CNO Financial Group Annual Report 2014

Plain-text annual report

2 0 1 4 A n n u a l R e p o r t I i C N O F n a n c i a l G r o u p , I n c . 2014 2014 ANNUAL REPORT CNO Financial Group, Inc. 11825 N. Pennsylvania Street Carmel, IN 46032 (317) 817-6100 © 2015 CNO Financial Group, Inc. (03/15) 159676 CNOinc.com Table of Contents 2014 in Review To Our Shareholders Bankers Life Colonial Penn Washington National CNO Financial in the Community Annual Report on Form 10-K Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Selected Consolidated Financial Data Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations Consolidated Financial Statements Exhibits and Financial Statement Schedules Directors of CNO Financial Group, Inc. Investor Information 1 2 6 8 10 12 15 50 52 53 109 172 178 180 Investor Information Meeting of Shareholders Our annual meeting of shareholders will be held at 8:00 a.m. (EDT) on May 6, 2015, in the auditorium of CNO Financial Group’s headquarters at 11825 N. Pennsylvania Street, Carmel, Indiana. This information is included in the meeting notice, proxy statement and form of proxy sent to each shareholder with this annual report. You may vote your proxy by executing and returning your form of proxy. If a brokerage firm holds your shares, you may be able to vote over the internet or by telephone; consult your broker for information. Shareholder Services If you are a registered shareholder and have a question about your account, or if you would like to report a change in your name or address, please call CNO’s transfer agent, American Stock Transfer & Trust Company, at (800) 937-5449 or (718) 921-8124. Shareholders may reach American Stock Transfer at amstock.com, by email to info@amstock.com, or by mail: American Stock Transfer & Trust Company 6201 15th Avenue Brooklyn, NY 11219 Ways to Learn More About Us Investor Hotline: Call (800) 426-6732 or (317) 817-2893 to receive annual reports, Form 10-Ks, Form 10-Qs and other documents by mail or to speak with an investor relations representative. Email: Contact us at ir@CNOinc.com to ask questions or request materials. Quarterly Reporting To receive CNO’s quarterly results as soon as they are announced, please sign up for CNO’s mailing list by contacting the investor relations department or visit investor.CNOinc.com. Copies of this Report To obtain additional copies of this report or to receive other free investor materials, contact the investor relations department. To view these reports online, please visit investor.CNOinc.com. Stock Information CNO Financial Group’s common stock is listed on the New York Stock Exchange (trading symbol: CNO). 2014 in Review 3-YEAR RETURN 3-YEAR RETURN OPERATING EARNINGS PER SHARE OPERATING EARNINGS PER SHARE 200 200 173% 173% CNO S&P 500 CNO S&P 500 3-YEAR RETURN 3-YEAR RETURN 3-YEAR RETURN 3-YEAR RETURN CNO CNO S&P 500 S&P 500 CNO CNO S&P 500 S&P 500 200 200 100 100 200 200 100 100 0 0 100 100 173% 173% 64% 173% 173% 64% 64% 64% 64% 64% 0 0 BOOK VALUE PER DILUTED SHARE BOOK VALUE PER DILUTED SHARE 0 0 2 0 1 2 2 0 1 3 2 0 1 2 BOOK VALUE PER DILUTED SHARE BOOK VALUE PER DILUTED SHARE $16.21 $16.21 BOOK VALUE PER DILUTED SHARE 2 0 1 3 BOOK VALUE PER DILUTED SHARE $18.62 $16.21 $16.21 2 2 0 0 1 1 2 2 $18.62 2 0 1 2 2 0 1 4 2 0 1 2 2 2 0 0 1 1 3 3 2 0 1 4 2 0 1 3 2 0 1 3 2 2 0 0 1 1 4 4 2 0 1 4 2 0 1 4 $16.21 $16.21 $18.75 $18.75 $18.62 $18.62 $18.62 $18.62 $18.75 $18.75 CAPITAL DEPLOYMENT ($MM) $18.75 CAPITAL DEPLOYMENT ($MM) $18.75 $23 $23 $38 $38 CAPITAL DEPLOYMENT ($MM) CAPITAL DEPLOYMENT ($MM) $63 Interest $63 Interest Securities Purchases Securities Purchases CAPITAL DEPLOYMENT ($MM) $38 $38 CAPITAL DEPLOYMENT ($MM) $23 $23 $23 $51 $23 $63 $63 $28 Common Stock Dividends Traditional Life Recapture Holding Company Expenses & Other Securities Purchases Securities Purchases Holding Company Expenses & Other $51 Debt Repayment/ Interest Interest Financing Costs $28 Interest Debt Repayment/ Financing Costs Securities Purchases Holding Company Holding Company Securities Purchases Common Stock Dividends Expenses & Other Expenses & Other Interest Traditional Life Recapture Debt Repayment/ Debt Repayment/ Holding Company Holding Company Financing Costs Financing Costs Expenses & Other Expenses & Other Common Stock Dividends Common Stock Dividends Debt Repayment/ Traditional Life Recapture Traditional Life Recapture Financing Costs Common Stock Dividends Debt Repayment/ Financing Costs Common Stock Dividends Traditional Life Recapture Traditional Life Recapture $376 $376 $38 $38 $376 $376 $376 $376 $63 $63 $51 $51 $28 $28 $51 $51 $28 $28 OPERATING EARNINGS PER SHARE OPERATING EARNINGS PER SHARE $1.07 $1.07 $1.19 $1.19 $0.78 $0.78 OPERATING EARNINGS PER SHARE $1.19 $1.19 OPERATING EARNINGS PER SHARE $1.07 $1.07 $0.78 $0.78 $1.07 $1.07 $1.19 $1.19 $0.78 2012 $0.78 2012 2013 2013 2014 2014 NEW ANNUALIZED PREMIUM ($MM) 2013 2013 NEW ANNUALIZED PREMIUM ($MM) 2012 2012 2014 2014 $425.4 $425.4 $393.4 2012 $61.8 $86.4 $245.2 $416.3 2013 $62.2 2013 $94.0 $393.4 $61.8 $86.4 2012 NEW ANNUALIZED PREMIUM ($MM) NEW ANNUALIZED PREMIUM ($MM) 2014 $64.6 $94.0 $99.2 $416.3 2014 $62.2 $260.1 $245.2 $425.4 $425.4 $416.3 $416.3 NEW ANNUALIZED PREMIUM ($MM) $64.6 $64.6 $62.2 $62.2 $425.4 $425.4 $99.2 $99.2 $416.3 $94.0 $94.0 $64.6 $62.2 $261.6 $261.6 $99.2 $260.1 $260.1 $94.0 $393.4 $393.4 NEW ANNUALIZED PREMIUM ($MM) $261.6 $61.8 $61.8 $393.4 $86.4 $86.4 $61.8 $245.2 $245.2 $86.4 $416.3 $62.2 $393.4 $61.8 $86.4 $260.1 $64.6 $99.2 $94.0 $64.6 $99.2 $261.6 2012 2012 $245.2 $245.2 Bankers Life 2013 $260.1 Washington National $260.1 Washington National $261.6 Colonial Penn 2013 2014 $261.6 2014 Bankers Life Colonial Penn 2012 2012 Bankers Life Bankers Life 2012 2012 OPERATING RETURN ON EQUITY 2014 2014 OPERATING RETURN ON EQUITY Colonial Penn Colonial Penn 2013 2013 Washington National Washington National Bankers Life Bankers Life Washington National 8.5% OPERATING RETURN ON EQUITY OPERATING RETURN ON EQUITY Washington National 8.0% 8.0% 2013 2013 2014 2014 Colonial Penn 8.5% Colonial Penn 6.8% 6.8% OPERATING RETURN ON EQUITY OPERATING RETURN ON EQUITY 8.0% 8.0% 8.5% 8.5% 8.5% 8.5% 8.0% 8.0% 6.8% 6.8% 6.8% 6.8% 2012 2012 2013 2013 2014 2014 2012 2012 2013 2013 2014 2014 2012 2012 2013 2013 2014 2014 Edward J. Bonach Chief Executive Officer To Our Shareholders 2014 was another year of progress for CNO. Our investments in distribution, new products and enhancing the customer experience continue to contribute to increases in sales, collected premiums and annuity account values. We significantly reduced the go forward risk profile of the company through the sale and reinsurance of non-core and volatile closed blocks of business. We continue to invest in and focus on operating efficiencies and productivity improvements across the company and early in 2015 announced a strategic partnership with Cognizant to accelerate information technology process improvements and innovation. We expect our partnership to improve the effectiveness of future IT delivery and open-up the possibility of joint investment in strategic initiatives designed to better serve the middle-market. We strengthened our financial position by reducing debt, generating excess capital and increasing financial flexibility. This financial strength enabled us to return capital to our shareholders in 2014 by repurchasing $376 million of securities during the year. We also doubled our common stock dividend and achieved a 20% payout ratio, one year earlier than our goal. CNO continued its positive momentum with the rating agencies and received four additional upgrades during the year, bringing the total number of upgrades to 10 since the beginning of 2012. Our strong operating performance and balanced approach to excess capital deployment has not gone unnoticed. Over the past three years, our total shareholder return was 173%, exceeding the average of our industry peer group. 2 CNO experienced strong operating performance in 2014, marked by sales growth in each business. Financial Performance Business Performance CNO experienced strong operating performance in 2014 and this was marked by sales growth in each of our businesses. Consolidated sales reached $425 million, an increase of 2% over 2013. For the full year, CNO recorded operating earnings of $259 million, or $1.19 per diluted share, compared to $1.07 per diluted share in 2013. Net income was $51 million, or $0.24 per diluted share, compared to $2.06 per diluted share in 2013. Net income in 2014 included ($1.24) from the net loss on the sale of Conseco Life Insurance Company and reinsurance transactions. Our financial strength continued to improve during the year. We ended the year with $345 million in cash and investments at the holding company and approximately $195 million in deployable capital. Our debt-to-total capital ratio of 17.1% was essentially flat compared to the prior year, and our consolidated risk-based capital ratio increased approximately 20 percentage points to over 430%. In addition, the risk-based capital ratio of Bankers Life and Casualty Company, our largest subsidiary, increased 29 percentage points over 2013 to 411%. CNO’s success stems from our focus on serving the health and life insurance protection needs of middle income working Americans and retirees; our mix of distribution channels, which is primarily exclusive; and the breadth of products we offer to meet our customers’ needs. We accelerated this formula for success with strategic investments to increase the reach and productivity of our distribution force, drive efficiencies in our operations, and improve the customer experience. We made progress on these initiatives in 2014. Bankers Life, our career distribution channel, added 11 new sales offices in 2014, bringing the total to 312 branches and satellite offices across the country. Sales increased by 1% for the year driven by increases in life insurance products, which were up 13% and annuities, which were up 5% despite the low interest rate environment. These increases were largely offset by lower sales of long-term care and Medicare supplement products. Bankers Life’s sales results were below our expectations but this was due primarily to challenges we faced in recruiting new agents in the first nine months of the year. New agent recruiting was strong in the fourth quarter and we expect that momentum to continue in 2015. While new agent recruiting was a challenge, we continue to benefit from the investments we have made to increase agent productivity, which increased by 4% during the year. Washington National, our owned agency and independent distribution channel, produced sales growth of 6% in 2014, on top of record-breaking 3 Exceptional people are a vital component of exceptional companies; strategies are only as good as the individuals who execute them. We consider our ability to attract, develop and retain talented people one of our strengths and a meaningful competitive advantage. growth in 2013. We continue to benefit from geographic expansion, recruiting new agents and improving retention. Performance Matters Associates, our wholly owned agency, recorded sales growth of 11%, driven by growth in both the individual and worksite markets. Colonial Penn, our direct distribution channel, grew sales by 4% in 2014. Colonial Penn continued to make progress on lead diversification initiatives, increased marketing and sales effectiveness and increased sales of newer simplified issue term and whole life products. Our People Exceptional people are a vital component of exceptional companies; strategies are only as good as the individuals who execute them. We consider our ability to attract, develop and retain talented people to be one of our strengths and a meaningful competitive advantage. In 2014, we continued to establish CNO as a great place to work by investing in the careers and well-being of our associates. That commitment was recognized when we were named one of the Healthiest 100 Workplaces in America and received the Best Employers for Healthy Lifestyles honor. Bankers Life was recognized by Training magazine as one of the top 125 training companies in the country for the third consecutive year and was honored with three Communicator Awards of Distinction for its new mobile application suite. Lastly, CNO was also recognized by Forbes magazine as one of America’s 50 Most Trustworthy Financial Companies. In 2014, Chris Nickele was promoted to chief actuary. Chris was the key business leader for the unwinding of our Other CNO Business segment. With the sale of Conseco Life Insurance Company now complete, Chris can devote his full attention, across the enterprise, to our critical actuarial work. Along with his continuing management of product pricing and development, Chris is now responsible for CNO’s actuarial financial reporting functions. Chris’s actuarial expertise, along with his outstanding track record of building enterprise value makes him uniquely qualified to lead our actuarial team. 4 Our Industry’s Value Everyone at CNO wholeheartedly embraces our mission-to enrich lives by providing life and health insurance for the protection and retirement needs of middle-income Americans, while building enduring value for all our stakeholders. We are always mindful of the important role our industry and our company play in helping provide financial security to our customers. Research conducted by the Bankers Life Center for a Secure Retirement and Washington National Institute for Wellness Solutions underscores several facts about middle-income Americans: their number is growing; they are living longer; and most are unprepared for retirement or to pay for healthcare expenses. We also know that today’s middle-income Americans think about retirement differently than previous generations; specifically, two-thirds are looking forward to an active lifestyle in retirement. By understanding the changing face of our customer base, we’re able to create and deliver products to help these underserved Americans gain financial security and fulfill their expectations and aspirations for retirement. This, in turn, positions CNO as a valuable partner to our customers, not just a mere provider of insurance products. Looking Forward We believe we have the right focus and strategy in place to create long-term value for CNO shareholders. We see significant opportunities for growth in the middle-income marketplace and will continue to invest in those opportunities to grow our franchise. We will also invest in initiatives to further enhance the customer experience and increase our operating effectiveness. At Bankers Life, we will focus on increasing agent productivity while making enhancements to our recruiting model to increase the number of new agent contracts. This should enable us to increase the size of our overall agent force. Washington National will focus on expanding worksite distribution and growing our owned agency distribution by increasing agent productivity and retention. In addition, we will introduce a suite of new group products and completely rollout our Washington National One SourceSM benefit enrollment and servicing platform. Colonial Penn will further diversify its lead generation sources by investing in additional direct mail and digital marketing activities, growing its simplified issue term and whole life products and enhancing our various marketing campaigns to yield additional improvements in marketing cost effectiveness. Delivering shareholder value will continue to be a focus, with sustained emphasis on increasing profitability and return on equity. Overall, we will concentrate on maintaining a strong and secure capital and financial position, delivering capital back to our shareholders in the form of dividends and stock repurchases, and actively managing our risk profile. Our strategy and commitment to the long-term care insurance market is worth noting. We believe long- term care insurance serves an important role in the retirement care and security of the middle-income market. Having a long-term care marketplace that includes private options is important not only for those who need it but for our country as well, to reduce the burden on already-strapped state Medicaid programs. Despite this need, the industry faces many challenges. We must continuously balance the need to price products profitably with providing affordable solutions for our customers. We actively manage this business with dedicated leadership and a cross- functional team of experienced professionals focused on managing risk and serving this essential need in the marketplace. We look forward to growing and delivering on our initiatives in 2015. With your support as owners and the ongoing dedication of our associates, we are confident we can achieve our vision of becoming the leading provider of financial security to middle- income American working families and retirees. Edward J. Bonach Chief Executive Officer 5 CNO Financial Group 2014 Annual ReportBankers Life, based in Chicago, serves everyday Americans who are near and in retirement with life and health insurance products and annuities. More than 4,800 exclusive producing agents build relationships with customers from coast to coast. 6 At Bankers Life, we’re investing in our business to better serve the needs of our customers: everyday Americans who are near and in retirement. Scott Goldberg, President, Bankers Life Navigating retirement is more challenging than ever. Compared to previous generations of retirees, Baby Boomers are living longer, working longer and more personally responsible for managing their savings, retirement income and health care costs. consumers who appreciate reliable, straightforward insurance at a good value. We pride ourselves on taking time to explain how the right life and health insurance can help protect their hard-earned retirement savings. With more than 300 offices nationwide, Bankers Life has more than 4,800 exclusive producing agents who play a vital role in countless communities. Our professionals often serve as a primary advisor in the retirement planning process, helping generations of Americans build financial peace of mind. Bankers Life’s suite of products—Medicare solutions, life insurance, annuities and assisted care plans— address the concerns of middle-income 73% of middle-income Baby Boomers say their financial situation, not their age, is the leading indicator for when they will retire. Source: Bankers Life Center for a Secure Retirement, CenterforaSecureRetirement.com To accelerate our growth, Bankers Life is introducing new mobile and digital technology tools, one of the many investments we’re making to modernize our infrastructure and elevate the sales experience for agents and clients. We are passionate about what we do for policyholders and their families, including supporting causes that are most important to them. Since 2003, the Bankers Life Forget Me Not Days fundraiser for the Alzheimer’s Association has raised nearly $4 million for research and caregiver services. Our focus on serving the unique insurance needs of retiring Americans is part of our core mission. It is the reason our agents still make house calls. In today’s fast-paced world, a face-to-face conversation with a dedicated agent is the best way to uncover the health care and retirement needs of consumers. A conversation with a Bankers Life agent might start at our customers’ kitchen table, but it has the potential to impact the life of their retirement. 7 CNO Financial Group 2014 Annual ReportColonial Penn, based in Philadelphia, specializes in offering insurance directly to consumers at affordable prices. Colonial Penn’s commitment to policyholders is evident in $130 million paid in life insurance benefits in 2014. 8 At Colonial Penn, we are committed to making insurance simple for millions of Americans nationwide. Gerardo Monroy, President, Colonial Penn At Colonial Penn, we feel all Americans age 50 and older deserve to be able to give their families the peace of mind that life insurance provides, with confidence, simplicity and ease. Colonial Penn’s signature guaranteed issue product is making life insurance accessible to more Americans than ever before. With affordable coverage and no medical exam required, Colonial Penn helps insure thousands of customers across the United States with life insurance that comfortably fits their budget. We are investing in bringing our customers new products, such as our term life insurance and whole life insurance with up to $50,000 in coverage. Anchored by our long-time, trusted Colonial Penn spokesperson, Alex Trebek, we share our message with millions of Americans each year on television, online and in the mail. Our customers can work directly with a dedicated Colonial Penn representative over the phone or purchase insurance through the mail or online, according to their preferences. Our commitment to simplicity and customer-focus is just one of the reasons our customer satisfaction ranks among the top companies in the industry. For nearly 60 years, Colonial Penn has been here when our customers need us the most. We continue to deliver on our promise, with more than $130 million in claims paid in 2014 to the families we serve. Colonial Penn has a strong tradition of investing in our community. In 2014, we contributed more than $60,000 to United Way nonprofit agencies through corporate and employee giving, and more than 80 Colonial Penn associates volunteered for our annual Afternoon of Service to refurbish a nearby park in Philadelphia. Our people make the difference at Colonial Penn, and we are proud that our commitment to customers is apparent in everything we do. 27% of Americans say they don’t have enough life insurance, including one-quarter who already have a policy. Source: LIMRA and LIFE Foundation 2014 Insurance Barometer Study 9 CNO Financial Group 2014 Annual ReportWashington National, based in Carmel, Indiana, is focused on serving the supplemental health and life insurance needs of middle-income Americans at the worksite and at home. We insure nearly 1 million policyholders and 25,000 employer groups. 10 Today, more Americans are managing the physical, emotional and financial challenges of accidents, cancer and other critical illnesses with support from Washington National supplemental health and life insurance. Barb Stewart, President, Washington National At Washington National, our goal is to provide middle-income Americans the flexibility to choose health care options and minimize financial hardship. Whether they’re served at the worksite or across the kitchen table, our customers have a vital trait in common: they seek a comfortable standard of living today and financial security for the future. They want affordable solutions with straightforward, timely claim payments they can depend on. Cancer is an ever-present challenge for consumers. According to the American Cancer Society, nearly 14.5 million cancer survivors were alive in 2014 and 1.6 million new cases are expected to be diagnosed in 2015.1 In a Washington National Institute for Wellness Solutions study of more than 400 survivors, the majority (62%) indicated they weren’t financially prepared for a cancer diagnosis and treatment. They were surprised by the direct and indirect expenses not covered by medical insurance. With input from this study and others, Washington National is advancing the solutions we provide consumers. This includes adding coverage for immunotherapy treatments and nonadmitted hospital stays, which have increased five-fold in recent years.2 Many of our policies include a popular premium-return option, for which we’ve returned more than $2.2 billion in premiums to policyholders since 1995.3 We are investing in new programs and tools to help our national network of agents reach and educate more consumers about their insurance protection options. And we are introducing our new Washington National One SourceSM enrollment and servicing platform. This system makes it easier for small and midsize employers to offer Washington National supplemental health and life insurance products in their employee benefit programs. HOPE (Health Opportunity through Partnership in Education), together with Washington National, has donated nearly $500,000 to the American Cancer Society in the past four years. We’re committed to making a difference in our customers’ lives and furthering lifesaving cancer research. 62% of survivors surveyed said they weren’t financially prepared for a cancer diagnosis and treatment. Source: Washington National Institute for Wellness Solutions, WNInstituteforWellness.com 1American Cancer Society, Cancer Facts & Figures 2015, 2015, p. 1. 2Kaiser Health News, “FAQ: Hospital Observation Care Can Be Costly for Medicare Patients,” kaiserhealthnews.org/news/observation-care-faq, June 18, 2014. 3Premium-return amount is based on Return of Premium/ Cash Value payments to Washington National Insurance Company policyholders from January 1, 1995, to December 31, 2014. 11 CNO Financial Group 2014 Annual ReportCNO Financial in the Community CNO Financial Group supports our communities, our associates and our customers through nonprofit agencies that address the physical and financial health and wellness of middle-income Americans and military families. Standing up for health and wellness • Supporting military families • Building stronger communities In 2014, CNO Financial, our associates and insurance producers gave over $1.3 million to nonprofit organizations benefiting communities across the nation. Nearly $400,000 more was contributed through associates and agents who volunteered their time to raise funds through public donations. In total, CNO Financial associates volunteered more than 14,000 hours to community service, including more than 1,600 hours to our Afternoon of Service in our Indianapolis, Chicago and Philadelphia locations. 12 CNO Financial supports military families though our partnership with the Military Warriors Support Foundation to help place our nation’s heroes on the path to lifelong financial security. In total, CNO Financial and Bankers Life sponsored six heroes in 2014 for the organization’s family and financial mentoring program, helping veterans transition to civilian life with financial literacy, a key component to successful home ownership. $120,000 DONATED TO SUPPORT MILITARY FAMILIES IN 2014 CNO Financial partners with United Way to build stronger communities. In 2014, our associates donated over $415,000 during our annual giving campaign, in addition to more than $265,000 in corporate matching funds. Associate pledges and company match $680,000 IN 2014 CNO Financial Community Spirit Awards CNO Financial is proud to recognize our associates and the community causes they passionately support. Every year CNO Financial donates $20,000 through our Community Spirit Awards. Since 2010, CNO has awarded $100,000 to organizations where our associates volunteer their time and talent. 13 Bankers Life is a proud national sponsor of the Alzheimer’s Association. Since 2003, Bankers Life has helped raise more than $3.7 million for the Alzheimer’s Association through the annual Forget Me Not Days fundraiser and corporate donations. In 2014, CNO Financial and Bankers Life associates and insurance agents raised $462,500 through Forget Me Not Days, the Walk to End Alzheimer’s and a $100,000 corporate donation. $462,500 in collections and corporate donations in 2014 Washington National is a proud sponsor of the American Cancer Society. In 2014, Washington National and HOPE (Health Opportunity through Partnership in Education) granted $50,000 to the American Cancer Society. This gift was made possible through contributions from Washington National policyholders. Associates participated in the Making Strides Against Breast Cancer walk and hosted “Pink Friday”events to raise awareness of breast cancer among employees. $72,000 DONATED IN 2014 14 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ✔ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2014 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______ to ______ CNO FINANCIAL GROUP, INC. Commission File Number 001-31792 DELAWARE State of Incorporation 11825 N. Pennsylvania Street, Carmel, Indiana 46032 Address of principal executive offices 75-3108137 IRS Employer Identification No. (317) 817-6100 Telephone SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: Title of each class Common Stock, par value $0.01 per share Name of Each Exchange on which Registered New York Stock Exchange Rights to purchase Series C Junior Participating Preferred Stock New York Stock Exchange SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE YES NO ✔ Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. 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: Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, 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). Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. ✔ ✔ ✔ Large accelerated filer ✔ Accelerated filer 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): ✔ At June 30, 2014, the last business day of the Registrant’s most recently completed second fiscal quarter, the aggregate market value of the Registrant’s common equity held by nonaffiliates was approximately $3.8 billion. Shares of common stock outstanding as of February 11, 2015: 200,194,506 DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Registrant’s definitive proxy statement for the 2015 annual meeting of shareholders are incorporated by reference into Part III of this report. CNO FINANCIAL GROUP, INC. - Form 10-K 15 Table of Contents PART I Page 17 Business of CNO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17 Item 1. Item 1A. Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .32 Item 1B. Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .48 Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .48 Item 2. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .48 Item 3. Item 4. Mine Safety Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .49 Executive Officers of the Registrant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .49 PART II 50 Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .50 Selected Consolidated Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .52 Item 6. Item 7. Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .53 Item 7A. Quantitative and Qualitative Disclosures About Market Risk. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108 Consolidated Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109 Item 8. Changes in and Disagreements with Accountants on Accounting and Item 9. Financial Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .170 Item 9A. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .170 Item 9B. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .170 PART III 171 Item 10. Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 171 Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 171 Item 11. Security Ownership of Certain Beneficial Owners and Management and Item 12. Related Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 171 Item 13. Certain Relationships and Related Transactions, and Director Independence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 171 Principal Accountant Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 171 Item 14. PART IV 172 Item 15. Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 172 PART I ITEM 1. Business of CNO. 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 this report 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. As of December 31, 2014, we had shareholders’ equity of $4.7 billion and assets of $31.2 billion. For the year ended December 31, 2014, we had revenues of $4.1 billion and net income of $51.4 million. See our consolidated financial statements and accompanying footnotes for additional financial information about the Company and its segments. Prior to 2014, the Company managed 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. As a result of the sale of Conseco Life Insurance Company (“CLIC”) which was completed on July 1, 2014 and the coinsurance agreements to cede certain long-term care business effective December 31, 2013 (as further described in the note to the consolidated financial statements entitled “Summary of Significant Accounting Policies - Reinsurance”), management has changed the manner in which it disaggregates the Company’s operations for making operating decisions and assessing performance. In periods prior to 2014: (i) the results in the Washington National segment have been adjusted to include the results from the business in the Other CNO Business segment that are being retained; (ii) the Other CNO Business segment included only the long-term care business that was ceded effective December 31, 2013 and the overhead expense of CLIC that is expected to continue after the completion of the sale; and (iii) the CLIC business being sold is excluded from our analysis of business segment results. Beginning on January 1, 2014: (i) the overhead expense of CLIC that is expected to continue after the completion of the sale has been reallocated primarily to the Bankers Life and Washington National segments; (ii) there is no longer an Other CNO Business segment; and (iii) the CLIC business being sold continues to be excluded from our analysis of business segment results. After the completion of the sale of CLIC: (i) the Bankers Life segment includes the results of certain life insurance business that was recaptured from Wilton Reassurance Company (“Wilton Re”); and (ii) the revenues and expenses associated with a transition services agreement and a special support services agreement with Wilton Re are included in our non-operating earnings. Under such agreements, we will receive $30 million in the year ending June 30, 2015 and $20 million in the year ending June 30, 2016. In addition, certain services will continue to be provided in the three years ending June 30, 2019 for an annual fee of $.2 million. The income we receive from these services agreements will offset certain of our overhead costs. If we are not successful in reducing our overhead costs to the same extent as the reduction in fees to be received from Wilton Re over the period of the agreements, our results of operations will be adversely affected. Our prior period segment disclosures have been revised to reflect management’s current view of the Company’s operating segments. The Company’s insurance segments are described below: life insurance, interest-sensitive Bankers Life, which markets and distributes Medicare insurance, supplement traditional life insurance, fixed annuities and long-term care insurance products to the middle-income senior market through a dedicated field force of career agents and sales managers supported by a network of community-based sales offices. The Bankers Life segment includes primarily the business of Bankers Life and Casualty Company (“Bankers Life”). Bankers Life also markets and distributes Medicare Advantage plans primarily through distribution arrangements with Humana, Inc. (“Humana”) and United HealthCare and Medicare Part D prescription drug plans (“PDP”) primarily through a distribution arrangement with Coventry Health Care (“Coventry”). Washington National, which markets and distributes supplemental health (including specified disease, accident and hospital indemnity insurance products) and life insurance to middle-income consumers at home and at the worksite. These products are marketed through Performance Matters Associates of Texas, Inc. (“PMA”, a wholly owned subsidiary) and through independent marketing organizations and insurance agencies including worksite marketing. The products being marketed are underwritten by Washington CNO FINANCIAL GROUP, INC. - Form 10-K 17 PART I ITEM 1 Business of CNO National Insurance Company (“Washington National”). This segment’s business also includes certain closed blocks of annuities and Medicare supplement policies which are no longer being actively marketed by this segment and were primarily issued or acquired by Washington National. Colonial Penn, which markets primarily graded benefit and simplified issue life insurance directly to customers in the senior middle-income market through television advertising, direct mail, the internet and telemarketing. The Colonial Penn segment includes primarily the business of Colonial Penn Life Insurance Company (“Colonial Penn”). Our Strategic Direction Our mission is to be the recognized market leader in providing financial security for the protection and retirement needs of middle-income American working families and retirees. Our strategic plans are focused on continuing to grow and deliver long- term value for all our stakeholders. Specifically, we will focus on the following priorities: • Growth (i) Continue to expand our reach to serve middle-income Americans (ii) Capitalize on increased opportunities to grow sales (iii) Continue to increase the productivity and size of our agent force • Further enhance the customer experience (i) Continue with initiatives that make it easier for our customers to do business with us Other Information • Increase profitability and return on equity (i) Maintain our strong capital position (ii) Maintain favorable financial metrics (iii) Continue to increase our return on equity • Effectively manage risk and deploy capital (i) Further invest in growing our business organically, while seeking strategic acquisitions (ii) Continue to cost effectively repurchase our common stock (iii) Maintain a competitive dividend payout ratio • Invest in our business and talent (i) Improve our business over the long-term through ongoing financial commitments (ii) Continue to provide our associates with new assignments and developmental opportunities (iii) Develop future leaders through our leadership development program Our executive offices are located at 11825 N. Pennsylvania Street, Carmel, Indiana 46032, and our telephone number is (317) 817-6100. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act are available free of charge on our website at www.CNOinc.com as soon as reasonably practicable after they are electronically filed with, or furnished to, the Securities and Exchange Commission (the “SEC”). These filings are also available on the SEC’s website at www.sec.gov. In addition, the public may read and copy any document we file at the SEC’s Public Reference Room located at 100 F Street, NE, Room 1580, Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Copies of these filings are also available, without charge, from CNO Investor Relations, 11825 N. Pennsylvania Street, Carmel, IN 46032. Our website also includes the charters of our Audit and Enterprise Risk Committee, Executive Committee, Governance and Nominating Committee, Human Resources and Compensation Committee and Investment Committee, as well as our Corporate Governance Operating Principles and our Code of Business Conduct and Ethics that applies to all officers, directors and employees. Copies of these documents are available free of charge on our website at www.CNOinc.com or from CNO Investor Relations at the address shown above. Within the time period specified by the SEC and the New York Stock Exchange, we will post on our website any amendment to our Code of Business Conduct and Ethics and any waiver applicable to our principal executive officer, principal financial officer or principal accounting officer. In May 2014, we filed with the New York Stock Exchange the Annual CEO Certification regarding the Company’s compliance with their Corporate Governance listing standards as required by Section 303A.12(a) of the New York Stock Exchange Listed Company Manual. In addition, we have filed as exhibits to this 2014 Form 10-K the applicable certifications of the Company’s Chief Executive Officer and Chief Financial Officer required under Section 302 of the Sarbanes-Oxley Act of 2002 regarding the Company’s public disclosures. CNO became the successor to Conseco, Inc., an Indiana corporation (our “Predecessor”), in connection with a bankruptcy reorganization which became effective on September 10, 2003 (the “Effective Date”). Our Predecessor was organized in 1979 and commenced operations in 1982. Data in Item 1 are provided as of or for the year ended December 31, 2014 (as the context implies), unless otherwise indicated. 18 CNO FINANCIAL GROUP, INC. - Form 10-K PART I ITEM 1 Business of CNO Strategic Technology Partnership On February 10, 2015, we announced that we have entered into a comprehensive agreement with Cognizant forming a strategic partnership for technology delivery that is expected to accelerate our core IT process improvements and enable more rapid innovation. Under the agreement, Cognizant will, after the transition period, assume CNO’s application development, maintenance, and testing functions as well as select IT infrastructure operations. Cognizant will also take over all CNO operations located in Marketing and Distribution Insurance Our insurance subsidiaries develop, market and administer health insurance, annuity, individual life insurance and other insurance products. We sell these products through three primary distribution channels: career agents, independent producers (some of whom sell one or more of our product lines exclusively) and direct marketing. We had premium collections, excluding premium collections related to CLIC prior to being sold, of $3.4 billion, $3.3 billion and $3.2 billion in 2014, 2013 and 2012, respectively. Our insurance subsidiaries collectively hold licenses to market our insurance products in all fifty states, the District of Columbia, and certain protectorates of the United States. Sales to residents of the following states accounted for at least five percent of our 2014 collected premiums: Florida (8.3 percent), Pennsylvania (6.7 percent), California (5.4 percent) and Texas (5.3 percent). We believe that most purchases of life insurance, accident and health insurance and annuity products occur only after individuals are contacted and solicited by an insurance agent. Accordingly, the success of our distribution system is largely dependent on our ability to attract and retain experienced and highly motivated agents. A description of our primary distribution channels is as follows: Career Agents. The products of the Bankers Life segment are sold through a career agency force of approximately 4,800 producing agents working from over 300 Bankers Life branch offices and satellites. These agents establish one-on-one contact with potential policyholders and promote strong personal relationships with existing policyholders. The career agents sell primarily Medicare supplement and long-term care insurance policies, life insurance and annuities. In 2014, this distribution channel accounted for $2.5 billion, or 73 percent, of our total collected premiums. These Hyderabad, India. The partnership will result in the movement of approximately 640 IT positions from CNO to Cognizant, roughly 240 of which are U.S.-based. The agreement is expected to deliver run-rate expense savings of approximately $10 million annually and to result in a modest charge to earnings of approximately $6 million over the first two quarters of 2015 related to certain one- time transition costs. agents sell Bankers Life policies, as well as Medicare Advantage plans primarily through distribution arrangements with Humana and United HealthCare, and typically visit the prospective policyholder’s home to conduct personalized “kitchen-table” sales presentations. After the sale of an insurance policy, the agent serves as a contact person for policyholder questions, claims assistance and additional insurance needs. Independent Producers. The products of the Washington National segment are primarily sold through our wholly-owned marketing organization, PMA. In addition, Washington National’s products are sold through a diverse network of independent agents, insurance brokers and marketing organizations. The general agency and insurance brokerage distribution system is comprised of independent licensed agents doing business in all fifty states, the District of Columbia, and certain protectorates of the United States. In 2014, this distribution channel accounted for $702.7 million, or 20 percent, of our total collected premiums (including $71.2 million related to CLIC prior to being sold). Marketing organizations typically recruit agents by advertising our products and commission structure through direct mail advertising or through seminars for agents and brokers. These organizations bear most of the costs incurred in marketing our products. We compensate the marketing organizations by paying them a percentage of the commissions earned on new sales generated by agents recruited by such organizations. Certain of these marketing organizations are specialty organizations that have a marketing expertise or a distribution system related to a particular product or market, such as worksite and individual health products. Direct Marketing. This distribution channel is engaged primarily in the sale of graded benefit life insurance policies through Colonial Penn. In 2014, this channel accounted for $245.1 million, or 7 percent, of our total collected premiums. CNO FINANCIAL GROUP, INC. - Form 10-K 19 PART I ITEM 1 Business of CNO Products The following table summarizes premium collections by major category and segment for the years ended December 31, 2014, 2013 and 2012 (dollars in millions): TOTAL PREMIUM COLLECTIONS Health: Bankers Life Washington National Colonial Penn Other CNO Business Total health Annuities: Bankers Life Washington National Total annuities Life: Bankers Life Washington National Colonial Penn Total life Total premium collections from business segments excluding the business of CLIC prior to being sold Premium collections related to business of CLIC prior to being sold (primarily life products) TOTAL PREMIUM COLLECTIONS Our collected premiums by product and segment were as follows: Health HEALTH PREMIUM COLLECTIONS (DOLLARS IN MILLIONS) Medicare supplement: Bankers Life Washington National Colonial Penn Total Long-term care: Bankers Life Other CNO Business Total Prescription Drug Plan products included in Bankers Life Supplemental health: Bankers Life Washington National Total Other: Bankers Life Washington National Colonial Penn Total TOTAL HEALTH PREMIUM COLLECTIONS 20 CNO FINANCIAL GROUP, INC. - Form 10-K 2014 1,275.1 603.0 3.4 — 1,881.5 782.3 2.6 784.9 424.9 25.9 241.7 692.5 2013 2012 $ 1,317.8 $ 596.3 4.1 23.6 1,941.8 744.1 4.3 748.4 368.3 26.5 227.6 622.4 1,323.9 577.0 4.9 25.1 1,930.9 709.0 3.5 712.5 314.6 23.8 211.9 550.3 3,358.9 3,312.6 3,193.7 71.2 3,430.1 $ 142.3 3,454.9 $ 155.7 3,349.4 $ 2014 743.3 85.2 3.2 831.7 500.6 — 500.6 6.8 16.3 515.4 531.7 2013 745.3 $ 101.9 3.7 850.9 534.0 23.6 557.6 18.2 9.9 491.3 501.2 8.1 2.4 .2 10.7 1,881.5 $ 10.4 3.1 .4 13.9 1,941.8 $ 2012 717.2 113.9 4.5 835.6 546.5 25.1 571.6 47.8 1.9 459.7 461.6 10.5 3.4 .4 14.3 1,930.9 $ $ $ $ The following describes our major health products: Medicare Supplement Medicare supplement collected premiums were $831.7 million during 2014 or 24 percent of our total collected premiums. Medicare is a federal health insurance program for disabled persons and seniors (age 65 and older). Part A of the program provides protection against the costs of hospitalization and related hospital and skilled nursing facility care, subject to an initial deductible, related coinsurance amounts and specified maximum benefit levels. The deductible and coinsurance amounts are subject to change each year by the federal government. Part B of Medicare covers doctor’s bills and a number of other medical costs not covered by Part A, subject to deductible and coinsurance amounts for charges approved by Medicare. The deductible amount is subject to change each year by the federal government. Medicare supplement policies provide coverage for many of the hospital and medical expenses which the Medicare program does not cover, such as deductibles, coinsurance costs (in which the insured and Medicare share the costs of medical expenses) and specified losses which exceed the federal program’s maximum benefits. Our Medicare supplement plans automatically adjust coverage to reflect changes in Medicare benefits. In marketing these products, we currently concentrate on individuals who have recently become eligible for Medicare by reaching the age of 65. Approximately 61 percent of new sales of Medicare supplement policies in 2014 were to individuals who had recently reached the age of 65. Bankers Life sells Medicare supplement insurance. Washington National discontinued new sales of Medicare supplement policies in the fourth quarter of 2012 to focus on the sale of supplemental health products. Long-Term Care Long-term care collected premiums were $500.6 million during 2014, or 15 percent of our total collected premiums. Long-term care products provide coverage, within prescribed limits, for nursing homes, home healthcare, or a combination of both. We sell long-term care plans primarily to retirees and, to a lesser degree, to older self-employed individuals in the middle-income market. Current nursing home care policies cover incurred charges up to a daily fixed-dollar limit with an elimination period (which, similar to a deductible, requires the insured to pay for a certain number of days of nursing home care before the insurance coverage begins), subject to a maximum benefit. Home healthcare policies cover incurred charges after a deductible or elimination period and are subject to a weekly or monthly maximum dollar amount, and an overall benefit maximum. Comprehensive policies cover both nursing home care and home healthcare. We monitor the loss experience on our long-term care products and, when necessary, apply for rate increases in the jurisdictions in which we sell such products. Regulatory filings are made before we increase our premiums on these products. A small portion of our long-term care business was included in the former Other CNO Business segment. This business was sold through independent producers and was largely underwritten by certain of our subsidiaries prior to their acquisitions by our PART I ITEM 1 Business of CNO Predecessor in 1996 and 1997. The performance of these blocks of business did not meet the expectations we had when the blocks were acquired. As a result, we ceased selling new long-term care policies through independent distribution in 2003. In December 2013, we ceded the long-term care business in our former Other CNO Business segment to an unaffiliated reinsurer. We remain primarily liable to the insured policyholders in the event the reinsurer does not meet its contractual obligations (see the note to the consolidated financial statements entitled “Summary of Significant Accounting Policies - Reinsurance”). Our long-term care insurance block is not expected to generate significant future profits and has low margins to offset any future deterioration in experience. We continue to sell long-term care insurance through the Bankers Life career agent distribution channel. However, the business currently being sold is underwritten using stricter underwriting and pricing standards and generally has shorter benefit periods than the older long-term care business in Bankers Life. Prescription Drug Plan and Medicare Advantage Improvement and The Medicare Prescription Drug, Modernization Act of 2003 provided for the introduction of a prescription drug program under Medicare Part D. Persons eligible for Medicare can receive their Part D coverage through a stand- alone PDP. In order to offer a PDP product to our current and potential future policyholders without investment in management and infrastructure, we entered into a national distribution agreement with Coventry to use our career and independent agents to distribute Coventry’s PDP product, Advantra Rx. We receive fees related to the PDP plans sold through our distribution channels. In August 2013, we received a notice of Coventry’s intent to terminate our PDP quota-share reinsurance agreement. Such agreement had provided CNO with a specified percentage of net premiums and related profits subject to a risk corridor for CNO enrollees. The $6.8 million of premiums collected in 2014 represented adjustments to premiums on such business related to periods prior to the termination of the agreement. We continue to receive distribution income from Coventry for PDP business sold through our Bankers Life segment. Bankers Life primarily partners with Humana and United HealthCare to offer Medicare Advantage plans to its policyholders and consumers nationwide through its career agency force and receives marketing fees based on sales. Supplemental Health Products Supplemental health collected premiums were $531.7 million during 2014, or 16 percent of our total collected premiums. These policies generally provide fixed or limited benefits. Cancer insurance and heart/stroke products are guaranteed renewable individual accident and health insurance policies. Payments under cancer insurance policies are generally made directly to, or at the direction of, the policyholder following diagnosis of, or treatment for, a covered type of cancer. Heart/stroke policies provide for payments directly to the policyholder for treatment of a covered heart disease, heart attack or stroke. Accident products combine insurance for accidental death with limited benefit disability CNO FINANCIAL GROUP, INC. - Form 10-K 21 PART I ITEM 1 Business of CNO income insurance. Hospital indemnity products provide a fixed dollar amount per day of confinement in a hospital. The benefits provided under the supplemental health policies do not necessarily reflect the actual cost incurred by the insured as a result of the illness, or accident, and benefits are not reduced by any other medical insurance payments made to or on behalf of the insured. Approximately 71 percent of the total number of our supplemental health policies inforce was sold with return of premium or cash value riders. The return of premium rider generally provides that, after a policy has been inforce for a specified number of years or upon the policyholder reaching a specified age, we will pay to the policyholder, or in some cases, a beneficiary under the policy, the aggregate amount of all premiums paid under the policy, without interest, less the aggregate amount of all claims incurred under the policy. For some policies, the return of premium rider does not have any claim offset. The cash value rider is similar to the return of premium rider, but also provides for payment of a graded portion of the return of premium benefit if the policy terminates before the return of premium benefit is earned. Premiums collected on supplemental health products in the Bankers Life segment primarily relate to a new critical illness product that was introduced in 2012. This critical illness insurance product pays a lump sum cash benefit directly to the insured when the insured is diagnosed with a specified critical illness. The product is designed to provide additional financial protection associated with treatment and recovery as well as cover non-medical expenses such as: (i) loss of income; (ii) at home recovery or treatment; (iii) experimental and/or alternative medicine; (iv) co-pays, deductibles and out-of-network expenses; and (v) child care and transportation costs. Other Health Products Collected premiums on other health products were $10.7 million during 2014. This category includes various other health products such as senior hospital indemnity and disability income products which are sold in small amounts and other products such as major medical health insurance which are no longer actively marketed. Annuities ANNUITY PREMIUM COLLECTIONS DOLLARS IN MILLIONS Fixed index annuity: Bankers Life Washington National Total fixed index annuity premium collections Other fixed rate annuity: Bankers Life Washington National Total fixed rate annuity premium collections Total annuity premium collections from business segments excluding the business of CLIC prior to being sold Premium collections related to business of CLIC prior to being sold TOTAL ANNUITY PREMIUM COLLECTIONS 2014 646.2 2.0 648.2 136.1 .6 136.7 784.9 .2 785.1 $ $ 2013 566.8 $ 3.8 570.6 177.3 .5 177.8 748.4 .3 748.7 $ 2012 505.0 2.9 507.9 204.0 .6 204.6 712.5 .3 712.8 $ $ During 2014, we collected annuity premiums of $785.1 million, or 23 percent, of our total premiums collected. Annuity products include fixed index annuity, traditional fixed rate annuity and single premium immediate annuity products sold through Bankers Life. Washington National no longer actively sells annuity products. Annuities offer a tax-deferred means of accumulating savings for retirement needs, and provide a tax-efficient source of income in the payout period. Our major source of income from fixed rate annuities is the spread between the investment income earned on the underlying general account assets and the interest credited to contractholders’ accounts. For fixed index annuities, our major source of income is the spread between the investment income earned on the underlying general account assets and the cost of the index options purchased to provide index-based credits to the contractholders’ accounts. The change in mix of premium collections between Bankers Life’s fixed index products and fixed annuity products has fluctuated due to volatility in the financial markets in recent periods. In addition, premium collections from Bankers Life’s fixed rate annuity products decreased in 2014 and 2013 as low market interest rates negatively impacted the attractiveness to the consumer of these products. The following describes the major annuity products: Fixed Index Annuities These products accounted for $648.2 million, or 19 percent, of our total premium collections during 2014. The account value (or “accumulation value”) of these annuities is credited in an amount that is based on changes in a particular index during a specified period of time. Within each contract issued, each fixed index annuity specifies: • The index to be used. • The time period during which the change in the index is measured. At the end of the time period, the change in the index is applied to the account value. The time period of the contract ranges from 1 to 4 years. 22 CNO FINANCIAL GROUP, INC. - Form 10-K PART I ITEM 1 Business of CNO In 2014, a significant portion of our new annuity sales were “bonus interest” products. The initial crediting rate on these products generally specifies a bonus crediting rate of up to 0.5 percent of the annuity deposit for the first policy year only. After the first year, the bonus interest portion of the initial crediting rate is automatically discontinued, and the renewal crediting rate is established. As of December 31, 2014, the average crediting rate, excluding bonuses, on our outstanding traditional annuities was 3.0 percent. Withdrawals from fixed interest annuities we are currently selling are generally subject to a surrender charge of 8 percent to 10 percent in the first year, declining to zero over a 5 to 12 year period, depending on issue age and product. Surrender charges are set at levels intended to protect the Company from loss on early terminations and to reduce the likelihood that policyholders will terminate their policies during periods of increasing interest rates. This practice is intended to lengthen the duration of policy liabilities and to enable us to maintain profitability on such policies. Penalty-free withdrawals from fixed interest annuities of up to 10 percent of either premiums or account value are available in most fixed interest annuities after the first year of the annuity’s term. Some fixed interest annuity products apply a market value adjustment during the surrender charge period. This adjustment is determined by a formula specified in the annuity contract, and may increase or decrease the cash surrender value depending on changes in the amount and direction of market interest rates or credited interest rates at the time of withdrawal. The resulting cash surrender values will be at least equal to the guaranteed minimum values. SPIAs accounted for $12.9 million of our total premiums collected in 2014. SPIAs are designed to provide a series of periodic payments for a fixed period of time or for life, according to the policyholder’s choice at the time of issuance. Once the payments begin, the amount, frequency and length of time over which they are payable are fixed. SPIAs often are purchased by persons at or near retirement age who desire a steady stream of payments over a future period of years. The single premium is often the payout from a fixed rate contract. The implicit interest rate on SPIAs is based on market conditions when the policy is issued. The implicit interest rate on our outstanding SPIAs averaged 6.7 percent at December 31, 2014. • The method used to measure the change in the index. • The measured change in the index is multiplied by a “participation rate” (percentage of change in the index) before the credit is applied. Some policies guarantee the initial participation rate for the life of the contract, and some vary the rate for each period. • The measured change in the index may also be limited by a “cap” before the credit is applied. Some policies guarantee the initial cap for the life of the contract, and some vary the cap for each period. • The measured change in the index may also be limited to the excess in the measured change over a “margin” before the credit is applied. Some policies guarantee the initial margin for the life of the contract, and some vary the margin for each period. These products have guaranteed minimum cash surrender values, regardless of actual index performance and the resulting indexed- based interest credits applied. We have generally been successful at hedging increases to policyholder benefits resulting from increases in the indices to which the product’s return is linked. Other Fixed Rate Annuities These products include fixed rate single-premium fixed interest annuities (“SPDAs”), flexible premium fixed interest annuities (“FPDAs”) and single-premium immediate annuities (“SPIAs”). These products accounted for $136.9 million, or 4 percent, of our total premium collections during 2014, of which SPDAs and FPDAs comprised $124.0 million. Our fixed rate SPDAs and FPDAs typically have an interest rate (the “crediting rate”) that is guaranteed by the Company for the first policy year, after which we have the discretionary ability to change the crediting rate to any rate not below a guaranteed minimum rate. The guaranteed rates on annuities written recently are 1.0 percent, and the guaranteed rates on all policies inforce range from 1.0 percent to 5.5 percent. The initial crediting rate is largely a function of: • the interest rate we can earn on invested assets acquired with the new annuity fund deposits; • the costs related to marketing and maintaining the annuity products; and • the rates offered on similar products by our competitors. For subsequent adjustments to crediting rates, we take into account current and prospective yields on investments, annuity surrender assumptions, competitive industry pricing and the crediting rate history for particular groups of annuity policies with similar characteristics. CNO FINANCIAL GROUP, INC. - Form 10-K 23 PART I ITEM 1 Business of CNO Life Insurance LIFE INSURANCE PREMIUM COLLECTIONS DOLLARS IN MILLIONS Interest-sensitive life products: Bankers Life Washington National Colonial Penn Total interest-sensitive life premium collections Traditional life: Bankers Life Washington National Colonial Penn Total traditional life premium collections Total life premium collections from business segments excluding the business of CLIC prior to being sold Premium collections related to business of CLIC prior to being sold: Interest-sensitive life Traditional life Total premium collections related to business of CLIC prior to being sold TOTAL LIFE INSURANCE PREMIUM COLLECTIONS 2014 169.8 13.0 .4 183.2 255.1 12.9 241.3 509.3 692.5 61.3 9.7 71.0 763.5 $ $ 2013 125.8 $ 13.1 .3 139.2 242.5 13.4 227.3 483.2 622.4 120.4 21.6 142.0 764.4 $ 2012 88.1 9.6 .5 98.2 226.5 14.2 211.4 452.1 550.3 130.5 24.9 155.4 705.7 $ $ Life products include traditional and interest-sensitive life insurance products. These products are currently sold through the Bankers Life, Washington National and Colonial Penn segments. During 2014, we collected life insurance premiums of $763.5 million, or 22 percent, of our total collected premiums. Interest-Sensitive Life Products These products include universal life and other interest-sensitive life products that provide life insurance with adjustable rates of return related to current interest rates. They accounted for $244.5 million, or 7 percent, of our total collected premiums in 2014. These products are marketed by independent producers and career agents (including independent producers and career agents specializing in worksite sales). The principal differences between universal life products and other interest-sensitive life products are policy provisions affecting the amount and timing of premium payments. Universal life policyholders may vary the frequency and size of their premium payments, and policy benefits may also fluctuate according to such payments. Premium payments under other interest-sensitive policies may not be varied by the policyholders. Universal life products include fixed index universal life products. The account value of these policies is credited with interest at a guaranteed rate, plus additional interest credits based on changes in a particular index during a specified time period. Traditional Life These products accounted for $519.0 million, or 15 percent, of our total collected premiums in 2014. Traditional life policies, including whole life, graded benefit life, term life and single premium whole life products, are marketed through independent producers, career agents and direct response marketing. Under whole life policies, the policyholder generally pays a level premium over an agreed period or the policyholder’s lifetime. The annual 24 CNO FINANCIAL GROUP, INC. - Form 10-K premium in a whole life policy is generally higher than the premium for comparable term insurance coverage in the early years of the policy’s life, but is generally lower than the premium for comparable term insurance coverage in the later years of the policy’s life. These policies combine insurance protection with a savings component that gradually increases in amount over the life of the policy. The policyholder may borrow against the savings component generally at a rate of interest lower than that available from other lending sources. The policyholder may also choose to surrender the policy and receive the accumulated cash value rather than continuing the insurance protection. Term life products offer pure insurance protection for life with a guaranteed level premium for a specified period of time-typically 5, 10, 15 or 20 years. In some instances, these products offer an option to return the premium at the end of the guaranteed period. life products also include graded benefit Traditional life insurance products. Graded benefit life products accounted for $239.5 million, or 7 percent, of our total collected premiums in 2014. Graded benefit life insurance products are offered on an individual basis primarily to persons age 50 to 85, principally in face amounts of $400 to $25,000, without medical examination or evidence of insurability. Premiums are paid as frequently as monthly. Benefits paid are less than the face amount of the policy during the first two years, except in cases of accidental death. Our Colonial Penn segment markets graded benefit life policies under its own brand name using direct response marketing techniques. New policyholder leads are generated primarily from television, print advertisements, direct response mailings and the internet. Traditional life products also include single premium whole life insurance. This product requires one initial lump sum payment in return for providing life insurance protection for the insured’s entire lifetime. Single premium whole life products accounted for $45.3 million of our total collected premiums in 2014. PART I ITEM 1 Business of CNO Investments 40|86 Advisors, Inc. (“40|86 Advisors”, a registered investment advisor and wholly owned subsidiary of CNO) manages the investment portfolios of our insurance subsidiaries. 40|86 Advisors had approximately $24.8 billion of assets (at fair value) under management at December 31, 2014, of which $24.4 billion were our assets and $.4 billion were assets managed for third parties. Our general account investment strategies are to: on the cost basis of our fixed maturity portfolio, was 5.6 percent, and the average interest rate credited or accruing to our total insurance liabilities was 4.5 percent. We manage the equity-based risk component of our fixed index annuity products by: • purchasing options on equity indices with similar payoff • provide largely stable investment income from a diversified high quality fixed income portfolio; • maximize and maintain a stable spread between our investment income and the yields we pay on insurance products; • sustain adequate liquidity levels to meet operating cash for potential adverse including a margin requirements, development; • continually monitor and manage the relationship between our investment portfolio and the financial characteristics of our insurance reserves such as durations and cash flows; and • maximize total return through active investment management. Investment activities are an important and integral part of our business because investment income is a significant component of our revenues. The profitability of many of our insurance products is significantly affected by spreads between interest yields on investments and rates credited on insurance liabilities. Also, certain insurance products are priced based on long term assumptions including investment returns. Although substantially all credited rates on SPDAs, FPDAs and interest sensitive life products may be changed annually (subject to minimum guaranteed rates), changes in crediting rates may not be sufficient to maintain targeted investment spreads in all economic and market environments. In addition, competition, minimum guaranteed rates and other factors, including the impact of surrenders and withdrawals, may limit our ability to adjust or to maintain crediting rates at levels necessary to avoid narrowing of spreads under certain market conditions. As of December 31, 2014, the average yield, computed Competition The markets in which we operate are competitive. Compared to CNO, many companies in the financial services industry are larger, have greater capital, technological and marketing resources, have greater access to capital and other sources of liquidity at a lower cost, offer broader and more diversified product lines, have greater brand recognition, have larger staffs and higher ratings. Banks, securities brokerage firms and other financial intermediaries also market insurance products or offer competing products, such as mutual fund products, traditional bank investments and other investment and retirement funding alternatives. We also compete with many of these companies and others in providing services for fees. In most areas, competition is based on a number of factors including pricing, service provided to distributors and policyholders and ratings. CNO’s subsidiaries must also compete to attract and retain the allegiance of agents, insurance brokers and marketing companies. characteristics; and • adjusting the participation rate to reflect the change in the cost of such options (such cost varies based on market conditions). The prices of the options we purchase to manage the equity- based risk component of our fixed index annuities vary based on market conditions. All other factors held constant, the prices of the options generally increase with increases in the volatility of the applicable indices, which may either reduce the profitability of the fixed index products or cause us to lower participation rates. Accordingly, volatility of the indices is one factor in the uncertainty regarding the profitability of our fixed index products. Our invested assets are predominately fixed rate in nature and their value fluctuates with changes in market rates. We seek to manage the interest rate risk inherent in our business by managing the durations and cash flows of our fixed maturity investments along with those of the related insurance liabilities. For example, one management measure we use is asset and liability duration. Duration measures expected change in fair value for a given change in interest rates. If interest rates increase by 1 percent, the fair value of a fixed maturity security with a duration of 5 years is typically expected to decrease in value by approximately 5 percent. When the estimated durations of assets and liabilities are similar, a change in the value of assets should be largely offset by a change in the value of liabilities. We calculate asset and liability durations using our estimates of future asset and liability cash flows. At December 31, 2014, the estimated duration of our fixed income securities (as modified to reflect prepayments and potential calls) and the estimated duration of our insurance liabilities were both approximately 8.5 years. In the individual health insurance business, companies compete primarily on the bases of marketing, service and price. Pursuant to federal regulations, the Medicare supplement products offered by all companies have standardized policy features. This increases the comparability of such policies and intensifies competition based on other factors. See “Insurance Underwriting” and “Governmental Regulation” for additional information. In addition to competing with the products of other insurance companies, commercial banks, mutual funds and broker dealers, our insurance products compete with health maintenance organizations, preferred provider organizations and other health care-related institutions which provide medical benefits based on contractual agreements. Our principal competitors vary by product line. Our main competitors for agent-sold long-term care insurance products include Genworth, Mutual of Omaha and Northwestern Mutual. Our main competitors for agent-sold Medicare supplement insurance products include Blue Cross and Blue Shield Plans, CNO FINANCIAL GROUP, INC. - Form 10-K 25 PART I ITEM 1 Business of CNO Mutual of Omaha and United HealthCare. Our main competitors for life insurance sold through direct marketing channels include Gerber Life, MetLife, Mutual of Omaha, New York Life and subsidiaries of Torchmark. Our main competitors for supplemental health products sold through our Washington National segment include AFLAC, subsidiaries of Allstate, Colonial Life and Accident Company and subsidiaries of Torchmark. In some of our product lines, such as life insurance and fixed annuities, we have a relatively small market share. Even in some of the lines in which we are one of the top writers, our market share is relatively small. For example, while, based on an Individual Long-Term Care Insurance Survey, our Bankers Life segment ranked ninth in annualized premiums of individual long-term care insurance in 2013 with a market share of approximately 3.0 percent, the top eight writers of individual long-term care insurance had annualized premiums with a combined market share of approximately 87 percent during the period. In addition, while, based on a 2013 Medicare Supplement Loss Ratios report, we ranked fifth in direct premiums earned for Medicare supplement insurance in 2013 with a market share of 3.5 percent, the top writer of Medicare supplement insurance had direct premiums with a market share of 33 percent during the period. Most of our major competitors have higher financial strength ratings than we do. Many of our competitors are larger companies that have greater capital, technological and marketing resources and have access to capital at a lower cost. Recent industry consolidation, including business combinations among insurance and other financial services companies, has resulted in larger competitors with even greater financial resources. Furthermore, changes in federal law have narrowed the historical separation between banks and insurance companies, enabling traditional banking institutions to enter the insurance and annuity markets and further increase competition. This increased competition may harm our ability to maintain or improve our profitability. In addition, because the actual cost of products is unknown when they are sold, we are subject to competitors who may sell a product at a price that does not cover its actual cost. Accordingly, if we do not also lower our prices for similar products, we may lose market share to these competitors. If we lower our prices to maintain market share, our profitability will decline. The Colonial Penn segment has faced increased competition from other insurance companies who also distribute products through direct marketing. In addition, the demand and cost of television advertising appropriate for Colonial Penn’s campaigns fluctuates from period to period and will impact the average cost to generate a TV lead. We must attract and retain sales representatives to sell our insurance and annuity products. Strong competition exists among insurance and financial services companies for sales representatives. We compete for sales representatives primarily on the basis of our financial position, financial strength ratings, support services, compensation, products and product features. Our competitiveness for such agents also depends upon the relationships we develop with these agents. An important competitive factor for life insurance companies is the ratings they receive from nationally recognized rating insurance brokers and marketing organizations. Agents, 26 CNO FINANCIAL GROUP, INC. - Form 10-K companies who market our products and prospective purchasers of our products use the ratings of our insurance subsidiaries as one factor in determining which insurer’s products to market or purchase. Ratings have the most impact on our sales in the worksite market and sales of our annuity, interest-sensitive life insurance and long-term care products. Financial strength ratings provided by Moody’s Investor Services, Inc. (“Moody’s”), A.M. Best Company (“A.M. Best”), Fitch Ratings (“Fitch”) and Standard & Poor’s Corporation (“S&P”) and are the rating agency’s opinions of the ability of our insurance subsidiaries to pay policyholder claims and obligations when due. They are not directed toward the protection of investors, and such ratings are not recommendations to buy, sell or hold securities. The most recent ratings actions are described below. On August 14, 2014, A.M. Best affirmed the financial strength ratings of “B++” of our primary insurance subsidiaries and revised the outlook for these ratings to positive from stable. A “positive” designation indicates a company’s financial/market trends are favorable, relative to its current rating level and, if continued, the company has a good possibility of having its rating upgraded. The “B++” rating is assigned to companies that have a good ability, in A.M. Best’s opinion, to meet their ongoing obligations to policyholders. A.M. Best ratings for the industry currently range from “A++ (Superior)” to “F (In Liquidation)” and some companies are not rated. An “A++” rating indicates a superior ability to meet ongoing obligations to policyholders. A.M. Best has sixteen possible ratings. There are four ratings above the “B++” rating of our primary insurance subsidiaries and eleven ratings that are below that rating. On July 2, 2014, S&P upgraded the financial strength ratings of our primary insurance subsidiaries to “BBB+” from “BBB” and the outlook for these ratings is stable. S&P financial strength ratings range from “AAA” to “R” and some companies are not rated. An insurer rated “BBB” or higher is regarded as having financial security characteristics that outweigh any vulnerabilities, and is highly likely to have the ability to meet financial commitments. An insurer rated “BBB”, in S&P’s opinion, has good financial security characteristics, but is more likely to be affected by adverse business conditions than are higher-rated insurers. Pluses and minuses show the relative standing within a category. S&P has twenty-one possible ratings. There are seven ratings above the “BBB+” rating of our primary insurance subsidiaries and thirteen ratings that are below that rating. On May 5, 2014, Fitch affirmed the financial strength ratings of “BBB” of our primary insurance subsidiaries and revised the outlook for these ratings to positive from stable. A “BBB” rating, in Fitch’s opinion, indicates that there is currently a low expectation of ceased or interrupted payments. The capacity to meet policyholder and contract obligations on a timely basis is considered adequate, but adverse changes in circumstances and economic conditions are more likely to impact this capacity. Fitch ratings for the industry range from “AAA Exceptionally Strong” to “C Distressed” and some companies are not rated. Pluses and minuses show the relative standing within a category. Fitch has nineteen possible ratings. There are eight ratings above the “BBB” rating of our primary insurance subsidiaries and ten ratings that are below that rating. PART I ITEM 1 Business of CNO On March 27, 2014, Moody’s upgraded the financial strength ratings of our primary insurance subsidiaries to “Baa2” from “Baa3” and the outlook for these ratings is positive. A “positive” designation indicates a higher likelihood of a rating change over the medium term. Moody’s financial strength ratings range from “Aaa” to “C”. These ratings may be supplemented with numbers “1”, “2”, or “3” to show relative standing within a category. In Moody’s view, an insurer rated “Baa” offers adequate financial security, however, certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Moody’s has twenty-one possible ratings. There are eight ratings above the “Baa2” rating of our primary insurance subsidiaries and twelve ratings that are below the rating. Rating agencies have increased the frequency and scope of their credit reviews and requested additional information from the companies that they rate, including us. They may also adjust upward the capital and other requirements employed in the rating agency models for maintenance of certain ratings levels. We cannot predict what actions rating agencies may take, or what actions we may take in response. Accordingly, downgrades and outlook revisions related to us or the life insurance industry may occur in the future at any time and without notice by any rating agency. These could increase policy surrenders and withdrawals, adversely affect relationships with our distribution channels, reduce new sales, reduce our ability to borrow and increase our future borrowing costs. Insurance Underwriting Under regulations developed by the National Association of Insurance Commissioners (the “NAIC”) (an association of state regulators and their staffs) and adopted by the states, we are prohibited from underwriting our Medicare supplement policies for certain first-time purchasers. If a person applies for insurance within six months after becoming eligible by reason of age, or disability in certain limited circumstances, the application may not be rejected due to medical conditions. Some states prohibit underwriting of all Medicare supplement policies. For other prospective Medicare supplement policyholders, such as senior citizens who are transferring to our products, the underwriting procedures are relatively limited, except for policies providing prescription drug coverage. Before issuing long-term care products, we generally apply detailed underwriting procedures to assess and quantify the insurance risks. We require medical examinations of applicants (including blood and urine tests, where permitted) for certain health insurance products and for life insurance products which exceed prescribed policy amounts. These requirements vary according to the applicant’s age and may vary by type of policy or product. We also rely on medical records and the potential policyholder’s written application. In recent years, there have been significant regulatory changes with respect to underwriting certain types of health insurance. An increasing number of states prohibit underwriting Liabilities for Insurance Products At December 31, 2014, the total balance of our liabilities for insurance products was $22.3 billion. These liabilities are generally payable over an extended period of time. The profitability of our insurance products depends on pricing and other factors. Differences between our expectations when we sold these products and our actual experience could result in future losses. Liabilities for insurance products are calculated using management’s best judgments, based on our past experience and standard actuarial tables, of mortality, morbidity, lapse rates, investment experience and expense levels with due consideration of provision for adverse development where prescribed by accounting principles generally accepted in the United States of America (“GAAP”). For all of our insurance products, we establish an active life reserve, a liability for due and unpaid claims, claims in the course of and/or charging higher premiums for substandard risks. We monitor changes in state regulation that affect our products, and consider these regulatory developments in determining the products we market and where we market them. Our supplemental health policies are individually underwritten using a simplified issue application. Based on an applicant’s responses on the application, the underwriter either: (i) approves the policy as applied for; (ii) approves the policy with reduced benefits; or (iii) rejects the application. Our life insurance products include policies that are underwritten individually and low face-amount life insurance products that utilize standardized underwriting procedures. After initial processing, insurance underwriters obtain the information needed to make an underwriting decision (such as medical examinations, doctors’ statements and special medical tests). After collecting and reviewing the information, the underwriter either: (i) approves the policy as applied for; (ii) approves the policy with an extra premium charge because of unfavorable factors; or (iii) rejects the application. We underwrite group insurance policies based on the characteristics of the group and its past claim experience. Graded benefit life insurance policies are issued without medical examination or evidence of insurability. There is minimal underwriting on annuities. settlement and incurred but not reported claims. In addition, for our health insurance business, we establish a reserve for the present value of amounts not yet due on incurred claims. Many factors can affect these reserves and liabilities, such as economic and social conditions, inflation, hospital and pharmaceutical costs, changes in doctrines of legal liability and extra-contractual damage awards. Therefore, our reserves and liabilities are necessarily based on extensive estimates, assumptions and historical experience. Establishing reserves is an uncertain process, and it is possible that actual claims will materially exceed our reserves and have a material adverse effect on our results of operations and financial condition. Our financial results depend significantly upon the extent to which our actual claims experience is consistent with the assumptions we used in determining our reserves and pricing our CNO FINANCIAL GROUP, INC. - Form 10-K 27 PART I ITEM 1 Business of CNO products. If our assumptions are incorrect with respect to future claims, future policyholder premiums and policy charges or the investment income on assets supporting liabilities, or our reserves are insufficient to cover our actual losses and expenses, we would be required to increase our liabilities, which would negatively affect our operating results. Reinsurance Consistent with the general practice of the life insurance industry, our subsidiaries enter into both facultative and treaty agreements of indemnity reinsurance with other insurance companies in order to reinsure portions of the coverage provided by our insurance products. Indemnity reinsurance agreements are intended to limit a life insurer’s maximum loss on a large or unusually hazardous risk or to diversify its risk. Indemnity reinsurance does not discharge the original insurer’s primary liability to the insured. Our reinsured business is ceded to numerous reinsurers. Based on our periodic review of their financial statements, insurance industry reports and reports filed with state insurance departments, we believe the assuming companies are able to honor all contractual commitments. As of December 31, 2014, the policy risk retention limit of our insurance subsidiaries was generally $.8 million or less. Reinsurance ceded by CNO represented 15 percent of gross combined life insurance inforce and reinsurance assumed represented .7 percent of net combined life insurance inforce. Our principal reinsurers at December 31, 2014 were as follows (dollars in millions): Name of Reinsurer Jackson National Life Insurance Company (“Jackson”)(a) Beechwood Re Ltd. (“BRe”)(b) Wilton Reassurance Company RGA Reinsurance Company(c) Swiss Re Life and Health America Inc. Munich American Reassurance Company SCOR Global Life USA Reinsurance Company All others(d) Reinsurance receivables Ceded life insurance inforce 884.3 $ $ — 1,516.4 83.9 458.3 256.0 118.6 342.6 3,660.1 1,692.1 503.5 346.2 146.8 2.9 2.9 1.4 295.3 2,991.1 $ $ A.M. Best rating A+ Not rated A A+ A+ A+ A (a) In addition to the life insurance business, Jackson has assumed certain annuity business from our insurance subsidiaries through a coinsurance agreement. Such business had total insurance policy liabilities of $1.3 billion at December 31, 2014. (b) BRe has assumed long-term care business as summarized in the paragraph below. (c) RGA Reinsurance Company has assumed a portion of the long-term care business of Bankers Life on a coinsurance basis. (d) No other single reinsurer represents more than 3 percent of the reinsurance receivables balance or has assumed greater than 2 percent of the total ceded life insurance business inforce. In December 2013, two of our insurance subsidiaries with long- term care business in the former Other CNO Business segment entered into 100% coinsurance agreements ceding $495 million of long-term care reserves to BRe, a reinsurer domiciled in the Cayman Islands. BRe was formed in 2012 and is focused on specialized insurance including long-term care. BRe is a reinsurer that is not licensed or accredited by the states of domicile of the insurance subsidiaries ceding the long-term care business and BRe is not rated by A.M. Best. As a result of its non-accredited status, BRe is required to provide collateral which meets the regulatory requirements of the states of domicile (New York and Indiana) in order for our insurance subsidiaries to obtain full credit in their Employees statutory financial statements for the reinsurance receivables due from BRe. Such collateral is held in market value trusts subject to 7% over collateralization, investment guidelines and periodic true-up provisions. Future payments into the trusts to maintain collateral requirements are subject to the ability and willingness of the reinsurer to honor its obligations. In the event of default by BRe, we could be exposed to credit risk if the collateral held in the trusts cannot be realized or is liquidated at prices that are not sufficient to recover the full amount of the reinsurance receivables. We remain primarily liable to the insured policyholders in the event BRe does not meet its contractual obligations. At December 31, 2014, we had approximately 4,200 full time employees, including 1,520 employees supporting our Bankers Life segment, 300 employees supporting our Colonial Penn segment and 2,380 employees supporting our shared services and our Washington National and corporate segments. None of our employees are covered by a collective bargaining agreement. We believe that we have good relations with our employees. 28 CNO FINANCIAL GROUP, INC. - Form 10-K Governmental Regulation Insurance Regulation and Oversight Our insurance businesses are subject to extensive regulation and supervision by the insurance regulatory agencies of the jurisdictions in which they operate. This regulation and supervision is primarily for the benefit and protection of customers, and not for the benefit of investors or creditors. State laws generally establish supervisory agencies that have broad regulatory authority, including the power to: • grant and revoke business licenses; • regulate and supervise sales practices and market conduct; • establish guaranty associations; • license agents; • approve policy forms; • approve premium rates and premium rate increases for some lines of business such as long-term care and Medicare supplement; • establish reserve requirements; • prescribe the form and content of required financial statements and reports; • determine the reasonableness and adequacy of statutory capital and surplus; • perform financial, market conduct and other examinations; • define acceptable accounting principles; and • regulate the types and amounts of permitted investments. In addition, the NAIC develops model laws and regulations, many of which have been adopted by state legislators and/or insurance regulators, relating to: • reserve requirements; • risk-based capital (“RBC”) standards; • codification of insurance accounting principles; • investment restrictions; PART I ITEM 1 Business of CNO State regulatory authorities and industry groups have developed several initiatives regarding market conduct, including the form and content of disclosures to consumers, advertising, sales practices and complaint handling. Various state insurance departments periodically examine the market conduct activities of domestic and non-domestic insurance companies doing business in their states, including our insurance subsidiaries. The purpose of these market conduct examinations is to determine if operations are consistent with the laws and regulations of the state conducting the examination. In addition, market conduct has become one of the criteria used by rating agencies to establish the ratings of an insurance company. For example, A.M. Best’s ratings analysis now includes a review of the insurer’s compliance program. Most states mandate minimum benefit standards and benefit ratios for accident and health insurance policies. We are generally required to maintain, with respect to our individual long-term care policies, minimum anticipated benefit ratios over the entire period of coverage of not less than 60 percent. With respect to our Medicare supplement policies, we are generally required to attain and maintain an actual benefit ratio, after three years, of not less than 65 percent. We provide to the insurance departments of all states in which we conduct business annual calculations that demonstrate compliance with required minimum benefit ratios for both long-term care and Medicare supplement insurance. These calculations are prepared utilizing statutory lapse and interest rate assumptions. In the event that we fail to maintain minimum mandated benefit ratios, our insurance subsidiaries could be required to provide retrospective refunds and/or prospective rate reductions. We believe that our insurance subsidiaries currently comply with all applicable mandated minimum benefit ratios. Our insurance subsidiaries are required, under guaranty fund laws of most states, to pay assessments up to prescribed limits to fund policyholder losses or liabilities of insolvent insurance companies. Typically, assessments are levied on member insurers on a basis which is related to the member insurer’s proportionate share of the business written by all member insurers. Assessments can be partially recovered through a reduction in future premium taxes in some states. • restrictions on an insurance company’s ability to pay dividends; Insurance Holding Company Regulations • credit for reinsurance; and • product illustrations. The Company’s insurance subsidiaries are required to file detailed annual reports, in accordance with prescribed statutory accounting rules, with regulatory authorities in each of the jurisdictions in which they do business. As part of their routine oversight process, state insurance departments conduct periodic detailed examinations, generally once every three to five years, of the books, records and accounts of insurers domiciled in their states. These examinations are generally conducted in cooperation with the departments of two or three other states under guidelines promulgated by the NAIC. Most states have enacted laws or regulations regarding the activities of insurance holding company systems, including acquisitions, the terms of surplus debentures, the terms of transactions between or involving insurance companies and their affiliates and other related matters. Various reporting and approval requirements apply to transactions between or involving insurance companies and their affiliates within an insurance holding company system, depending on the size and nature of the transactions. Currently, the Company and its insurance subsidiaries are registered as a holding company system pursuant to such laws and regulations in the domiciliary states of the insurance subsidiaries. In addition, the Company’s insurance subsidiaries routinely report to other jurisdictions. CNO FINANCIAL GROUP, INC. - Form 10-K 29 PART I ITEM 1 Business of CNO Most states have also enacted legislation or adopted administrative regulations that affect the acquisition (or sale) of control of insurance companies. The nature and extent of such legislation and regulations vary from state to state. Generally, these regulations require an acquirer of control to file detailed information and the plan of acquisition, and to obtain administrative approval prior to the acquisition of control. “Control” is generally defined as the direct or indirect power to direct or cause the direction of the management and policies of a person and is rebuttably presumed to exist if a person or group of affiliated persons directly or indirectly owns or controls 10 percent or more of the voting securities of another person. Insurance regulators may prohibit the payment of dividends or other payments by our insurance subsidiaries to parent companies if they determine that such payment could be adverse to our policyholders or contract holders. Otherwise, the ability of our insurance subsidiaries to pay dividends is subject to state insurance department regulations and is based on the financial statements of our insurance subsidiaries prepared in accordance with statutory accounting practices prescribed or permitted by regulatory authorities, which differ from financial statements prepared in accordance with GAAP. These regulations generally permit dividends to be paid by the insurance company if such dividends are not in excess of unassigned surplus and, for any 12-month period, are in amounts less than the greater of, or in a few states, the lesser of: • statutory net gain from operations or statutory net income for the prior year; or • 10 percent of statutory capital and surplus at the end of the preceding year. Any dividends in excess of these levels require the approval of the director or commissioner of the applicable state insurance department. In accordance with an order from the Florida Office of Insurance Regulation, Washington National may not distribute funds to any affiliate or shareholder without prior notice to the Florida Office of Insurance Regulation. In addition, the RBC and other capital requirements described below can also limit, in certain circumstances, the ability of our insurance subsidiaries to pay dividends. Long-Term Care Regulations The NAIC has adopted model long-term care policy language providing nonforfeiture benefits and has proposed a rate stabilization standard for long-term care policies. Various bills are introduced from time to time in the U.S. Congress which propose the implementation of certain minimum consumer protection standards in all long-term care policies, including guaranteed renewability, protection against inflation and limitations on waiting periods for pre-existing conditions. Federal legislation permits premiums paid for qualified long-term care insurance to be tax-deductible medical expenses and for benefits received on such policies to be excluded from taxable income. Our insurance subsidiaries that have long-term care business have made insurance regulatory filings seeking actuarially justified rate increases on our long-term care policies. Most of our long- 30 CNO FINANCIAL GROUP, INC. - Form 10-K term care business is guaranteed renewable, and, if necessary rate increases are not approved, we may be required to write off all or a portion of the deferred acquisition costs and the present value of future profits (collectively referred to as “insurance acquisition costs”) and establish a premium deficiency reserve. If we are unable to raise our premium rates because we fail to obtain approval for actuarially justified rate increases in one or more states, our financial condition and results of operations could be adversely affected. Capital Requirements Using statutory statements filed with state regulators annually, the NAIC calculates certain financial ratios to assist state regulators in monitoring the financial condition of insurance companies. A “usual range” of results for each ratio is used as a benchmark. An insurance company may fall out of the usual range for one or more ratios because of specific transactions that are in themselves immaterial or eliminated at the consolidated level. Generally, an insurance company will become subject to regulatory scrutiny if it falls outside the usual ranges of four or more of the ratios, and regulators may then act, if the company has insufficient capital, to constrain the company’s underwriting capacity. In the past, variances in certain ratios of our insurance subsidiaries have resulted in inquiries from insurance departments, to which we have responded. These inquiries have not led to any restrictions affecting our operations. The NAIC’s RBC requirements provide a tool for insurance regulators to determine the levels of statutory capital and surplus an insurer must maintain in relation to its insurance and investment risks and the need for possible regulatory attention. The basis of the system is a formula that applies prescribed factors to various risk elements in an insurer’s business to report a minimum capital requirement proportional to the amount of risk assumed by the insurer. The life and health insurer RBC formula is designed to measure annually: (i) the risk of loss from asset defaults and asset value fluctuations; (ii) the risk of loss from adverse mortality and morbidity experience; (iii) the risk of loss from mismatching of assets and liability cash flow due to changing interest rates; and (iv) business risks. In addition, the RBC requirements currently provide for a trend test if a company’s total adjusted capital is between 100 percent and 150 percent of its RBC at the end of the year. The trend test calculates the greater of the decrease in the margin of total adjusted capital over RBC: • between the current year and the prior year; and • for the average of the last 3 years. It assumes that such decrease could occur again in the coming year. Any company whose trended total adjusted capital is less than 95 percent of its RBC would trigger a requirement to submit a comprehensive plan as described above for the Company Action Level. The 2014 statutory annual statements of each of our insurance subsidiaries reflect total adjusted capital in excess of the levels subjecting the subsidiaries to any regulatory action. Although we are under no obligation to do so, we may elect to contribute additional capital or retain greater amounts of capital to strengthen the surplus of certain insurance subsidiaries. Any election to contribute or retain additional capital could impact the amounts our insurance subsidiaries pay as dividends to the holding company. The ability of our insurance subsidiaries to pay dividends is also impacted by various criteria established by rating agencies to maintain or receive higher ratings and by the capital levels that we target for our insurance subsidiaries. The NAIC currently has in place its “Solvency Modernization Initiative,” which is designed to review the U.S. financial regulatory system and all aspects of financial regulation affecting insurance companies. Though broad in scope, the NAIC has stated that the Solvency Modernization Initiative will focus on: (1) capital requirements; (2) corporate governance and risk management; (3) group supervision; (4) statutory accounting and financial reporting; and (5) reinsurance. This initiative has resulted in the adoption by the NAIC of the Risk Management and Own Risk and Solvency Assessment Model Act (“ORSA”), which has been or is expected to be enacted by our insurance subsidiaries’ domiciliary states in the near future. ORSA requires that insurers maintain a risk management framework and conduct an internal own risk and solvency assessment of the insurer’s material risks in normal and stressed environments. The assessment must be documented in an annual summary report, a copy of which must be submitted to insurance regulators as required or upon request. We will submit our first ORSA summary report in 2015. We cannot predict the impact, if any, that compliance with the ORSA requirements will have on our business, financial condition or results of operations. Regulation of Investments Our insurance subsidiaries are subject to state laws and regulations that require diversification of their investment portfolios and limit the amount of investments in certain investment categories, such as below-investment grade bonds, equity real estate and common stocks. Failure to comply with these laws and regulations would cause investments exceeding regulatory limitations to be treated as non-admitted assets for purposes of measuring statutory surplus, and, in some instances, would require divestiture of such non- qualifying investments. The investments made by our insurance subsidiaries comply in all material respects with such investment regulations as of December 31, 2014. Federal Laws and Regulations Federal and state law and regulation require financial institutions to protect the security and confidentiality of personal information, including health-related and customer information, and to notify customers and other individuals about their policies and practices relating to their collection and disclosure of health-related and customer information and their practices relating to protecting the security and confidentiality of that information. State laws regulate use and disclosure of social security numbers and federal and state laws require notice to affected individuals, law enforcement, regulators and others if there is a breach of the security of certain PART I ITEM 1 Business of CNO personal information, including social security numbers. Federal and state laws and regulations regulate the ability of financial institutions to make telemarketing calls and to send unsolicited e-mail or fax messages to consumers and customers. Federal and state lawmakers and regulatory bodies may be expected to consider additional or more detailed regulation regarding these subjects and the privacy and security of personal information. The United States Department of Health and Human Services has issued regulations under the Health Insurance Portability and Accountability Act relating to standardized electronic transaction formats, code sets and the privacy of member health information. These regulations, and any corresponding state legislation, affect our administration of health insurance. The USA PATRIOT Act of 2001 seeks to promote cooperation among financial institutions, regulators and law enforcement entities in identifying parties that may be involved in terrorism, money laundering or other illegal activities. To the extent required by applicable laws and regulations, CNO and its insurance subsidiaries have adopted AML programs that include policies, procedures and controls to detect and prevent money laundering, have designated compliance officers to oversee the programs, provide for on-going employee training and ensure periodic independent testing of the programs. CNO’s and the insurance subsidiaries’ AML programs, to the extent required, also establish and enforce customer identification programs and provide for the monitoring and the reporting to the Department of the Treasury of certain suspicious transactions. In addition, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) generally provides for enhanced federal supervision of financial institutions, including insurance companies in certain circumstances, and financial activities that represent a systemic risk to financial stability or the U.S. economy. Under the Dodd-Frank Act, a Federal Insurance Office has been established within the U.S. Treasury Department to monitor all aspects of the insurance industry and its authority will likely extend to most lines of insurance that are written by the Company, although the Federal Insurance Office is not empowered with any general regulatory authority over insurers. The director of the Federal Insurance Office serves in an advisory capacity to the newly established Financial Stability Oversight Council and will have the ability to recommend that an insurance company or an insurance holding company be subject to heightened prudential standards by the Federal Reserve, if it is determined that financial distress at the company could pose a threat to financial stability in the U.S. The Dodd-Frank Act also provides for the preemption of state laws when inconsistent with certain international agreements, and would streamline the state- level regulation of reinsurance and surplus lines insurance. Under certain circumstances, the FDIC can assume the role of a state insurance regulator and initiate liquidation proceedings under state law. The asset management activities of 40|86 Advisors are subject to various federal and state securities laws and regulations. The SEC and the Commodity Futures Trading Commission are the principal regulators of our asset management operations. CNO FINANCIAL GROUP, INC. - Form 10-K 31 PART I ITEM 1A Risk Factors Federal Income Taxation Our annuity and life insurance products generally provide policyholders with an income tax advantage, as compared to other savings investments such as certificates of deposit and bonds, because taxes on the increase in value of the products are deferred until received by policyholders. With other savings investments, the increase in value is generally taxed as earned. Annuity benefits and life insurance benefits, which accrue prior to the death of the policyholder, are generally not taxable until paid. Life insurance death benefits are generally exempt from income tax. Also, benefits received on immediate annuities (other than structured settlements) are recognized as taxable income ratably, as opposed to the methods used for some other investments which tend to accelerate taxable income into earlier years. The tax advantage for annuities and life insurance is provided in the Internal Revenue Code (the “Code”), and is generally followed in all states and other United States taxing jurisdictions. Congress has considered, from time to time, possible changes to the U.S. tax laws, including elimination of the tax deferral on the accretion of value of certain annuities and life insurance products. It is possible that further tax legislation will be enacted which would contain provisions with possible adverse effects on our annuity and life insurance products. Our insurance company subsidiaries are taxed under the life insurance company provisions of the Code. Provisions in the Code require a portion of the expenses incurred in selling insurance products to be deducted over a period of years, as opposed to ITEM 1A. Risk Factors. immediate deduction in the year incurred. This provision increases the tax for statutory accounting purposes, which reduces statutory earnings and surplus and, accordingly, decreases the amount of cash dividends that may be paid by the life insurance subsidiaries. Our income tax expense includes deferred income taxes arising from temporary differences between the financial reporting and tax bases of assets and liabilities, capital loss carryforwards and net operating loss carryforwards (“NOLs”). In evaluating our deferred tax assets, we consider whether it is more likely than not that the deferred tax assets will be realized. The ultimate realization of our deferred tax assets depends upon generating future taxable income during the periods in which our temporary differences become deductible and before our NOLs expire. In addition, the use of our NOLs is dependent, in part, on whether the Internal Revenue Service (“IRS”) ultimately agrees with the tax positions we have taken in previously filed tax returns and that we plan to take in future tax returns. Accordingly, with respect to our deferred tax assets, we assess the need for a valuation allowance on an ongoing basis. As of December 31, 2014, 2013 and 2012, we have established a valuation allowance equal to the portion of the net deferred tax assets whose realization is uncertain. The determination of the amount of valuation allowance established is made by assessing the effects of limitations or issues on the value of our net deferred tax assets expected to be fully recognized in the future. CNO and its businesses are subject to a number of risks including general business and financial risk. Any or all of such risks could have a material adverse effect on the business, financial condition or results of operations of CNO. In addition, please refer to the “Cautionary Statement Regarding Forward-Looking Statements” included in “Item 7 - Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations”. Potential continuation of a low interest rate environment for an extended period of time may negatively impact our results of operations, financial position and cash flows. In recent periods, interest rates have been at or near historically low levels. Some of our products, principally traditional whole life, universal life, fixed rate and fixed index annuity contracts, expose us to the risk that low or declining interest rates will reduce our spread (the difference between the amounts that we are required to pay under the contracts and the investment income we are able to earn on the investments supporting our obligations under the contracts). Our spread is a key component of our net income. Investment income is also an important component of the profitability of our health products, especially long-term care and supplemental health policies. In addition, interest rates impact the liability for the benefits we provide under our agent deferred compensation plan. If interest rates were to decrease further or remain at low levels for an extended period of time, we may have to invest new cash flows or reinvest proceeds from investments that have matured or have been prepaid or sold at yields that have the effect of reducing our net investment income as well as the spread between interest earned on investments and interest credited to some of our products below present or planned levels. To the extent prepayment rates on fixed maturity investments or mortgage loans in our investment portfolio exceed our assumptions, this could increase the impact of this risk. We can lower crediting rates on certain products to offset the decrease in investment yield. However, our ability to lower these rates may be limited by: (i) contractually guaranteed minimum rates; or (ii) competition. In addition, a decrease in crediting rates may not match the timing or magnitude of changes in investment yields. Currently, the vast majority of our products with contractually guaranteed minimum rates, have crediting rates set at the minimum rate. As a result, further decreases in investment yields would decrease the spread we earn and such spread could potentially become a loss. 32 CNO FINANCIAL GROUP, INC. - Form 10-K The following table summarizes the distribution of annuity and universal life account values, net of amounts ceded, by guaranteed interest crediting rates as of December 31, 2014 (dollars in millions): PART I ITEM 1A Risk Factors Guaranteed rate > 5.0% to 6.0% > 4.0% to 5.0% > 3.0% to 4.0% > 2.0% to 3.0% > 1.0% to 2.0% 1.0% and under Weighted average In addition, during periods of declining or low interest rates, life and annuity products may be relatively more attractive to consumers, resulting in increased premium payments on products with flexible premium features, repayment of policy loans and increased persistency (a higher percentage of insurance policies remaining in force from year-to-year). Our expectation of future investment income is an important consideration in determining the amortization of insurance acquisition costs and analyzing the recovery of these assets as well as determining the adequacy of our liabilities for insurance products. Expectations of lower future investment earnings may cause us to accelerate amortization, write down the balance of insurance acquisition costs or establish additional liabilities for insurance products, thereby reducing net income in the future periods. In the fourth quarter of 2014, we completed a comprehensive review of interest rate assumptions on all of our products. As a result of this review, we lowered our new money rate assumptions used in determining our projections of future investment income. The new money rate is the rate of return we receive on cash flows invested at a current date. If new money rates are lower than the overall weighted average return we earn from our investment portfolio, and the lower rates persist, our overall earned rates will decrease. Specifically, our revised projections assumed new money rates ranging from 4.36 percent to 5.13 percent for one year and then grade over 5 years from these levels to an ultimate new money rate ranging from 5.85 percent to 6.50 percent, depending on the specific product. During 2014, our review of interest rate assumptions resulted in adjustments to future loss reserves totaling $3.4 million. While subject to many uncertainties, we believe our assumptions for future new money rates are reasonable. We have established a deficiency reserve for the life contingent payout annuities segment. Accordingly, these annuities are not expected to generate future profits and future unfavorable changes to our assumptions will reduce earnings in the period such changes occur. the Washington National in The following hypothetical scenarios illustrate the sensitivity of changes in interest rates to our products: • The first hypothetical scenario assumes immediate and permanent reductions to current interest rates. We estimate that a pre-tax charge of approximately $40 million would occur if assumed spreads related to our interest-sensitive life and annuity products immediately and permanently decreased by 10 basis points. $ Fixed rate and fixed index annuities .3 42.3 1,265.1 3,048.4 1,086.2 2,518.3 7,960.6 $ Universal life 14.5 304.2 60.1 173.6 5.5 176.9 734.8 $ $ $ $ Total 14.8 346.5 1,325.2 3,222.0 1,091.7 2,695.2 8,695.4 2.15% 3.29% 2.24% With respect to products other than interest-sensitive life and annuity products, no charge would occur if investment earnings rates immediately and permanently decreased by 20 basis points or less (a decrease of 50 basis points would result in a pre-tax charge of approximately $175 million). • The second hypothetical scenario assumes current new money rates increase such that our current portfolio yield remains level. We estimate that this scenario would result in an after tax charge of approximately $5 million to $10 million primarily related to an increase in deficiency reserves related to life contingent payout annuities. Under this scenario, insurance liabilities under statutory accounting principles may also increase modestly, but by less than $10 million, with a reduction in our consolidated RBC ratio of approximately 2 percentage points. While we expect the long-term care business to generate future net profits, the margins are relatively small and are vulnerable to a variety of factors including lower interest rates, higher morbidity and higher persistency. In addition, our projections of estimated future profits (losses) indicates that profits will be recognized in earlier periods, followed by losses in later periods, which has required us to establish a future loss reserve for this business. Our 2014 comprehensive actuarial review of the long-term care business indicated margins have decreased by $150 million in 2014 to approximately $100 million, or approximately 2 percent of related insurance liabilities net of insurance intangibles. Given the concentration of exposure to interest rates in our long-term care block, we modeled the following additional hypothetical scenarios to illustrate the sensitivity of additional changes in interest rates on long-term care products: • One scenario assumes that the new money rates available to invest cash flows from our long-term care block remain flat for the next 5 years and then grade over 2 years from that level to the ultimate new money rate of 6.50 percent. This scenario would reduce margins by $45 million but would not result in a charge because margins would continue to be positive. • An additional scenario assumes that current new money rates available to invest cash flows from our long-term care block immediately decrease by 50 basis points and stay at that lower level indefinitely. This scenario would reduce margins by $250 million and would result in a pre-tax charge of $150 million. Under this scenario, we would not expect to generate future profits from the long-term care block and future unfavorable changes to our assumptions would reduce earnings in the period such changes occur. CNO FINANCIAL GROUP, INC. - Form 10-K 33 PART I ITEM 1A Risk Factors Although the hypothetical revisions described in the scenarios summarized above are not currently required or anticipated, we believe similar changes could occur based on past variances in experience and our expectations of the ranges of future experience that could reasonably occur. We have assumed that revisions to assumptions resulting in such adjustments would occur equally among policy types, ages and durations within each product classification. Any actual adjustment would be dependent on the specific policies affected and, therefore, may differ from such estimates. In addition, the impact of actual adjustments would reflect the net effect of all changes in assumptions during the period. Sustained periods of low or declining interest rates may adversely affect our results of operations, financial position and cash flows. There are risks to our business associated with broad economic conditions. From 2008 to 2010, the U.S. economy experienced unusually severe credit and liquidity contraction and underwent a recession. Following several years of rapid credit expansion, a contraction in mortgage lending coupled with substantial declines in home prices and rising mortgage defaults, resulted in significant write-downs of asset values by financial institutions, including government- sponsored entities and major commercial and investment banks. These write-downs, initially of mortgage-backed securities but spreading to many sectors of the related credit markets, and to related credit default swaps and other derivative securities, caused many financial institutions to seek additional capital, to merge with larger and stronger institutions, to be subsidized by the U.S. government or, in some cases, to fail. These factors, combined with declining business and consumer confidence and increased unemployment, precipitated an economic slowdown. General factors such as the availability of credit, consumer spending, business investment, capital market conditions and inflation affect our business. For example, in an economic downturn, higher unemployment, lower family income, lower corporate earnings, lower business investment and lower consumer spending may depress the demand for life insurance, annuities and other insurance products. In addition, this type of economic environment may result in higher lapses or surrenders of policies. Our business is exposed to the performance of the debt and equity markets. Adverse market conditions can affect the liquidity and value of our investments. The manner in which debt and equity market performance and changes in interest rates have affected, and will continue to affect, our business, financial condition, growth and profitability include, but are not limited to, the following: • The value of our investment portfolio has been materially affected in the past by changes in market conditions which resulted in substantial changes in realized and/or unrealized losses. Future adverse capital market conditions could result in additional realized and/or unrealized losses. • Changes in interest rates also affect our investment portfolio. In periods of increasing interest rates, life insurance policy loans, surrenders and withdrawals could increase as policyholders seek higher returns. This could require us to sell invested assets at a time when their prices may be depressed by the increase in interest rates, which could cause us to realize investment losses. 34 CNO FINANCIAL GROUP, INC. - Form 10-K Conversely, during periods of declining interest rates, we could experience increased premium payments on products with flexible premium features, repayment of policy loans and increased percentages of policies remaining inforce. We could obtain lower returns on investments made with these cash flows. In addition, prepayment rates on investments may increase so that we might have to reinvest those proceeds in lower-yielding investments. As a consequence of these factors, we could experience a decrease in the spread between the returns on our investment portfolio and amounts to be credited to policyholders and contractholders, which could adversely affect our profitability. • The attractiveness of certain of our insurance products may decrease because they are linked to the equity markets and assessments of our financial strength, resulting in lower profits. Increasing consumer concerns about the returns and features of our insurance products or our financial strength may cause existing customers to surrender policies or withdraw assets, and diminish our ability to sell policies and attract assets from new and existing customers, which would result in lower sales and fee revenues. Claims experience on our long-term care products could negatively impact our operations if actual experience diverges from historical patterns and our expectations. In setting premium rates, we consider historical claims information and other factors, but we cannot predict future claims with certainty. This is particularly applicable to our long-term care insurance products, for which historical claims experience may not be indicative of future experience. Long-term care products tend to have fewer claims than other health products such as Medicare supplement products, but when claims are incurred, they tend to be much higher in dollar amount and longer in duration. Also, long-term care claims are incurred much later in the life of the policy than most other supplemental health products. As a result of these traits, it is difficult to appropriately price this product. For our long-term care insurance, actual persistency in later policy durations that is higher than our persistency assumptions could have a negative impact on profitability. If these policies remain inforce longer than we assumed, then we could be required to make greater benefit payments than anticipated when the products were priced. Mortality is a critical factor influencing the length of time a claimant receives long-term care benefits. Mortality continues to improve for the general population. Improvements in actual mortality compared to our pricing assumptions have adversely affected the profitability of long-term care products and if such trends continue, further losses may be realized. Our Bankers Life segment has offered long-term care insurance since 1985. In recent years, the claims experience and persistency on some of Bankers Life long-term care blocks has generally been higher than our pricing expectations which has resulted in higher benefit ratios and adversely affected our profitability. While we have received regulatory approvals for numerous premium rate increases in recent years pertaining to these blocks, there can be no assurance that future requests will be approved. Even with the rate increases that have been approved, this block experienced benefit ratios of 129.7 percent in 2014, 129.3 percent in 2013 and 117.6 percent in 2012. The results of operations of our insurance business will decline if our premium rates are not adequate or if we are unable to increase rates. We set the premium rates on our health insurance policies based on facts and circumstances known at the time we issue the policies and on assumptions about numerous variables, including the actuarial probability of a policyholder incurring a claim, the probable size of the claim, maintenance costs to administer the policies and the interest rate earned on our investment of premiums. In setting premium rates, we consider historical claims information, industry statistics, the rates of our competitors and other factors, but we cannot predict with certainty the future actual claims on our products. If our actual claims experience proves to be less favorable than we assumed and we are unable to raise our premium rates to the extent necessary to offset the unfavorable claims experience, our financial results will be adversely affected. We review the adequacy of our premium rates regularly and file proposed rate increases on our health insurance products when we believe existing premium rates are too low. It is possible that we will not be able to obtain approval for premium rate increases from currently pending or future requests. If we are unable to raise our premium rates because we fail to obtain approval in one or more states, our financial results will be adversely affected. Moreover, in some instances, our ability to exit unprofitable lines of business is limited by the guaranteed renewal feature of most of our insurance policies. Due to this feature, we cannot exit such lines of business without regulatory approval, and accordingly, we may be required to continue to service those products at a loss for an extended period of time. If we are successful in obtaining regulatory approval to raise premium rates, the increased premium rates may reduce the volume of our new sales and cause existing policyholders to allow their policies to lapse. This could result in a significantly higher ratio of claim costs to premiums if healthier policyholders allow their policies to lapse, while policies of less healthy policyholders continue inforce. This would reduce our premium income and profitability in future periods. Our Medicare supplement health policies allow us to increase premium rates when warranted by our actual claims experience. These rate increases must be approved by the applicable state insurance departments, and we are required to submit actuarial claims data to support the need for such rate increases. The re-rate application and approval process on Medicare supplement health products is a normal recurring part of our business operations and reasonable rate increases are typically approved by the state departments as long as they are supported by actual claims experience and are not unusually large in either dollar amount or percentage increase. For policy types on which rate increases are a normal recurring event, our estimates of insurance liabilities assume we will be able to raise rates if experience on the blocks warrants such increases in the future. As a result of higher persistency and resultant higher claims in our long-term care block in the Bankers Life segment than assumed in the original pricing, our premium rates were too low. Accordingly, we have been seeking approval from regulatory authorities for rate increases on portions of this business. Many of the rate increases have been approved by regulators and implemented, but it has PART I ITEM 1A Risk Factors become increasingly difficult to receive regulatory approval for the premium rate increases we have sought. If we are unable to obtain pending or future rate increases, the profitability of these policies and the performance of this block of business will be adversely affected. Most of our long-term care business is guaranteed renewable, and, if necessary rate increases are not approved, we would be required to recognize a loss and establish a premium deficiency reserve. In some cases, we offer long-term care policyholders the opportunity to reduce their coverage amounts or accept non-forfeiture benefits as alternatives to increasing their premium rates. The financial impact of these alternatives could also result in policyholder anti- selection, meaning that policyholders who are less likely to incur claims may reduce their benefits, while policyholders who are more likely to incur claims may maintain full coverage and accept their rate increase. Our reserves for future insurance policy benefits and claims may prove to be inadequate, requiring us to increase liabilities which results in reduced net income and shareholders’ equity. for insurance products are calculated using Liabilities management’s best judgments, based on our past experience and standard actuarial tables of mortality, morbidity, lapse rates, investment experience and expense levels. For our health insurance business, we establish an active life reserve, a liability for due and unpaid claims, claims in the course of settlement, incurred but not reported claims, and a reserve for the present value of amounts on incurred claims not yet due. We establish reserves based on assumptions and estimates of factors either established at the Effective Date for business inforce or considered when we set premium rates for business written after that date. Many factors can affect these reserves and liabilities, such as economic and social conditions, inflation, hospital and pharmaceutical costs, changes in life expectancy, regulatory actions, changes in doctrines of legal liability and extra-contractual damage awards. Therefore, the reserves and liabilities we establish are necessarily based on estimates, assumptions, industry data and prior years’ statistics. It is possible that actual claims will materially exceed our reserves and have a material adverse effect on our results of operations and financial condition. We have incurred significant losses beyond our estimates as a result of actual claim costs and persistency of our long-term care business included in our Bankers Life segment. The insurance policy benefits incurred for our long-term care products in our Bankers Life segment were $656.0 million, $689.2 million and $653.1 million in 2014, 2013 and 2012, respectively. The benefit ratios for our long-term care products in our Bankers Life segment were 129.7 percent, 129.3 percent and 117.6 percent in 2014, 2013 and 2012, respectively. Our financial performance depends significantly upon the extent to which our actual claims experience and future expenses are consistent with the assumptions we used in setting our reserves. If our assumptions with respect to future claims are incorrect, and our reserves prove to be insufficient to cover our actual losses and expenses, we would be required to increase our liabilities, and our financial results could be adversely affected. CNO FINANCIAL GROUP, INC. - Form 10-K 35 PART I ITEM 1A Risk Factors We may be required to accelerate the amortization of deferred acquisition costs or the present value of future profits or establish premium deficiency reserves. Deferred acquisition costs represent incremental direct costs related to the successful acquisition of new or renewal insurance contracts. The present value of future profits represents the value assigned to the right to receive future cash flows from contracts existing at the Effective Date. The balances of these accounts are amortized over the expected lives of the underlying insurance contracts. On an ongoing basis, we test these accounts recorded on our balance sheet to determine if these amounts are recoverable under current assumptions. In addition, we regularly review the estimates and assumptions underlying these accounts for those products for which we amortize deferred acquisition costs or the present value of future profits in proportion to gross profits or gross margins. If facts and circumstances change, these tests and reviews could lead to reduction in the balance of those accounts, and the establishment of a premium deficiency reserve. Such results could have an adverse effect on the results of our operations and our financial condition. See “Item 7 Management’s Discussion and Analysis of Consolidated Finance Condition and Results of Operations, Critical Accounting Policies, Present Value of Future Profits and Deferred Acquisition Costs.” Our operating results will suffer if policyholder surrender levels differ significantly from our assumptions. Surrenders of our annuities and life insurance products can result in losses and decreased revenues if surrender levels differ significantly from assumed levels. At December 31, 2014, approximately 24 percent of our total insurance liabilities, or approximately $5.4 billion, could be surrendered by the policyholder without penalty. The surrender charges that are imposed on our fixed rate annuities typically decline during a penalty period, which ranges from five to twelve years after the date the policy is issued. Surrender charges are eliminated after the penalty period. Surrenders and redemptions could require us to dispose of assets earlier than we had planned, possibly at a loss. Moreover, surrenders and redemptions require faster amortization of either the acquisition costs or the commissions associated with the original sale of a product, thus reducing our net income. We believe policyholders are generally more likely to surrender their policies if they believe the issuer is having financial difficulties, or if they are able to reinvest the policy’s value at a higher rate of return in an alternative insurance or investment product. Changing interest rates may adversely affect our results of operations. Our profitability is affected by fluctuating interest rates. While we monitor the interest rate environment and employ asset/liability and hedging strategies to mitigate such impact, our financial results could be adversely affected by changes in interest rates. Our spread-based insurance and annuity business is subject to several inherent risks arising from movements in interest rates. First, interest rate changes can cause compression of our net spread between interest earned on investments and interest credited to customer deposits. Our ability to adjust for such a compression 36 CNO FINANCIAL GROUP, INC. - Form 10-K is limited by the guaranteed minimum rates that we must credit to policyholders on certain products, as well as the terms on most of our other products that limit reductions in the crediting rates to pre-established intervals. As of December 31, 2014, the vast majority of our products with contractual guaranteed minimum rates, had crediting rates set at the minimum. In addition, approximately 26 percent of our insurance liabilities were subject to interest rates that may be reset annually; 50 percent had a fixed explicit interest rate for the duration of the contract; 22 percent had credited rates that approximate the income we earn; and the remainder had no explicit interest rates. Second, if interest rate changes produce an unanticipated increase in surrenders of our spread-based products, we may be forced to sell invested assets at a loss in order to fund such surrenders. Third, the profits from many non-spread-based insurance products, such as long-term care policies, can be adversely affected when interest rates decline because we may be unable to reinvest the cash from premiums received at the interest rates anticipated when we sold the policies. Finally, changes in interest rates can have significant effects on the fair value and performance of our investments in general such as the timing of cash flows on many structured securities due to changes in the prepayment rate of the loans underlying such securities. We employ asset/liability strategies that are designed to mitigate the effects of interest rate changes on our profitability but do not currently extensively employ derivative instruments for this purpose. We may not be successful in implementing these strategies and achieving adequate investment spreads. We simulate our cash flows expected from existing business under various interest rate scenarios. With such estimates, we actively manage the relationship between the duration of our assets and the expected duration of our liabilities. When the estimated durations of assets and liabilities are similar, exposure to interest rate risk is minimized because a change in the value of assets should be largely offset by a change in the value of liabilities. At December 31, 2014, the estimated durations of our fixed income securities (as modified to reflect prepayments and potential calls) and insurance liabilities were both approximately 8.5 years. We estimate that our fixed maturity securities and short- term investments, net of corresponding changes in insurance acquisition costs, would decline in fair value by approximately $325 million if interest rates were to increase by 10 percent from rates as of December 31, 2014. Our simulations incorporate numerous assumptions, require significant estimates and assume an immediate change in interest rates without any management reaction to such change. Consequently, potential changes in the values of our financial instruments indicated by the simulations will likely be different from the actual changes experienced under given interest rate scenarios, and the differences may be material. Because we actively manage our investments and liabilities, our net exposure to interest rates can vary over time. General market conditions affect investments and investment income. The performance of our investment portfolio depends in part upon the level of and changes in interest rates, risk spreads, real estate values, market volatility, the performance of the economy in general, the performance of the specific obligors included in our portfolio and other factors that are beyond our control. Changes in these factors can affect our net investment income in any period, and such changes can be substantial. Financial market conditions can also affect our realized and unrealized investment gains (losses). During periods of rising interest rates, the fair values of our investments will typically decline. Conversely, during periods of falling interest rates, the fair values of our investments will typically rise. In addition, our investment borrowings from the Federal Home Loan Bank (“FHLB”) are secured by collateral, the fair value of which can be significantly impacted by general market conditions. If the fair value of pledged collateral falls below specific levels, we would be required to pledge additional collateral or repay all or a portion of the investment borrowings. We face risk with respect to our reinsurance agreements. We transfer exposure to certain risks to others through reinsurance arrangements. Under these arrangements, other insurers assume a portion of our losses and expenses associated with reported and unreported claims in exchange for a portion of policy premiums. The availability, amount and cost of reinsurance depend on general market conditions and may vary significantly. As of December 31, 2014, our reinsurance receivables and ceded life insurance in-force totaled $3.0 billion and $3.7 billion, respectively. Our six largest reinsurers accounted for 91 percent of our ceded life insurance in-force. We face credit risk with respect to reinsurance. When we obtain reinsurance, we are still liable for those transferred risks even if the reinsurer defaults on its obligations. The failure, insolvency, inability or unwillingness of one or more of the Company’s reinsurers to perform in accordance with the terms of its reinsurance agreement could negatively impact our earnings or financial position. In December 2013, two of our insurance subsidiaries with long- term care business in the former Other CNO Business segment entered into 100% coinsurance agreements ceding $495 million of long-term care reserves to BRe, a reinsurer domiciled in the Cayman Islands. BRe was formed in 2012 and is focused on specialized insurance including long-term care. BRe is a reinsurer that is not licensed or accredited by the states of domicile of the insurance subsidiaries ceding the long-term care business and BRe is not rated by A.M. Best. As a result of its non-accredited status, BRe is required to provide collateral which meets the regulatory requirements of the states of domicile (New York and Indiana) in order for our insurance subsidiaries to obtain full credit in their statutory financial statements for the reinsurance receivables due from BRe. Such collateral is held in market value trusts subject to 7% over collateralization, investment guidelines and periodic true-up provisions. Future payments into the trusts to maintain collateral requirements are subject to the ability and willingness of the reinsurer to honor its obligations. In the event of default by BRe, we could be exposed to credit risk if the collateral held in the trusts cannot be realized or is liquidated at prices that are not sufficient to recover the full amount of the reinsurance receivables. PART I ITEM 1A Risk Factors Our investment portfolio is subject to several risks that may diminish the value of our invested assets and negatively impact our profitability, our financial condition, our liquidity and our ability to continue to comply with the financial covenants under the Senior Secured Credit Agreement. The value of our investment portfolio is subject to numerous factors, which may be difficult to predict, and are often beyond our control. These factors include, but are not limited to, the following: • changes in interest rates and credit spreads, which can reduce the value of our investments as further discussed in the risk factor entitled “Changing interest rates may adversely affect our results of operations”; • changes in patterns of relative liquidity in the capital markets for various asset classes; • changes in the perceived or actual ability of issuers to make timely repayments, which can reduce the value of our investments. This risk is significantly greater with respect to below-investment grade securities, which comprised 12 percent of the cost basis of our available for sale fixed maturity investments as of December 31, 2014; and • changes in the estimated timing of receipt of cash flows. For example, our structured security investments, which comprised 20 percent of our available for sale fixed maturity investments at December 31, 2014, are subject to variable prepayment on the assets underlying such securities, such as mortgage loans. When asset-backed securities, collateralized debt obligations, commercial mortgage-backed securities, mortgage pass-through securities and collateralized mortgage obligations (collectively referred to as “structured securities”) prepay faster than expected, investment income may be adversely affected due to the acceleration of the amortization of purchase premiums or the inability to reinvest at comparable yields in lower interest rate environments. We have recorded writedowns of fixed maturity investments, equity securities and other invested assets as a result of conditions which caused us to conclude a decline in the fair value of the investment was other than temporary as follows: $27.3 million in 2014; $11.6 million in 2013; and $37.8 million in 2012. Our investment portfolio is subject to the risks of further declines in realizable value. However, we attempt to mitigate this risk through the diversification and active management of our portfolio. In the event of substantial product surrenders or policy claims, we may be required to sell assets at a loss, thereby eroding the performance of our portfolio. Because a substantial portion of our operating results are derived from returns on our investment portfolio, significant losses in the portfolio may have a direct and materially adverse impact on our results of operations. In addition, losses on our investment portfolio could reduce the investment returns that we are able to credit to our customers of certain products, thereby impacting our sales and eroding our financial performance. Investment losses may also reduce the capital of our insurance subsidiaries, which CNO FINANCIAL GROUP, INC. - Form 10-K 37 PART I ITEM 1A Risk Factors may cause us to make additional capital contributions to those subsidiaries or may limit the ability of the insurance subsidiaries to make dividend payments to CNO. In addition, future investment losses could cause us to be in violation of the financial covenants under the Senior Secured Credit Agreement. date. Moreover, the use of different valuation assumptions may have a material effect on the fair values of the financial assets and financial liabilities. As of December 31, 2014 and 2013, our total unrealized net investment gains before adjustments for insurance intangibles and deferred income taxes were $2.2 billion and $1.3 billion, respectively. Deteriorating financial performance of securities collateralized by mortgage loans and commercial mortgage loans may lead to writedowns, which could have a material adverse effect on our results of operations and financial condition. Changes in mortgage delinquency or recovery rates, declining real estate prices, challenges to the validity of foreclosures and the quality of service provided by service providers on securities in our portfolios could lead us to determine that writedowns are appropriate in the future. The determination of the amount of realized investment losses recorded as impairments of our investments is highly subjective and could have a material adverse effect on our operating results and financial condition. The determination of realized investment losses recorded as impairments is based upon our ongoing evaluation and assessment of known risks. We consider a wide range of factors about the issuer and use our best judgment in evaluating the cause of a decline in estimated fair value and in assessing prospects for recovery. Inherent in our evaluation are assumptions and estimates about the operations of the issuer and its future earnings potential. Such evaluations and assessments are revised as conditions change and new information becomes available. We update our evaluations regularly and reflect losses from impairments in operating results as such evaluations are revised. Our assessment of whether unrealized losses are other-than-temporary impairments requires significant judgment and future events may occur, or additional information may become available, which may necessitate future impairments of securities in our portfolio. Historical trends may not be indicative of future other-than- temporary impairments. The determination of fair value of our fixed maturity securities results in unrealized investment gains and losses and is, in some cases, highly subjective and could materially impact our operating results and financial condition. In determining fair value, we generally utilize market transaction data for the same or similar instruments. The degree of management judgment involved in determining fair values is inversely related to the availability of market observable information. Since significant observable market inputs are not available for certain securities, it may be difficult to value them. The fair value of financial assets and financial liabilities may differ from the amount actually received to sell an asset or the amount paid to transfer a liability in an orderly transaction between market participants at the measurement Concentration of our investment portfolio in any particular sector of the economy or type of asset may have an adverse effect on our financial position or results of operations. The concentration of our investment portfolio in any particular industry, group of related industries, asset classes (such as residential mortgage-backed securities and other asset-backed securities), or geographic area could have an adverse effect on our results of operations and financial position. While we seek to mitigate this risk by having a broadly diversified portfolio, events or developments that have a negative impact on any particular industry, group of related industries or geographic area may have an adverse effect on the investment portfolio. Our business is subject to extensive regulation, which limits our operating flexibility and could result in our insurance subsidiaries being placed under regulatory control or otherwise negatively impact our financial results. Our insurance business is subject to extensive regulation and supervision in the jurisdictions in which we operate. See “Business of CNO - Governmental Regulation.” Our insurance subsidiaries are subject to state insurance laws that establish supervisory agencies. The regulations issued by state insurance agencies can be complex and subject to differing interpretations. If a state insurance regulatory agency determines that one of our insurance company subsidiaries is not in compliance with applicable regulations, the subsidiary is subject to various potential administrative remedies including, without limitation, monetary penalties, restrictions on the subsidiary’s ability to do business in that state and a return of a portion of policyholder premiums. In addition, regulatory action or investigations could cause us to suffer significant reputational harm, which could have an adverse effect on our business, financial condition and results of operations. Our insurance subsidiaries are also subject to RBC requirements. These requirements were designed to evaluate the adequacy of statutory capital and surplus in relation to investment and insurance risks associated with asset quality, mortality and morbidity, asset and liability matching and other business factors. The requirements are used by states as an early warning tool to discover companies that may be weakly-capitalized for the purpose of initiating regulatory action. Generally, if an insurer’s RBC ratio falls below specified levels, the insurer is subject to different degrees of regulatory action depending upon the magnitude of the deficiency. The 2014 statutory annual statements of each of our insurance subsidiaries reflect RBC ratios in excess of the levels subjecting the insurance subsidiaries to any regulatory action. 38 CNO FINANCIAL GROUP, INC. - Form 10-K In addition to the RBC requirements, certain states have established minimum capital requirements for insurance companies licensed to do business in their state. These regulators have the discretionary authority, in connection with the continual licensing of the Company’s insurance subsidiaries, to limit or prohibit writing new business within its jurisdiction when, in the state’s judgment, the insurance subsidiary is not maintaining adequate statutory surplus or capital or that the insurance subsidiary’s further transaction of business would be hazardous to policyholders. The state insurance department rules provide several standards for the regulators to use in identifying companies which may be deemed to be in hazardous financial condition. One of the standards defines hazardous conditions as existing if an insurer’s operating loss in the last twelve months or any shorter period of time, (including, but not limited to: (A) net capital gain or loss; (B) change in nonadmitted assets; and (C) cash dividends paid to shareholders), is greater than fifty percent of the insurer’s remaining surplus. All of our insurance subsidiaries currently exceed these standards. Volatility in the securities markets, and other economic factors, may adversely affect our business, particularly our sales of certain life insurance products and annuities. Fluctuations in the securities markets and other economic factors may adversely affect sales and/or policy surrenders of our annuities and life insurance policies. For example, volatility in the equity markets may deter potential purchasers from investing in fixed index annuities and may cause current policyholders to surrender their policies for the cash value or to reduce their investments. In addition, significant or unusual volatility in the general level of interest rates could negatively impact sales and/or lapse rates on certain types of insurance products. Litigation and regulatory investigations are inherent in our business, may harm our financial condition and reputation, and may negatively impact our financial results. Insurance companies historically have been subject to substantial litigation. In addition to the traditional policy claims associated with their businesses, insurance companies like ours face class action suits and derivative suits from policyholders and/or shareholders. We also face significant risks related to regulatory investigations and proceedings. The litigation and regulatory matters we are, have been, or may become, subject to include matters related to the classification of our career agents as independent contractors, sales, marketing and underwriting practices, payment of contingent or other sales commissions, claim payments and procedures, product design, product disclosure, administration, additional premium charges for premiums paid on a periodic basis, calculation of cost of insurance charges, changes to certain non-guaranteed policy features, denial or delay of benefits, charging excessive or impermissible fees on products, procedures related to canceling policies and recommending unsuitable products to customers. Certain of our insurance policies allow or require us to make changes based on experience to certain non-guaranteed elements (“NGEs”) such as cost of insurance charges, expense loads, PART I ITEM 1A Risk Factors credited interest rates and policyholder bonuses. We intend to make changes to certain NGEs in the future. In some instances in the past, such action has resulted in litigation and similar litigation may arise in the future. Our exposure (including the potential adverse financial consequences of delays or decisions not to pursue changes to certain NGEs), if any, arising from any such action cannot presently be determined. Our pending legal and regulatory proceedings include matters that are specific to us, as well as matters faced by other insurance companies. State insurance departments have focused and continue to focus on sales, marketing and claims payment practices and product issues in their market conduct examinations. Negotiated settlements of class action and other lawsuits have had a material adverse effect on the business, financial condition and results of operations of our insurance subsidiaries. We are, in the ordinary course of our business, a plaintiff or defendant in actions arising out of our insurance business, including class actions and reinsurance disputes, and, from time to time, we are also involved in various governmental and administrative proceedings and investigations and inquiries such as information requests, subpoenas and books and record examinations, from state, federal and other authorities. Recently, we and other insurance companies have been the subject of regulatory examinations regarding compliance with state unclaimed property laws. Such examinations have included inquiries related to the use of data available on the U.S. Social Security Administration’s Death Master File to identify instances where benefits under life insurance policies, annuities and retained asset accounts are payable. It is possible that such examination or other regulatory inquiries may result in payments to beneficiaries, escheatment of funds deemed abandoned under state laws and changes to procedures for the identification and escheatment of abandoned property. See the note to the consolidated financial statements entitled “Litigation and Other Legal Proceedings.” The ultimate outcome of these lawsuits, regulatory proceedings and investigations cannot be predicted with certainty. In the event of an unfavorable outcome in one or more of these matters, the ultimate liability may be in excess of liabilities we have established and could have a material adverse effect on our business, financial condition, results of operations or cash flows. We could also suffer significant reputational harm as a result of such litigation, regulatory proceedings or investigations, including harm flowing from actual or threatened revocation of licenses to do business, regulator actions to assert supervision or control over our business, and other sanctions which could have a material adverse effect on our business, financial condition, results of operations or cash flows. Managing operational risks may not be effective in mitigating risk and loss to us. We are subject to operational risks including, among other things, fraud, errors, failure to document transactions properly or to obtain proper internal authorization, failure to comply with regulatory requirements or obligations under our agreements, information technology failures including cyber security attacks and failure of our service providers (such as investment custodians and information technology and policyholder service providers) to comply with our services agreements. The associates and CNO FINANCIAL GROUP, INC. - Form 10-K 39 PART I ITEM 1A Risk Factors agents who conduct our business, including executive officers and other members of management, sales managers, investment professionals, product managers, sales agents and other associates, do so in part by making decisions and choices that involve exposing us to risk. These include decisions involving numerous business activities such as setting underwriting guidelines, product design and pricing, investment purchases and sales, reserve setting, claim processing, policy administration and servicing, financial and tax reporting and other activities, many of which are very complex. We seek to monitor and control our exposure to risks arising out of these activities through a risk control framework encompassing a variety of reporting systems, internal controls, management review processes and other mechanisms. However, these processes and procedures may not effectively control all known risks or effectively identify unforeseen risks. Management of operational risks can fail for a number of reasons including design failure, systems failure, cyber security attacks, human error or unlawful activities. If our controls are not effective or properly implemented, we could suffer financial or other loss, disruption of our business, regulatory sanctions or damage to our reputation. Losses resulting from these failures may have a material adverse effect on our financial position or results of operations. The occurrence of natural or man-made disasters or a pandemic could adversely affect our financial condition and results of operations. We are exposed to various risks arising out of natural disasters, including earthquakes, hurricanes, floods and tornadoes, and man- made disasters, including acts of terrorism and military actions and pandemics. For example, a natural or man-made disaster or a pandemic could lead to unexpected changes in persistency rates as policyholders and contractholders who are affected by the disaster may be unable to meet their contractual obligations, such as payment of premiums on our insurance policies and deposits into our investment products. In addition, such a disaster or pandemic could also significantly increase our mortality and morbidity experience above the assumptions we used in pricing our products. The continued threat of terrorism and ongoing military actions may cause significant volatility in global financial markets, and a natural or man-made disaster or a pandemic could trigger an economic downturn in the areas directly or indirectly affected by the disaster or pandemic. These consequences could, among other things, result in a decline in business and increased claims from those areas. Disasters or a pandemic also could disrupt public and private infrastructure, including communications and financial services, which could disrupt our normal business operations. A natural or man-made disaster or a pandemic could also disrupt the operations of our counterparties or result in increased prices for the products and services they provide to us. For example, a natural or man-made disaster or a pandemic could lead to increased reinsurance prices and potentially cause us to retain more risk than we otherwise would retain if we were able to obtain reinsurance at lower prices. In addition, a disaster or a pandemic could adversely affect the value of the assets in our investment portfolio if it affects companies’ ability to pay principal or interest on their securities. 40 CNO FINANCIAL GROUP, INC. - Form 10-K Interruption in telecommunication, information technology and other operational systems, or a failure to maintain the security, confidentiality or privacy of sensitive data residing on such systems, could harm our business. We depend heavily on our telecommunication, information technology and other operational systems and on the integrity and timeliness of data we use to run our businesses and service our customers. These systems may fail to operate properly or become disabled as a result of events or circumstances which may be wholly or partly beyond our control. Further, we face the risk of operational and technology failures by others, including financial intermediaries, vendors and parties that provide services to us. If these parties do not perform as anticipated, we may experience operational difficulties, increased costs and other adverse effects on our business. Despite our implementation of a variety of security measures, our information technology and other systems could be subject to cyber attacks (including the risk of undetected attacks) and unauthorized access, such as physical or electronic break-ins, unauthorized tampering or other security breaches, resulting in a failure to maintain the security, confidentiality or privacy of sensitive data, including personal financial and health information relating to customers. There can be no assurance that any such breach will not occur or, if any does occur, that it can be sufficiently remediated. Interruption in telecommunication, information technology and other operational systems, or a failure to maintain the security, confidentiality or privacy of sensitive data residing on such systems, whether due to actions by us or others, could delay or disrupt our ability to do business and service our customers, harm our reputation, subject us to litigation, regulatory sanctions and other claims, require us to incur significant expenses, lead to a loss of customers and revenues and otherwise adversely affect our business. Third parties to whom we outsource certain of our functions are also subject to the risks outlined above, and failures in their systems could adversely affect our business. Our business could be interrupted or compromised if we experience difficulties arising from outsourcing relationships. information technology and policy We outsource certain administration operations to third-party service providers. If we fail to maintain an effective outsourcing strategy or if third- party providers do not perform as contracted, we may experience operational difficulties, increased costs and a loss of business that could have a material adverse effect on our results of operations. In the event that one or more of our third-party service providers becomes unable to continue to provide services, we may suffer financial loss and other negative consequences. We have substantial indebtedness that will require a significant portion of the cash available to CNO, which may restrict our ability to take advantage of business, strategic or financing opportunities. As of December 31, 2014, we had an aggregate principal amount of indebtedness of $797.1 million. CNO’s indebtedness will require approximately $115 million in cash to service in 2015. The payment of principal and interest on our outstanding indebtedness will require a substantial portion of CNO’s available cash each year, which, as a holding company, is limited, as further described in the risk factor entitled “CNO is a holding company and its liquidity and ability to meet its obligations may be constrained by the ability of CNO’s insurance subsidiaries to distribute cash to it” below. Our debt obligations may restrict our ability to take advantage of business, strategic or financing opportunities. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Liquidity of the Holding Companies” for more information. loan term facility ($390.9 million On September 28, 2012, the Company entered into a senior secured credit agreement, providing for: (i) a $425.0 million six-year remained outstanding at December 31, 2014); (ii) a $250.0 million four- year term loan facility ($131.2 million remained outstanding at December 31, 2014); and (iii) a $50.0 million three-year revolving credit facility (no amounts were outstanding at December 31, 2014), with JPMorgan Chase Bank, N.A., as administrative agent, and the lenders from time to time party thereto (the “Senior Secured Credit Agreement”). On September 28, 2012, we also issued $275.0 million in aggregate principal amount of 6.375% Senior Secured Notes due October 2020 (the “6.375% Notes”) pursuant to an indenture, dated as of September 28, 2012 (the “6.375% Indenture”), among the Company, the subsidiary guarantors party thereto and Wilmington Trust, National Association, as trustee (the “Trustee”) and as collateral agent (the “Collateral Agent”). The Senior Secured Credit Agreement contains various restrictive covenants and required financial ratios that we are required to meet or maintain and that will limit our operating flexibility. If we default under any of these covenants, the lenders could declare the outstanding principal amount of the term loan, accrued and unpaid interest and all other amounts owing or payable thereunder to be immediately due and payable, which would have material adverse consequences to us. In such event, the holders of the 6.375% Notes could elect to take similar action with respect to those debts. If that were to occur, we would not have sufficient liquidity to repay our indebtedness. If we fail to pay interest or principal on our other indebtedness, including the 6.375% Notes, we will be in default under the indenture governing such indebtedness, which could also lead to a default under agreements governing our existing and future indebtedness, including under the Senior Secured Credit Agreement. If the repayment of the related indebtedness were to be accelerated after any applicable notice or grace periods, we likely would not have sufficient funds to repay our indebtedness. Absent sufficient liquidity to repay our indebtedness, our management or our independent registered public accounting firm may conclude that there is substantial doubt regarding our ability to continue as a going concern. PART I ITEM 1A Risk Factors The Senior Secured Credit Agreement and the 6.375% Notes contain various restrictive covenants and required financial ratios that limit our operating flexibility. The violation of one or more loan covenant requirements will entitle our lenders to declare all outstanding amounts under the Senior Secured Credit Agreement and the 6.375% Notes to be due and payable. Pursuant to the Senior Secured Credit Agreement, CNO agreed to a number of covenants and other provisions that restrict the Company’s ability to borrow money and pursue some operating activities without the prior consent of the lenders. We also agreed to meet or maintain various financial ratios and balances. Our ability to meet these financial tests or maintain ratings may be affected by events beyond our control. There are several conditions or circumstances that could lead to an event of default under the Senior Secured Credit Agreement, as described below. The Senior Secured Credit Agreement prohibits or restricts, among other things, CNO’s ability to: • incur or guarantee additional indebtedness (including, for this purpose, reimbursement obligations under letters of credit, except to the extent such reimbursement obligations relate to letters of credit issued in connection with reinsurance transactions entered into in the ordinary course of business) or issue preferred stock; • pay dividends or make other distributions to shareholders; • purchase or redeem capital stock or subordinated indebtedness; • make certain investments; • create liens; • incur restrictions on CNO’s ability and the ability of CNO’s subsidiaries to pay dividends or make other payments to CNO; • sell assets, including capital stock of CNO’s subsidiaries; • enter into sale and leaseback transactions; • consolidate or merge with or into other companies or transfer all or substantially all of our assets; and • engage in transactions with affiliates; in each case subject to important exceptions and qualifications as set forth in the Senior Secured Credit Agreement. Mandatory prepayments of the Senior Secured Credit Agreement will be required, subject to certain exceptions, in an amount equal to: (i) 100% of the net cash proceeds from certain asset sales or casualty events; (ii) 100% of the net cash proceeds received by the Company or any of its restricted subsidiaries from certain debt issuances; and (iii) 100% of the amount of certain restricted payments made (including any common stock dividends and share repurchases) as defined in the Senior Secured Credit Agreement provided that if, as of the end of the fiscal quarter immediately preceding such restricted payment, the debt to total capitalization ratio is: (x) equal to or less than 25.0%, but greater than 20.0%, the prepayment requirement shall be reduced to 33.33%; or (y) equal to or less than 20.0%, the prepayment requirement shall not apply. CNO FINANCIAL GROUP, INC. - Form 10-K 41 PART I ITEM 1A Risk Factors Notwithstanding the foregoing, no mandatory prepayments pursuant to item (i) in the preceding paragraph shall be required if: (x) the debt to total capitalization ratio is equal or less than 20% and (y) either (A) the financial strength rating of certain of the Company’s insurance subsidiaries is equal to or better than A- (stable) from A.M. Best or (B) the Senior Secured Credit Agreement is rated equal or better than BBB- (stable) from S&P and Baa3 (stable) by Moody’s . The Senior Secured Credit Agreement requires the Company to maintain (each as calculated in accordance with the Senior Secured Credit Agreement): (i) a debt to total capitalization ratio of not more than 27.5 percent (such ratio was 17.2 percent at December 31, 2014); (ii) an interest coverage ratio of not less than 2.50 to 1.00 for each rolling four quarters (such ratio was 15.75 to 1.00 for the four quarters ended December 31, 2014); (iii) an aggregate ratio of total adjusted capital to company action level risk-based capital for the Company’s insurance subsidiaries of not less than 250 percent (such ratio was 434 percent at December 31, 2014); and (iv) a combined statutory capital and surplus for the Company’s insurance subsidiaries of at least $1,300.0 million (combined statutory capital and surplus at December 31, 2014, was $1,868 million). These covenants place significant restrictions on the manner in which we may operate our business and our ability to meet these financial covenants may be affected by events beyond our control. If we default under any of these covenants, the lenders could declare the outstanding principal amount of the term loan, accrued and unpaid interest and all other amounts owing and payable thereunder to be immediately due and payable, which would have material adverse consequences to us. If the lenders under the Senior Secured Credit Agreement elect to accelerate the amounts due, the holders of CNO’s 6.375% Notes could elect to take similar action with respect to those debts. If that were to occur, we would not have sufficient liquidity to repay our indebtedness. We are required to assess our ability to continue as a going concern as part of our preparation of financial statements at each quarter- end. The assessment includes, among other things, consideration of our plans to address our liquidity and capital needs during the following twelve months and our ability to comply with the future loan covenant and financial ratio requirements under the Senior Secured Credit Agreement. If we default under any covenants or financial ratio requirement, the lenders could declare the outstanding principal amount of the term loan, accrued and unpaid interest and all other amounts owing and payable thereunder to be immediately due and payable. In such event, the holders of CNO’s 6.375% Notes could elect to take similar action with respect to those debts. If that were to occur, we would not have sufficient liquidity to repay our indebtedness. Absent sufficient liquidity to repay our indebtedness, we or our auditors may conclude that there is substantial doubt regarding our ability to continue as a going concern. If we were to conclude there was substantial doubt regarding our ability to continue as a going concern in our financial statements for subsequent periods, we may be required to increase the valuation allowance for deferred tax assets, which could result in the violation of one or more loan covenant requirements under the Senior Secured Credit Agreement. If in future periods we are not able to demonstrate that we will be in compliance with the financial covenant requirements in the Senior Secured Credit Agreement for at least 12 months following the date 42 CNO FINANCIAL GROUP, INC. - Form 10-K of the financial statements, management would conclude there is substantial doubt about our ability to continue as a going concern and the audit opinion that we would receive from our independent registered public accounting firm would include an explanatory paragraph regarding our ability to continue as a going concern. Such an opinion would cause us to be in breach of the covenants in the Senior Secured Credit Agreement. If the circumstances leading to the substantial doubt were not cured prior to the issuance of the audit opinion, or we were unable to obtain a waiver on the going concern opinion requirement within 30 days after notice from the lenders, the issuance of such an opinion would be an event of default entitling the lenders to declare the outstanding principal amount of term loans, accrued and unpaid interest and all other amounts due and payable thereunder to be due and payable. If an event of default were to occur, it is highly probable that we would not have sufficient liquidity to repay our bank indebtedness in full or any of our other indebtedness which could also be accelerated as a result of the default. The 6.375% Indenture contains covenants that, among other things, limit (subject to certain exceptions) the Company’s ability and the ability of the Company’s Restricted Subsidiaries (as defined in the 6.375% Indenture) to: • incur or guarantee additional indebtedness or issue preferred stock; • pay dividends or make other distributions to shareholders; • purchase or redeem capital stock or subordinated indebtedness; • make investments; • create liens; • incur restrictions on the Company’s ability and the ability of its Restricted Subsidiaries to pay dividends or make other payments to the Company; • sell assets, including capital stock of the Company’s subsidiaries; • consolidate or merge with or into other companies or transfer all or substantially all of the Company’s assets; and • engage in transactions with affiliates. The 6.375% Indenture provides for customary events of default (subject in certain cases to customary grace and cure periods), which include nonpayment, breach of covenants in the 6.375% Indenture, failure to pay at maturity or acceleration of other indebtedness, a failure to pay certain judgments and certain events of bankruptcy and insolvency. Generally, if an event of default occurs, the Trustee or holders of at least 25% in principal amount of the then outstanding 6.375% Notes may declare the principal of and accrued but unpaid interest, including any additional interest, on all of the 6.375% Notes to be due and payable. Under the 6.375% Indenture, the Company can make Restricted Payments (as such term is defined in the 6.375% Indenture) up to a calculated limit, provided that the Company’s pro forma risk-based capital ratio exceeds 225% after giving effect to the Restricted Payment and certain other conditions are met. Restricted Payments include, among other items, repurchases of common stock and cash dividends on common stock (to the extent such dividends exceed $30.0 million in the aggregate in any calendar year). The limit of Restricted Payments permitted under the 6.375% Indenture is the sum of (x) 50% of the Company’s “Net Excess Cash Flow” (as defined in the 6.375% Indenture) for the period (taken as one accounting period) from July 1, 2012 to the end of the Company’s most recently ended fiscal quarter for which financial statements are available at the time of such Restricted Payment, (y) $175.0 million and (z) certain other amounts specified in the 6.375% Indenture. Based on the provisions set forth in the 6.375% Indenture and the Company’s Net Excess Cash Flow for the period from July 1, 2012 through December 31, 2014, the Company could have made additional Restricted Payments under this 6.375% Indenture covenant of approximately $75 million as of December 31, 2014. This limitation on Restricted Payments does not apply if the Debt to Total Capitalization Ratio (as defined in the 6.375% Indenture) as of the last day of the Company’s most recently ended fiscal quarter for which financial statements are available that immediately precedes the date of any Restricted Payment, calculated immediately after giving effect to such Restricted Payment and any related transactions on a pro forma basis, is equal to or less than 17.5%. If, however, our Debt to Total Capitalization Ratio were to increase to greater than 17.5%, our ability to make anticipated share repurchases and common stock dividends may be restricted. The obligations under the Senior Secured Credit Agreement and the 6.375% Notes are guaranteed by our current and future restricted domestic subsidiaries, other than our insurance subsidiaries and certain immaterial subsidiaries. The guarantee of CDOC, Inc. (“CDOC”) (our wholly owned subsidiary and a guarantor under the 6.375% Notes and the Senior Secured Credit Agreement) is secured by a lien on substantially all of the assets of the subsidiary guarantors party thereto, including the stock of Conseco Life Insurance Company of Texas (“CLTX”) (which is the parent of Bankers Life, Bankers Conseco Life Insurance Company (“Bankers Conseco Life”) and Colonial Penn) and Washington National. If we fail to make the required payments, do not meet the financial covenants or otherwise default on the terms of the Senior Secured Credit Agreement or the 6.375% Notes, the stock of CLTX and Washington National could be transferred to the lenders (subject to regulatory approval) under the Senior Secured Credit Agreement and the holders of the 6.375% Notes. Any such transfer would have a material adverse effect on our business, financial condition and results of operations. Our current credit ratings may adversely affect our ability to access capital and the cost of such capital, which could have a material adverse effect on our financial condition and results of operations. Our issuer credit and senior secured debt rating from each of the major rating agencies is below investment grade. If we were to require additional capital, either to refinance our existing indebtedness or for any other reason, our current senior debt ratings, as well as conditions in the credit markets generally, could restrict our access to such capital and adversely affect its cost. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Liquidity of the Holding Companies” for more information. PART I ITEM 1A Risk Factors CNO is a holding company and its liquidity and ability to meet its obligations may be constrained by the ability of CNO’s insurance subsidiaries to distribute cash to it. CNO and CDOC are holding companies with no business operations of their own. CNO and CDOC depend on their operating subsidiaries for cash to make principal and interest payments on debt and to pay administrative expenses and income taxes. CNO and CDOC receive cash from our insurance subsidiaries, consisting of dividends and distributions, principal and interest payments on surplus debentures and tax-sharing payments, as well as cash from their non-insurance subsidiaries consisting of dividends, distributions, loans and advances. Deterioration in the financial condition, earnings or cash flow of these significant subsidiaries for any reason could hinder the ability of such subsidiaries to pay cash dividends or other disbursements to CNO and/or CDOC, which would limit our ability to meet our debt service requirements and satisfy other financial obligations. In addition, CNO may elect to contribute additional capital to certain insurance subsidiaries to strengthen their surplus for covenant compliance or regulatory purposes (including, for example, maintaining adequate RBC level) or to provide the capital necessary for growth, in which case it is less likely that its insurance subsidiaries would pay dividends to the holding company. Accordingly, this could limit CNO’s ability to meet debt service requirements and satisfy other holding company financial obligations. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Liquidity of the Holding Companies” for more information. CNO receives dividends and other payments from CDOC and from certain non-insurance subsidiaries. CDOC receives dividends and surplus debenture interest payments from our insurance subsidiaries and payments from certain of our non-insurance subsidiaries. Payments from our non-insurance subsidiaries to CNO or CDOC, and payments from CDOC to CNO, do not require approval by any regulatory authority or other third party. However, the payment of dividends or surplus debenture interest by our insurance subsidiaries to CDOC is subject to state insurance department regulations and may be prohibited by insurance regulators if they determine that such dividends or other payments could be adverse to our policyholders or contract holders. Insurance regulations generally permit dividends to be paid from statutory earned surplus of the insurance company without regulatory approval for any 12-month period in amounts equal to the greater of (or in a few states, the lesser of): • statutory net gain from operations or statutory net income for the prior year, or • 10 percent of statutory capital and surplus as of the end of the preceding year. This type of dividend is referred to as an “ordinary dividend”. Any dividend in excess of these levels requires the approval of the director or commissioner of the applicable state insurance department and is referred to as an “extraordinary dividend”. In 2014, our insurance subsidiaries paid extraordinary dividends of $227.0 million to CDOC. Each of the immediate insurance subsidiaries of CDOC had negative earned surplus at December 31, 2014. As a result, CNO FINANCIAL GROUP, INC. - Form 10-K 43 PART I ITEM 1A Risk Factors any dividend payments from the insurance subsidiaries to CNO will be considered extraordinary dividends and will require the prior approval of the director or commissioner of the applicable state insurance department. CNO expects to receive regulatory approval for future dividends from our insurance subsidiaries, but there can be no assurance that such payments will be approved or that the financial condition of our insurance subsidiaries will not deteriorate, making future approvals less likely. CDOC holds surplus debentures from CLTX with an aggregate principal amount of $749.6 million. Interest payments on those surplus debentures do not require additional approval provided the RBC ratio of CLTX exceeds 100 percent (but do require prior written notice to the Texas state insurance department). The estimated RBC ratio of CLTX was 375 percent at December 31, 2014. CDOC also holds a surplus debenture from Colonial Penn with a principal balance of $160.0 million. Interest payments on that surplus debenture require prior approval by the Pennsylvania state insurance department. Dividends and other payments from our non-insurance subsidiaries, including 40|86 Advisors and CNO Services, LLC (“CNO Services”), to CNO or CDOC do not require approval by any regulatory authority or other third party. However, insurance regulators may prohibit payments by our insurance subsidiaries to parent companies if they determine that such payments could be adverse to our policyholders or contractholders. In addition, although we are under no obligation to do so, we may elect to contribute additional capital to strengthen the surplus of certain insurance subsidiaries for covenant compliance or regulatory purposes or to provide the capital necessary for growth. Any election regarding the contribution of additional capital to our insurance subsidiaries could affect the ability of our top tier insurance subsidiaries to pay dividends. The ability of our insurance subsidiaries to pay dividends is also impacted by various criteria established by rating agencies to maintain or receive higher financial strength ratings and by the capital levels that we target for our insurance subsidiaries, as well as RBC and statutory capital and surplus compliance requirements under the Senior Secured Credit Agreement. In addition, Washington National may not distribute funds to any affiliate or shareholder, except pursuant to agreements with affiliates that have been approved, without prior notice to the Florida Office of Insurance Regulation, in accordance with an order from the Florida Office of Insurance Regulation. We previously identified a material weakness in our internal control over financial reporting which has been remediated, and our business may be adversely affected if we fail to maintain effective controls over financial reporting. We have previously identified material weaknesses in internal controls, including one identified at September 30, 2012 related to the accurate calculation of certain adjustments impacting other comprehensive income. Specifically, controls in place to ensure the accurate calculation of these adjustments did not operate effectively. We have emphasized the importance of performing and reviewing calculations consistent with the design of our internal control structure in an effort to ensure controls operate effectively. 44 CNO FINANCIAL GROUP, INC. - Form 10-K The Company has completed its testing of controls over the calculation of these adjustments and concluded that the material weakness identified at September 30, 2012 was remediated as of December 31, 2012. We face the risk that, notwithstanding our efforts to date to identify and remedy the material weakness in our internal control over financial reporting, we may discover other material weaknesses in the future and the cost of remediating the material weakness could be high and could have a material adverse effect on our financial condition and results of operations. Our ability to use our existing NOLs may be limited by certain transactions, and an impairment of existing NOLs could result in a significant writedown in the value of our deferred tax assets, which could cause us to breach the debt to total capitalization covenant of the Senior Secured Credit Agreement. As of December 31, 2014, we had approximately $3.0 billion of federal tax NOLs resulting in deferred tax assets of approximately $1.0 billion, expiring in years 2018 through 2032. Section 382 of the Code imposes limitations on a corporation’s ability to use its NOLs when it undergoes a 50 percent “ownership change” over a three year period. Although we underwent an ownership change in 2003 as the result of our reorganization, the timing and manner in which we will be able to utilize our NOLs is not currently limited by Section 382. We regularly monitor ownership changes (as calculated for purposes of Section 382) based on available information and, as of December 31, 2014, our analysis indicated that we were below the 50 percent ownership change threshold that would limit our ability to utilize our NOLs. A future transaction or transactions and the timing of such transaction or transactions could trigger an ownership change under Section 382. Such transactions may include, but are not limited to, additional repurchases or issuances of common stock, acquisitions or sales of shares of CNO’s stock by certain holders of its shares, including persons who have held, currently hold or may accumulate in the future 5 percent or more of CNO’s outstanding common stock for their own account. In January 2009, CNO’s Board of Directors adopted a Section 382 Rights Agreement designed to protect shareholder value by preserving the value of our NOLs. The Section 382 Rights Agreement was amended and extended by the CNO Board of Directors on December 6, 2011 and on November 13, 2014. The Amended Section 382 Rights Agreement provides a strong economic disincentive for any one shareholder knowingly, and without the approval of the Board of Directors, to become an owner of more than 4.99% of the Company’s outstanding common stock (or any other interest in CNO that would be treated as “stock” under applicable Section 382 regulations) and for any owner of more than 4.99% of CNO’s outstanding common stock as of the date of the Amended Section 382 Rights Agreement to increase their ownership stake by more than 1 percent of the shares of CNO’s common stock then outstanding, and thus limits the uncertainty with regard to the potential for future ownership changes. However, despite the strong economic disincentives of the Amended Section 382 Rights Agreement, shareholders may elect to increase their ownership, including beyond the limits set by the Amended Section 382 Rights Agreement, and thus adversely affect CNO’s ownership shift calculations. To further protect against the possibility of triggering an ownership change under Section 382, CNO’s shareholders approved an amendment to CNO’s certificate of incorporation (the “Original Section 382 Charter Amendment”) designed to prevent certain transfers of common stock which could otherwise adversely affect our ability to use our NOLs. On May 8, 2013, our shareholders approved an amendment (the “Extended Section 382 Charter Amendment”) to CNO’s certificate of incorporation to: (i) extend the term of the Original Section 382 Charter Amendment for three years until December 31, 2016, (ii) provide for a 4.99% ownership threshold relating to our stock, and (iii) amend certain other provisions of the Original Section 382 Charter Amendment, including updates to certain definitions, for consistency with the Amended Section 382 Rights Agreement. See the note to the consolidated financial statements entitled “Income Taxes” for further information regarding the Amended Section 382 Rights Agreement, the Extended Section 382 Charter Amendment and CNO’s NOLs. If an ownership change were to occur for purposes of Section 382, we would be required to calculate an annual limitation on the amount of our taxable income that may be offset by NOLs arising prior to such ownership change. That limitation would apply to all of our current NOLs. The annual limitation would be calculated based upon the fair market value of our equity at the time of such ownership change, multiplied by a federal long-term tax exempt rate (2.80 percent at December 31, 2014), and would eliminate our ability to use a substantial portion of our NOLs to offset future taxable income. Additionally, the writedown of our deferred tax assets that would occur in the event of an ownership change for purposes of Section 382 could cause us to breach the debt to total capitalization covenant in the Senior Secured Credit Agreement. The value of our deferred tax assets may be reduced to the extent our future profits are less than we have projected or the current corporate income tax rate is reduced, and such reductions in value may have a material adverse effect on our results of operations and our financial condition. As of December 31, 2014, we had net deferred tax assets of $799.8 million. Our income tax expense includes deferred income taxes arising from temporary differences between the financial reporting and tax bases of assets and liabilities, capital loss carry- forwards and NOLs. We evaluate the realizability of our deferred tax assets and assess the need for a valuation allowance on an ongoing basis. In evaluating our deferred tax assets, we consider whether it is more likely than not that the deferred tax assets will be realized. The ultimate realization of our deferred tax assets depends upon generating sufficient future taxable income during the periods in which our temporary differences become deductible and before our capital loss carry-forwards and NOLs expire. Our assessment of the realizability of our deferred tax assets requires significant judgment. Failure to achieve our projections may result in an increase in the valuation allowance in a future period. Any future increase in the valuation allowance would result in PART I ITEM 1A Risk Factors additional income tax expense which could have a material adverse effect upon our earnings in the future, and reduce shareholders’ equity. The value of our net deferred tax assets as of December 31, 2014 reflects the current corporate income tax rate of approximately 35 percent. A reduction in the corporate income tax rate would cause a writedown of our deferred tax assets, which may have a material adverse effect on our results of operations and financial condition. From time to time we may become subject to tax audits, tax litigation or similar proceedings, and as a result we may owe additional taxes, interest and penalties, or our NOLs may be reduced, in amounts that may be material. In determining our provisions for income taxes and our accounting for tax-related matters in general, we are required to exercise judgment. We regularly make estimates where the ultimate tax determination is uncertain. The final determination of any tax audit, appeal of the decision of a taxing authority, tax litigation or similar proceedings may be materially different from that reflected in our financial statements. The assessment of additional taxes, interest and penalties could be materially adverse to our current and future results of operations and financial condition. See the note to the consolidated financial statements entitled “Income Taxes” for further information. Our results of operations may be negatively impacted if our initiatives to restructure our insurance operations or our efforts to become more efficient are unsuccessful. We have implemented or are in the process of implementing several initiatives to improve operating results, including: (i) focusing sales efforts on higher margin products; (ii) reducing operating expenses by eliminating or reducing marketing costs of certain products; (iii) streamlining administrative procedures and reducing personnel; (iv) using third party service providers to improve service and reduce expenses; and (v) increasing retention rates on our more profitable blocks of inforce business. Many of our initiatives address issues resulting from the substantial number of acquisitions of our Predecessor. Between 1982 and 1997, our Predecessor completed 19 transactions involving the acquisitions of 44 separate insurance companies. These prior acquisitions have contributed to the complexity and cost of our current administrative operating environment and make it challenging, in some instances, to operate our business within the expense levels assumed in the pricing of our products. If we are unsuccessful in our efforts to become more efficient, our future earnings will be adversely affected. In the event one or more of our third party service providers to whom we outsource certain of our functions becomes unable to continue to provide services or experiences a failure in their systems, our business could be adversely impacted. CNO FINANCIAL GROUP, INC. - Form 10-K 45 PART I ITEM 1A Risk Factors Conversions to new systems can result in valuation differences between the prior system and the new system. We have recognized such differences in the past. Our planned conversions could result in future valuation adjustments, and these adjustments may have a material adverse effect on future earnings. A decline in the current financial strength rating of our insurance subsidiaries could cause us to experience decreased sales, increased agent attrition and increased policyholder lapses and redemptions. An important competitive factor for our insurance subsidiaries is the ratings they receive from nationally recognized rating organizations. Agents, insurance brokers and marketing companies who market our products and prospective purchasers of our products use the financial strength ratings of our insurance subsidiaries as an important factor in determining whether to market or purchase. Ratings have the most impact on our annuity, interest-sensitive life insurance and long-term care products. The current financial strength ratings of our primary insurance subsidiaries from A.M. Best, S&P, Fitch and Moody’s are “B++”, “BBB+”, “BBB” and “Baa2”, respectively. A.M. Best has sixteen possible ratings. There are four ratings above our “B++” rating and eleven ratings that are below our rating. S&P has twenty-one possible ratings. There are seven ratings above our “BBB+” rating and thirteen ratings that are below our rating. Fitch has nineteen possible ratings. There are eight ratings above our “BBB” rating and ten ratings that are below our rating. Moody’s has twenty-one possible ratings. There are eight ratings above our “Baa2” rating and twelve ratings that are below our rating. If our ratings are downgraded, we may experience declining sales of certain of our insurance products, defections of our independent and career sales force, and increased policies being redeemed or allowed to lapse. These events would adversely affect our financial results, which could then lead to ratings downgrades. Competition from companies that have greater market share, higher ratings, greater financial resources and stronger brand recognition, may impair our ability to retain existing customers and sales representatives, attract new customers and sales representatives and maintain or improve our financial results. The supplemental health insurance, annuity and individual life insurance markets are highly competitive. Competitors include other life and accident and health insurers, commercial banks, thrifts, mutual funds and broker-dealers. Our principal competitors vary by product line. Our main competitors for agent-sold long-term care insurance products include Genworth, Mutual of Omaha and Northwestern Mutual. Our main competitors for agent-sold Medicare supplement insurance products include Blue Cross and Blue Shield Plans, Mutual of Omaha and United HealthCare. Our main competitors for life insurance sold through direct marketing channels include Gerber Life, MetLife, Mutual of Omaha, New York Life and subsidiaries of Torchmark. Our main competitors for supplemental 46 CNO FINANCIAL GROUP, INC. - Form 10-K health products sold through our Washington National segment include AFLAC, subsidiaries of Allstate, Colonial Life and Accident Company and subsidiaries of Torchmark. In some of our product lines, such as life insurance and fixed annuities, we have a relatively small market share. Even in some of the lines in which we are one of the top writers, our market share is relatively small. For example, while, based on an Individual Long-Term Care Insurance Survey, our Bankers Life segment ranked ninth in annualized premiums of individual long-term care insurance in 2013 with a market share of approximately 3.0 percent, the top eight writers of individual long-term care insurance had annualized premiums with a combined market share of approximately 87 percent during the period. In addition, while, based on a 2013 Medicare Supplement Loss Ratios report, we ranked fifth in direct premiums earned for Medicare supplement insurance in 2013 with a market share of 3.5 percent, the top writer of Medicare supplement insurance had direct premiums with a market share of 33 percent during the period. Most of our major competitors have higher financial strength ratings than we do. Many of our competitors are larger companies that have greater capital, technological and marketing resources and have access to capital at a lower cost. Recent industry consolidation, including business combinations among insurance and other financial services companies, has resulted in larger competitors with even greater financial resources. Furthermore, changes in federal law have narrowed the historical separation between banks and insurance companies, enabling traditional banking institutions to enter the insurance and annuity markets and further increase competition. This increased competition may harm our ability to maintain or improve our profitability. In addition, because the actual cost of products is unknown when they are sold, we are subject to competitors who may sell a product at a price that does not cover its actual cost. Accordingly, if we do not also lower our prices for similar products, we may lose market share to these competitors. If we lower our prices to maintain market share, our profitability will decline. The Colonial Penn segment has faced increased competition from other insurance companies who also distribute products through direct marketing. In addition, the demand and cost of television advertising appropriate for Colonial Penn’s campaigns fluctuates from period to period and this will impact the average cost to generate a TV lead. We must attract and retain sales representatives to sell our insurance and annuity products. Strong competition exists among insurance and financial services companies for sales representatives. We compete for sales representatives primarily on the basis of our financial position, financial strength ratings, support services, compensation, products and product features. Our competitiveness for such agents also depends upon the relationships we develop with these agents. Our Predecessor’s bankruptcy continues to be an adverse factor in developing relationships with certain agents. If we are unable to attract and retain sufficient numbers of sales representatives to sell our products, our ability to compete and our revenues and profitability would suffer. If we are unable to attract and retain agents and marketing organizations, sales of our products may be reduced. Our products are marketed and distributed primarily through a dedicated field force of career agents and sales managers (in our Bankers Life segment) and through PMA and independent marketing organizations (in our Washington National segment). We must attract and retain agents, sales managers and independent marketing organizations to sell our products through those distribution channels. We compete with other insurance companies and financial services companies for agents and sales managers and for business through marketing organizations. If we are unable to attract and retain these agents, sales managers and marketing organizations, our ability to grow our business and generate revenues from new sales would suffer. Federal and state legislation could adversely affect the financial performance of our insurance operations. During recent years, the health insurance industry has experienced substantial changes, including those caused by healthcare legislation. Recent federal and state legislation and pending legislative proposals concerning healthcare reform contain features that could severely limit, or eliminate, our ability to vary pricing terms or apply medical underwriting standards to individuals, thereby potentially increasing our benefit ratios and adversely impacting our financial results. In particular, Medicare reform could affect our ability to price or sell our products or profitably maintain our blocks inforce. For example, the Medicare Advantage program provides incentives for health plans to offer managed care plans to seniors. The growth of managed care plans under this program could decrease sales of the traditional Medicare supplement products we sell. Some current proposals contain government provided long-term care insurance which could affect the sales of our long-term care products. Proposals currently pending in Congress and some state legislatures may also affect our financial results. These proposals include the implementation of minimum consumer protection standards in all long-term care policies, including: guaranteed premium rates; protection against inflation; limitations on waiting periods for pre-existing conditions; setting standards for sales practices for long-term care insurance; and guaranteed consumer access to information about insurers, including information regarding lapse and replacement rates for policies and the percentage of claims denied. Enactment of any proposal that would limit the amount we can charge for our products, such as guaranteed premium rates, or that would increase the benefits we must pay, such as limitations on waiting periods, or that would otherwise increase the costs of our business, could adversely affect our financial results. On July 21, 2010, the Dodd-Frank Act was enacted and signed into law. The Dodd-Frank Act made extensive changes to the laws regulating financial services firms and requires various federal agencies to adopt a broad range of new rules and regulations. Among other provisions, the Dodd-Frank Act provides for a new framework of regulation of over-the-counter derivatives markets. This will require us to clear certain types of transactions currently traded in the over-the-counter derivative markets and PART I ITEM 1A Risk Factors may limit our ability to customize derivative transactions for our needs. In addition, we will likely experience additional collateral requirements and costs associated with derivative transactions. The Dodd-Frank Act also establishes a Financial Stability Oversight Council, which is authorized to subject nonbank financial companies deemed systemically significant to stricter prudential standards and other requirements and to subject such a company to a special orderly liquidation process outside the federal bankruptcy code, administered by the Federal Deposit Insurance Corporation (although insurance company subsidiaries would remain subject to liquidation and rehabilitation proceedings under state law). In addition, the Dodd-Frank Act establishes a Federal Insurance Office within the Department of the Treasury. While not having a general supervisory or regulatory authority over the business of insurance, the director of this office will perform various functions with respect to insurance, including serving as a non-voting member of the Financial Stability Oversight Council and making recommendations to the Council regarding insurers to be designated for more stringent regulation. The director is also required to conduct a study on how to modernize and improve the system of insurance regulation in the United States, including by increased national uniformity through either a federal charter or effective action by the states. Federal agencies have been given significant discretion in drafting the rules and regulations that will implement the Dodd-Frank Act. Consequently, many of the details and much of the impact of the Dodd-Frank Act may not be known for some time. In addition, this legislation mandated multiple studies and reports for Congress, which could result in additional legislative or regulatory action. We cannot predict the requirements of the regulations ultimately adopted under the Dodd-Frank Act, the effect such regulations will have on financial markets generally, or on our businesses specifically, the additional costs associated with compliance with such regulations, or any changes to our operations that may be necessary to comply with the Dodd-Frank Act, any of which could have a material adverse affect on our business, results of operations, cash flows or financial condition. Reinsurance may not be available, affordable or adequate to protect us against losses. As part of our overall risk and capital management strategy, we have historically purchased reinsurance from external reinsurers as well as provided internal reinsurance support for certain risks underwritten by our business segments. The availability and cost of reinsurance protection are impacted by our operating and financial performance as well as conditions beyond our control. For example, volatility in the equity markets and the related impacts on asset values required to fund liabilities may reduce the availability of certain types of reinsurance and make it more costly when it is available, as reinsurers are less willing to take on credit risk in a volatile market. Accordingly, we may be forced to incur additional expenses for reinsurance or may not be able to obtain sufficient new reinsurance on acceptable terms, which could adversely affect our ability to write future business or obtain statutory capital credit for new reinsurance. CNO FINANCIAL GROUP, INC. - Form 10-K 47 PART I ITEM 3 Legal Proceedings Our insurance subsidiaries may be required to pay assessments to fund other companies’ policyholder losses or liabilities and this may negatively impact our financial results. The solvency or guaranty laws of most states in which an insurance company does business may require that company to pay assessments up to certain prescribed limits to fund policyholder losses or liabilities of other insurance companies that become insolvent. Insolvencies of insurance companies increase the possibility that these assessments may be required. These assessments may be deferred or forgiven under most guaranty laws if they would threaten an insurer’s financial strength and, in certain instances, may be offset against future premium taxes. We cannot estimate the likelihood and amount of future assessments. Although past assessments have not been material, if there were a number of large insolvencies, future assessments could be material and could have a material adverse effect on our operating results and financial position. ITEM 1B. Unresolved Staff Comments. None. ITEM 2. Properties. Our headquarters and the administrative operations of our Washington National segment and certain administrative operations of our subsidiaries are located on a Company-owned corporate campus in Carmel, Indiana, immediately north of Indianapolis. We currently occupy four buildings on the campus with approximately 422,000 square feet of space. Our Bankers Life segment is primarily administered from downtown Chicago, Illinois. In 2012, Bankers Life relocated from one downtown location to another. The new location has approximately 135,000 square feet leased under an agreement which expires in 2023. Bankers Life has subleased its prior location of 222,000 square feet through the remaining term of the lease which expires in 2018. We also lease 318 sales offices in various states totaling approximately 925,000 square feet. These leases generally are short-term in length, with remaining lease terms expiring between 2015 and 2020. Our Colonial Penn segment is administered from a Company- owned office building in Philadelphia, Pennsylvania, with approximately 127,000 square feet. We occupy approximately 45 percent of this space, with unused space leased to tenants. Management believes that this office space is adequate for our needs. ITEM 3. Legal Proceedings. Information required for Item 3 is incorporated by reference to the discussion under the heading “Legal Proceedings” in the note to the consolidated financial statements entitled “Litigation and Other Legal Proceedings” included in Item 8 of this Form 10-K. 48 CNO FINANCIAL GROUP, INC. - Form 10-K PART I ITEM 4 Mine Safety Disclosures ITEM 4. Mine Safety Disclosures. Not applicable. Executive Officers of the Registrant Officer Name and Age(a) Bruce Baude, 50 Since 2012 Edward J. Bonach, 60 2007 Frederick J. Crawford, 51 2012 Eric R. Johnson, 54 1997 John R. Kline, 57 Susan L. Menzel, 49 Christopher J. Nickele, 58 Scott R. Perry, 52 Matthew J. Zimpfer, 47 1990 2005 2005 2001 1998 Positions with CNO, Principal Occupation and Business Experience(b) Since July 2012, executive vice president, chief operations and technology officer. From 2008 to 2012, Mr. Baude was chief operating officer at Univita Health. He joined Long Term Care Group in 2005 and served as chief executive officer through 2008, when it was acquired by Univita Health. Since October 2011, chief executive officer. From May 2007 to January 2012, chief financial officer of CNO. Since January 2012, executive vice president and chief financial officer. From 2001 to January 2012, Mr. Crawford was with Lincoln Financial Group, serving as vice president and treasurer (2001-2004), chief financial officer (2005-2010), and executive vice president and head of corporate development and investments (2011-January 2012). Since September 2003, chief investment officer of CNO and president and chief executive officer of 40|86 Advisors, CNO’s wholly-owned registered investment advisor. Mr. Johnson has held various investment management positions since joining CNO in 1997. Since July 2002, senior vice president and chief accounting officer. Mr. Kline has served in various accounting and finance capacities with CNO since 1990. Since May 2005, executive vice president, human resources. Since August 2014, executive vice president and chief actuary. From October 2005 until August 2014, executive vice president, product management and from May 2010 until March 2014, president, Other CNO Business. Since July 2011, chief business officer of CNO. From 2006 until September 2013, president of Bankers Life and from 2001 to 2006, employed in various capacities for Bankers Life. Since June 2008, executive vice president and general counsel. Mr. Zimpfer has held various legal positions since joining CNO in 1998. (a) The executive officers serve as such at the discretion of the Board of Directors and are elected annually. (b) Business experience is given for at least the last five years. CNO FINANCIAL GROUP, INC. - Form 10-K 49 PART II ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. Market Information and Dividends The following table sets forth the dividends declared and paid per share and the ranges of high and low sales prices per share for our common stock on the New York Stock Exchange for the quarterly periods beginning January 1, 2013. Period 2013: First Quarter Second Quarter Third Quarter Fourth Quarter 2014: First Quarter Second Quarter Third Quarter Fourth Quarter Market price High Dividends declared and paid Low $ $ 11.67 $ 13.01 14.97 17.91 19.33 $ 19.00 18.23 18.47 $ $ 9.34 10.46 12.99 13.86 16.09 15.55 15.90 15.46 0.02 0.03 0.03 0.03 0.06 0.06 0.06 0.06 As of February 9, 2015, there were approximately 52,000 holders of the outstanding shares of common stock, including individual participants in securities position listings. We commenced the payment of a dividend on our common stock in the second quarter of 2012. The dividend on our common stock is declared each quarter by our Board of Directors. In determining dividends, our Board of Directors takes into consideration our financial condition, including current and expected earnings and projected cash flows. The Company’s debt agreements contain covenants which could limit our ability to pay cash dividends on our common stock, but we do not believe such covenants are likely to impact the future payment of dividends on our common stock. Refer to the note to the consolidated financial statements entitled “Notes Payable - Direct Corporate Obligations” for further information regarding these limitations. Performance Graph The performance graph below compares CNO’s cumulative total shareholder return on its common stock for the period from December 31, 2009 through December 31, 2014 with the cumulative total return of the Standard & Poor’s 500 Composite Stock Price Index (the “S&P 500 Index”) and the Standard & Poor’s Life and Health Insurance Index (the “S&P Life and Health Insurance Index”). The comparison for each of the periods assumes that $100 was invested on December 31, 2009 in each of CNO common stock, the stocks included in the S&P 500 Index and the stocks included in the S&P Life and Health Insurance Index and that all dividends were reinvested. The stock performance shown in this graph represents past performance and should not be considered an indication of future performance of CNO’s common stock. 50 CNO FINANCIAL GROUP, INC. - Form 10-K PART II ITEM 5 Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN* Among CNO Financial Group, Inc., the S&P 500 Index, and the S&P Life & Health Insurance Index $400 $350 $300 $250 $200 $150 $100 $50 $- 12/09 12/10 12/11 12/12 12/13 12/14 CNO Financial Group, Inc. S&P 500 S&P Life & Health Insurance * $100 invested on 12/31/09 in stock or index, including reinvestment of dividends. CNO Financial Group, Inc. S&P 500 Index S&P Life & Health Insurance Index $ 12/09 100.00 $ 100.00 100.00 12/10 135.60 $ 115.06 125.25 12/11 126.20 $ 117.49 99.31 12/12 187.95 $ 136.30 113.80 $ 12/13 359.23 180.44 186.04 12/14 354.52 205.14 189.66 Issuer Purchases of Equity Securities Period (in 2014) October 1 through October 31 November 1 through November 30 December 1 through December 31 TOTAL Total number of shares (or units) 3,365,011 $ 1,006,773 26,069 4,397,853 Average price paid per share (or unit) 16.94 17.88 17.50 17.16 Total number of shares (or units) purchased as part of publicly announced plans or programs 3,364,288 1,006,773 — 4,371,061 Maximum number (or approximate dollar value) of shares (or units) that may yet be purchased under the plans or programs(a) (dollars in millions) 38.9 420.9 420.9 420.9 $ (a) In May 2011, the Company announced a securities repurchase program of up to $100.0 million. In February 2012, June 2012, December 2012, December 2013 and November 2014, the Company’s Board of Directors approved, in aggregate, an additional $1,200.0 million to repurchase the Company’s outstanding securities. CNO FINANCIAL GROUP, INC. - Form 10-K 51 PART II ITEM 6 Selected Consolidated Financial Data Equity Compensation Plan Information The following table summarizes information, as of December 31, 2014, relating to our common stock that may be issued under the CNO Financial Group, Inc. Amended and Restated Long-Term Incentive Plan. Equity compensation plans approved by security holders Equity compensation plans not approved by security holders TOTAL Number of securities to be issued upon exercise of outstanding options, warrants and rights Weighted-average exercise price of outstanding options, warrants and rights 12.04 — 12.04 Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in first column) 8,571,490 — 8,571,490 5,011,125 $ — 5,011,125 $ ITEM 6. Selected Consolidated Financial Data. (Amounts in millions, except per share data) STATEMENT OF OPERATIONS DATA Insurance policy income Net investment income Net realized investment gains Total revenues Interest expense Total benefits and expenses Income before income taxes Income tax expense (benefit) Net income PER SHARE DATA Net income, basic Net income, diluted Dividends declared per common share Book value per common share outstanding Weighted average shares outstanding for basic earnings Weighted average shares outstanding for diluted earnings Shares outstanding at period-end BALANCE SHEET DATA - AT PERIOD END Total investments Total assets Corporate notes payable Total liabilities Shareholders’ equity STATUTORY DATA - AT PERIOD END(a) Statutory capital and surplus Asset valuation reserve (“AVR”) Total statutory capital and surplus and AVR Years ended December 31, 2014 2013 2012 2011 2010 $ $ $ $ $ $ $ $ 2,629.7 1,427.4 36.7 4,144.7 92.8 3,969.6 175.1 123.7 51.4 .24 .24 .24 23.06 212.9 217.7 203.3 24,908.3 31,184.2 794.4 26,496.0 4,688.2 1,664.4 203.1 1,867.5 $ $ $ $ 2,744.7 1,664.0 33.4 4,476.1 105.3 4,171.3 304.8 (173.2) 478.0 2.16 2.06 .11 22.49 221.6 232.7 220.3 27,151.7 34,780.6 856.4 29,825.4 4,955.2 1,711.9 233.9 1,945.8 $ $ $ 2,755.4 1,486.4 81.1 4,342.7 114.6 4,187.0 155.7 (65.3) 221.0 .95 .83 .06 22.80 233.7 281.4 221.5 27,959.3 34,131.4 1,004.2 29,082.1 5,049.3 2,690.5 1,354.1 61.8 4,124.6 114.1 3,818.4 306.2 (29.5) 335.7 1.35 1.15 — 19.12 248.0 304.1 241.3 26,364.3 32,921.9 857.9 28,308.1 4,613.8 $ 1,560.4 222.2 1,782.6 1,578.1 168.4 1,746.5 $ $ $ $ 2,670.0 1,366.9 30.2 4,083.9 113.2 3,859.0 224.9 (15.7) 240.6 .96 .84 — 15.18 251.0 301.9 251.1 23,782.0 31,394.9 998.5 27,583.3 3,811.6 1,525.1 71.3 1,596.4 (a) We have derived the statutory data from statements filed by our insurance subsidiaries with regulatory authorities which are prepared in accordance with statutory accounting principles, which vary in certain respects from GAAP. 52 CNO FINANCIAL GROUP, INC. - Form 10-K PART II ITEM 7 Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations ITEM 7. Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations. In this section, we review the consolidated financial condition of CNO and its consolidated results of operations for the years ended December 31, 2014, 2013 and 2012 and, where appropriate, factors that may affect future financial performance. Please read this discussion in conjunction with the consolidated financial statements and notes included in this Form 10-K. Cautionary Statement Regarding Forward-Looking Statements Our statements, trend analyses and other information contained in this report and elsewhere (such as in filings by CNO with the SEC, press releases, presentations by CNO or its management or oral statements) relative to markets for CNO’s products and trends in CNO’s operations or financial results, as well as other statements, contain forward-looking statements within the meaning of the federal securities laws and the Private Securities Litigation Reform Act of 1995. Forward-looking statements typically are identified by the use of terms such as “anticipate,” “believe,” “plan,” “estimate,” “expect,” “project,” “intend,” “may,” “will,” “would,” “contemplate,” “possible,” “attempt,” “seek,” “should,” “could,” “goal,” “target,” “on track,” “comfortable with,” “optimistic” and similar words, although some forward-looking statements are expressed differently. You should consider statements that contain these words carefully because they describe our expectations, plans, strategies and goals and our beliefs concerning future business conditions, our results of operations, financial position, and our business outlook or they state other “forward-looking” information based on currently available information. The “Risk Factors” in Item 1A provide examples of risks, uncertainties and events that could cause our actual results to differ materially from the expectations expressed in our forward-looking statements. Assumptions and other important factors that could cause our actual results to differ materially from those anticipated in our forward-looking statements include, among other things: • changes in or sustained low interest rates causing reductions in investment income, the margins of our fixed annuity and life insurance businesses, and sales of, and demand for, our products; • expectations of lower future investment earnings may cause us to accelerate amortization, write down the balance of insurance acquisition costs or establish additional liabilities for insurance products; • general economic, market and political conditions, including the performance of the financial markets which may affect the value of our investments as well as our ability to raise capital or refinance existing indebtedness and the cost of doing so; • the ultimate outcome of lawsuits filed against us and other legal and regulatory proceedings to which we are subject; • our ability to make anticipated changes to certain non- guaranteed elements of our life insurance products; • our ability to obtain adequate and timely rate increases on our health products, including our long-term care business; • the receipt of any required regulatory approvals for dividend and surplus debenture interest payments from our insurance subsidiaries; • mortality, morbidity, the increased cost and usage of health care services, persistency, the adequacy of our previous reserve estimates and other factors which may affect the profitability of our insurance products; • changes in our assumptions related to deferred acquisition costs or the present value of future profits; • the recoverability of our deferred tax assets and the effect of potential ownership changes and tax rate changes on their value; • our assumption that the positions we take on our tax return filings will not be successfully challenged by the IRS; • changes in accounting principles and the interpretation thereof; • our ability to continue to satisfy the financial ratio and balance requirements and other covenants of our debt agreements; • our ability to achieve anticipated expense reductions and levels of operational efficiencies including improvements in claims adjudication and continued automation and rationalization of operating systems; • performance and valuation of our investments, including the impact of realized losses (including other-than-temporary impairment charges); • our ability to identify products and markets in which we can compete effectively against competitors with greater market share, higher ratings, greater financial resources and stronger brand recognition; • our ability to generate sufficient liquidity to meet our debt service obligations and other cash needs; CNO FINANCIAL GROUP, INC. - Form 10-K 53 PART II ITEM 7 Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations • our ability to maintain effective controls over financial reporting; • our ability to continue to recruit and retain productive agents and distribution partners and customer response to new products, distribution channels and marketing initiatives; • our ability to achieve additional upgrades of the financial strength ratings of CNO and our insurance company subsidiaries as well as the impact of our ratings on our business, our ability to access capital, and the cost of capital; • regulatory changes or actions, including those relating to regulation of the financial affairs of our insurance companies, such as the payment of dividends and surplus debenture interest to us, regulation of the sale, underwriting and pricing of products, and health care regulation affecting health insurance products; • changes in the Federal income tax laws and regulations which may affect or eliminate the relative tax advantages of some of our products or affect the value of our deferred tax assets; • availability and effectiveness of reinsurance arrangements, as well as any defaults or failure of reinsurers to perform; • the performance of third party service providers and potential difficulties arising from outsourcing arrangements; • the growth rate of sales, collected premiums, annuity deposits • interruption in telecommunication, information technology or other operational systems or failure to maintain the security, confidentiality or privacy of sensitive data on such systems; • events of terrorism, cyber attacks, natural disasters or other catastrophic events, including losses from a disease pandemic; • ineffectiveness of risk management policies and procedures in identifying, monitoring and managing risks; and • the risk factors or uncertainties listed from time to time in our filings with the SEC; Other factors and assumptions not identified above are also relevant to the forward-looking statements, and if they prove incorrect, could also cause actual results to differ materially from those projected. All written or oral forward-looking statements attributable to us are expressly qualified in their entirety by the foregoing cautionary statement. Our forward-looking statements speak only as of the date made. We assume no obligation to update or to publicly announce the results of any revisions to any of the forward-looking statements to reflect actual results, future events or developments, changes in assumptions or changes in other factors affecting the forward-looking statements. The reporting of RBC measures is not intended for the purpose of ranking any insurance company or for use in connection with any marketing, advertising or promotional activities. and assets; Overview We are 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. We focus on serving the senior and middle-income markets, which we believe are attractive, underserved, high growth markets. We sell our products through three distribution channels: career agents, independent producers (some of whom sell one or more of our product lines exclusively) and direct marketing. Prior to 2014, the Company managed 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. As a result of the sale of CLIC which was completed on July 1, 2014 and the coinsurance agreements to cede certain long-term care business effective December 31, 2013 (as further described in the note to the consolidated financial statements entitled “Summary of Significant Accounting Policies - Reinsurance”), management has changed the manner in which it disaggregates the Company’s operations for making operating decisions and assessing performance. In periods prior to 2014: (i) the results in the Washington National segment have been adjusted to include the results from the business in the Other CNO Business segment that are being retained; (ii) the Other CNO Business segment included only the long-term care business that was ceded effective December 31, 2013 and the overhead expense of CLIC that is expected to continue after the completion of the sale; and (iii) the CLIC business being sold is excluded from our analysis of business segment results. Beginning on January 1, 2014: (i) the overhead expense of CLIC that is expected to continue after the completion of the sale has been reallocated primarily to the Bankers Life and Washington National segments; (ii) there is no longer an Other CNO Business segment; and (iii) the CLIC business being sold continues to be excluded from our analysis of business segment results. After the completion of the sale of CLIC: (i) the Bankers Life segment includes the results of certain life insurance business that was recaptured from Wilton Re; and (ii) the revenues and expenses associated with a transition services agreement and a special support services agreement with Wilton Re are included in our non-operating earnings. Under such agreements, we will receive $30 million in the year ending June 30, 2015 and $20 million in the year ending June 30, 2016. In addition, certain services will continue to be provided in the three years ending June 30, 2019 for an annual fee of $.2 million. The income we receive from these services agreements will offset certain of our overhead costs. If we are not successful in reducing our overhead costs to the same extent as the reduction in fees to be received from Wilton Re over the period of the agreements, our results of operations will be adversely affected. Our prior period 54 CNO FINANCIAL GROUP, INC. - Form 10-K PART II ITEM 7 Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations segment disclosures have been revised to reflect management’s current view of the Company’s operating segments. The Company’s insurance segments are described below: interest-sensitive insurance, traditional • Bankers Life, which markets and distributes Medicare supplement insurance, life life insurance, fixed annuities and long-term care insurance products to the middle-income senior market through a dedicated field force of career agents and sales managers supported by a network of community-based sales offices. The Bankers Life segment includes primarily the business of Bankers Life and Casualty Company. Bankers Life also markets and distributes Medicare Advantage plans primarily through distribution arrangements with Humana, Inc. and United HealthCare and PDP primarily through a distribution arrangement with Coventry. • Washington National, which markets and distributes supplemental health (including specified disease, accident and hospital indemnity insurance products) and life insurance to middle-income consumers at home and at the worksite. These products are marketed through PMA and through independent marketing organizations and insurance agencies including worksite marketing. The products being marketed are underwritten by Washington National. This segment’s business also includes certain closed blocks of annuities and Medicare supplement policies which are no longer being actively marketed by this segment and were primarily issued or acquired by Washington National. • Colonial Penn, which markets primarily graded benefit and simplified issue life insurance directly to customers in the senior middle-income market through television advertising, direct mail, the internet and telemarketing. The Colonial Penn segment includes primarily the business of Colonial Penn. CNO FINANCIAL GROUP, INC. - Form 10-K 55 PART II ITEM 7 Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations The following summarizes our earnings for the three years ending December 31, 2014 (dollars in millions, except per share data): 2014 2013 2012 Income before the net loss on the sale of CLIC and gain on reinsurance transactions, the earnings of CLIC prior to being sold, net realized investment gains (losses), fair value changes in embedded derivative liabilities, loss on extinguishment or modification of debt, other non-operating items consisting primarily of earnings attributable to variable interests, corporate interest expense and income taxes (“EBIT” a non-GAAP financial measure)(a): Bankers Life Washington National Colonial Penn Other CNO Business: Losses from the long-term care business reinsured effective December 31, 2013 Overhead expense of CLIC allocated to other segments effective January 1, 2014 EBIT from business segments continuing after the CLIC sale Corporate operations, excluding corporate interest expense EBIT from operations continuing after the CLIC sale Corporate interest expense Operating earnings before taxes Tax expense on operating income Net operating income Earnings of CLIC prior to being sold (net of taxes) Net loss on sale of CLIC and gain on reinsurance transactions (including impact of taxes) Net realized investment gains (net of related amortization and taxes) Fair value changes in embedded derivative liabilities (net of related amortization and taxes) Loss on extinguishment or modification of debt (net of taxes) Valuation allowance for deferred tax assets and other tax items(b) Other NET INCOME Per diluted share: Net operating income Earnings of CLIC prior to being sold (net of taxes) Net loss on sale of CLIC and gain on reinsurance transactions (including impact of taxes) Net realized investment gains (net of related amortization and taxes) Fair value changes in embedded derivative liabilities (net of related amortization and taxes) Loss on extinguishment or modification of debt (net of taxes) Valuation allowance for deferred tax assets and other tax items(b) Other NET INCOME $ $ $ $ 386.9 111.2 .8 — — 498.9 (54.4) 444.5 (43.9) 400.6 141.1 259.5 15.2 (269.7) 21.4 (23.4) (.4) 54.9 (6.1) 51.4 1.19 .07 (1.24) .10 (.11) — .25 (.02) .24 $ $ $ $ 310.5 140.6 (12.5) (8.0) (19.6) 411.0 18.6 429.6 (51.3) 378.3 129.9 248.4 25.5 (63.3) 16.8 23.0 (64.0) 301.5 (9.9) 478.0 1.07 .11 (.27) .08 .10 (.28) 1.29 (.04) 2.06 $ $ $ $ 300.9 148.8 (8.6) (9.2) (20.5) 411.4 (20.3) 391.1 (66.2) 324.9 118.0 206.9 (31.1) — 53.0 (1.8) (177.5) 171.5 — 221.0 .78 (.11) — .19 (.01) (.63) .61 — .83 (a) Management believes that an analysis of EBIT provides a clearer comparison of the operating results of the Company from period to period because it excludes: (i) the net loss on the sale of CLIC and gain on reinsurance transactions, including impact of taxes; (ii) the earnings of CLIC prior to being sold, net of taxes; (iii) net realized investment gains or losses, net of related amortization and taxes; (iv) fair value changes due to fluctuations in the interest rates used to discount embedded derivative liabilities related to our fixed index annuities, net of related amortization and taxes; (v) loss on extinguishment or modification of debt, net of taxes; (vi) changes in the valuation allowance for deferred tax assets; and (vii) other non-operating items consisting primarily of equity in earnings of certain non-strategic investments and earnings attributable to variable interest entities. Net realized investment gains or losses include: (i) gains or losses on the sales of investments; (ii) other-than-temporary impairments recognized through net income; and (iii) changes in fair value of certain fixed maturity investments with embedded derivatives. The table above reconciles the non-GAAP measure to the corresponding GAAP measure. (b) Increase in valuation allowance of $19.4 million in 2014, related to the expected change in future taxable income following the sale of CLIC, is included in the “net loss on sale of CLIC and gain on reinsurance transactions (including impact of taxes)”. Our mission is to be the recognized market leader in providing financial security for the protection and retirement needs of middle-income American working families and retirees. Our strategic plans are focused on continuing to grow and deliver long- term value for all our stakeholders. Specifically, we will focus on the following priorities: (ii) Capitalize on increased opportunities to grow sales (iii) Continue to increase the productivity and size of our agent force • Further enhance the customer experience (i) Continue with initiatives that make it easier for our customers to do business with us • Growth (i) Continue to expand our reach to serve middle-income Americans • Increase profitability and return on equity (i) Maintain our strong capital position (ii) Maintain favorable financial metrics (iii) Continue to increase our return on equity 56 CNO FINANCIAL GROUP, INC. - Form 10-K PART II ITEM 7 Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations • Effectively manage risk and deploy capital • Invest in our business and talent (i) Further invest in growing our business organically, while seeking strategic acquisitions (ii) Continue to cost effectively repurchase our common stock (iii) Maintain a competitive dividend payout ratio (i) Improve our business over the long-term through ongoing financial commitments (ii) Continue to provide our associates with new assignments and developmental opportunities (iii) Develop future leaders through our leadership development program Critical Accounting Policies The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management has made estimates in the past that we believed to be appropriate but were subsequently revised to reflect actual experience. If our future experience differs materially from these estimates and assumptions, our results of operations and financial condition could be materially affected. We base our estimates on historical experience and other assump- tions that we believe are reasonable under the circumstances. We continually evaluate the information used to make these estimates as our business and the economic environment change. The use of estimates is pervasive throughout our financial statements. The accounting policies and estimates we consider most critical are summarized below. Additional information on our accounting policies is included in the note to our consolidated financial statements entitled “Summary of Significant Accounting Policies”. Investments At December 31, 2014, the carrying value of our investment portfolio was $24.9 billion. Interest income on fixed maturity securities is recognized when earned using a constant effective yield method giving effect to amortization of premiums and accretion of discounts. Prepayment fees are recognized when earned. Dividends on equity securities are recognized when declared. Our evaluation of investments for impairment requires significant judgments, including: (i) the identification of potentially impaired securities; (ii) the determination of their estimated fair value; and (iii) the assessment of whether any decline in estimated fair value is other than temporary. 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 CNO FINANCIAL GROUP, INC. - Form 10-K 57 PART II ITEM 7 Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations 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 December 31, 2014, other-than-temporary impairments included in accumulated other comprehensive income of $3.2 million (before taxes and related amortization) related to structured securities. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date and, therefore, represents an exit price, not an entry price. We carry certain assets and liabilities at fair value on a recurring basis, including fixed maturities, equity securities, trading securities, investments held by VIEs, derivatives, cash and cash equivalents, separate account assets and embedded derivatives. We carry our company-owned life insurance policy, which is invested in a series of mutual funds, at its cash surrender value and our hedge fund investments at their net asset values; in both cases, we believe these values approximate their fair values. In addition, we disclose fair value for certain financial instruments, including mortgage loans and policy loans, policyholder account balances, investment borrowings, notes payable and borrowings related to variable interest entities (“VIEs”). The degree of judgment utilized in measuring the fair value of financial instruments is largely dependent on the level to which pricing is based on observable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our view of market assumptions in the absence of observable market data. Financial instruments with readily available active quoted prices would be considered to have fair values based on the highest level of observable inputs, and little judgment would be utilized in measuring fair value. Financial instruments that rarely trade would often have fair value based on a lower level of observable inputs, and more judgment would be utilized in measuring fair value. There is a three-level hierarchy for valuing assets or liabilities at fair value based on whether inputs are observable or unobservable. • Level 1 – includes assets and liabilities valued using inputs that are unadjusted quoted prices in active markets for identical assets or liabilities. Our Level 1 assets primarily include cash and exchange traded securities. • Level 2 – includes assets and liabilities valued using inputs that are quoted prices for similar assets in an active market, quoted prices for identical or similar assets in a market that is not active, observable inputs, or observable inputs that can be corroborated by market data. Level 2 assets and liabilities include those financial instruments that are valued by independent pricing services using models or other valuation methodologies. These models consider various inputs such as credit rating, maturity, corporate credit spreads, reported trades and other inputs that are observable or derived from observable information in the marketplace or are supported by transactions executed in the marketplace. Financial assets in this category primarily include: certain publicly registered and privately placed corporate fixed maturity securities; certain government or agency securities; certain mortgage and asset- backed securities; certain equity securities; most investments held by our consolidated VIEs; certain mutual fund and hedge fund investments; most short-term investments; and non-exchange- traded derivatives such as call options. Financial liabilities in this category include investment borrowings, notes payable and borrowings related to VIEs. • Level 3 – includes assets and liabilities valued using unobservable inputs that are used in model-based valuations that contain management assumptions. Level 3 assets and liabilities include those financial instruments whose fair value is estimated based on broker/dealer quotes, pricing services or internally developed models or methodologies utilizing significant inputs not based on, or corroborated by, readily available market information. Financial assets in this category include certain corporate securities (primarily certain below-investment grade privately placed securities), certain structured securities, mortgage loans, and other less liquid securities. Financial liabilities in this category include our insurance liabilities for interest-sensitive products, which includes embedded derivatives (including embedded derivatives related to our fixed index annuity products and to a modified coinsurance arrangement) since their values include significant unobservable inputs including actuarial assumptions. At each reporting date, we classify assets and liabilities into the three input levels based on the lowest level of input that is significant to the measurement of fair value for each asset and liability reported at fair value. This classification is impacted by a number of factors, including the type of financial instrument, whether the financial instrument is new to the market and not yet established, the characteristics specific to the transaction and overall market conditions. Our assessment of the significance of a particular input to the fair value measurement and the ultimate classification of each asset and liability requires judgment and is subject to change from period to period based on the observability of the valuation inputs. Below-investment grade corporate debt securities typically have different characteristics than investment grade corporate debt securities. Based on historical performance, probability of default by the borrower is significantly greater for below-investment grade corporate debt securities and in many cases severity of loss is relatively greater as such securities are generally unsecured and often subordinated to other indebtedness of the issuer. Also, issuers of below-investment grade corporate debt securities frequently have higher levels of debt relative to investment-grade issuers, hence, all other things being equal, are generally more sensitive to adverse economic conditions. The Company attempts to reduce the overall risk related to its investment in below-investment grade securities, as in all investments, through careful credit analysis, strict investment policy guidelines, and diversification by issuer and/or guarantor and by industry. Our fixed maturity investments are generally purchased in the context of 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. 58 CNO FINANCIAL GROUP, INC. - Form 10-K PART II ITEM 7 Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations 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 2014, we sold $233.7 million of fixed maturity investments which resulted in gross investment losses (before income taxes) of $13.0 million. We actively manage the relationship between the duration and cash flows of our invested assets and the estimated duration and cash flows of benefit payments arising from contract liabilities. These efforts may cause us to sell investments before their maturity date and could result in the realization of net realized investment gains (losses). When the estimated durations of assets and liabilities are similar, exposure to interest rate risk is minimized because a change in the value of assets should be largely offset by a change in the value of liabilities. In certain circumstances, a mismatch of the durations or related cash flows of invested assets and insurance liabilities could have a significant impact on our results of operations and financial position. For more information on our investment portfolio and our critical accounting policies related to investments, see the note to our consolidated financial statements entitled “Investments”. Present Value of Future Profits and Deferred Acquisition Costs In conjunction with the implementation of fresh start accounting, we eliminated the historical balances of our Predecessor’s deferred acquisition costs and the present value of future profits and replaced them with the present value of future profits as calculated on the Effective Date. The value assigned to the right to receive future cash flows from contracts existing at the Effective Date is referred to as the present value of future profits. The balance of this account is amortized, evaluated for recovery, and adjusted for the impact of unrealized gains (losses) in the same manner as the deferred acquisition costs described below. We expect to amortize the balance of the present value of future profits as of December 31, 2014 as follows: 11 percent in 2015, 10 percent in 2016, 9 percent in 2017, 8 percent in 2018 and 7 percent in 2019. Deferred acquisition costs represent incremental direct costs related to the successful acquisition of new or renewal insurance contracts. For interest-sensitive life or annuity products, we amortize these costs in relation to the estimated gross profits using the interest rate credited to the underlying policies. For other products, we generally amortize these costs in relation to future anticipated premium revenue using the projected investment earnings rate. Insurance acquisition costs are amortized to expense over the lives of the underlying policies in relation to future anticipated premiums or gross profits. The insurance acquisition costs for policies other than interest-sensitive life and annuity products are amortized with interest (using the projected investment earnings rate) over the estimated premium-paying period of the policies, in a manner which recognizes amortization expense in proportion to each year’s premium income. The insurance acquisition costs for interest-sensitive life and annuity products are amortized with interest (using the interest rate credited to the underlying policy) in proportion to estimated gross profits. The interest, mortality, morbidity and persistency assumptions used to amortize insurance acquisition costs are consistent with those assumptions used to estimate liabilities for insurance products. For interest-sensitive life and annuity products, these assumptions are reviewed on a regular basis. When actual profits or our current best estimates of future profits are different from previous estimates, we adjust cumulative amortization of insurance acquisition costs to maintain amortization expense as a constant percentage of gross profits over the entire life of the policies. When we realize a gain or loss on investments backing our interest- sensitive life or annuity products, we adjust the amortization of insurance acquisition costs to reflect the change in estimated gross profits from the products due to the gain or loss realized and the effect on future investment yields. We increased amortization expense for such changes by $1.0 million, $1.6 million and $6.5 million during the years ended December 31, 2014, 2013 and 2012, respectively. We also adjust insurance acquisition costs for the change in amortization that would have been recorded if fixed maturity securities, available for sale, had been sold at their stated aggregate fair value and the proceeds reinvested at current yields. Such adjustments are commonly referred to as “shadow adjustments” and may include adjustments to: (i) deferred acquisition costs; (ii) the present value of future profits; (iii) loss recognition reserves; and (iv) income taxes. We include the impact of this adjustment in accumulated other comprehensive income (loss) within shareholders’ equity. The total pre-tax impact of such adjustments on accumulated other comprehensive income was a decrease of $921.8 million at December 31, 2014 (including $652.4 million for premium deficiencies that would exist on certain blocks of business (primarily long-term care products) if unrealized gains on the assets backing such products had been realized and the proceeds from our sales of such assets were invested at then current yields.) The total pre-tax impact of such adjustments on accumulated other comprehensive income at December 31, 2013 was a decrease of $184.7 million (including $27.8 million for premium deficiencies that would exist on certain long-term care products if unrealized gains on the assets backing such products had been realized and the proceeds from our sales of such assets were invested at then current yields.) At December 31, 2014, the balance of insurance acquisition costs was $1.8 billion prior to shadow adjustments. The recoverability of this amount is dependent on the future profitability of the related business. Each year, we evaluate the recoverability of the unamortized balance of insurance acquisition costs. These evaluations are performed to determine whether estimates of the present value of future cash flows, in combination with the related liability for insurance products, will support the unamortized balance. These future cash flows are based on our best estimate of future premium income, less benefits and expenses. The present value of these cash flows, plus the related balance of liabilities for insurance products, is then compared with the unamortized balance of insurance acquisition costs. In the event of a deficiency, such amount would be charged to amortization expense. If the deficiency exceeds the balance of insurance acquisition costs, a premium deficiency reserve is established for the excess. The determination of future cash flows involves significant judgment. Revisions to the assumptions which determine such cash flows could have a significant adverse effect on our results of operations and financial position. While we expect the long-term care CNO FINANCIAL GROUP, INC. - Form 10-K 59 PART II ITEM 7 Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations business in the Bankers Life segment to generate future profits, the margins are relatively thin and are vulnerable to changes in assumptions. In 2014, we were required to establish a $9 million deficiency reserve for the life contingent payout annuities in the Washington National segment. Accordingly, these annuities are not expected to generate future profits and future unfavorable changes to our assumptions will reduce earnings in the period such changes occur. The table presented below summarizes our estimates of cumulative adjustments to insurance acquisition costs or premium deficiency reserves (when the deficiency exceeds the balance of insurance acquisition costs) resulting from hypothetical revisions to certain assumptions. Although such hypothetical revisions are not currently required or anticipated, we believe they could occur based on past variances in experience and our expectations of the ranges of future experience that could reasonably occur. We have assumed that revisions to assumptions resulting in the adjustments summarized below would occur equally among policy types, ages and durations within each product classification. Any actual adjustment would be dependent on the specific policies affected and, therefore, may differ from the estimates summarized below. In addition, the impact of actual adjustments would reflect the net effect of all changes in assumptions during the period. Change in assumptions Interest-sensitive life products: 5% increase to assumed mortality 5% decrease to assumed mortality 15% increase to assumed expenses 15% decrease to assumed expenses 10 basis point decrease to assumed spread 10 basis point increase to assumed spread 10% increase to assumed lapses 10% decrease to assumed lapses Fixed index and fixed interest annuity products: 20% increase to assumed surrenders 20% decrease to assumed surrenders 15% increase to assumed expenses 15% decrease to assumed expenses 10 basis point decrease to assumed spread 10 basis point increase to assumed spread Other than interest-sensitive life and annuity products(a): 5% increase to assumed morbidity 20 basis point decrease to investment earnings rate 50 basis point decrease to investment earnings rate 5% decrease to assumed mortality Estimated adjustment to income before income taxes based on revisions to certain assumptions (dollars in millions) $ (25) 25 (10) 10 (5) 5 (5) 5 (70) 85 (10) 10 (35) 35 (210) — (175) (60) (a) We have excluded the effect of reasonably likely changes in lapse, surrender and expense assumptions for policies other than interest-sensitive life and annuity products. 60 CNO FINANCIAL GROUP, INC. - Form 10-K PART II ITEM 7 Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations The following summarizes the persistency of our major blocks of insurance business summarized by segment and line of business: Bankers Life: Medicare supplement(1) Long-term care(1) Fixed index annuities(2) Other annuities(2) Life(1) Washington National: Medicare supplement(1) Supplemental health(1) Life(1) Colonial Penn: Life(1) (1) Based on number of inforce policies. (2) Based on the percentage of the inforce block persisting. Years ended December 31, 2014 2013 2012 82.8% 91.1% 90.8% 85.2% 87.3% 84.2% 88.4% 92.5% 83.2% 82.3% 90.9% 90.8% 86.6% 87.2% 82.4% 87.2% 90.9% 83.8% 80.7% 90.4% 90.8% 87.3% 86.2% 81.2% 88.3% 92.4% 84.7% Liabilities for Insurance Products - reserves for the future payment of long-term care policy claims We calculate and maintain reserves for the future payment of claims to our policyholders based on actuarial assumptions. For all our insurance products, we establish an active life reserve, a liability for due and unpaid claims, claims in the course of settlement and incurred but not reported claims. In addition, for our health insurance business, we establish a reserve for the present value of amounts not yet due on claims. Many factors can affect these reserves and liabilities, such as economic and social conditions, inflation, hospital and pharmaceutical costs, changes in doctrines of legal liability and extra-contractual damage awards. Therefore, our reserves and liabilities are necessarily based on numerous estimates and assumptions as well as historical experience. Establishing reserves is an uncertain process, and it is possible that actual claims will materially exceed our reserves and have a material adverse effect on our results of operations and financial condition. For example, our long-term care policy claims may be paid over a long period of time and, therefore, loss estimates have a higher degree of uncertainty. The following summarizes the components of the reserves related to our long-term care business in our Bankers Life segment as well as the long-term care reserves ceded to BRe as of December 31, 2014 and 2013 (dollars in millions): Amounts classified as future policy benefits: Active life reserves Reserves for the present value of amounts not yet due on claims Future loss reserves Premium deficiency reserves related to reinsurance transaction Premium deficiency reserves assuming net unrealized gains had been realized Amounts classified as liability for policy and contract claims: Liability for due and unpaid claims, claims in the course of settlement and incurred but not reported claims Total Reinsurance receivables LONG-TERM CARE RESERVES, NET OF REINSURANCE RECEIVABLES 2014 3,634.5 1,279.7 120.1 — 350.9 185.1 5,570.3 490.1 5,080.2 $ $ 2013 3,547.9 1,256.8 98.1 96.9 — 187.8 5,187.5 494.5 4,693.0 $ $ The significant assumptions used to calculate the active life reserves include morbidity, persistency and investment yields. These assumptions are determined at the issuance date and do not change over the life of the policy. The significant assumptions used to calculate the reserves for the present value of amounts not yet due on claims include future benefit payments, interest rates and claim continuance patterns. Interest rates are used to determine the present value of the future benefit payments and are based on the investment yield of assets supporting the reserves. Claim continuance assumptions are estimates of the expected period of time that claim payments will continue before termination due to recovery, death or attainment of policy maximum benefits. These estimates are based on historical claim experience for similar policy and coverage types. Our estimates of benefit payments, interest rates and claim continuance are reviewed regularly and updated to consider current portfolio investment yields and recent claims experience. In December 2013, two of our insurance subsidiaries with long-term care business in our former Other CNO Business segment entered into 100% coinsurance agreements ceding CNO FINANCIAL GROUP, INC. - Form 10-K 61 PART II ITEM 7 Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations $495 million of long-term care reserves to BRe. Pursuant to the agreements, the Company paid an additional premium of $96.9 million to BRe and an amount equal to the related net liabilities. We recognized a premium deficiency reserve of $96.9 million at December 31, 2013. Such deficiency reserve was no longer required when the additional premium was paid to BRe in conjunction with its assumption of the liabilities related to this block. With respect to the long-term care block in our Bankers Life segment, the aggregate liability is not deficient, but our projections of estimated future profits (losses) indicate that profits will be recognized in earlier periods, followed by losses in later periods. In this situation, we are required to recognize future loss reserves. Such reserves are calculated based on our current estimate of the amount necessary to offset the losses in future periods and are established during the period the block is profitable. We estimate the future losses based on our current best estimates of morbidity, persistency, premium rates, maintenance expense and investment yields, which estimates are generally updated annually. During 2014, we increased the future loss reserves related to our long-term care blocks of business by $22.0 million based on these calculations. The significant assumptions used to calculate the liability for due and unpaid claims, claims in the course of settlement and incurred but not reported claims are based on historical claim payment patterns and include assumptions related to the number of claims and the size and timing of claim payments. These assumptions are updated quarterly to reflect the most current information regarding claim payment patterns. In order to determine the accuracy of our prior estimates, we calculate the total redundancy (deficiency) of our prior claim reserve estimates. The 2013 claim reserve redundancy for long-term care claim reserves in our Bankers Life segment, as measured at December 31, 2014, was $21.2 million. Estimates of unpaid losses related to long-term care business have a higher degree of uncertainty than estimates for our other products due to the range of ultimate duration of these claims and the resulting variability in their cost (in addition to the variations in the lag time in reporting claims). As an example, an increase in the loss ratio of 5 percentage points for claims incurred in 2014 related to our long-term care business in our Bankers Life segment would have resulted in an immediate decrease in our earnings of approximately $25 million. Our financial results depend significantly upon the extent to which our actual claims experience is consistent with the assumptions we used in determining our reserves and pricing our products. If our assumptions with respect to future claims are incorrect, and our reserves are insufficient to cover our actual losses and expenses, we would be required to increase our liabilities, which would negatively affect our operating results. Accounting for certain marketing agreements Bankers Life has entered into various distribution and marketing agreements with other insurance companies to use Bankers Life’s career agents to distribute prescription drug and Medicare Advantage plans. These agreements allow Bankers Life to offer these products to current and potential future policyholders without investment in management and infrastructure. We receive fee income related to the plans sold through our distribution channels. We account for these distribution agreements as follows: • We recognize distribution income based on either: (i) a fixed fee per contract sold; or (ii) a percentage of premiums collected. This fee income is recognized over the calendar year term of the contract. • We also pay commissions to our agents who sell the plans. These payments are deferred and amortized over the term of the contract. The following summarizes the fee revenue, net of distribution expenses, earned through these marketing agreements (dollars in millions): Fee revenue: Medicare Advantage contracts PDP contracts Total revenue Distribution expenses FEE REVENUE, NET OF DISTRIBUTION EXPENSES Income Taxes Our income tax expense includes deferred income taxes arising from temporary differences between the financial reporting and tax bases of assets and liabilities, capital loss carryforwards and NOLs. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply in the years in which temporary differences are expected to be recovered or paid. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in earnings in the period when the changes are enacted. 2014 22.4 3.0 25.4 10.4 15.0 $ $ 2013 16.1 $ 2.3 18.4 7.1 11.3 $ 2012 12.4 2.5 14.9 5.9 9.0 $ $ A reduction of the net carrying amount of deferred tax assets by establishing a valuation allowance is required if, based on the available evidence, it is more likely than not that such assets will not be realized. In assessing the need for a valuation allowance, all available evidence, both positive and negative, shall be considered to determine whether, based on the weight of that evidence, a valuation allowance for deferred tax assets is needed. This assessment requires significant judgment and considers, among other matters, the nature, frequency and severity of current and cumulative losses, forecasts of future profitability, the duration of carryforward periods, our experience with operating loss and tax credit carryforwards expiring unused, and tax planning strategies. 62 CNO FINANCIAL GROUP, INC. - Form 10-K PART II ITEM 7 Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations We evaluate the need to establish a valuation allowance for our deferred tax assets on an ongoing basis. The realization of our deferred tax assets depends upon generating sufficient future taxable income of the appropriate type during the periods in which our temporary differences become deductible and before our life and non-life NOLs expire. Based on our assessment, it appears more likely than not that $799.8 million of our total deferred tax assets of $1,045.8 million will be realized through future taxable earnings. Accordingly, we have established a deferred tax valuation allowance of $246.0 million at December 31, 2014. We will continue to assess the need for a valuation allowance in the future. If future results are less than projected, an increase to the valuation allowance may be required to reduce the deferred tax asset, which could have a material impact on our results of operations in the period in which it is recorded. We use a deferred tax valuation model to assess the need for a valuation allowance. Our model is adjusted to reflect changes in our projections of future taxable income including changes resulting reinsurance transactions and the impact of the sale of CLIC. Our estimates of future taxable income are based on evidence we consider to be objective and verifiable. investment strategies, trading from At December 31, 2014, our projection of future taxable income for purposes of determining the valuation allowance is based on our adjusted average annual taxable income for the last three years plus: (i) a 3 percent core growth factor (consistent with the prior year assumption); and (ii) an additional 1 percent increase which primarily reflects the impact of the investment trading strategies completed in 2013 (which grade off over time). The aggregate 4 percent factor is used to increase taxable income annually over the next five years, and level taxable income is assumed thereafter. In the projections used for our December 31, 2014 analysis, our three year average taxable income increased to approximately $320 million, compared to $315 million in our prior projections. Approximately $50 million of the current three year average relates to non-life taxable income and $270 million relates to life income. Based on our assessment, we recognized a reduction to the allowance for deferred tax assets of $48.8 million in 2014. We have evaluated the recovery of our deferred tax assets and assessed the effect of limitations and/or interpretations on their value and have concluded that it is more likely than not that the value recognized will be fully realized in the future. Changes in our valuation allowance are summarized as follows (dollars in millions): Balance, December 31, 2011 Decrease in 2012 Balance, December 31, 2012 Decrease in 2013 Balance, December 31, 2013 Decrease in 2014 BALANCE, DECEMBER 31, 2014 $ $ 938.4 (171.5)(a) 766.9 (472.1)(b) 294.8 (48.8)(c) 246.0 (a) The 2012 reduction to the deferred tax valuation allowance primarily resulted from the impact of recent higher levels of income when projecting future taxable income. (b) The 2013 reduction to the deferred tax valuation allowance primarily resulted from the impact of higher levels of income on projected future taxable income, the expiration of capital loss carryforwards, a settlement with the IRS related to the classification of a portion of the cancellation of indebtedness income and the execution of certain investment trading strategies. (c) The 2014 reduction to the deferred tax valuation allowance primarily resulted from tax examination adjustments and the tax gain on the sale of CLIC. Recovery of our deferred tax asset is dependent on achieving the level of future taxable income projected in our deferred tax valuation model and failure to do so could result in an increase in the valuation allowance in a future period. Any future increase in the valuation allowance may result in additional income tax expense and reduce shareholders’ equity, and such an increase could have a significant impact upon our earnings in the future. The Code limits the extent to which losses realized by a non-life entity (or entities) may offset income from a life insurance company (or companies) to the lesser of: (i) 35 percent of the income of the life insurance company; or (ii) 35 percent of the total loss of the non-life entities (including NOLs of the non-life entities). There is no similar limitation on the extent to which losses realized by a life insurance entity (or entities) may offset income from a non-life entity (or entities). This limitation is the primary reason a valuation allowance for non-life NOL carryforwards is required. Section 382 of the Code imposes limitations on a corporation’s ability to use its NOLs when the company undergoes an ownership change. Future transactions and the timing of such transactions could cause an ownership change for Section 382 income tax purposes. Such transactions may include, but are not limited to, additional repurchases under our securities repurchase program, issuances of common stock and acquisitions or sales of shares of CNO stock by certain holders of our shares, including persons who have held, currently hold or may accumulate in the future five percent or more of our outstanding common stock for their own account. Many of these transactions are beyond our control. If an additional ownership change were to occur for purposes of Section 382, we would be required to calculate an annual restriction on the use of our NOLs to offset future taxable income. The annual restriction would be calculated based upon the value of CNO’s equity at the time of such ownership change, multiplied by a federal long-term tax exempt rate (2.80 percent at December 31, 2014), and the annual restriction could limit our ability to use a substantial portion of our NOLs to offset future taxable income. We regularly monitor ownership change (as calculated for purposes of Section 382) and, as of December 31, 2014, we were below the 50 percent ownership change level that would trigger further impairment of our ability to utilize our NOLs. CNO FINANCIAL GROUP, INC. - Form 10-K 63 PART II ITEM 7 Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations As of December 31, 2014, we had $3.0 billion of federal NOLs. The following table summarizes the expiration dates of our loss carryforwards assuming the IRS ultimately agrees with the position we have taken with respect to the loss on our investment in Conseco Senior Health Insurance Company (“CSHI”) (dollars in millions): Year of expiration 2022 2023 2025 2026 2027 2028 2029 2032 Subtotal Less: Unrecognized tax benefits TOTAL Net operating loss carryforwards Life 112.1 742.6 — — — — — — 854.7 Non-life $ — $ 1,983.0 91.5 207.4 4.9 203.7 146.6 44.0 2,681.1 Total loss carryforwards 112.1 2,725.6 91.5 207.4 4.9 203.7 146.6 44.0 3,535.8 (342.9) 511.8 $ (197.4) 2,483.7 $ (540.3) 2,995.5 $ $ We had deferred tax assets related to NOLs for state income taxes of $15.2 million and $20.0 million at December 31, 2014 and 2013, respectively. The related state NOLs are available to offset future state taxable income in certain states through 2025. We recognized an $878 million ordinary loss on our investment in CSHI which was worthless when it was transferred to an independent trust in 2008. Of this loss, $742 million has been reported as a life loss and $136 million as a non-life loss. The IRS has disagreed with our ordinary loss treatment and believes that it should be treated as a capital loss, subject to a five year carryover. We are seeking resolution of this matter through early referral to appeals, a process that seeks to resolve disputes with the IRS. If the IRS position is ultimately determined to be correct, $473 million would have expired unused in 2013. Due to this uncertainty, we have not recognized a tax benefit of $166.0 million. However, if this unrecognized tax benefit had been recognized, we would also have established a valuation allowance of $34.0 million at December 31, 2014. A reconciliation of the beginning and ending amount of unrecognized tax benefits for the years ended December 31, 2014 and 2013 is as follows (dollars in millions): Balance at beginning of year Increase based on tax positions taken in prior years Decrease based on tax positions taken in prior years Increase based on tax positions taken in the current year Decrease in unrecognized tax benefits related to settlements with taxing authorities BALANCE AT END OF YEAR Years ended December 31, 2014 226.7 10.9 — — (8.9) 228.7 $ $ 2013 310.5 35.6 (27.0) 47.6 (140.0) 226.7 $ $ As of December 31, 2014 and 2013, $155.4 million and $156.0 million, respectively, of our unrecognized tax benefits, if recognized, would affect the effective tax rate. The remaining balances relate to timing differences which, if recognized, would have no effect on the Company’s tax expense. The Company recognizes interest related to unrecognized tax benefits as income tax expense in the consolidated statement of operations. Such amounts were not significant in each of the three years ended December 31, 2014. The liability for accrued interest was $2.4 million and $1.8 million at December 31, 2014 and 2013, respectively. Tax years 2004 and 2008 through 2014 are open to examination by the IRS. The Company’s various state income tax returns are generally open for tax years 2011 through 2014 based on the individual state statutes of limitation. Generally, for tax years which generate NOLs, capital losses or tax credit carryforwards, the statute of limitations does not close until the expiration of the statute of limitations for the tax year in which such carryforwards are utilized. Liabilities for Insurance Products At December 31, 2014, the total balance of our liabilities for insurance products was $22.3 billion. These liabilities are generally payable over an extended period of time and the profitability of the related products is dependent on the pricing of the products and other factors. Differences between our expectations when we sold these products and our actual experience could result in future losses. We calculate and maintain reserves for the future payment of claims to our policyholders based on actuarial assumptions. For our insurance products, we establish an active life reserve, a liability 64 CNO FINANCIAL GROUP, INC. - Form 10-K PART II ITEM 7 Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations for due and unpaid claims, claims in the course of settlement and incurred but not reported claims. In addition, for our health insurance business, we establish a reserve for the present value of amounts not yet due on claims. Many factors can affect these reserves and liabilities, such as economic and social conditions, inflation, hospital and pharmaceutical costs, changes in doctrines of legal liability and extra-contractual damage awards. We establish liabilities for annuity and interest-sensitive life products equal to the accumulated policy account values, which include an accumulation of deposit payments plus credited interest, less withdrawals and the amounts assessed against the policyholder through the end of the period. In addition, policyholder account values for certain interest-sensitive life products are impacted by our assumptions related to changes of certain NGEs that we are allowed to make under the terms of the policy, such as cost of insurance charges, expense loads, credited interest rates and policyholder bonuses. Therefore, our reserves and liabilities are necessarily based on numerous estimates and assumptions as well as historical experience. Establishing reserves is an uncertain process, and it is possible that actual claims will materially exceed our reserves and have a material adverse effect on our results of operations and financial condition. Our financial results depend significantly upon the extent to which our actual claims experience is consistent with the assumptions we used in determining our reserves and pricing our products. If our assumptions with respect to future claims are incorrect, and our reserves are insufficient to cover our actual losses and expenses, we would be required to increase our liabilities, which would negatively affect our operating results. Liabilities for insurance products are calculated using management’s best judgments, based on our past experience and standard actuarial tables, of mortality, morbidity, lapse rates, investment experience and expense levels. Accounting for Long-term Care Premium Rate Increases Many of our long-term care policies have been subject to premium rate increases. In some cases, these premium rate increases were materially consistent with the assumptions we used to value the particular block of business at the Effective Date. With respect to certain premium rate increases, some of our policyholders were provided an option to cease paying their premiums and receive a non-forfeiture option in the form of a paid-up policy with limited benefits. In addition, our policyholders could choose to reduce their coverage amounts and premiums in the same proportion, when permitted by our contracts or as required by regulators. The following describes how we account for these policyholder options: • Premium rate increases - If premium rate increases reflect a change in our previous rate increase assumptions, the new assumptions are not reflected prospectively in our reserves. Instead, the additional premium revenue resulting from the rate increase is recognized as earned and original assumptions continue to be used to determine changes to liabilities for insurance products unless a premium deficiency exists. • Benefit reductions - If there is a premium rate increase on one of our long-term care policies, a policyholder may choose reduced coverage with a proportionate reduction in premium, when permitted by our contracts. This option does not require additional underwriting. Benefit reductions are treated as a partial lapse of coverage, and the balance of our reserves and deferred insurance acquisition costs is reduced in proportion to the reduced coverage. • Non-forfeiture benefits offered in conjunction with a rate increase - In some cases, non-forfeiture benefits are offered to policyholders who wish to lapse their policies at the time of a significant rate increase. In these cases, exercise of this option is treated as an extinguishment of the original contract and issuance of a new contract. The balance of our reserves and deferred insurance acquisition costs are released, and a reserve for the new contract is established. Some of our policyholders may receive a non-forfeiture benefit if they cease paying their premiums pursuant to their original contract (or pursuant to changes made to their original contract as a result of a litigation settlement made prior to the Effective Date or an order issued by the Florida Office of Insurance Regulation). In these cases, exercise of this option is treated as the exercise of a policy benefit, and the reserve for premium paying benefits is reduced, and the reserve for the non-forfeiture benefit is adjusted to reflect the election of this benefit. Liabilities for Loss Contingencies Related to Lawsuits The Company and its subsidiaries are involved in various legal actions in the normal course of business, in which claims for compensatory and punitive damages are asserted, some for substantial amounts. We recognize an estimated loss from these loss contingencies when we believe it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated. Some of the pending matters have been filed as purported class actions and some actions have been filed in certain jurisdictions that permit punitive damage awards that are disproportionate to the actual damages incurred. The amounts sought in certain of these actions are often large or indeterminate and the ultimate outcome of certain actions is difficult to predict. In the event of an adverse outcome in one or more of these matters, there is a possibility that the ultimate liability may be in excess of the liabilities we have established and could have a material adverse effect on our business, financial condition, results of operations and cash flows. In addition, the resolution of pending or future litigation may involve modifications to the terms of outstanding insurance policies or could impact the timing and amount of rate increases, which could adversely affect the future profitability of the related insurance policies. Based upon information presently available, and in light of legal, factual and other defenses available to the Company and its subsidiaries, the Company does not believe that it is probable that the ultimate liability from either pending or threatened legal actions, after consideration of existing loss provisions, will have a material adverse effect on the Company’s consolidated financial condition, operating results or cash flows. However, given the inherent difficulty in predicting the outcome of legal proceedings, there exists the possibility such legal actions could have a material adverse effect on the Company’s consolidated financial condition, operating results or cash flows. In addition to the inherent difficulty of predicting litigation outcomes, particularly those that will be decided by a jury, many of these matters purport to seek substantial or an unspecified amount CNO FINANCIAL GROUP, INC. - Form 10-K 65 PART II ITEM 7 Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations of damages for unsubstantiated conduct spanning several years based on complex legal theories and damages models. The alleged damages typically are indeterminate or not factually supported in the complaint, and, in any event, the Company’s experience indicates that monetary demands for damages often bear little relation to the ultimate loss. In some cases, plaintiffs are seeking to certify classes in the litigation and class certification either has been denied or is pending and we have filed oppositions to class certification or sought to decertify a prior class certification. In addition, for many of these cases: (i) there is uncertainty as to the outcome of pending appeals or motions; (ii) there are significant factual issues to be resolved; and/or (iii) there are novel legal issues presented. Accordingly, the Company cannot reasonably estimate the possible loss or range of loss in excess of amounts accrued, if any, or predict the timing of the eventual resolution of these matters. The Company reviews these matters on an ongoing basis. When assessing reasonably possible and probable outcomes, the Company bases its assessment on the expected ultimate outcome following all appeals. Results of Operations The following tables and narratives summarize the operating results of our segments (dollars in millions): Pre-tax operating earnings (a non-GAAP measure)(a): Bankers Life Washington National Colonial Penn Corporate operations Other CNO Business Gain (loss) on reinsurance transactions: Bankers Life Washington National Other CNO Business Net realized investment gains (losses), net of related amortization: Bankers Life Washington National Colonial Penn Corporate operations Fair value changes in embedded derivative liabilities, net of related amortization: Bankers Life Washington National Equity in earnings of certain non-strategic investments and earnings attributable to VIEs: Corporate operations Net revenue pursuant to transition and support services agreements, net of taxes Corporate operations Loss on extinguishment or modification of debt: Corporate operations Amounts related to CLIC prior to being sold: Earnings of CLIC prior to being sold Loss on sale of CLIC Income (loss) before income taxes: Bankers Life Washington National Colonial Penn Corporate operations Other CNO Business Amount related to CLIC prior to being sold INCOME BEFORE INCOME TAXES 66 CNO FINANCIAL GROUP, INC. - Form 10-K 2014 2013 2012 $ $ 386.9 111.2 .8 (98.3) — 400.6 26.1 3.8 — 29.9 7.8 33.9 1.1 (9.9) 32.9 (35.6) (.4) (36.0) (8.0) 2.6 (.6) 23.4 (269.7) (246.3) 385.2 148.5 1.9 (114.2) — (246.3) 175.1 $ $ $ 310.5 140.6 (12.5) (32.7) (27.6) 378.3 — — (98.4) (98.4) 15.1 11.8 .4 (1.5) 25.8 34.8 .6 35.4 (10.2) — 300.9 148.8 (8.6) (86.5) (29.7) 324.9 — — — — 48.7 23.9 7.2 1.8 81.6 (2.8) — (2.8) — — (65.4) (200.2) 39.3 — 39.3 360.4 153.0 (12.1) (109.8) (126.0) 39.3 304.8 $ (47.8) — (47.8) 346.8 172.7 (1.4) (284.9) (29.7) (47.8) 155.7 PART II ITEM 7 Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations (a) These non-GAAP measures as presented in the above table and in the following segment financial data and discussions of segment results exclude the net loss on the sale of CLIC and 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, equity in earnings of certain non-strategic investments and earnings attributable to VIEs, net revenue pursuant to transition and support services agreements, loss on extinguishment or modification of debt and before income taxes. These are considered non-GAAP financial measures. A non-GAAP measure is a numerical measure of a company’s performance, financial position, or cash flows that excludes or includes amounts that are normally excluded or included in the most directly comparable measure calculated and presented in accordance with GAAP. These non-GAAP financial measures of “pre-tax operating earnings” differ from “ income (loss) before income taxes” as presented in our consolidated statement of operations prepared in accordance with GAAP due to the exclusion of the net loss on the sale of CLIC and gain on reinsurance transactions, the earnings of CLIC prior to being sold, 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 VIEs, net revenue pursuant to transition and support services agreements and loss on extinguishment or modification of debt. We measure segment performance excluding these items because we believe that this performance measure is a better indicator of the ongoing businesses and trends in our business. Our primary investment focus is on investment income to support our liabilities for insurance products as opposed to the generation of realized investment gains (losses), and a long-term focus is necessary to maintain profitability over the life of the business. Realized investment gains (losses), fair value changes in embedded derivative liabilities and equity in earnings of certain non-strategic investments and earnings attributable to VIEs depend on market conditions and do not necessarily relate to decisions regarding the underlying business of our segments. However, “pre-tax operating earnings” does not replace “ income (loss) before income taxes” as a measure of overall profitability. We may experience realized investment gains (losses), which will affect future earnings levels since our underlying business is long-term in nature and we need to earn the assumed interest rates on the investments backing our liabilities for insurance products to maintain the profitability of our business. In addition, management uses this non-GAAP financial measure in its budgeting process, financial analysis of segment performance and in assessing the allocation of resources. We believe these non-GAAP financial measures enhance an investor’s understanding of our financial performance and allows them to make more informed judgments about the Company as a whole. These measures also highlight operating trends that might not otherwise be transparent. The table above reconciles the non-GAAP measure to the corresponding GAAP measure. General: CNO is the top tier 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. We distribute these products through our Bankers Life segment, which utilizes a career agency force, through our Washington National segment, which utilizes independent producers and through our Colonial Penn segment, which utilizes direct response marketing. CNO FINANCIAL GROUP, INC. - Form 10-K 67 PART II ITEM 7 Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations Bankers Life (dollars in millions) Premium collections: Annuities Medicare supplement and other supplemental health Life Total collections Average liabilities for insurance products: Fixed index annuities Fixed interest annuities SPIAs and supplemental contracts: Mortality based Deposit based Health: Long-term care Medicare supplement Other health Life: Interest sensitive Non-interest sensitive Total average liabilities for insurance products, net of reinsurance ceded Revenues: Insurance policy income Net investment income: General account invested assets Fixed index products Fee revenue and other income Total revenues Expenses: Insurance policy benefits Amounts added to policyholder account balances: Cost of interest credited to policyholders Cost of options to fund index credits, net of forfeitures Market value changes credited to policyholders Amortization related to operations Interest expense on investment borrowings Other operating costs and expenses Total benefits and expenses Income before gain on reinsurance transaction, net realized investment gains (losses), net of related amortization, and fair value changes in embedded derivative liabilities, net of related amortization, and income taxes Gain on reinsurance transaction Net realized investment gains Amortization related to net realized investment gains Net realized investment gains, net of related amortization Insurance policy benefits - fair value changes in embedded derivative liabilities Amortization related to fair value changes in embedded derivative liabilities Fair value changes in embedded derivative liabilities, net of related amortization INCOME BEFORE INCOME TAXES 2014 782.3 1,275.1 424.9 2,482.3 3,636.7 3,845.0 202.8 149.1 4,735.4 331.0 47.5 564.7 782.1 14,294.3 1,651.7 895.4 61.9 29.3 2,638.3 $ $ $ $ $ $ $ $ $ $ 2013 744.1 1,317.8 368.3 2,430.2 3,185.8 4,137.2 221.5 156.5 4,632.2 332.4 45.4 490.4 610.6 13,812.0 1,648.7 854.0 151.7 19.0 2,673.4 2012 709.0 1,323.9 314.6 2,347.5 2,831.5 4,407.2 231.7 162.5 4,370.0 334.2 43.9 448.9 499.3 13,329.2 1,657.4 817.6 21.3 15.2 2,511.5 1,427.7 1,447.5 1,415.0 127.2 49.2 63.5 174.7 7.9 401.2 2,251.4 386.9 26.1 8.3 (.5) 7.8 (47.0) 11.4 (35.6) 385.2 141.9 47.4 151.9 187.5 6.7 380.0 2,362.9 310.5 — 16.3 (1.2) 15.1 51.7 (16.9) 34.8 360.4 $ $ 155.0 51.1 21.8 187.6 5.3 374.8 2,210.6 300.9 — 53.0 (4.3) 48.7 (4.5) 1.7 (2.8) 346.8 $ $ $ $ $ $ 68 CNO FINANCIAL GROUP, INC. - Form 10-K PART II ITEM 7 Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations Health benefit ratios: All health lines: Insurance policy benefits Benefit ratio(a) Medicare supplement: Insurance policy benefits Benefit ratio(a) PDP: Insurance policy benefits Benefit ratio(a) Long-term care: Insurance policy benefits Benefit ratio(a) Interest-adjusted benefit ratio(b) 2014 2013 2012 $ $ $ $ $ $ $ $ 1,190.6 92.5% 529.3 68.4% 5.3 77.9% 656.0 129.7% 77.2% $ $ $ $ 1,214.0 92.6% 509.0 67.1% 15.9 80.5% 689.2 129.3% 80.6% 1,196.7 89.1% 508.5 69.0% 35.6 71.4% 653.1 117.6% 71.2% (a) We calculate benefit ratios by dividing the related product’s insurance policy benefits by insurance policy income. (b) We calculate the interest-adjusted benefit ratio (a non-GAAP measure) for Bankers Life’s long-term care products by dividing such product’s insurance policy benefits less the imputed interest income on the accumulated assets backing the insurance liabilities by policy income. These are considered non-GAAP financial measures. A non-GAAP measure is a numerical measure of a company’s performance, financial position, or cash flows that excludes or includes amounts that are normally excluded or included in the most directly comparable measure calculated and presented in accordance with GAAP. These non-GAAP financial measures of “ interest-adjusted benefit ratios” differ from “benefit ratios” due to the deduction of imputed interest income on the accumulated assets backing the insurance liabilities from the product’s insurance policy benefits used to determine the ratio. Interest income is an important factor in measuring the performance of health products that are expected to be inforce for a longer duration of time, are not subject to unilateral changes in provisions (such as non-cancelable or guaranteed renewable contracts) and require the performance of various functions and services (including insurance protection) for an extended period of time. The net cash flows from long-term care products generally cause an accumulation of amounts in the early years of a policy (accounted for as reserve increases) that will be paid out as benefits in later policy years (accounted for as reserve decreases). Accordingly, as the policies age, the benefit ratio will typically increase, but the increase in benefits will be partially offset by the imputed interest income earned on the accumulated assets. The interest-adjusted benefit ratio reflects the effects of such interest income offset (which is equal to the tabular interest on the related insurance liabilities). Since interest income is an important factor in measuring the performance of this product, management believes a benefit ratio that includes the effect of interest income is useful in analyzing product performance. We utilize the interest-adjusted benefit ratio in measuring segment performance because we believe that this performance measure is a better indicator of the ongoing businesses and trends in the business. However, the “ interest-adjusted benefit ratio” does not replace the “benefit ratio” as a measure of current period benefits to current period insurance policy income. Accordingly, management reviews both “benefit ratios” and “ interest-adjusted benefit ratios” when analyzing the financial results attributable to these products. The imputed investment income earned on the accumulated assets backing Bankers Life’s long-term care reserves was $265.5 million, $259.5 million and $257.8 million in 2014, 2013 and 2012, respectively. The Bankers Life segment included approximately $5.5 million of additional pre-tax earnings in the last six months of 2014 from the recapture of a block of life insurance business previously ceded to Wilton Re. Total premium collections were $2,482.3 million in 2014, up 2.1 percent from 2013, and $2,430.2 million in 2013, up 3.5 percent from 2012. See “Premium Collections” for further analysis of Bankers Life’s premium collections. Average liabilities for insurance products, net of reinsurance ceded were $14.3 billion in 2014, up 3.5 percent from 2013 and $13.8 billion in 2013, up 3.6 percent from 2012. Such average insurance liabilities for certain long-term care products were increased by $126 million, $159 million and $145 million in 2014, 2013 and 2012, respectively, to reflect the premium deficiencies that would exist 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. Such increase is reflected as a reduction of accumulated other comprehensive income. In addition, the increase in the non-interest sensitive life reserves in 2014 reflects approximately $155 million of reserves related to the recapture in July 2014 of a block of life insurance business previously ceded to Wilton Re. Excluding the impact of the aforementioned items, the increase in average liabilities for insurance products was primarily due to new sales and the amounts added to policyholder account balances on interest- sensitive products. Insurance policy income is comprised of premiums earned on policies which provide mortality or morbidity coverage and fees and other charges assessed on other policies. Insurance policy income included premium revenue of $6.8 million, $19.7 million and $49.9 million in 2014, 2013 and 2012, respectively, related to our PDP quota-share reinsurance agreement with Coventry. In August 2013, we received a notice of Coventry’s intent to terminate our PDP quota-share reinsurance agreement, as further described in the note to the consolidated financial statements entitled “Summary of Significant Accounting Policies - Reinsurance”. The PDP premiums collected in 2014 represent adjustments to premiums on such business related to periods prior to the termination of the agreement. Partially offsetting the decrease in premium income from the PDP business in 2013 was higher premium income and policyholder charges from our life insurance products. Net investment income on general account invested assets (which excludes income on policyholder accounts) increased 4.8 percent, to $895.4 million, in 2014 and 4.5 percent, to $854.0 million, in 2013. The increase in net investment income is due to: (i) the impact of favorable experience resulting in prospective changes in assumptions which increased the yield on certain structured securities in 2014; and (ii) higher general account invested assets. The increase in general account invested assets has resulted from: (i) sales and persistency of our annuity and health products in recent periods; and (ii) the proceeds from $50 million and $250 million in 2014 and 2013, respectively, of CNO FINANCIAL GROUP, INC. - Form 10-K 69 PART II ITEM 7 Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations additional collateralized borrowings from the FHLB pursuant to an investment borrowing program. Prepayment income was $16.9 million, $13.4 million and $11.6 million in 2014, 2013 and 2012, respectively. Net investment income related to fixed index products represents the change in the estimated fair value of options which are purchased in an effort to offset or hedge certain potential benefits accruing to the policyholders of our fixed index products. Our fixed index products are designed so that investment income spread is expected to be more than adequate to cover the cost of the options and other costs related to these policies. Net investment income related to fixed index products was $61.9 million, $151.7 million and $21.3 million in 2014, 2013 and 2012, respectively. Such amounts were mostly offset by the corresponding charge (credit) to amounts added to policyholder account balances - market value changes credited to policyholders. Such income and related charges fluctuate based on the value of options embedded in the segment’s fixed index annuity policyholder account balances subject to this benefit and to the performance of the index to which the returns on such products are linked. Fee revenue and other income was $29.3 million in 2014, compared to $19.0 million in 2013, and $15.2 million in 2012. We recognized fee income of $25.4 million, $18.4 million and $14.9 million in 2014, 2013 and 2012, respectively, pursuant to marketing agreements to sell PDP and Medicare Advantage products of other insurance companies. In 2014, we also received a $3 million settlement from Coventry related to the termination of our PDP quota-share agreement. Insurance policy benefits fluctuated as a result of the factors summarized below for benefit ratios. Benefit ratios are calculated by dividing the related insurance product’s insurance policy benefits by insurance policy income. The Medicare supplement business consists of both individual and group policies. Government regulations generally require us to attain and maintain a ratio of total benefits incurred to total premiums earned (excluding changes in policy benefit reserves), after three years from the original issuance of the policy and over the lifetime of the policy, of not less than 65 percent on individual products and not less than 75 percent on group products, as determined in accordance with statutory accounting principles. Since the insurance product liabilities we establish for Medicare supplement business are subject to significant estimates, the ultimate claim liability we incur for a particular period is likely to be different than our initial estimate. Our benefit ratios were 68.4 percent, 67.1 percent and 69.0 percent in 2014, 2013 and 2012, respectively. Our insurance policy benefits reflected reserve redundancies from prior years of $2.3 million, $10.3 million and $13.7 million in 2014, 2013 and 2012, respectively. Excluding the effects of prior period claim reserve redundancies, our benefit ratios would have been 68.7 percent, 68.5 percent and 70.8 percent in 2014, 2013 and 2012, respectively. We currently expect the benefit ratio on this Medicare supplement business to be in the 70 percent range in 2015. The insurance policy benefits on our PDP business result from our quota-share reinsurance agreement with Coventry. Insurance margins (insurance policy income less insurance policy benefits) on the PDP business were $1.5 million, $3.8 million and $14.3 million in 2014, 2013 and 2012, respectively. In August 2013, we received a notice of Coventry’s intent to terminate our PDP quota-share reinsurance agreement, as further described in the note to the consolidated financial statements entitled “Summary of Significant Accounting Policies - Reinsurance”. As a result, there was no PDP business recognized in the third and fourth quarters of 2013. The PDP results in 2014 represent adjustments to earnings on such business related to periods prior to the termination of the agreement. The net cash flows from our long-term care products generally cause an accumulation of amounts in the early years of a policy (accounted for as reserve increases) which will be paid out as benefits in later policy years (accounted for as reserve decreases). Accordingly, as the policies age, the benefit ratio typically increases, but the increase in reserves is partially offset by investment income earned on the accumulated assets. The benefit ratio on our long-term care business in the Bankers Life segment was 129.7 percent, 129.3 percent and 117.6 percent in 2014, 2013 and 2012, respectively. The interest-adjusted benefit ratio on this business was 77.2 percent, 80.6 percent and 71.2 percent in 2014, 2013 and 2012, respectively. The benefit ratio in 2014 reflects $2.8 million of reserve releases related to the use of a new process to identify changes in the status of our insureds in a more timely manner. The benefit ratio in 2013 increased due to higher persistency and higher incurred claims as the business continues to age and as new business becomes less of a component of the overall inforce business. In addition, we recognized an out- of-period adjustment of $6.7 million in the first quarter of 2013 and made certain refinements to reserving methodologies of $3.5 million in the second quarter of 2013, both of which increased insurance policy benefits. We currently expect the interest- adjusted benefit ratio on this long-term care business to be in the 81 percent range in 2015. Since the insurance product liabilities we establish for long-term care business are subject to significant estimates, the ultimate claim liability we incur for a particular period is likely to be different than our initial estimate. Our insurance policy benefits reflected reserve redundancies from prior years of $21.2 million, $17.9 million and $26.6 million in 2014, 2013 and 2012, respectively. Excluding the effects of prior year claim reserve redundancies, our benefit ratios would have been 133.8 percent, 132.7 percent and 122.4 percent in 2014, 2013 and 2012, respectively. When policies lapse, active life reserves for such lapsed policies are released, resulting in decreased insurance policy benefits (although such decrease is somewhat offset by additional amortization expense). In 2013 and 2012, the income before income taxes in the Bankers Life segment reflected a reduction in insurance policy benefits partially offset by additional amortization of insurance acquisition costs due to the impacts of recent rate increases. These impacts netted to approximately $4 million in 2013 and $18 million in 2012 and included: (i) the reduction in liabilities for policyholders choosing to lapse their policies rather than paying higher rates; (ii) the reduction in liabilities for policyholders choosing to reduce their coverages to achieve a lower cost; offset by (iii) the increase in the liabilities related to waiver of premium benefits to reflect higher premiums after the rate increases; and (iv) increased amortization of insurance acquisition costs resulting from the increase in lapses. In 2014, the impact of rate increases was not material. In 2015, we expect to file additional rate increases generally on older blocks of our long-term care business. 70 CNO FINANCIAL GROUP, INC. - Form 10-K PART II ITEM 7 Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations Amounts added to policyholder account balances - cost of interest credited to policyholders were $127.2 million, $141.9 million and $155.0 million in 2014, 2013 and 2012, respectively. The weighted average crediting rates for these products was 2.8 percent, 3.0 percent and 3.1 percent in 2014, 2013 and 2012, respectively. The average liabilities of the fixed interest annuity block was $3.8 billion, $4.1 billion and $4.4 billion in 2014, 2013 and 2012, respectively. Amounts added to policyholder account balances for fixed index products represent a guaranteed minimum rate of return and a higher potential return that is based on a percentage (the “participation rate”) of the amount of increase in the value of a particular index, such as the S&P 500 Index, over a specified period. Such amounts include our cost to fund the annual index credits, net of policies that are canceled prior to their anniversary date (classified as cost of options to fund index credits, net of forfeitures). Market value changes in the underlying indices during a specified period of time are classified as market value changes credited to policyholders. Such market value changes are generally offset by the net investment income related to fixed index products discussed above. Amortization related to operations includes amortization of insurance acquisition costs. Insurance acquisition costs are generally amortized either: (i) in relation to the estimated gross profits for interest-sensitive life and annuity products; or (ii) in relation to actual and expected premium revenue for other products. In addition, for interest-sensitive life and annuity products, we are required to adjust the total amortization recorded to date through the statement of operations if actual experience or other evidence suggests that earlier estimates of future gross profits Commission expense and agent manager benefits Other operating expenses TOTAL Gain on reinsurance transaction in 2014 resulted from the recapture of life insurance business written by Bankers Life that was reinsured by Wilton Re. Net realized investment gains (losses) fluctuate each period. During 2014, net realized investment gains in this segment included $13.1 million of net gains from the sales of investments (primarily fixed maturities) and $4.8 million of writedowns of investments for other than temporary declines in fair value recognized through net income. During 2013, net realized investment gains in this segment included $22.3 million of net gains from the sales of investments (primarily fixed maturities) and $6.0 million of writedowns of investments for other than temporary declines in fair value recognized through net income. During 2012, net realized investment gains in this segment included $61.7 million of net gains from the sales of investments (primarily fixed maturities) and $8.7 million of writedowns of investments for other than temporary declines in fair value recognized through net income. Amortization related to net realized investment losses is the increase or decrease in the amortization of insurance acquisition costs which results from realized investment gains or losses. should be revised. Accordingly, amortization for interest-sensitive life and annuity products is dependent on the profits realized during the period and on our expectation of future profits. For other products, we amortize insurance acquisition costs in relation to actual and expected premium revenue, and amortization is only adjusted if expected premium revenue changes or if we determine the balance of these costs is not recoverable from future profits. In the fourth quarter of 2014, we completed our comprehensive review of actuarial assumptions. Such review resulted in a decrease to amortization expense of $11 million due to changes in mortality, spread and surrender rate assumptions related to certain annuity and interest-sensitive life products. Such amount was partially offset by $5 million of additional reserves on such products due to the changes in assumptions and refinements to reserving methodologies. Interest expense on investment borrowings represents interest expense on collateralized borrowings as further described in the note to the consolidated financial statements entitled “Summary of Significant Accounting Policies - Investment Borrowings”. Other operating costs and expenses in our Bankers Life segment were $401.2 million in 2014, up 5.6 percent from 2013, and were $380.0 million in 2013, up 1.4 percent from 2012. Expenses in 2014 included approximately $9 million of overhead expenses that were allocated to the Other CNO Business segment prior to 2014 and are expected to continue after the completion of the sale of CLIC. The increase in operating costs in 2014 from 2013 also reflected additional investments in our business, partially offset by lower legal and regulatory costs. Other operating costs and expenses include the following (dollars in millions): $ $ 2014 57.2 344.0 401.2 $ $ 2013 60.0 $ 320.0 380.0 $ 2012 61.1 313.7 374.8 When we sell securities which back our interest-sensitive life and annuity products at a gain (loss) and reinvest the proceeds at a different yield, we increase (reduce) the amortization of insurance acquisition costs in order to reflect the change in estimated gross profits due to the gains (losses) realized and the resulting effect on estimated future yields. Sales of fixed maturity investments resulted in an increase in the amortization of insurance acquisition costs of $.5 million, $1.2 million and $4.3 million in 2014, 2013 and 2012, respectively. Insurance policy benefits - fair value changes in embedded derivative liabilities represents fair value changes due to fluctuations in the interest rates used to discount embedded derivative liabilities related to our fixed index annuities. Amortization related to fair value changes in embedded derivative liabilities is the increase or decrease in the amortization of insurance acquisition costs which results from changes in interest rates used to discount embedded derivative liabilities related to our fixed index annuities. CNO FINANCIAL GROUP, INC. - Form 10-K 71 PART II ITEM 7 Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations Washington National (dollars in millions) $ $ $ $ $ Premium collections: Supplemental health and other health Medicare supplement Life Annuity Total collections Average liabilities for insurance products: Fixed index annuities Fixed interest annuities SPIAs and supplemental contracts: Mortality based Deposit based Separate Accounts Health: Supplemental health Medicare supplement Other health Life: Interest sensitive life Non-interest sensitive life Total average liabilities for insurance products, net of reinsurance ceded Revenues: Insurance policy income Net investment income: General account invested assets Fixed index products Trading account income related to reinsurer accounts Change in value of embedded derivatives related to modified coinsurance agreements Trading account income related to policyholder accounts Fee revenue and other income Total revenues Expenses: Insurance policy benefits Amounts added to policyholder account balances: Cost of interest credited to policyholders Cost of options to fund index credits, net of forfeitures Market value changes credited to policyholders Amortization related to operations Interest expense on investment borrowings Other operating costs and expenses Total benefits and expenses Income before gain on reinsurance transaction, net realized investment gains and fair value changes in embedded derivative liabilities, net of related amortization, and income taxes Gain on reinsurance transaction Net realized investment gains Amortization related to net realized investment gains Net realized investment gains, net of related amortization Insurance policy benefits - fair value changes in embedded derivative liabilities Amortization related to fair value changes in embedded derivative liabilities Fair value changes in embedded derivative liabilities, net of related amortization INCOME BEFORE INCOME TAXES $ 72 CNO FINANCIAL GROUP, INC. - Form 10-K 2014 517.8 85.2 25.9 2.6 631.5 421.5 130.2 245.4 252.6 8.5 2,387.9 35.2 14.9 159.4 192.0 3,847.6 626.0 266.5 6.3 1.4 (1.4) 3.3 1.1 903.2 505.7 14.9 5.6 10.0 64.6 1.7 189.5 792.0 111.2 3.8 34.4 (.5) 33.9 (1.5) 1.1 (.4) 148.5 $ $ $ $ $ $ 2013 494.4 101.9 26.5 4.3 627.1 457.4 147.1 248.9 245.9 14.1 2,231.0 38.7 12.3 166.2 198.8 3,760.4 621.5 275.0 17.9 (3.7) 3.7 4.0 .9 919.3 497.8 14.7 6.1 22.8 64.9 1.9 170.5 778.7 140.6 — 12.2 (.4) 11.8 2.7 (2.1) .6 153.0 $ $ $ $ $ $ 2012 463.1 113.9 23.8 3.5 604.3 521.7 166.9 258.9 234.2 15.6 2,199.6 44.2 15.1 166.8 199.4 3,822.4 608.9 281.4 4.2 3.1 (2.4) 2.9 1.1 899.2 469.0 16.5 8.9 6.2 64.9 2.8 182.1 750.4 148.8 — 26.0 (2.1) 23.9 .1 (.1) — 172.7 PART II ITEM 7 Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations Health benefit ratios: Medicare supplement: Insurance policy benefits Benefit ratio(a) Supplemental health: Insurance policy benefits Benefit ratio(a) Interest-adjusted benefit ratio(b) 2014 2013 2012 $ $ $ $ 55.2 63.3% 408.7 80.1% 54.6% $ $ 66.1 64.6% 378.1 78.5% 52.3% 77.6 65.4% 347.6 76.6% 49.8% (a) We calculate benefit ratios by dividing the related product’s insurance policy benefits by insurance policy income. (b) We calculate the interest-adjusted benefit ratio (a non-GAAP measure) for Washington National’s supplemental health products by dividing such product’s insurance policy benefits less the imputed interest income on the accumulated assets backing the insurance liabilities by policy income. These are considered non-GAAP financial measures. A non-GAAP measure is a numerical measure of a company’s performance, financial position, or cash flows that excludes or includes amounts that are normally excluded or included in the most directly comparable measure calculated and presented in accordance with GAAP. These non-GAAP financial measures of “ interest-adjusted benefit ratios” differ from “benefit ratios” due to the deduction of imputed interest income on the accumulated assets backing the insurance liabilities from the product’s insurance policy benefits used to determine the ratio. Interest income is an important factor in measuring the performance of health products that are expected to be inforce for a longer duration of time, are not subject to unilateral changes in provisions (such as non-cancelable or guaranteed renewable contracts) and require the performance of various functions and services (including insurance protection) for an extended period of time. The net cash flows from supplemental health products generally cause an accumulation of amounts in the early years of a policy (accounted for as reserve increases) that will be paid out as benefits in later policy years (accounted for as reserve decreases). Accordingly, as the policies age, the benefit ratio will typically increase, but the increase in benefits will be partially offset by the imputed interest income earned on the accumulated assets. The interest-adjusted benefit ratio reflects the effects of such interest income offset (which is equal to the tabular interest on the related insurance liabilities). Since interest income is an important factor in measuring the performance of these products, management believes a benefit ratio that includes the effect of interest income is useful in analyzing product performance. We utilize the interest-adjusted benefit ratio in measuring segment performance because we believe that this performance measure is a better indicator of the ongoing businesses and trends in the business. However, the “ interest-adjusted benefit ratio” does not replace the “benefit ratio” as a measure of current period benefits to current period insurance policy income. Accordingly, management reviews both “benefit ratios” and “ interest-adjusted benefit ratios” when analyzing the financial results attributable to these products. The imputed investment income earned on the accumulated assets backing the supplemental health reserves was $130.2 million, $126.4 million and $121.6 million in 2014, 2013 and 2012, respectively. Total premium collections were $631.5 million in 2014, up .7 percent from 2013, and $627.1 million in 2013, up 3.8 percent from 2012. This segment no longer markets Medicare supplement products and no longer actively pursues sales of annuity products. See “Premium Collections” for further analysis of fluctuations in premiums collected by product. Average liabilities for insurance products, net of reinsurance ceded were $3,847.6 million in 2014, up 2.3 percent from 2013, and $3,760.4 million in 2013, down 1.6 percent from 2012, primarily reflecting an increase in the supplemental health block; partially offset by the run-off of the annuity blocks. Insurance policy income is comprised of premiums earned on traditional insurance policies which provide mortality or morbidity coverage and fees and other charges assessed on other policies. Such income increased in recent periods as supplemental health premiums have increased consistent with sales; partially offset by the decrease in Medicare supplement premiums. Net investment income on general account invested assets (which excludes income on policyholder and reinsurer accounts) decreased 3.1 percent, to $266.5 million in 2014 and 2.3 percent, to $275.0 million in 2013. As a result of the sale of CLIC, investment income decreased by approximately $5.2 million in 2014, representing the investment income earned on the invested assets backing a block of health business issued by CLIC and included in the Washington National segment. Prior to the sale of CLIC, such business was ceded to Washington National through a modified coinsurance agreement pursuant to which all invested assets related to the insurance block are held by CLIC. Net investment income related to fixed index products represents the change in the estimated fair value of options which are purchased in an effort to offset or hedge certain potential benefits accruing to the policyholders of our fixed index products. Our fixed index products are designed so that investment income spread is expected to be more than adequate to cover the cost of the options and other costs related to these policies. Net investment income related to fixed index products was $6.3 million, $17.9 million and $4.2 million in 2014, 2013 and 2012, respectively. Such amounts were generally offset by the corresponding charge to amounts added to policyholder account balances - market value changes credited to policyholders. Such income and related charges fluctuate based on the value of options embedded in the segment’s fixed index annuity policyholder account balances subject to this benefit and to the performance of the index to which the returns on such products are linked. Trading account income related to reinsurer accounts primarily represents the income on trading securities which were held to act as hedges for embedded derivatives related to a modified coinsurance agreement. The income on such trading account securities was designed to substantially offset the change in value of embedded derivatives related to a modified coinsurance agreement. Such trading securities were sold in the second quarter of 2014 in conjunction with the recapture of a modified coinsurance agreement. Change in value of embedded derivatives related to modified coinsurance agreements is described in the note to our consolidated financial statements entitled “Summary of Significant Accounting Policies - Accounting for Derivatives.” We transferred a specific block of investments related to these agreements to our trading securities account, which we carried at estimated fair value with changes in such value recognized as trading account income. The change in the value of the embedded derivatives was largely offset by the change in value of the trading securities. In the second quarter of 2014, we recaptured this modified coinsurance agreement and the embedded derivative was eliminated. CNO FINANCIAL GROUP, INC. - Form 10-K 73 PART II ITEM 7 Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations Trading account income related to policyholder accounts represents the income on investments backing the market strategies of certain annuity products which provide for different rates of cash value growth based on the experience of a particular market strategy. The income on our trading account securities is designed to substantially offset certain amounts included in insurance policy benefits related to the aforementioned annuity products. Insurance policy benefits fluctuated as a result of the factors summarized below. Benefit ratios are calculated by dividing the related insurance product’s insurance policy benefits by insurance policy income. In the fourth quarter of 2014, we completed our comprehensive annual review of actuarial assumptions. Such review resulted in a $9 million increase in reserves related to a block of payout annuities due to changes in our interest rate and mortality assumptions for this block. Washington National’s Medicare supplement business primarily consists of individual policies. The insurance product liabilities we establish for our Medicare supplement business are subject to significant estimates and the ultimate claim liability we incur for a particular period is likely to be different than our initial estimate. Governmental regulations generally require us to attain and maintain a ratio of total benefits incurred to total premiums earned (excluding changes in policy benefit reserves), after three years from the original issuance of the policy and over the lifetime of the policy, of not less than 65 percent on these products, as determined in accordance with statutory accounting principles. Insurance margins (insurance policy income less insurance policy benefits) on these products were $31.9 million, $36.2 million and $41.0 million in 2014, 2013 and 2012, respectively. Such decrease reflects the run-off of this business as we discontinued new sales of Medicare supplement business in this segment in the fourth quarter of 2012. Washington National’s supplemental health products (including specified disease, accident and hospital indemnity products) generally provide fixed or limited benefits. For example, payments under cancer insurance policies are generally made directly to, or at the direction of, the policyholder following diagnosis of, or treatment for, a covered type of cancer. Approximately three-fourths of our supplemental health policies inforce (based on policy count) were sold with return of premium or cash value riders. The return of premium rider generally provides that after a policy has been inforce for a specified number of years or upon the policyholder reaching a specified age, we will pay to the policyholder, or a beneficiary under the policy, the aggregate amount of all premiums paid under the policy, without interest, less the aggregate amount of all claims incurred under the policy. The cash value rider is similar to the return of premium rider, but also provides for payment of a graded portion of the return of premium benefit if the policy terminates before the return of premium benefit is earned. Accordingly, the net cash flows from these products generally result in the accumulation of amounts in the early years of a policy (reflected in our earnings as reserve increases) which will be paid out as benefits in later policy years (reflected in our earnings as reserve decreases which offset the recording of benefit payments). As the policies age, the benefit ratio will typically increase, but the increase in benefits will be partially offset by investment income earned on the accumulated assets. The benefit ratio will fluctuate depending on the claim experience during the year. Insurance margins (insurance policy income less insurance policy benefits) on supplemental health products were $101.8 million, $103.4 million and $106.2 million in 2014, 2013 and 2012, respectively. The benefit ratio on these products was 80.1 percent, 78.5 percent and 76.6 percent in 2014, 2013 and 2012, respectively. In addition, the insurance margin on supplemental health products was reduced by $2.5 million related to premium refunds due to the use of a new process to identify changes in the status of insureds in a more timely manner. The benefit ratios on this business can be impacted by changes in the extent to which policyholders convert their current policies to policies with additional benefits, as well as persistency in certain blocks. The benefits ratio in 2013 and 2014 reflect a decision we made in 2013 to reduce the commission we pay on certain conversion activity. While we believe this change will improve the longer-term profitability of the block, lower conversions of policies with return-of-premium features that are approaching maturity, results in lower reserve releases. Accordingly, the benefit ratio on this block has increased. The interest adjusted benefit ratio on this supplemental health business was 54.6 percent, 52.3 percent and 49.8 percent in 2014, 2013 and 2012, respectively. We currently expect the interest-adjusted benefit ratio on this supplemental health business to be in the 54 percent range in 2015. Amounts added to policyholder account balances - cost of interest credited to policyholders were $14.9 million, $14.7 million and $16.5 million in 2014, 2013 and 2012, respectively. Amounts added to policyholder account balances for fixed index products represent a guaranteed minimum rate of return and a higher potential return that is based on a percentage (the “participation rate”) of the amount of increase in the value of a particular index, such as the S&P 500 Index, over a specified period. Such amounts include our cost to fund the annual index credits, net of policies that are canceled prior to their anniversary date (classified as cost of options to fund index credits, net of forfeitures). Market value changes in the underlying indices during a specified period of time are classified as market value changes credited to policyholders. Such market value changes are generally offset by the net investment income related to fixed index products discussed above. Amortization related to operations includes amortization of insurance acquisition costs. Insurance acquisition costs are generally amortized in relation to actual and expected premium revenue, and amortization is only adjusted if expected premium revenue changes or if we determine the balance of these costs is not recoverable from future profits. Such amounts were generally consistent with the related premium revenue. A revision to our current assumptions could result in increases or decreases to amortization expense in future periods. Interest expense on investment borrowings represents $1.7 million, $1.9 million and $2.8 million of interest expense on collateralized borrowings in 2014, 2013 and 2012, respectively, as further described in the note to the consolidated financial statements entitled “Summary of Significant Accounting Policies - Investment Borrowings”. Other operating costs and expenses were $189.5 million, $170.5 million and $182.1 million in 2014, 2013 and 2012, respectively. Other operating costs and expenses include commission expense of $64.6 million, $63.1 million and $69.9 million in 2014, 2013 74 CNO FINANCIAL GROUP, INC. - Form 10-K PART II ITEM 7 Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations and 2012, respectively. Expenses in 2014 included approximately $7 million of overhead expenses that were allocated to the Other CNO Business segment prior to 2014 and are expected to continue after the completion of the sale of CLIC. In addition, 2013 reflects lower legal expenses than the previous year. Gain on reinsurance transaction of $3.8 million related to the recapture of a modified coinsurance agreement in the second quarter of 2014. Net realized investment gains fluctuate each period. During 2014, net realized investment gains in this segment included $37.8 million of net gains from the sales of investments (primarily fixed maturities) and $3.4 million of writedowns of investments for other than temporary declines in fair value recognized through net income. During 2013, net realized investment gains in this segment included $15.9 million of net gains from the sales of investments (primarily fixed maturities) and $3.7 million of writedowns of investments for other than temporary declines in fair value recognized through net income. During 2012, net realized investment gains in this segment included $40.5 million of net gains from the sales of investments (primarily fixed maturities) and $14.5 million of writedowns of investments for other than temporary declines in fair value recognized through net income. Amortization related to net realized investment gains is the increase or decrease in the amortization of insurance acquisition costs which results from realized investment gains or losses. When we sell securities which back our interest-sensitive life and annuity products at a gain (loss) and reinvest the proceeds at a different yield (or when we have the intent to sell the impaired investments before an anticipated recovery in value occurs), we increase (reduce) the amortization of insurance acquisition costs in order to reflect the change in estimated gross profits due to the gains (losses) realized and the resulting effect on estimated future yields. Sales of fixed maturity investments resulted in an increase in the amortization of insurance acquisition costs of $.5 million, $.4 million and $2.1 million in 2014, 2013 and 2012, respectively. Insurance policy benefits - fair value changes in embedded derivative liabilities represents fair value changes due to fluctuations in the interest rates used to discount embedded derivative liabilities related to our fixed index annuities. Amortization related to fair value changes in embedded derivative liabilities is the increase or decrease in the amortization of insurance acquisition costs which results from changes in interest rates used to discount embedded derivative liabilities related to our fixed index annuities. Colonial Penn (dollars in millions) Premium collections: Life Supplemental health Total collections Average liabilities for insurance products: SPIAs - mortality based Health: Medicare supplement Other health Life: Interest sensitive Non-interest sensitive Total average liabilities for insurance products, net of reinsurance ceded Revenues: Insurance policy income Net investment income on general account invested assets Fee revenue and other income Total revenues Expenses: Insurance policy benefits Amounts added to annuity and interest-sensitive life product account balances Amortization related to operations Other operating costs and expenses Total benefits and expenses Income (loss) before net realized investment gains and income taxes Net realized investment gains INCOME (LOSS) BEFORE INCOME TAXES 2014 241.7 3.4 245.1 69.6 8.3 4.5 17.0 649.8 749.2 246.0 41.7 1.0 288.7 172.5 .7 15.3 99.4 287.9 .8 1.1 1.9 $ $ $ $ $ $ 2013 227.6 4.1 231.7 $ $ 73.5 $ 9.2 4.7 17.5 629.4 734.3 232.1 40.0 .8 272.9 $ $ 165.0 .7 14.5 105.2 285.4 (12.5) .4 (12.1) $ 2012 211.9 4.9 216.8 76.5 10.2 4.9 18.7 604.5 714.8 217.8 40.4 .7 258.9 160.3 .8 15.0 91.4 267.5 (8.6) 7.2 (1.4) $ $ $ $ $ $ This segment’s results are significantly impacted by the accounting standard related to deferred acquisition costs. We are not able to defer most of Colonial Penn’s direct response advertising costs although such costs generate predictable sales and future inforce profits. We plan to continue to invest in this segment’s business, including the development of new products and markets. The CNO FINANCIAL GROUP, INC. - Form 10-K 75 PART II ITEM 7 Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations amount of our investment in new business during a particular period will have a significant impact on this segment’s results. Based on our current advertising plan, we expect this segment to report slightly positive earnings (before net realized investment gains (losses) and income taxes) in 2015, but because of the seasonality of the advertising spend, we expect a loss in the $7 million range in the first quarter of 2015. Total premium collections to $245.1 million, in 2014 and 6.9 percent, to $231.7 million, in 2013. See “Premium Collections” for further analysis of Colonial Penn’s premium collections. increased 5.8 percent, Average liabilities for insurance products, net of reinsurance ceded have increased as a result of growth in this segment. Insurance policy income is comprised of premiums earned on policies which provide mortality or morbidity coverage and fees and other charges assessed on other policies. The increase in such income reflects the growth in the block of business. Net investment income on general account invested assets increased in 2014 primarily due to the higher general account invested assets as a result of growth in this segment. Insurance policy benefits fluctuated as a result of the growth in this segment. Amortization related to operations includes amortization of insurance acquisition costs. Insurance acquisition costs in the Colonial Penn segment are amortized in relation to actual and expected premium revenue, and amortization is only adjusted if expected premium revenue changes or if we determine the balance of these costs is not recoverable from future profits. Such amounts were generally consistent with the related premium revenue and Corporate Operations (dollars in millions) Corporate operations: Interest expense on corporate debt Net investment income (loss): General investment portfolio Other special-purpose portfolios: COLI Investments held in a rabbi trust Investments in certain hedge funds Other trading account activities Fee revenue and other income Net operating results of variable interest entities Interest expense on investment borrowings Other operating costs and expenses gross profits for such periods and the assumptions we made when we established the present value of future profits. A revision to our current assumptions could result in increases or decreases to amortization expense in future periods. Other operating costs and expenses in our Colonial Penn segment fluctuate primarily due to changes in the marketing expenses incurred to generate new business. Such marketing expenses totaled $71.3 million, $76.7 million and $66.1 million in 2014, 2013 and 2012, respectively. Marketing expenses in 2014 reflect a modest increase in the deferral of acquisition costs due to a slight shift to deferrable direct mail marketing activities. Although the effectiveness of our sales and marketing expenditures have improved, we continue to face increased competition from other insurance companies who also distribute products through direct marketing. In addition, the demand and cost of television advertising appropriate for Colonial Penn’s campaigns has fluctuated widely in certain periods. In some periods increased advertising costs have resulted in decisions to lower our planned spending. These factors may reoccur in the future. Net realized investment gains fluctuated each period. During 2014, we recognized $1.1 million of net gains from the sales of investments (primarily fixed maturities). During 2013, net realized investment gains in this segment included $.6 million of net gains from the sales of investments (primarily fixed maturities) and $.2 million of writedowns of investments for other than temporary declines in fair value recognized through net income. During 2012, net realized investment gains in this segment included $7.8 million of net gains from the sales of investments (primarily fixed maturities) and $.6 million of writedowns of investments for other than temporary declines in fair value recognized through net income. 2014 2013 2012 $ (43.9) $ (51.3) $ (66.2) 8.5 (1.3) .4 (2.8) 10.1 6.7 — (.1) (75.9) (98.3) (9.9) (8.0) 2.6 (.6) (114.2) $ 5.4 15.7 1.3 4.9 12.5 6.2 — (.1) (27.3) (32.7) (1.5) (10.2) — (65.4) (109.8) $ 3.6 5.0 4.3 (2.1) 20.3 1.2 12.3 (.4) (64.5) (86.5) 1.8 — — (200.2) (284.9) Loss before net realized investment gains (losses), equity in earnings of certain non- strategic investments and earnings attributable to non-controlling interests, net revenue pursuant to transition and support services agreements, loss on extinguishment or modification of debt and income taxes Net realized investment gains (losses) Equity in earnings of certain non-strategic investments and earnings attributable to non- controlling interests Net revenue pursuant to transition and support services agreements Loss on extinguishment or modification of debt LOSS BEFORE INCOME TAXES $ 76 CNO FINANCIAL GROUP, INC. - Form 10-K PART II ITEM 7 Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations Interest expense on corporate debt has been impacted by: (i) repayments of the Senior Secured Credit Agreement; (ii) the amendment to our Senior Secured Credit Agreement in May 2013 which reduced the interest rate payable; (iii) the completion of the cash tender offer (the “Offer”) in March 2013 for $59.3 million aggregate principal amount of our 7.0% Senior Debentures due 2016 (the “7.0% Debentures”); (iv) repayments of the Senior Health Note due November 12, 2013; and (v) the recapitalization transactions completed in September 2012. Such transactions are further discussed in the note to the consolidated financial statements entitled “Notes Payable - Direct Corporate Obligations”. Our average corporate debt outstanding was $838.2 million, $926.9 million and $882.7 million in 2014, 2013 and 2012, respectively. The average interest rate on our debt was 4.5 percent, 4.8 percent and 6.8 percent in 2014, 2013 and 2012, respectively. Net investment income on general investment portfolio fluctuates based on the amount and type of invested assets in the corporate operations segment. Net investment income on other special-purpose portfolios includes the income (loss) from: (i) investments related to deferred compensation plans held in a rabbi trust (which is offset by amounts included in other operating costs and expenses as the investment results are allocated to participants’ account balances); (ii) trading account activities; (iii) income (loss) from Company-owned life insurance (“COLI”) equal to the difference between the return on these investments (representing the change in value of the underlying investments) and our overall portfolio yield; and (iv) other investments including certain hedge funds and other alternative strategies. COLI is utilized as an investment vehicle to fund Bankers Life’s agent deferred compensation plan. For segment reporting, the Bankers Life segment is allocated a return on these investments equivalent to the yield on the Company’s overall portfolio, with any difference in the actual COLI return allocated to the Corporate operations segment. We also recognized death benefits of $1.7 million and $2.9 million related to the COLI in 2014 and 2013, respectively. Net operating results of variable interest entities relates to the 2012 period and represents the impact of consolidating various VIEs in accordance with GAAP. These entities were established to issue securities and use the proceeds to invest in loans and other permitted assets. Refer to the note to the consolidated financial statements entitled “Investments in Variable Interest Entities” for more information on the VIEs. Beginning January 1, 2013, the earnings from the VIEs are recognized by our segments as follows: (i) investment income earned on investments in the VIEs made by our insurance segments are recognized in the segment’s earnings; (ii) investment income earned on investments in the VIEs made by the Corporate segment are recognized in the Corporate segment earnings; (iii) fee revenue earned for providing investment management services to the VIEs is recognized in fee revenue and other income in the Corporate segment; and (iv) earnings from the non-controlling interests in the VIEs are recognized as “equity in earnings of certain non-strategic investments and earnings attributable to non-controlling interests.” Other operating costs and expenses include general corporate expenses, net of amounts charged to subsidiaries for services provided by the corporate operations. These amounts fluctuate as a result of expenses such as consulting and legal costs which often vary from period to period. In 2014, 2013 and 2012, other operating costs and expenses were increased (decreased) by $26.9 million, $(15.9) million and $9.7 million, respectively, related to changes in the underlying actuarial assumptions used to value liabilities for our agent deferred compensation plan and former executive retirement annuities. In addition, such amounts in the first three months of 2014 included higher expenses of $3 million primarily related to accrual adjustments for incentive compensation. In 2012, we also recognized a $6.8 million charge related to the relocation of Bankers Life’s primary office. Net realized investment gains (losses) often fluctuate each period. During 2014, net realized investment losses in this segment included $9.2 million of net gains from the sales of investments (of which $2.2 million were losses recognized by VIEs) and $19.1 million of writedowns of investments (none of which were recognized by VIEs) due to other-than-temporary declines in value. During 2013, net realized investment losses in this segment included $.4 million of net losses from the sales of investments (of which $.5 million were losses recognized by VIEs) and $1.1 million of writedowns of investments (all of which were recognized by VIEs) due to other-than-temporary declines in value. During 2012, net realized investment gains in this segment included $2.6 million of net gains from the sales of investments (of which $.4 million were gains recognized by VIEs) and $.8 million of writedowns of investments (all of which were recognized by VIEs) due to other-than-temporary declines in value. Equity in earnings of certain non-strategic investments and earnings attributable to non-controlling interests include the earnings attributable to non-controlling interests in certain VIEs that we are required to consolidate and certain private companies that were acquired in the commutation of an investment made by our Predecessor, net of affiliated amounts. Such earnings are not indicative and are unrelated to the Company’s underlying fundamentals. Net revenue pursuant to transition and support services agreements represents the difference between the fees we receive from Wilton Re and the overhead costs incurred to provide such services under the agreements subsequent to the sale of CLIC. Loss on extinguishment or modification of debt in 2014 of $.6 million resulted from: (i) expenses related to the amendment of the Senior Secured Credit Agreement in May 2014; and (ii) the repurchase of the remaining $3.5 million principal amount of the 7.0% Debentures for a purchase price of $3.7 million. The loss on extinguishment of debt of $65.4 million in 2013 resulted from: (i) the Offer and repurchase of 7.0% Debentures, the write-off of unamortized discount and issuance costs associated with the 7.0% Debentures that were repurchased and other transaction costs; and (ii) expenses related to the amendment of our Senior Secured Credit Agreement and the write-off of unamortized discount and issuance costs associated with prepayments on the Senior Secured Credit Agreement. The loss on extinguishment of debt of $200.2 million in 2012 represents: (i) $136.5 million due to our repurchase of $200.0 million principal amount of 7.0% Debentures and the write-off of unamortized discount and issuance costs associated with the 7.0% Debentures; (ii) $58.2 million related to the tender offer and consent solicitation for the 9.0% Senior Secured Notes due January 2018 CNO FINANCIAL GROUP, INC. - Form 10-K 77 PART II ITEM 7 Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations (the “9.0% Notes”), the write-off of unamortized issuance costs related to the 9.0% Notes and other transactions; (iii) $5.1 million representing the write-off of unamortized discount and issuance costs associated with repayments of a previous senior secured credit agreement; and (iv) $.4 million representing the write-off of unamortized discount and issuance costs associated with payments on our Senior Secured Credit Agreement. These transactions are further discussed in the note to the consolidated financial statements entitled “Notes Payable - Direct Corporate Obligations”. Other CNO Business (dollars in millions) The Other CNO Business segment included the long-term care business that was ceded to BRe effective December 31, 2013, as further described below. This segment also included the overhead expense of CLIC that is expected to continue after the completion of the CLIC sale. The Other CNO Business segment no longer exists, effective January 1, 2014. Beginning on January 1, 2014 the overhead of CLIC that is expected to continue after the completion of the sale was reallocated primarily to the Bankers Life and Washington National segments. Premium collections: Long-term care (all renewal) Average liabilities for insurance products: Average liabilities for long-term care products, net of reinsurance ceded Revenues: Insurance policy income Net investment income on general account invested assets Total revenues Expenses: Insurance policy benefits Other operating costs and expenses: Related to the long-term care business reinsured in 4Q13 Overhead expense of CLIC expected to continue after the completion of the sale Total benefits and expenses Loss before loss related to reinsurance transaction and income taxes Loss related to reinsurance transaction LOSS BEFORE INCOME TAXES Health benefit ratios: Long-term care: Insurance policy benefits Benefit ratio(a) Interest-adjusted benefit ratio(b) $ $ $ $ $ 2013 23.6 467.4 24.1 33.3 57.4 59.2 6.2 19.6 85.0 (27.6) (98.4) (126.0) 59.2 245.7 % 131.2 % $ $ $ $ $ 2012 25.1 467.0 25.6 32.9 58.5 63.2 4.5 20.5 88.2 (29.7) — (29.7) 63.4 247.0 % 137.6 % (a) We calculate benefit ratios by dividing the related product’s insurance policy benefits by insurance policy income. (b) We calculate the interest-adjusted benefit ratio (a non-GAAP measure) for long-term care products in our Other CNO Business segment by dividing such product’s insurance policy benefits less the imputed interest income on the accumulated assets backing the insurance liabilities by policy income. These are considered non-GAAP financial measures. A non-GAAP measure is a numerical measure of a company’s performance, financial position, or cash flows that excludes or includes amounts that are normally excluded or included in the most directly comparable measure calculated and presented in accordance with GAAP. These non-GAAP financial measures of “ interest-adjusted benefit ratios” differ from “benefit ratios” due to the deduction of imputed interest income on the accumulated assets backing the insurance liabilities from the product’s insurance policy benefits used to determine the ratio. Interest income is an important factor in measuring the performance of health products that are expected to be inforce for a longer duration of time, are not subject to unilateral changes in provisions (such as non-cancelable or guaranteed renewable contracts) and require the performance of various functions and services (including insurance protection) for an extended period of time. The net cash flows from long-term care products generally cause an accumulation of amounts in the early years of a policy (accounted for as reserve increases) that will be paid out as benefits in later policy years (accounted for as reserve decreases). Accordingly, as the policies age, the benefit ratio will typically increase, but the increase in benefits will be partially offset by the imputed interest income earned on the accumulated assets. The interest-adjusted benefit ratio reflects the effects of such interest income offset (which is equal to the tabular interest on the related insurance liabilities). Since interest income is an important factor in measuring the performance of these products, management believes a benefit ratio that includes the effect of interest income is useful in analyzing product performance. We utilize the interest-adjusted benefit ratio in measuring segment performance because we believe that this performance measure is a better indicator of the ongoing businesses and trends in the business. However, the “ interest-adjusted benefit ratio” does not replace the “benefit ratio” as a measure of current period benefits to current period insurance policy income. Accordingly, management reviews both “benefit ratios” and “ interest-adjusted benefit ratios” when analyzing the financial results attributable to these products. The imputed investment income earned on the accumulated assets backing the long-term care reserves was $27.6 million and $28.1 million in 2013 and 2012, respectively. 78 CNO FINANCIAL GROUP, INC. - Form 10-K PART II ITEM 7 Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations Insurance policy benefits fluctuated as a result of the factors summarized below for benefit ratios. Benefit ratios are calculated by dividing the related insurance product’s insurance policy benefits by insurance policy income. The long-term care policies in this segment generally provide for indemnity and non-indemnity benefits on a guaranteed renewable or non-cancellable basis. The benefit ratio on our long-term care policies was 245.7 percent and 247.0 percent in 2013 and 2012, respectively. Since the insurance product liabilities we establish for long-term care business are subject to significant estimates, the ultimate claim liability we incur for a particular period is likely to be different than our initial estimate. Our insurance policy benefits reflected reserve deficiencies from prior years of $5.1 million and $9.2 million in 2013 and 2012, respectively. Excluding the effects of prior year claim reserve deficiencies, our benefit ratios would have been 224.6 percent and 211.1 percent in 2013 and 2012, respectively. These ratios reflect the level of incurred claims experienced in recent periods, adverse development on claims incurred in prior periods and lower policy income. The prior period deficiencies have primarily resulted from the impact of paid claim experience being different than prior estimates. The net cash flows from long-term care products generally cause an accumulation of amounts in the early years of a policy (reflected in our earnings as reserve increases) which will be paid out as benefits in later policy years (reflected in our earnings as reserve decreases which offset the recording of benefit payments). Accordingly, as the policies age, the benefit ratio will typically increase, but the increase in benefits will be partially offset by investment income earned on the assets which have accumulated. The interest-adjusted benefit ratio for long-term care products is calculated by dividing the insurance product’s insurance policy benefits less the imputed interest income on the accumulated assets backing the insurance liabilities by insurance policy income. The interest-adjusted benefit ratio on this business was 131.2 percent and 137.6 percent in 2013 and 2012, respectively. Excluding the effects of prior year claim reserve deficiencies, our interest-adjusted benefit ratios would have been 110.0 percent and 101.8 percent in 2013 and 2012, respectively. In each quarterly period, we calculate our best estimate of claim reserves based on all of the information available to us at that time, which necessarily takes into account new experience emerging during the period. Our actuaries estimate these claim reserves using various generally recognized actuarial methodologies which are based on informed estimates and judgments that are believed to be appropriate. As additional experience emerges and other data become available, these estimates and judgments are reviewed and may be revised. Significant assumptions made in estimating claim reserves for long-term care policies include expectations about the: (i) future duration of existing claims; (ii) cost of care and benefit utilization; (iii) interest rate utilized to discount claim reserves; (iv) claims that have been incurred but not yet reported; (v) claim status on the reporting date; (vi) claims that have been closed but are expected to reopen; and (vii) correspondence that has been received that will ultimately become claims that have payments associated with them. Loss related to reinsurance transaction resulted from the long- term care business in this segment being ceded under 100% coinsurance agreements effective December 31, 2013. As a result, the long-term care reserves in this segment were ceded to BRe. Pursuant to the agreements, we paid an additional premium of $96.9 million to BRe plus an amount equal to the related net statutory liabilities. The reinsurance receivables related to the agreements will be secured by assets in market-value trusts subject to a 7% over-collateralization, investment guidelines and periodic true-up provisions. Future payments into the trusts to maintain collateral requirements are the responsibility of BRe. We evaluate this block separately to determine whether aggregate liabilities are deficient. We recognized a pre-tax loss of $98.4 million in 2013 to reflect: (i) the known loss (or premium deficiency) on the business, as we will not be recognizing additional income in future periods to recover the unamortized additional premium which will be paid to BRe; and (ii) other transaction costs related to the reinsurance agreements. CNO FINANCIAL GROUP, INC. - Form 10-K 79 PART II ITEM 7 Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations Amounts related to CLIC prior to being sold (dollars in millions) Premium collections: Annuities Life Total collections Average liabilities for insurance products: Fixed index annuities Fixed interest annuities SPIAs and supplemental contracts: Mortality based Deposit based Health: Supplemental health Medicare supplement Other health Life: Interest sensitive Non-interest sensitive Total average liabilities for insurance products, net of reinsurance ceded Revenues: Insurance policy income Net investment income: General account invested assets Fixed index products Fee revenue and other income Total revenues Expenses: Insurance policy benefits Amounts added to policyholder account balances: Cost of interest credited to policyholders Cost of options to fund index credits, net of forfeitures Market value changes credited to policyholders Amortization related to operations Interest expense on investment borrowings Other operating costs and expenses Total benefits and expenses Income (loss) before net realized investment gains (losses), loss on sale of CLIC and income taxes Net realized investment gains (losses) Amortization related to net realized investment gains (losses) Net realized investment gains (losses), net of related amortization Earnings of CLIC prior to being sold Loss on sale of CLIC INCOME (LOSS) BEFORE INCOME TAXES 2014 .2 71.0 71.2 — — — — — — — — — — 106.0 100.7 1.3 — 208.0 115.8 43.2 .8 .9 4.3 9.1 13.3 187.4 20.6 2.8 — 2.8 23.4 (269.7) (246.3) $ $ $ $ $ $ 2013 .3 142.0 142.3 .6 148.4 39.2 106.7 146.9 2.2 6.7 2,317.8 432.1 3,200.6 218.3 210.2 7.9 5.1 441.5 239.6 90.2 1.4 7.9 8.8 19.3 41.0 408.2 33.3 6.0 — 6.0 39.3 — 39.3 $ $ $ $ $ $ 2012 .3 155.4 155.7 — 157.5 41.9 123.7 157.4 3.1 12.5 2,388.1 450.3 3,334.5 245.7 222.6 — — 468.3 291.9 97.9 1.8 .1 16.6 19.9 80.9 509.1 (40.8) (6.9) (.1) (7.0) (47.8) — (47.8) $ $ $ $ $ $ The information summarized above represents the pre-tax earnings related to the operations of CLIC prior to being sold (which occurred on July 1, 2014) as well as the loss on the sale of CLIC. Operating expenses exclude overhead expense that is expected to continue after the sale of CLIC. Refer to the note to the consolidated financial statements entitled “Sale of Subsidiary” for additional information. Total premium collections were $142.3 million in 2013, down 8.6 percent from 2012. The decrease in collected premiums was primarily due to policyholder redemptions and lapses. See 80 CNO FINANCIAL GROUP, INC. - Form 10-K “Premium Collections” for further analysis of fluctuations in premiums collected by product. Average liabilities for insurance products, net of reinsurance ceded were $3.2 billion in 2013, down 4.0 percent from 2012. The decreases in such liabilities were primarily due to policyholder redemptions and lapses. PART II ITEM 7 Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations Insurance policy income is comprised of policyholder charges on our interest-sensitive products and premiums earned on traditional insurance policies which provide mortality or morbidity coverage. The decrease in insurance policy income in 2013 is primarily due to a reduction in policyholder charges on certain interest-sensitive life products consistent with the settlement offered in a class action lawsuit and lower premium revenue due to policyholder redemptions and lapses. Net investment income on general account invested assets (which excludes income on policyholder and reinsurer accounts) decreased 5.6 percent, to $210.2 million in 2013. The decrease in net investment income is primarily due to the lower invested assets in this segment as the business runs off. Net investment income related to fixed index products represents the change in the estimated fair value of options which are purchased in an effort to offset or hedge certain potential benefits accruing to the policyholders of our fixed index products. Our fixed index products are designed so that investment income spread is expected to be more than adequate to cover the cost of the options and other costs related to these policies. Net investment income (loss) related to fixed index products was $1.3 million, $7.9 million and nil in 2014, 2013 and 2012, respectively. Such amounts were mostly offset by the corresponding charge (credit) to amounts added to policyholder account balances - market value changes credited to policyholders. Such income and related charges fluctuate based on the value of options embedded in the segment’s fixed index annuity policyholder account balances subject to this benefit and to the performance of the index to which the returns on such products are linked. Fee revenue and other income in 2013 included a $5 million favorable impact from the settlement of a reinsurance matter. Insurance policy benefits in 2012 included approximately $43 million of increases to future loss reserves primarily resulting from decreased projected future investment yields related to interest-sensitive insurance products. During 2013, our review of assumptions resulted in no significant adjustments. We did not change our long-term interest rate assumptions, as investment results were relatively consistent with our 2013 new money rate assumptions. Amounts added to policyholder account balances - cost of interest credited to policyholders were $43.2 million, $90.2 million and $97.9 million in 2014, 2013 and 2012, respectively. The decrease was primarily due to a smaller block of interest-sensitive life business inforce due to lapses in recent periods. Amounts added to policyholder account balances for fixed index products represent a guaranteed minimum rate of return and a higher potential return that is based on a percentage (the “participation rate”) of the amount of increase in the value of a particular index, such as the S&P 500 Index, over a specified period. Such amounts include our cost to fund the annual index credits, net of policies that are canceled prior to their anniversary date (classified as cost of options to fund index credits, net of forfeitures). Market value changes in the underlying indices during a specified period of time are classified as market value changes credited to policyholders. Such market value changes are generally offset by the net investment income related to fixed index products discussed above. Amortization related to operations includes amortization of insurance acquisition costs. Insurance acquisition costs were generally amortized either: (i) in relation to the estimated gross profits for interest-sensitive life and annuity products; or (ii) in relation to actual and expected premium revenue for other products. In addition, for interest-sensitive life and annuity products, we were required to adjust the total amortization recorded to date through the statement of operations if actual experience or other evidence suggests that earlier estimates of future gross profits should be revised. Accordingly, amortization for interest-sensitive life and annuity products is dependent on the profits realized during the period and on our expectation of future profits. For other products, we amortize insurance acquisition costs in relation to actual and expected premium revenue, and amortization was only adjusted if expected premium revenue changes. The assumptions we used to estimate our future gross profits and premiums involved significant judgment. Earnings on our interest-sensitive life products, which comprised a significant part of this block, was subject to volatility since our insurance acquisition costs were equal to the value of future estimated gross profits. Accordingly, the impact of adverse changes in our earlier estimates of future gross profits was generally reflected in earnings in the period such differences occur. In 2013, amortization of insurance acquisition costs in the annuity block was favorably impacted primarily due to revising our lapse assumptions as we had experienced lower surrenders than reflected in our previous assumptions. Amortization related to operations in 2012 was impacted by an acceleration of amortization due to lower projected estimated gross profits for interest-sensitive life products. The lower profits primarily resulted from decreased projected future investment yields, as described above under insurance policy benefits. Interest expense on investment borrowings includes $9.1 million, $19.3 million and $19.9 million of interest expense on collateralized borrowings in 2014, 2013 and 2012, respectively. Other operating costs and expenses were $13.3 million, $41.0 million and $80.9 million in 2014, 2013 and 2012, respectively. Other operating costs and expenses include commission expense of $.2 million, $3.8 million and $4.5 million in 2014, 2013 and 2012, respectively. In 2012, we recognized charges of $41.5 million related to pending lawsuits that were subsequently settled. Net realized investment gains (losses) fluctuate each period. During 2014, we recognized net realized investment gains in this segment of $2.8 million from the sales of investments (primarily fixed maturities). During 2013, net realized investment gains in this segment included $6.6 million of net gains from the sales of investments (primarily fixed maturities) and $.6 million of writedowns of investments for other than temporary declines in fair value recognized through net income. During 2012, net realized investment gains in this segment included $6.3 million of net gains from the sales of investments (primarily fixed maturities) and $13.2 million of writedowns of investments for other than temporary declines in fair value recognized through net income. Amortization related to net realized investment gains (losses) is the increase or decrease in the amortization of insurance acquisition costs which results from realized investment gains or losses. When we sell securities which back our interest-sensitive life and annuity products at a gain (loss) and reinvest the proceeds at CNO FINANCIAL GROUP, INC. - Form 10-K 81 PART II ITEM 7 Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations a different yield (or when we have the intent to sell the impaired investments before an anticipated recovery in value occurs), we increase (reduce) the amortization of insurance acquisition costs in order to reflect the change in estimated gross profits due to the gains (losses) realized and the resulting effect on estimated future yields. Sales of fixed maturity investments resulted in an increase in the amortization of insurance acquisition costs of nil, nil and $.1 million in 2014, 2013 and 2012, respectively. EBIT From Business Segments Continuing after the CLIC Sale Summarized by In-Force and New Business Management believes that an analysis of EBIT from our business segments continuing after the CLIC sale, separated between in- force and new business, provides increased clarity around the value drivers of our business, particularly since the new business results are significantly impacted by the rate of sales, mix of business and the distribution channel through which new sales are made. EBIT from new business includes pre-tax revenues and expenses associated with new sales of our insurance products during the first year after the sale is completed. EBIT from in-force business includes all pre-tax revenues and expenses associated with sales of insurance products that were completed more than one year before the end of the reporting period. The allocation of certain revenues and expenses between new and in-force business is based on estimates, which we believe are reasonable. The following summarizes our earnings, separated between in-force and new business on a consolidated basis and for each of our operating segments for the three years ended December 31, 2014: Business segments - total (dollars in millions) 2014 2013 2012 EBIT FROM IN-FORCE BUSINESS Revenues: Insurance policy income Net investment income and other Total revenues Benefits and expenses: Insurance policy benefits Amortization Other expenses Total benefits and expenses EBIT from In-Force Business EBIT FROM NEW BUSINESS Revenues: Insurance policy income Net investment income and other Total revenues Benefits and expenses: Insurance policy benefits Amortization Other expenses Total benefits and expenses EBIT from New Business EBIT FROM IN-FORCE AND NEW BUSINESS Revenues: Insurance policy income Net investment income and other Total revenues Benefits and expenses: Insurance policy benefits Amortization Other expenses Total benefits and expenses EBIT from In-Force and New Business 82 CNO FINANCIAL GROUP, INC. - Form 10-K $ $ $ $ $ $ 2,163.4 1,263.2 3,426.6 2,136.4 228.2 357.5 2,722.1 704.5 360.3 43.3 403.6 240.6 26.4 342.2 609.2 (205.6) 2,523.7 1,306.5 3,830.2 2,377.0 254.6 699.7 3,331.3 498.9 $ $ $ $ $ $ $ $ $ 2,147.1 1,348.8 3,495.9 2,287.9 236.3 358.6 2,882.8 613.1 379.3 47.8 427.1 267.1 30.6 331.5 629.2 (202.1) $ 2,526.4 1,396.6 3,923.0 2,555.0 266.9 690.1 3,512.0 411.0 $ $ 2,131.4 1,179.7 3,311.1 2,107.1 237.9 370.3 2,715.3 595.8 378.3 38.7 417.0 260.7 29.6 311.1 601.4 (184.4) 2,509.7 1,218.4 3,728.1 2,367.8 267.5 681.4 3,316.7 411.4 PART II ITEM 7 Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations Bankers Life (dollars in millions) EBIT FROM IN-FORCE BUSINESS Revenues: Insurance policy income Net investment income and other Total revenues Benefits and expenses: Insurance policy benefits Amortization Other expenses Total benefits and expenses EBIT from In-Force Business EBIT FROM NEW BUSINESS Revenues: Insurance policy income Net investment income and other Total revenues Benefits and expenses: Insurance policy benefits Amortization Other expenses Total benefits and expenses EBIT from New Business EBIT FROM IN-FORCE AND NEW BUSINESS Revenues: Insurance policy income Net investment income and other Total revenues Benefits and expenses: Insurance policy benefits Amortization Other expenses Total benefits and expenses EBIT from In-Force and New Business 2014 2013 2012 $ $ $ $ $ $ 1,411.0 943.3 2,354.3 1,484.3 153.3 184.7 1,822.3 532.0 240.7 43.3 284.0 183.3 21.4 224.4 429.1 (145.1) 1,651.7 986.6 2,638.3 1,667.6 174.7 409.1 2,251.4 386.9 $ $ $ $ $ $ $ $ $ 1,378.0 976.9 2,354.9 1,574.7 160.9 176.7 1,912.3 442.6 270.7 47.8 318.5 214.0 26.6 210.0 450.6 (132.1) $ 1,648.7 1,024.7 2,673.4 1,788.7 187.5 386.7 2,362.9 310.5 $ $ 1,381.3 815.4 2,196.7 1,431.2 161.8 186.4 1,779.4 417.3 276.1 38.7 314.8 211.7 25.8 193.7 431.2 (116.4) 1,657.4 854.1 2,511.5 1,642.9 187.6 380.1 2,210.6 300.9 CNO FINANCIAL GROUP, INC. - Form 10-K 83 PART II ITEM 7 Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations Washington National (dollars in millions) EBIT FROM IN-FORCE BUSINESS Revenues: Insurance policy income Net investment income and other Total revenues Benefits and expenses: Insurance policy benefits Amortization Other expenses Total benefits and expenses EBIT from In-Force Business EBIT FROM NEW BUSINESS Revenues: Insurance policy income Net investment income and other Total revenues Benefits and expenses: Insurance policy benefits Amortization Other expenses Total benefits and expenses EBIT from New Business EBIT FROM IN-FORCE AND NEW BUSINESS Revenues: Insurance policy income Net investment income and other Total revenues Benefits and expenses: Insurance policy benefits Amortization Other expenses Total benefits and expenses EBIT from In-Force and New Business 2014 2013 2012 $ $ $ $ $ $ 552.1 277.2 829.3 505.2 60.0 141.2 706.4 122.9 73.9 — 73.9 31.0 4.6 50.0 85.6 (11.7) 626.0 277.2 903.2 536.2 64.6 191.2 792.0 111.2 $ $ $ $ $ $ $ $ $ 558.0 297.8 855.8 514.2 61.3 128.4 703.9 151.9 63.5 — 63.5 27.2 3.6 44.0 74.8 (11.3) $ 621.5 297.8 919.3 541.4 64.9 172.4 778.7 140.6 $ $ 550.0 290.3 840.3 476.4 62.0 134.3 672.7 167.6 58.9 — 58.9 24.2 2.9 50.6 77.7 (18.8) 608.9 290.3 899.2 500.6 64.9 184.9 750.4 148.8 84 CNO FINANCIAL GROUP, INC. - Form 10-K PART II ITEM 7 Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations Colonial Penn (dollars in millions) 2014 2013 2012 EBIT FROM IN-FORCE BUSINESS Revenues: Insurance policy income Net investment income and other Total revenues Benefits and expenses: Insurance policy benefits Amortization Other expenses Total benefits and expenses EBIT from In-Force Business EBIT FROM NEW BUSINESS Revenues: Insurance policy income Net investment income and other Total revenues Benefits and expenses: Insurance policy benefits Amortization Other expenses Total benefits and expenses EBIT from New Business EBIT FROM IN-FORCE AND NEW BUSINESS Revenues: Insurance policy income Net investment income and other Total revenues Benefits and expenses: Insurance policy benefits Amortization Other expenses Total benefits and expenses EBIT from In-Force and New Business Other CNO Business (dollars in millions) EBIT FROM IN-FORCE BUSINESS(a) Revenues: Insurance policy income Net investment income and other Total revenues Benefits and expenses: Insurance policy benefits Amortization Other expenses Total benefits and expenses EBIT from In-Force Business (a) All activity in the Other CNO Business segment related to in-force business. $ $ $ $ $ $ 200.3 42.7 243.0 146.9 14.9 31.6 193.4 49.6 45.7 — 45.7 26.3 .4 67.8 94.5 (48.8) 246.0 42.7 288.7 173.2 15.3 99.4 287.9 .8 $ $ $ $ $ $ $ $ $ $ $ 187.0 40.8 227.8 139.8 14.1 27.7 181.6 46.2 45.1 — 45.1 25.9 .4 77.5 103.8 (58.7) $ $ 232.1 40.8 272.9 165.7 14.5 105.2 285.4 (12.5) $ 174.5 41.1 215.6 136.3 14.1 24.6 175.0 40.6 43.3 — 43.3 24.8 .9 66.8 92.5 (49.2) 217.8 41.1 258.9 161.1 15.0 91.4 267.5 (8.6) 2013 2012 $ 24.1 33.3 57.4 59.2 — 25.8 85.0 (27.6) $ 25.6 32.9 58.5 63.2 — 25.0 88.2 (29.7) CNO FINANCIAL GROUP, INC. - Form 10-K 85 PART II ITEM 7 Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations The above analysis of EBIT, separated between in-force and new business, illustrates how our segments are impacted by the rate of sales, mix of business and distribution channel through which new sales are made. In addition, when the impacts from new business are separated, the value drivers of our in-force business are more apparent. The EBIT from in-force business in the Bankers Life segment grew in 2014 and 2013 primarily due to the growth in the size of the block. The EBIT from new business in the Bankers Life segment reflects new sales. The EBIT from in-force business in the Washington National segment was lower in 2014 due to the run-off of the Medicare supplement business in this segment and additional overhead expenses that were previously allocated to the Other CNO Business segment. EBIT from in-force business in the Washington National segment was lower in 2013 due to higher supplemental health benefit ratios and the run-off of the Medicare supplement business in this segment as compared to 2012. The EBIT from in-force business in the Colonial Penn segment in 2014 and 2013 reflects growth in the size of the block. The EBIT from new business in the Colonial Penn segment in 2014 reflects a modest increase in the deferral of acquisition costs due to a light shift to deferrable direct mail marketing activities. The vast majority of the costs to generate new business in this segment are not deferrable and EBIT will fluctuate based on management’s decisions on how much marketing costs to incur in each period. Premium Collections In accordance with GAAP, insurance policy income in our consolidated statement of operations consists of premiums earned for traditional insurance policies that have life contingencies or morbidity features. For annuity and interest-sensitive life contracts, premiums collected are not reported as revenues, but as deposits to insurance liabilities. We recognize revenues for these products over time in the form of investment income and surrender or other charges. Our insurance segments sell products through three primary distribution channels - career agents (our Bankers Life segment), direct marketing (our Colonial Penn segment) and independent producers (our Washington National segment). Our career agency force in the Bankers Life segment sells primarily Medicare supplement and long-term care insurance policies, life insurance and annuities. These agents visit the customer’s home, which permits one-on-one contact with potential policyholders and promotes strong personal relationships with existing policyholders. Our direct marketing distribution channel in the Colonial Penn segment is engaged primarily in the sale of graded benefit life and simplified issue life insurance policies which are sold directly to the policyholder. Our Washington National segment sells primarily supplemental health and life insurance. These products are marketed through PMA, a subsidiary that specializes in marketing and distributing health products, and through independent marketing organizations and insurance agencies, including worksite marketing. Agents, insurance brokers and marketing companies who market our products and prospective purchasers of our products use the financial strength ratings of our insurance subsidiaries as an important factor in determining whether to market or purchase. Ratings have the most impact on our sales of supplemental health and life products to consumers at the worksite. The current financial strength ratings of our primary insurance subsidiaries from A.M. Best, S&P, Fitch and Moody’s are “B++”, “BBB+”, “BBB” and “Baa2”, respectively. For a description of these ratings and additional information on our ratings, see “Consolidated Financial Condition - Financial Strength Ratings of our Insurance Subsidiaries.” We set premium rates on our health insurance policies based on facts and circumstances known at the time we issue the policies using assumptions about numerous variables, including the actuarial probability of a policyholder incurring a claim, the probable size of the claim, and the interest rate earned on our investment of premiums. We also consider historical claims information, industry statistics, the rates of our competitors and other factors. If our actual claims experience is less favorable than we anticipated and we are unable to raise our premium rates, our financial results may be adversely affected. We generally cannot raise our health insurance premiums in any state until we obtain the approval of the state insurance regulator. We review the adequacy of our premium rates regularly and file for rate increases on our products when we believe such rates are too low. It is likely that we will not be able to obtain approval for all requested premium rate increases. If such requests are denied in one or more states, our net income may decrease. If such requests are approved, increased premium rates may reduce the volume of our new sales and may cause existing policyholders to lapse their policies. If the healthier policyholders allow their policies to lapse, this would reduce our premium income and profitability in the future. 86 CNO FINANCIAL GROUP, INC. - Form 10-K PART II ITEM 7 Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations Total premium collections by segment were as follows: Bankers Life (dollars in millions) Premiums collected by product: Annuities: Fixed index (first-year) Other fixed rate (first-year) Other fixed rate (renewal) Subtotal - other fixed rate annuities Total annuities Health: Medicare supplement (first-year) Medicare supplement (renewal) Subtotal - Medicare supplement Long-term care (first-year) Long-term care (renewal) Subtotal - long-term care PDP (first year) PDP (renewal) Subtotal – PDP Supplemental health (first-year) Supplemental health (renewal) Subtotal – supplemental health Other health (first-year) Other health (renewal) Subtotal - other health Total health Life insurance: First-year Renewal Total life insurance Collections on insurance products: 2014 2013 2012 $ 646.2 129.1 7.0 136.1 782.3 88.6 654.7 743.3 16.8 483.8 500.6 — 6.8 6.8 7.6 8.7 16.3 .7 7.4 8.1 1,275.1 157.0 267.9 424.9 $ 566.8 $ 170.6 6.7 177.3 744.1 92.1 653.2 745.3 21.2 512.8 534.0 .1 18.1 18.2 8.3 1.6 9.9 1.3 9.1 10.4 1,317.8 163.3 205.0 368.3 505.0 198.0 6.0 204.0 709.0 99.4 617.8 717.2 23.4 523.1 546.5 .7 47.1 47.8 1.9 — 1.9 1.4 9.1 10.5 1,323.9 149.9 164.7 314.6 Total first-year premium collections on insurance products Total renewal premium collections on insurance products TOTAL COLLECTIONS ON INSURANCE PRODUCTS 1,046.0 1,436.3 2,482.3 $ 1,023.7 1,406.5 2,430.2 $ 979.7 1,367.8 2,347.5 $ Annuities in this segment include fixed index and other fixed annuities sold to the senior market. Annuity collections in this segment increased 5.1 percent, to $782.3 million in 2014 and 5.0 percent, to $744.1 million, in 2013. Premium collections from our fixed index products were favorably impacted in 2014 and 2013 by the general stock market performance which made these products attractive to certain customers. Premium collections from Bankers Life’s other fixed rate annuity products have decreased in recent periods as low new money rates negatively impacted our sales and the overall sales in the fixed rate annuity market. Health products include Medicare supplement, long-term care, PDP contracts and other insurance products. Our profits on health policies depend on the overall level of sales, the length of time the business remains inforce, investment yields, claims experience and expense management. Collected premiums on Medicare supplement policies in the Bankers Life segment decreased .3 percent, to $743.3 million, in 2014 and increased 3.9 percent, to $745.3 million, in 2013. In recent periods, we experienced a slight shift in the sale of Medicare supplement policies to the sale of Medicare Advantage policies. Medicare Advantage policies are sold through Bankers Life’s agency force for other providers in exchange for marketing fees. Our new agents often focus their sales efforts on Medicare supplement products. Accordingly, first year collected premiums on Medicare supplement policies were impacted by lower recruiting levels of new agents in 2014. Premiums collected on Bankers Life’s long-term care policies decreased 6.3 percent, to $500.6 million in 2014 and 2.3 percent, to $534.0 million in 2013, reflecting the run-off of this business and a continuing shift in the mix of new business to short-term care sales, which have lower premiums per policy. Premiums collected on PDP business related to our quota-share reinsurance agreement with Coventry. In August 2013, we received a notice of Coventry’s intent to terminate our PDP quota- share reinsurance agreement as further described in the note to the consolidated financial statements entitled “Summary of Significant CNO FINANCIAL GROUP, INC. - Form 10-K 87 PART II ITEM 7 Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations Accounting Policies - Reinsurance”. The premiums collected in 2014 represent adjustments to premiums on such business related to periods prior to the termination of the agreement. Premiums collected on supplemental health products relate to a new critical illness product that was introduced in 2012. Life products in this segment include traditional and interest- sensitive life products. Life premiums collected in this segment increased 15 percent, $424.9 million, in 2014 and 17 percent, to $368.3 million, in 2013. Collected premiums in 2014 and 2013 reflect higher sales in this segment in recent years and higher persistency. Washington National (dollars in millions) Premiums collected by product: Health: Medicare supplement (first-year) Medicare supplement (renewal) Subtotal - Medicare supplement Supplemental health (first-year) Supplemental health (renewal) Subtotal – supplemental health Other health (first-year) Other health (renewal) Subtotal – other health Total health Life insurance: First-year Renewal Total life insurance Annuities: Fixed index (first-year) Fixed index (renewal) Subtotal - fixed index annuities Other fixed rate (renewal) Total annuities Collections on insurance products: 2014 2013 2012 $ — $ 85.2 85.2 72.8 442.6 515.4 .2 2.2 2.4 603.0 4.4 21.5 25.9 .2 1.8 2.0 .6 2.6 $ .3 101.6 101.9 64.7 426.6 491.3 .2 2.9 3.1 596.3 4.6 21.9 26.5 .4 3.4 3.8 .5 4.3 1.0 112.9 113.9 59.2 400.5 459.7 — 3.4 3.4 577.0 4.1 19.7 23.8 .6 2.3 2.9 .6 3.5 Total first-year premium collections on insurance products Total renewal premium collections on insurance products TOTAL COLLECTIONS ON INSURANCE PRODUCTS 77.6 553.9 631.5 $ 70.2 556.9 627.1 $ 64.9 539.4 604.3 $ Health products in the Washington National segment include Medicare supplement, supplemental health and other insurance products. Our profits on health policies depend on the overall level of sales, the length of time the business remains inforce, investment yields, claim experience and expense management. Collected premiums on Medicare supplement policies in the Washington National segment decreased 16 percent, to $85.2 million, in 2014 and 11 percent, to $101.9 million, in 2013. We discontinued new sales of Medicare supplement policies in this segment in the fourth quarter of 2012. Premiums collected on supplemental health products (including specified disease, accident and hospital indemnity insurance products) increased 4.9 percent, to $515.4 million, in 2014 and 6.9 percent, to $491.3 million, in 2013. Such increases are due to higher new sales in each year and steady persistency. Overall, excluding premiums from the Washington National Medicare supplement and annuity blocks which are in run-off, collected premiums were up 4.4 percent in 2014 compared to 2013, driven by strong sales and persistency. Life products in the Washington National segment are primarily traditional life products. Life premiums collected decreased 2.3 percent, to $25.9 million, in 2014 and increased 11 percent, to $26.5 million, in 2013. Annuities in this segment include fixed index and other fixed annuities. We are no longer actively pursuing sales of annuity products in this segment. 88 CNO FINANCIAL GROUP, INC. - Form 10-K PART II ITEM 7 Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations Colonial Penn (dollars in millions) Premiums collected by product: Life insurance: First-year Renewal Total life insurance Health (all renewal): Medicare supplement Other health Total health Collections on insurance products: Total first-year premium collections on insurance products Total renewal premium collections on insurance products TOTAL COLLECTIONS ON INSURANCE PRODUCTS Life products in this segment are sold primarily to the senior market. Life premiums collected in this segment increased 6.2 percent, to $241.7 million, in 2014 and 7.4 percent, to $227.6 million, in 2013. Graded benefit life products sold through our direct response marketing channel accounted for $239.5 million, $225.2 million and $209.2 million of collected premiums in 2014, 2013 and 2012, respectively. Other CNO Business (dollars in millions) Premiums collected by product: Health: Long-term care (all renewal) 2014 2013 2012 $ $ 45.7 196.0 241.7 3.2 .2 3.4 45.7 199.4 245.1 $ $ $ 45.2 182.4 227.6 3.7 .4 4.1 45.2 186.5 231.7 $ 43.1 168.8 211.9 4.5 .4 4.9 43.1 173.7 216.8 Health products include Medicare supplement and other insurance products. Our profits on health policies depend on the overall level of sales, the length of time the business remains inforce, investment yields, claims experience and expense management. Premiums collected on these products have decreased as we do not currently market these products through this segment. 2014 2013 2012 $ — $ 23.6 $ 25.1 The Other CNO Business segment reflected the long-term care premiums collected prior to the reinsurance agreement with BRe effective December 31, 2013. Refer to the note to the consolidated financial statements entitled “Summary of Significant Accounting Policies - Reinsurance” for additional information. Investments Our investment strategy is to: (i) provide largely stable investment income from a diversified high quality fixed income portfolio; (ii) mitigate the effect of changing interest rates through active asset/liability management; (iii) provide liquidity to meet our cash obligations to policyholders and others; and (iv) maximize total return through active investment management. Consistent with this strategy, investments in fixed maturity securities, mortgage loans and policy loans made up 90 percent of our $24.9 billion investment portfolio at December 31, 2014. The remainder of the invested assets was trading securities, investments held by variable interest entities, equity securities and other invested assets. The following table summarizes the composition of our investment portfolio as of December 31, 2014 (dollars in millions): Fixed maturities, available for sale Equity securities Mortgage loans Policy loans Trading securities Investments held by variable interest entities Company-owned life insurance Other invested assets TOTAL INVESTMENTS Carrying value 20,634.9 419.0 1,691.9 106.9 244.9 1,367.1 157.6 286.0 24,908.3 $ $ Percent of total investments 83% 2 7 — 1 5 1 1 100% CNO FINANCIAL GROUP, INC. - Form 10-K 89 PART II ITEM 7 Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations Insurance statutes regulate the types of investments that our insurance subsidiaries are permitted to make and limit the amount of funds that may be used for any one type of investment. In addition, we have internal management compliance limits on various exposures and activities which are typically more restrictive than insurance statutes. In light of these statutes and regulations and our business and investment strategy, we generally seek to invest in United States government and government- agency securities and corporate securities rated investment grade by established nationally recognized rating organizations or in securities of comparable investment quality, if not rated. The following table summarizes the carrying values and gross unrealized losses of our fixed maturity securities, available for sale, by category as of December 31, 2014 (dollars in millions): $ States and political subdivisions Energy/pipelines Utilities Insurance Collateralized mortgage obligations Commercial mortgage-backed securities Asset-backed securities Healthcare/pharmaceuticals Food/beverage Cable/media Real estate/REITs Banks Capital goods Aerospace/defense Transportation Chemicals Telecom Collateralized debt obligations Building materials Metals and mining Paper Brokerage Technology Business services Other TOTAL FIXED MATURITIES, AVAILABLE FOR SALE $ Carrying value 2,277.7 2,007.2 1,780.7 1,468.8 1,341.0 1,276.3 1,269.0 1,133.0 928.8 853.4 723.2 662.5 587.7 401.7 397.2 396.7 371.5 324.5 324.2 281.0 260.5 250.3 220.2 208.3 889.5 20,634.9 Percent of fixed maturities 11.0% $ 9.7 8.6 7.1 6.5 6.2 6.2 5.5 4.5 4.1 3.5 3.2 2.8 1.9 1.9 1.9 1.8 1.6 1.6 1.4 1.3 1.2 1.1 1.0 4.4 100.0% $ Gross unrealized losses 3.0 49.0 — .7 1.3 .5 3.4 1.2 3.5 3.2 .1 .5 1.7 1.2 — 1.3 2.7 3.4 3.7 7.3 .1 .7 .4 5.8 2.1 96.8 Percent of gross unrealized losses 3.1% 50.6 — .7 1.4 .6 3.5 1.2 3.6 3.3 .1 .6 1.7 1.3 — 1.3 2.8 3.5 3.8 7.6 .1 .7 .4 6.0 2.1 100.0% At December 31, 2014, the carrying value of the Company’s fixed maturity securities in the energy/pipeline sector was $2.0 billion, with gross unrealized gains of $194.7 million and gross unrealized losses of $49.0 million. Although these securities are of high quality (87 percent are rated investment grade) and diversified (over 85 individual credits/issuers), we could be exposed to future downgrades and declines in market values if oil prices remain at low levels for an extended period of time. 90 CNO FINANCIAL GROUP, INC. - Form 10-K PART II ITEM 7 Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations The following table summarizes the gross unrealized losses of our fixed maturity securities, available for sale, by category and ratings category as of December 31, 2014 (dollars in millions): Energy/pipelines Metals and mining Business services Building materials Food/beverage Asset-backed securities Collateralized debt obligations Cable/media States and political subdivisions Telecom Capital goods Collateralized mortgage obligations Chemicals Aerospace/defense Healthcare/pharmaceuticals Retail Brokerage Insurance Commercial mortgage-backed securities Banks Technology Autos Consumer products Paper United States Treasury securities and obligations of United States government corporations and agencies Entertainment/hotels Gaming Other TOTAL FIXED MATURITIES, AVAILABLE FOR SALE Investment grade AAA/AA/A $ 1.6 $ — — — .3 .5 3.4 — .7 — — .5 — — — — — .1 .5 .4 — — — — .1 — — — $ BBB 26.3 6.7 — — .2 1.1 — 1.5 — — .1 .1 1.1 — 1.0 .8 .5 .6 — .1 — .1 — .1 — — — .6 Below-investment grade BB 6.4 $ .6 5.7 3.3 2.1 .1 — .9 2.3 1.6 — .3 — .1 .2 — .2 — — — .1 .2 .1 — — .1 .1 — B+ and below 14.7 — .1 .4 .9 1.7 — .8 — 1.2 1.6 .4 .2 1.1 — — — — — — .3 — — — — — — — Total gross unrealized losses 49.0 $ 7.3 5.8 3.7 3.5 3.4 3.4 3.2 3.0 2.8 1.7 1.3 1.3 1.2 1.2 .8 .7 .7 .5 .5 .4 .3 .1 .1 .1 .1 .1 .6 $ 8.1 $ 40.9 $ 24.4 $ 23.4 $ 96.8 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. Our fixed maturity securities consist predominantly of publicly traded securities. We classify securities issued in the Rule 144A market as publicly traded. Securities not publicly traded comprise approximately 10 percent of our total fixed maturity securities portfolio. Fair Value of Investments Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date and, therefore, represents an exit price, not an entry price. We carry certain assets and liabilities at fair value on a recurring basis, including fixed maturities, equity securities, trading securities, investments held by VIEs, derivatives, cash and cash equivalents, separate account assets and embedded derivatives. We carry our company-owned life insurance policy, which is backed by a series of mutual funds, at its cash surrender value and our hedge fund investments at their net asset values; in both cases, we believe these values approximate their fair values. In addition, we disclose fair value for certain financial instruments, including mortgage loans and policy loans, insurance liabilities for interest-sensitive products, investment borrowings, notes payable and borrowings related to VIEs. The degree of judgment utilized in measuring the fair value of financial instruments is largely dependent on the level to which pricing is based on observable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our view of market assumptions in the absence of observable market data. Financial instruments with readily available active quoted prices would be considered to have fair values based on the highest level of observable inputs, and little judgment would be utilized in measuring fair value. Financial CNO FINANCIAL GROUP, INC. - Form 10-K 91 PART II ITEM 7 Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations instruments that rarely trade would often have fair value based on a lower level of observable inputs, and more judgment would be utilized in measuring fair value. Valuation Hierarchy There is a three-level hierarchy for valuing assets or liabilities at fair value based on whether inputs are observable or unobservable. • Level 1 – includes assets and liabilities valued using inputs that are unadjusted quoted prices in active markets for identical assets or liabilities. Our Level 1 assets primarily include cash and exchange traded securities. • Level 2 – includes assets and liabilities valued using inputs that are quoted prices for similar assets in an active market, quoted prices for identical or similar assets in a market that is not active, observable inputs, or observable inputs that can be corroborated by market data. Level 2 assets and liabilities include those financial instruments that are valued by independent pricing services using models or other valuation methodologies. These models consider various inputs such as interest rate, credit or issuer spreads, reported trades and other inputs that are observable or derived from observable information in the marketplace or are supported by observable levels at which transactions are executed in the marketplace. Financial assets in this category primarily include: certain public and privately placed corporate fixed maturity securities; certain government or agency securities; certain mortgage and asset-backed securities; certain equity securities; most investments held by our consolidated VIEs; certain mutual fund and hedge fund investments; and most short-term investments; and non-exchange-traded derivatives such as call options to hedge liabilities related to our fixed index annuity products. Financial liabilities in this category include investment borrowings, notes payable and borrowings related to VIEs. • Level 3 – includes assets and liabilities valued using unobservable inputs that are used in model-based valuations that contain management assumptions. Level 3 assets and liabilities include those financial instruments whose fair value is estimated based on broker/dealer quotes, pricing services or internally developed models or methodologies utilizing significant inputs not based on, or corroborated by, readily available market information. Financial assets in this category include certain corporate securities (primarily certain below-investment grade privately placed securities), certain structured securities, mortgage loans, and other less liquid securities. Financial liabilities in this category include our insurance liabilities for interest-sensitive products, which includes embedded derivatives (including embedded derivatives related to our fixed index annuity products and to a modified coinsurance arrangement) since their values include significant unobservable inputs including actuarial assumptions. At each reporting date, we classify assets and liabilities into the three input levels based on the lowest level of input that is significant to the measurement of fair value for each asset and liability reported at fair value. This classification is impacted by a number of factors, including the type of financial instrument, whether the financial instrument is new to the market and not yet established, the characteristics specific to the transaction and overall market conditions. Our assessment of the significance of a particular input to the fair value measurement and the ultimate classification of each asset and liability requires judgment and is subject to change from period to period based on the observability of the valuation inputs. Any transfers between levels are reported as having occurred at the beginning of the period. There were no transfers between Level 1 and Level 2 in 2014 and 2013. The vast majority of our fixed maturity and equity securities, including those held in trading portfolios and those held by consolidated VIEs, short-term and separate account assets use Level 2 inputs for the determination of fair value. These fair values are obtained primarily from independent pricing services, which use Level 2 inputs for the determination of fair value. Substantially all of our Level 2 fixed maturity securities and separate account assets were valued from independent pricing services. Third party pricing services normally derive the security prices through recently reported trades for identical or similar securities making adjustments through the reporting date based upon available market observable information. If there are no recently reported trades, the third party pricing services may use matrix or model processes to develop a security price where future cash flow expectations are discounted at an estimated risk- adjusted market rate. The number of prices obtained for a given security is dependent on the Company’s analysis of such prices as further described below. For securities that are not priced by pricing services and may not be reliably priced using pricing models, we obtain broker quotes. These broker quotes are non-binding and represent an exit price, but assumptions used to establish the fair value may not be observable and therefore represent Level 3 inputs. Approximately 26 percent of our Level 3 fixed maturity securities were valued using unadjusted broker quotes or broker-provided valuation inputs. The remaining Level 3 fixed maturity investments do not have readily determinable market prices and/or observable inputs. For these securities, we use internally developed valuations. Key assumptions used to determine fair value for these securities may include risk-free rates, risk premiums, performance of underlying collateral and other factors involving significant assumptions which may not be reflective of an active market. For certain investments, we use a matrix or model process to develop a security price where future cash flow expectations are developed and discounted at an estimated market rate. The pricing matrix incorporates term interest rates as well as a spread level based on the issuer’s credit rating and other factors relating to the issuer and the security’s maturity. In some instances issuer-specific spread adjustments, which can be positive or negative, are made based upon internal analysis of security specifics such as liquidity, deal size, and time to maturity. As the Company is responsible for the determination of fair value, we have control processes designed to ensure that the fair values received from third-party pricing sources are reasonable and the valuation techniques and assumptions used appear reasonable and consistent with prevailing market conditions. Additionally, when inputs are provided by third-party pricing sources, we have controls in place to review those inputs for reasonableness. As part of these controls, we perform monthly quantitative and qualitative analysis on the prices received from third parties to determine whether the prices are reasonable estimates of fair value. The Company’s analysis includes: (i) a review of the methodology used by third party pricing services; (ii) where available, a comparison of multiple pricing services’ valuations for the same security; 92 CNO FINANCIAL GROUP, INC. - Form 10-K PART II ITEM 7 Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations (iii) a review of month to month price fluctuations; (iv) a review to ensure valuations are not unreasonably dated; and (v) back testing to compare actual purchase and sale transactions with valuations received from third parties. As a result of such procedures, the Company may conclude the prices received from third parties are not reflective of current market conditions. In those instances, we may request additional pricing quotes or apply internally developed valuations. However, the number of instances is insignificant and the aggregate change in value of such investments is not materially different from the original prices received. The categorization of the fair value measurements of our investments priced by independent pricing services was based upon the Company’s judgment of the inputs or methodologies used by the independent pricing services to value different asset classes. Such inputs typically include: benchmark yields, reported trades, broker dealer quotes, issuer spreads, benchmark securities, bids, offers and reference data. The Company categorizes such fair value measurements based upon asset classes and the underlying observable or unobservable inputs used to value such investments. The fair value measurements for derivative instruments, including embedded derivatives requiring bifurcation, are determined based on the consideration of several inputs including closing exchange or over-the-counter market price quotations; time value and volatility factors underlying options; market interest rates; and non-performance risk. For certain embedded derivatives, we use actuarial assumptions in the determination of fair value. The categorization of fair value measurements, by input level, for our financial instruments carried at fair value on a recurring basis at December 31, 2014 is as follows (dollars in millions): ASSETS: Fixed maturities, available for sale: Corporate securities United States Treasury securities and obligations of United States government corporations and agencies States and political subdivisions Debt securities issued by foreign governments Asset-backed securities Collateralized debt obligations Commercial mortgage-backed securities Mortgage pass-through securities Collateralized mortgage obligations Total fixed maturities, available for sale Equity securities - corporate securities Trading securities: Corporate securities United States Treasury securities and obligations of United States government corporations and agencies Asset-backed securities Commercial mortgage-backed securities Mortgage pass-through securities Collateralized mortgage obligations Equity securities Total trading securities Investments held by variable interest entities - corporate securities Other invested assets - derivatives Assets held in separate accounts TOTAL ASSETS CARRIED AT FAIR VALUE BY CATEGORY LIABILITIES: Future policy benefits - embedded derivatives associated with fixed index annuity products Quoted prices in active markets for identical assets or liabilities (Level 1) Significant other observable inputs (Level 2) Significant unobservable inputs (Level 3) Total $ — $ 13,605.1 $ 365.9 $ 13,971.0 — — — — — — — — — 216.9 — — — — — — 3.5 3.5 — 1.4 — 168.9 2,242.2 1.9 1,209.8 324.5 1,275.1 4.2 1,341.0 20,172.7 174.1 24.3 3.7 24.0 131.0 .1 29.7 — 212.8 1,367.1 107.2 5.6 — 35.5 — 59.2 — 1.2 .4 — 462.2 28.0 — — — 28.6 — — — 28.6 — — — 168.9 2,277.7 1.9 1,269.0 324.5 1,276.3 4.6 1,341.0 20,634.9 419.0 24.3 3.7 24 159.6 .1 29.7 3.5 244.9 1,367.1 108.6 5.6 $ $ 221.8 $ 22,039.5 $ 518.8 $ 22,780.1 — $ — $ 1,081.5 $ 1,081.5 CNO FINANCIAL GROUP, INC. - Form 10-K 93 PART II ITEM 7 Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations The following table presents additional information about assets and liabilities measured at fair value on a recurring basis and for which we have utilized significant unobservable (Level 3) inputs to determine fair value for the year ended December 31, 2014 (dollars in millions): December 31, 2014 Beginning balance as of December 31, 2013 Purchases, sales, issuances and settlements, net(b) Total realized and unrealized gains (losses) included in net income Total realized and unrealized gains (losses) included in accumulated other comprehensive income (loss) Transfers into Level 3 (a) Transfers out of Level 3(a) Assets of CLIC sold Ending balance as of December 31, 2014 Amount of total gains (losses) for the year ended December 31, 2014 included in our net income relating to assets and liabilities still held as of the reporting date $ 359.6 $ 70.0 $ — $ 20.1 $ 36.8 $ (69.4) $ (51.2) $ 365.9 $ — 42.2 246.7 — 1.6 650.1 24.5 (1.8) 7.6 — 1.1 (1.2) 75.7 3.5 — 29.0 — — — — — — — — 3.0 5.1 — .1 — 36.5 14.0 — — — — — (246.7) — — (2.2) (9.7) — — — 35.5 59.2 — 1.2 .4 28.3 87.3 (316.1) (63.1) 462.2 — (.4) — — — — 28.0 28.6 — — — — — — — — (.4) ASSETS: Fixed maturities, available for sale: Corporate securities States and political subdivisions Asset-backed securities Collateralized debt obligations Commercial mortgage- backed securities Mortgage pass-through securities Total fixed maturities, available for sale Equity securities - corporate securities Trading securities - commercial mortgage- backed securities LIABILITIES: Future policy benefits - embedded derivatives associated with fixed index annuity products Other liabilities - embedded derivatives associated with modified coinsurance agreement Total liabilities (903.7) (104.3) (73.5) — — (1.8) (905.5) 1.8 (102.5) — (73.5) — — — — — (1,081.5) (73.5) — — — (1,081.5) — (73.5) (a) Transfers into Level 3 are the result of unobservable inputs utilized within valuation methodologies for assets that were previously valued using observable inputs. Transfers out of Level 3 are due to the use of observable inputs in valuation methodologies as well as the utilization of pricing service information for certain assets that the Company is able to validate. 94 CNO FINANCIAL GROUP, INC. - Form 10-K — — — — — PART II ITEM 7 Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations (b) Purchases, sales, issuances and settlements, net, represent the activity that occurred during the period that results in a change of the asset or liability but does not represent changes in fair value for the instruments held at the beginning of the period. Such activity primarily consists of purchases and sales of fixed maturity and equity securities and changes to embedded derivative instruments related to insurance products resulting from the issuance of new contracts, or changes to existing contracts. The following summarizes such activity for the year ended December 31, 2014 (dollars in millions): Purchases Sales Issuances Settlements Purchases, sales, issuances and settlements, net ASSETS: Fixed maturities, available for sale: Corporate securities States and political subdivisions Asset-backed securities Commercial mortgage-backed securities Mortgage pass-through securities Total fixed maturities, available for sale $ Equity securities - corporate securities Trading securities - commercial mortgage-backed securities LIABILITIES: Future policy benefits - embedded derivatives associated with fixed index annuity products Other liabilities - embedded derivatives associated with modified coinsurance agreement Total liabilities 71.7 — 9.9 1.1 1.1 83.8 3.5 29.0 (121.9) — (121.9) $ (1.7) $ (1.8) (2.3) — (2.3) (8.1) — — $ — — — — — — — $ — — — — — — — — — 7.5 3.4 10.9 (45.9) (1.6) (47.5) 56.0 — 56.0 70.0 (1.8) 7.6 1.1 (1.2) 75.7 3.5 29.0 (104.3) 1.8 (102.5) At December 31, 2014, 85 percent of our Level 3 fixed maturities, available for sale, were investment grade and 79 percent of our Level 3 fixed maturities, available for sale, consisted of corporate securities. changes in fair value of trading securities and certain derivatives and changes in fair value of embedded derivative instruments included in liabilities for insurance products that exist as of the reporting date. Realized and unrealized investment gains and losses presented in the preceding tables represent gains and losses during the time the applicable financial instruments were classified as Level 3. Realized and unrealized gains (losses) on Level 3 assets are primarily reported in either net investment income for policyholder and reinsurer accounts and other special-purpose portfolios, net realized investment gains (losses) or insurance policy benefits within the consolidated statement of operations or accumulated other comprehensive income within shareholders’ equity based on the appropriate accounting treatment for the instrument. The amount presented for gains (losses) included in our net loss for assets and liabilities still held as of the reporting date primarily represents impairments for fixed maturities, available for sale, Investment ratings are assigned the second lowest rating by Nationally Recognized Statistical Rating Organizations (“NRSROs”) (Moody’s, S&P or Fitch), or if not rated by such firms, the rating assigned by the NAIC. NAIC designations of “1” or “2” include fixed maturities generally rated investment grade (rated “Baa3” or higher by Moody’s or rated “BBB-” or higher by S&P and Fitch). NAIC designations of “3” through “6” are referred to as below-investment grade (which generally are rated “Ba1” or lower by Moody’s or rated “BB+” or lower by S&P and Fitch). References to investment grade or below- investment grade throughout our consolidated financial statements are determined as described above. The following table sets forth fixed maturity investments at December 31, 2014, classified by ratings (dollars in millions): Investment rating AAA AA A BBB+ BBB BBB- Investment grade BB+ BB BB- B+ and below Below-investment grade TOTAL FIXED MATURITY SECURITIES Estimated fair value Amount 1,038.1 1,998.4 5,669.5 2,650.3 3,708.9 3,153.6 18,218.8 263.6 310.5 438.0 1,404.0 2,416.1 20,634.9 $ $ Percent of fixed maturities 5% 10 27 13 18 15 88 1 2 2 7 12 100% $ Amortized cost 971.9 1,745.6 4,840.4 2,275.9 3,326.7 2,908.4 16,068.9 252.0 310.7 437.9 1,338.6 2,339.2 18,408.1 $ CNO FINANCIAL GROUP, INC. - Form 10-K 95 PART II ITEM 7 Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations The following table summarizes investment yields earned over the past three years on the general account invested assets of our insurance subsidiaries. General account investments exclude the value of options (dollars in millions). Weighted average general account invested assets at amortized cost Net investment income on general account invested assets Yield earned Although investment income is a significant component of total revenues, the profitability of certain of our insurance products is evaluated primarily by the spreads between the interest rates we earn and the rates we credit or accrue to our insurance liabilities. At both December 31, 2014 and 2013, the average yield, computed on the cost basis of our fixed maturity portfolio, was 5.6 percent and the average interest rate credited or accruing to our total insurance liabilities (excluding interest rate bonuses for the first policy year only and excluding the effect of credited rates attributable to variable or fixed index products) was 4.5 percent. Fixed Maturities, Available for Sale Our fixed maturity portfolio at December 31, 2014, included primarily debt securities of the United States government, various corporations, and structured securities. Asset-backed securities, collateralized debt obligations, commercial mortgage-backed securities, mortgage pass-through securities and collateralized mortgage obligations are collectively referred to as “structured securities”. At December 31, 2014, our fixed maturity portfolio had $2,323.6 million of unrealized gains and $96.8 million of unrealized losses, for a net unrealized gain of $2,226.8 million. Estimated fair values of fixed maturity investments were determined based on estimates from: (i) nationally recognized pricing services (89 percent of the portfolio); (ii) broker-dealer market makers (1 percent of the portfolio); and (iii) internally developed methods (10 percent of the portfolio). At December 31, 2014, approximately 10 percent of our invested assets (12 percent of fixed maturity investments) were fixed maturities rated below-investment grade. Our level of investments in below-investment grade fixed maturities could change based on market conditions or changes in our management policies. Below-investment grade corporate debt securities have different characteristics than investment grade corporate debt securities. Based on historical performance, probability of default by the borrower is significantly greater for below-investment grade securities and in many cases severity of loss is relatively greater as such securities are often subordinated to other indebtedness of the issuer. Also, issuers of below-investment grade securities frequently have higher levels of debt relative to investment-grade issuers, hence, all other things being equal, are more sensitive to adverse economic conditions, such as recession or increasing interest rates. The Company attempts to reduce the overall risk related to its investment in below-investment grade securities, as in all investments, through careful credit analysis, strict investment policy guidelines, and diversification by issuer and/or guarantor and by industry. At December 31, 2014, our below-investment grade fixed maturity investments had an amortized cost of $2,339.2 million and an estimated fair value of $2,416.1 million. $ 2014 22,939.9 1,304.3 $ 2013 24,693.2 1,412.5 $ 2012 24,215.5 1,394.9 5.69% 5.72% 5.76% We continually evaluate the creditworthiness of each issuer whose securities we hold. We pay special attention to large investments, investments which have significant risk characteristics and to those securities whose fair values have declined materially for reasons other than changes in interest rates or other general market conditions. We evaluate the realizable value of the investment, the specific condition of the issuer and the issuer’s ability to comply with the material terms of the security. We review the recent operational results and financial position of the issuer, information about its industry, information about factors affecting the issuer’s performance and other information. 40|86 Advisors employs experienced securities analysts in a broad variety of specialty areas who compile and review such data. If evidence does not exist to support a realizable value equal to or greater than the amortized cost of the investment, and such decline in fair value is determined to be other than temporary, we reduce the amortized cost to its fair value, which becomes the new cost basis. We report the amount of the reduction as a realized loss. We recognize any recovery of such reductions as investment income over the remaining life of the investment (but only to the extent our current valuations indicate such amounts will ultimately be collected), or upon the repayment of the investment. During 2014, we recognized net realized investment gains of $36.7 million, which were comprised of: (i) $54.4 million of net gains from the sales of investments (primarily fixed maturities) with proceeds of $2.1 billion; (ii) the increase in fair value of certain fixed maturity investments with embedded derivatives of $7.6 million; (iii) the increase in fair value of embedded derivatives related to a modified coinsurance agreement of $2.0 million; and (iv) $27.3 million of writedowns of investments for other than temporary declines in fair value recognized through net income. Our investment portfolio is subject to the risk of declines in realizable value. However, we attempt to mitigate this risk through the diversification and active management of our portfolio. 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. As of December 31, 2014, we had no investments in substantive default (i.e., in default due to nonpayment of interest or principal). There were no other fixed maturity investments about which we had serious doubts as to the recoverability of the carrying value of the investment. When a security defaults or securities (other than structured securities) are other-than-temporarily impaired, our policy is to discontinue the accrual of interest and eliminate all previous 96 CNO FINANCIAL GROUP, INC. - Form 10-K PART II ITEM 7 Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations interest accruals, if we determine that such amounts will not be ultimately realized in full. Investment income forgone on nonperforming investments was less than $.1 million, $.5 million and $.6 million for the years ended December 31, 2014, 2013 and 2012, respectively. At December 31, 2014 fixed maturity investments included structured securities with an estimated fair value of $4.2 billion (or 20 percent of all fixed maturity securities). The yield characteristics of structured securities generally differ in some respects from those of traditional corporate fixed-income securities or government securities. For example, interest and principal payments on structured securities may occur more frequently, often monthly. In many instances, we are subject to variability in the amount and timing of principal and interest payments. For example, in many cases, partial prepayments may occur at the option of the issuer and prepayment rates are influenced by a number of factors that cannot be predicted with certainty, including: the relative sensitivity of prepayments on the underlying assets backing the security to changes in interest rates and asset values; the availability and cost of alternative financing; a variety of economic, geographic and other factors; the timing, pace and proceeds of liquidations of defaulted collateral; and various security-specific structural considerations (for example, the repayment priority of a given security in a securitization structure). In addition, the total amount of payments for non-agency structured securities may be affected by changes to cumulative default rates or loss severities of the related collateral. Historically, the rate of prepayments on structured securities has tended to increase when prevailing interest rates have declined significantly in absolute terms and also relative to the interest rates on the underlying collateral. The yields recognized on structured securities purchased at a discount to par will generally increase (relative to the stated rate) when the underlying collateral prepays faster than expected. The yields recognized on structured securities purchased at a premium will decrease (relative to the stated rate) when the underlying collateral prepays faster than expected. When interest rates decline, the proceeds from prepayments may be reinvested at lower rates than we were earning on the prepaid securities. When interest rates increase, prepayments may decrease below expected levels. When this occurs, the average maturity and duration of structured securities increases, decreasing the yield on structured securities purchased at discounts and increasing the yield on those purchased at a premium because of a decrease in the annual amortization of premium. For structured securities included in fixed maturities, available for sale, that were purchased at a discount or premium, we recognize investment income using an effective yield based on anticipated future prepayments and the estimated final maturity of the securities. Actual prepayment experience is periodically reviewed and effective yields are recalculated when differences arise between the prepayments originally anticipated and the actual prepayments received and currently anticipated. For credit sensitive mortgage- backed and asset-backed securities, and for securities that can be prepaid or settled in a way that we would not recover substantially all of our investment, the effective yield is recalculated on a prospective basis. Under this method, the amortized cost basis in the security is not immediately adjusted and a new yield is applied prospectively. For all other structured and asset-backed securities, the effective yield is recalculated when changes in assumptions are made, and reflected in our income on a retrospective basis. Under this method, the amortized cost basis of the investment in the securities is adjusted to the amount that would have existed had the new effective yield been applied since the acquisition of the securities. Such adjustments were not significant in 2014. The following table sets forth the par value, amortized cost and estimated fair value of structured securities, summarized by interest rates on the underlying collateral, at December 31, 2014 (dollars in millions): Below 4 percent 4 percent – 5 percent 5 percent – 6 percent 6 percent – 7 percent 7 percent – 8 percent 8 percent and above TOTAL STRUCTURED SECURITIES Par value 1,160.7 759.5 1,880.0 533.6 85.3 20.0 4,439.1 $ $ Amortized cost 887.8 717.6 1,760.1 496.5 87.0 20.9 3,969.9 $ $ Estimated fair value 908.0 757.7 1,882.2 544.7 101.3 21.5 4,215.4 $ $ The amortized cost and estimated fair value of structured securities at December 31, 2014, summarized by type of security, were as follows (dollars in millions): Type Pass-throughs, sequential and equivalent securities Planned amortization classes, target amortization classes and accretion-directed bonds Commercial mortgage-backed securities Asset-backed securities Collateralized debt obligations Other TOTAL STRUCTURED SECURITIES Estimated fair value Amount 1,033.4 262.0 1,276.3 1,269.0 324.5 50.2 4,215.4 $ $ Percent of fixed maturities 5.0% 1.3 6.2 6.1 1.6 .2 20.4% $ Amortized cost 969.4 243.3 1,195.0 1,186.6 325.3 50.3 3,969.9 $ CNO FINANCIAL GROUP, INC. - Form 10-K 97 PART II ITEM 7 Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations Pass-throughs, sequentials and equivalent securities have unique prepayment variability characteristics. Pass-through securities typically return principal to the holders based on cash payments from the underlying mortgage obligations. Sequential securities return principal to tranche holders in a detailed hierarchy. Planned amortization classes, targeted amortization classes and accretion- directed bonds adhere to fixed schedules of principal payments as long as the underlying mortgage loans experience prepayments within certain estimated ranges. In most circumstances, changes in prepayment rates are first absorbed by support or companion classes insulating the timing of receipt of cash flows from the consequences of both faster prepayments (average life shortening) and slower prepayments (average life extension). securities are Commercial mortgage-backed secured by commercial real estate mortgages, generally income producing properties that are managed for profit. Property types include multi-family dwellings including apartments, retail centers, hotels, restaurants, hospitals, nursing homes, warehouses, and office buildings. While most commercial mortgage-backed securities have call protection features whereby underlying borrowers may not prepay their mortgages for stated periods of time without incurring prepayment penalties, recoveries on defaulted collateral may result in involuntary prepayments. During 2014, we sold $233.7 million of fixed maturity investments which resulted in gross investment losses (before income taxes) of $13.0 million. 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 cash flows. Other Investments At December 31, 2014, we held commercial mortgage loan investments with a carrying value of $1,691.9 million (or 6.8 percent of total invested assets) and a fair value of $1,768.9 million. We had no mortgage loans that were in the process of foreclosure at December 31, 2014. During 2014, 2013 and 2012, we recognized $6.8 million, $.8 million and $5.4 million, respectively, of impairments on commercial mortgage loans. Our commercial mortgage loan portfolio is comprised of large commercial mortgage loans. We do not hold groups of smaller-balance homogeneous loans. Our loans have risk characteristics that are individually unique. Accordingly, we measure potential losses on a loan-by-loan basis rather than establishing an allowance for losses on mortgage loans. Approximately 13 percent, 10 percent and 7 percent of the mortgage loan balance were on properties located in California, Texas and Maryland, respectively. No other state comprised greater than five percent of the mortgage loan balance. The following table shows the distribution of our commercial mortgage loan portfolio by property type as of December 31, 2014 (dollars in millions): Retail Office building Multi-family Industrial Other TOTAL COMMERCIAL MORTGAGE LOANS $ Number of loans Carrying value 473.2 471.2 428.4 223.3 95.8 1,691.9 124 56 31 28 9 248 $ The following table shows our commercial mortgage loan portfolio by loan size as of December 31, 2014 (dollars in millions): $ Number of loans Carrying value 224.5 425.3 481.2 560.9 1,691.9 129 61 35 23 248 $ Under $5 million $5 million but less than $10 million $10 million but less than $20 million Over $20 million TOTAL COMMERCIAL MORTGAGE LOANS 98 CNO FINANCIAL GROUP, INC. - Form 10-K PART II ITEM 7 Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations The following table summarizes the distribution of maturities of our commercial mortgage loans as of December 31, 2014 (dollars in millions): 2015 2016 2017 2018 2019 after 2019 TOTAL COMMERCIAL MORTGAGE LOANS $ Number of loans Carrying value 49.3 51.2 113.4 156.6 49.5 1,271.9 1,691.9 11 16 21 31 24 145 248 $ The following table provides the carrying value and estimated fair value of our outstanding mortgage loans and the underlying collateral as of December 31, 2014 (dollars in millions): Loan-to-value ratio(a) Less than 60% 60% to 70% Greater than 70% to 80% Greater than 80% to 90% Greater than 90% TOTAL Estimated fair value Carrying value Mortgage loans $ $ 745.8 $ 376.9 425.3 139.6 4.3 1,691.9 $ 787.4 $ 387.1 441.6 147.8 5.0 1,768.9 $ Collateral 1,694.1 587.0 574.8 165.2 4.7 3,025.8 (a) Loan-to-value ratios are calculated as the ratio of: (i) the carrying value of the commercial mortgage loans; to (ii) the estimated fair value of the underlying collateral. At December 31, 2014, we held $244.9 million of trading securities. We carry trading securities at estimated fair value; changes in fair value are reflected in the statement of operations. 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. 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. Other invested assets also include options backing our fixed index products, COLI, credit default swaps and certain nontraditional investments, including investments in limited partnerships, promissory notes, hedge funds and real estate investments held for sale. At December 31, 2014, we held investments with an amortized cost of $1,398.1 million and an estimated fair value of $1,367.1 million related to variable interest entities that we are required to consolidate. The investment portfolio held by the variable interest entities is primarily comprised of commercial bank loans, the borrowers for which are almost entirely rated below-investment grade. Refer to the note to the consolidated financial statements entitled “Investments in Variable Interest Entities” for additional information on these investments. CNO FINANCIAL GROUP, INC. - Form 10-K 99 PART II ITEM 7 Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations Consolidated Financial Condition Changes in the Consolidated Balance Sheet Changes in our consolidated balance sheet between December 31, 2014 and December 31, 2013, primarily reflect: (i) the sale of CLIC; (ii) our net income for 2014; (iii) changes in the fair value of our fixed maturity securities, available for sale; and (iv) payments to repurchase common stock and warrants of $376.5 million. In accordance with GAAP, we record our fixed maturity securities, available for sale, equity securities and certain other invested assets at estimated fair value with any unrealized gain or loss (excluding impairment losses, which are recognized through earnings), net of tax and related adjustments, recorded as a component of shareholders’ equity. At December 31, 2014, we increased the carrying value of such investments by $2.2 billion as a result of this fair value adjustment. Our capital structure as of December 31, 2014 and December 31, 2013 was as follows (dollars in millions): Total capital: Corporate notes payable Shareholders’ equity: Common stock Additional paid-in capital Accumulated other comprehensive income Retained earnings Total shareholders’ equity TOTAL CAPITAL December 31, 2014 December 31, 2013 $ $ 794.4 $ 856.4 2.0 3,732.4 825.3 128.5 4,688.2 5,482.6 $ 2.2 4,092.8 731.8 128.4 4,955.2 5,811.6 The following table summarizes certain financial ratios as of and for the years ended December 31, 2014 and December 31, 2013: Book value per common share Book value per common share, excluding accumulated other comprehensive income(a) Ratio of earnings to fixed charges Debt to total capital ratios: Corporate debt to total capital Corporate debt to total capital, excluding accumulated other comprehensive income(a) December 31, 2014 $ 23.06 19.00 1.62X December 31, 2013 $ 22.49 19.17 1.87X 14.5% 17.1% 14.7% 16.9% (a) This non-GAAP measure differs from the corresponding GAAP measure presented immediately above, because accumulated other comprehensive income has been excluded from the value of capital used to determine this measure. Management believes this non-GAAP measure is useful because it removes the volatility that arises from changes in accumulated other comprehensive income. Such volatility is often caused by changes in the estimated fair value of our investment portfolio resulting from changes in general market interest rates rather than the business decisions made by management. However, this measure does not replace the corresponding GAAP measure. Contractual Obligations The Company’s significant contractual obligations as of December 31, 2014, were as follows (dollars in millions): Payment due in Insurance liabilities(a) Notes payable(b) Investment borrowings(c) Borrowings related to variable interest entities(d) Postretirement plans(e) Operating leases and certain other contractual commitments(f ) TOTAL Total $ 52,342.2 $ 961.8 1,599.0 1,563.9 270.1 220.7 $ 56,957.7 $ 2015 3,234.7 $ 115.1 84.2 66.1 6.5 129.1 3,635.7 $ 2016-2017 6,859.3 $ 130.1 753.4 60.1 13.9 56.0 7,872.8 $ 2018-2019 Thereafter 6,399.2 $ 35,849.0 292.5 99.2 1,316.0 234.0 11.1 7,647.4 $ 37,801.8 424.1 662.2 121.7 15.7 24.5 (a) These cash flows represent our estimates of the payments we expect to make to our policyholders, without consideration of future premiums or reinsurance recoveries. These estimates are based on numerous assumptions (depending on the product type) related to mortality, morbidity, lapses, withdrawals, future premiums, future deposits, interest rates on investments, credited rates, expenses and other factors which affect our future payments. The cash flows presented are undiscounted for interest. As a result, total outflows for all years exceed the corresponding liabilities of $22.3 billion included in our consolidated balance sheet as of December 31, 2014. As such payments are based on numerous assumptions, the actual payments may vary significantly from the amounts shown. 100 CNO FINANCIAL GROUP, INC. - Form 10-K PART II ITEM 7 Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations In estimating the payments we expect to make to our policyholders, we considered the following: • For products such as immediate annuities and structured settlement annuities without life contingencies, the payment obligation is fixed and determinable based on the terms of the policy. For products such as universal life, ordinary life, long-term care, supplemental health and fixed rate annuities, the future payments are not due until the occurrence of an insurable event (such as death or disability) or a triggering event (such as a surrender or partial withdrawal). We estimated these payments using actuarial models based on historical experience and our expectation of the future payment patterns. For short-term insurance products such as Medicare supplement insurance, the future payments relate only to amounts necessary to settle all outstanding claims, including those that have been incurred but not reported as of the balance sheet date. We estimated these payments based on our historical experience and our expectation of future payment patterns. The average interest rate we assumed would be credited to our total insurance liabilities (excluding interest rate bonuses for the first policy year only and excluding the effect of credited rates attributable to variable or fixed index products) over the term of the contracts was 4.5 percent. • • • (b) Includes projected interest payments based on interest rates, as applicable, as of December 31, 2014. Refer to the note to the consolidated financial statements entitled “Notes Payable - Direct Corporate Obligations” for additional information on notes payable. (c) These borrowings primarily represent collateralized borrowings from the FHLB. (d) These borrowings represent the securities issued by VIEs and include projected interest payments based on interest rates, as applicable, as of December 31, 2014. (e) Includes benefits expected to be paid pursuant to our deferred compensation plan and postretirement plans based on numerous actuarial assumptions and interest credited at 4.15 percent. (f) Includes amounts related to noncancellable operating leases, sponsorship agreements and commitments to purchase investments. It is possible that the ultimate outcomes of various uncertainties could affect our liquidity in future periods. For example, the following events could have a material adverse effect on our cash flows: • • • • • • • • An adverse decision in pending or future litigation. An inability to obtain rate increases on certain of our insurance products. Worse than anticipated claims experience. Lower than expected dividends and/or surplus debenture interest payments from our insurance subsidiaries (resulting from inadequate earnings or capital or regulatory requirements). An inability to meet and/or maintain the covenants in our Senior Secured Credit Agreement. A significant increase in policy surrender levels. A significant increase in investment defaults. An inability of our reinsurers to meet their financial obligations. While we actively manage the relationship between the duration and cash flows of our invested assets and the estimated duration and cash flows of benefit payments arising from contract liabilities, there could be significant variations in the timing of such cash flows. Although we believe our current estimates properly project future claim experience, if these estimates prove to be wrong, and our experience worsens (as it did in some prior periods), our future liquidity could be adversely affected. Liquidity for Insurance Operations Our insurance companies generally receive adequate cash flows from premium collections and investment income to meet their obligations. Life insurance, long-term care insurance and annuity liabilities are generally long-term in nature. Life and annuity policyholders may, however, withdraw funds or surrender their policies, subject to any applicable penalty provisions; there are generally no withdrawal or surrender benefits for long-term care insurance. We actively manage the relationship between the duration of our invested assets and the estimated duration of benefit payments arising from contract liabilities. CNO FINANCIAL GROUP, INC. - Form 10-K 101 PART II ITEM 7 Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations Two of the Company’s insurance subsidiaries (Washington National and Bankers Life) are members of the FHLB. As members of the FHLB, Washington National and Bankers Life have the ability to borrow on a collateralized basis from the FHLB. Washington National and Bankers Life are required to hold certain minimum amounts of FHLB common stock as a condition of membership in the FHLB, and additional amounts based on the amount of the borrowings. At December 31, 2014, the carrying value of the FHLB common stock was $73.5 million. As of December 31, 2014, collateralized borrowings from the FHLB totaled $1.5 billion and the proceeds were used to purchase fixed maturity securities. The borrowings are classified as investment borrowings in the accompanying consolidated balance sheet. The borrowings are collateralized by investments with an estimated fair value of $1.8 billion at December 31, 2014, which are maintained in custodial accounts for the benefit of the FHLB. The following summarizes the terms of the borrowings from the FHLB by Washington National and Bankers Life (dollars in millions): Amount borrowed $ 50.0 100.0 75.0 100.0 50.0 50.0 57.7 50.0 75.0 100.0 50.0 50.0 50.0 50.0 50.0 22.0 100.0 50.0 50.0 50.0 50.0 100.0 21.8 21.8 28.2 26.8 20.5 1,498.8 Maturity date October 2015 June 2016 June 2016 October 2016 November 2016 November 2016 June 2017 August 2017 August 2017 October 2017 November 2017 January 2018 January 2018 February 2018 February 2018 February 2018 May 2018 July 2018 August 2018 January 2019 February 2019 March 2019 July 2019 June 2020 August 2021 March 2023 June 2025 Interest rate at December 31, 2014 Variable rate – 0.511% Variable rate – 0.610% Variable rate – 0.417% Variable rate – 0.413% Variable rate – 0.505% Variable rate – 0.640% Variable rate – 0.587% Variable rate – 0.432% Variable rate – 0.383% Variable rate – 0.661% Variable rate – 0.744% Variable rate – 0.579% Variable rate – 0.571% Variable rate – 0.542% Variable rate – 0.322% Variable rate – 0.566% Variable rate – 0.620% Variable rate – 0.703% Variable rate – 0.352% Variable rate – 0.649% Variable rate – 0.322% Variable rate – 0.642% Variable rate – 0.655% Fixed rate – 1.960% Fixed rate – 2.550% Fixed rate – 2.160% Fixed rate – 2.940% $ State laws generally give state insurance regulatory agencies broad authority to protect policyholders in their jurisdictions. Regulators have used this authority in the past to restrict the ability of our insurance subsidiaries to pay any dividends or other amounts without prior approval. We cannot be assured that the regulators will not seek to assert greater supervision and control over our insurance subsidiaries’ businesses and financial affairs. During 2014, the financial statements of three of our insurance subsidiaries prepared in accordance with statutory accounting practices prescribed or permitted by regulatory authorities reflected asset adequacy or premium deficiency reserves. Total asset adequacy and premium deficiency reserves for Washington National, Bankers Conseco Life and Bankers Life were $8.0 million, $1.5 million and $54.0 million, respectively, at December 31, 2014. Due to differences between statutory and GAAP insurance liabilities, we were not required to recognize a similar asset adequacy or premium deficiency reserve in our consolidated financial statements prepared in accordance with GAAP. The determination of the need for and amount of asset adequacy or premium deficiency reserves is subject to numerous actuarial assumptions, including the Company’s ability to change NGEs related to certain products consistent with contract provisions. 102 CNO FINANCIAL GROUP, INC. - Form 10-K PART II ITEM 7 Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations Financial Strength Ratings of our Insurance Subsidiaries Financial strength ratings provided by A.M. Best, S&P, Fitch and Moody’s are the rating agency’s opinions of the ability of our insurance subsidiaries to pay policyholder claims and obligations when due. On August 14, 2014, A.M. Best affirmed the financial strength ratings of “B++” of our primary insurance subsidiaries and revised the outlook for these ratings to positive from stable. A “positive” designation indicates a company’s financial/market trends are favorable, relative to its current rating level and, if continued, the company has a good possibility of having its rating upgraded. The “B++” rating is assigned to companies that have a good ability, in A.M. Best’s opinion, to meet their ongoing obligations to policyholders. A.M. Best ratings for the industry currently range from “A++ (Superior)” to “F (In Liquidation)” and some companies are not rated. An “A++” rating indicates a superior ability to meet ongoing obligations to policyholders. A.M. Best has sixteen possible ratings. There are four ratings above the “B++” rating of our primary insurance subsidiaries and eleven ratings that are below that rating. On July 2, 2014, S&P upgraded the financial strength ratings of our primary insurance subsidiaries to “BBB+” from “BBB” and the outlook for these ratings is stable. S&P financial strength ratings range from “AAA” to “R” and some companies are not rated. An insurer rated “BBB” or higher is regarded as having financial security characteristics that outweigh any vulnerabilities, and is highly likely to have the ability to meet financial commitments. An insurer rated “BBB”, in S&P’s opinion, has good financial security characteristics, but is more likely to be affected by adverse business conditions than are higher-rated insurers. Pluses and minuses show the relative standing within a category. S&P has twenty-one possible ratings. There are seven ratings above the “BBB+” rating of our primary insurance subsidiaries and thirteen ratings that are below that rating. On May 5, 2014, Fitch affirmed the financial strength ratings of “BBB” of our primary insurance subsidiaries and revised the outlook for these ratings to positive from stable. A “BBB” rating, in Fitch’s opinion, indicates that there is currently a low expectation of ceased or interrupted payments. The capacity to meet policyholder and contract obligations on a timely basis is considered adequate, but adverse changes in circumstances and economic conditions are more likely to impact this capacity. Fitch ratings for the industry range from “AAA Exceptionally Strong” to “C Distressed” and some companies are not rated. Pluses and minuses show the relative standing within a category. Fitch has nineteen possible ratings. There are eight ratings above the “BBB” rating of our primary insurance subsidiaries and ten ratings that are below that rating. On March 27, 2014, Moody’s upgraded the financial strength ratings of our primary insurance subsidiaries to “Baa2” from “Baa3” and the outlook for these ratings is positive. A “positive” designation indicates a higher likelihood of a rating change over the medium term. Moody’s financial strength ratings range from “Aaa” to “C”. These ratings may be supplemented with numbers “1”, “2”, or “3” to show relative standing within a category. In Moody’s view, an insurer rated “Baa” offers adequate financial security, however, certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Moody’s has twenty-one possible ratings. There are eight ratings above the “Baa2” rating of our primary insurance subsidiaries and twelve ratings that are below the rating. Rating agencies have increased the frequency and scope of their credit reviews and requested additional information from the companies that they rate, including us. They may also adjust upward the capital and other requirements employed in the rating agency models for maintenance of certain ratings levels. We cannot predict what actions rating agencies may take, or what actions we may take in response. Accordingly, downgrades and outlook revisions related to us or the life insurance industry may occur in the future at any time and without notice by any rating agency. These could increase policy surrenders and withdrawals, adversely affect relationships with our distribution channels, reduce new sales, reduce our ability to borrow and increase our future borrowing costs. Liquidity of the Holding Companies Availability and Sources and Uses of Holding Company Liquidity; Limitations on Ability of Insurance Subsidiaries to Make Dividend and Surplus Debenture Interest Payments to the Holding Companies; Limitations on Holding Company Activities At December 31, 2014, CNO, CDOC and our other non- insurance subsidiaries held: (i) unrestricted cash and cash equivalents of $88.2 million; (ii) fixed income investments of $110.1 million; and (iii) equity securities and other invested assets totaling $146.3 million. CNO and CDOC are holding companies with no business operations of their own; they depend on their operating subsidiaries for cash to make principal and interest payments on debt, and to pay administrative expenses and income taxes. CNO and CDOC receive cash from insurance subsidiaries, consisting of dividends and distributions, interest payments on surplus debentures and tax-sharing payments, as well as cash from non-insurance subsidiaries consisting of dividends, distributions, loans and advances. The principal non- insurance subsidiaries that provide cash to CNO and CDOC are 40|86 Advisors, which receives fees from the insurance subsidiaries for investment services, and CNO Services which receives fees from the insurance subsidiaries for providing administrative services. The agreements between our insurance subsidiaries and CNO Services and 40|86 Advisors, respectively, were previously approved by the domestic insurance regulator for each insurance company, and any payments thereunder do not require further regulatory approval. CNO FINANCIAL GROUP, INC. - Form 10-K 103 PART II ITEM 7 Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations The following table sets forth the aggregate amount of dividends (net of capital contributions) and other distributions that our insurance subsidiaries paid to our non-insurance subsidiaries in each of the last three fiscal years (dollars in millions): Dividends from insurance subsidiaries, net of contributions Surplus debenture interest Fees for services provided pursuant to service agreements TOTAL DIVIDENDS AND OTHER DISTRIBUTIONS PAID BY INSURANCE SUBSIDIARIES The following summarizes the current ownership structure of CNO’s primary subsidiaries: Years ended December 31, $ 2014 174.0 63.3 92.5 $ 2013 236.8 63.7 72.9 2012 265.0 58.9 99.4 329.8 $ 373.4 $ 423.3 $ $ CNO CNO Services, LLC 40|86 Advisors CDOC Washington National Conseco Life of Texas Bankers Life Colonial Penn Bankers Conseco Life The ability of our insurance subsidiaries to pay dividends is subject to state insurance department regulations and is based on the financial statements of our insurance subsidiaries prepared in accordance with statutory accounting practices prescribed or permitted by regulatory authorities, which differ from GAAP. These regulations generally permit dividends to be paid from statutory earned surplus of the insurance company for any 12-month period in amounts equal to the greater of (or in a few states, the lesser of): (i) statutory net gain from operations or net income for the prior year; or (ii) 10 percent of statutory capital and surplus as of the end of the preceding year. This type of dividend is referred to as an “ordinary dividend”. Any dividend in excess of these levels or from an insurance company that has negative earned surplus requires the approval of the director or commissioner of the applicable state insurance department and is referred to as an “extraordinary dividend”. Each of the direct insurance subsidiaries of CDOC has significant negative earned surplus and any dividend payments from the subsidiaries of CDOC would be considered extraordinary dividends and, therefore, require the approval of the director or commissioner of the applicable state insurance department. In 2014, our insurance subsidiaries paid extraordinary dividends to CDOC totaling $227.0 million. We expect to receive regulatory approval for future dividends from our subsidiaries, but there can be no assurance that such payments will be approved or that the financial condition of our insurance subsidiaries will not change, making future approvals less likely. We generally maintain capital and surplus levels in our insurance subsidiaries in an amount that is sufficient to maintain a minimum consolidated RBC ratio of 350 percent and may seek to have our insurance subsidiaries pay ordinary dividends or request regulatory approval for extraordinary dividends when the consolidated RBC ratio exceeds such level and we have concluded the capital level in each of our insurance subsidiaries is adequate to support their business and projected growth. The consolidated RBC ratio of our insurance subsidiaries was estimated at 434 percent at December 31, 2014. CDOC holds surplus debentures from CLTX with an aggregate principal amount of $749.6 million. Interest payments on those surplus debentures do not require additional approval provided the RBC ratio of CLTX exceeds 100 percent (but do require prior written notice to the Texas state insurance department). The estimated RBC ratio of CLTX was 375 percent at December 31, 2014. CDOC also holds a surplus debenture from Colonial Penn with a principal balance of $160.0 million. Interest payments on that surplus debenture require prior approval by the Pennsylvania state insurance department. Dividends and other payments from our non-insurance subsidiaries, including 40|86 Advisors and CNO Services, to CNO or CDOC do not require approval by any regulatory authority or other third party. However, insurance regulators may prohibit payments by our insurance subsidiaries to parent companies if they determine that such payments could be adverse to our policyholders or contractholders. 104 CNO FINANCIAL GROUP, INC. - Form 10-K PART II ITEM 7 Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations The insurance subsidiaries of CDOC receive funds to pay dividends primarily from: (i) the earnings of their direct businesses; (ii) tax sharing payments received from subsidiaries (if applicable); and (iii) with respect to CLTX, dividends received from subsidiaries. At December 31, 2014, the principal subsidiaries of CLTX had earned surplus (deficit) as summarized below (dollars in millions): Subsidiary of CDOC Subsidiaries of CLTX: Bankers Life Colonial Penn Earned surplus (deficit) Additional information $ 434.5 (279.1) (a) (b) (a) Bankers Life paid ordinary dividends of $95.0 million to CLTX in 2014. (b) The deficit is primarily due to transactions which occurred several years ago, including a tax planning transaction and the fee paid to recapture a block of business previously ceded to an unaffiliated insurer. A significant deterioration in the financial condition, earnings or cash flow of the material subsidiaries of CNO or CDOC for any reason could hinder such subsidiaries’ ability to pay cash dividends or other disbursements to CNO and/or CDOC, which, in turn, could limit CNO’s ability to meet debt service requirements and satisfy other financial obligations. In addition, we may choose to retain capital in our insurance subsidiaries or to contribute additional capital to our insurance subsidiaries to strengthen their surplus, and these decisions could limit the amount available at our top tier insurance subsidiaries to pay dividends to the holding companies. CDOC made $53.0 million of capital contributions to its insurance subsidiaries in 2014 to fund: (i) the recapture of life business written by Bankers Life that was previously ceded; and (ii) to increase the statutory capital and RBC ratios of our life insurance subsidiaries, consistent with our goal to continue to increase their financial strength ratings. The scheduled principal and interest payments on our direct corporate obligations are as follows (dollars in millions): 2015 2016 2017 2018 2019 2020 Principal 79.2 60.5 4.3 378.1 — 275.0 797.1 $ $ Interest(a) 35.9 33.2 32.1 28.4 17.6 17.5 164.7 $ $ (a) Based on interest rates as of December 31, 2014. In May 2011, the Company announced a common share repurchase program of up to $100.0 million. In February 2012, June 2012, December 2012, December 2013 and November 2014, the Company’s Board of Directors approved, in aggregate, an additional $1,200.0 million to repurchase the Company’s outstanding securities. In 2014, we repurchased 18.5 million shares of common stock for $319.1 million under the securities repurchase program. In addition, in September 2014, we repurchased all outstanding common stock warrants for $57.4 million under the securities repurchase program. Such warrants had been held by Paulson & Co., Inc. on behalf of several investment funds and accounts managed by them, and were issued in conjunction with a private sale of our common stock in 2009. The Company had remaining repurchase authority of $420.9 million as of December 31, 2014. We currently anticipate repurchasing a total of approximately $250 million to $325 million of our common stock during 2015, absent compelling alternatives. The amount and timing of the securities repurchases (if any) will be based on business and market conditions and other factors. In May 2012, we initiated a common stock dividend program. In 2014, 2013 and 2012, dividends declared and paid on common stock totaled $51.0 million ($0.24 per common share), $24.4 million ($0.11 per common share) and $13.9 million ($0.06 per common share), respectively. In March 2014, the Company increased its quarterly common stock dividend to $0.06 per share from $0.03 per share. On May 30, 2014, the Company completed an amendment to the Senior Secured Credit Agreement to waive the requirement that the net proceeds in excess of $125 million received from the sale of CLIC be used to prepay amounts outstanding under the Senior Secured Credit Agreement. In 2014, we made $59.4 million of scheduled quarterly principal payments due under the Senior Secured Credit Agreement. On May 30, 2014, we repurchased the remaining $3.5 million principal amount of our 7.0% Debentures for a purchase price of $3.7 million. Mandatory prepayments of the Senior Secured Credit Agreement will be required, subject to certain exceptions, in an amount equal to: (i) 100% of the net cash proceeds from certain asset sales or casualty events; (ii) 100% of the net cash proceeds received by the Company or any of its restricted subsidiaries from certain debt issuances; and (iii) 100% of the amount of certain restricted payments made (including any common stock dividends and share repurchases) as defined in the Senior Secured Credit Agreement provided that if, as of the end of the fiscal quarter immediately preceding such restricted payment, the debt to total capitalization ratio is: (x) equal to or less than 25.0%, but greater than 20.0%, the prepayment requirement shall be reduced to 33.33%; or (y) equal to or less than 20.0%, the prepayment requirement shall not apply. CNO FINANCIAL GROUP, INC. - Form 10-K 105 PART II ITEM 7 Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations Notwithstanding the foregoing, no mandatory prepayments pursuant to item (i) in the preceding paragraph shall be required if: (x) the debt to total capitalization ratio is equal or less than 20% and (y) either (A) the financial strength rating of certain of the Company’s insurance subsidiaries is equal to or better than A- (stable) from A.M. Best or (B) the Senior Secured Credit Agreement is rated equal or better than BBB- (stable) from S&P and Baa3 (stable) by Moody’s. The Senior Secured Credit Agreement requires the Company to maintain (each as calculated in accordance with the Senior Secured Credit Agreement): (i) a debt to total capitalization ratio of not more than 27.5 percent (such ratio was 17.2 percent at December 31, 2014); (ii) an interest coverage ratio of not less than 2.50 to 1.00 for each rolling four quarters (such ratio was 15.75 to 1.00 for the four quarters ended December 31, 2014); (iii) an aggregate ratio of total adjusted capital to company action level risk-based capital for the Company’s insurance subsidiaries of not less than 250 percent (such ratio was 434 percent at December 31, 2014); and (iv) a combined statutory capital and surplus for the Company’s insurance subsidiaries of at least $1,300.0 million (combined statutory capital and surplus at December 31, 2014, was $1,868 million). Under the 6.375% Indenture, the Company can make Restricted Payments (as such term is defined in the 6.375% Indenture) up to a calculated limit, provided that the Company’s pro forma risk-based capital ratio exceeds 225% after giving effect to the Restricted Payment and certain other conditions are met. Restricted Payments include, among other items, repurchases of common stock and cash dividends on common stock (to the extent such dividends exceed $30.0 million in the aggregate in any calendar year). The limit of Restricted Payments permitted under the 6.375% Indenture is the sum of (x) 50% of the Company’s “Net Excess Cash Flow” (as defined in the 6.375% Indenture) for the period (taken as one accounting period) from July 1, 2012 to the end of the Company’s most recently ended fiscal quarter for which financial statements are available at the time of such Restricted Payment, (y) $175.0 million and (z) certain other amounts specified in the 6.375% Indenture. Based on the provisions set forth in the 6.375% Indenture and the Company’s Net Excess Cash Flow for the period from July 1, 2012 through December 31, 2014, the Company could have made additional Restricted Payments under this 6.375% Indenture covenant of approximately $75 million as of December 31, 2014. This limitation on Restricted Payments does not apply if the Debt to Total Capitalization Ratio (as defined in the 6.375% Indenture) as of the last day of the Company’s most recently ended fiscal quarter for which financial statements are available that immediately precedes the date of any Restricted Payment, calculated immediately after giving effect to such Restricted Payment and any related transactions on a pro forma basis, is equal to or less than 17.5%. The amendment to the Senior Secured Credit Agreement on May 30, 2014 did not impact the restrictions set forth in the 6.375% Indenture regarding the Company’s use of the proceeds from the sale of CLIC. Under the Indenture, the net proceeds received by the Company from the sale of CLIC (defined as “Net Available Cash” under the Indenture) may be used to: (i) reinvest in or acquire assets to be used in the insurance business or a related business; or (ii) repay the Senior Secured Credit Agreement. Under the Indenture, any Net Available Cash not so reinvested or applied within 365 days after the closing of the sale of CLIC must be used to make an offer to purchase the outstanding notes at par and, in the interim, may only be invested as set forth in the Indenture. The Company currently plans to use the cash received from the sale of CLIC as permitted under the 6.375% Indenture including the investment on July 1, 2014, of $28.0 million to recapture a block of life insurance business from Wilton Re. On August 14, 2014, A.M. Best upgraded our issuer credit and senior secured debt ratings to “bb+” from “bb” and the outlook for these ratings is positive. A “positive” designation indicates a possible rating upgrade over an intermediate term due to favorable financial/market trends relative to the current rating level. In A.M. Best’s view, a company rated “bb+” has speculative credit characteristics generally due to a moderate margin of principal and interest payment protection and vulnerability to economic changes. Pluses and minuses show the relative standing within a category. A.M. Best has a total of 22 possible ratings ranging from “aaa (Exceptional)” to “d (In default)”. There are ten ratings above CNO’s “bb+” rating and eleven ratings that are below its rating. On July 2, 2014, S&P upgraded our issuer credit and senior secured debt ratings to “BB+” from “BB” and the outlook for these ratings is stable. In S&P’s view, an obligation rated “BB” is less vulnerable to nonpayment than other speculative issues. However, it faces major ongoing uncertainties or exposure to adverse business, financial or economic conditions which could lead to the obligor’s inadequate capacity to meet its financial commitment on the obligation. Pluses and minuses show the relative standing within a category. S&P has a total of 22 possible ratings ranging from “AAA (Extremely Strong)” to “D (Payment Default)”. There are ten ratings above CNO’s “BB+” rating and eleven ratings that are below its rating. On May 5, 2014, Fitch upgraded our issuer credit and senior secured debt ratings to “BB+” from “BB” and the outlook for these ratings is positive. The rating outlook indicates the direction a rating is likely to move over a one to two year period. In Fitch’s view, an obligation rated “BB” indicates an elevated vulnerability to default risk, particularly in the event of adverse changes in business or economic conditions over time; however, business or financial flexibility exists which supports the servicing of financial commitments. Pluses and minuses show the relative standing within a category. Fitch has a total of 21 possible ratings ranging from “AAA” to “D”. There are ten ratings above CNO’s “BB+” rating and ten ratings that are below its rating. On March 27, 2014, Moody’s upgraded our issuer credit and senior secured debt ratings to “Ba2” from “Ba3” and the outlook for these ratings is positive. A positive designation indicates a higher likelihood of a ratings change over the medium term. In Moody’s view, obligations rated “Ba” are judged to have speculative elements and are subject to substantial credit risk. A rating is supplemented with numerical modifiers “1”, “2” or “3” to show the relative standing within a category. Moody’s has a total of 21 possible ratings ranging from “Aaa” to “C”. There are eleven ratings above CNO’s “Ba2” rating and nine ratings that are below its rating. 106 CNO FINANCIAL GROUP, INC. - Form 10-K PART II ITEM 7 Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations As part of our investment strategy, we may enter into repurchase agreements to increase our investment return. Pursuant to such agreements, the Company sells securities subject to an obligation to repurchase the same securities. Under these arrangements, the Company may transfer legal control over the assets but still retain effective control through an agreement that both entitles and obligates the Company to repurchase the assets. As a result, these repurchase agreements are accounted for as collateralized financing arrangements (i.e., secured borrowings) and not as a sale and subsequent repurchase of securities. Such borrowings totaled $20.4 million at December 31, 2014 and mature prior to June 30, 2015. Outlook We believe that the existing cash available to the holding company, the cash flows to be generated from operations and other transactions will be sufficient to allow us to meet our debt service obligations, pay corporate expenses and satisfy other financial obligations. However, our cash flow is affected by a variety of factors, many of which are outside of our control, including insurance regulatory issues, competition, financial markets and other general business conditions. We cannot provide assurance that we will possess sufficient income and liquidity to meet all of our debt service requirements and other holding company obligations. For additional discussion regarding the liquidity and other risks that we face, see “Risk Factors”. Market-Sensitive Instruments and Risk Management Our spread-based insurance business is subject to several inherent risks arising from movements in interest rates, especially if we fail to anticipate or respond to such movements. First, interest rate changes can cause compression of our net spread between interest earned on investments and interest credited on customer deposits, thereby adversely affecting our results. Second, if interest rate changes produce an unanticipated increase in surrenders of our spread-based products, we may be forced to sell invested assets at a loss in order to fund such surrenders. Many of our products include surrender charges, market interest rate adjustments or other features to encourage persistency; however at December 31, 2014, approximately 24 percent of our total insurance liabilities, or approximately $5.4 billion, could be surrendered by the policyholder without penalty. Finally, changes in interest rates can have significant effects on the performance of our investment portfolio as a result of changes in the prepayment rate of various securities. We use asset/liability strategies that are designed to mitigate the effect of interest rate changes on our profitability. However, there can be no assurance that management will be successful in implementing such strategies and achieving adequate investment spreads. We seek to invest our available funds in a manner that will fund future obligations to policyholders, subject to appropriate risk considerations. We seek to meet this objective through investments that: (i) have similar cash flow characteristics with the liabilities they support; (ii) are diversified (including by types of obligors); and (iii) are predominantly investment-grade in quality. Our investment strategy is to maximize, over a sustained period and within acceptable parameters of risk, investment income and total investment return through active investment management. Accordingly, our entire portfolio of fixed maturity securities is available to be sold in response to: (i) changes in market interest rates; (ii) changes in relative values of individual securities and asset sectors; (iii) changes in prepayment risks; (iv) changes in credit quality outlook for certain securities; (v) liquidity needs; and (vi) other factors. From time to time, we invest in securities for trading purposes, although such investments are a relatively small portion of our total portfolio. The profitability of many of our products depends on the spread between the interest earned on investments and the rates credited on our insurance liabilities. In addition, changes in competition and other factors, including the level of surrenders and withdrawals, may limit our ability to adjust or to maintain crediting rates at levels necessary to avoid narrowing of spreads under certain market conditions. As of December 31, 2014, approximately 26 percent of our insurance liabilities had interest rates that may be reset annually; 50 percent had a fixed explicit interest rate for the duration of the contract; 22 percent had credited rates which approximate the income earned by the Company; and the remainder had no explicit interest rates. At December 31, 2014, the average yield, computed on the cost basis of our fixed maturity portfolio, was 5.6 percent, and the average interest rate credited or accruing to our total insurance liabilities (excluding interest rate bonuses for the first policy year only and excluding the effect of credited rates attributable to variable or fixed index products) was 4.5 percent. We simulate the cash flows expected from our existing insurance business under various interest rate scenarios. These simulations help us to measure the potential gain or loss in fair value of our interest rate-sensitive investments and to manage the relationship between the interest sensitivity of our assets and liabilities. When the estimated durations of assets and liabilities are similar, a change in the value of assets should be largely offset by a change in the value of liabilities. At December 31, 2014, the estimated duration of our fixed income securities (as modified to reflect payments and potential calls) and the estimated duration of our insurance liabilities were both approximately 8.5 years. We estimate that our fixed maturity securities and short-term investments (net of corresponding changes in insurance acquisition costs) would decline in fair value by approximately $325 million if interest rates were to increase by 10 percent from their levels at December 31, 2014. Our simulations incorporate numerous assumptions, require significant estimates and assume an immediate change in interest rates without any management of the investment portfolio in reaction to such change. Consequently, potential changes in value of our financial instruments indicated by the simulations will likely be different from the actual changes experienced under given interest rate scenarios, and the differences may be material. Because we actively manage our investments and liabilities, our net exposure to interest rates can vary over time. We are subject to the risk that our investments will decline in value. This has occurred in the past and may occur again, particularly if CNO FINANCIAL GROUP, INC. - Form 10-K 107 PART II ITEM 7A Quantitative and Qualitative Disclosures About Market Risk interest rates rise from their current low levels. During 2014, we recognized net realized investment gains of $36.7 million, which were comprised of $54.4 million of net gains from the sales of investments (primarily fixed maturities); the increase in fair value of certain fixed maturity investments with embedded derivatives of $7.6 million; the increase in fair value of embedded derivatives related to a modified coinsurance agreement of $2.0 million; and $27.3 million of writedowns of investments for other than temporary declines in fair value recognized through net income. During 2013, we recognized net realized investment gains of $33.4 million, which were comprised of $51.8 million of net gains from the sales of investments (primarily fixed maturities); the decrease in fair value of certain fixed maturity investments with embedded derivatives of $6.8 million; and $11.6 million of writedowns of investments for other than temporary declines in fair value recognized through net income. During 2012, we recognized net realized investment gains of $81.1 million, which were comprised of $98.8 million of net gains from the sales of investments (primarily fixed maturities); the increase in fair value of certain fixed maturity investments with embedded derivatives of $20.1 million; and $37.8 million of writedowns of investments for other than temporary declines in fair value recognized through net income. The Company is subject to risk resulting from fluctuations in market prices of our equity securities. In general, these investments have more year-to-year price variability than our fixed maturity investments. However, returns over longer time frames have been consistently higher. We manage this risk by limiting our equity securities to a relatively small portion of our total investments. Our investment in options backing our equity-linked products is closely matched with our obligation to fixed index annuity holders. Fair value changes associated with that investment are substantially offset by an increase or decrease in the amounts added to policyholder account balances for fixed index products. Inflation Inflation rates may impact the financial statements and operating results in several areas. Inflation influences interest rates, which in turn impact the fair value of the investment portfolio and yields on new investments. Inflation also impacts a portion of our insurance policy benefits affected by increased medical coverage costs. Operating expenses, including payrolls, are impacted to a certain degree by the inflation rate. ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk. The information included under the caption “Market-Sensitive Instruments and Risk Management” in Item 7. “Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations” is incorporated herein by reference. 108 CNO FINANCIAL GROUP, INC. - Form 10-K PART II ITEM 8 Consolidated Financial Statements ITEM 8. Consolidated Financial Statements. Index to Consolidated Financial Statements Page Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .109 Consolidated Balance Sheet at December 31, 2014 and 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .110 Consolidated Statement of Operations for the years ended December 31, 2014, 2013 and 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .112 Consolidated Statement of Comprehensive Income for the years ended December 31, 2014, 2013 and 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . .113 Consolidated Statement of Shareholders’ Equity for the years ended December 31, 2014, 2013 and 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .114 Consolidated Statement of Cash Flows for the years ended December 31, 2014, 2013 and 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .115 Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .116 Report of Independent Registered Public Accounting Firm To the Shareholders and Board of Directors of CNO Financial Group, Inc.: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, comprehensive income, shareholders’ equity and cash flows present fairly, in all material respects, the financial position of CNO Financial Group, Inc. and its subsidiaries at December 31, 2014 and 2013, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2014 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control Over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these financial statements and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/PricewaterhouseCoopers LLP Indianapolis, Indiana February 20, 2015 CNO FINANCIAL GROUP, INC. - Form 10-K 109 PART II ITEM 8 Consolidated Financial Statements Consolidated Balance Sheet December 31, 2014 and 2013 (Dollars in millions) ASSETS Investments: Fixed maturities, available for sale, at fair value (amortized cost: 2014 - $18,408.1; 2013 - $21,891.8) Equity securities at fair value (cost: 2014 - $400.5; 2013 - $206.7) Mortgage loans Policy loans Trading securities Investments held by variable interest entities Other invested assets Total investments Cash and cash equivalents - unrestricted Cash and cash equivalents held by variable interest entities Accrued investment income Present value of future profits Deferred acquisition costs Reinsurance receivables Income tax assets, net Assets held in separate accounts Other assets TOTAL ASSETS (CONTINUED ON NEXT PAGE) The accompanying notes are an integral part of the consolidated financial statements. 2014 2013 $ $ 20,634.9 419.0 1,691.9 106.9 244.9 1,367.1 443.6 24,908.3 611.6 68.3 242.9 489.4 770.6 2,991.1 758.7 5.6 337.7 31,184.2 $ $ 23,204.6 223.0 1,729.5 277.0 247.6 1,046.7 423.3 27,151.7 699.0 104.3 286.9 679.3 968.1 3,392.1 1,147.2 10.3 341.7 34,780.6 110 CNO FINANCIAL GROUP, INC. - Form 10-K Consolidated Balance Sheet, continued PART II ITEM 8 Consolidated Financial Statements December 31, 2014 and 2013 (Dollars in millions) LIABILITIES AND SHAREHOLDERS’ EQUITY Liabilities: Liabilities for insurance products: Policyholder account balances Future policy benefits Liability for policy and contract claims Unearned and advanced premiums Liabilities related to separate accounts Other liabilities Payable to reinsurer Investment borrowings Borrowings related to variable interest entities Notes payable – direct corporate obligations Total liabilities Commitments and Contingencies Shareholders’ equity: Common stock ($0.01 par value, 8,000,000,000 shares authorized, shares issued and outstanding: 2014 – 203,324,458; 2013 – 220,323,823) Additional paid-in capital Accumulated other comprehensive income Retained earnings Total shareholders’ equity TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY The accompanying notes are an integral part of the consolidated financial statements. 2014 2013 $ $ 10,707.2 10,835.4 468.7 291.8 5.6 587.6 — 1,519.2 1,286.1 794.4 26,496.0 2.0 3,732.4 825.3 128.5 4,688.2 31,184.2 $ $ 12,776.4 11,222.5 566.0 300.6 10.3 590.6 590.3 1,900.0 1,012.3 856.4 29,825.4 2.2 4,092.8 731.8 128.4 4,955.2 34,780.6 CNO FINANCIAL GROUP, INC. - Form 10-K 111 PART II ITEM 8 Consolidated Financial Statements Consolidated Statement of Operations for the years ended December 31, 2014, 2013 and 2012 (Dollars in millions, except per share data) Revenues: Insurance policy income Net investment income : General account assets Policyholder and reinsurer accounts and other special-purpose portfolios Realized investment gains (losses): Net realized investment gains, excluding impairment losses Other-than-temporary impairment losses: Total other-than-temporary impairment losses Portion of other-than-temporary impairment losses recognized in accumulated other comprehensive income Net impairment losses recognized Total realized gains Fee revenue and other income Total revenues Benefits and expenses: Insurance policy benefits Net loss on sale of subsidiary and (gain) loss on reinsurance transactions Interest expense Amortization Loss on extinguishment or modification of debt Other operating costs and expenses Total benefits and expenses Income before income taxes Income tax expense (benefit): Tax expense on period income Valuation allowance for deferred tax assets and other tax items NET INCOME Earnings per common share: Basic: Weighted average shares outstanding NET INCOME Diluted: Weighted average shares outstanding NET INCOME The accompanying notes are an integral part of the consolidated financial statements. 2014 2013 2012 $ 2,629.7 $ 2,744.7 $ 2,755.4 1,301.0 126.4 64.0 (27.3) — (27.3) 36.7 50.9 4,144.7 2,586.2 239.8 92.8 247.4 .6 802.8 3,969.6 175.1 159.2 (35.5) 51.4 1,405.8 258.2 45.0 (11.6) — (11.6) 33.4 34.0 4,476.1 2,839.7 98.4 105.3 296.3 65.4 766.2 4,171.3 304.8 128.3 (301.5) 478.0 1,398.5 87.9 118.9 (37.8) — (37.8) 81.1 19.8 4,342.7 2,763.9 — 114.6 289.0 200.2 819.3 4,187.0 155.7 106.2 (171.5) 221.0 $ $ $ 212,917,000 .24 $ 221,628,000 2.16 $ 233,685,000 .95 $ 217,655,000 .24 $ 232,702,000 2.06 $ 281,427,000 .83 $ 112 CNO FINANCIAL GROUP, INC. - Form 10-K Consolidated Statement of Comprehensive Income PART II ITEM 8 Consolidated Financial Statements for the years ended December 31, 2014, 2013 and 2012 (Dollars in millions) Net income Other comprehensive income, before tax: Unrealized gains (losses) for the period Amortization of present value of future profits and deferred acquisition costs Amount related to premium deficiencies assuming the net unrealized gains had been realized Reclassification adjustments: For net realized investment gains included in net income For amortization of the present value of future profits and deferred acquisition costs related to net realized investment gains included in net income Unrealized gains (losses) on investments Change related to deferred compensation plan Other comprehensive income (loss) before tax Income tax (expense) benefit related to items of accumulated other comprehensive income Other comprehensive income (loss), net of tax COMPREHENSIVE INCOME $ The accompanying notes are an integral part of the consolidated financial statements. $ 2014 51.4 $ 2013 478.0 $ 2012 221.0 942.9 (113.5) (624.6) (59.0) 1.0 146.8 (1.4) 145.4 (51.9) 93.5 144.9 $ (1,627.4) 175.2 1,336.2 (107.1) 774.2 (531.0) (39.8) (68.7) 1.6 (716.2) .8 (715.4) 249.8 (465.6) 12.4 $ 6.5 635.9 .4 636.3 (220.5) 415.8 636.8 CNO FINANCIAL GROUP, INC. - Form 10-K 113 PART II ITEM 8 Consolidated Financial Statements Consolidated Statement of Shareholders’ Equity (Dollars in millions) Balance, December 31, 2011 Net income Change in unrealized appreciation (depreciation) of investments (net of applicable income tax expense of $216.1) Change in noncredit component of impairment losses on fixed maturities, available for sale (net of applicable income tax expense of $4.4) Extinguishment of beneficial conversion feature related to the repurchase of convertible debentures Cost of common stock repurchased Dividends on common stock Stock options, restricted stock and performance units Balance, December 31, 2012 Net income Change in unrealized appreciation (depreciation) of investments (net of applicable income tax benefit of $248.7) Change in noncredit component of impairment losses on fixed maturities, available for sale (net of applicable income tax benefit of $1.1) Extinguishment of beneficial conversion feature related to the repurchase of convertible debentures Cost of common stock repurchased Dividends on common stock Conversion of convertible debentures Stock options, restricted stock and performance units Balance, December 31, 2013 Net income Change in unrealized appreciation (depreciation) of investments (net of applicable income tax expense of $52.3) Change in noncredit component of impairment losses on fixed maturities, available for sale (net of applicable income tax benefit of $.4) Cost of common stock and warrants repurchased Dividends on common stock Stock options, restricted stock and performance units Common stock and additional paid-in capital 4,364.3 $ — Accumulated other comprehensive income 781.6 — $ Retained earnings (accumulated deficit) (532.1) $ 221.0 $ Total 4,613.8 221.0 407.8 8.0 (24.0) (180.2) (13.9) 16.8 5,049.3 478.0 (463.7) (1.9) (12.6) (118.4) (24.6) 24.9 24.2 4,955.2 51.4 — — — — (13.9) — (325.0) 478.0 — — — — (24.6) — — 128.4 51.4 — — (24.0) (180.2) — 16.8 4,176.9 — — — (12.6) (118.4) — 24.9 24.2 4,095.0 — — 407.8 8.0 — — — — 1,197.4 — (463.7) (1.9) — — — — — 731.8 — 94.2 — 94.2 — (376.5) — 15.9 3,734.4 $ (.7) — — — 825.3 $ — — (51.3) — 128.5 $ (.7) (376.5) (51.3) 15.9 4,688.2 BALANCE, DECEMBER 31, 2014 $ The accompanying notes are an integral part of the consolidated financial statements. 114 CNO FINANCIAL GROUP, INC. - Form 10-K Consolidated Statement of Cash Flows for the years ended December 31, 2014, 2013 and 2012 (Dollars in millions) Cash flows from operating activities: Insurance policy income Net investment income Fee revenue and other income Insurance policy benefits Payment to reinsurer pursuant to long-term care business reinsured Interest expense Deferrable policy acquisition costs Other operating costs Taxes NET CASH FROM OPERATING ACTIVITIES Cash flows from investing activities: Sales of investments Maturities and redemptions of investments Purchases of investments Net sales of trading securities Change in cash and cash equivalents held by variable interest entities Cash and cash equivalents held by subsidiary prior to being sold Proceeds from sale of subsidiary Other NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES Cash flows from financing activities: Issuance of notes payable, net Payments on notes payable Expenses related to extinguishment or modification of debt Amount paid to extinguish the beneficial conversion feature associated with repurchase of convertible debentures Issuance of common stock Payments to repurchase common stock and warrants Common stock dividends paid Amounts received for deposit products Withdrawals from deposit products Issuance of investment borrowings: Federal Home Loan Bank Related to variable interest entities Payments on investment borrowings: Federal Home Loan Bank Related to variable interest entities and other Investment borrowings - repurchase agreements, net NET CASH USED BY FINANCING ACTIVITIES Net increase (decrease) in cash and cash equivalents Cash and cash equivalents, beginning of year CASH AND CASH EQUIVALENTS, END OF YEAR PART II ITEM 8 Consolidated Financial Statements 2014 2013 2012 2,407.9 1,279.0 50.9 (1,968.4) (590.3) (81.7) (242.8) (728.8) (4.0) 121.8(a) 2,090.0 1,618.2 (3,731.6) 4.9 36.0 (164.7) 231.0 (27.5) 56.3 — (62.9) (.6) — 5.0 (376.5) (51.0) 1,295.4 (1,347.3) 350.0 358.5 (367.7) (88.8) 20.4 (265.5) (87.4) 699.0 611.6 $ $ $ 2,464.9 1,387.7 34.0 (2,093.8) — (95.9) (222.8) (745.7) (8.0) 720.4 2,315.8 2,491.9 (5,367.1) 30.0 (50.1) — — (23.0) (602.5) — (126.9) (61.6) (12.6) 15.1 (118.4) (24.4) 1,298.1 (1,464.4) 500.0 376.3 (250.5) (132.1) — (1.4) 116.5 582.5 699.0 $ 2,419.7 1,385.8 19.8 (2,096.5) — (109.0) (191.7) (786.7) (6.5) 634.9 2,057.6 1,967.4 (4,271.1) 60.4 20.2 — — (31.6) (197.1) 944.5 (810.6) (183.0) (24.0) 3.1 (180.2) (13.9) 1,296.7 (1,544.9) 375.0 246.7 (375.0) (.9) (24.8) (291.3) 146.5 436.0 582.5 $ $ (a) Cash flows from operating activities reflect outflows in 2014 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. CNO FINANCIAL GROUP, INC. - Form 10-K 115 PART II ITEM 8 Consolidated Financial Statements Notes to Consolidated Financial Statements 1. BUSINESS AND BASIS OF PRESENTATION 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. June 30, 2019 for an annual fee of $.2 million. The income we receive from these services agreements will offset certain of our overhead costs. If we are not successful in reducing our overhead costs to the same extent as the reduction in fees to be received from Wilton Re over the period of the agreements, our results of operations will be adversely affected. Our prior period segment disclosures have been revised to reflect management’s current view of the Company’s operating segments. The Company’s insurance segments are described below: 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. Prior to 2014, the Company managed 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. As a result of the sale of Conseco Life Insurance Company (“CLIC”) which was completed on July 1, 2014 (as further described in the note to the consolidated financial statements entitled “Sale of Subsidiary”) and the coinsurance agreements to cede certain long-term care business effective December 31, 2013, management has changed the manner in which it disaggregates the Company’s operations for making operating decisions and assessing performance. In periods prior to 2014: (i) the results in the Washington National segment have been adjusted to include the results from the business in the Other CNO Business segment that are being retained; (ii) the Other CNO Business segment included only the long-term care business that was ceded effective December 31, 2013 and the overhead expense of CLIC that is expected to continue after the completion of the sale; and (iii) the CLIC business being sold is excluded from our analysis of business segment results. Beginning on January 1, 2014: (i) the overhead expense of CLIC that is expected to continue after the completion of the sale has been reallocated primarily to the Bankers Life and Washington National segments; (ii) there is no longer an Other CNO Business segment; and (iii) the CLIC business being sold continues to be excluded from our analysis of business segment results. After the completion of the sale of CLIC: (i) the Bankers Life segment includes the results of certain life insurance business that was recaptured from Wilton Reassurance Company (“Wilton Re”); and (ii) the revenues and expenses associated with a transition services agreement and a special support services agreement with Wilton Re are included in our non-operating earnings. Under such agreements, we will receive $30 million in the year ending June 30, 2015 and $20 million in the year ending June 30, 2016. In addition, certain services will continue to be provided in the three years ending 116 CNO FINANCIAL GROUP, INC. - Form 10-K life insurance, interest-sensitive • Bankers Life, which markets and distributes Medicare supplement insurance, traditional life insurance, fixed annuities and long-term care insurance products to the middle-income senior market through a dedicated field force of career agents and sales managers supported by a network of community-based sales offices. The Bankers Life segment includes primarily the business of Bankers Life and Casualty Company (“Bankers Life”). Bankers Life also markets and distributes Medicare Advantage plans primarily through distribution arrangements with Humana, Inc. and United HealthCare and Medicare Part D prescription drug plans (“PDP”) primarily through a distribution arrangement with Coventry Health Care (“Coventry”). • Washington National, which markets and distributes supplemental health (including specified disease, accident and hospital indemnity insurance products) and life insurance to middle-income consumers at home and at the worksite. These products are marketed through Performance Matters Associates of Texas, Inc. (a wholly owned subsidiary) and through independent marketing organizations and insurance agencies including worksite marketing. The products being marketed are underwritten by Washington National Insurance Company (“Washington National”). This segment’s business also includes certain closed blocks of annuities and Medicare supplement policies which are no longer being actively marketed by this segment and were primarily issued or acquired by Washington National. • Colonial Penn, which markets primarily graded benefit and simplified issue life insurance directly to customers in the senior middle-income market through television advertising, direct mail, the internet and telemarketing. The Colonial Penn segment includes primarily the business of Colonial Penn Life Insurance Company (“Colonial Penn”). We prepare our financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”). 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. PART II ITEM 8 Consolidated 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. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Investments Fixed maturity securities include available for sale bonds and redeemable preferred stocks. We carry these investments at estimated fair value. We record any unrealized gain or loss, net of tax and related adjustments, as a component of shareholders’ equity. Equity securities include available for sale investments in common stock and non-redeemable preferred stock. We carry these investments at estimated fair value. We record any unrealized gain or loss, net of tax and related adjustments, as a component of shareholders’ equity. Mortgage loans held in our investment portfolio are carried at amortized unpaid balances, net of provisions for estimated losses. Interest income is accrued on the principal amount of the loan based on the loan’s contractual interest rate. Payment terms specified for mortgage loans may include a prepayment penalty for unscheduled payoff of the investment. Prepayment penalties are recognized as investment income when received. Policy loans are stated at current unpaid principal balances. Policy loans are collateralized by the cash surrender value of the life insurance policy. Interest income is recorded as earned using the contractual interest rate. Trading securities include: (i) investments purchased with the intent of selling in the near team to generate income; (ii) invest- ments supporting certain insurance liabilities (including invest- ments 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 invest- ments supporting insurance liabilities and reinsurance agree- ments 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 investments sup- porting certain insurance liabilities and certain reinsurance agreements is substantially offset by the change in insurance policy benefits related to certain products and agreements. Other invested assets include: (i) call options purchased in an effort to offset or hedge the effects of certain policyholder benefits related to our fixed index annuity and life insurance products; (ii) Company-owned life insurance (“COLI”); and (iii) certain non-traditional investments. We carry the call options at estimated fair value as further described in the section of this note entitled “Accounting for Derivatives”. We carry COLI at its cash surrender value which approximates its net realizable value. Non-traditional investments include investments in certain limited partnerships and hedge funds which are accounted for using the equity method; and promissory notes, which are accounted for using the cost method. In accounting for limited partnerships and hedge funds, we consistently use the most recently available financial information provided by the general partner or manager of each of these investments, which is one to three months prior to the end of our reporting period. Interest income on fixed maturity securities is recognized when earned using a constant effective yield method giving effect to amortization of premiums and accretion of discounts. Prepayment fees are recognized when earned. Dividends on equity securities are recognized when declared. When we sell a security (other than trading securities), we report the difference between the sale proceeds and amortized cost (determined based on specific identification) as a realized investment gain or loss. We regularly evaluate our investments for possible impairment as further described in the note to the consolidated financial statements entitled “Investments”. When a security defaults (including mortgage loans) or securities are other-than-temporarily impaired, our policy is to discontinue the accrual of interest and eliminate all previous interest accruals, if we determine that such amounts will not be ultimately realized in full. Cash and Cash Equivalents Cash and cash equivalents include commercial paper, invested cash and other investments purchased with original maturities of less than three months. We carry them at amortized cost, which approximates estimated fair value. Deferred Acquisition Costs Deferred acquisition costs represent incremental direct costs related to the successful acquisition of new or renewal insurance contracts. For interest-sensitive life or annuity products, we amortize these costs in relation to the estimated gross profits using the interest rate credited to the underlying policies. For other products, we amortize these costs in relation to future anticipated premium revenue using the projected investment earnings rate. CNO FINANCIAL GROUP, INC. - Form 10-K 117 PART II ITEM 8 Consolidated Financial Statements When we realize a gain or loss on investments backing our interest- sensitive life or annuity products, we adjust the amortization to reflect the change in estimated gross profits from the products due to the gain or loss realized and the effect on future investment yields. We also adjust deferred acquisition costs for the change in amortization that would have been recorded if our fixed maturity securities, available for sale, had been sold at their stated aggregate fair value and the proceeds reinvested at current yields. We limit the total adjustment related to the impact of unrealized losses to the total of costs capitalized plus interest related to insurance policies issued in a particular year. We include the impact of this adjustment in accumulated other comprehensive income (loss) within shareholders’ equity. We regularly evaluate the recoverability of the unamortized balance of the deferred acquisition costs. We consider estimated future gross profits or future premiums, expected mortality or morbidity, interest earned and credited rates, persistency and expenses in determining whether the balance is recoverable. If we determine a portion of the unamortized balance is not recoverable, it is charged to amortization expense. In certain cases, the unamortized balance of the deferred acquisition costs may not be deficient in the aggregate, but our estimates of future earnings indicate that profits would be recognized in early periods and losses in later periods. In this case, we increase the amortization of the deferred acquisition costs over the period of profits, by an amount necessary to offset losses that are expected to be recognized in the later years. Present Value of Future Profits The present value of future profits is the value assigned to the right to receive future cash flows from policyholder insurance contracts existing at September 10, 2003 (the “Effective Date”, the effective date of the bankruptcy reorganization of Conseco, Inc., an Indiana corporation (our “Predecessor”)). The discount rate we used to determine the present value of future profits was 12 percent. The balance of this account is amortized and evaluated for recovery in the same manner as described above for deferred acquisition costs. We also adjust the present value of future profits for the change in amortization that would have been recorded if the fixed maturity securities, available for sale, had been sold at their stated aggregate fair value and the proceeds reinvested at current yields, similar to the manner described above for deferred acquisition costs. We limit the total adjustment related to the impact of unrealized losses to the total present value of future profits plus interest. Assets Held in Separate Accounts Separate accounts are funds on which investment income and gains or losses accrue directly to certain policyholders. The assets of these accounts are legally segregated. They are not subject to the claims that may arise out of any other business of CNO. We report separate account assets at fair value; the underlying investment risks are assumed by the contractholders. We record the related liabilities at amounts equal to the separate account assets. We record the fees earned for administrative and contractholder services performed for the separate accounts in insurance policy income. 118 CNO FINANCIAL GROUP, INC. - Form 10-K Recognition of Insurance Policy Income and Related Benefits and Expenses on Insurance Contracts For interest-sensitive life and annuity contracts that do not involve significant mortality or morbidity risk, the amounts collected from policyholders are considered deposits and are not included in revenue. Revenues for these contracts consist of charges for policy administration, cost of insurance charges and surrender charges assessed against policyholders’ account balances. Such revenues are recognized when the service or coverage is provided, or when the policy is surrendered. We establish liabilities for annuity and interest-sensitive life products equal to the accumulated policy account values, which include an accumulation of deposit payments plus credited interest, less withdrawals and the amounts assessed against the policyholder through the end of the period. In addition, policyholder account values for certain interest-sensitive life products are impacted by our assumptions related to changes of certain non-guaranteed elements that we are allowed to make under the terms of the policy, such as cost of insurance charges, expense loads, credited interest rates and policyholder bonuses. Sales inducements provided to the policyholders of these products are recognized as liabilities over the period that the contract must remain in force to qualify for the inducement. The options attributed to the policyholder related to our fixed index annuity products are accounted for as embedded derivatives as described in the section of this note entitled “Accounting for Derivatives”. Premiums from individual life products (other than interest- sensitive life contracts) and health products are recognized when due. When premiums are due over a significantly shorter period than the period over which benefits are provided, any gross premium in excess of the net premium (i.e., the portion of the gross premium required to provide for all expected future benefits and expenses) is deferred and recognized into revenue in a constant relationship to insurance in force. Benefits are recorded as an expense when they are incurred. We establish liabilities for traditional life, accident and health insurance, and life contingent payment annuity products using mortality tables in general use in the United States, which are modified to reflect the Company’s actual experience when appropriate. We establish liabilities for accident and health insurance products using morbidity tables based on the Company’s actual or expected experience. These reserves are computed at amounts that, with additions from estimated future premiums received and with interest on such reserves at estimated future rates, are expected to be sufficient to meet our obligations under the terms of the policy. Liabilities for future policy benefits are computed on a net-level premium method based upon assumptions as to future claim costs, investment yields, mortality, morbidity, withdrawals, policy dividends and maintenance expenses determined when the policies were issued (or with respect to policies inforce at August 31, 2003, the Company’s best estimate of such assumptions on the Effective Date). We make an additional provision to allow for potential adverse deviation for some of our assumptions. Once established, assumptions on these products are generally not changed unless a premium deficiency exists. In that case, a premium deficiency reserve is recognized and the future pattern of reserve changes is modified to reflect the relationship of premiums to benefits based on the current best estimate of future claim costs, investment yields, mortality, morbidity, withdrawals, policy dividends and maintenance expenses, determined without an additional provision for potential adverse deviation. We establish claim reserves based on our estimate of the loss to be incurred on reported claims plus estimates of incurred but unreported claims based on our past experience. Accounting for Long-term Care Premium Rate Increases Many of our long-term care policies have been subject to premium rate increases. In some cases, these premium rate increases were materially consistent with the assumptions we used to value the particular block of business at the Effective Date. With respect to certain premium rate increases, some of our policyholders were provided an option to cease paying their premiums and receive a non-forfeiture option in the form of a paid-up policy with limited benefits. In addition, our policyholders could choose to reduce their coverage amounts and premiums in the same proportion, when permitted by our contracts or as required by regulators. The following describes how we account for these policyholder options: • Premium rate increases - If premium rate increases reflect a change in our previous rate increase assumptions, the new assumptions are not reflected prospectively in our reserves. Instead, the additional premium revenue resulting from the rate increase is recognized as earned and original assumptions continue to be used to determine changes to liabilities for insurance products unless a premium deficiency exists. • Benefit reductions - A policyholder may choose reduced coverage with a proportionate reduction in premium, when permitted by our contracts. This option does not require additional underwriting. Benefit reductions are treated as a partial lapse of coverage, and the balance of our reserves and deferred insurance acquisition costs is reduced in proportion to the reduced coverage. • Non-forfeiture benefits offered in conjunction with a rate increase - In some cases, non-forfeiture benefits are offered to policyholders who wish to lapse their policies at the time of a significant rate increase. In these cases, exercise of this option is treated as an extinguishment of the original contract and issuance of a new contract. The balance of our reserves and deferred insurance acquisition costs are released, and a reserve for the new contract is established. Some of our policyholders may receive a non-forfeiture benefit if they cease paying their premiums pursuant to their original contract (or pursuant to changes made to their original contract as a result of a litigation settlement made prior to the Effective Date or an order issued by the Florida Office of Insurance Regulation). In these cases, exercise of this option is treated as the exercise of a policy benefit, and the reserve for premium paying benefits is reduced, and the reserve for the non-forfeiture benefit is adjusted to reflect the election of this benefit. PART II ITEM 8 Consolidated Financial Statements Accounting for Certain Marketing and Reinsurance Agreements Bankers Life has entered into various distribution and marketing agreements with other insurance companies to use Bankers Life’s career agents to distribute prescription drug and Medicare Advantage plans. These agreements allow Bankers Life to offer these products to current and potential future policyholders without investment in management and infrastructure. We receive fee income related to the plans sold through our distribution channels. We account for these distribution agreements as follows: • We recognize distribution income based on either: (i) a fixed fee per contract sold; or (ii) a percentage of premiums collected. This fee income is recognized over the calendar year term of the contract. • We also pay commissions to our agents who sell the plans. These payments are deferred and amortized over the term of the contract. Prior to its termination in August 2013, we had a quota-share reinsurance agreement with Coventry that provided Bankers Life with 50 percent of the net premiums and related policy benefits of certain PDP business sold through Bankers Life’s career agency force. We accounted for the quota-share agreement as follows: • We recognized premium revenue evenly over the period of the underlying Medicare Part D contracts. • We recognized policyholder benefits and assumed commission expense as incurred. • We recognized risk-share premium adjustments consistent with Coventry’s risk-share agreement with the Centers for Medicare and Medicaid Services. Reinsurance In the normal course of business, we seek to limit our loss exposure on any single insured or to certain groups of policies by ceding reinsurance to other insurance enterprises. We currently retain no more than $.8 million of mortality risk on any one policy. We diversify the risk of reinsurance loss by using a number of reinsurers that have strong claims-paying ratings. In each case, the ceding CNO subsidiary is directly liable for claims reinsured in the event the assuming company is unable to pay. The cost of reinsurance ceded totaled $176.7 million, $212.1 million and $220.0 million in 2014, 2013 and 2012, respectively. We deduct this cost from insurance policy income. Reinsurance recoveries netted against insurance policy benefits totaled $195.3 million, $196.2 million and $210.2 million in 2014, 2013 and 2012, respectively. From time-to-time, we assume insurance from other companies. Any costs associated with the assumption of insurance are amortized consistent with the method used to amortize deferred acquisition costs. Reinsurance premiums assumed totaled $35.0 million, $37.4 million and $69.4 million in 2014, 2013 and 2012, respectively. Reinsurance premiums included amounts assumed pursuant to marketing and quota-share agreements with Coventry of $6.8 million, $19.7 million and $49.9 million, in 2014, 2013 and 2012 CNO FINANCIAL GROUP, INC. - Form 10-K 119 PART II ITEM 8 Consolidated Financial Statements respectively. As further described above, we received a notice of Coventry’s intent to terminate the PDP quota-share reinsurance agreement in August 2013. The premiums collected from Coventry in 2014 represented adjustments to premiums on such business related to periods prior to the termination of the agreement. In December 2013, two of our insurance subsidiaries with long- term care business in the former Other CNO Business segment entered into 100% coinsurance agreements ceding $495 million of long-term care reserves to Beechwood Re Ltd. (“BRe”). Pursuant to the agreements, the insurance subsidiaries paid an additional premium of $96.9 million to BRe and an amount equal to the related net liabilities. The insurance subsidiaries’ ceded reserve credits are secured by assets in market-value trusts subject to a 7% over-collateralization, investment guidelines and periodic true-up provisions. Future payments into the trusts to maintain collateral requirements are the responsibility of BRe. We recognized a pre-tax loss of $98.4 million in 2013 to reflect: (i) the known loss (or premium deficiency) on the business, as we will not be recognizing additional income in future periods to recover the unamortized additional premium which will be paid to BRe; and (ii) other transaction costs. In the second quarter of 2014, we recaptured a block of interest- sensitive life business that was previously ceded under a modified coinsurance agreement. The recapture of this block resulted in a gain related to reinsurance transaction of $3.8 million. As further described in the note to the financial statements entitled “Sale of Subsidiary”, we recaptured a block of life insurance business in 2014 that was previously ceded under a coinsurance agreement. Income Taxes Our income tax expense includes deferred income taxes arising from temporary differences between the financial reporting and tax bases of assets and liabilities, capital loss carryforwards and net operating loss carryforwards (“NOLs”). Deferred tax assets and liabilities are measured using enacted tax rates expected to apply in the years in which temporary differences are expected to be recovered or paid. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in earnings in the period when the changes are enacted. A reduction of the net carrying amount of deferred tax assets by establishing a valuation allowance is required if, based on the available evidence, it is more likely than not that such assets will not be realized. In assessing the need for a valuation allowance, all available evidence, both positive and negative, shall be considered to determine whether, based on the weight of that evidence, a valuation allowance for deferred tax assets is needed. This assessment requires significant judgment and considers, among other matters, the nature, frequency and severity of current and cumulative losses, forecasts of future profitability, the duration of carryforward periods, our experience with operating loss and tax credit carryforwards expiring unused, and tax planning strategies. We evaluate the need to establish a valuation allowance for our deferred income tax assets on an ongoing basis. The realization of our deferred tax assets depends upon 120 CNO FINANCIAL GROUP, INC. - Form 10-K generating sufficient future taxable income of the appropriate type during the periods in which our temporary differences become deductible and before our capital loss carryforwards and life and non-life NOLs expire. At December 31, 2014, our valuation allowance for our net deferred tax assets was $246.0 million, as we have determined that it is more likely than not that a portion of our deferred tax assets will not be realized. This determination was made by evaluating each component of the deferred tax assets and assessing the effects of limitations and/or interpretations on the value of such component to be fully recognized in the future. Investments in Variable Interest Entities We have concluded that we are the primary beneficiary with respect to certain variable interest entities (“VIEs”), which are consolidated in our financial statements. All such VIEs are collateralized loan trusts that were established to issue securities to finance the purchase of corporate loans and other permitted investments (including two new VIEs which were consolidated in 2014, one new VIE which was consolidated in 2013 and one new VIE which was consolidated in 2012). The assets held by the trusts are legally isolated and not available to the Company. The liabilities of the VIEs are expected to be satisfied from the cash flows generated by the underlying loans held by the trusts, not from the assets of the Company. The Company has no financial obligation to the VIEs beyond its investment in each VIE. The investment portfolios held by the VIEs are primarily comprised of commercial bank loans to corporate obligors which are almost entirely rated below-investment grade. Refer to the note to the consolidated financial statements entitled “Investments in Variable Interest Entities” for additional information about VIEs. Investment Borrowings Two of the Company’s insurance subsidiaries (Washington National and Bankers Life) are members of the Federal Home Loan Bank (“FHLB”). As members of the FHLB, Washington National and Bankers Life have the ability to borrow on a collateralized basis from the FHLB. Washington National and Bankers Life are required to hold certain minimum amounts of FHLB common stock as a condition of membership in the FHLB, and additional amounts based on the amount of the borrowings. At December 31, 2014, the carrying value of the FHLB common stock was $73.5 million. As of December 31, 2014, collateralized borrowings from the FHLB totaled $1.5 billion and the proceeds were used to purchase fixed maturity securities. The borrowings are classified as investment borrowings in the accompanying consolidated balance sheet. The borrowings are collateralized by investments with an estimated fair value of $1.8 billion at December 31, 2014, which are maintained in a custodial account for the benefit of the FHLB. Substantially all of such investments are classified as fixed maturities, available for sale, in our consolidated balance sheet. The following summarizes the terms of the borrowings from the FHLB by Washington National and Bankers Life (dollars in millions): Amount borrowed $ $ Maturity date October 2015 June 2016 June 2016 October 2016 November 2016 November 2016 June 2017 August 2017 August 2017 October 2017 November 2017 January 2018 January 2018 February 2018 February 2018 February 2018 May 2018 July 2018 August 2018 January 2019 February 2019 March 2019 July 2019 June 2020 August 2021 March 2023 June 2025 Interest rate at December 31, 2014 Variable rate – 0.511% Variable rate – 0.610% Variable rate – 0.417% Variable rate – 0.413% Variable rate – 0.505% Variable rate – 0.640% Variable rate – 0.587% Variable rate – 0.432% Variable rate – 0.383% Variable rate – 0.661% Variable rate – 0.744% Variable rate – 0.579% Variable rate – 0.571% Variable rate – 0.542% Variable rate – 0.322% Variable rate – 0.566% Variable rate – 0.620% Variable rate – 0.703% Variable rate – 0.352% Variable rate – 0.649% Variable rate – 0.322% Variable rate – 0.642% Variable rate – 0.655% Fixed rate – 1.960% Fixed rate – 2.550% Fixed rate – 2.160% Fixed rate – 2.940% 50.0 100.0 75.0 100.0 50.0 50.0 57.7 50.0 75.0 100.0 50.0 50.0 50.0 50.0 50.0 22.0 100.0 50.0 50.0 50.0 50.0 100.0 21.8 21.8 28.2 26.8 20.5 1,498.8 The variable rate borrowings are pre-payable on each interest reset date without penalty. The fixed rate borrowings are pre-payable subject to payment of a yield maintenance fee based on prevailing market interest rates. At December 31, 2014, the aggregate yield maintenance fee to prepay all fixed rate borrowings was $1.2 million. Interest expense of $18.7 million, $27.9 million and $28.0 million in 2014, 2013 and 2012, respectively, was recognized related to total borrowings from the FHLB. In addition to our borrowings from the FHLB, we may enter into repurchase agreements to increase our investment return as part of our investment strategy. Pursuant to such agreements, the Company sells securities subject to an obligation to repurchase the same securities. Under these arrangements, the Company may transfer legal control over the assets but still retain effective control through an agreement that both entitles and obligates the Company to repurchase the assets. As a result, these repurchase agreements are accounted for as collateralized financing arrangements (i.e., secured borrowings) and not as a sale and subsequent repurchase of securities. Such borrowings totaled $20.4 million at December 31, 2014 and mature prior to June 30, 2015. We had no such borrowings outstanding at December 31, 2013. PART II ITEM 8 Consolidated Financial Statements The primary risks associated with short-term collateralized borrowings are: (i) a substantial decline in the market value of the margined security; and (ii) that a counterparty may be unable to perform under the terms of the contract or be unwilling to extend such financing in future periods especially if the liquidity or value of the margined security has declined. Exposure is limited to any depreciation in value of the related securities. Accounting for Derivatives Our fixed index annuity products provide a guaranteed minimum rate of return and a higher potential return that is based on a percentage (the “participation rate”) of the amount of increase in the value of a particular index, such as the Standard & Poor’s 500 Index, over a specified period. Typically, on each policy anniversary date, a new index period begins. We are generally able to change the participation rate at the beginning of each index period during a policy year, subject to contractual minimums. The Company accounts for the options attributed to the policyholder for the estimated life of the annuity contract as embedded derivatives. These accounting requirements often create volatility in the earnings from these products. We typically buy call options (including call spreads) referenced to the applicable indices in an effort to offset or hedge potential increases to policyholder benefits resulting from increases in the particular index to which the policy’s return is linked. We utilize United States Treasury interest rate futures primarily to hedge interest rate risk related to anticipated mortgage loan transactions. In periods prior to the second quarter of 2014, we were required to establish an embedded derivative related to a modified coinsurance agreement which ceded the risks of a block of interest sensitive life business. We recaptured this block in the second quarter of 2014 resulting in a gain of $3.8 million. Prior to the recapture of this block, we maintained the investments related to the modified coinsurance agreement in our trading securities account, which we carried at estimated fair value with changes in such value recognized as investment income. Such trading securities were sold in the second quarter of 2014 in conjunction with the reinsurance recapture. We purchase certain fixed maturity securities that contain embedded derivatives that are required to be bifurcated from the instrument and held at fair value on the consolidated balance sheet. We have elected the fair value option to carry the entire security at fair value with changes in fair value reported in net income for operational ease. Multibucket Annuity Products The Company’s multibucket annuity is an annuity product that credits interest based on the experience of a particular market strategy. Policyholders allocate their annuity premium payments to several different market strategies based on different asset classes within the Company’s investment portfolio. Interest is credited to this product based on the market return of the given strategy, less management fees, and funds may be moved between different strategies. The Company guarantees a minimum return CNO FINANCIAL GROUP, INC. - Form 10-K 121 PART II ITEM 8 Consolidated Financial Statements of premium plus approximately 3 percent per annum over the life of the contract. The investments backing the market strategies of these products are designated by the Company as trading securities. The change in the fair value of these securities is recognized as investment income (classified as income from policyholder and reinsurer accounts and other special-purpose portfolios), which is substantially offset by the change in insurance policy benefits for these products. We hold insurance liabilities of $43.4 million and $45.8 million related to multibucket annuity products as of December 31, 2014 and 2013, respectively. Sales Inducements Certain of our annuity products offer sales inducements to contract holders in the form of enhanced crediting rates or bonus payments in the initial period of the contract. Certain of our life insurance products offer persistency bonuses credited to the contract holders balance after the policy has been outstanding for a specified period of time. These enhanced rates and persistency bonuses are considered sales inducements in accordance with GAAP. Such amounts are deferred and amortized in the same manner as deferred acquisition costs. Sales inducements deferred totaled $5.1 million, $5.0 million and $4.4 million during 2014, 2013 and 2012, respectively. Amounts amortized totaled $12.4 million, $22.9 million and $27.1 million during 2014, 2013 and 2012, respectively. The unamortized balance of deferred sales inducements was $67.4 million and $108.6 million at December 31, 2014 and 2013, respectively. The balance of insurance liabilities for persistency bonus benefits was $1.5 million and $28.9 million at December 31, 2014 and 2013, respectively. Out-of-Period Adjustments In 2014, we recorded the net effect of an out-of-period adjustment related to the calculation of incentive compensation accruals which increased other operating costs and expenses by $2.4 million, decreased tax expense by $.8 million and decreased our net income by $1.6 million (or 1 cent per diluted share). In 2013 we recorded the net effect of out-of-period adjustment which increased our insurance policy benefits by $4.7 million, increased amortization expense by $2.1 million, increased other operating costs and expenses by $1.5 million, decreased tax expense by $.7 million and decreased our net income by $7.6 million (or 3 cents per diluted share). We evaluated these adjustments taking into account both qualitative and quantitative factors and considered the impact of these adjustments in relation to each period, as well as the periods in which they originated. The impact of recognizing these adjustments in prior years was not significant to any individual period. Management believes these adjustments are immaterial to the consolidated financial statements and all previously issued financial statements. Recently Issued Accounting Standards Pending Accounting Standards In April 2014, the Financial Accounting Standards Board (the “FASB”) issued authoritative guidance changing the criteria for reporting discontinued operations. Under the revised guidance, 122 CNO FINANCIAL GROUP, INC. - Form 10-K only disposals of a component or a group of components, including those classified as held for sale, which represent a strategic shift that has or will have a major effect on a company’s operations and financial results will be reported as discontinued operations. The guidance is effective prospectively for new disposals occurring after January 1, 2015. In May 2014, the FASB issued authoritative guidance for recognizing revenue from contracts with customers. Certain contracts with customers are specifically excluded from this guidance, including insurance contracts. The core principle of the new guidance is that an entity should recognize revenue when it transfers promised goods or services in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance also requires additional disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The guidance will be effective for the Company on January 1, 2017 and permits two methods of transition upon adoption; full retrospective and modified retrospective. Under the full retrospective method, prior periods would be restated under the new revenue standard, providing for comparability in all periods presented. Under the modified retrospective method, prior periods would not be restated. Instead, revenues and other disclosures for pre-2017 periods would be provided in the notes to the financial statements as previously reported under the current revenue standard. The Company is currently assessing the impact the guidance will have upon adoption. In June 2014, the FASB issued authoritative guidance on the accounting and disclosure of repurchase-to-maturity transactions and repurchase financings. Under this new accounting guidance, repurchase-to-maturity transactions will be accounted for as secured borrowings rather than sales of an asset, and transfers of financial assets with a contemporaneous repurchase financing arrangement will no longer be evaluated to determine whether they should be accounted for on a combined basis as forward contracts. The new guidance also prescribes additional disclosures particularly on the nature of collateral pledged in the repurchase agreement accounted for as a secured borrowing. The new guidance is effective beginning on January 1, 2015. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements. In August 2014, the FASB issued authoritative guidance related to measuring the financial assets and the financial liabilities of a consolidated collateralized financing entity which provides a measurement alternative for an entity that consolidates collateralized financing entities. A collateralized financing entity is a variable interest entity with no more than nominal equity that holds financial assets and issues beneficial interests in those financial assets; the beneficial interests have contractual recourse only to the related assets of the collateralized financing entity and are classified as financial liabilities. If elected, the alternative method results in the reporting entity measuring both the financial assets and the financial liabilities of the collateralized financing entity using the more observable of the two fair value measurements, which effectively removes measurement differences between the financial assets and the financial PART II ITEM 8 Consolidated Financial Statements liabilities of the collateralized financing entity previously recorded as net income (loss) attributable to non-controlling and other beneficial interests and as an adjustment to appropriated retained earnings. The reporting entity continues to measure its own beneficial interests in the collateralized financing entity (other than those that represent compensation for services) at fair value. The guidance is effective for interim and annual periods beginning after December 15, 2015. A reporting entity may apply the guidance using a modified retrospective approach by recording a cumulative-effect adjustment to equity as of the beginning of the annual period of adoption. A reporting entity may also apply the guidance retrospectively to all relevant prior periods. Early adoption is permitted. The Company is currently assessing the impact the guidance will have upon adoption. Adopted Accounting Standards In July 2013, the FASB issued authoritative guidance regarding the financial statement presentation of an unrecognized tax benefit when a NOL carryforward, a similar tax loss or a tax credit carryforward exists. Such guidance requires an unrecognized tax benefit, or a portion of an unrecognized tax benefit, to be presented in the financial statements as a reduction to a deferred tax asset for a NOL carryforward, a similar tax loss, or a tax credit carryforward, except under certain circumstances as further described in the guidance. Such guidance does not require new recurring disclosures. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The adoption of this guidance did not have a material impact on our consolidated financial statements. 3. INVESTMENTS At December 31, 2014, the amortized cost, gross unrealized gains and losses, estimated fair value and 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 Investment grade(a): Corporate securities United States Treasury securities and obligations of United States government corporations and agencies States and political subdivisions Debt securities issued by foreign governments Asset-backed securities Collateralized debt obligations Commercial mortgage-backed securities Mortgage pass-through securities Collateralized mortgage obligations Total investment grade fixed maturities, available for sale Below-investment grade(a): Corporate securities States and political subdivisions Asset-backed securities Collateralized debt obligations Commercial mortgage-backed securities Collateralized mortgage obligations $ 11,177.1 $ 1,710.5 $ (42.1) $ 12,845.5 $ 138.8 1,960.6 1.8 720.7 314.9 1,179.7 4.2 571.1 16,068.9 1,139.3 20.6 465.9 10.4 15.3 687.7 30.2 299.3 .1 52.0 2.4 80.9 .4 23.1 2,198.9 29.2 .2 33.8 .2 .9 60.4 (.1) (.7) — (1.6) (3.4) (.5) — (.6) (49.0) (43.0) (2.3) (1.8) — — (.7) 168.9 2,259.2 1.9 771.1 313.9 1,260.1 4.6 593.6 18,218.8 1,125.5 18.5 497.9 10.6 16.2 747.4 Total below-investment grade fixed maturities, available for sale TOTAL FIXED MATURITIES, AVAILABLE FOR SALE $ 18,408.1 $ 400.5 $ EQUITY SECURITIES 2,339.2 $ 124.7 2,323.6 $ 19.1 $ (47.8) (96.8) $ 20,634.9 $ 2,416.1 (.6) $ 419.0 — — — — — — — — — — — — — — — (3.2) (3.2) (3.2) (a) Investment ratings – Investment ratings are assigned the second lowest rating by Nationally Recognized Statistical Rating Organizations (“NRSROs”) (Moody’s Investor Services, Inc. (“Moody’s”), Standard & Poor’s Corporation (“S&P”) or Fitch Ratings (“Fitch”)), or if not rated by such firms, the rating assigned by the National Association of Insurance Commissioners (the “NAIC”). NAIC designations of “1” or “2” include fixed maturities generally rated investment grade (rated “Baa3” or higher by Moody’s or rated “BBB-” or higher by S&P and Fitch). NAIC designations of “3” through “6” are referred to as below-investment grade (which generally are rated “Ba1” or lower by Moody’s or rated “BB+” or lower by S&P and Fitch). References to investment grade or below-investment grade throughout our consolidated financial statements are determined as described above. CNO FINANCIAL GROUP, INC. - Form 10-K 123 PART II ITEM 8 Consolidated Financial Statements The NAIC evaluates the fixed maturity investments of insurers for regulatory and capital assessment purposes and assigns securities to one of six credit quality categories called NAIC designations, which are used by insurers when preparing their annual statements based on statutory accounting principles. The NAIC designations are generally similar to the credit quality designations of the NRSROs for marketable fixed maturity securities, except for certain structured securities. However, certain structured securities rated below investment grade by the NRSROs can be assigned NAIC 1 or NAIC 2 designations dependent on the cost basis of the holding relative to estimated recoverable amounts as determined by the NAIC. The following summarizes the NAIC designations and NRSRO equivalent ratings: NAIC Designation 1 2 3 4 5 6 NRSRO Equivalent Rating AAA/AA/A BBB BB B CCC and lower In or near default A summary of our fixed maturity securities, available for sale, by NAIC designations (or for fixed maturity securities held by non- insurance entities, based on NRSRO ratings) as of December 31, 2014 is as follows (dollars in millions): NAIC designation 1 2 3 4 5 6 Amortized cost 8,930.8 $ 8,294.0 800.6 350.2 32.5 — 18,408.1 $ Estimated fair value 10,158.6 9,310.1 800.6 334.5 31.1 — 20,634.9 $ $ Percentage of total estimated fair value 49.2% 45.1 3.9 1.6 .2 — 100.0% At December 31, 2013, the amortized cost, gross unrealized gains and losses, estimated fair value and 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 Investment grade : Corporate securities United States Treasury securities and obligations of United States government corporations and agencies States and political subdivisions Asset-backed securities Collateralized debt obligations Commercial mortgage-backed securities Mortgage pass-through securities Collateralized mortgage obligations Total investment grade fixed maturities, available for sale Below-investment grade : Corporate securities States and political subdivisions Asset-backed securities Collateralized debt obligations Collateralized mortgage obligations $ 13,404.1 $ 1,086.2 $ (125.8) $ 14,364.5 $ 71.1 2,130.2 869.9 259.4 1,517.1 12.7 936.2 19,200.7 1,314.5 6.4 523.5 27.6 819.1 2.6 106.8 41.6 7.4 97.7 .7 34.3 1,377.3 53.4 — 34.3 .1 60.9 (.6) (38.5) (3.9) (.1) (5.8) — (1.3) (176.0) (32.7) (.5) (3.3) (.4) (.3) 73.1 2,198.5 907.6 266.7 1,609.0 13.4 969.2 20,402.0 1,335.2 5.9 554.5 27.3 879.7 Total below-investment grade fixed maturities, available for sale TOTAL FIXED MATURITIES, AVAILABLE FOR SALE EQUITY SECURITIES 2,691.1 $ 21,891.8 $ 206.7 $ $ 148.7 1,526.0 $ 16.3 $ (37.2) 2,802.6 (213.2) $ 23,204.6 $ — $ 223.0 — — — — — — — — — — — — — (4.3) (4.3) (4.3) 124 CNO FINANCIAL GROUP, INC. - Form 10-K PART II ITEM 8 Consolidated Financial Statements 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 December 31, 2014 and 2013, were as follows (dollars in millions): Net unrealized appreciation (depreciation) on fixed maturity securities, available for sale, on which an other-than-temporary impairment loss has been recognized Net unrealized gains on all other investments Adjustment to present value of future profits(a) Adjustment to deferred acquisition costs Adjustment to insurance liabilities Unrecognized net loss related to deferred compensation plan Deferred income tax liabilities ACCUMULATED OTHER COMPREHENSIVE INCOME 2014 2013 $ $ 5.3 2,207.7 (149.9) (390.5) (381.4) (8.5) (457.4) 825.3 $ $ 6.5 1,322.6 (47.7) (137.0) — (7.1) (405.5) 731.8 (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 December 31, 2014, adjustments to the present value of future profits, deferred acquisition costs, insurance liabilities and deferred tax assets included $(128.8) million, $(142.2) million, $(381.4) million and $232.1 million, respectively, for premium deficiencies that would exist on certain blocks of business (primarily long-term care 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. At December 31, 2013, adjustments to the present value of future profits and deferred tax assets included $(27.8) million and $9.9 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. Below-Investment Grade Securities At December 31, 2014, the amortized cost of the Company’s below- investment grade fixed maturity securities was $2,339.2 million, or 13 percent of the Company’s fixed maturity portfolio. The estimated fair value of the below-investment grade portfolio was $2,416.1 million, or 103 percent of the amortized cost. Below-investment grade corporate debt securities typically have different characteristics than investment grade corporate debt securities. Based on historical performance, probability of default (Dollars in millions) Due in one year or less Due after one year through five years Due after five years through ten years Due after ten years Subtotal Structured securities TOTAL FIXED MATURITIES, AVAILABLE FOR SALE by the borrower is significantly greater for below-investment grade corporate debt securities and in many cases severity of loss is relatively greater as such securities are generally unsecured and often subordinated to other indebtedness of the issuer. Also, issuers of below-investment grade corporate debt securities frequently have higher levels of debt relative to investment-grade issuers, hence, all other things being equal, are generally more sensitive to adverse economic conditions. The Company attempts to reduce the overall risk related to its investment in below-investment grade securities, as in all investments, through careful credit analysis, strict investment policy guidelines, and diversification by issuer and/or guarantor and by industry. Contractual Maturity The following table sets forth the amortized cost and estimated fair value of fixed maturities, available for sale, at December 31, 2014, 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 216.5 $ 1,966.5 2,689.5 9,565.7 14,438.2 3,969.9 18,408.1 $ Estimated fair value 220.0 2,152.3 2,879.6 11,167.6 16,419.5 4,215.4 20,634.9 $ $ CNO FINANCIAL GROUP, INC. - Form 10-K 125 PART II ITEM 8 Consolidated Financial Statements Net Investment Income Net investment income consisted of the following (dollars in millions): General account assets: Fixed maturities Equity securities Mortgage loans Policy loans Other invested assets Cash and cash equivalents Policyholder and reinsurer accounts and other special-purpose portfolios: Trading securities(a) Options related to fixed index products: Option income Change in value of options Other special-purpose portfolios Gross investment income Less investment expenses NET INVESTMENT INCOME 2014 2013 2012 $ 1,175.8 13.9 104.2 11.0 17.1 .6 $ 1,290.3 7.0 96.3 17.3 14.4 .5 1,281.1 4.2 99.8 17.1 14.4 .6 14.8 12.8 26.3 118.9 (49.4) 42.1 1,449.0 21.6 1,427.4 $ 77.4 100.1 67.9 1,684.0 20.0 1,664.0 $ .4 25.1 36.1 1,505.1 18.7 1,486.4 $ $ (a) Changes in the estimated fair value for trading securities still held as of the end of the respective years and included in net investment income were $3.4 million, $.4 million and $4.9 million for the years ended December 31, 2014, 2013 and 2012, respectively. The estimated fair value of fixed maturity investments and mortgage loans not accruing investment income totaled nil and $.5 million at December 31, 2014 and 2013, respectively. Net Realized Investment Gains (Losses) The following table sets forth the net realized investment gains (losses) for the periods indicated (dollars in millions): Fixed maturity securities, available for sale: Gross realized gains on sale Gross realized losses on sale Impairments: Total other-than-temporary impairment losses Other-than-temporary impairment losses recognized in accumulated other comprehensive income Net impairment losses recognized Net realized investment gains from fixed maturities Equity securities Commercial mortgage loans Impairments of mortgage loans and other investments Other(a) 2014 2013 2012 $ $ 64.4 (13.0) $ 57.7 (11.4) 115.4 (15.4) — — — 51.4 10.1 (.1) (27.3) 2.6 36.7 $ (7.1) — (7.1) 39.2 4.8 (1.1) (4.5) (5.0) 33.4 $ (1.0) — (1.0) 99.0 .1 (3.7) (36.8) 22.5 81.1 NET REALIZED INVESTMENT GAINS (LOSSES) $ (a) Changes in the estimated fair value for trading securities for we have elected the fair value option still held as of the end of the respective years and included in net realized investment gains (losses) were $7.8 million, $(3.0) million and $20.1 million for the years ended December 31, 2014, 2013 and 2012, respectively. During 2014, we recognized net realized investment gains of $36.7 million, which were comprised of: (i) $54.4 million of net gains from the sales of investments (primarily fixed maturities) with proceeds of $2.1 billion; (ii) the increase in fair value of certain fixed maturity investments with embedded derivatives of $7.6 million; (iii) the increase in fair value of embedded derivatives related to a modified coinsurance agreement of $2.0 million; and (iv) $27.3 million of writedowns of mortgage loans and other investments for other than temporary declines in fair value recognized through net income. During 2013, we recognized net realized investment gains of $33.4 million, which were comprised of: (i) $51.8 million of net gains from the sales of investments (primarily fixed maturities) 126 CNO FINANCIAL GROUP, INC. - Form 10-K PART II ITEM 8 Consolidated Financial Statements with proceeds of $2.3 billion; (ii) the decrease in fair value of certain fixed maturity investments with embedded derivatives of $6.8 million; and (iii) $11.6 million of writedowns of investments for other than temporary declines in fair value recognized through net income. During 2013, the $11.4 million of realized losses on sales of $477.5 million of fixed maturity securities, available for sale, included: (i) $2.5 million of losses related to the sales of mortgage- backed securities and asset-backed securities; and (ii) $8.9 million of additional losses primarily related to various corporate securities. During 2012, we recognized net realized investment gains of $81.1 million, which were comprised of: (i) $98.8 million of net gains from the sales of investments (primarily fixed maturities) with proceeds of $2.1 billion; (ii) the increase in fair value of certain fixed maturity investments with embedded derivatives of $20.1 million; and (iii) $37.8 million of writedowns of investments for other than temporary declines in fair value recognized through net income. At December 31, 2014, there were no fixed maturity securities in default or considered nonperforming. During 2014, the $13.0 million of realized losses on sales of $233.7 million of fixed maturity securities, available for sale, included: (i) $.7 million of losses related to the sales of securities issued by state and political subdivisions; and (ii) $12.3 million of additional losses primarily related to various corporate 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 cash flows. During 2014, we recognized $27.3 million of impairment losses recorded in earnings which included: (i) a $6.8 million writedown of commercial mortgage loans as a result of our intent to sell the loans; (ii) $19.1 million of impairments related to two legacy private company investments where earnings and cash flows have not met the expectations assumed in our previous valuations; and (iii) $1.4 million of losses on other investments following unforeseen issue-specific events or conditions. Less than 6 months prior to sale Greater than or equal to 6 months and less than 12 months prior to sale Greater than 12 months prior to sale During 2013, the $11.6 million of other-than-temporary impairments we recorded in earnings included: (i) $5.0 million of losses on a corporate security; (ii) $2.5 million of losses on an equity security; and (iii) $4.1 million of losses primarily related to fixed maturity securities following unforeseen issue-specific events or conditions. During 2012, the $15.4 million of realized losses on sales of $402.5 million of fixed maturity securities, available for sale, included: (i) $5.2 million of losses related to the sales of mortgage- backed securities and asset-backed securities; and (ii) $10.2 million of additional losses primarily related to various corporate securities. During 2012, the $37.8 million of other-than-temporary impairments we recorded in earnings included: (i) $5.4 million of losses related to certain commercial mortgage loans; (ii) $29.9 million of losses on equity securities primarily related to investments obtained through the commutation of an investment made by our Predecessor; and (iii) $2.5 million of losses on other investments following unforeseen issue-specific events or conditions. 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. The following summarizes the investments sold at a loss during 2014 which had been continuously in an unrealized loss position exceeding 20 percent of the amortized cost basis prior to the sale for the period indicated (dollars in millions): At date of sale Number of issuers 1 1 2 4 Amortized cost .5 $ .2 5.2 5.9 $ $ $ Fair value .4 .2 3.9 4.5 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. CNO FINANCIAL GROUP, INC. - Form 10-K 127 PART II ITEM 8 Consolidated Financial Statements 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 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 December 31, 2014, other- than-temporary impairments included in accumulated other comprehensive income of $3.2 million (before taxes and related amortization) related to structured securities. Mortgage loans are impaired when it is probable that we will not collect the contractual principal and interest on the loan. We measure impairment based upon the difference between the carrying value of the loan and the estimated fair value of the collateral securing the loan less cost to sell. 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 years ended December 31, 2014, 2013 and 2012 (dollars in millions): Credit losses on fixed maturity securities, available for sale, beginning of period $ Add: credit losses on other-than-temporary impairments not previously recognized Less: credit losses on securities sold 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 Year ended December 31, 2014 (1.3) — .3 — — — 2013 (1.6) $ $ — .3 — — — 2012 (2.0) — .4 — — — $ (1.0) $ (1.3) $ (1.6) (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. 128 CNO FINANCIAL GROUP, INC. - Form 10-K PART II ITEM 8 Consolidated Financial Statements Investments with Unrealized Losses The following table sets forth the amortized cost and estimated fair value of those fixed maturities, available for sale, with unrealized losses at December 31, 2014, by contractual maturity. Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without penalties. Structured securities frequently include provisions for periodic principal payments and permit periodic unscheduled payments. (Dollars in millions) Due in one year or less Due after one year through five years Due after five years through ten years Due after ten years Subtotal Structured securities TOTAL Amortized cost 7.8 170.7 508.4 758.2 1,445.1 502.8 1,947.9 $ Estimated fair value 7.8 $ 165.3 474.4 709.4 1,356.9 494.2 1,851.1 $ $ The following summarizes the investments in our portfolio rated below-investment grade which have been continuously in an unrealized loss position exceeding 20 percent of the cost basis for the period indicated as of December 31, 2014 (dollars in millions): Less than 6 months Greater than 12 months(a) Number of issuers 6 1 7 Cost basis 40.9 14.1 55.0 $ $ $ $ Unrealized loss (10.3) $ (4.5) (14.8) $ Estimated fair value 30.6 9.6 40.2 (a) With respect to the security which has been in an unrealized position for greater than 12 months, we have analyzed the issuer’s financial performance and determined we expect to recover the entire amortized cost. 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): Description of securities United States Treasury securities and obligations of United States government corporations and agencies States and political subdivisions Corporate securities Asset-backed securities Collateralized debt obligations Commercial mortgage-backed securities Mortgage pass-through securities Collateralized mortgage obligations TOTAL FIXED MATURITIES, AVAILABLE FOR SALE EQUITY SECURITIES Less than 12 months 12 months or greater Total Fair value Unrealized losses Unrealized Fair value losses Fair value Unrealized losses $ 12.1 13.2 985.0 91.2 184.2 46.7 .5 79.0 $ 1,411.9 13.2 $ $ $ $ (.1) (.3) (65.9) (1.3) (3.4) (.5) — (.8) (72.3) (.6) $ $ $ 4.6 44.5 297.5 60.5 — — .1 32.0 439.2 .5 $ $ $ — $ (2.7) (19.2) (2.1) — — — (.5) 16.7 57.7 1,282.5 151.7 184.2 46.7 .6 111.0 (24.5) $ 1,851.1 13.7 — $ $ $ $ (.1) (3.0) (85.1) (3.4) (3.4) (.5) — (1.3) (96.8) (.6) CNO FINANCIAL GROUP, INC. - Form 10-K 129 PART II ITEM 8 Consolidated Financial Statements 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, 2013 (dollars in millions): Description of securities United States Treasury securities and obligations of United States government corporations and agencies States and political subdivisions Corporate securities Asset-backed securities Collateralized debt obligations Commercial mortgage-backed securities Mortgage pass-through securities Collateralized mortgage obligations TOTAL FIXED MATURITIES, AVAILABLE FOR SALE EQUITY SECURITIES Less than 12 months 12 months or greater Total Fair value Unrealized losses Unrealized Fair value losses Fair value Unrealized losses $ — $ $ 23.8 473.6 2,432.4 308.4 46.7 161.8 1.6 121.8 $ 3,570.1 .5 $ $ $ $ (.6) (30.3) (137.7) (6.5) (.5) (5.8) — (1.6) (183.0) $ — $ 79.2 170.3 32.5 — — 1.6 2.2 285.8 $ — $ — $ (8.7) (20.8) (.7) — — — — 23.8 552.8 2,602.7 340.9 46.7 161.8 3.2 124.0 (30.2) $ 3,855.9 .5 — $ $ $ $ (.6) (39.0) (158.5) (7.2) (.5) (5.8) — (1.6) (213.2) — Based on management’s current assessment of investments with unrealized losses at December 31, 2014, 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. Structured Securities At December 31, 2014 fixed maturity investments included structured securities with an estimated fair value of $4.2 billion (or 20 percent of all fixed maturity securities). The yield characteristics of structured securities generally differ in some respects from those of traditional corporate fixed-income securities or government securities. For example, interest and principal payments on structured securities may occur more frequently, often monthly. In many instances, we are subject to variability in the amount and timing of principal and interest payments. For example, in many cases, partial prepayments may occur at the option of the issuer and prepayment rates are influenced by a number of factors that cannot be predicted with certainty, including: the relative sensitivity of prepayments on the underlying assets backing the security to changes in interest rates and asset values; the availability and cost of alternative financing; a variety of economic, geographic and other factors; the timing, pace and proceeds of liquidations of defaulted collateral; and various security-specific structural considerations (for example, the repayment priority of a given security in a securitization structure). In addition, the total amount of payments for non-agency structured securities may be affected by changes to cumulative default rates or loss severities of the related collateral. Historically, the rate of prepayments on structured securities has tended to increase when prevailing interest rates have declined significantly in absolute terms and also relative to the interest rates on the underlying collateral. The yields recognized on structured securities purchased at a discount to par will generally increase (relative to the stated rate) when the underlying collateral prepays faster than expected. The yields recognized on structured securities purchased at a premium will decrease (relative to the stated rate) when the underlying collateral prepays faster than expected. When interest rates decline, the proceeds from prepayments may be reinvested at lower rates than we were earning on the prepaid securities. When interest rates increase, prepayments may decrease below expected levels. When this occurs, the average maturity and duration of structured securities increases, decreasing the yield on structured securities purchased at discounts and increasing the yield on those purchased at a premium because of a decrease in the annual amortization of premium. For structured securities included in fixed maturities, available for sale, that were purchased at a discount or premium, we recognize investment income using an effective yield based on anticipated future prepayments and the estimated final maturity of the securities. Actual prepayment experience is periodically reviewed and effective yields are recalculated when differences arise between the prepayments originally anticipated and the actual prepayments received and currently anticipated. For credit sensitive mortgage- backed and asset-backed securities, and for securities that can be prepaid or settled in a way that we would not recover substantially all of our investment, the effective yield is recalculated on a prospective basis. Under this method, the amortized cost basis in the security is not immediately adjusted and a new yield is applied prospectively. For all other structured and asset-backed securities, the effective yield is recalculated when changes in assumptions are made, and reflected in our income on a retrospective basis. Under this method, the amortized cost basis of the investment in the securities is adjusted to the amount that would have existed had the new effective yield been applied since the acquisition of the securities. Such adjustments were not significant in 2014. 130 CNO FINANCIAL GROUP, INC. - Form 10-K PART II ITEM 8 Consolidated Financial Statements For purchased credit impaired securities, at acquisition, the difference between the undiscounted expected future cash flows and the recorded investment in the securities represents the initial accretable yield, which is to be accreted into net investment income over the securities’ remaining lives on a level-yield basis. Subsequently, effective yields recognized on purchased credit impaired securities are recalculated and adjusted prospectively to reflect changes in the contractual benchmark interest rates on variable rate securities and any significant increases in undiscounted expected future cash flows arising due to reasons other than interest rate changes. Significant decreases in expected cash flows arising from credit events would result in impairment if such security’s fair value is below amortized cost. The following table sets forth the par value, amortized cost and estimated fair value of structured securities, summarized by interest rates on the underlying collateral, at December 31, 2014 (dollars in millions): Below 4 percent 4 percent – 5 percent 5 percent – 6 percent 6 percent – 7 percent 7 percent – 8 percent 8 percent and above TOTAL STRUCTURED SECURITIES Par value 1,160.7 759.5 1,880.0 533.6 85.3 20.0 4,439.1 $ $ Amortized cost 887.8 717.6 1,760.1 496.5 87.0 20.9 3,969.9 $ $ Estimated fair value 908.0 757.7 1,882.2 544.7 101.3 21.5 4,215.4 $ $ The amortized cost and estimated fair value of structured securities at December 31, 2014, summarized by type of security, were as follows (dollars in millions): Type Pass-throughs, sequential and equivalent securities Planned amortization classes, target amortization classes and accretion-directed bonds Commercial mortgage-backed securities Asset-backed securities Collateralized debt obligations Other TOTAL STRUCTURED SECURITIES Estimated fair value Amount 1,033.4 262.0 1,276.3 1,269.0 324.5 50.2 4,215.4 $ $ Percent of fixed maturities 5.0% 1.3 6.2 6.1 1.6 .2 20.4% $ Amortized cost 969.4 243.3 1,195.0 1,186.6 325.3 50.3 3,969.9 $ Pass-throughs, sequentials and equivalent securities have unique prepayment variability characteristics. Pass-through securities typically return principal to the holders based on cash payments from the underlying mortgage obligations. Sequential securities return principal to tranche holders in a detailed hierarchy. Planned amortization classes, targeted amortization classes and accretion- directed bonds adhere to fixed schedules of principal payments as long as the underlying mortgage loans experience prepayments within certain estimated ranges. In most circumstances, changes in prepayment rates are first absorbed by support or companion classes insulating the timing of receipt of cash flows from the consequences of both faster prepayments (average life shortening) and slower prepayments (average life extension). securities are Commercial mortgage-backed secured by commercial real estate mortgages, generally income producing properties that are managed for profit. Property types include multi-family dwellings including apartments, retail centers, hotels, restaurants, hospitals, nursing homes, warehouses, and office buildings. While most commercial mortgage-backed securities have call protection features whereby underlying borrowers may not prepay their mortgages for stated periods of time without incurring prepayment penalties, recoveries on defaulted collateral may result in involuntary prepayments. Commercial Mortgage Loans At December 31, 2014, the mortgage loan balance was primarily comprised of commercial mortgage loans. Approximately 13 percent, 10 percent and 7 percent of the mortgage loan balance were on properties located in California, Texas and Maryland, respectively. No other state comprised greater than five percent of the mortgage loan balance. None of the commercial mortgage loan balance was noncurrent at December 31, 2014. Our commercial mortgage loan portfolio is comprised of large commercial mortgage loans. We do not hold groups of smaller- balance homogeneous loans. Our loans have risk characteristics that are individually unique. Accordingly, we measure potential losses on a loan-by-loan basis rather than establishing an allowance for losses on mortgage loans. CNO FINANCIAL GROUP, INC. - Form 10-K 131 PART II ITEM 8 Consolidated Financial Statements The following table provides the carrying value and estimated fair value of our outstanding mortgage loans and the underlying collateral as of December 31, 2014 (dollars in millions): Estimated fair value Loan-to-value ratio(a) Less than 60% 60% to 70% Greater than 70% to 80% Greater than 80% to 90% Greater than 90% TOTAL $ $ Carrying value Mortgage loans 787.4 $ 387.1 441.6 147.8 5.0 1,768.9 745.8 376.9 425.3 139.6 4.3 1,691.9 $ Collateral 1,694.1 587.0 574.8 165.2 4.7 3,025.8 $ $ (a) Loan-to-value ratios are calculated as the ratio of: (i) the carrying value of the commercial mortgage loans; to (ii) the estimated fair value of the underlying collateral. Other Investment Disclosures Life insurance companies are required to maintain certain investments on deposit with state regulatory authorities. Such assets had aggregate carrying values of $42.3 million and $65.6 million at December 31, 2014 and 2013, respectively. 4. FAIR VALUE MEASUREMENTS Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date and, therefore, represents an exit price, not an entry price. We carry certain assets and liabilities at fair value on a recurring basis, including fixed maturities, equity securities, trading securities, investments held by VIEs, derivatives, cash and cash equivalents, separate account assets and embedded derivatives. We carry our COLI policy, which is invested in a series of mutual funds, at its cash surrender value and our hedge fund investments at their net asset values; in both cases, we believe these values approximate their fair values. In addition, we disclose fair value for certain financial instruments, including mortgage loans and policy loans, policyholder account balances, investment borrowings, notes payable and borrowings related to VIEs. The degree of judgment utilized in measuring the fair value of financial instruments is largely dependent on the level to which pricing is based on observable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our view of market assumptions in the absence of observable market data. Financial instruments with readily available active quoted prices would be considered to have fair values based on the highest level of observable inputs, and little judgment would be utilized in measuring fair value. Financial instruments that rarely trade would often have fair value based on a lower level of observable inputs, and more judgment would be utilized in measuring fair value. Valuation Hierarchy There is a three-level hierarchy for valuing assets or liabilities at fair value based on whether inputs are observable or unobservable. • Level 1 – includes assets and liabilities valued using inputs that are unadjusted quoted prices in active markets for identical assets or liabilities. Our Level 1 assets primarily include cash and exchange traded securities. 132 CNO FINANCIAL GROUP, INC. - Form 10-K CNO had no fixed maturity investments that were in excess of 10 percent of shareholders’ equity at December 31, 2014 and 2013. • Level 2 – includes assets and liabilities valued using inputs that are quoted prices for similar assets in an active market, quoted prices for identical or similar assets in a market that is not active, observable inputs, or observable inputs that can be corroborated by market data. Level 2 assets and liabilities include those financial instruments that are valued by independent pricing services using models or other valuation methodologies. These models consider various inputs such as credit rating, maturity, corporate credit spreads, reported trades and other inputs that are observable or derived from observable information in the marketplace or are supported by transactions executed in the marketplace. Financial assets in this category primarily include: certain publicly registered and privately placed corporate fixed maturity securities; certain government or agency securities; certain mortgage and asset-backed securities; certain equity securities; most investments held by our consolidated VIEs; certain mutual fund and hedge fund investments; most short- term investments; and non-exchange-traded derivatives such as call options. Financial liabilities in this category include investment borrowings, notes payable and borrowings related to VIEs. • Level 3 – includes assets and liabilities valued using unobservable inputs that are used in model-based valuations that contain management assumptions. Level 3 assets and liabilities include those financial instruments whose fair value is estimated based on broker/dealer quotes, pricing services or internally developed models or methodologies utilizing significant inputs not based on, or corroborated by, readily available market information. Financial assets in this category include certain corporate securities (primarily certain below-investment grade privately placed securities), certain structured securities, mortgage loans, and other less liquid securities. Financial liabilities in this category include our insurance liabilities for interest-sensitive products, which includes embedded derivatives (including embedded PART II ITEM 8 Consolidated Financial Statements derivatives related to our fixed index annuity products and to a modified coinsurance arrangement) since their values include significant unobservable inputs including actuarial assumptions. At each reporting date, we classify assets and liabilities into the three input levels based on the lowest level of input that is significant to the measurement of fair value for each asset and liability reported at fair value. This classification is impacted by a number of factors, including the type of financial instrument, whether the financial instrument is new to the market and not yet established, the characteristics specific to the transaction and overall market conditions. Our assessment of the significance of a particular input to the fair value measurement and the ultimate classification of each asset and liability requires judgment and is subject to change from period to period based on the observability of the valuation inputs. Any transfers between levels are reported as having occurred at the beginning of the period. There were no transfers between Level 1 and Level 2 in 2014 and 2013. The vast majority of our fixed maturity and equity securities, including those held in trading portfolios and those held by consolidated VIEs, short-term and separate account assets use Level 2 inputs for the determination of fair value. These fair values are obtained primarily from independent pricing services, which use Level 2 inputs for the determination of fair value. Substantially all of our Level 2 fixed maturity securities and separate account assets were valued from independent pricing services. Third party pricing services normally derive security prices through recently reported trades for identical or similar securities making adjustments through the reporting date based upon available market observable information. If there are no recently reported trades, the third party pricing services may use matrix or model processes to develop a security price where future cash flow expectations are discounted at an estimated risk- adjusted market rate. The number of prices obtained for a given security is dependent on the Company’s analysis of such prices as further described below. For securities that are not priced by pricing services and may not be reliably priced using pricing models, we obtain broker quotes. These broker quotes are non-binding and represent an exit price, but assumptions used to establish the fair value may not be observable and therefore represent Level 3 inputs. Approximately 26 percent of our Level 3 fixed maturity securities were valued using unadjusted broker quotes or broker-provided valuation inputs. The remaining Level 3 fixed maturity investments do not have readily determinable market prices and/or observable inputs. For these securities, we use internally developed valuations. Key assumptions used to determine fair value for these securities may include risk premiums, projected performance of underlying collateral and other factors involving significant assumptions which may not be reflective of an active market. For certain investments, we use a matrix or model process to develop a security price where future cash flow expectations are discounted at an estimated market rate. The pricing matrix incorporates term interest rates as well as a spread level based on the issuer’s credit rating, other factors relating to the issuer, and the security’s maturity. In some instances issuer- specific spread adjustments, which can be positive or negative, are made based upon internal analysis of security specifics such as liquidity, deal size, and time to maturity. As the Company is responsible for the determination of fair value, we have control processes designed to ensure that the fair values received from third-party pricing sources are reasonable and the valuation techniques and assumptions used appear reasonable and consistent with prevailing market conditions. Additionally, when inputs are provided by third-party pricing sources, we have controls in place to review those inputs for reasonableness. As part of these controls, we perform monthly quantitative and qualitative analysis on the prices received from third parties to determine whether the prices are reasonable estimates of fair value. The Company’s analysis includes: (i) a review of the methodology used by third party pricing services; (ii) where available, a comparison of multiple pricing services’ valuations for the same security; (iii) a review of month to month price fluctuations; (iv) a review to ensure valuations are not unreasonably dated; and (v) back testing to compare actual purchase and sale transactions with valuations received from third parties. As a result of such procedures, the Company may conclude the prices received from third parties are not reflective of current market conditions. In those instances, we may request additional pricing quotes or apply internally developed valuations. However, the number of instances is insignificant and the aggregate change in value of such investments is not materially different from the original prices received. The categorization of the fair value measurements of our investments priced by independent pricing services was based upon the Company’s judgment of the inputs or methodologies used by the independent pricing services to value different asset classes. Such inputs typically include: benchmark yields, reported trades, broker dealer quotes, issuer spreads, benchmark securities, bids, offers and reference data. The Company categorizes such fair value measurements based upon asset classes and the underlying observable or unobservable inputs used to value such investments. The fair value measurements for derivative instruments, including embedded derivatives requiring bifurcation, are determined based on the consideration of several inputs including closing exchange or over-the-counter market price quotations; time value and volatility factors underlying options; market interest rates; and non-performance risk. For certain embedded derivatives, we use actuarial assumptions in the determination of fair value. CNO FINANCIAL GROUP, INC. - Form 10-K 133 PART II ITEM 8 Consolidated Financial Statements The categorization of fair value measurements, by input level, for our financial instruments carried at fair value on a recurring basis at December 31, 2014 is as follows (dollars in millions): Quoted prices in active markets for identical assets or liabilities (Level 1) Significant other observable inputs (Level 2) Significant unobservable inputs (Level 3) Total $ — $ 13,605.1 $ 365.9 $ 13,971.0 — — — — — — — — — 216.9 — — — — — — 3.5 3.5 168.9 2,242.2 1.9 1,209.8 324.5 1,275.1 4.2 1,341.0 20,172.7 174.1 24.3 3.7 24.0 131.0 .1 29.7 — 212.8 — 35.5 — 59.2 — 1.2 .4 — 462.2 28.0 — — — 28.6 — — — 28.6 168.9 2,277.7 1.9 1,269.0 324.5 1,276.3 4.6 1,341.0 20,634.9 419.0 24.3 3.7 24.0 159.6 .1 29.7 3.5 244.9 — 1.4 — 221.8 $ 1,367.1 107.2 5.6 22,039.5 $ — — — 518.8 1,367.1 108.6 5.6 $ 22,780.1 — $ — $ 1,081.5 $ 1,081.5 ASSETS: Fixed maturities, available for sale: Corporate securities United States Treasury securities and obligations of United States government corporations and agencies States and political subdivisions Debt securities issued by foreign governments Asset-backed securities Collateralized debt obligations Commercial mortgage-backed securities Mortgage pass-through securities Collateralized mortgage obligations Total fixed maturities, available for sale Equity securities - corporate securities Trading securities: Corporate securities United States Treasury securities and obligations of United States government corporations and agencies Asset-backed securities Commercial mortgage-backed securities Mortgage pass-through securities Collateralized mortgage obligations Equity securities Total trading securities Investments held by variable interest entities - corporate securities Other invested assets - derivatives Assets held in separate accounts TOTAL ASSETS CARRIED AT FAIR VALUE BY CATEGORY LIABILITIES: Future policy benefits - embedded derivatives associated with fixed index annuity products $ $ 134 CNO FINANCIAL GROUP, INC. - Form 10-K PART II ITEM 8 Consolidated Financial Statements The categorization of fair value measurements, by input level, for our financial instruments carried at fair value on a recurring basis at December 31, 2013 is as follows (dollars in millions): ASSETS: Fixed maturities, available for sale: Corporate securities United States Treasury securities and obligations of United States government corporations and agencies States and political subdivisions Asset-backed securities Collateralized debt obligations Commercial mortgage-backed securities Mortgage pass-through securities Collateralized mortgage obligations Total fixed maturities, available for sale Equity securities - corporate securities Trading securities: Corporate securities United States Treasury securities and obligations of United States government corporations and agencies States and political subdivisions Asset-backed securities Commercial mortgage-backed securities Mortgage pass-through securities Collateralized mortgage obligations Equity securities Total trading securities Investments held by variable interest entities - corporate securities Other invested assets - derivatives Assets held in separate accounts TOTAL ASSETS CARRIED AT FAIR VALUE BY CATEGORY LIABILITIES: Future policy benefits - embedded derivatives associated with fixed index annuity products Other liabilities - embedded derivatives associated with modified coinsurance agreement TOTAL LIABILITIES CARRIED AT FAIR VALUE BY CATEGORY For those financial instruments disclosed at fair value, we use the following methods and assumptions to determine the estimated fair values: Mortgage loans and policy loans. We discount future expected cash flows based on interest rates currently being offered for similar loans with similar risk characteristics. We aggregate loans with similar characteristics in our calculations. The fair value of policy loans approximates their carrying value. Company-owned life insurance is backed by a series of mutual funds and is carried at cash surrender value which approximates estimated fair value. Alternative investment funds are carried at their net asset values which approximates estimated fair value. Quoted prices in active markets for identical assets or liabilities (Level 1) Significant other observable inputs (Level 2) Significant unobservable inputs (Level 3) Total $ — $ 15,340.1 $ 359.6 $ 15,699.7 — — — — — — — — 79.6 — — — — — — — 2.4 2.4 — .6 — 82.6 $ 73.1 2,204.4 1,419.9 47.3 1,609.0 11.8 1,848.9 22,554.5 118.9 — — 42.2 246.7 — 1.6 — 650.1 24.5 73.1 2,204.4 1,462.1 294.0 1,609.0 13.4 1,848.9 23,204.6 223.0 45.2 — 45.2 4.6 14.1 24.3 125.8 .1 31.1 — 245.2 1,046.7 156.2 10.3 24,131.8 $ — — — — — — — — — — — 4.6 14.1 24.3 125.8 .1 31.1 2.4 247.6 1,046.7 156.8 10.3 674.6 $ 24,889.0 — $ — — $ — $ 903.7 $ 903.7 — — $ 1.8 905.5 $ 1.8 905.5 $ $ $ Cash and cash equivalents include commercial paper, invested cash and other investments purchased with original maturities of less than three months. We carry them at amortized cost, which approximates estimated fair value. Liabilities for policyholder account balances. We discount future expected cash flows based on interest rates currently being offered for similar contracts with similar maturities. Investment borrowings, notes payable and borrowings related to variable interest entities. For publicly traded debt, we use current fair values. For other notes, we use discounted cash flow analyses based on our current incremental borrowing rates for similar types of borrowing arrangements. CNO FINANCIAL GROUP, INC. - Form 10-K 135 PART II ITEM 8 Consolidated Financial Statements The fair value measurements for our financial instruments disclosed at fair value on a recurring basis are as follows (dollars in millions): December 31, 2014 Quoted prices in active markets for identical assets or liabilities (Level 1) Significant other observable inputs (Level 2) Significant unobservable inputs (Level 3) Total estimated fair value Total carrying amount Assets: Mortgage loans Policy loans Other invested assets: Company-owned life insurance Alternative investment funds Cash and cash equivalents: Unrestricted Held by variable interest entities Liabilities: Policyholder account balances(a) Investment borrowings Borrowings related to variable interest entities Notes payable – direct corporate obligations Assets: Mortgage loans Policy loans Other invested assets: Company-owned life insurance Alternative investment funds Cash and cash equivalents: Unrestricted Held by variable interest entities Liabilities: Policyholder account balances(a) Investment borrowings Borrowings related to variable interest entities Notes payable – direct corporate obligations $ — $ — — $ — 1,768.9 $ 1,768.9 $ 1,691.9 106.9 106.9 106.9 — — 549.6 68.3 — — — — 157.6 102.8 62.0 — — 1,520.4 1,229.2 807.4 — — — — 157.6 102.8 611.6 68.3 157.6 102.8 611.6 68.3 10,707.2 — — — 10,707.2 10,707.2 1,519.2 1,520.4 1,286.1 1,229.2 794.4 807.4 December 31, 2013 Quoted prices in active markets for identical assets or liabilities (Level 1) Significant other observable inputs (Level 2) Significant unobservable inputs (Level 3) Total estimated fair value Total carrying amount $ — $ — — $ — 1,749.5 $ 1,749.5 $ 1,729.5 277.0 277.0 277.0 — — 457.8 104.3 — — — — 144.8 67.6 241.2 — — 1,948.5 993.7 872.5 — — — — 144.8 67.6 699.0 104.3 144.8 67.6 699.0 104.3 12,776.4 — — — 12,776.4 12,776.4 1,900.0 1,948.5 1,012.3 993.7 856.4 872.5 (a) The estimated fair value of insurance liabilities for policyholder account balances was approximately equal to its carrying value at December 31, 2014 and 2013. This was because interest rates credited on the vast majority of account balances approximate current rates paid on similar products and because these rates are not generally guaranteed beyond one year. 136 CNO FINANCIAL GROUP, INC. - Form 10-K PART II ITEM 8 Consolidated Financial Statements The following table presents additional information about assets and liabilities measured at fair value on a recurring basis and for which we have utilized significant unobservable (Level 3) inputs to determine fair value for the year ended December 31, 2014 (dollars in millions): December 31, 2014 Purchases, sales, issuances and settlements, net(b) Total realized and unrealized gains (losses) included in net income Total realized and unrealized gains (losses) included in accumulated other comprehensive income (loss) Beginning balance as of December 31, 2013 Transfers into Level 3(a) Transfers out of Level 3(a) Assets of CLIC sold Ending balance as of December 31, 2014 Amount of total gains (losses) for the year ended December 31, 2014 included in our net income relating to assets and liabilities still held as of the reporting date ASSETS: Fixed maturities, available for sale: Corporate securities States and political subdivisions Asset-backed securities Collateralized debt obligations Commercial mortgage-backed securities Mortgage pass- through securities Total fixed maturities, available for sale Equity securities - corporate securities Trading securities - commercial mortgage- backed securities LIABILITIES: Future policy benefits - embedded derivatives associated with fixed index annuity products Other liabilities - embedded derivatives associated with modified coinsurance agreement Total liabilities $ 359.6 $ 70.0 $ — $ 20.1 $ 36.8 $ (69.4)$ (51.2) $ 365.9 $ — 42.2 246.7 — 1.6 650.1 24.5 (1.8) 7.6 — 1.1 (1.2) 75.7 3.5 — 29.0 — — — — — — — — 3.0 5.1 — .1 — 36.5 14.0 — — (2.2) (9.7) — (246.7) — — — — — — — 35.5 59.2 — 1.2 .4 28.3 87.3 (316.1) (63.1) 462.2 — (.4) — — — — — — 28.0 28.6 — — — — — — — — (.4) (903.7) (104.3) (73.5) — — — — (1,081.5) (73.5) (1.8) (905.5) 1.8 (102.5) — (73.5) — — — — — — — — — (1,081.5) — (73.5) (a) Transfers into Level 3 are the result of unobservable inputs utilized within valuation methodologies for assets that were previously valued using observable inputs. Transfers out of Level 3 are due to the use of observable inputs in valuation methodologies as well as the utilization of pricing service information for certain assets that the Company is able to validate. CNO FINANCIAL GROUP, INC. - Form 10-K 137 PART II ITEM 8 Consolidated Financial Statements (b) Purchases, sales, issuances and settlements, net, represent the activity that occurred during the period that results in a change of the asset or liability but does not represent changes in fair value for the instruments held at the beginning of the period. Such activity primarily consists of purchases and sales of fixed maturity and equity securities and changes to embedded derivative instruments related to insurance products resulting from the issuance of new contracts, or changes to existing contracts. The following summarizes such activity for the year ended December 31, 2014 (dollars in millions): Purchases Sales Issuances Settlements Purchases, sales, issuances and settlements, net ASSETS: Fixed maturities, available for sale: Corporate securities States and political subdivisions Asset-backed securities Commercial mortgage-backed securities Mortgage pass-through securities Total fixed maturities, available for sale Equity securities - corporate securities Trading securities - commercial mortgage-backed securities LIABILITIES: Future policy benefits - embedded derivatives associated with fixed index annuity products Other liabilities - embedded derivatives associated with modified coinsurance agreement Total liabilities $ 71.7 — 9.9 1.1 1.1 83.8 3.5 29.0 $ (1.7) $ (1.8) (2.3) — (2.3) (8.1) — — — $ — — — — — — — — $ — — — — — — — (121.9) 7.5 (45.9) — (121.9) 3.4 10.9 (1.6) (47.5) 56.0 — 56.0 70.0 (1.8) 7.6 1.1 (1.2) 75.7 3.5 29.0 (104.3) 1.8 (102.5) 138 CNO FINANCIAL GROUP, INC. - Form 10-K PART II ITEM 8 Consolidated Financial Statements The following table presents additional information about assets and liabilities measured at fair value on a recurring basis and for which we have utilized significant unobservable (Level 3) inputs to determine fair value for the year ended December 31, 2013 (dollars in millions): December 31, 2013 Total realized and unrealized gains (losses) included in net income Total realized and unrealized gains (losses) included in accumulated other comprehensive income (loss) Beginning balance as of December 31, 2012 Purchases, sales, issuances and settlements, net(b) Transfers into Level 3(a) Transfers out of Level 3(a) Ending balance as of December 31, 2013 Amount of total gains (losses) for the year ended December 31, 2013 included in our net income relating to assets and liabilities still held as of the reporting date ASSETS: Fixed maturities, available for sale: Corporate securities States and political subdivisions Asset-backed securities Collateralized debt obligations Commercial mortgage- backed securities Mortgage pass-through securities Collateralized mortgage obligations Total fixed maturities, available for sale Equity securities: Corporate securities Venture capital investments Total equity securities Trading securities: States and political subdivisions Collateralized debt obligations Collateralized mortgage obligations Total trading securities LIABILITIES: Future policy benefits - embedded derivatives associated with fixed index annuity products Other liabilities - embedded derivatives associated with modified coinsurance agreement Total liabilities $ 355.5 $ 34.0 $ (.3) $ (9.8) $ 13.2 $ (33.0) $ 359.6 $ 13.1 44.0 — 1.6 324.0 (85.4) 6.2 1.9 16.9 761.6 .1 2.8 2.9 .6 7.3 5.8 13.7 — (.3) — (50.1) 24.5 — 24.5 — (7.7) — (7.7) — .1 .2 — — — — — (2.5) (2.5) — .6 — .6 (734.0) (219.0) 49.3 (5.5) (739.5) 3.7 (215.3) — 49.3 — (3.6) 7.9 — — — — .1 — — — — (13.1) — — (6.2) — (16.9) — 42.2 246.7 — 1.6 — (5.5) 13.3 (69.2) 650.1 (.1) (.3) (.4) — (.2) — (.2) — — — — — — — — — — — — — — — — (.6) — (5.8) (6.4) — — — 24.5 — 24.5 — — — — (903.7) (1.8) (905.5) — — — — — — — — — — — — (.2) — (.2) 49.3 — 49.3 (a) Transfers into Level 3 are the result of unobservable inputs utilized within valuation methodologies for assets that were previously valued using observable inputs. Transfers out of Level 3 are due to the use of observable inputs in valuation methodologies as well as the utilization of pricing service information for certain assets that the Company is able to validate. CNO FINANCIAL GROUP, INC. - Form 10-K 139 PART II ITEM 8 Consolidated Financial Statements (b) Purchases, sales, issuances and settlements, net, represent the activity that occurred during the period that results in a change of the asset or liability but does not represent changes in fair value for the instruments held at the beginning of the period. Such activity primarily consists of purchases and sales of fixed maturity and equity securities and changes to embedded derivative instruments related to insurance products resulting from the issuance of new contracts, or changes to existing contracts. The following summarizes such activity for the year ended December 31, 2013 (dollars in millions): Purchases Sales Issuances Settlements Purchases, sales, issuances and settlements, net ASSETS: Fixed maturities, available for sale: Corporate securities Asset-backed securities Collateralized debt obligations Mortgage pass-through securities Total fixed maturities, available for sale Equity securities - corporate securities Trading securities - collateralized debt obligations LIABILITIES: Future policy benefits - embedded derivatives associated with fixed index annuity products Other liabilities - embedded derivatives associated with modified coinsurance agreement Total liabilities $ $ 44.0 22.0 6.0 — 72.0 24.5 — (10.0) $ (20.4) (91.4) (.3) (122.1) — (7.7) — $ — — — — — — — $ — — — — — — (105.6) — (105.6) 1.4 3.7 5.1 (156.3) — (156.3) 41.5 — 41.5 34.0 1.6 (85.4) (.3) (50.1) 24.5 (7.7) (219.0) 3.7 (215.3) At December 31, 2014, 85 percent of our Level 3 fixed maturities, available for sale, were investment grade and 79 percent of our Level 3 fixed maturities, available for sale, consisted of corporate securities. Realized and unrealized investment gains and losses presented in the preceding tables represent gains and losses during the time the applicable financial instruments were classified as Level 3. Realized and unrealized gains (losses) on Level 3 assets are primarily reported in either net investment income for policyholder and reinsurer accounts and other special-purpose portfolios, net realized investment gains (losses) or insurance policy benefits within the consolidated statement of operations or accumulated other comprehensive income within shareholders’ equity based on the stated accounting policy for the instrument. The amount presented for gains (losses) included in our net loss for assets and liabilities still held as of the reporting date primarily represents impairments for fixed maturities, available for sale, changes in fair value of trading securities and certain derivatives and changes in fair value of embedded derivative instruments included in liabilities for insurance products that exist as of the reporting date. The following table provides additional information about the significant unobservable (Level 3) inputs developed internally by the Company to determine fair value for certain assets and liabilities carried at fair value at December 31, 2014 (dollars in millions): Fair value at December 31, 2014 Valuation technique(s) inputs Range (weighted average) Unobservable ASSETS: Corporate securities(a) Asset-backed securities(b) Equity security(c) Other assets categorized as Level 3(d) $ Total LIABILITIES: Discounted cash flow analysis 312.1 Discounted cash flow analysis 30.6 Market approach 28.0 148.1 Unadjusted third-party price source 518.8 Discount margins Discount margins Projected cash flows Not applicable 1.48% - 5.83% (2.58%) 1.99% - 4.15% (2.95%) Not applicable Not applicable Future policy benefits(e) 1,081.5 Discounted projected embedded derivatives 5.15% - 5.61% (5.42%) Projected portfolio yields Discount rates 0.00 - 2.74% (1.78%) Surrender rates 1.98% - 47.88% (14.16%) (a) Corporate securities - The significant unobservable input used in the fair value measurement of our corporate securities is discount margin added to a riskless market yield. Significant increases (decreases) in discount margin in isolation would result in a significantly lower (higher) fair value measurement. (b) Asset-backed securities - The significant unobservable input used in the fair value measurement of these asset-backed securities is discount margin added to a riskless market yield. Significant increases (decreases) in discount margin in isolation would result in a significantly lower (higher) fair value measurement. (c) Equity security - This equity security represents an investment in a company that is constructing a manufacturing facility. The significant unobservable input is the cash flows that will be generated upon completion of the manufacturing facility. Given the nature of this investment, the best current indicator of value is the cost basis of the investment, which we believe approximates market value. (d) Other assets categorized as Level 3 - For these assets, there were no adjustments to quoted market prices obtained from third-party pricing sources. (e) Future policy benefits - The significant unobservable inputs used in the fair value measurement of our embedded derivatives associated with fixed index annuity products are projected portfolio yields, discount rates and surrender rates. Increases (decreases) in projected portfolio yields in isolation would lead to a higher (lower) fair value measurement. The discount rate is based on the Treasury rate adjusted by a margin. Increases (decreases) in the discount rates would lead to a lower (higher) fair value measurement. Assumed surrender rates are used to project how long the contracts remain in force. Generally, the longer the contracts are assumed to be in force the higher the fair value of the embedded derivative. 140 CNO FINANCIAL GROUP, INC. - Form 10-K PART II ITEM 8 Consolidated Financial Statements The following table provides additional information about the significant unobservable (Level 3) inputs developed internally by the Company to determine fair value for certain assets and liabilities carried at fair value at December 31, 2013 (dollars in millions): Fair value at December 31, 2013 Valuation technique(s) Unobservable inputs Range (weighted average) ASSETS: Corporate securities(a) Asset-backed securities(b) Collateralized debt obligations(c) $ 260.3 35.1 240.7 Discounted cash flow analysis Discounted cash flow analysis Discounted cash flow analysis Equity security(d) Other assets categorized as Level 3(e) Total LIABILITIES: 24.5 Market approach 114.0 Unadjusted third-party price source 674.6 Discount margins Discount margins Recoveries Constant prepayment rate Discount margins Annual default rate 1.65% - 2.90% (2.36%) 2.03% - 4.20% (3.09%) 64% - 67% (65.8%) 20% .95% - 2.00% (1.32%) 1.14% - 5.57% (3.05%) Portfolio CCC % 1.52% - 21.79% (12.57%) Not applicable Not applicable Projected cash flows Not applicable Future policy benefits(f ) 905.5 Discounted projected embedded derivatives 5.35% - 6.63% (5.60%) Projected portfolio yields Discount rates 0.00 - 4.64% (2.47%) Surrender rates 2.80% - 54.60% (14.39%) (a) Corporate securities - The significant unobservable input used in the fair value measurement of our corporate securities is discount margin added to a riskless market yield. Significant increases (decreases) in discount margin in isolation would result in a significantly lower (higher) fair value measurement. (b) Asset-backed securities - The significant unobservable input used in the fair value measurement of these asset-backed securities is discount margin added to a riskless market yield. Significant increases (decreases) in discount margin in isolation would result in a significantly lower (higher) fair value measurement. (c) Collateralized debt obligations - The significant unobservable inputs used in the fair value measurement of our collateralized debt obligations relate to collateral performance, including default rate, recoveries and constant prepayment rate, as well as discount margins of the underlying collateral. Significant increases (decreases) in default rate in isolation would result in a significantly lower (higher) fair value measurement. Generally, a significant increase (decrease) in the constant prepayment rate and recoveries in isolation would result in a significantly higher (lower) fair value measurement. Generally a significant increase (decrease) in discount margin in isolation would result in a significantly lower (higher) fair value measurement. Generally, a change in the assumption used for the annual default rate is accompanied by a directionally similar change in the assumption used for discount margins and portfolio CCC % and a directionally opposite change in the assumption used for constant prepayment rate and recoveries. A tranche’s payment priority and investment cost basis could alter generalized fair value outcomes. (d) Equity security - This equity security represents an investment in a company that is constructing a manufacturing facility. The significant unobservable input is the cash flows that will be generated upon completion of the manufacturing facility. Given the nature of this investment, the best current indicator of value is the cost basis of the investment, which we believe approximates market value. (e) Other assets categorized as Level 3 - For these assets, there were no adjustments to quoted market prices obtained from third-party pricing sources. (f) Future policy benefits - The significant unobservable inputs used in the fair value measurement of our embedded derivatives associated with fixed index annuity products are projected portfolio yields, discount rates and surrender rates. Increases (decreases) in projected portfolio yields in isolation would lead to a higher (lower) fair value measurement. The discount rate is based on the Treasury rate adjusted by a margin. Increases (decreases) in the discount rates would lead to a lower (higher) fair value measurement. Assumed surrender rates are used to project how long the contracts remain in force. Generally, the longer the contracts are assumed to be in force the higher the fair value of the embedded derivative. 5. LIABILITIES FOR INSURANCE PRODUCTS Our future policy benefits are summarized as follows (dollars in millions): Long-term care Traditional life insurance contracts Accident and health contracts Interest-sensitive life insurance contracts Annuities and supplemental contracts with life contingencies TOTAL Withdrawal assumption Company experience Company experience Company experience Company experience Company experience Morbidity assumption Company experience Company experience Company experience Company experience Company experience Mortality assumption Company experience (a) Company experience Company experience (b) Interest rate assumption 2014 2013 6% $ 5,385.2 $ 4,999.7 5% 5% 5% 4% 2,175.8 2,519.1 47.6 2,517.5 2,466.8 526.5 707.7 10,835.4 $ $ 712.0 11,222.5 (a) Principally, modifications of: (i) the 1965 - 70 and 1975 - 80 Basic Tables; and (ii) the 1941, 1958 and 1980 Commissioners’ Standard Ordinary Tables; as well as Company experience. (b) Principally, modifications of: (i) the 1971 Individual Annuity Mortality Table; (ii) the 1983 Table “A”; and (iii) the Annuity 2000 Mortality Table; as well as Company experience. CNO FINANCIAL GROUP, INC. - Form 10-K 141 PART II ITEM 8 Consolidated Financial Statements Our policyholder account balances are summarized as follows (dollars in millions): Fixed index annuities Other annuities Interest-sensitive life insurance contracts TOTAL 2014 4,496.9 5,280.8 929.5 10,707.2 $ $ 2013 4,093.9 6,013.0 2,669.5 12,776.4 $ $ The Company establishes reserves for insurance policy benefits based on assumptions as to investment yields, mortality, morbidity, withdrawals, lapses and maintenance expenses. These reserves include amounts for estimated future payment of claims based on actuarial assumptions. The balance includes provision for the Company’s best estimate of the future policyholder benefits to be incurred on this business, given recent and expected future changes in experience. Changes in the unpaid claims reserve (included in claims payable) and disabled life reserves related to accident and health insurance (included in the liability for future policy benefits) were as follows (dollars in millions): Balance, beginning of year Less reinsurance receivables Net balance, beginning of year Incurred claims related to: Current year Prior years(a) Total incurred Interest on claim reserves Paid claims related to: Current year Prior years Total paid Net balance, end of year Add reinsurance receivables BALANCE, END OF YEAR $ $ 2014 1,710.1 (164.1) 1,546.0 1,468.1 (39.9) 1,428.2 70.5 848.7 641.5 1,490.2 1,554.5 125.0 1,679.5 $ $ 2013 1,679.3 (27.4) 1,651.9 1,511.1 (162.3) 1,348.8 75.2 870.0 659.9 1,529.9 1,546.0 164.1 1,710.1 $ $ 2012 1,637.3 (21.7) 1,615.6 1,570.1 (56.4) 1,513.7 77.8 891.3 663.9 1,555.2 1,651.9 27.4 1,679.3 (a) The reserves and liabilities we establish are necessarily based on estimates, assumptions and prior years’ statistics. Such amounts will fluctuate based upon the estimation procedures used to determine the amount of unpaid losses. It is possible that actual claims will exceed our reserves and have a material adverse effect on our results of operations and financial condition. 6. INCOME TAXES The components of income tax expense (benefit) were as follows (dollars in millions): Current tax expense Deferred tax expense Tax expense on period income Tax expense related to the sale of CLIC Deferred taxes on expired capital loss carryforwards Change in valuation allowance Other items TOTAL INCOME TAX EXPENSE (BENEFIT) $ $ 2014 15.6 143.6 159.2 14.2 — (48.8) (.9) 123.7 $ $ $ 2013 8.2 120.1 128.3 — 159.4 (472.1) 11.2 (173.2) $ 2012 12.5 93.7 106.2 — — (171.5) — (65.3) 142 CNO FINANCIAL GROUP, INC. - Form 10-K A reconciliation of the U.S. statutory corporate tax rate to the estimated annual effective rate reflected in the consolidated statement of operations is as follows: PART II ITEM 8 Consolidated Financial Statements U.S. statutory corporate rate Valuation allowance Expired capital loss carryforwards (which were fully offset by a corresponding reduction in the valuation allowance) Non-taxable income and nondeductible benefits, net State taxes Impact of the sale of CLIC Other items EFFECTIVE TAX RATE 2014 35.0% (27.9) — (.9) 1.5 66.3 (3.4) 70.6% 2013 35.0% (154.9) 52.3 5.0 1.9 — 3.9 (56.8)% The components of the Company’s income tax assets and liabilities are summarized below (dollars in millions): 2012 35.0% (110.1) — 32.3 1.4 — (.5) (41.9)% 2013 1,240.2 20.0 43.9 13.4 74.3 723.8 64.7 2,180.3 (306.8) (405.5) (712.3) 1,468.0 (294.8) 1,173.2 (26.0) 1,147.2 2014 1,048.4 15.2 47.2 — 59.7 585.9 67.3 1,823.7 (320.5) (457.4) (777.9) 1,045.8 (246.0) 799.8 (41.1) 758.7 $ $ $ $ our deferred tax assets depends upon generating sufficient future taxable income of the appropriate type during the periods in which our temporary differences become deductible and before our life and non-life NOLs expire. Based on our assessment, it appears more likely than not that $799.8 million of our total deferred tax assets of $1,045.8 million will be realized through future taxable earnings. Accordingly, we have established a deferred tax valuation allowance of $246.0 million at December 31, 2014. We will continue to assess the need for a valuation allowance in the future. If future results are less than projected, an increase to the valuation allowance may be required to reduce the deferred tax asset, which could have a material impact on our results of operations in the period in which it is recorded. We use a deferred tax valuation model to assess the need for a valuation allowance. Our model is adjusted to reflect changes in our projections of future taxable income including changes resulting reinsurance transactions and the impact of the sale of CLIC. Our estimates of future taxable income are based on evidence we consider to be objective and verifiable. investment strategies, trading from CNO FINANCIAL GROUP, INC. - Form 10-K 143 Deferred tax assets: Net federal operating loss carryforwards Net state operating loss carryforwards Tax credits Capital loss carryforwards Investments Insurance liabilities Other Gross deferred tax assets Deferred tax liabilities: Present value of future profits and deferred acquisition costs Accumulated other comprehensive income Gross deferred tax liabilities Net deferred tax assets before valuation allowance Valuation allowance Net deferred tax assets Current income taxes accrued INCOME TAX ASSETS, NET Our income tax expense includes deferred income taxes arising from temporary differences between the financial reporting and tax bases of assets and liabilities, capital loss carryforwards and NOLs. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply in the years in which temporary differences are expected to be recovered or paid. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in earnings in the period when the changes are enacted. A reduction of the net carrying amount of deferred tax assets by establishing a valuation allowance is required if, based on the available evidence, it is more likely than not that such assets will not be realized. In assessing the need for a valuation allowance, all available evidence, both positive and negative, shall be considered to determine whether, based on the weight of that evidence, a valuation allowance for deferred tax assets is needed. This assessment requires significant judgment and considers, among other matters, the nature, frequency and severity of current and cumulative losses, forecasts of future profitability, the duration of carryforward periods, our experience with operating loss and tax credit carryforwards expiring unused, and tax planning strategies. We evaluate the need to establish a valuation allowance for our deferred income tax assets on an ongoing basis. The realization of PART II ITEM 8 Consolidated Financial Statements At December 31, 2014, our projection of future taxable income for purposes of determining the valuation allowance is based on our adjusted average annual taxable income for the last three years plus: (i) a 3 percent core growth factor (consistent with the prior year assumption); and (ii) an additional 1 percent increase which primarily reflects the impact of the investment trading strategies completed in 2013 (which grade off over time). The aggregate 4 percent factor is used to increase taxable income annually over the next five years, and level taxable income is assumed thereafter. In the projections used for our December 31, 2014 analysis, our three year average taxable income increased to approximately $320 million, compared to $315 million in our prior projections. Approximately $50 million of the current three year average relates to non-life taxable income and $270 million relates to life income. Based on our assessment, we recognized a reduction to the allowance for deferred tax assets of $48.8 million in 2014. We have evaluated the recovery of our deferred tax assets and assessed the effect of limitations and/or interpretations on their value and have concluded that it is more likely than not that the value recognized will be fully realized in the future. Changes in our valuation allowance are summarized as follows (dollars in millions): Balance, December 31, 2011 Decrease in 2012 Balance, December 31, 2012 Decrease in 2013 Balance, December 31, 2013 Decrease in 2014 BALANCE, DECEMBER 31, 2014 $ $ 938.4 (171.5)(a) 766.9 (472.1)(b) 294.8 (48.8)(c) 246.0 (a) The 2012 reduction to the deferred tax valuation allowance primarily resulted from the impact of recent higher levels of income when projecting future taxable income. (b) The 2013 reduction to the deferred tax valuation allowance primarily resulted from the impact of higher levels of income on projected future taxable income, the expiration of capital loss carryforwards, a settlement with the Internal Revenue Service (the “IRS”) related to the classification of a portion of the cancellation of indebtedness income and the execution of certain investment trading strategies. (c) The 2014 reduction to the deferred tax valuation allowance primarily resulted from tax examination adjustments and the tax gain on the sale of CLIC. Recovery of our deferred tax asset is dependent on achieving the level of future taxable income projected in our deferred tax valuation model and failure to do so could result in an increase in the valuation allowance in a future period. Any future increase in the valuation allowance may result in additional income tax expense and reduce shareholders’ equity, and such an increase could have a significant impact upon our earnings in the future. The Internal Revenue Code (the “Code”) limits the extent to which losses realized by a non-life entity (or entities) may offset income from a life insurance company (or companies) to the lesser of: (i) 35 percent of the income of the life insurance company; or (ii) 35 percent of the total loss of the non-life entities (including NOLs of the non-life entities). There is no similar limitation on the extent to which losses realized by a life insurance entity (or entities) may offset income from a non-life entity (or entities). This limitation is the primary reason a valuation allowance for non-life NOL carryforwards is required. Section 382 of the Code imposes limitations on a corporation’s ability to use its NOLs when the company undergoes an ownership change. Future transactions and the timing of such transactions could cause an ownership change for Section 382 income tax purposes. Such transactions may include, but are not limited to, additional repurchases under our securities repurchase program, issuances of common stock and acquisitions or sales of shares of CNO stock by certain holders of our shares, including persons who have held, currently hold or may accumulate in the future five percent or more of our outstanding common stock for their own account. Many of these transactions are beyond our control. If an additional ownership change were to occur for purposes of Section 382, we would be required to calculate an annual restriction on the use of our NOLs to offset future taxable income. The annual restriction would be calculated based upon the value of CNO’s equity at the time of such ownership change, multiplied by a federal long-term tax exempt rate (2.80 percent at December 31, 2014), and the annual restriction could limit our ability to use a substantial portion of our NOLs to offset future taxable income. We regularly monitor ownership change (as calculated for purposes of Section 382) and, as of December 31, 2014, we were below the 50 percent ownership change level that would trigger further impairment of our ability to utilize our NOLs. On January 20, 2009, the Company’s Board of Directors adopted a Section 382 Rights Agreement designed to protect shareholder value by preserving the value of our tax assets primarily associated with tax NOLs under Section 382. The Section 382 Rights Agreement was adopted to reduce the likelihood of an ownership change occurring by deterring the acquisition of stock that would create “5 percent shareholders” as defined in Section 382. On December 6, 2011, the Company’s Board of Directors amended the Section 382 Rights Agreement to, among other things, (i) extend the final expiration date of the Amended Rights Agreement to December 6, 2014, (ii) update the purchase price of the rights described below, (iii) provide for a new series of preferred stock relating to the rights that is substantially identical to the prior series of preferred stock, (iv) provide for a 4.99 percent ownership threshold relating to any Company 382 Securities (as defined below), and amend other provisions to reflect best practices for tax benefit preservation plans, including updates to certain definitions. On November 13, 2014, the Company entered into the Second Amended and Restated Section 382 Rights Agreement which extends the final expiration date of the Amended Section 382 Rights Agreement to December 31, 2017, updates the purchase price of the Rights and provides for a new 144 CNO FINANCIAL GROUP, INC. - Form 10-K series of preferred stock relating to the Rights that is substantially identical to the prior series of preferred stock. The Company expects to submit the Second Amended Rights Agreement to the Company’s stockholders for approval at the Company’s 2015 annual meeting. Under the Section 382 Rights Agreement, one right was distributed for each share of our common stock outstanding as of the close of business on January 30, 2009 and for each share issued after that date. Pursuant to the Amended Section 382 Rights Agreement, if any person or group (subject to certain exemptions) becomes an owner of more than 4.99 percent of the Company’s outstanding common stock (or any other interest in the Company that would be treated as “stock” under applicable Section 382 regulations) without the approval of the Board of Directors, there would be a triggering event causing significant dilution in the voting power and economic ownership of that person or group. Shareholders who held more than 4.99 percent of the Company’s outstanding common stock as of December 6, 2011 will trigger a dilutive event only if they acquire additional shares exceeding one percent of our outstanding shares without prior approval from the Board of Directors. PART II ITEM 8 Consolidated Financial Statements On May 11, 2010, our shareholders approved an amendment to CNO’s certificate of incorporation designed to prevent certain transfers of common stock which could otherwise adversely affect our ability to use our NOLs (the “Original Section 382 Charter Amendment”). Subject to the provisions set forth in the Original Section 382 Charter Amendment, transfers of our common stock would be void and of no effect if the effect of the purported transfer would be to: (i) increase the direct or indirect ownership of our common stock by any person or public group (as such term is defined in the regulations under Section 382) from less than 5% to 5% or more of our common stock; (ii) increase the percentage of our common stock owned directly or indirectly by a person or public group owning or deemed to own 5% or more of our common stock; or (iii) create a new public group. On May 8, 2013, our shareholders approved an amendment (the “Extended Section 382 Charter Amendment”) to CNO’s certificate of incorporation to: (i) extend the term of the Original Section 382 Charter Amendment for three years until December 31, 2016, (ii) provide for a 4.99% percent ownership threshold relating to our stock, and (iii) amend certain other provisions of the Original Section 382 Charter Amendment, including updates to certain definitions, for consistency with the Amended Section 382 Rights Agreement. As of December 31, 2014, we had $3.0 billion of federal NOLs. The following table summarizes the expiration dates of our loss carryforwards assuming the IRS ultimately agrees with the position we have taken with respect to the loss on our investment in Conseco Senior Health Insurance Company (“CSHI”) (dollars in millions): Year of expiration Net operating loss carryforwards 2022 2023 2025 2026 2027 2028 2029 2032 Subtotal Less: Unrecognized tax benefits TOTAL $ $ Life 112.1 742.6 — — — — — — 854.7 $ Non-life — $ 1,983.0 91.5 207.4 4.9 203.7 146.6 44.0 2,681.1 Total loss carryforwards 112.1 2,725.6 91.5 207.4 4.9 203.7 146.6 44.0 3,535.8 (342.9) 511.8 $ (197.4) 2,483.7 $ (540.3) 2,995.5 We had deferred tax assets related to NOLs for state income taxes of $15.2 million and $20.0 million at December 31, 2014 and 2013, respectively. The related state NOLs are available to offset future state taxable income in certain states through 2025. We recognized an $878 million ordinary loss on our investment in CSHI which was worthless when it was transferred to an independent trust in 2008. Of this loss, $742 million has been reported as a life loss and $136 million as a non-life loss. The IRS disagreed with our ordinary loss treatment and believes that it should be treated as a capital loss, subject to a five year carryover. We are seeking resolution of this matter through early referral to appeals, a process that seeks to resolve disputes with the IRS. If the IRS position is ultimately determined to be correct, $473 million would have expired unused in 2013. Due to this uncertainty, we have not recognized the tax benefit related to this loss of $166.0 million. However, if this unrecognized tax benefit had been recognized, we would also have increased our valuation allowance by $34.0 million at December 31, 2014. CNO FINANCIAL GROUP, INC. - Form 10-K 145 PART II ITEM 8 Consolidated Financial Statements A reconciliation of the beginning and ending amount of unrecognized tax benefits for the years ended December 31, 2014 and 2013 is as follows (dollars in millions): Balance at beginning of year Increase based on tax positions taken in prior years Decrease based on tax positions taken in prior years Increase based on tax positions taken in the current year Decrease in unrecognized tax benefits related to settlements with taxing authorities BALANCE AT END OF YEAR Years ended December 31, 2014 226.7 10.9 — — (8.9) 228.7 $ $ 2013 310.5 35.6 (27.0) 47.6 (140.0) 226.7 $ $ As of December 31, 2014 and 2013, $155.4 million and $156.0 million, respectively, of our unrecognized tax benefits, if recognized, would affect the effective tax rate. The remaining balances relate to timing differences which, if recognized, would have no effect on the Company’s tax expense. The Company recognizes interest related to unrecognized tax benefits as income tax expense in the consolidated statement of operations. Such amounts were not significant in each of the three years ended December 31, 2014. The liability for accrued interest was $2.4 million and $1.8 million at December 31, 2014 and 2013, respectively. Tax years 2004 and 2008 through 2014 are open to examination by the IRS. The Company’s various state income tax returns are generally open for tax years 2011 through 2014 based on the individual state statutes of limitation. Generally, for tax years which generate NOLs, capital losses or tax credit carryforwards, the statute of limitations does not close until the expiration of the statute of limitations for the tax year in which such carryforwards are utilized. In accordance with GAAP, we are precluded from recognizing the tax benefits of any tax windfall upon the exercise of a stock option or the vesting of restricted stock unless such deduction resulted in actual cash savings to the Company. Because of the Company’s NOLs, no cash savings have occurred. NOL carryforwards of $30.9 million related to deductions for stock options and restricted stock will be reflected in additional paid-in capital if realized. 7. NOTES PAYABLE - DIRECT CORPORATE OBLIGATIONS The following notes payable were direct corporate obligations of the Company as of December 31, 2014 and 2013 (dollars in millions): Senior Secured Credit Agreement (as defined below) 6.375% Senior Secured Notes due October 2020 (the “6.375% Notes”) 7.0% Debentures Unamortized discount on Senior Secured Credit Agreement DIRECT CORPORATE OBLIGATIONS $ $ 2014 522.1 275.0 — (2.7) 794.4 $ $ 2013 581.5 275.0 3.5 (3.6) 856.4 In the third quarter of 2012, as further discussed below, we completed a comprehensive recapitalization plan. The following table sets forth the sources and uses of cash from the recapitalization transactions (dollars in millions): Sources: Senior Secured Credit Agreement Issuance of 6.375% Notes TOTAL SOURCES Uses: Cash on hand for general corporate purposes Repurchase of $200 million principal amount of 7.0% Debentures pursuant to Debenture Repurchase Agreement Repayment of a previous senior secured credit agreement Repayment of $275.0 million principal amount of 9.0% Notes, including redemption premium Debt issuance costs Accrued interest TOTAL USES $ $ $ $ 669.5 275.0 944.5 13.7 355.1 223.8 322.7 23.1 6.1 944.5 Senior Secured Credit Agreement On September 28, 2012, the Company entered into a new senior secured credit agreement, providing for: (i) a $425.0 million six-year term loan facility ($390.9 million remained outstanding at December 31, 2014); (ii) a $250.0 million four-year term loan facility ($131.2 million remained outstanding at December 31, 2014); and (iii) a $50.0 million three-year revolving credit facility, with JPMorgan Chase Bank, N.A., as administrative agent (the “Agent”), and the lenders from time to time party thereto 146 CNO FINANCIAL GROUP, INC. - Form 10-K (the “Senior Secured Credit Agreement”). The Senior Secured Credit Agreement is guaranteed by the Subsidiary Guarantors (as defined below) and secured by a first-priority lien (which ranks pari passu with the liens securing the 6.375% Notes) on substantially all of the Company’s and the Subsidiary Guarantors’ assets. As of December 31, 2014, no amounts have been borrowed under the revolving credit facility. The net proceeds from the Senior Secured Credit Agreement, together with the net proceeds from the 6.375% Notes, were used to repay other outstanding indebtedness, as further described below, and for general corporate purposes. The revolving credit facility includes an uncommitted subfacility for swingline loans of up to $5.0 million, and up to $5.0 million of the revolving credit facility is available for the issuance of letters of credit. The six-year term loan facility amortizes in quarterly installments in amounts resulting in an annual amortization of 1% and the four-year term loan facility amortizes in quarterly installments resulting in an annual amortization of 20% during the first and second years and 30% during the third and fourth years. Subject to certain conditions, the Company may incur additional incremental loans under the Senior Secured Credit Agreement in an amount of up to $250.0 million. On May 30, 2014, the Company completed an amendment to the Senior Secured Credit Agreement to waive the requirement that the net proceeds in excess of $125 million received from the sale of CLIC be used to prepay amounts outstanding under the Senior Secured Credit Agreement. In May 2013, we amended our Senior Secured Credit Agreement. Pursuant to the amended terms, the applicable interest rates were decreased. The new interest rates with respect to loans under: (i) the six-year term loan facility are, at the Company’s option, equal to a eurodollar rate, plus 2.75% per annum, or a base rate, plus 1.75% per annum, subject to a eurodollar rate “floor” of 1.00% and a base rate “floor” of 2.25% (previously a eurodollar rate, plus 3.75% per annum, or a base rate, plus 2.75% per annum, subject to a eurodollar rate “floor” of 1.25% and a base rate “floor” of 2.25%); (ii) the four-year term loan facility are, at the Company’s option, equal to a eurodollar rate, plus 2.25% per annum, or a base rate, plus 1.25% per annum, subject to a eurodollar rate “floor” of .75% and a base rate “floor” of 2.00% (previously a eurodollar rate, plus 3.25% per annum, or a base rate, plus 2.25% per annum, subject to a eurodollar rate “floor” of 1.00% and a base rate “floor” of 2.00%); and (iii) the revolving credit facility will be, at the Company’s option, equal to a eurodollar rate, plus 3.00% per annum, or a base rate, plus 2.00% per annum, in each case, with respect to revolving credit facility borrowings only, subject to certain step-downs based on the debt to total capitalization ratio of the Company (previously a eurodollar rate, plus 3.50% per annum, or a base rate, plus 2.50% per annum, subject to certain step-downs based on the debt to total capitalization ratio of the Company). At December 31, 2014, the interest rates on the six-year term loan facility and the four-year term loan facility were 3.75% and 3.00%, respectively. Other changes made in May 2013 to the Senior Secured Credit Agreement included modifications of mandatory prepayments resulting from certain restricted payments made (including any common stock dividends and share repurchases) as defined in the Senior Secured Credit Agreement. Pursuant to the amended terms, the amount of the mandatory prepayment is: (a) 100% of PART II ITEM 8 Consolidated Financial Statements the amount of certain restricted payments provided that if, as of the end of the fiscal quarter immediately preceding such restricted payment, the debt to total capitalization ratio is: (x) equal to or less than 25.0% but greater than 20.0%, the prepayment requirement shall be reduced to 33.33% (previously less than or equal to 22.5% but greater than 17.5%); or (y) equal to or less than 20.0%, the prepayment requirement shall not apply (previously equal to or less than 17.5%). Mandatory prepayments of the Senior Secured Credit Agreement will be required, subject to certain exceptions, in an amount equal to: (i) 100% of the net cash proceeds from certain asset sales or casualty events; (ii) 100% of the net cash proceeds received by the Company or any of its restricted subsidiaries from certain debt issuances; and (iii) 100% of the amount of certain restricted payments made (including any common stock dividends and share repurchases) as defined in the Senior Secured Credit Agreement provided that if, as of the end of the fiscal quarter immediately preceding such restricted payment, the debt to total capitalization ratio is: (x) equal to or less than 25.0%, but greater than 20.0%, the prepayment requirement shall be reduced to 33.33%; or (y) equal to or less than 20.0%, the prepayment requirement shall not apply. Notwithstanding the foregoing, no mandatory prepayments pursuant to item (i) in the preceding paragraph shall be required if: (x) the debt to total capitalization ratio is equal or less than 20% and (y) either (A) the financial strength rating of certain of the Company’s insurance subsidiaries is equal to or better than A- (stable) from A.M. Best Company or (B) the Senior Secured Credit Agreement is rated equal or better than BBB- (stable) from S&P and Baa3 (stable) by Moody’s. In 2014, we made $59.4 million of scheduled quarterly principal payments due under the Senior Secured Credit Agreement. In the first six months of 2013, we made mandatory prepayments of $20.4 million in an amount equal to 33.33% of our share repurchases and common stock dividend payments, as required under the terms of our Senior Secured Credit Agreement. No mandatory prepayments were required in the second half of 2013 as our debt to total capitalization ratio, as defined in the Senior Secured Credit Agreement, was below 20.0 percent. We also made additional payments of $42.7 million in 2013 to cover the remaining portion of the scheduled quarterly principal payments due under the Senior Secured Credit Agreement. In 2012, as required under the terms of the Senior Secured Credit Agreement, we made mandatory prepayments of $28.4 million due to repurchases of our common stock and payment of a common stock dividend. We also made an additional payment of $2.0 million to cover the remaining portion of the scheduled quarterly principal payments. The Senior Secured Credit Agreement contains covenants that limit the Company’s ability to take certain actions and perform certain activities, including (each subject to exceptions as set forth in the Senior Secured Credit Agreement): • limitations on debt (including, without limitation, guarantees and other contingent obligations); • limitations on issuances of disqualified capital stock; • limitations on liens and further negative pledges; • limitations on sales, transfers and other dispositions of assets; CNO FINANCIAL GROUP, INC. - Form 10-K 147 PART II ITEM 8 Consolidated Financial Statements • limitations on transactions with affiliates; 6.375% Notes • limitations on changes in the nature of the Company’s business; • limitations on mergers, consolidations and acquisitions; • limitations on dividends and other distributions, stock repurchases and redemptions and other restricted payments; • limitations on investments and acquisitions; • limitations on prepayment of certain debt; • limitations on modifications or waivers of certain debt documents and charter documents; • investment portfolio requirements for insurance subsidiaries; • limitations on restrictions affecting subsidiaries; • limitations on holding company activities; and • limitations on changes in accounting policies. The Senior Secured Credit Agreement requires the Company to maintain (each as calculated in accordance with the Senior Secured Credit Agreement): (i) a debt to total capitalization ratio of not more than 27.5 percent (such ratio was 17.2 percent at December 31, 2014); (ii) an interest coverage ratio of not less than 2.50 to 1.00 for each rolling four quarters (such ratio was 15.75 to 1.00 for the four quarters ended December 31, 2014); (iii) an aggregate ratio of total adjusted capital to company action level risk-based capital for the Company’s insurance subsidiaries of not less than 250 percent (such ratio was 434 percent at December 31, 2014); and (iv) a combined statutory capital and surplus for the Company’s insurance subsidiaries of at least $1,300.0 million (combined statutory capital and surplus at December 31, 2014, was $1,868 million). The Senior Secured Credit Agreement provides for customary events of default (subject in certain cases to customary grace and cure periods), which include nonpayment, incorrectness of any representation or warranty in any material respect, breach of covenants in the Senior Secured Credit Agreement or other loan documents, cross default to certain other indebtedness, certain events of bankruptcy and insolvency, certain ERISA events, a failure to pay certain judgments, certain material regulatory events, the occurrence of a change of control, and the invalidity of any material provision of any loan document or material lien or guarantee granted under the loan documents. If an event of default under the Senior Secured Credit Agreement occurs and is continuing, the Agent may accelerate the amounts and terminate all commitments outstanding under the Senior Secured Credit Agreement and may exercise remedies in respect of the collateral. In connection with the execution of the Senior Secured Credit Agreement, the Company and the Subsidiary Guarantors entered into a guarantee and security agreement, dated as of September 28, 2012 (the “Guarantee and Security Agreement”), by and among the Company, the Subsidiary Guarantors and the Agent, pursuant to which the Subsidiary Guarantors guaranteed all of the obligations of the Company under the Senior Secured Credit Agreement and the Company and the Subsidiary Guarantors pledged substantially all of their assets to secure the Senior Secured Credit Agreement, subject to certain exceptions as set forth in the Guarantee and Security Agreement. On September 28, 2012, we issued $275.0 million in aggregate principal amount of 6.375% Notes pursuant to an Indenture, dated as of September 28, 2012 (the “6.375% Indenture”), among the Company, the subsidiary guarantors party thereto (the “Subsidiary Guarantors”) and Wilmington Trust, National Association, as trustee (the “Trustee”) and as collateral agent (the “Collateral Agent”). The net proceeds from the issuance of the 6.375% Notes, together with the net proceeds from the Senior Secured Credit Agreement, were used to repay other outstanding indebtedness and for general corporate purposes. The 6.375% Notes mature on October 1, 2020. Interest on the 6.375% Notes accrues at a rate of 6.375% per annum and is payable semiannually in arrears on April 1 and October 1 of each year, commencing on April 1, 2013. The 6.375% Notes and the guarantees thereof (the “Guarantees”) are senior secured obligations of the Company and the Subsidiary Guarantors and rank equally in right of payment with all of the Company’s and the Subsidiary Guarantors’ existing and future senior obligations, and senior to all of the Company’s and the Subsidiary Guarantors’ future subordinated indebtedness. The 6.375% Notes are secured by a first-priority lien on substantially all of the assets of the Company and the Subsidiary Guarantors, subject to certain exceptions. The 6.375% Notes and the Guarantees are pari passu with respect to security and in right of payment with all of the Company’s and the Subsidiary Guarantors’ existing and future secured indebtedness under the Senior Secured Credit Agreement. The 6.375% Notes are structurally subordinated to all of the liabilities and preferred stock of each of the Company’s insurance subsidiaries, which are not guarantors of the 6.375% Notes. The Company may redeem all or part of the 6.375% Notes beginning on October 1, 2015, at the redemption prices set forth in the 6.375% Indenture. The Company may also redeem all or part of the 6.375% Notes at any time and from time to time prior to October 1, 2015, at a price equal to 100% of the aggregate principal amount of the 6.375% Notes to be redeemed, plus a “make-whole” premium and accrued and unpaid interest to, but not including, the redemption date. In addition, prior to October 1, 2015, the Company may redeem up to 35% of the aggregate principal amount of the 6.375% Notes with the net cash proceeds of certain equity offerings at a price equal to 106.375% of the aggregate principal amount of the 6.375% Notes to be redeemed, plus accrued and unpaid interest to, but not including, the redemption date. Upon the occurrence of a Change of Control (as defined in the 6.375% Indenture), each holder of the 6.375% Notes may require the Company to repurchase all or a portion of the 6.375% Notes in cash at a price equal to 101% of the aggregate principal amount of the 6.375% Notes to be repurchased, plus accrued and unpaid interest, if any, to, but not including, the date of repurchase. The 6.375% Indenture contains covenants that, among other things, limit (subject to certain exceptions) the Company’s ability and the ability of the Company’s Restricted Subsidiaries (as defined in the 6.375% Indenture) to: 148 CNO FINANCIAL GROUP, INC. - Form 10-K • incur or guarantee additional indebtedness or issue preferred stock; • pay dividends or make other distributions to shareholders; • purchase or redeem capital stock or subordinated indebtedness; • make investments; • create liens; • incur restrictions on the Company’s ability and the ability of its Restricted Subsidiaries to pay dividends or make other payments to the Company; • sell assets, including capital stock of the Company’s subsidiaries; • consolidate or merge with or into other companies or transfer all or substantially all of the Company’s assets; and • engage in transactions with affiliates. The 6.375% Indenture provides for customary events of default (subject in certain cases to customary grace and cure periods), which include nonpayment, breach of covenants in the 6.375% Indenture, failure to pay at maturity or acceleration of other indebtedness, a failure to pay certain judgments and certain events of bankruptcy and insolvency. Generally, if an event of default occurs, the Trustee or holders of at least 25% in principal amount of the then outstanding 6.375% Notes may declare the principal of and accrued but unpaid interest, including any additional interest, on all of the 6.375% Notes to be due and payable. Under the 6.375% Indenture, the Company can make Restricted Payments (as such term is defined in the 6.375% Indenture) up to a calculated limit, provided that the Company’s pro forma risk-based capital ratio exceeds 225% after giving effect to the Restricted Payment and certain other conditions are met. Restricted Payments include, among other items, repurchases of common stock and cash dividends on common stock (to the extent such dividends exceed $30.0 million in the aggregate in any calendar year). The limit of Restricted Payments permitted under the 6.375% Indenture is the sum of (x) 50% of the Company’s “Net Excess Cash Flow” (as defined in the 6.375% Indenture) for the period (taken as one accounting period) from July 1, 2012 to the end of the Company’s most recently ended fiscal quarter for which financial statements are available at the time of such Restricted Payment, (y) $175.0 million and (z) certain other amounts specified in the 6.375% Indenture. Based on the provisions set forth in the 6.375% Indenture and the Company’s Net Excess Cash Flow for the period from July 1, 2012 through December 31, 2014, the Company could have made additional Restricted Payments under this 6.375% Indenture covenant of approximately $75 million as of December 31, 2014. This limitation on Restricted Payments does not apply if the Debt to Total Capitalization Ratio (as defined in the 6.375% Indenture) as of the last day of the Company’s most recently ended fiscal quarter for which financial statements are available that immediately precedes the date of any Restricted Payment, calculated immediately after giving effect to such Restricted Payment and any related transactions on a pro forma basis, is equal to or less than 17.5%. PART II ITEM 8 Consolidated Financial Statements The amendment to the Senior Secured Credit Agreement on May 30, 2014, did not impact the restrictions set forth in the 6.375% Indenture regarding the Company’s use of the proceeds from the sale of CLIC. Under the Indenture, the net proceeds received by the Company from the sale of CLIC (defined as “Net Available Cash” under the Indenture) may be used to: (i) reinvest in or acquire assets to be used in the insurance business or a related business; or (ii) repay the Senior Secured Credit Agreement. Under the Indenture, any Net Available Cash not so reinvested or applied within 365 days after the closing of the sale of CLIC must be used to make an offer to purchase the outstanding notes at par and, in the interim, may only be invested as set forth in the Indenture. The Company currently plans to use the cash received from the sale of CLIC as permitted under the 6.375 Indenture including the investment on July 1, 2014, of $28.0 million to recapture a block of life insurance business from Wilton Re. In connection with the issuance of the 6.375% Notes and execution of the 6.375% Indenture, the Company and the Subsidiary Guarantors entered into a security agreement, dated as of September 28, 2012 (the “Security Agreement”), by and among the Company, the Subsidiary Guarantors and the Collateral Agent, pursuant to which the Company and the Subsidiary Guarantors pledged substantially all of their assets to secure their obligations under the 6.375% Notes and the 6.375% Indenture, subject to certain exceptions as set forth in the Security Agreement. Pari Passu Intercreditor Agreement In connection with the issuance of the 6.375% Notes and entry into the Senior Secured Credit Agreement, the Agent and the Collateral Agent, as authorized representative with respect to the 6.375% Notes, entered into a Pari Passu Intercreditor Agreement, dated as of September 28, 2012 (the “Intercreditor Agreement”), which sets forth agreements with respect to the first-priority liens granted by the Company and the Subsidiary Guarantors pursuant to the 6.375% Indenture and the Senior Secured Credit Agreement. Under the Intercreditor Agreement, any actions that may be taken with respect to the collateral that secures the 6.375% Notes and the Senior Secured Credit Agreement, including the ability to cause the commencement of enforcement proceedings against such collateral, to control such proceedings and to approve amendments to releases of such collateral from the lien of, and waive past defaults under, such documents relating to such collateral, will be at the direction of the authorized representative of the lenders under the Senior Secured Credit Agreement until the earliest of: (i) the Company’s obligations under the Senior Secured Credit Agreement (or refinancings thereof) are discharged; (ii) the earlier of (x) the date on which the outstanding principal amount of loans and commitments under the Senior Secured Credit Agreement is less than $25.0 million and (y) the date on which the outstanding principal amount of another tranche of first-priority indebtedness exceeds the principal amount of loans and commitments under the Senior Secured Credit Agreement; and (iii) 180 days after the occurrence of both an event of default under the 6.375% Indenture and the authorized representative of the holders of the New Notes CNO FINANCIAL GROUP, INC. - Form 10-K 149 PART II ITEM 8 Consolidated Financial Statements making certain representations as described in the Intercreditor Agreement, unless the authorized representative of the lenders under the Senior Secured Credit Agreement has commenced and is diligently pursuing enforcement action with respect to the collateral or the grantor of the security interest in that collateral (whether the Company or the applicable Subsidiary Guarantor) is then a debtor under or with respect to (or otherwise subject to) any insolvency or liquidation proceeding. 9.0% Notes On December 21, 2010, we issued $275.0 million aggregate principal amount of 9.0% Senior Secured Notes due January 2018 (the “9.0% Notes”). The net proceeds of $267.0 million were used to repay certain indebtedness. The Company could redeem all or part of the 9.0% Notes at any time and from time to time prior to January 15, 2014, at a price equal to 100% of the aggregate principal amount of the 9.0% Notes to be redeemed plus a “make- whole” premium and accrued and unpaid interest. On September 28, 2012, the Company completed the cash tender offer for $273.8 million aggregate principal amount of the 9.0% Notes and received consents from such holders to proposed amendments to the indenture governing the 9.0% Notes (the “9.0% Indenture”). In addition, on September 28, 2012 (the “Initial Payment Date”), the Company, the Subsidiary Guarantors and Wilmington Trust, National Association (as successor by merger to Wilmington Trust FSB), as trustee, executed a first supplemental indenture to the 9.0% Indenture (the “Supplemental Indenture”) that eliminated substantially all of the restrictive covenants contained in the 9.0% Indenture and certain events of default and related provisions. The Supplemental Indenture became effective upon execution, and the amendments to the 9.0% Indenture became operative on the Initial Payment Date upon acceptance of and payment for the tendered 9.0% Notes by the Company. On the Initial Payment Date, the Company paid an aggregate of $326.3 million (using a portion of the net proceeds from its offering of the 6.375% Notes, together with borrowings under the Senior Secured Credit Agreement) in order to purchase the 9.0% Notes tendered prior to the Initial Payment Date (representing, in the aggregate, tender offer consideration of approximately $313.1 million, consent payments of approximately $8.2 million and accrued and unpaid interest to, but not including, the Initial Payment Date of approximately $5.0 million). The remaining $1.2 million of 9.0% Notes were redeemed on October 29, 2012. 7.0% Debentures From November 2009 through May 2010, we issued $293.0 million aggregate principal amount of our 7.0% Senior Debentures due 2016 (the “7.0% Debentures”). The Company used the net proceeds from the issuance of the 7.0% Debentures to retire outstanding indebtedness. The 7.0% Debentures ranked equally in right of payment with all of the Company’s unsecured and unsubordinated obligations. The 7.0% Debentures were governed by an Indenture dated as of October 16, 2009 between the Company and The Bank of New York Mellon Trust Company, N.A., as trustee. The 7.0% Debentures bore interest at a rate of 7.0% per annum, payable 150 CNO FINANCIAL GROUP, INC. - Form 10-K semi-annually on June 30 and December 30 of each year. The 7.0% Debentures would have matured on December 30, 2016. The 7.0% Debentures were not convertible prior to June 30, 2013, except under limited circumstances. Commencing on June 30, 2013, the 7.0% Debentures were convertible into shares of our common stock at the option of the holder at any time, subject to certain exceptions and subject to our right to terminate such conversion rights under certain circumstances relating to the sale price of our common stock. As further described below, we elected to terminate the conversion rights in July 2013. On September 4, 2012, the Company entered into a Debenture Repurchase Agreement (the “Debenture Repurchase Agreement”) with Paulson Credit Opportunities Master Ltd. and Paulson Recovery Master Fund Ltd. (collectively, the “Paulson Holders”), funds managed by Paulson & Co. Inc., (“Paulson”) that held $200.0 million in aggregate principal amount of the Company’s 7.0% Debentures. Pursuant to the Debenture Repurchase Agreement, the Company purchased from each of the Paulson Holders the 7.0% Debentures held by such Paulson Holders, for a cash purchase price of $355.1 million that provided for a 2.8% discount to the estimated fair market value of the 7.0% Debentures as defined in the Debenture Repurchase Agreement. On March 28, 2013, the Company completed the cash tender offer (the “Offer”) for $59.3 million aggregate principal amount of its 7.0% Debentures for an aggregate purchase price of $124.8 million. The Offer was conducted as part of our previously announced securities repurchase program. Pursuant to the terms of the Offer, holders of the 7.0% Debentures who tendered their 7.0% Debentures prior to the expiration date, received, for each $1,000 principal amount of such 7.0% Debentures, a cash purchase price equal to the sum of: (i) the average volume weighted average price of our common stock (as defined in the Offer) ($11.2393 at the close of trading on March 27, 2013) multiplied by 183.5145; plus (ii) a fixed cash amount of $61.25. The final purchase price per $1,000 principal amount of 7.0% Debentures was $2,123.82. In addition to the purchase price, holders received accrued and unpaid interest on any 7.0% Debentures that were tendered to, but excluding, the settlement date of the Offer. In May 2013, we repurchased $4.5 million principal amount of the 7.0% Debentures for an aggregate purchase price of $9.4 million. On July 1, 2013, the Company issued a conversion right termination notice to holders of the 7.0% Debentures. The Company elected to terminate the right to convert the 7.0% Debentures into shares of its common stock, effective as of July 30, 2013. Holders of the 7.0% Debentures were able to exercise their conversion right at any time on or prior to the close of business on July 30, 2013. Holders exercising their conversion right received 184.3127 shares of common stock per $1,000 principal amount of 7.0% Debentures converted. The 7.0% Debentures submitted for conversion were deemed paid in full and the Company has no further obligation with respect to such 7.0% Debentures. Holders of $25.7 million in aggregate principal amount of the 7.0% Debentures exercised their conversion right and received 4.7 million shares of our common stock. On May 30, 2014, we repurchased the remaining $3.5 million principal amount of the 7.0% Debentures for a purchase price of $3.7 million. Previous Senior Secured Credit Agreement In 2013, we recognized a loss on extinguishment of debt totaling $65.4 million consisting of: PART II ITEM 8 Consolidated Financial Statements In the first nine months of 2012, as required under the terms of a previous senior secured credit agreement, we made mandatory prepayments of $31.4 million due to repurchases of our common stock and payment of a common stock dividend. In September 2012, the Company used a portion of the net proceeds from its offering of the 6.375% Notes, together with borrowings under the Senior Secured Credit Agreement to repay the remaining $223.8 million principal amount outstanding under its previous senior secured credit agreement. (i) (ii) Senior Health Note In connection with the Transfer, the Company issued the Senior Health Note due November 12, 2013 (the “Senior Health Note”) payable to Senior Health. The Senior Health Note was unsecured and had an interest rate of 6.0% payable quarterly, beginning on March 15, 2009. We were required to make annual principal payments of $25.0 million beginning on November 12, 2009. The Company made a $25.0 million scheduled payment on the Senior Health Note in 2011, 2010 and 2009. In March 2012, we paid in full the remaining $50.0 million principal balance on the Senior Health Note, which had been scheduled to mature in November 2013. The repayment in full of the Senior Health Note removed the previous restriction on our ability to pay cash dividends on our common stock. Loss on Extinguishment of Debt In 2014, we recognized a loss on extinguishment or modification of debt totaling $.6 million consisting of: (i) (ii) $.4 million of expenses related to the amendment of the Senior Secured Credit Agreement; and $.2 million related to the repurchase of the remaining principal amount of the 7.0% Debentures. $2.9 million related to the amendment of the Senior Secured Credit Agreement and the write-off of unamortized discount and issuance costs associated with prepayments on the Senior Secured Credit Agreement; and $62.5 million as a result of the Offer and repurchase of 7.0% Debentures described above, the write-off of unamortized discount and issuance costs associated with the 7.0% Debentures that were repurchased and other transaction costs. Additional paid-in capital was also reduced by $12.6 million to extinguish the beneficial conversion feature associated with a portion of the 7.0% Debentures that were repurchased. In 2012, we recognized a loss on extinguishment of debt totaling $200.2 million consisting of: (i) $136.5 million due to our repurchase of $200.0 million principal amount of 7.0% Debentures pursuant to the Debenture Repurchase Agreement described above and the write-off of unamortized discount and issuance costs associated with the 7.0% Debentures. Additional paid-in capital was also reduced by $24.0 million to extinguish the beneficial conversion feature associated with a portion of the 7.0% Debentures that were repurchased. As the Code limits the deduction to taxable income for losses on the redemption of convertible debt, a minimal tax benefit was recognized related to the repurchase of the 7.0% Debentures; (ii) (iii) (iv) $58.2 million related to the Offer and consent solicitation for the 9.0% Notes; the write-off of unamortized issuance costs related to the 9.0% Notes; and other transaction costs; $5.1 million representing the write-off of unamortized discount and issuance costs associated with repayments of a previous senior secured credit agreement; and $.4 million representing the write-off of unamortized discount and issuance costs associated with payments on our Senior Secured Credit Agreement. Scheduled Repayment of our Direct Corporate Obligations The scheduled repayment of our direct corporate obligations was as follows at December 31, 2014 (dollars in millions): Year ending December 31, 2015 2016 2017 2018 2019 Thereafter $ $ 79.2 60.5 4.3 378.1 — 275.0 797.1 CNO FINANCIAL GROUP, INC. - Form 10-K 151 PART II ITEM 8 Consolidated Financial Statements 8. LITIGATION AND OTHER LEGAL PROCEEDINGS Legal Proceedings Regulatory Examinations and Fines The Company and its subsidiaries are involved in various legal actions in the normal course of business, in which claims for compensatory and punitive damages are asserted, some for substantial amounts. We recognize an estimated loss from these loss contingencies when we believe it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated. Some of the pending matters have been filed as purported class actions and some actions have been filed in certain jurisdictions that permit punitive damage awards that are disproportionate to the actual damages incurred. The amounts sought in certain of these actions are often large or indeterminate and the ultimate outcome of certain actions is difficult to predict. In the event of an adverse outcome in one or more of these matters, there is a possibility that the ultimate liability may be in excess of the liabilities we have established and could have a material adverse effect on our business, financial condition, results of operations and cash flows. In addition, the resolution of pending or future litigation may involve modifications to the terms of outstanding insurance policies or could impact the timing and amount of rate increases, which could adversely affect the future profitability of the related insurance policies. Based upon information presently available, and in light of legal, factual and other defenses available to the Company and its subsidiaries, the Company does not believe that it is probable that the ultimate liability from either pending or threatened legal actions, after consideration of existing loss provisions, will have a material adverse effect on the Company’s consolidated financial condition, operating results or cash flows. However, given the inherent difficulty in predicting the outcome of legal proceedings, there exists the possibility that such legal actions could have a material adverse effect on the Company’s consolidated financial condition, operating results or cash flows. In addition to the inherent difficulty of predicting litigation outcomes, particularly those that will be decided by a jury, some matters purport to seek substantial or an unspecified amount of damages for unsubstantiated conduct spanning several years based on complex legal theories and damages models. The alleged damages typically are indeterminate or not factually supported in the complaint, and, in any event, the Company’s experience indicates that monetary demands for damages often bear little relation to the ultimate loss. In some cases, plaintiffs are seeking to certify classes in the litigation and class certification either has been denied or is pending and we have filed oppositions to class certification or sought to decertify a prior class certification. In addition, for many of these cases: (i) there is uncertainty as to the outcome of pending appeals or motions; (ii) there are significant factual issues to be resolved; and/or (iii) there are novel legal issues presented. Accordingly, the Company cannot reasonably estimate the possible loss or range of loss in excess of amounts accrued, if any, or predict the timing of the eventual resolution of these matters. The Company reviews these matters on an ongoing basis. When assessing reasonably possible and probable outcomes, the Company bases its assessment on the expected ultimate outcome following all appeals. Insurance companies face significant risks related to regulatory investigations and actions. Regulatory investigations generally result from matters related to sales or underwriting practices, payment of contingent or other sales commissions, claim payments and procedures, product design, product disclosure, additional premium charges for premiums paid on a periodic basis, denial or delay of benefits, charging excessive or impermissible fees on products, procedures related to canceling policies, changing the way cost of insurance charges are calculated for certain life insurance products or recommending unsuitable products to customers. We are, in the ordinary course of our business, subject to various examinations, inquiries and information requests from state, federal and other authorities. The ultimate outcome of these regulatory actions (including the costs of complying with information requests and policy reviews) cannot be predicted with certainty. In the event of an unfavorable outcome in one or more of these matters, the ultimate liability may be in excess of liabilities we have established and we could suffer significant reputational harm as a result of these matters, which could also have a material adverse effect on our business, financial condition, results of operations or cash flows. In August 2011, we were notified of an examination to be done on behalf of a number of states for the purpose of determining compliance with unclaimed property laws by the Company and its subsidiaries. Such examination has included inquiries related to the use of data available on the U.S. Social Security Administration’s Death Master File to identify instances where benefits under life insurance policies, annuities and retained asset accounts are payable. We are continuing to provide information to the examiners in response to their requests. A total of 38 states and the District of Columbia are currently participating in this examination. Guaranty Fund Assessments The balance sheet at December 31, 2014, included: (i) accruals of $23.7 million, representing our estimate of all known assessments that will be levied against the Company’s insurance subsidiaries by various state guaranty associations based on premiums written through December 31, 2014; and (ii) receivables of $23.6 million that we estimate will be recovered through a reduction in future premium taxes as a result of such assessments. At December 31, 2013, such guaranty fund assessment accruals were $24.0 million and such receivables were $24.9 million. These estimates are subject to change when the associations determine more precisely the losses that have occurred and how such losses will be allocated among the insurance companies. We recognized expense for such assessments of $1.1 million, $2.7 million and $4.3 million in 2014, 2013 and 2012, respectively. 152 CNO FINANCIAL GROUP, INC. - Form 10-K PART II ITEM 8 Consolidated Financial Statements require future payments. Total expense pursuant to these lease and sponsorship agreements was $50.4 million, $44.3 million and $47.5 million in 2014, 2013 and 2012, respectively. Future required minimum payments as of December 31, 2014, were as follows (dollars in millions): 2015 2016 2017 2018 2019 Thereafter TOTAL $ $ 47.3 34.8 21.2 17.6 6.9 11.1 138.9 Guarantees In accordance with the terms of the employment agreements of two of the Company’s former chief executive officers, certain wholly- owned subsidiaries of the Company are the guarantors of the former executives’ nonqualified supplemental retirement benefits. The liability for such benefits was $27.2 million and $25.9 million at December 31, 2014 and 2013, respectively, and is included in the caption “Other liabilities” in the consolidated balance sheet. Leases and Certain Other Long-Term Commitments The Company rents office space, equipment and computer software under noncancellable operating lease agreements. In addition, the Company has entered into certain sponsorship agreements which 9. AGENT DEFERRED COMPENSATION PLAN For our agent deferred compensation plan, it is our policy to immediately recognize changes in the actuarial benefit obligation resulting from either actual experience being different than expected or from changes in actuarial assumptions. One of our insurance subsidiaries has a noncontributory, unfunded deferred compensation plan for qualifying members of its career agency force. Benefits are based on years of service and career earnings. The actuarial measurement date of this deferred compensation plan is December 31. The liability recognized in the consolidated balance sheet for the agent deferred compensation plan was $175.1 million and $142.7 million at December 31, 2014 and 2013, respectively. Expenses incurred on this plan were $36.3 million, $(2.9) million and $20.5 million during 2014, 2013 and 2012, respectively (including the recognition of gains (losses) of $(24.3) million, $17.2 million and $(7.5) million in 2014, 2013 and 2012, respectively, primarily resulting from: (i) changes in the discount rate assumption used to determine the deferred compensation plan liability to reflect current investment yields; and (ii) changes in mortality table assumptions). We purchased COLI as an investment vehicle to fund the agent deferred compensation plan. The COLI assets are not assets of the agent deferred compensation plan, and as a result, are accounted for outside the plan and are recorded in the consolidated balance sheet as other invested assets. The carrying value of the COLI assets was $157.6 million and $144.8 million at December 31, 2014 and 2013, respectively. Changes in the cash surrender value (which approximates net realizable value) of the COLI assets are recorded as net investment income and totaled $5.7 million, $19.7 million and $9.0 million in 2014, 2013 and 2012, respectively. We used the following assumptions for the deferred compensation plan to calculate: Benefit obligations: Discount rate Net periodic cost: Discount rate 2014 2013 4.15% 4.75% 4.75% 4.00% The discount rate is based on the yield of a hypothetical portfolio of high quality debt instruments which could effectively settle plan benefits on a present value basis as of the measurement date. At December 31, 2014, for our deferred compensation plan for qualifying members of our career agency force, we assumed a 4.0 percent annual increase in compensation until the participant’s assumed retirement date (ranging from ages 60 to 65 and completion of five years of service). The benefits expected to be paid pursuant to our agent deferred compensation plan as of December 31, 2014 were as follows (dollars in millions): 2015 2016 2017 2018 2019 2020 - 2024 $ 6.5 6.8 7.1 7.7 8.0 47.4 The Company has a qualified defined contribution plan for which substantially all employees are eligible. Company contributions, which match a portion of certain voluntary employee contributions to the plan, totaled $5.1 million, $4.6 million and $4.5 million in 2014, 2013 and 2012, respectively. Employer matching contributions are discretionary. CNO FINANCIAL GROUP, INC. - Form 10-K 153 PART II ITEM 8 Consolidated Financial Statements 10. DERIVATIVES Our freestanding and embedded derivatives, which are not designated as hedging instruments, are summarized as follows (dollars in millions): Assets: Fixed index call options Interest futures TOTAL ASSETS Liabilities: Interest futures Fixed index annuities - embedded derivative Reinsurance payable - embedded derivative TOTAL LIABILITIES Balance sheet classification Other invested assets Other invested assets Other invested assets Future policy benefits Future policy benefits $ $ $ $ Fair value 2014 107.2 — 107.2 .2 1,081.5 — 1,081.7 $ $ $ $ 2013 156.2 .2 156.4 — 903.7 1.8 905.5 The activity associated with freestanding derivative instruments is measured as either the notional or the number of contracts. The activity associated with the fixed index annuity embedded derivatives are shown by the number of policies. The following table represents activity associated with derivative instruments as of the dates indicated: Interest futures Fixed index annuities - embedded derivative Fixed index call options (a) Dollars in millions. Measurement Contracts Policies Notional(a) December 31, 2013 186 90,408 2,284.8 $ $ Additions 4,847 9,830 2,430.2 $ Maturities/ terminations (4,631) (7,053) (2,311.1) $ December 31, 2014 402 93,185 2,403.9 The following table provides the pre-tax gains (losses) recognized in net income for derivative instruments, which are not designated as hedges for the periods indicated (dollars in millions): Fixed index call options Interest futures Fixed index annuities - embedded derivative Reinsurance payable - embedded derivative TOTAL Derivative Counterparty Risk Income statement classification Net investment income from policyholder and reinsurer accounts and other special-purpose portfolios Net realized investments gains (losses) Insurance policy benefits Net investment income from policyholder and reinsurer accounts and other special-purpose portfolios 2014 2013 2012 $ $ $ 69.5 (7.0) (73.5) $ 177.5 (.4) 49.3 (1.4) (12.4) $ 3.7 230.1 $ 25.5 (.2) (15.2) (2.4) 7.7 The Company and its subsidiaries are parties to master netting arrangements with its counterparties related to entering into various derivative contracts. Exchange-traded derivatives require margin accounts which we offset. If the counterparties to the call options fail to meet their obligations, we may recognize a loss. We limit our exposure to such a loss by diversifying among several counterparties believed to be strong and creditworthy. At December 31, 2014, all of our counterparties were rated “A-” or higher by S&P. The interest rate future contracts are effected through regulated exchanges. Such positions are marked to market and margined on a daily basis. The Company has minimal exposure to credit-related losses in the event of nonperformance. 154 CNO FINANCIAL GROUP, INC. - Form 10-K PART II ITEM 8 Consolidated Financial Statements The following table summarizes information related to derivatives with master netting arrangements or collateral as of December 31, 2014 and 2013 (dollars in millions): December 31, 2014: Fixed index call options Interest futures December 31, 2013: Fixed index call options Interest futures Gross amounts offset in the balance sheet Net amounts of assets presented in the balance sheet Gross amounts not offset in the balance sheet Cash collateral received Financial instruments Gross amounts recognized Net amount $ $ 107.2 (.2) — $ 1.5 $ 107.2 1.3 156.2 .2 — .4 156.2 .6 — $ — — — — $ — — — 107.2 1.3 156.2 .6 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. The following table summarizes information related to repurchase agreements as of December 31, 2014 (dollars in millions): December 31, 2014: Repurchase agreements(a) Gross amounts of recognized liabilities Gross amounts offset in the balance sheet Net amounts of liabilities presented in the balance sheet Gross amounts not offset in the balance sheet Cash collateral pledged Financial instruments Net amount $ 20.4 $ — $ 20.4 $ 20.4 $ — $ — (a) As of December 31, 2014, these agreements were collateralized by investment securities with a fair value of $25.3 million. There were no repurchase agreements outstanding at December 31, 2013. 11. SHAREHOLDERS’ EQUITY Changes in the number of shares of common stock outstanding were as follows (shares in thousands): Balance, beginning of year Treasury stock purchased and retired Conversion of 7.0% Debentures Stock options exercised Restricted and performance stock vested(a) BALANCE, END OF YEAR 2014 220,324 (18,489) — 916 573 203,324 2013 221,502 (8,949) 4,739 2,087 945 220,324 2012 241,305 (21,533) — 1,191 539 221,502 (a) In 2014, 2013 and 2012, such amount was reduced by 257 thousand, 472 thousand and 237 thousand shares, respectively, which were tendered to the Company for the payment of required federal and state tax withholdings owed on the vesting of restricted and performance stock. CNO FINANCIAL GROUP, INC. - Form 10-K 155 PART II ITEM 8 Consolidated Financial Statements In May 2011, the Company announced a common share repurchase program of up to $100.0 million. In February 2012, June 2012, December 2012, December 2013 and November 2014, the Company’s Board of Directors approved, in aggregate, an additional $1,200.0 million to repurchase the Company’s outstanding securities. In 2014, 2013 and 2012 we repurchased 18.5 million, 8.9 million and 21.5 million shares, respectively, of common stock for $319.1 million, $118.4 million and $180.2 million under the securities repurchase program. In addition, in September 2014, we repurchased all outstanding common stock warrants for $57.4 million under the securities repurchase program. Such warrants had been held by Paulson on behalf of several investment funds and accounts managed by them, and were issued in conjunction with a private sale of our common stock in 2009. In 2013, the Company also purchased $63.8 million aggregate principal amount of our 7.0% Debentures as further discussed in the note to the consolidated financial statements entitled “Notes Payable - Direct Corporate Obligations”. Such purchases were made pursuant to our securities repurchase program. The Company had remaining repurchase authority of $420.9 million as of December 31, 2014. In May 2012, we initiated a common stock dividend program. In 2014, 2013 and 2012, dividends declared and paid on common stock totaled $51.0 million ($0.24 per common share), $24.4 million ($0.11 per common share) and $13.9 million ($0.06 per common share), respectively. In March 2014, the Company increased its quarterly common stock dividend to $0.06 per share from $0.03 per share. The Company has a long-term incentive plan which permits the grant of CNO incentive or non-qualified stock options, restricted stock awards, stock appreciation rights, performance shares or units and certain other equity-based awards to certain directors, officers and employees of the Company and certain other individuals who perform services for the Company. As of December 31, 2014, 8.6 million shares remained available for issuance under the plan. Our stock option awards are generally granted with an exercise price equal to the market price of the Company’s stock on the date of grant. For options granted in 2006 and prior years, our stock option awards generally vested on a graded basis over a four year service term and expire ten years from the date of grant. Our stock option awards granted in 2007 through 2009 generally vested on a graded basis over a three year service term and expire five years from the date of grant. Our stock options granted in 2010 through 2014 generally vest on a graded basis over a three year service term and expire seven years from the date of grant. The vesting periods for our restricted stock awards range from immediate vesting to a period of three years. A summary of the Company’s stock option activity and related information for 2014 is presented below (shares in thousands; dollars in millions, except per share amounts): Outstanding at the beginning of the year Options granted Exercised Forfeited or terminated Outstanding at the end of the year Options exercisable at the end of the year Available for future grant $ Weighted average exercise price 10.64 19.10 5.47 20.07 12.04 Shares 5,579 1,014 (917) (665) 5,011 2,030 8,571 Weighted average remaining life (in years) Aggregate intrinsic value $ $ $ 4.3 2.7 3.8 32.1 12.1 A summary of the Company’s stock option activity and related information for 2013 is presented below (shares in thousands; dollars in millions, except per share amounts): Outstanding at the beginning of the year Options granted Exercised Forfeited or terminated Outstanding at the end of the year Options exercisable at the end of the year Available for future grant $ Weighted average exercise price 9.72 11.01 7.27 13.95 10.64 Shares 6,655 1,447 (2,087) (436) 5,579 2,529 9,099 Weighted average remaining life (in years) Aggregate intrinsic value $ $ $ 4.0 2.1 6.0 32.5 13.9 156 CNO FINANCIAL GROUP, INC. - Form 10-K PART II ITEM 8 Consolidated Financial Statements A summary of the Company’s stock option activity and related information for 2012 is presented below (shares in thousands; dollars in millions, except per share amounts): Outstanding at the beginning of the year Options granted Exercised Forfeited or terminated Outstanding at the end of the year Options exercisable at the end of the year Available for future grant $ Weighted average exercise price 10.13 7.55 3.14 16.13 9.72 Shares 7,712 1,389 (1,191) (1,255) 6,655 3,715 9,713 Weighted average remaining life (in years) Aggregate intrinsic value $ $ $ 3.4 1.7 2.7 30.2 15.5 We recognized compensation expense related to stock options totaling $7.9 million ($5.1 million after income taxes) in 2014, $7.2 million ($4.7 million after income taxes) in 2013 and $6.7 million ($4.4 million after income taxes) in 2012. Compensation expense related to stock options reduced both basic and diluted earnings per share by two cents in each of the three years ended December 31, 2014. At December 31, 2014, the unrecognized compensation expense for non-vested stock options totaled $8.7 million which is expected to be recognized over a weighted average period of 1.7 years. Cash received by the Company from the exercise of stock options was $5.0 million, $15.1 million and $3.1 million during 2014, 2013 and 2012, respectively. The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option valuation model with the following weighted average assumptions: Weighted average risk-free interest rates Weighted average dividend yields Volatility factors Weighted average expected life (in years) Weighted average fair value per share The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant. The dividend yield is based on the Company’s history and expectation of dividend payouts. Volatility factors are based on the weekly historical volatility of the Company’s common stock equal to the expected life of the option or since our emergence from bankruptcy in September 2003. The expected life is based on the average of the graded vesting period and the contractual terms of the option. 2014 Grants 2013 Grants 2012 Grants 1.6% 1.3% 51% 4.8 7.65 $ .8% .7% 107% 4.8 8.02 $ .9% —% 108% 4.7 5.76 $ The exercise price was equal to the market price of our stock on the date of grant for all options granted in 2014, 2013 and 2012. The following table summarizes information about stock options outstanding at December 31, 2014 (shares in thousands): Options outstanding Options exercisable Range of exercise prices $6.45 - $6.77 $7.38 - $7.74 $8.29 - $12.34 $12.74 - $18.27 $19.15 - $25.45 Number outstanding 521 1,580 1,396 83 1,431 5,011 Remaining life (in years) 2.2 3.8 5.1 5.9 4.6 $ Average exercise price 6.45 7.47 10.78 15.40 20.18 Number exercisable 520 $ 1,027 31 — 452 2,030 Average exercise price 6.45 7.44 8.29 — 22.41 CNO FINANCIAL GROUP, INC. - Form 10-K 157 PART II ITEM 8 Consolidated Financial Statements During 2014, 2013 and 2012, the Company granted .1 million, .2 million and .7 million restricted shares, respectively, of CNO common stock to certain directors, officers and employees of the Company at a weighted average fair value of $17.15 per share, $12.00 per share and $7.35 per share, respectively. The fair value of such grants totaled $1.9 million, $2.1 million and $5.0 million in 2014, 2013 and 2012, respectively. Such amounts are recognized as compensation expense over the vesting period of the restricted stock. A summary of the Company’s non-vested restricted stock activity for 2014 is presented below (shares in thousands): Non-vested shares, beginning of year Granted Vested Forfeited NON-VESTED SHARES, END OF YEAR At December 31, 2014, the unrecognized compensation expense for non-vested restricted stock totaled $1.4 million which is expected to be recognized over a weighted average period of 1.6 years. At December 31, 2013, the unrecognized compensation expense for non-vested restricted stock totaled $2.5 million. We recognized compensation expense related to restricted stock awards totaling $3.0 million, $4.5 million and $4.5 million in 2014, 2013 and 2012, respectively. The fair value of restricted stock that vested during 2014, 2013 and 2012 was $3.7 million, $5.6 million and $4.4 million, respectively. Authoritative guidance also requires us to estimate the amount of unvested stock-based awards that will be forfeited in future periods and reduce the amount of compensation expense recognized over the applicable service period to reflect this estimate. We periodically evaluate our forfeiture assumptions to more accurately reflect our actual forfeiture experience. Shares 521 113 (396) (2) 236 $ Weighted average grant date fair value 8.29 17.15 9.22 10.19 10.95 The Company does not currently recognize tax benefits resulting from tax deductions in excess of the compensation expense recognized because of NOLs which are available to offset future taxable income. In 2014, 2013 and 2012 the Company granted performance units totaling 283,630, 424,400 and 406,500, respectively, pursuant to its long-term incentive plan to certain officers of the Company. The criteria for payment for such awards are based on certain company-wide performance levels that must be achieved within a specified performance time (generally three years), each as defined in the award. Unless antidilutive, the diluted weighted average shares outstanding would reflect the number of performance units expected to be issued, using the treasury stock method. A summary of the Company’s performance units is presented below (shares in thousands): Awards outstanding at December 31, 2011 Granted in 2012 Forfeited Awards outstanding at December 31, 2012 Granted in 2013 Additional shares issued pursuant to achieving certain performance criteria(a) Shares vested in 2013 Forfeited Awards outstanding at December 31, 2013 Granted in 2014 Additional shares issued pursuant to achieving certain performance criteria(a) Shares vested in 2014 Forfeited Total shareholder return awards — 203 (10) 193 212 — — (23) 382 142 — — (5) 519 Operating return on equity awards — — — — 212 — — (8) 204 142 — — (3) 343 Pre-tax operating income awards 836 203 (62) 977 — 223 (668) (62) 470 — 142 (434) (2) 176 AWARDS OUTSTANDING AT DECEMBER 31, 2014 (a) The performance units provide for a payout of up to 150 percent of the award if certain performance levels are achieved. The grant date fair value of the performance units awarded was $5.2 million and $4.4 million in 2014 and 2013, respectively. We recognized compensation expense of $4.7 million, $3.4 million and $3.8 million in 2014, 2013 and 2012, respectively, related to the performance units. As further discussed in the footnote to the consolidated financial statements entitled “Income Taxes”, the Company’s Board of Directors adopted the Section 382 Rights Agreement on January 20, 2009 and amended and extended the Section 382 Rights Agreement on December 6, 2011 and November 13, 2014. The Section 382 Rights Agreement, as amended, is designed to protect shareholder value by preserving the value of our tax assets primarily associated with NOLs. At the time the Section 382 Rights Agreement was adopted, the Company declared a dividend of one preferred share purchase right (a “Right”) for each outstanding share of common stock. The dividend was payable on January 30, 2009, to the shareholders of record as of the close of business on that date and a Right is also attached to each share of CNO common stock issued after that date. Pursuant to the Section 382 Rights Agreement, as amended, each Right entitles the shareholder to purchase from the Company one one-thousandth of a share of Series C Junior Participating Preferred Stock, par value $.01 per 158 CNO FINANCIAL GROUP, INC. - Form 10-K PART II ITEM 8 Consolidated Financial Statements share (the “Junior Preferred Stock”) of the Company at a price of $25.00 per one one-thousandth of a share of Junior Preferred Stock. The description and terms of the Rights are set forth in the Section 382 Rights Agreement, as amended. The Rights would become exercisable in the event any person or group (subject to certain exemptions) becomes an owner of more than 4.99 percent of the outstanding stock of CNO (a “Threshold Holder”) without the approval of the Board of Directors or an existing shareholder who is currently a Threshold Holder acquires additional shares exceeding one percent of our outstanding shares without prior approval from the Board of Directors. 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): Net income for basic earnings per share Add: interest expense on 7.0% Debentures, net of income taxes NET INCOME FOR DILUTED EARNINGS PER SHARE Shares: Weighted average shares outstanding for basic earnings per share Effect of dilutive securities on weighted average shares: 7.0% Debentures Stock options, restricted stock and performance units Warrants (a) $ $ 2014 51.4 — 51.4 $ $ 2013 478.0 1.6 479.6 $ $ 2012 221.0 12.2 233.2 212,917 221,628 233,685 — 2,505 2,233 4,738 5,780 2,776 2,518 11,074 44,037 2,762 943 47,742 Dilutive potential common shares WEIGHTED AVERAGE SHARES OUTSTANDING FOR DILUTED EARNINGS PER SHARE (a) All outstanding warrants were repurchased in September 2014 as further discussed above. Accordingly, the warrants will have no dilutive effect in periods beginning 217,655 232,702 281,427 after September 30, 2014. 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 was equivalent to an initial conversion price of approximately $5.49 per share. The conversion rate was 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. On July 1, 2013, the Company issued a conversion right termination notice to holders of the 7.0% Debentures and the right to convert the 7.0% Debentures into shares of its common stock was terminated effective July 30, 2013 as further discussed in the note to the consolidated financial statements entitled “Notes Payable - Direct Corporate Obligations”. 12. OTHER OPERATING STATEMENT DATA Insurance policy income consisted of the following (dollars in millions): Direct premiums collected Reinsurance assumed Reinsurance ceded Premiums collected, net of reinsurance Change in unearned premiums Less premiums on interest-sensitive life and products without mortality and morbidity risk which are recorded as additions to insurance liabilities Premiums on traditional products with mortality or morbidity risk Fees and surrender charges on interest-sensitive products INSURANCE POLICY INCOME 2014 3,856.2 34.5 (187.9) 3,702.8 9.1 (1,295.4) 2,416.5 213.2 2,629.7 $ $ 2013 3,966.0 38.0 (240.5) 3,763.5 (16.6) (1,298.1) 2,448.8 295.9 2,744.7 $ $ 2012 3,883.1 70.4 (237.1) 3,716.4 20.8 (1,296.7) 2,440.5 314.9 2,755.4 $ $ The four states with the largest shares of 2014 collected premiums were Florida (8.3 percent), Pennsylvania (6.7 percent), California (5.4 percent) and Texas (5.3 percent) . No other state accounted for more than five percent of total collected premiums. CNO FINANCIAL GROUP, INC. - Form 10-K 159 PART II ITEM 8 Consolidated Financial Statements Other operating costs and expenses were as follows (dollars in millions): Commission expense Salaries and wages Other TOTAL OTHER OPERATING COSTS AND EXPENSES Changes in the present value of future profits were as follows (dollars in millions): Balance, beginning of year Amortization Effect of reinsurance transaction Amounts related to CLIC prior to being sold Amounts related to fair value adjustment of fixed maturities, available for sale BALANCE, END OF YEAR 2014 99.4 242.4 461.0 802.8 $ $ 2013 103.8 234.0 428.4 766.2 $ $ $ $ 2014 679.3 (76.2) 5.0 (15.5) (103.2) 489.4 $ $ $ $ 2013 626.0 (92.0) — — 145.3 679.3 $ $ 2012 115.8 226.6 476.9 819.3 2012 697.7 (93.5) — — 21.8 626.0 Based on current conditions and assumptions as to future events on all policies inforce, the Company expects to amortize approximately 11 percent of the December 31, 2014 balance of the present value of future profits in 2015, 10 percent in 2016, 9 percent in 2017, 8 percent in 2018 and 7 percent in 2019. The discount rate used to determine the amortization of the present value of future profits averaged approximately 5 percent in the years ended December 31, 2014, 2013 and 2012. In accordance with authoritative guidance, we are required to amortize the present value of future profits in relation to estimated gross profits for interest-sensitive life products and annuity products. Such guidance also requires that estimates of expected gross profits used as a basis for amortization be evaluated regularly, and that the total amortization recorded to date be adjusted by a charge or credit to the statement of operations, if actual experience or other evidence suggests that earlier estimates should be revised. Changes in deferred acquisition costs were as follows (dollars in millions): Balance, beginning of year Additions Amortization Effect of reinsurance transaction Amounts related to CLIC prior to being sold Amounts related to fair value adjustment of fixed maturities, available for sale Other BALANCE, END OF YEAR 2014 968.1 242.8 (171.2) 24.0 (37.6) (255.5) — 770.6 $ $ 2013 629.7 222.8 (204.3) — — 315.9 4.0 968.1 $ $ 2012 797.1 191.7 (195.5) — — (163.6) — 629.7 $ $ 13. CONSOLIDATED STATEMENT OF CASH FLOWS The following disclosures supplement our consolidated statement of cash flows. The following reconciles net income to net cash provided by operating activities (dollars in millions): Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash from operating activities: Amortization and depreciation Income taxes Insurance liabilities Accrual and amortization of investment income Deferral of policy acquisition costs Net realized investment gains Payment to reinsurer pursuant to long-term care business reinsured Net loss on sale of subsidiary and (gain) loss on reinsurance transactions Loss on extinguishment or modification of debt Other 2014 2013 2012 $ 51.4 $ 478.0 $ 221.0 274.2 119.7 398.2 (148.3) (242.8) (36.7) (590.3) 239.8 .6 56.0 121.8(a) $ 324.6 (181.2) 465.8 (276.3) (222.8) (33.6) — 98.4 65.4 2.1 720.4 $ 315.0 (71.8) 330.0 (100.7) (191.7) (81.1) — — 200.2 14.0 634.9 NET CASH FROM OPERATING ACTIVITIES $ (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. 160 CNO FINANCIAL GROUP, INC. - Form 10-K On July 1, 2014, Bankers Life recaptured the life business written by Bankers Life that was reinsured by Wilton Re in 2009. The following summarizes the impact of the recapture (dollars in millions): PART II ITEM 8 Consolidated Financial Statements Investments Cash Present value of future profits and deferred acquisition costs Reinsurance receivables Other liabilities Gain on reinsurance transaction (classified as “Net loss on sale of subsidiary and (gain) loss on reinsurance transactions”) Income tax expense GAIN ON REINSURANCE TRANSACTION (NET OF INCOME TAXES) (a) Such amount has been reduced by a $28.0 million recapture fee. (b) Such non-cash amounts have been excluded from the consolidated statement of cash flows. $ $ 139.4(a)(b) 7.7 29.0(b) (155.9)(b) 5.9(b) 26.1 9.2 16.9 Other non-cash items not reflected in the financing activities section of the consolidated statement of cash flows (dollars in millions): Stock options, restricted stock and performance units $ 2014 15.6 $ 2013 15.1 $ 2012 13.7 14. STATUTORY INFORMATION (BASED ON NON-GAAP MEASURES) Statutory accounting practices prescribed or permitted by regulatory authorities for the Company’s insurance subsidiaries differ from GAAP. The Company’s insurance subsidiaries reported the following amounts to regulatory agencies, after appropriate elimination of intercompany accounts among such subsidiaries (dollars in millions): Statutory capital and surplus Asset valuation reserve Interest maintenance reserve TOTAL 2014 1,664.4 203.1 504.1 2,371.6 $ $ 2013 1,711.9 233.9 582.4 2,528.2 $ $ Statutory capital and surplus included investments in upstream affiliates of $42.6 million and $52.4 million at December 31, 2014 and 2013, respectively, which were eliminated in the consolidated financial statements prepared in accordance with GAAP. Statutory earnings build the capital required by ratings agencies and regulators. Statutory earnings, fees and interest paid by the insurance companies to the parent company create the “cash flow capacity” the parent company needs to meet its obligations, including debt service. The consolidated statutory net income (a non-GAAP measure) of our insurance subsidiaries was $374.3 million, $386.5 million and $350.4 million in 2014, 2013 and 2012, respectively. Included in such net income were net realized capital gains (losses), net of income taxes, of $(18.2) million, $19.0 million and $13.0 million in 2014, 2013 and 2012, respectively. In addition, such net income included pre-tax amounts for fees and interest paid to CNO or its non-life subsidiaries totaling $157.5 million, $159.7 million and $155.3 million in 2014, 2013 and 2012, respectively. Insurance regulators may prohibit the payment of dividends or other payments by our insurance subsidiaries to parent companies if they determine that such payment could be adverse to our policyholders or contract holders. Otherwise, the ability of our insurance subsidiaries to pay dividends is subject to state insurance department regulations. Insurance regulations generally permit dividends to be paid from statutory earned surplus of the insurance company without regulatory approval for any 12-month period in amounts equal to the greater of (or in a few states, the lesser of): (i) statutory net gain from operations or statutory net income for the prior year; or (ii) 10 percent of statutory capital and surplus as of the end of the preceding year. This type of dividend is referred to as an “ordinary dividend”. Any dividend in excess of these levels requires the approval of the director or commissioner of the applicable state insurance department and is referred to as an “extraordinary dividend”. During 2014, our insurance subsidiaries paid extraordinary dividends of $227.0 million to CDOC, Inc. (“CDOC”) (our wholly owned subsidiary and the immediate parent of Washington National and Conseco Life Insurance Company of Texas). The holding companies made capital contributions to insurance subsidiaries totaling $53.0 million in 2014. Each of the immediate insurance subsidiaries of CDOC had negative earned surplus at December 31, 2014. Accordingly, any dividend payments from these subsidiaries require the approval of the director or commissioner of the applicable state insurance department. The payment of interest on surplus debentures requires either prior written notice or approval of the director or commissioner of the applicable state insurance department. Dividends and other payments from our non-insurance subsidiaries to CNO or CDOC do not require approval by any regulatory authority or other third party. In accordance with an order from the Florida Office of Insurance Regulation, Washington National may not distribute funds to any affiliate or shareholder, except pursuant to agreements that have been approved, without prior notice to the Florida Office of Insurance Regulation. In addition, the risk-based capital (“RBC”) and other capital requirements described below can also limit, in certain circumstances, the ability of our insurance subsidiaries to pay dividends. CNO FINANCIAL GROUP, INC. - Form 10-K 161 PART II ITEM 8 Consolidated Financial Statements RBC requirements provide a tool for insurance regulators to determine the levels of statutory capital and surplus an insurer must maintain in relation to its insurance and investment risks and the need for possible regulatory attention. The RBC requirements provide four levels of regulatory attention, varying with the ratio of the insurance company’s total adjusted capital (defined as the total of its statutory capital and surplus, asset valuation reserve and certain other adjustments) to its RBC (as measured on December 31 of each year) as follows: (i) if a company’s total adjusted capital is less than 100 percent but greater than or equal to 75 percent of its RBC, the company must submit a comprehensive plan to the regulatory authority proposing corrective actions aimed at improving its capital position (the “Company Action Level”); (ii) if a company’s total adjusted capital is less than 75 percent but greater than or equal to 50 percent of its RBC, the regulatory authority will perform a special examination of the company and issue an order specifying the corrective actions that must be taken; (iii) if a company’s total adjusted capital is less than 50 percent but greater than or equal to 35 percent of its RBC, the regulatory authority may take any action it deems necessary, including placing the company under regulatory control; and (iv) if a company’s total adjusted capital is less than 35 percent of its RBC, the regulatory authority must place the company under its control. In addition, the RBC requirements provide for a trend test if a company’s total adjusted capital is between 100 percent and 150 percent of its RBC at the end of the year. The trend test calculates the greater of the decrease in the margin of total adjusted capital over RBC: (i) between the current year and the 15. SALE OF SUBSIDIARY prior year; and (ii) for the average of the last 3 years. It assumes that such decrease could occur again in the coming year. Any company whose trended total adjusted capital is less than 95 percent of its RBC would trigger a requirement to submit a comprehensive plan as described above for the Company Action Level. The 2014 statutory annual statements of each of our insurance subsidiaries reflect total adjusted capital in excess of the levels subjecting the subsidiaries to any regulatory action. In addition, although we are under no obligation to do so, we may elect to contribute additional capital or retain greater amounts of capital to strengthen the surplus of certain insurance subsidiaries. Any election to contribute or retain additional capital could impact the amounts our insurance subsidiaries pay as dividends to the holding company. The ability of our insurance subsidiaries to pay dividends is also impacted by various criteria established by rating agencies to maintain or receive higher ratings and by the capital levels that we target for our insurance subsidiaries. At December 31, 2014, the consolidated RBC ratio of our insurance subsidiaries exceeded the minimum RBC requirement included in our Senior Secured Credit Agreement. See the note to the consolidated financial statements entitled “Notes Payable - Direct Corporate Obligations” for further discussion of various financial ratios and balances we are required to maintain. We calculate the consolidated RBC ratio by assuming all of the assets, liabilities, capital and surplus and other aspects of the business of our insurance subsidiaries are combined together in one insurance subsidiary, with appropriate intercompany eliminations. On March 2, 2014, CNO entered into a Stock Purchase Agreement (the “Stock Purchase Agreement”) with Wilton Re, pursuant to which CNO agreed to sell to Wilton Re all of the issued and outstanding shares of CLIC. The transaction closed on July 1, 2014, after the receipt of insurance regulatory approvals and satisfaction of other customary closing conditions. After adjustments for transaction costs and post-closing adjustments, the transaction resulted in net cash proceeds of $224.9 million, including the impact of intercompany transactions completed in connection with the closing. In the first quarter of 2014, we recognized an estimated loss on the sale of CLIC of $298 million, net of income taxes. In the third and fourth quarters of 2014, we recognized a reduction to the loss on the sale of CLIC of $6 million and $2.9 million, respectively, to reflect the determination of the final sales price and net proceeds. The loss on the sale of CLIC in 2014, is summarized below (dollars in millions): Net cash proceeds Net assets being sold: Investments Cash and cash equivalents Accrued investment income Present value of future profits Deferred acquisition costs Reinsurance receivables Income tax assets, net Other assets Liabilities for insurance products Other liabilities Investment borrowings Accumulated other comprehensive income Net assets being sold Loss before taxes Tax expense related to the sale Valuation allowance release related to the tax on the sale Valuation allowance increase related to the decrease in projected future taxable income NET LOSS 162 CNO FINANCIAL GROUP, INC. - Form 10-K $ 224.9 3,863.8 164.7 42.7 15.5 37.6 307.4 84.4 2.8 (3,201.3) (199.1) (383.4) (240.5) 494.6 (269.7) 14.2 (14.2) 19.4 (289.1) $ PART II ITEM 8 Consolidated Financial Statements Because the tax basis of CLIC is lower than the net cash proceeds, the transaction generated a taxable gain and estimated tax expense of $14.2 million. Fully offsetting the tax is $14.2 million of a valuation allowance release pertaining to NOLs which may now be utilized. However, the disposition of CLIC is expected to result in a net reduction to CNO’s taxable income in future periods which also required us to establish a valuation allowance of $19.4 million. In connection with the closing of the transaction, CNO Services, LLC (“CNO Services”), an indirect wholly owned subsidiary of CNO, entered into a transition services agreement and a special support services agreement with Wilton Re, pursuant to which CNO Services will make available to Wilton Re and its affiliates, for a limited period of time, certain services required for the operation of CLIC’s business following the closing. Under such agreements, we will receive $30 million in the year ending June 30, 2015 and $20 million in the year ending June 30, 2016. In addition, certain services will continue to be provided in the three years ending June 30, 2019 for an annual fee of $.2 million. The costs of the services provided to Wilton Re are expected to approximate the fees received under the agreements. The Stock Purchase Agreement also provided that, at the closing, Bankers Life, an indirect wholly owned subsidiary of CNO, recapture the life insurance business written by Bankers Life that was reinsured by Wilton Re. The recapture agreement was conditioned on the concurrent consummation of the closing. On July 1, 2014, Bankers Life paid $28.0 million to recapture the life insurance business from Wilton Re and recognized a gain (net of income taxes) of $16.9 million in the third quarter of 2014 as a result of the recapture. Refer to the note to the consolidated financial statements entitled “Consolidated Statement of Cash Flows” for additional information. 16. BUSINESS SEGMENTS Prior to 2014, the Company managed 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. As a result of the sale of CLIC which was completed on July 1, 2014 and the coinsurance agreements to cede certain long-term care business effective December 31, 2013 (as further described in the note to the consolidated financial statements entitled “Summary of Significant Accounting Policies - Reinsurance”), management has changed the manner in which it disaggregates the Company’s operations for making operating decisions and assessing performance. In periods prior to 2014: (i) the results in the Washington National segment have been adjusted to include the results from the business in the Other CNO Business segment that are being retained; (ii) the Other CNO Business segment included only the long-term care business that was ceded effective December 31, 2013 and the overhead expense of CLIC that is expected to continue after the completion of the sale; and (iii) the CLIC business being sold is excluded from our analysis of business segment results. Beginning on January 1, 2014: (i) the overhead expense of CLIC that is expected to continue after the completion of the sale has been reallocated primarily to the Bankers Life and Washington National segments; (ii) there is no longer an Other CNO Business segment; and (iii) the CLIC business being sold continues to be excluded from our analysis of business segment results. After the completion of the sale of CLIC: (i) the Bankers Life segment includes the results of certain life insurance business that was recaptured from Wilton Re; and (ii) the revenues and expenses associated with a transition services agreement and a special support services agreement with Wilton Re are included in our non-operating earnings. Our prior period segment disclosures have been revised to reflect management’s current view of the Company’s operating segments. 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, 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 VIEs, net revenue pursuant to transition and support services agreements, loss on extinguishment or modification of debt and income taxes (“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 and gain on related reinsurance transaction, the earnings of CLIC prior to being sold, 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 VIEs, net revenue pursuant to transition and support services agreements and loss on extinguishment or modification of debt 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. CNO FINANCIAL GROUP, INC. - Form 10-K 163 PART II ITEM 8 Consolidated Financial Statements Operating information by segment was as follows (dollars in millions): Revenues: Bankers Life: Insurance policy income: Annuities Health Life Net investment income(a) Fee revenue and other income(a) Total Bankers Life revenues Washington National: Insurance policy income: Annuities Health Life Net investment income(a) Fee revenue and other income(a) Total Washington National revenues Colonial Penn: Insurance policy income: Health Life Net investment income(a) Fee revenue and other income(a) Total Colonial Penn revenues Other CNO Business: Insurance policy income - health Net investment income(a) Total Other CNO Business revenues Corporate operations: Net investment income Fee and other income Total corporate revenues Total revenues (continued on next page) 2014 2013 2012 $ $ 26.0 1,287.1 338.6 957.3 29.3 2,638.3 $ 28.9 1,311.2 308.6 1,005.7 19.0 2,673.4 28.4 1,342.7 286.3 838.9 15.2 2,511.5 4.0 597.6 24.4 276.1 1.1 903.2 3.6 242.4 41.7 1.0 288.7 — — — 14.9 6.7 21.6 3,851.8 11.4 587.1 23.0 296.9 .9 919.3 4.3 227.8 40.0 .8 272.9 24.1 33.3 57.4 39.8 6.2 46.0 3,969.0 9.6 575.9 23.4 289.2 1.1 899.2 5.2 212.6 40.4 .7 258.9 25.6 32.9 58.5 62.4 2.8 65.2 3,793.3 164 CNO FINANCIAL GROUP, INC. - Form 10-K (continued from previous page) Expenses: Bankers Life: Insurance policy benefits Amortization Interest expense on investment borrowings Other operating costs and expenses Total Bankers Life expenses Washington National: Insurance policy benefits Amortization Interest expense on investment borrowings Other operating costs and expenses Total Washington National expenses Colonial Penn: Insurance policy benefits Amortization Other operating costs and expenses Total Colonial Penn expenses Other CNO Business: Insurance policy benefits Other operating costs and expenses Total Other CNO Business expenses Corporate operations: Interest expense on corporate debt Interest expense on borrowings of variable interest entities Interest expense on investment borrowings Other operating costs and expenses Total corporate expenses Total expenses Pre-tax operating earnings by segment: Bankers Life Washington National Colonial Penn Other CNO Business Corporate operations PRE-TAX OPERATING EARNINGS $ (a) It is not practicable to provide additional components of revenue by product or services. PART II ITEM 8 Consolidated Financial Statements 2014 2013 2012 $ $ 1,667.6 174.7 7.9 401.2 2,251.4 $ 1,788.7 187.5 6.7 380.0 2,362.9 1,642.9 187.6 5.3 374.8 2,210.6 536.2 64.6 1.7 189.5 792.0 173.2 15.3 99.4 287.9 — — — 43.9 — .1 75.9 119.9 3,451.2 541.4 64.9 1.9 170.5 778.7 165.7 14.5 105.2 285.4 59.2 25.8 85.0 51.3 .1 — 27.3 78.7 3,590.7 386.9 111.2 .8 — (98.3) 400.6 $ 310.5 140.6 (12.5) (27.6) (32.7) 378.3 $ 500.6 64.9 2.8 182.1 750.4 161.1 15.0 91.4 267.5 63.2 25.0 88.2 66.2 20.0 .4 65.1 151.7 3,468.4 300.9 148.8 (8.6) (29.7) (86.5) 324.9 CNO FINANCIAL GROUP, INC. - Form 10-K 165 PART II ITEM 8 Consolidated Financial Statements A reconciliation of segment revenues and expenses to consolidated revenues and expenses and net income is as follows (dollars in millions): Total segment revenues Net realized investment gains Revenues related to certain non-strategic investments and earnings attributable to VIEs Fee revenue related to transition and support services agreements Revenues of CLIC prior to being sold CONSOLIDATED REVENUES Total segment expenses Insurance policy benefits - fair value changes in embedded derivative liabilities Amortization related to fair value changes in embedded derivative liabilities Amortization related to net realized investment gains Expenses related to certain non-strategic investments and earnings attributable to VIEs Loss on extinguishment or modification of debt Net loss on sale of subsidiary and (gain) loss on reinsurance transactions Expenses related to transition and support services agreements Expenses of CLIC prior to being sold CONSOLIDATED EXPENSES Income before tax Income tax expense: Tax expense on period income Valuation allowance for deferred tax assets and other tax items NET INCOME Segment balance sheet information was as follows (dollars in millions): $ 2014 3,851.8 33.9 $ 2013 3,969.0 33.4 $ 33.2 15.0 210.8 4,144.7 3,451.2 48.5 (12.5) 1.0 41.2 .6 239.8 12.4 187.4 3,969.6 175.1 32.2 — 441.5 4,476.1 3,590.7 (54.4) 19.0 1.6 42.4 65.4 98.4 — 408.2 4,171.3 304.8 159.2 (35.5) 51.4 $ 128.3 (301.5) 478.0 $ $ 2012 3,793.3 81.1 — — 468.3 4,342.7 3,468.4 4.4 (1.6) 6.5 — 200.2 — — 509.1 4,187.0 155.7 106.2 (171.5) 221.0 2014 2013 19,303.0 8,207.9 945.3 — — 2,728.0 31,184.2 16,697.5 6,778.8 802.2 — — 2,217.5 26,496.0 $ $ $ $ 18,230.2 8,204.8 891.1 607.4 4,326.8 2,520.3 34,780.6 15,866.4 6,834.3 766.6 597.6 3,764.5 1,996.0 29,825.4 $ $ $ $ Assets: Bankers Life Washington National Colonial Penn Other CNO Business Business of CLIC being sold Corporate operations TOTAL ASSETS Liabilities: Bankers Life Washington National Colonial Penn Other CNO Business Business of CLIC being sold Corporate operations TOTAL LIABILITIES 166 CNO FINANCIAL GROUP, INC. - Form 10-K The following table presents selected financial information of our segments (dollars in millions): PART II ITEM 8 Consolidated Financial Statements Segment 2014 Bankers Life Washington National Colonial Penn TOTAL 2013 Bankers Life Washington National Colonial Penn Other CNO Business Business of CLIC prior to being sold TOTAL Present value of future profits Deferred acquisition costs Insurance liabilities $ $ $ $ 128.4 314.2 46.8 489.4 263.2 344.3 55.7 — 16.1 679.3 $ $ $ $ 456.6 240.2 73.8 770.6 627.8 232.2 67.4 — 40.7 968.1 $ $ $ $ 15,308.9 6,228.8 771.0 22,308.7 14,575.0 5,664.1 766.2 597.5 3,273.0 24,875.8 17. QUARTERLY FINANCIAL DATA (UNAUDITED) We compute earnings per common share for each quarter independently of earnings per share for the year. The sum of the quarterly earnings per share may not equal the earnings per share for the year because of: (i) transactions affecting the weighted average number of shares outstanding in each quarter; and (ii) the uneven distribution of earnings during the year. Quarterly financial data (unaudited) were as follows (dollars in millions, except per share data): 2014 Revenues Income (loss) before income taxes Income tax expense (benefit) NET INCOME (LOSS) Earnings per common share: Basic: Net income (loss) Diluted: Net income (loss) 2013 Revenues Income before income taxes Income tax expense (benefit) NET INCOME Earnings per common share: Basic: Net income Diluted: Net income 1st Qtr. 1,084.7 $ (169.6) $ 58.4 (228.0) $ 2nd Qtr. 1,093.0 114.4 36.3 78.1 3rd Qtr. 967.0 154.4 37.0 117.4 $ $ $ 4th Qtr. 1,000.0 75.9 (8.0) 83.9 $ $ $ (1.03) $ .36 $ .56 $ .41 (1.03) $ 1st Qtr. 1,142.6 34.6 22.7 11.9 $ $ $ .35 2nd Qtr. 1,081.5 114.7 37.6 77.1 $ $ $ .54 3rd Qtr. 1,093.8 114.4 (168.6) 283.0 $ $ $ $ .41 4th Qtr. 1,158.2 41.1 (64.9) 106.0 .05 $ .35 $ 1.27 $ .05 $ .34 $ 1.23 $ .48 .47 $ $ $ $ $ $ $ $ $ $ 18. INVESTMENTS IN VARIABLE INTEREST ENTITIES We have concluded that we are the primary beneficiary with respect to certain VIEs, which are consolidated in our financial statements. In consolidating the VIEs, we consistently use the financial information most recently distributed to investors in the VIE, which in one case, is less than two months prior to the end of our reporting period. All of the VIEs are collateralized loan trusts that were established to issue securities to finance the purchase of corporate loans and other permitted investments (including two new VIEs which were consolidated in 2014, one new VIE which was consolidated in 2013 and one new VIE which was consolidated in 2012). The assets held by the trusts are legally isolated and not available to the Company. The liabilities of the VIEs are expected to be satisfied from the cash flows generated by the underlying loans held by the trusts, not from the assets of the Company. The scheduled repayment of the remaining principal balance of the borrowings related to the VIEs are as follows: $35.4 million in 2015; $64.5 million in 2018; $492.0 million in 2022; $381.8 million in 2024; and $326.9 million in 2026. The Company has no further commitments to the VIEs. CNO FINANCIAL GROUP, INC. - Form 10-K 167 PART II ITEM 8 Consolidated Financial Statements Certain of our insurance subsidiaries are noteholders of the VIEs. Another subsidiary of the Company is the investment manager for the VIEs. As such, it has the power to direct the most significant activities of the VIEs which materially impacts the economic performance of the VIEs. The following table provides supplemental information about the assets and liabilities of the VIEs which have been consolidated (dollars in millions): ASSETS: Investments held by variable interest entities Notes receivable of VIEs held by insurance subsidiaries Cash and cash equivalents held by variable interest entities Accrued investment income Income tax assets, net Other assets TOTAL ASSETS LIABILITIES: Other liabilities Borrowings related to variable interest entities Notes payable of VIEs held by insurance subsidiaries TOTAL LIABILITIES ASSETS: Investments held by variable interest entities Notes receivable of VIEs held by insurance subsidiaries Cash and cash equivalents held by variable interest entities Accrued investment income Income tax assets, net Other assets TOTAL ASSETS LIABILITIES: Other liabilities Borrowings related to variable interest entities Notes payable of VIEs held by insurance subsidiaries TOTAL LIABILITIES December 31, 2014 VIEs Eliminations Net effect on consolidated balance sheet 1,367.1 $ — 68.3 3.2 18.1 14.2 1,470.9 $ 61.2 $ 1,286.1 157.3 1,504.6 $ — $ (153.3) — — (2.9) (1.7) (157.9) $ (6.1) $ — (157.3) (163.4) $ 1,367.1 (153.3) 68.3 3.2 15.2 12.5 1,313.0 55.1 1,286.1 — 1,341.2 December 31, 2013 VIEs Eliminations Net effect on consolidated balance sheet 1,046.7 $ — 104.3 1.9 5.4 22.6 1,180.9 $ 66.0 $ 1,012.3 112.5 1,190.8 $ — $ (108.5) — — (2.5) (.9) (111.9) $ (4.0) $ — (112.5) (116.5) $ 1,046.7 (108.5) 104.3 1.9 2.9 21.7 1,069.0 62.0 1,012.3 — 1,074.3 $ $ $ $ $ $ $ $ The following table provides supplemental information about the revenues and expenses of the VIEs which have been consolidated in accordance with authoritative guidance, after giving effect to the elimination of our investment in the VIEs and investment management fees earned by a subsidiary of the Company (dollars in millions): REVENUES: Net investment income – policyholder and reinsurer accounts and other special-purpose portfolios Fee revenue and other income $ Total revenues EXPENSES: Interest expense Other operating expenses Total expenses Income before net realized investment losses and income taxes Net realized investment losses INCOME BEFORE INCOME TAXES 168 CNO FINANCIAL GROUP, INC. - Form 10-K $ 2014 2013 2012 47.2 1.1 48.3 30.1 1.2 31.3 17.0 (2.2) 14.8 $ $ 42.3 1.8 44.1 26.0 1.4 27.4 16.7 (1.6) 15.1 $ $ 31.3 1.6 32.9 20.0 .6 20.6 12.3 (.4) 11.9 PART II ITEM 8 Consolidated Financial Statement The investment portfolios held by the VIEs are primarily comprised of commercial bank loans to corporate obligors which are almost entirely rated below-investment grade. At December 31, 2014, such loans had an amortized cost of $1,398.1 million; gross unrealized gains of $.5 million; gross unrealized losses of $31.5 million; and an estimated fair value of $1,367.1 million. The following table sets forth the amortized cost and estimated fair value of the investments held by the VIEs at December 31, 2014, by contractual maturity. Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without penalties. (Dollars in millions) Due after one year through five years Due after five years through ten years TOTAL Amortized cost 417.2 980.9 1,398.1 $ $ Estimated fair value 411.3 955.8 1,367.1 $ $ The following table sets forth the amortized cost and estimated fair value of those investments held by the VIEs with unrealized losses at December 31, 2014, by contractual maturity. Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without penalties. (Dollars in millions) Due after one year through five years Due after five years through ten years TOTAL During 2014, the VIEs recognized net realized investment losses of $2.2 million from the sales of fixed maturities. During 2013, the VIEs recognized net realized investment losses of $1.6 million, which were comprised of $.5 million of net losses from the sales of fixed maturities, and $1.1 million of writedowns of investments for other than temporary declines in fair value recognized through net income. During 2012, the VIEs recognized net realized investment losses of $.4 million, which were comprised of $.4 million of net gains from the sales of fixed maturities, and $.8 million of writedowns of investments for other than temporary declines in fair value recognized through net income. At December 31, 2014, there were no investments held by the VIEs that were in default. During 2014, $38.7 million of investments held by the VIEs were sold which resulted in gross investment losses (before income taxes) of $2.4 million. During 2013, $11.1 million of investments held by the VIEs were sold which resulted in gross investment losses (before income taxes) of $.9 million. During 2012, $34.9 million of investments held by the VIEs were sold which resulted in gross investment losses (before income taxes) of $.3 million. At December 31, 2014, the VIEs held: (i) investments with a fair value of $1,053.2 million and gross unrealized losses of $27.3 million that had been in an unrealized loss position for less than twelve months; and (ii) investments with a fair value of $167.4 million and gross unrealized losses of $4.2 million that had been in an unrealized loss position for greater than twelve months. Amortized cost 382.3 869.8 1,252.1 $ $ Estimated fair value 376.3 844.3 1,220.6 $ $ At December 31, 2013, the VIEs held: (i) investments with a fair value of $355.5 million and gross unrealized losses of $3.1 million that had been in an unrealized loss position for less than twelve months; and (ii) investments with a fair value of $7.9 million and gross unrealized losses of less than $.1 million that had been in an unrealized loss position for greater than twelve months. The investments held by the VIEs are evaluated for other-than- temporary declines in fair value in a manner that is consistent with the Company’s fixed maturities, available for sale. In addition, the Company, in the normal course of business, makes passive investments in structured securities issued by VIEs for which the Company is not the investment manager. These structured securities include asset-backed securities, collateralized securities, debt obligations, commercial mortgage-backed residential mortgage-backed collateralized mortgage obligations. Our maximum exposure to loss on these securities is limited to our cost basis in the investment. We have determined that we are not the primary beneficiary of these structured securities due to the relative size of our investment in comparison to the total principal amount of the individual structured securities and the level of credit subordination which reduces our obligation to absorb gains or losses. securities and At December 31, 2014, we held investments in various limited partnerships, in which we are not the primary beneficiary, totaling $36.3 million (classified as other invested assets). At December 31, 2014, we had unfunded commitments to these partnerships of $81.8 million. Our maximum exposure to loss on these investments is limited to the amount of our investment. 19. SUBSEQUENT EVENT On February 10, 2015, we announced that we have entered into a comprehensive agreement with Cognizant forming a strategic partnership for technology delivery that is expected to accelerate our core IT process improvements and enable more rapid innovation. Under the agreement, Cognizant will, after the transition period, assume CNO’s application development, maintenance, and testing functions as well as select IT infrastructure operations. Cognizant will also take over all CNO operations located in Hyderabad, India. The partnership will result in the movement of approximately 640 IT positions from CNO to Cognizant, roughly 240 of which are U.S.-based. CNO FINANCIAL GROUP, INC. - Form 10-K 169 PART II ITEM 9B Other Information ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None. ITEM 9A. Controls and Procedures. Evaluation of Disclosure Controls and Procedures. CNO’s management, under the supervision and with the participation of the Chief Executive Officer and the Chief Financial Officer, evaluated the effectiveness of CNO’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended). Based on its evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2014, CNO’s disclosure controls and procedures were effective to ensure that information required to be disclosed by CNO in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s (the “SEC”) rules and forms. Disclosure controls and procedures are also designed to reasonably assure that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Limitations on the Effectiveness of Controls. Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls over financial reporting will prevent all error and fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures. Based on our controls evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of the end of the period covered by this annual report, our disclosure controls and procedures were effective to provide reasonable assurance that: (i) the information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms; and (ii) material information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Management’s Report on Internal Control Over Financial Reporting. Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal Control - Integrated Framework (2013), our management concluded that our internal control over financial reporting was effective as of December 31, 2014. The effectiveness of our internal control over financial reporting as of December 31, 2014 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which is included herein. Changes to Internal Control Over Financial Reporting. There were no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) during the quarter ended December 31, 2014, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. ITEM 9B. Other Information. None. 170 CNO FINANCIAL GROUP, INC. - Form 10-K PART III ITEM 10. Directors, Executive Officers and Corporate Governance. We will provide information that is responsive to this Item 10 in our definitive proxy statement or in an amendment to this Annual Report not later than 120 days after the end of the fiscal year covered by this Annual Report. That information is incorporated by reference into this Item 10. Additional information called for by this item is contained in Part I of this Annual Report under the caption “Executive Officers of the Registrant.” ITEM 11. Executive Compensation. We will provide information that is responsive to this Item 11 in our definitive proxy statement or in an amendment to this Annual Report not later than 120 days after the end of the fiscal year covered by this Annual Report. That information is incorporated by reference into this Item 11. ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. We will provide information that is responsive to this Item 12 in our definitive proxy statement or in an amendment to this Annual Report not later than 120 days after the end of the fiscal year covered by this Annual Report. That information is incorporated by reference into this Item 12. ITEM 13. Certain Relationships and Related Transactions, and Director Independence. We will provide information that is responsive to this Item 13 in our definitive proxy statement or in an amendment to this Annual Report not later than 120 days after the end of the fiscal year covered by this Annual Report. That information is incorporated by reference into this Item 13. ITEM 14. Principal Accountant Fees and Services. We will provide information that is responsive to this Item 14 in our definitive proxy statement or in an amendment to this Annual Report not later than 120 days after the end of the fiscal year covered by this Annual Report. That information is incorporated by reference into this Item 14. CNO FINANCIAL GROUP, INC. - Form 10-K 171 PART IV ITEM 15. Exhibits and Financial Statement Schedules. (a) 1. Financial Statements. See Index to Consolidated Financial Statements on page 109 for a list of financial statements included in this Report. 2. Financial Statement Schedules: Schedule II -- Condensed Financial Information of Registrant (Parent Company) Schedule IV -- Reinsurance All other schedules are omitted, either because they are not applicable, not required, or because the information they contain is included elsewhere in the consolidated financial statements or notes. 3. Exhibits. See Exhibit Index immediately preceding the Exhibits filed with this report. 172 CNO FINANCIAL GROUP, INC. - Form 10-K PART IV Signature Signature Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CNO FINANCIAL GROUP, INC. Dated: February 20, 2015 By: /s/ Edward J. Bonach Edward J. Bonach Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated: Signature /s/ EDWARD J. BONACH Edward J. Bonach /s/ FREDERICK J. CRAWFORD Frederick J. Crawford /s/ JOHN R. KLINE John R. Kline /s/ ELLYN L. BROWN Ellyn L. Brown /s/ ROBERT C. GREVING Robert C. Greving /s/ MARY R. HENDERSON Mary R. Henderson /s/ R. KEITH LONG R. Keith Long /s/ NEAL C. SCHNEIDER Neal C. Schneider /s/ FREDERICK J. SIEVERT Frederick J. Sievert /s/ MICHAEL T. TOKARZ Michael T. Tokarz /s/ JOHN G. TURNER John G. Turner Title (Capacity) Director and Chief Executive Officer (Principal Executive Officer) Executive Vice President and Chief Financial Officer (Principal Financial Officer) Senior Vice President and Chief Accounting Officer (Principal Accounting Officer) Director Director Director Director Director Director Director Director Date February 20, 2015 February 20, 2015 February 20, 2015 February 20, 2015 February 20, 2015 February 20, 2015 February 20, 2015 February 20, 2015 February 20, 2015 February 20, 2015 February 20, 2015 CNO FINANCIAL GROUP, INC. - Form 10-K 173 PART IV Report of Independent Registered Public Accounting Firm on Financial Statement Schedules Report of Independent Registered Public Accounting Firm on Financial Statement Schedules To the Shareholders and Board of Directors of CNO Financial Group, Inc.: Our audits of the consolidated financial statements and of the effectiveness of internal control over financial reporting of CNO Financial Group, Inc. and subsidiaries referred to in our report dated February 20, 2015 appearing under Item 8 of this Form 10-K also included an audit of the financial statement schedules at December 31, 2014 and 2013 and for the years ended December 31, 2014, 2013 and 2012 listed in Item 15(a)(2) of this Form 10-K. In our opinion, these financial statement schedules present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. /s/PricewaterhouseCoopers LLP Indianapolis, Indiana February 20, 2015 174 CNO FINANCIAL GROUP, INC. - Form 10-K PART IV SCHEDULE II Condensed Financial Information of Registrant (Parent Company) SCHEDULE II Condensed Financial Information of Registrant (Parent Company) Balance Sheet as of December 31, 2014 and 2013 (Dollars in millions) ASSETS Fixed maturities, available for sale, at fair value (amortized cost: 2014 - $35.0; 2013 - $51.8) Cash and cash equivalents - unrestricted Equity securities at fair value (cost: 2014 - $202.7; 2013 - $65.3) Trading securities Other invested assets Investment in wholly-owned subsidiaries (eliminated in consolidation) Income tax assets, net Other invested assets - affiliated (eliminated in consolidation) Receivable from subsidiaries (eliminated in consolidation) Other assets TOTAL ASSETS LIABILITIES AND SHAREHOLDERS’ EQUITY Liabilities: Notes payable Payable to subsidiaries (eliminated in consolidation) Other liabilities Total liabilities Commitments and Contingencies Shareholders’ equity: Common stock and additional paid-in capital ($0.01 par value, 8,000,000,000 shares authorized, shares issued and outstanding: 2014 – 203,324,458; 2013 – 220,323,823) Accumulated other comprehensive income Retained earnings TOTAL SHAREHOLDERS’ EQUITY TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY The accompanying notes are an integral part of the condensed financial statements. 2014 2013 $ $ $ $ 34.9 86.6 216.9 2.1 — 5,263.3 47.9 27.0 10.8 17.2 5,706.7 794.4 114.3 109.8 1,018.5 3,734.4 825.3 128.5 4,688.2 5,706.7 $ $ $ $ 51.7 131.1 79.6 2.1 22.2 5,550.9 107.6 19.9 1.7 22.1 5,988.9 856.4 108.7 68.6 1,033.7 4,095.0 731.8 128.4 4,955.2 5,988.9 SCHEDULE II Condensed Financial Information of Registrant (Parent Company) Statement of Operations for the years ended December 31, 2014, 2013 and 2012 (Dollars in millions) Revenues: Net investment income Net realized investment gains Intercompany revenues (losses) (eliminated in consolidation) Total revenues Expenses: Interest expense Intercompany expenses (eliminated in consolidation) Operating costs and expenses Loss on extinguishment of debt Total expenses Loss before income taxes and equity in undistributed earnings of subsidiaries Income tax benefit on period income Loss before equity in undistributed earnings of subsidiaries Equity in undistributed earnings of subsidiaries (eliminated in consolidation) NET INCOME The accompanying notes are an integral part of the condensed financial statements. 2014 12.7 11.1 (1.0) 22.8 44.0 .3 66.6 .6 111.5 (88.7) (34.1) (54.6) 106.0 51.4 $ $ 2013 21.1 .4 1.6 23.1 51.4 .3 26.1 65.4 143.2 (120.1) (8.8) (111.3) 589.3 478.0 $ $ 2012 22.3 1.9 — 24.2 66.6 .4 50.9 200.2 318.1 (293.9) (59.8) (234.1) 455.1 221.0 $ $ CNO FINANCIAL GROUP, INC. - Form 10-K 175 PART IV SCHEDULE II Condensed Financial Information of Registrant (Parent Company) SCHEDULE II Condensed Financial Information of Registrant (Parent Company) Statement of Cash Flows for the years ended December 31, 2014, 2013 and 2012 (Dollars in millions) Cash flows from operating activities Cash flows from investing activities: 2014 (66.7) $ 2013 (65.9) $ $ Sales of investments Sales of investments - affiliated* Purchases of investments Purchases of investments - affiliated* Net sales of trading securities Dividends received from consolidated subsidiary, net of capital contributions of $18.8 in 2014, nil in 2013 and $26 in 2012* Change in restricted cash Net cash provided by investing activities Cash flows from financing activities: Issuance of notes payable, net Payments on notes payable Issuance of common stock Payments to repurchase common stock and warrants Common stock dividends paid Expenses related to extinguishment or modification of debt Amount paid to extinguish the beneficial conversion feature associated with repurchase of convertible debentures Investment borrowings - repurchase agreements, net Issuance of notes payable to affiliates* Payments on notes payable to affiliates* Net cash used by financing activities Net increase (decrease) in cash and cash equivalents Cash and cash equivalents, beginning of the year CASH AND CASH EQUIVALENTS, END OF THE YEAR $ * Eliminated in consolidation The accompanying notes are an integral part of the condensed financial statements. 229.8 18.3 (320.1) (30.7) 9.9 423.5 — 330.7 — (62.9) 5.0 (376.5) (51.0) (.6) — 20.4 257.8 (100.7) (308.5) (44.5) 131.1 86.6 $ 95.8 — (119.3) (10.0) 12.6 242.8 — 221.9 — (126.9) 15.1 (118.4) (24.4) (61.6) (12.6) — 222.1 (83.9) (190.6) (34.6) 165.7 131.1 $ 2012 (95.3) 159.7 — (145.0) — 37.4 245.0 26.0 323.1 944.5 (810.6) 3.1 (180.2) (13.9) (183.0) (24.0) (24.8) 208.6 (52.0) (132.3) 95.5 70.2 165.7 176 CNO FINANCIAL GROUP, INC. - Form 10-K PART IV SCHEDULE II Condensed Financial Information of Registrant (Parent Company) SCHEDULE II Notes to Condensed Financial Information 1. Basis of Presentation The condensed financial information should be read in conjunction with the consolidated financial statements of CNO Financial Group, Inc. The condensed financial information includes the accounts and activity of the parent company. SCHEDULE IV Reinsurance for the years ended December 31, 2014, 2013 and 2012 (Dollars in millions) Life insurance inforce: Direct Assumed Ceded NET INSURANCE INFORCE PERCENTAGE OF ASSUMED TO NET Insurance policy income: Direct Assumed Ceded NET PREMIUMS PERCENTAGE OF ASSUMED TO NET 2014 2013 2012 $ $ $ $ 25,029.0 147.1 (3,660.1) 21,516.0 .7% 2014 2,558.2 35.0 (176.7) 2,416.5 $ $ $ $ 53,304.9 305.7 (11,477.6) 42,133.0 .7% 2013 2,623.5 37.4 (212.1) 2,448.8 $ $ $ $ 53,750.8 325.7 (12,392.4) 41,684.1 .8% 2012 2,591.1 69.4 (220.0) 2,440.5 1.4% 1.5% 2.8% CNO FINANCIAL GROUP, INC. - Form 10-K 177 PART IV Director of CNO Financial Group, Inc. Directors of CNO Financial Group, Inc. Neal C. Schneider (Chairman) Former Chairman of the Board, PMA Capital Corporation Edward J. Bonach Chief Executive Officer, CNO Financial Group, Inc. Ellyn L. Brown Retired Principal, Brown & Associates Robert C. Greving Retired Executive Vice President, Chief Financial Officer and Chief Actuary, Unum Group Mary R. (Nina) Henderson Managing Partner, Henderson Advisory R. Keith Long President and Chief Executive Officer, Otter Creek Management, Inc. Fredrick J. Sievert Retired President, New York Life Insurance Company Michael T. Tokarz Chairman, MVC Capital, Inc. John G. Turner Chairman, Hillcrest Capital Partners 178 Table of Contents 2014 in Review To Our Shareholders Bankers Life Colonial Penn Washington National CNO Financial in the Community Annual Report on Form 10-K Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Selected Consolidated Financial Data Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations Consolidated Financial Statements Exhibits and Financial Statement Schedules Directors of CNO Financial Group, Inc. Investor Information 1 2 6 8 10 12 15 50 52 53 109 172 178 180 Investor Information Meeting of Shareholders Our annual meeting of shareholders will be held at 8:00 a.m. (EDT) on May 6, 2015, in the auditorium of CNO Financial Group’s headquarters at 11825 N. Pennsylvania Street, Carmel, Indiana. This information is included in the meeting notice, proxy statement and form of proxy sent to each shareholder with this annual report. You may vote your proxy by executing and returning your form of proxy. If a brokerage firm holds your shares, you may be able to vote over the internet or by telephone; consult your broker for information. Shareholder Services If you are a registered shareholder and have a question about your account, or if you would like to report a change in your name or address, please call CNO’s transfer agent, American Stock Transfer & Trust Company, at (800) 937-5449 or (718) 921-8124. Shareholders may reach American Stock Transfer at amstock.com, by email to info@amstock.com, or by mail: American Stock Transfer & Trust Company 6201 15th Avenue Brooklyn, NY 11219 Ways to Learn More About Us Investor Hotline: Call (800) 426-6732 or (317) 817-2893 to receive annual reports, Form 10-Ks, Form 10-Qs and other documents by mail or to speak with an investor relations representative. Email: Contact us at ir@CNOinc.com to ask questions or request materials. Quarterly Reporting To receive CNO’s quarterly results as soon as they are announced, please sign up for CNO’s mailing list by contacting the investor relations department or visit investor.CNOinc.com. Copies of this Report To obtain additional copies of this report or to receive other free investor materials, contact the investor relations department. To view these reports online, please visit investor.CNOinc.com. Stock Information CNO Financial Group’s common stock is listed on the New York Stock Exchange (trading symbol: CNO). 2 0 1 4 A n n u a l R e p o r t I i C N O F n a n c i a l G r o u p , I n c . 2014 2014 ANNUAL REPORT CNO Financial Group, Inc. 11825 N. Pennsylvania Street Carmel, IN 46032 (317) 817-6100 © 2015 CNO Financial Group, Inc. (03/15) 159676 CNOinc.com

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