CNO Financial Group Annual Report 2014

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FY2014 Annual Report · CNO Financial Group

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2014

2014 ANNUAL REPORT

CNO Financial Group, Inc.
11825 N. Pennsylvania Street
Carmel, IN 46032

(317) 817-6100

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

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

OPERATING EARNINGS PER SHARE

200

173%

CNO
S&P 500

3-YEAR RETURN
3-YEAR RETURN

3-YEAR RETURN

CNO
CNO
S&P 500
S&P 500

200
200

100

200

100
100

0
100

100

173%
173%

64%

173%

64%

64%
64%

64%

0
0
BOOK VALUE PER DILUTED SHARE

BOOK VALUE PER DILUTED SHARE

2
0
1
2

2
0
1
3

2
0
1
2

BOOK VALUE PER DILUTED SHARE
BOOK VALUE PER DILUTED SHARE

$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
2
0
0
1
1
4
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

$38

CAPITAL DEPLOYMENT ($MM)
CAPITAL DEPLOYMENT ($MM)
$63

Interest

$63

Interest

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

$376

$38

$376
$376

$376

$63

$51
$51

$28
$28

$51

$28

OPERATING EARNINGS PER SHARE
OPERATING EARNINGS PER SHARE

$1.07

$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

$1.19

$0.78
2012

$0.78

2012

2013

2014

NEW ANNUALIZED PREMIUM ($MM)
2013
2013

NEW ANNUALIZED PREMIUM ($MM)

2012
2012

2014
2014

$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

Washington National
8.5%
OPERATING RETURN ON EQUITY
OPERATING RETURN ON EQUITY

Washington National
8.0%

8.0%

2013

2014
2014
Colonial Penn
8.5%

Colonial Penn

6.8%

OPERATING RETURN ON EQUITY

OPERATING RETURN ON EQUITY
8.0%
8.0%

8.5%
8.5%

8.5%

8.0%

6.8%
6.8%

6.8%

2012

2013

2014

2012
2012

2013
2013

2014
2014

2012

2013

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.

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

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.

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

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.

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.

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.

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

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.

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.

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.

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.

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

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

✔

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

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.

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.

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

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.

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

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.

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.

An important competitive factor for life insurance companies
is the ratings they receive from nationally recognized rating
insurance brokers and marketing
organizations. Agents,

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.

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.

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-

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.

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

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.

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

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.

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.

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

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.

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

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.

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.

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.

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.

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.

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

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)”.

(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

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.

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.

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.

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.

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.

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

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

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

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.

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.

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

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.

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

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.

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

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.

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

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.

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

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

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.

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.

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.

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

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.

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 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.

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.

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

—

36.5
14.0

—

—
—

(246.7)

—

(2.2)
(9.7)

—

35.5
59.2

—

1.2

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.

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.

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

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.

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

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.

(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

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.

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.

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

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:

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.

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.

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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:

• 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.

PART II
ITEM 8 Consolidated Financial Statements

Accounting for Certain Marketing and
Reinsurance Agreements

• 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
$

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.

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

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.

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

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

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.

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.

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):

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

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.

Valuation Hierarchy

There is a three-level hierarchy for valuing assets or liabilities at
fair value based on whether inputs are observable or unobservable.

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.

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.

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.

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.

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

ASSETS:

Fixed maturities, available for sale:

Total fixed maturities, available for sale

Equity securities - corporate securities
Trading 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

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

—
—

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

—
—

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

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

—

36.5
14.0

—
—

(2.2)
(9.7)

— (246.7)

—

35.5
59.2

—

1.2

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)

CNO FINANCIAL GROUP, INC. - Form 10-K 137

PART II
ITEM 8 Consolidated Financial Statements

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

7.3

5.8
13.7

—

(.3)

—

(50.1)

24.5
—
24.5

—

(7.7)

—
(7.7)

—
.1

—

—
(2.5)
(2.5)

—

—
.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

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)

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

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.

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

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.

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.

PART II
ITEM 8 Consolidated Financial Statements

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.

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 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

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.

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 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.

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.

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%

4.00%

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

— $

—

(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

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:

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

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

Date
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

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

109

172

178

180

Investor Information

American Stock Transfer & Trust Company
6201 15th Avenue
Brooklyn, NY 11219

Email: Contact us at ir@CNOinc.com to ask questions or
request materials.

Stock Information
CNO Financial Group’s common stock is listed on the
New York Stock Exchange (trading symbol: CNO).

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2014

2014 ANNUAL REPORT

CNO Financial Group, Inc.
11825 N. Pennsylvania Street
Carmel, IN 46032

(317) 817-6100

CNOinc.com