
3,732.4

Accumulated other comprehensive income
510.4

 
825.3

Retained earnings
222.9

 
128.5

Total shareholders' equity
4,171.0

 
4,688.2

Total liabilities and shareholders' equity
$
31,011.2

 
$
31,184.2

















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
 
Nine months ended
 
 
September 30,
 
September 30,
 
 
2015
 
2014
 
2015
 
2014
Revenues:
 
 
 
 
 
 
 
 
Insurance policy income
 
$
640.6

 
$
632.1

 
$
1,917.2

 
$
1,997.0

Net investment income (loss):
 
 
 
 
 
 

 
 

General account assets
 
298.2

 
300.1

 
900.4

 
995.6

Policyholder and reinsurer accounts and other special-purpose portfolios
 
(27.6
)
 
14.8

 
.8

 
82.9

Realized investment gains (losses):
 
 
 
 
 
 

 
 

Net realized investment gains (losses), excluding impairment losses
 
(7.2
)
 
6.8

 
(10.5
)
 
54.5

Other-than-temporary impairments:
 
 
 
 
 
 
 
 
Total other-than-temporary impairment losses
 
(15.4
)
 
(2.8
)
 
(24.6
)
 
(14.7
)
Portion of other-than-temporary impairment losses recognized in accumulated other comprehensive income
 
3.0

 

 
3.0

 

Net impairment losses recognized
 
(12.4
)
 
(2.8
)
 
(21.6
)
 
(14.7
)
Gain on dissolution of a variable interest entity
 

 

 
11.3

 

Total realized gains (losses)
 
(19.6
)
 
4.0

 
(20.8
)
 
39.8

Fee revenue and other income
 
12.9

 
16.0

 
44.7

 
29.4

Total revenues
 
904.5

 
967.0

 
2,842.3

 
3,144.7

Benefits and expenses:
 
 
 
 
 
 
 
 
Insurance policy benefits
 
582.1

 
565.5

 
1,756.4

 
1,946.9

Loss on sale of subsidiary, gain on reinsurance transactions and transition expenses
 

 
(32.1
)
 
9.0

 
242.7

Interest expense
 
23.9

 
21.9

 
70.7

 
70.8

Amortization
 
55.8

 
65.8

 
195.6

 
197.4

Loss on extinguishment or modification of debt
 

 

 
32.8

 
.6

Other operating costs and expenses
 
190.3

 
191.5

 
570.4

 
587.1

Total benefits and expenses
 
852.1

 
812.6

 
2,634.9

 
3,045.5

Income before income taxes
 
52.4

 
154.4

 
207.4

 
99.2

Income tax expense:
 
 
 
 
 
 
 
 
Tax expense on period income
 
18.6

 
53.8

 
74.0

 
133.1

Valuation allowance for deferred tax assets and other tax items
 

 
(16.8
)
 

 
(1.4
)
Net income (loss)
 
$
33.8

 
$
117.4

 
$
133.4

 
$
(32.5
)
Earnings per common share:
 
 
 
 
 
 
 
 
Basic:
 
 
 
 
 
 
 
 
Weighted average shares outstanding
 
190,260,000

 
210,525,000

 
195,536,000

 
215,790,000

Net income (loss)
 
$
.18

 
$
.56

 
$
.68

 
$
(.15
)
Diluted:
 
 
 
 
 
 
 
 
Weighted average shares outstanding
 
192,365,000

 
215,458,000

 
197,571,000

 
215,790,000

Net income (loss)
 
$
.18

 
$
.54

 
$
.68

 
$
(.15
)



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
 
Nine months ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
Net income (loss)
$
33.8

 
$
117.4

 
$
133.4

 
$
(32.5
)
Other comprehensive income, before tax:
 
 
 
 
 
 
 
Unrealized gains (losses) for the period
(136.0
)
 
(116.2
)
 
(883.1
)
 
756.7

Amortization of present value of future profits and deferred acquisition costs
11.2

 
15.8

 
101.4

 
(103.6
)
Amount related to premium deficiencies assuming the net unrealized gains (losses) had been realized
(40.5
)
 
11.8

 
269.8

 
(405.8
)
Reclassification adjustments:
 
 
 
 
 
 
 
For net realized investment (gains) losses included in net income (loss)
17.7

 
(15.5
)
 
19.5

 
(51.2
)
For amortization of the present value of future profits and deferred acquisition costs related to net realized investment gains (losses) included in net income (loss)
(.6
)
 
.1

 
(.5
)
 
.6

Unrealized gains (losses) on investments
(148.2
)
 
(104.0
)
 
(492.9
)
 
196.7

Change related to deferred compensation plan
1.2

 
.3

 
3.7

 
1.0

Other comprehensive income (loss) before tax
(147.0
)
 
(103.7
)
 
(489.2
)
 
197.7

Income tax (expense) benefit related to items of accumulated other comprehensive income (loss)
52.4

 
36.9

 
174.3

 
(70.2
)
Other comprehensive income (loss), net of tax
(94.6
)
 
(66.8
)
 
(314.9
)
 
127.5

Comprehensive income (loss)
$
(60.8
)
 
$
50.6

 
$
(181.5
)
 
$
95.0
























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
 
Retained earnings
 
Total
Balance, December 31, 2013
$
4,095.0

 
$
731.8

 
$
128.4

 
$
4,955.2

Net loss

 

 
(32.5
)
 
(32.5
)
Change in unrealized appreciation (depreciation) of investments (net of applicable income tax expense of $70.4)

 
127.9

 

 
127.9

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

 
(.4
)
 

 
(.4
)
Cost of common stock and warrants repurchased
(301.5
)
 

 

 
(301.5
)
Dividends on common stock

 

 
(39.0
)
 
(39.0
)
Stock options, restricted stock and performance units
12.3

 

 

 
12.3

Balance, September 30, 2014
$
3,805.8

 
$
859.3

 
$
56.9

 
$
4,722.0

 
 
 
 
 
 
 
 
Balance, December 31, 2014
$
3,734.4

 
$
825.3

 
$
128.5

 
$
4,688.2

Net income

 

 
133.4

 
133.4

Change in unrealized appreciation (depreciation) of investments (net of applicable income tax benefit of $173.6)

 
(313.6
)
 

 
(313.6
)
Change in noncredit component of impairment losses on fixed maturities, available for sale (net of applicable income tax benefit of $.7)

 
(1.3
)
 

 
(1.3
)
Cost of common stock repurchased
(311.2
)
 

 

 
(311.2
)
Dividends on common stock

 

 
(39.0
)
 
(39.0
)
Stock options, restricted stock and performance units
14.5

 

 

 
14.5

Balance, September 30, 2015
$
3,437.7

 
$
510.4

 
$
222.9

 
$
4,171.0











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)

 
Nine months ended
 
 
September 30,
 
 
2015
 
2014
 
Cash flows from operating activities:
 
 
 
 
Insurance policy income
$
1,811.6

 
$
1,783.2

 
Net investment income
885.4

 
966.2

 
Fee revenue and other income
44.7

 
29.4

 
Insurance policy benefits
(1,414.2
)
 
(1,506.8
)
 
Payment to reinsurer pursuant to long-term care business reinsured

 
(590.3
)
 
Interest expense
(53.5
)
 
(59.7
)
 
Deferrable policy acquisition costs
(181.9
)
 
(176.6
)
 
Other operating costs
(553.5
)
 
(566.5
)
 
Taxes
(3.3
)
 
(2.8
)
 
Net cash from operating activities
535.3

 
(123.9
)
(a)
Cash flows from investing activities:
 

 
 

 
Sales of investments
1,461.2

 
1,695.0

 
Maturities and redemptions of investments
1,427.8

 
1,323.5

 
Purchases of investments
(3,281.7
)
 
(2,982.0
)
 
Net sales (purchases) of trading securities
(8.2
)
 
8.0

 
Change in cash and cash equivalents held by variable interest entities
(38.6
)
 
(46.4
)
 
Cash and cash equivalents held by subsidiary prior to being sold

 
(164.7
)
 
Proceeds from sale of subsidiary

 
232.9

 
Other
(18.6
)
 
(19.8
)
 
Net cash provided (used) by investing activities
(458.1
)
 
46.5

 
Cash flows from financing activities:
 

 
 

 
Issuance of notes payable, net
909.0

 

 
Payments on notes payable
(797.1
)
 
(43.1
)
 
Expenses related to extinguishment or modification of debt
(17.8
)
 
(.5
)
 
Issuance of common stock
5.3

 
4.7

 
Payments to repurchase common stock
(306.2
)
 
(297.0
)
 
Common stock dividends paid
(39.0
)
 
(39.0
)
 
Amounts received for deposit products
908.1

 
971.2

 
Withdrawals from deposit products
(930.5
)
 
(1,047.6
)
 
Issuance of investment borrowings:
 
 
 
 
Federal Home Loan Bank
300.0

 
350.0

 
Related to variable interest entities
274.8

 
347.1

 
Payments on investment borrowings:
 
 
 
 
Federal Home Loan Bank
(275.5
)
 
(367.6
)
 
Related to variable interest entities and other
(106.1
)
 
(68.1
)
 
Investment borrowings - repurchase agreements, net

 
20.4

 
Net cash used by financing activities
(75.0
)
 
(169.5
)
 
Net increase (decrease) in cash and cash equivalents
2.2

 
(246.9
)
 
Cash and cash equivalents, beginning of period
611.6

 
699.0

 
Cash and cash equivalents, end of period
$
613.8

 
$
452.1

 
______________________
(a)
Cash flows from operating activities reflect outflows in the 2014 period due to the payment to reinsurer to transfer certain long-term care business.


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 2014 Annual Report on Form 10-K as retrospectively updated by the Current Report on Form 8-K filed on May 11, 2015 reflecting updated disclosures of operating earnings performance measures.

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.  The terms "CNO Financial Group, Inc.", "CNO", the "Company", "we", "us", and "our" as used in these financial statements refer to CNO 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 middle-income pre-retiree and retired Americans, 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 2015 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, 2014, 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.

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; (ii) investments supporting certain insurance liabilities (including investments backing the market strategies of our multibucket annuity products) and certain reinsurance agreements; and (iii) certain fixed maturity securities containing embedded derivatives for which we have elected the fair value option.  The change in fair value of the income generating investments and investments supporting insurance liabilities and reinsurance agreements is recognized in income from policyholder and reinsurer accounts and other special-purpose portfolios (a component of net investment income). The change in fair value of securities with embedded derivatives is recognized in realized investment gains (losses). Investment income related to

9

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


investments supporting certain insurance liabilities and certain reinsurance agreements is substantially offset by the change in insurance policy benefits related to certain products and agreements.

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 September 30, 2015 and December 31, 2014, were as follows (dollars in millions):

 
September 30,
2015
 
December 31,
2014
Net unrealized appreciation (depreciation) on fixed maturity securities, available for sale, on which an other-than-temporary impairment loss has been recognized
$
3.1

 
$
5.3

Net unrealized gains on all other investments
1,346.3

 
2,207.7

Adjustment to present value of future profits (a)
(132.5
)
 
(149.9
)
Adjustment to deferred acquisition costs
(290.7
)
 
(390.5
)
Adjustment to insurance liabilities
(127.9
)
 
(381.4
)
Unrecognized net loss related to deferred compensation plan
(4.8
)
 
(8.5
)
Deferred income tax liabilities
(283.1
)
 
(457.4
)
Accumulated other comprehensive income
$
510.4

 
$
825.3

________
(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 Conseco, Inc., an Indiana corporation (our "Predecessor"), emerged from bankruptcy.

At September 30, 2015, adjustments to the present value of future profits, deferred acquisition costs, insurance liabilities and deferred tax assets included $(115.0) million, $(139.7) million, $(127.9) million and $135.9 million, respectively, for premium deficiencies that would exist on certain products (primarily long-term care) 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 September 30, 2015, 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, and equity securities 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
$
12,280.0

 
$
1,159.0

 
$
(241.2
)
 
$
13,197.8

 
$

United States Treasury securities and obligations of United States government corporations and agencies
137.4

 
25.5

 

 
162.9

 

States and political subdivisions
2,024.7

 
241.2

 
(6.5
)
 
2,259.4

 
(3.0
)
Debt securities issued by foreign governments
16.7

 

 
(.2
)
 
16.5

 

Asset-backed securities
1,438.4

 
66.1

 
(4.9
)
 
1,499.6

 

Collateralized debt obligations
361.2

 
1.4

 
(1.2
)
 
361.4

 

Commercial mortgage-backed securities
1,464.9

 
60.4

 
(6.7
)
 
1,518.6

 

Mortgage pass-through securities
3.2

 
.3

 

 
3.5

 

Collateralized mortgage obligations
1,046.2

 
79.6

 
(1.0
)
 
1,124.8

 
(2.9
)
Total fixed maturities, available for sale
$
18,772.7

 
$
1,633.5

 
$
(261.7
)
 
$
20,144.5

 
$
(5.9
)
Equity securities
$
429.7

 
$
12.1

 
$
(4.5
)
 
$
437.3

 
 

The following table sets forth the amortized cost and estimated fair value of fixed maturities, available for sale, at September 30, 2015, 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
$
225.6

 
$
230.0

Due after one year through five years
2,211.1

 
2,383.1

Due after five years through ten years
1,872.4

 
1,979.7

Due after ten years
10,149.7

 
11,043.8

Subtotal
14,458.8

 
15,636.6

Structured securities
4,313.9

 
4,507.9

Total fixed maturities, available for sale
$
18,772.7

 
$
20,144.5



11

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


Net Realized Investment Gains (Losses)

The following table sets forth the net realized investment gains (losses) for the periods indicated (dollars in millions):

 
Three months ended
 
Nine months ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
Fixed maturity securities, available for sale:
 
 
 
 
 
 
 
Gross realized gains on sale
$
21.7

 
$
8.3

 
$
47.9

 
$
54.7

Gross realized losses on sale
(27.8
)
 
(2.6
)
 
(48.7
)
 
(11.1
)
Impairments:
 
 
 
 
 
 
 
Total other-than-temporary impairment losses
(11.1
)
 

 
(12.4
)
 

Other-than-temporary impairment losses recognized in accumulated other comprehensive income
3.0

 

 
3.0

 

Net impairment losses recognized
(8.1
)
 

 
(9.4
)
 

Net realized investment gains from fixed maturities
(14.2
)
 
5.7

 
(10.2
)
 
43.6

Equity securities

 
1.9

 
3.0

 
9.8

Commercial mortgage loans

 
(1.2
)
 
(2.3
)
 
(.1
)
Impairments of mortgage loans and other investments
(4.3
)
 
(2.8
)
 
(12.2
)
 
(14.7
)
Gain on dissolution of a variable interest entity

 

 
11.3

 

Other (a)
(1.1
)
 
.4

 
(10.4
)
 
1.2

Net realized investment gains (losses)
$
(19.6
)
 
$
4.0

 
$
(20.8
)
 
$
39.8

_________________
(a)
Changes in the estimated fair value of trading securities that we have elected the fair value option (and are still held as of the end of the respective periods) were $(4.7) million and $6.3 million for the nine months ended September 30, 2015 and 2014, respectively.

During the first nine months of 2015, we recognized net realized investment losses of $20.8 million, which were comprised of: (i) $6.2 million of net losses from the sales of investments; (ii) an $11.3 million gain on the dissolution of a variable interest entity ("VIE"); (iii) the decrease in fair value of embedded derivatives related to a modified coinsurance agreement of $4.3 million; and (iv) $21.6 million of writedowns of investments for other than temporary declines in fair value recognized through net income ($24.6 million, prior to the $3.0 million of impairment losses recognized through accumulated other comprehensive income).

During the first nine months of 2015, a VIE that was required to be consolidated was dissolved. A gain of $11.3 million was recognized representing the difference between the borrowings of such VIE and the contractual distributions required following the liquidation of the underlying assets.

During the first nine months of 2014, we recognized net realized investment gains of $39.8 million, which were comprised of: (i) $48.4 million of net gains from the sales of investments (primarily fixed maturities); (ii) the increase in fair value of certain fixed maturity investments with embedded derivatives of $6.1 million; and (iii) $14.7 million of writedowns of investments for other than temporary declines in fair value recognized through net income.

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 first nine months of 2015, the $48.7 million of gross realized losses on sales of $416.7 million of fixed maturity securities, available for sale included: (i) $47.9 million related to various corporate securities (including $29.3 million

12

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


related to sales of investments in the energy sector); and (ii) $.8 million of losses related to the sales of asset-backed securities.  Securities are generally sold at a loss following unforeseen issue-specific events or conditions or shifts in perceived risks.  These reasons include but are 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 portfolio cash flows.

During the first nine months of 2015, we recognized $21.6 million of impairment losses recorded in earnings which included: (i) $7.4 million of writedowns on fixed maturities in the energy sector; (ii) $3.6 million of writedowns on commercial bank loans held by VIEs; (iii) $2.7 million of writedowns on other investments (primarily fixed maturities) due to issuer specific events; and (iv) a $7.9 million writedown of a legacy investment in a private company that was liquidated. We no longer have any exposure to legacy private companies related to investments acquired by our Predecessor. Factors considered in determining the writedowns of investments in the first nine months of 2015 included the subordination status of each investment, the impact of recent downgrades and issuer specific events, including the impact of the current low oil prices on issuers in the energy sector.

During the first nine months of 2014, we recognized $14.7 million of impairment losses recorded in earnings which included: (i) a $3.9 million writedown of a commercial mortgage loan related to a property with expected occupancy challenges; and (ii) $10.8 million of impairments related to two legacy private company investments where earnings and cash flows had not met the expectations assumed in our previous valuations.

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,

13

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


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 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 September 30, 2015, other-than-temporary impairments included in accumulated other comprehensive income of $5.9 million (before taxes and related amortization) related to certain 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 nine months ended September 30, 2015 and 2014 (dollars in millions):

 
Three months ended
 
Nine months ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
Credit losses on fixed maturity securities, available for sale, beginning of period
$
(1.0
)
 
$
(1.2
)
 
$
(1.0
)
 
$
(1.3
)
Add:  credit losses on other-than-temporary impairments not previously recognized
(2.0
)
 

 
(2.0
)
 

Less:  credit losses on securities sold
.1

 
.1

 
.1

 
.2

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
$
(2.9
)
 
$
(1.1
)
 
$
(2.9
)
 
$
(1.1
)
__________
(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.


14

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 September 30, 2015 (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
 
$
101.8

 
$
(3.4
)
 
$
16.8

 
$
(3.1
)
 
$
118.6

 
$
(6.5
)
Debt securities issued by foreign governments
 
16.5

 
(.2
)
 

 

 
16.5

 
(.2
)
Corporate securities
 
2,275.1

 
(175.7
)
 
270.1

 
(65.5
)
 
2,545.2

 
(241.2
)
Asset-backed securities
 
352.0

 
(4.0
)
 
63.0

 
(.9
)
 
415.0

 
(4.9
)
Collateralized debt obligations
 
86.8

 
(.6
)
 
91.1

 
(.6
)
 
177.9

 
(1.2
)
Commercial mortgage-backed securities
 
287.0

 
(6.7
)
 
8.9

 

 
295.9

 
(6.7
)
Mortgage pass-through securities
 

 

 
.2

 

 
.2

 

Collateralized mortgage obligations
 
49.6

 
(.6
)
 
38.0

 
(.4
)
 
87.6

 
(1.0
)
Total fixed maturities, available for sale
 
$
3,168.8

 
$
(191.2
)
 
$
488.1

 
$
(70.5
)
 
$
3,656.9

 
$
(261.7
)
Equity securities
 
$
123.5

 
$
(4.1
)
 
$
2.4

 
$
(.4
)
 
$
125.9

 
$
(4.5
)

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, 2014 (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
 
$
12.1

 
$
(.1
)
 
$
4.6

 
$

 
$
16.7

 
$
(.1
)
States and political subdivisions
 
13.2

 
(.3
)
 
44.5

 
(2.7
)
 
57.7

 
(3.0
)
Corporate securities
 
985.0

 
(65.9
)
 
297.5

 
(19.2
)
 
1,282.5

 
(85.1
)
Asset-backed securities
 
91.2

 
(1.3
)
 
60.5

 
(2.1
)
 
151.7

 
(3.4
)
Collateralized debt obligations
 
184.2

 
(3.4
)
 

 

 
184.2

 
(3.4
)
Commercial mortgage-backed securities
 
46.7

 
(.5
)
 

 

 
46.7

 
(.5
)
Mortgage pass-through securities
 
.5

 

 
.1

 

 
.6

 

Collateralized mortgage obligations
 
79.0

 
(.8
)
 
32.0

 
(.5
)
 
111.0

 
(1.3
)
Total fixed maturities, available for sale
 
$
1,411.9

 
$
(72.3
)
 
$
439.2

 
$
(24.5
)
 
$
1,851.1

 
$
(96.8
)
Equity securities
 
$
13.2

 
$
(.6
)
 
$
.5

 
$

 
$
13.7

 
$
(.6
)

Based on management's current assessment of investments with unrealized losses at September 30, 2015, 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

15

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


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.

Repurchase agreements

We may enter into agreements under which we sell securities subject to an obligation to repurchase the same securities. These repurchase agreements are accounted for as collateralized financing arrangements and not as a sale and subsequent repurchase of securities. The obligation to repurchase the securities is reflected as investment borrowings in the Company's consolidated balance sheet, while the securities underlying the repurchase agreements remain in the respective investment asset accounts. There is no offsetting or netting of the investment securities assets with the repurchase agreement liabilities. In addition, as the Company does not currently have any outstanding reverse repurchase agreements, there is no such offsetting to be done with the repurchase agreements.

The right of offset for a repurchase agreement resembles a secured borrowing, whereby the collateral would be used to settle the fair value of the repurchase agreement should the Company be in default under the agreement (e.g., fails to make an interest payment to the counterparty). If the counterparty were to default (e.g., declare bankruptcy), the Company could cancel the repurchase agreement (i.e., cease payment of principal and interest), and attempt collection on the amount of collateral value in excess of the repurchase agreement fair value. The collateral is held by a third party financial institution in the counterparty's custodial account. The counterparty has the right to sell or repledge the investment securities. Offsetting disclosures are included in the note to the consolidated financial statements entitled "Accounting for Derivatives".

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
 
Nine months ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
Net income (loss) for basic and diluted earnings per share
$
33.8

 
$
117.4

 
$
133.4

 
$
(32.5
)
Shares:
 

 
 

 
 
 
 
Weighted average shares outstanding for basic earnings per share
190,260

 
210,525

 
195,536

 
215,790

Effect of dilutive securities on weighted average shares (a):
 

 
 

 
 
 
 
Stock options, restricted stock and performance units
2,105

 
2,447

 
2,035

 

Warrants

 
2,486

 

 

Weighted average shares outstanding for diluted earnings per share
192,365

 
215,458

 
197,571

 
215,790

________
(a)
In the nine months ended September 30, 2014, 5,435 thousand equivalent common shares (comprised of 2,458 thousand shares related to stock options, restricted stock and performance units and 2,977 thousand shares related to warrants) were not included in the diluted weighted average shares outstanding, because their inclusion would have been antidilutive in such period due to the net loss recognized by the Company resulting from the sale of Conseco Life Insurance Company ("CLIC").

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, restricted shares and warrants (until they were repurchased in September 2014) 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

16

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


period, reducing the dilutive effect of the exercise of the options and warrants (or the vesting of the restricted stock and performance units).


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; and corporate operations, comprised of holding company activities and certain noninsurance company businesses.

Effective January 1, 2015, we changed our definition of pre-tax operating income to exclude the impact of fair market value changes related to the agent deferred compensation plan, since such impacts are not indicative of our ongoing business and trends in our business. Prior periods have been revised, as applicable, to conform to our current presentation. Pre-tax income is not impacted by this change. We measure segment performance by excluding the net loss on the sale of CLIC and gain on reinsurance transactions, the earnings of CLIC prior to being sold on July 1, 2014, net realized investment gains (losses), fair value changes in embedded derivative liabilities (net of related amortization), fair value changes in the agent deferred compensation plan, loss on extinguishment or modification of debt, income taxes and other non-operating items consisting primarily of equity in earnings of certain non-strategic investments and earnings attributable to VIEs ("pre-tax operating earnings") 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 net realized investment gains (losses), and a long-term focus is necessary to maintain profitability over the life of the business.

The net loss on the sale of CLIC, gain on reinsurance transactions, the earnings of CLIC prior to being sold, net realized investment gains (losses), fair value changes in embedded derivative liabilities (net of related amortization), fair value changes in the agent deferred compensation plan, loss on extinguishment or modification of debt and other non-operating items consisting primarily of equity in earnings of certain non-strategic investments and earnings attributable to VIEs depend on market conditions or represent unusual items that 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.

17

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


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

 
Three months ended
 
Nine months ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
Revenues:
 
 
 
 
 
 
 
Bankers Life:
 
 
 
 
 
 
 
Insurance policy income:
 
 
 
 
 
 
 
Annuities
$
5.2

 
$
6.6

 
$
17.0

 
$
21.8

Health
311.6

 
319.4

 
940.5

 
970.4

Life
95.7

 
90.4

 
281.6

 
248.6

Net investment income (a)
196.3

 
231.2

 
648.0

 
703.2

Fee revenue and other income (a)
7.0

 
7.0

 
19.8

 
18.1

Total Bankers Life revenues
615.8

 
654.6

 
1,906.9

 
1,962.1

Washington National:
 

 
 

 
 
 
 
Insurance policy income:
 

 
 

 
 
 
 
Annuities
.7

 
.9

 
2.3

 
3.3

Health
155.0

 
147.1

 
459.9

 
444.8

Life
6.4

 
6.0

 
19.0

 
18.2

Net investment income (a)
58.4

 
65.2

 
187.1

 
206.0

Fee revenue and other income (a)
.3

 
.3

 
1.0

 
.7

Total Washington National revenues
220.8

 
219.5

 
669.3

 
673.0

Colonial Penn:
 

 
 

 
 
 
 
Insurance policy income:
 

 
 

 
 
 
 
Health
.7

 
.8

 
2.3

 
2.7

Life
65.3

 
60.9

 
194.6

 
181.2

Net investment income (a)
10.5

 
10.3

 
32.0

 
31.5

Fee revenue and other income (a)
.2

 
.2

 
.7

 
.7

Total Colonial Penn revenues
76.7

 
72.2

 
229.6

 
216.1

Corporate operations:
 

 
 

 
 
 
 
Net investment income
(6.1
)
 
(1.0
)
 
3.4

 
11.7

Fee and other income
2.1

 
1.9

 
6.2

 
4.6

Total corporate revenues
(4.0
)
 
.9

 
9.6

 
16.3

Total revenues
909.3

 
947.2

 
2,815.4

 
2,867.5


(continued on next page)


18

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


(continued from previous page)
 
Three months ended
 
Nine months ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
Expenses:
 
 
 
 
 
 
 
Bankers Life:
 
 
 
 
 
 
 
Insurance policy benefits
$
386.1

 
$
394.9