CNO Financial Group Annual Report 2016

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FY2016 Annual Report · CNO Financial Group

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FOCUSED ON SERVING
MIDDLE-INCOME AMERICANS

Table of Contents

To Our Shareholders

Our Business Segments

CNO Financial Group 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

CNO Financial Group 2016 Annual Report

102

164

172

173

Edward J. Bonach
Chief Executive Officer

To Our Shareholders

CNO Financial Group continued its strong track record of operating performance in
2016, marked by a fifth consecutive year of operating earnings per share growth.

I am pleased to report that 2016 was another notable year of
solid results for CNO Financial and our family of companies—
Bankers Life, Washington National, and Colonial Penn. We
enhanced shareholder value, extended our customer reach,
made significant progress on advancing our technology and
business solutions, and improved our customer experience to
better serve middle-income Americans.

In 2016, we moved the dial on several fronts and grew the
enterprise. Total collected premiums were up 6 percent and
first-year collected premiums were up 12 percent, primarily due
to strong annuity sales. In-force policies were up 1 percent,
including a 6 percent increase in third-party policies.

Our sales results continue to reveal a change in product mix
toward annuities, as consumer concerns shift from dying too
soon to outliving one’s assets. We expect that financial security
in retirement will continue to be a primary concern, as healthcare
costs increase as we age, and more of our customers rely on
defined contribution plans instead of pensions and defined
benefit plans to fund their retirement.

This shift also played a significant role in the 2016 launch of
our in-house broker-dealer and registered investment advisor,
Bankers Life Securities, Inc. and Bankers Life Advisory Services,
Inc., respectively. These wholly-owned subsidiaries allow us to
more fully meet our customers’ financial and advisory services
needs, while providing valuable fee income to CNO Financial.
These types of services have historically been focused on serving
wealthier demographics; however, our customer relationships
confirm a need across all income levels. We listened, and are
now better able to respond to our customers’ requests for these
services, as part of our controlled distribution channels.

Although our stated objective is to reduce our relative long-term
care exposure in the near term, we recaptured a closed block
of long-term care business previously ceded to an offshore
reinsurance entity, as a result of certain irregularities that had
come to our attention. While unexpected, we moved with speed
and purpose, working transparently with the state insurance
regulators to limit uncertainty and disruption to our affected
policyholders, while minimizing financial risk.

In 2016, CNO Financial made a strategic investment in Tennenbaum
Capital Partners, LLC, an investment management firm with over $6

2016 was another
notable year of
solid results for
CNO Financial
and our family
of companies.

OPERATING EARNINGS PER SHARE

$1.27

$1.41

$1.47

2014

2015

2016

BOOK VALUE PER DILUTED SHARE

$18.75

$20.05

$22.02

billion in committed capital under management. This non-controlling,
minority interest transaction is a great fit for many reasons, including
diversification of our income into alternative investments, a long-
term opportunity through ownership in a growing platform, and
further utilization of our tax assets.

Financial Performance

CNO Financial continued its strong track record of operating
performance in 2016, marked by a fifth consecutive year
of operating earnings per share growth. For the full year, we
recorded operating earnings of $263 million, or $1.47 per
diluted share, compared to $1.41 per diluted share in 2015.
Net income was $358 million, or $2.01 per diluted share,
compared to $1.39 per diluted share in 2015. Book value per
diluted share increased to $22.02 from $20.05 in 2015.

We ended the year with $264 million in cash and investments
at the holding company and approximately $114 million in
deployable capital. Our debt-to-total capital ratio was 19.1
percent. Our consolidated risk-based capital ratio increased 10
percentage points to 459 percent.

2
0
1
4

2
0
1
5

2
0
1
6

In 2016, we moved the dial on several fronts and grew the enterprise.

We returned $258 million to shareholders in the year, with $203
million in common stock repurchases and paid common stock
dividends totaling $55 million.

Business Performance

Middle-income Americans are underserved in regards to
insurance and retirement services. We understand this market,
as we have been serving it as our primary focus for many years.

In 2016, we completed a comprehensive customer segmentation
analysis to look within the many unique divisions of the middle-
income market to more effectively define their needs and how to
meet them. As a result, we released several new products, and will
continue to build the right products and solutions to stay competitive
and help our market succeed in the changing landscape.

At Bankers Life—our career distribution channel—first-year collected
premiums were up 14 percent, with total collected premiums up
9 percent, indicating our ability to expand market reach and retain
customers. New annualized premium (NAP) was down 4 percent for
the year, largely due to a decline in life and Medicare supplement
sales. Both first-year and total collected premiums for annuities
were up 21 percent over 2015, and annuity account values grew 3
percent. Total year recruiting was up 3 percent. However, retention
of first-year agents was down, primarily causing a 5 percent drop in
the average producing agent count. We are piloting various models
to address the situation. We continue to see steady growth with our
most productive agent segment, veteran producers, who have been
with Bankers Life for over three years.

Washington National—our owned agency and
independent
distribution channel—saw first-year collected premiums down 2
percent, with total collected premiums up 1 percent. This resulted
from lower sales in recent periods, offset by higher retention of
current policyholders. NAP declined 1 percent in 2016. Similar to
2015, sales contraction in the individual market due to a struggling
farm and rural community was offset by gains in the worksite
market, driven by technology improvements and access to more
employers aided by our “A-” A.M. Best rating. Average producing
agents continued to increase in 2016, and were up 8 percent.

For our direct distribution channel, Colonial Penn led the franchise
with first-year collected premium growth of 6 percent, and total
collected premium growth of 7 percent. NAP was up 3 percent for
the year. Presidential election years are notoriously challenging for
Colonial Penn, as demand and costs for TV advertising spike while
candidates compete for limited, cost-effective TV spots. Colonial
Penn’s increasing focus on web and digital lead generation helped
to mitigate the impact of higher TV advertising costs in 2016.

Our People

CNO Financial’s success would not be possible without our team
of committed associates and agents. We’re aligned around a
culture of core values—Integrity, Customer Focus, Teamwork and
Excellence—that establish our priorities and set our goals. Our
ability to attract, develop and retain exceptional talent is a key
strength and meaningful competitive advantage, as we strive to
ensure we are an employer of choice. Our team of seasoned
leaders has a unique combination of industry experience,

CNO Financial Group 2016 Annual Report

knowledge and perspective, and a track record of proven
decision making, execution and success.

worksite. We can optimally penetrate the middle-income market
and allow our customers to purchase our products and services
in the way they prefer.

Understanding that focus as a backdrop, our 2017 priorities
build on the foundation for growth we set in 2016 and earlier.
They will emphasize initiatives to drive increased growth,
productivity and retention of our agent force; further extend our
customer reach within the middle-income market; and increase
timely delivery of our product and service offerings to ensure we
are responding to customer needs.

We continue to be committed to reducing our relative long-term
care exposure over the next two-to-five years. Part of achieving
this goal is the natural runoff of existing business, coupled with
the growth of other business lines. To completely achieve this
goal, we are still focused on beneficial reinsurance transactions
for at least a portion of the legacy long-term care business.

Our 2016 accomplishments and confidence in the future are
direct results of the dedication brought to CNO Financial each
and every day by our associates, agents, leadership team,
and Board of Directors. Growing and delivering on our vision
to become the leader in meeting the needs of middle-income
Americans for financial security and readiness, for the life of
their retirement, is the cornerstone of our success.

Our incredible people, our spirit, our commitment, our belief in
this vision—that’s why I come to work inspired every day, and it’s
why CNO Financial will continue to be a successful company.

Edward J. Bonach
Chief Executive Officer

We enhanced the talent of our senior leadership team this year,
with the addition of Gary Bhojwani as CNO Financial’s President,
and the promotion of Erik Helding to Chief Financial Officer.
Gary brings a wealth of experience in the insurance industry,
as he focuses on generating profitable growth in our business
segments, and improving on our execution. Additionally, he’s a
proven insurance leader who will bring a fresh perspective to our
go-to-market strategy. It’s always great to have the opportunity
to promote internal talent. Erik’s success has been earned,
and he will play a key role in growing our business and driving
shareholder value.

Training and development are high priorities across our
businesses. Bankers Life was again recognized by Training
magazine as one of the country’s Top 125 training companies
for a sixth consecutive year. CNO Financial’s commitment to our
associates’ health and wellness earned top spots for a second
consecutive year to both the “Best of the Best” Healthiest 100
Workplaces in America, and as a Platinum winner for the Best
Employers for Healthy Lifestyles.

Looking Forward

America’s middle-income market is the largest population segment
of our country, and there are 10,000 baby boomers turning 65 every
day. According to Bankers Life’s Center For a Secure Retirement, six
out of 10 boomers don’t receive professional financial guidance of
any kind. They have the fewest options, in terms of helping them
meet their needs. For CNO Financial, serving the middle-income
market is as much an opportunity as it is a privilege.

The journey of our multi-year Grow and Deliver strategy continues.
As we enter 2017, it’s important to reiterate what differentiates
CNO Financial from our competitors. At the core, we are market-
focused, delivering products and solutions based on the needs
of the middle-income market. That distinction allows our agents
and associates to better serve our customers, providing value
across the spectrum of our stakeholders.

Our controlled distribution model is a competitive advantage
and unique, in that it allows us to serve our customers directly,
through our network of career insurance agents, or at the

Our Business Segments

CNO Financial Group serves the needs of middle-income Americans through its
Bankers Life, Colonial Penn, and Washington National business segments. In 2016,
we made numerous focused investments in initiatives to identify opportunities, drive
increased productivity, improve efficiencies and profitability, and increase speed-to-market.

Bankers Life

reduces costs through elimination of manual data entry, and
enables straight-through processing.

For financially stable customers who desire to minimize
healthcare cost exposure and ensure stable retirement
income, Bankers Life provides trusted and personal guidance
solutions across a broad suite of products, enabling customers
to prepare for and navigate the complexities of retirement.

With over 300 Bankers Life offices nationwide, our 4,300
exclusive producing agents play a vital role in the communities
where they live and work. Our agents serve as primary advisors
in the retirement planning process by helping generations of
Americans build financial peace of mind for the life of their
retirement. In 2016, we listened closely to our customers’ needs
for improved financial security solutions and released three new
products—the Guaranteed Lifetime Income Annuity, Hospital
Indemnity, and the enhanced Critical Benefit PlusSM.

Colonial Penn

For customers who want to protect their family from critical
life events, Colonial Penn provides no-hassle and affordable
financial protection solutions.

Colonial Penn has been a direct-to-consumer manufacturer
and distributor of simple, low-cost life insurance products for
60 years. We serve the life insurance needs of the underserved
low-to-middle-income senior market primarily to help meet final
expense needs. In 2016, in addition to the strong sales results
noted earlier, we enhanced our customer service capabilities
by
for electronic
applications, enabling streamlined workflows and seamless
integration of application submissions.

implementing automated underwriting

We enhanced the customer experience with improved pre- and
post-sales service by fully supporting paperless processing
for new and updated products. Our new integrated electronic
application and illustration system improves the sales process,

Colonial Penn is also an active community supporter, and in
2016 donated $300,000 to the Children’s Scholarship Fund
Philadelphia, to help 150 low-income families access quality
K-8 education options for their children.

Washington National

new programs and technologies to help our growing agent force
serve our customers.

For middle-income customers who wish to protect their
savings and prepare for retirement, Washington National
provides affordable solutions to address unexpected losses
and the high cost of healthcare.

Washington National is focused on providing our customers
with options and flexibility to choose healthcare and financial
support through our supplemental health and life insurance,
at the worksite and at home. We’re committed to investing in

Our Washington National One Source® platform, for premium
quoting and electronic application and enrollment, was
operationalized in 2016, enhancing our capabilities for individual
and worksite business. New digital tools for our agents were
introduced with the launch of a new mobile platform for the
Consumer Marketing Division. Finally, we released a competitive
update to our Washington National Solutions® Cancer product to
include coverage for future cancer therapies and other new benefits.

CNO Financial Group
in the Community

CNO Financial supports our communities, our associates, and our
customers through nonprofit organizations that address the health
and financial wellness of middle-income Americans.

OUR COMMUNITY PARTNERS

15,000 run through downtown Indianapolis
November 2016 marked the inaugural year
of the company’s title sponsorship of the
Indianapolis Monumental
CNO Financial
Marathon. Named the 18th largest marathon
held in the United States in 2016, the race
generated $4.2 million in local economic
impact according to Visit Indy. Over 350 CNO
Financial associates and family members ran
or volunteered on race weekend.

$478,000 in collections and corporate
donations in 2016
Bankers Life is a proud national supporter of the
Alzheimer’s Association®. Since 2003, Bankers
Life has helped raise more than $4.5 million
for the Association through its annual Forget Me
Not Days fundraiser and corporate donations.

$615,000 in collections and corporate
donations in 2016
CNO Financial is proud to partner with the
United Way and its local agencies in the
communities where we live and work to help
people learn more, earn more and lead safe
and healthy lives.

$63,000 in collections and corporate
donations in 2016
Washington National Insurance Company is
proud to support the American Cancer Society
and its mission to save lives, celebrate lives
and lead the fight for a world without cancer.

$2.7 million in
total community
impact delivered
in 2016

In 2016, CNO Financial
helped deliver $2.7 million
in total community impact
to the neighborhoods where
we live and work. CNO
Financial, our associates and
insurance producers donated
$2.4 million to our partner
organizations in 2016 and
raised an additional $336,000
in community fundraising.

Our associates volunteered
more than 14,000 hours to
community service in 2016,
including donating their
time to our CNO Financial
Afternoon of Service projects
to benefit the United Way
in Carmel, IN, Chicago and
Philadelphia, where we have
corporate locations.

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, 2016

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, 2016, 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 $3.1 billion.

Shares of common stock outstanding as of February 9, 2017: 173,795,204

DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant’s definitive proxy statement for the 2017 annual meeting of shareholders are incorporated by reference into Part
III of this report.

CNO FINANCIAL GROUP, INC. - Form 10-K

Table of Contents

PART I

Page
11

Item 1.
Business of CNO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11
Item 1A. Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .26
Item 1B. Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Item 2.
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Item 3.
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Item 4. Mine Safety Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .43
Executive Officers of the Registrant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .43

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and

Issuer Purchases of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Selected Consolidated Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46

Item 6.
Item 7. Management’s Discussion and Analysis of Consolidated Financial Condition and

Results of Operations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .47
Item 7A. Quantitative and Qualitative Disclosures About Market Risk. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .101
Item 8.
Consolidated Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .102
Item 9.
Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .162
Item 9A. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .162
Item 9B. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .162

PART III

163

Item 10. Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 163
Item 11.
Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 163
Item 12.
Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 163
Item 13. Certain Relationships and Related Transactions, and Director Independence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 163
Item 14.
Principal Accountant Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 163

PART IV

164

Item 15. Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 164
Item 16.
Form 10-K Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 164

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, 2016, we had shareholders’
equity of $4.5 billion and assets of $32.0 billion. For the year
ended December 31, 2016, we had revenues of $4.0 billion and
net income of $358.2 million. See our consolidated financial
statements and accompanying footnotes for additional financial
information about the Company and its segments.

The Company manages its business through the following
operating segments: Bankers Life, Washington National and
Colonial Penn, which are defined on the basis of product
distribution; and corporate operations, comprised of holding
company activities and certain noninsurance company businesses.
In the fourth quarter of 2016, we began reporting as an additional
business segment, the long-term care block recaptured from
Beechwood Re Ltd. (“BRe”) as further described in “Management’s
Discussion and Analysis of Consolidated Financial Condition
and Results of Operations - Consolidated Financial Condition -
Termination of Long-Term Care Reinsurance Agreements and
Recapture of Related Long-Term Care Business in Run-off”.

The Company’s insurance segments are described below:

Bankers Life, which markets and distributes Medicare
supplement
insurance,
traditional life insurance, fixed annuities and long-term care

interest-sensitive

insurance,

life

insurance products to the middle-income senior market
through a dedicated field force of career agents, financial
and investment advisors, 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 has
various distribution and marketing agreements with other
insurance companies to use Bankers Life’s career agents to
distribute Medicare Advantage and prescription drug plans
(“PDP”) products in exchange for a fee.

indemnity

insurance products) and

Washington National, which markets and distributes
supplemental health (including specified disease, accident
and hospital
life
insurance to middle-income consumers at home and at the
worksite. These products are marketed through Performance
Matters Associates, 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
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”).

Long-term care in run-off consists of the long-term care
business that was recaptured due to the termination of certain
reinsurance agreements effective September 30, 2016. This
business is not actively marketed and was issued or acquired
by Washington National and Bankers Conseco Life Insurance
Company (“BCLIC”).

Our Strategic Direction

Our vision is to become the leader in meeting Middle America’s needs for financial security and readiness for the life of their retirement. Our
strategic plans are focused on continuing to grow and deliver long-term value for all our stakeholders. In the last year, we have continued to see
change, including innovative technology, economic shifts, the presidential election, changing regulations and increasing competition. These
changes impact all of our constituents: our customers, investors, agents, associates and business. In this ever-changing environment, in order
to achieve the level of growth we want and need, our strategy in 2017 and beyond is designed to position CNO as the preferred provider of
products and services that meet Middle-Income Americans’ dynamic financial needs. Specifically, we are focused on the following priorities:

CNO FINANCIAL GROUP, INC. - Form 10-K 11

PART I
ITEM 1 Business of CNO

(cid:116) Growth

(i) Maximize our product portfolio to ensure it meets our
customers’ needs for integrated products and advice covering
a broad range of their financial needs

(ii) Position marketing and our distribution channels to better

respond to evolving customer preferences

(iii) Expand and enhance elements of our broker-dealer and

registered investment advisor program

(iv) Expand our reach within certain demographics of the
middle-income market based on our improved customer
segmentation analytics

(cid:116) Increase profitability and return on equity

(i)

Maintain our strong capital position and favorable financial
metrics

(ii) Work to increase our return on equity
(iii) Maintain pricing discipline

(cid:116) Effectively manage risk and deploy capital

(i) Active enterprise risk management process
(ii) Continue to cost effectively repurchase our common stock,

absent compelling alternatives

(iii) Maintain a competitive dividend payout ratio
(iv) Reduce relative legacy long-term care exposure

Other Information

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

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

CNO FINANCIAL GROUP, INC. - Form 10-K

(cid:116) Capitalize on investments made in our businesses

(i)

Leverage our recent investments to identify opportunities,
drive increased productivity, improve efficiencies and
profitability, and increase the speed-to-market for new
products

(ii) Create a strong enterprise data strategy using our platforms
and state-of-the-art tools to drive growth on a cost-effective
basis

(iii) Continue to invest in technology partnerships that will
support our field force and relationships with our customers,
and leverage data to run our business profitably

(iv) Pilot various models across the agent lifecycle to drive

increased growth, productivity and retention

(cid:116) Continue to invest in talent

(i)

Attract, retain and develop the best talent to help us drive
sustainable growth, and provide them with development
opportunities

(ii) Recruit, develop and retain our agent force

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 2016, 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
2016 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, 2016 (as the context implies), unless otherwise indicated.

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 Conseco Life Insurance Company

PART I
ITEM 1 Business of CNO

(“CLIC”, a wholly owned subsidiary prior to being sold on July 1,
2014) of $3.6 billion, $3.4 billion and $3.4 billion in 2016, 2015
and 2014, respectively.

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.

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 2016
collected premiums: Florida (9 percent), Pennsylvania (6 percent),
Texas (5 percent) and California (5 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 over 4,200 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 2016, this distribution channel accounted for
$2.7 billion, or 74 percent, of our total collected premiums. These
agents sell Bankers Life policies, as well as Medicare Advantage
plans primarily through distribution arrangements with Humana,
Inc. (“Humana”) and United HealthCare, and typically visit the
prospective policyholder’s home to conduct personalized “kitchen-

Products

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 2016, this distribution channel accounted for
$659.3 million, or 18 percent, of our total collected premiums.

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 2016, this channel accounted for $280.2 million, or 8
percent, of our total collected premiums.

The following table summarizes premium collections by major category and segment for the years ended December 31, 2016, 2015 and
2014 (dollars in millions):

TOTAL PREMIUM COLLECTIONS

Health:

Bankers Life
Washington National
Colonial Penn
Long-term care in run-off

Total health

Annuities:

Bankers Life
Washington National

Total annuities

Life:

Bankers Life
Washington National
Colonial Penn
Total life

2016

1,235.3
628.4
2.4
4.7
1,870.8

970.0
1.5
971.5

461.1
29.4
277.8
768.3

2015

2014

1,242.3 $
619.6
3.0
—
1,864.9

803.0
2.4
805.4

446.0
27.7
259.9
733.6

1,275.1
603.0
3.4
—
1,881.5

782.3
2.6
784.9

424.9
25.9
241.7
692.5

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

3,610.6

3,403.9

3,358.9

—
3,610.6

—
3,403.9 $

71.2
3,430.1

CNO FINANCIAL GROUP, INC. - Form 10-K 13

PART I
ITEM 1 Business of CNO

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
Long-term care in run-off

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

The following describes our major health products:

2016

739.3
61.0
2.3
802.6

468.6
4.7
473.3
—

21.2
565.5
586.7

2015

739.4 $
72.6
2.7
814.7

476.6
—
476.6
—

19.2
544.8
564.0

6.2
1.9
.1
8.2
1,870.8

7.1
2.2
.3
9.6
1,864.9 $

2014

743.3
85.2
3.2
831.7

500.6
—
500.6
6.8

16.3
515.4
531.7

8.1
2.4
.2
10.7
1,881.5

Medicare Supplement

Long-Term Care

Medicare supplement collected premiums were $802.6 million
during 2016, or 22 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
59 percent of new sales of Medicare supplement policies in 2016 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 2012 to focus on the sale of supplemental health products.

Long-term care collected premiums were $473.3 million during
2016, or 13 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 appropriate,
apply for actuarially justified rate increases in the jurisdictions in
which we sell such products. Regulatory approval is required before
we can increase our premiums on these products.

A small portion of our long-term care business is included in the
Long-term care in run-off segment. This business was sold through
independent producers and was largely underwritten by certain of
our subsidiaries prior to their acquisitions by our 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 this long-term

CNO FINANCIAL GROUP, INC. - Form 10-K

PART I
ITEM 1 Business of CNO

care business to an unaffiliated reinsurer. In September 2016, we
recaptured this business as further described in “Management’s
Discussion and Analysis of Consolidated Financial Condition
and Results of Operations - Consolidated Financial Condition -
Termination of Long-Term Care Reinsurance Agreements and
Recapture of Related Long-Term Care Business in Run-off”.

Our legacy long-term care insurance block is not expected to generate
significant future profits and could produce volatile earnings if
experience deteriorates. 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

Prior to its termination in 2013, we had a quota-share reinsurance
agreement with Coventry Health Care (“Coventry”). 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 $586.7 million
during 2016, or 17 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
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 72 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 $8.2 million
during 2016. This category includes various other health products
such as 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 interest annuity:

Bankers Life
Washington National

Total fixed interest 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

2016

868.1
1.2
869.3

101.9
.3
102.2

971.5
—
971.5

2015

706.6 $
1.9
708.5

96.4
.5
96.9

805.4
—
805.4 $

2014

646.2
2.0
648.2

136.1
.6
136.7

784.9
.2
785.1

CNO FINANCIAL GROUP, INC. - Form 10-K 15

PART I
ITEM 1 Business of CNO

During 2016, we collected annuity premiums of $971.5 million,
or 27 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 interest 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 have been negatively impacted by low
market interest rates in recent periods.

The following describes the major annuity products:

Fixed Index Annuities

These products accounted for $869.3 million, or 24 percent, of
our total premium collections during 2016. 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:

(cid:116) The index to be used.

(cid:116) 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.

(cid:116) The method used to measure the change in the index.

(cid:116) 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.

(cid:116) 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.

(cid:116) 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. In 2016, we began offering a
guaranteed lifetime income annuity, which allows policyholders to
opt to receive a guaranteed income stream for life, without having
to annuitize their policy.

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.

CNO FINANCIAL GROUP, INC. - Form 10-K

Other Fixed Interest Annuities

These products include fixed rate single-premium deferred
annuities (“SPDAs”),
flexible premium deferred annuities
(“FPDAs”) and single-premium immediate annuities (“SPIAs”).
These products accounted for $102.2 million, or 3 percent, of
our total premium collections during 2016, of which SPDAs
and FPDAs comprised $88.2 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:

(cid:116) the interest rate we can earn on invested assets acquired with the

new annuity fund deposits;

(cid:116) the costs related to marketing and maintaining the annuity

products; and

(cid:116) 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.

In 2016, a significant portion of our new annuity sales were “bonus
interest” products. The initial credited rate on these products
generally specifies a bonus crediting rate of up to 0.5 percent 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, 2016,
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 $14.0 million of our total premiums
collected in 2016. SPIAs are designed to provide a series of
periodic payments for a fixed period of time or for life, according

PART I
ITEM 1 Business of CNO

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 6.6 percent at December 31, 2016.

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 on July 1, 2014:

Interest-sensitive life
Traditional life

Total premium collections related to business of CLIC prior to being sold

TOTAL LIFE INSURANCE PREMIUM COLLECTIONS

2016

175.0
18.0
.3
193.3

286.1
11.4
277.5
575.0

768.3

—
—
—
768.3

2015

169.1 $
15.6
.2
184.9

276.9
12.1
259.7
548.7

733.6

—
—
—
733.6 $

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

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 2016, we collected life insurance premiums of
$768.3 million, or 21 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
$193.3 million, or 5 percent, of our total collected premiums in
2016. 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 $575.0 million, or 16 percent, of
our total collected premiums in 2016. 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 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.

Traditional life products also include graded benefit life
insurance products. Graded benefit life products accounted for
$275.9 million, or 8 percent, of our total collected premiums in
2016. 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

CNO FINANCIAL GROUP, INC. - Form 10-K 17

PART I
ITEM 1 Business of CNO

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 $35.8 million of our total collected premiums in 2016.

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 $26.0 billion of assets (at fair value) under
management at December 31, 2016, of which $25.8 billion were
our assets (including investments held by variable interest entities
(“VIEs”) that are included on our consolidated balance sheet)
and $.2 billion were assets managed for third parties. Our general
account investment strategies are to:

5.5 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 manage the equity-based risk component of our fixed index
annuity products by:

(cid:116) purchasing options on equity indices with similar payoff

characteristics; and

(cid:116) provide largely stable investment income from a diversified high

quality fixed income portfolio;

(cid:116) adjusting the participation rate to reflect the change in the cost
of such options (such cost varies based on market conditions).

(cid:116) maximize and maintain a stable spread between our investment

income and the yields we pay on insurance products;

(cid:116) sustain adequate liquidity levels to meet operating cash
requirements, including a margin for potential adverse
developments;

(cid:116) continually monitor and manage the relationship between our
investment portfolio and the financial characteristics of our
insurance liabilities such as durations and cash flows; and

(cid:116) 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, 2016, the average yield,
computed on the cost basis of our fixed maturity portfolio, was

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, among other
factors (such as changes in the credit quality of the issuer). 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, absent other factors, a change in the value of assets
related to changes in interest rates 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, 2016, the estimated duration of our fixed
income securities (as modified to reflect estimated prepayments
and call premiums) and the estimated duration of our insurance
liabilities were approximately 8.0 years and 8.4 years, respectively.

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.

CNO FINANCIAL GROUP, INC. - Form 10-K

In the individual health insurance business, companies compete
primarily on the bases of marketing, service and price. Pursuant to
federal regulations, the Medicare supplement products offered by
all companies have standardized policy features. This increases the
comparability of such policies and intensifies competition based on
other factors. See “Insurance Underwriting” and “Governmental
Regulation” for additional information. In addition to competing
with the products of other insurance companies, commercial
banks, mutual funds and broker dealers, our insurance products
compete with health maintenance organizations, preferred
provider organizations and other health care-related institutions
which provide medical benefits based on contractual agreements.

Our principal competitors vary by product line. Our main
competitors for agent-sold long-term care insurance products
include Northwestern Mutual, Mutual of Omaha, New York Life
and Genworth. 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,
Massachusetts Mutual Life Insurance Company and subsidiaries
of Torchmark Corporation (“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 new premiums of individual long-term care insurance
in the first half of 2016 with a market share of approximately
5 percent, the top eight writers of individual long-term care
insurance had annualized new premiums with a combined market
share of approximately 86 percent during the period. In addition,
while, based on a 2015 Medicare Supplement Loss Ratios report, we
ranked sixth in direct premiums earned for Medicare supplement
insurance in 2015 with a market share of 3.1 percent, the top writer
of Medicare supplement insurance had direct premiums with a
market share of 35 percent during the period.

Most of our major competitors have higher financial strength
ratings than we do. 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

PART I
ITEM 1 Business of CNO

advertising appropriate for Colonial Penn’s campaigns fluctuates
from period to period and will impact the average cost to generate
a TV lead.

We must attract and retain sales representatives to sell our
insurance and annuity products. Strong competition exists
among insurance and financial services companies for sales
representatives. We compete for sales representatives primarily
on the basis of our financial position, financial strength ratings,
support services, compensation, products and product features.
Our competitiveness for such agents also depends upon the
relationships we develop with these agents.

An important competitive factor for life insurance companies
is the ratings they receive from nationally recognized rating
organizations. Agents, insurance brokers and marketing 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 A.M.
Best Company (“A.M. Best”), Fitch Ratings (“Fitch”), S&P Global
Ratings (“S&P”) and Moody’s Investor Services, Inc. (“Moody’s”)
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 February 8, 2017, A.M. Best affirmed the financial strength
ratings of “A-” of our primary insurance subsidiaries and the
outlook for these ratings is stable. The “A-” rating is assigned to
companies that have an excellent 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 three ratings above the “A-” rating of our primary insurance
subsidiaries and twelve ratings that are below that rating.

On January 12, 2017, Fitch affirmed its “BBB+” financial strength
ratings of our primary insurance subsidiaries. The outlook for
these ratings is 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 seven ratings above the “BBB+” rating of our primary
insurance subsidiaries and eleven ratings that are below that rating.

CNO FINANCIAL GROUP, INC. - Form 10-K 19

PART I
ITEM 1 Business of CNO

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.

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
and/or charging higher premiums for substandard risks. We

Liabilities for Insurance Products

may be characteristically unreliable over any great length of time.
Moody’s has twenty-one possible ratings. There are seven ratings
above the “Baa1” rating of our primary insurance subsidiaries and
thirteen ratings that are below that 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.

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.

At December 31, 2016, the total balance of our liabilities for
insurance products was $22.7 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

CNO FINANCIAL GROUP, INC. - Form 10-K

PART I
ITEM 1 Business of CNO

all of 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 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
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 indemnity reinsurance agreements
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, 2016, the policy risk retention limit of our
insurance subsidiaries was generally $.8 million or less. Reinsurance
ceded by CNO represented 13 percent of gross combined life
insurance inforce and reinsurance assumed represented .5 percent
of net combined life insurance inforce. Our principal reinsurers at
December 31, 2016 were as follows (dollars in millions):

Name of Reinsurer
Jackson National Life Insurance Company (“Jackson”)(a)
Wilton Reassurance Company (“Wilton Re”)
RGA Reinsurance Company(b)
Munich American Reassurance Company
Swiss Re Life and Health America Inc.
SCOR Global Life USA Reinsurance Company
All others(c)

Reinsurance receivables Ceded life insurance inforce
755.1
$
$
1,309.0
102.6
476.6
611.0
95.0
254.7
3,604.0

1,482.4
320.2
200.3
3.4
3.0
1.4
249.7
2,260.4

A.M. Best rating
A+
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 $1.1 billion at December 31, 2016.

(b) RGA Reinsurance Company has assumed a portion of the long-term care business of Bankers Life on a coinsurance basis.
(c) 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.

credit in their statutory financial statements for the reinsurance
receivables due from BRe. Such collateral was required to be held in
market value trusts subject to 7% over collateralization, investment
guidelines and periodic true-up provisions. In September 2016, we
terminated the reinsurance agreements with BRe and recaptured
the ceded business as further described in “Management’s
Discussion and Analysis of Consolidated Financial Condition
and Results of Operations - Consolidated Financial Condition
- Termination of Long-Term Care Reinsurance Agreements and
Recapture of Related Long-Term Care Business in Run-off”.
The recapture of this block of business resulted in a reduction in
reinsurance receivables of approximately $500 million in 2016.

CNO FINANCIAL GROUP, INC. - Form 10-K 21

PART I
ITEM 1 Business of CNO

Employees

At December 31, 2016, we had approximately 3,400 full time
employees, including 1,250 employees supporting our Bankers
Life segment, 250 employees supporting our Colonial Penn
segment and 1,900 employees supporting our shared services and

our Washington National, long-term care in run-off and corporate
segments. None of our employees are covered by a collective
bargaining agreement. We believe that we have good relations
with our employees.

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:

(cid:116) grant and revoke business licenses;

(cid:116) regulate and supervise sales practices and market conduct;

(cid:116) establish guaranty associations;

(cid:116) license agents;

(cid:116) approve policy forms;

(cid:116) approve premium rates and premium rate increases for some lines
of business such as long-term care and Medicare supplement;

(cid:116) establish reserve requirements;

(cid:116) prescribe the form and content of required financial statements

and reports;

(cid:116) determine the reasonableness and adequacy of statutory capital

and surplus;

(cid:116) perform financial, market conduct and other examinations;

(cid:116) define acceptable accounting principles; and

(cid:116) 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:

(cid:116) reserve requirements;

(cid:116) risk-based capital (“RBC”) standards;

(cid:116) codification of insurance accounting principles;

(cid:116) investment restrictions;

(cid:116) restrictions on an insurance company’s ability to pay dividends;

(cid:116) credit for reinsurance; and

(cid:116) 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

CNO FINANCIAL GROUP, INC. - Form 10-K

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 coordinated under the direction
of the lead state and typically include all insurers operating in a
holding company system pursuant to guidelines promulgated by
the NAIC.

The NAIC has developed a principle-based reserving approach
which will replace the current formulaic approach to determining
policy reserves with an approach that more closely reflects the
risks of the products. The principle-based approach will become
effective on January 1, 2017, and there is a three-year transition
period where the approach is optional until it is required to be
applied. The new approach will impact the financial statements
of our insurance subsidiaries prepared under statutory accounting
principles prescribed or permitted by regulatory authorities.
Certain states, such as New York, have not yet adopted the new
approach. The Company is reviewing the application of the new
approach to its reserves.

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.

The NAIC has adopted the Risk Management and Own Risk
and Solvency Assessment Model Act (“ORSA”), which has
been enacted by each of our insurance subsidiaries’ domiciliary
states. 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 have submitted our
ORSA summary reports in 2015 and 2016.

The NAIC has adopted the Corporate Governance Annual
Disclosure Model Act (“CGAD”), which has been enacted by our
lead state insurance regulator. CGAD requires an annual filing
by an insurer or insurance group that provides a detailed narrative
and sample documentation on corporate governance structure
and policies and practices. We submitted our first CGAD filing
in 2016.

The NAIC is expected to adopt a model law governing
cybersecurity consumer protections in 2017 with enactment by
states thereafter. The earliest effective date is expected to be in
2018. In addition, the New York Department of Financial Services
has a new cybersecurity regulation expected to be effective
March 1, 2017, which includes transitional phase-in periods up
to two years.

Insurance Holding Company Regulations

All U.S. jurisdictions in which our insurers conduct business,
except the Virgin Islands, 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.

All U.S. jurisdictions in which our insurers conduct business, except
the Virgin Islands, have also enacted legislation or 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

PART I
ITEM 1 Business of CNO

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 some states,
the lesser of:

(cid:116) statutory net gain from operations or statutory net income for

the prior year; or

(cid:116) 10 percent of statutory capital and surplus at the end of the

preceding year.

If an insurance company has negative earned surplus, any
dividend payments require the prior 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, except pursuant to agreements with
affiliates that have been approved, 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.

Insurance regulations require an annual enterprise risk report that
identifies the material risks within the insurance holding company
system that could pose enterprise risk to the insurer and which
must be submitted to insurance regulators as required. We have
submitted our enterprise risk reports in 2015 and 2016.

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-term care business is guaranteed renewable, and, if

CNO FINANCIAL GROUP, INC. - Form 10-K 23

PART I
ITEM 1 Business of CNO

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:

(cid:116) between the current year and the prior year; and

(cid:116) 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 to the regulatory authority proposing
corrective actions aimed at improving its capital position. The 2016
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 is working to develop a group capital measure to be
utilized as an analytical tool to supplement the existing holding
company analysis as opposed to a capital standard. The measure
is expected to be based on the aggregation of existing regulatory
capital calculations for all entities within the insurance holding
company system.

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, 2016.

Other Federal and State 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 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.

CNO FINANCIAL GROUP, INC. - Form 10-K

PART I
ITEM 1 Business of CNO

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 and our
other investment advisory subsidiary 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.

Broker-Dealer and Securities Regulation

We have a broker-dealer subsidiary that is registered under the
Securities Exchange Act of 1934 and is subject to federal and
state regulation, including, but not limited to, the Financial
Industry Regulatory Authority (“FINRA”). Agents and employees
registered or associated with our broker-dealer subsidiary are
subject to the Securities Exchange Act of 1934 and to examination
requirements and regulation by the SEC, FINRA and state
securities commissioners. The SEC and other governmental
agencies, as well as state securities commissions in the U.S.,
have the power to conduct administrative proceedings that can
result in censure, fines, the issuance of cease-and-desist orders or
suspension and termination or limitation of the activities of the
regulated entity or its employees.

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 anti-money laundering (“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 April 2016, the U.S. Department of Labor (“DOL”) issued a
final regulation that expands the range of activities considered to
be fiduciary investment advice under the Employee Retirement
Income Security Act of 1974 and the Internal Revenue Code (the
“Code”). The DOL also issued a new “best interest contract”
prohibited transaction exemption regarding how such advice
can be provided to retirement investors. These regulations
focus in large part on conflicts of interest related to investment
financial advisors, registered
recommendations made by
investment advisors, insurance agents and other investment
professionals to retirement investors, how financial advisors are
able to discuss IRA rollovers, as well as how financial advisors and
affiliates can transact with retirement investors. These regulations
will impact primarily our Bankers Life segment. Implementation
of these new regulations will be phased in beginning in April
2017 with the regulations in full effect by January 1, 2018.
CNO and its advisors have spent considerable time analyzing the
potential effect of the regulations on our business and identifying
actions to be taken in order to comply with the regulations. We
have determined that we will utilize the best interest contract
exemption. Transaction compensation will continue to be paid
for covered products and additional compensation impacts are
currently under review. We currently expect the implementation
expenses associated with the DOL regulations to be in the range
of $8 million to $10 million in 2017, with annual expenses
thereafter expected to be approximately $2 million. President
Trump has issued a Presidential Memorandum requiring the
DOL to re-examine these regulations. Such examination may
result in a delay in the effective date of the rule or the regulation
may be modified, repealed or replaced. At this time, our current
implementation strategy is continuing, which will allow us to be
in compliance with the current regulations.

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 Code and is
generally followed in all states and other United States taxing
jurisdictions.

CNO FINANCIAL GROUP, INC. - Form 10-K 25

PART I
ITEM 1A Risk Factors

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
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, 2016, 2015 and 2014, 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.

ITEM 1A. Risk Factors.

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 (as it is our policy to immediately recognize
changes in assumptions used to determine this liability).

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, 2016 (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 2016, we completed a comprehensive
review of interest rate assumptions on all of our products. 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 current projections assume new money rates
ranging from 4.90 percent to 5.67 percent for one year (previously
ranged from 4.74 percent to 5.51 percent) and then grade over
6 years from these levels to an ultimate new money rate ranging
from 5.73 percent to 6.50 percent (unchanged from the prior
year), depending on the specific product. While subject to many
uncertainties, we believe our assumptions for future new money
rates are reasonable.

We have established deficiency reserves for the life contingent
payout annuities in the Colonial Penn and Washington National
segments and for the long-term care block in run-off. Accordingly,
these blocks of business are not expected to generate future profits
and any future unfavorable changes to our assumptions will reduce
earnings in the period such changes occur.

The following hypothetical scenarios illustrate the sensitivity of
changes in interest rates to our products:

(cid:116) The first hypothetical scenario assumes immediate and permanent
reductions to current interest rate spreads on interest-sensitive
products. We estimate that a pre-tax charge of approximately $35
million would occur if assumed spreads related to our interest-
sensitive life and annuity products immediately and permanently
decreased by 10 basis points.

Fixed interest and fixed
index annuities
.3
35.3
1,018.8
2,406.4
882.3
3,866.2
8,209.3

Universal
life
14.4
288.6
50.0
196.0
18.5
297.3
864.8

Total
14.7
323.9
1,068.8
2,602.4
900.8
4,163.5
9,074.1

1.91%

2.91%

2.01%

(cid:116) A second scenario assumes that new money rates remain at their
current level indefinitely. We estimate that this scenario would
result in a pre-tax charge of approximately $20 million related
to an increase in deficiency reserves related to the long-term care
block in run-off and life contingent payout annuities.

(cid:116) The third hypothetical scenario assumes current new money rates
increase such that our current portfolio yield remains level. We
estimate that this scenario would result in a pre-tax charge of
approximately $15 million related to an increase in deficiency
reserves related to the long-term care in run-off block and life
contingent payout annuities.

While we expect the long-term care business in our Bankers Life
segment 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 2016 comprehensive actuarial
review of this long-term care business indicated margins have
increased by $140 million in 2016 to approximately $320 million,
or approximately 7 percent of related insurance liabilities net of
insurance intangibles. Given the concentration of exposure to
interest rates in this block of business, we modeled the following
additional hypothetical scenarios to illustrate the sensitivity of
additional changes in interest rates on long-term care products in
the Bankers Life segment:

(cid:116) One scenario assumes that the new money rates available to invest
cash flows from our long-term care block in the Bankers Life
segment remain at their current level of 5.42 percent indefinitely.
This scenario would reduce margins by approximately
$110 million but would not result in a charge because margins
would continue to be positive (based on our 2016 comprehensive
actuarial review).

(cid:116) An additional scenario assumes that current new money rates
available to invest cash flows from our long-term care block in
the Bankers Life segment immediately decrease to approximately
3.5 percent and remain at that level indefinitely. This scenario
would reduce margins in this block by approximately $405 million
and would result in a pre-tax charge of approximately $85 million
(based on our 2016 comprehensive actuarial review).

CNO FINANCIAL GROUP, INC. - Form 10-K 27

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.

A long-term care reinsurance transaction could
adversely impact our financial position, results of
operations and/or cash flows.

We have previously disclosed that our strategic priorities include a
reduction of our relative long-term care exposure. To achieve this
goal, it is likely that we will need to transfer the risks of a portion
of this business through one or more reinsurance transactions. A
substantial ceding commission could be paid by the Company
to transfer long-term care risk through reinsurance, depending
on the specific types of risks and amounts ceded. The long-
term care business written after 2007 has positive margins. The
comprehensive and home health care long-term care business
written before 2007 has negative margins and would likely require
the payment of a significant ceding commission in a reinsurance
transaction. The payment of a ceding commission by the Company
would likely result in the recognition of a loss upon the completion
of a reinsurance transaction. Due to our current tax position, it is
likely that a portion of the tax benefit recognized on the loss would
not be realized and we may be required to increase our valuation
allowance for deferred tax assets. Although we believe reducing
our exposure to the risk of long-term care business through
reinsurance would benefit the Company in the long term, such a
transaction could initially adversely impact certain aspects of our
financial position, results of operations and/or cash flow, including
the cash available to repurchase shares of our common stock.

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

CNO FINANCIAL GROUP, INC. - Form 10-K

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:

(cid:116) 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.

(cid:116) 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.
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.

(cid:116) 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 135.0 percent in 2016, 139.2 percent in 2015 and
129.7 percent in 2014.

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

PART I
ITEM 1A Risk Factors

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
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,

CNO FINANCIAL GROUP, INC. - Form 10-K 29

PART I
ITEM 1A Risk Factors

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 $636.1 million, $669.0 million and $656.0 million in 2016,
2015 and 2014, respectively. The benefit ratios for our long-term
care products in our Bankers Life segment were 135.0 percent,
139.2 percent and 129.7 percent in 2016, 2015 and 2014,
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.

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.”

CNO FINANCIAL GROUP, INC. - Form 10-K

Our operating results may 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, 2016, approximately
23 percent of our total insurance liabilities, or approximately
$5.2 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
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, 2016, the vast
majority of our products with contractual guaranteed minimum
rates had crediting rates set at the minimum. In addition,
approximately 23 percent of our insurance liabilities were subject
to interest rates that may be reset annually; 51 percent had a fixed
explicit interest rate for the duration of the contract; 24 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, 2016, the estimated durations of our fixed income
securities (as modified to reflect estimated prepayments and call
premiums) and insurance liabilities were approximately 8.0 years
and 8.4 years, respectively. 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 $365 million if interest rates were to increase by
10 percent from rates as of December 31, 2016. 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.

We use derivatives in an effort to hedge higher potential returns
to our fixed index annuity policyholders based on the increase in
the value of a particular index. For derivative positions we hold
that are in-the-money, we are exposed to credit risk in the event of
default of our counterparty.

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 eligible collateral or repay
all or a portion of the investment borrowings.

PART I
ITEM 1A Risk Factors

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,
2016, our reinsurance receivables and ceded life insurance inforce
totaled $2.3 billion and $3.6 billion, respectively. Our six largest
reinsurers accounted for 93 percent of our ceded life insurance
inforce. 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 (Washington National and BCLIC)
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 was focused on
specialized insurance including long-term care. BRe is a reinsurer
that is not licensed or accredited by the states of domicile (Indiana
and New York, respectively) 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 was required to provide
collateral which meets the regulatory requirements of the states
of domicile in order for our insurance subsidiaries to obtain full
credit in their statutory financial statements for the reinsurance
receivables due from BRe. Such collateral was held in market value
trusts subject to 7% over collateralization, investment guidelines
and periodic true-up provisions. In September 2016, we terminated
the reinsurance agreements with BRe and recaptured the ceded
business as further described in “Management’s Discussion
and Analysis of Consolidated Financial Condition and Results
of Operations - Consolidated Financial Condition - Termination
of Long-Term Care Reinsurance Agreements and Recapture of
Related Long-Term Care Business in Run-off”.

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 and our liquidity.

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:

(cid:116) 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”;

(cid:116) changes in patterns of relative liquidity in the capital markets for

various asset classes;

CNO FINANCIAL GROUP, INC. - Form 10-K 31

PART I
ITEM 1A Risk Factors

(cid:116) 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 16 percent of the cost basis of
our available for sale fixed maturity investments as of December
31, 2016; and

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.

(cid:116) changes in the estimated timing of receipt of cash flows. For
example, our structured securities, which comprised 26 percent of
our available for sale fixed maturity investments at December 31,
2016, 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: $32.3 million in
2016 ($35.9 million, prior to the $3.6 million of impairment losses
recognized through accumulated other comprehensive income);
$39.9 million in 2015 ($42.9 million, prior to the $3.0 million
of impairment losses recognized through accumulated other
comprehensive income); and $27.3 million in 2014. 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 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.

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 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 changes
in our ongoing assessments which may impact the level of 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 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, 2016 and 2015, our total unrealized net
investment gains before adjustments for insurance intangibles and
deferred income taxes were $1.3 billion and $.9 billion, respectively.

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.

CNO FINANCIAL GROUP, INC. - Form 10-K

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 required to comply with statutory
accounting principles (“SAP”). SAP (including principles that
impact the calculation of RBC and our insurance liabilities) are
subject to continued review by the NAIC in an effort to address
emerging issues and improve financial reporting. Various proposals
are currently being considered by the NAIC, some of which, if
enacted, would negatively impact our insurance subsidiaries.

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 2016 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.

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, if applicable.

PART I
ITEM 1A Risk Factors

Our broker-dealer and investment advisor subsidiaries are subject
to regulation and supervision by the SEC, FINRA and certain
state regulatory bodies. The SEC, FINRA and other governmental
agencies, as well as state securities commissions, may examine or
investigate the activities of broker-dealers and investment advisors.
These examinations or investigations often focus on the activities
of the registered representatives and registered investment
advisors doing business through such entities and the entities’
supervision of those persons. It is possible that any examination
or investigation could lead to enforcement action by the regulator
and/or may result in payments of fines and penalties, payments to
customers, or both, as well as changes in systems or procedures of
such entities, any of which could have a material adverse effect on
the Company’s financial condition or results of operations.

Furthermore, the SEC is reviewing the standard of conduct
applicable to brokers, dealers and investment advisors when those
entities provide personalized investment advice about securities to
retail customers. FINRA has also issued a report addressing how
its member firms might identify and address conflicts of interest
including conflicts related to the introduction of new products and
services and the compensation of the member firms’ associated
persons. These regulatory initiatives could have an impact on
Company operations and the manner in which broker-dealers and
investment advisors distribute the Company’s products.

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

CNO FINANCIAL GROUP, INC. - Form 10-K 33

PART I
ITEM 1A Risk Factors

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, 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

CNO FINANCIAL GROUP, INC. - Form 10-K

and information technology and policyholder service providers)
to comply with our services agreements. The associates and
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.

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. Depending on the nature of the information
compromised, in the event of a data breach or other unauthorized
access to our customer data, we may also have obligations to notify
customers about the incident and we may need to provide some
form of remedy, such as a subscription to a credit monitoring
service, for the individuals affected by the incident. A growing
number of legislative and regulatory bodies have adopted consumer
notification requirements in the event of unauthorized access
to or acquisition of certain types of personal data. Such breach
notification laws continue to evolve and may be inconsistent from
one jurisdiction to another. Complying with these obligations
could cause us to incur substantial costs (including fines) and
could increase negative publicity surrounding any incident that
compromises customer data. While we maintain insurance
coverage that, subject to policy terms and conditions and a self-
insured retention, is designed to address certain aspects of cyber
risks, such insurance coverage may be insufficient to cover all
losses or all types of claims that may arise in the continually
evolving area of cyber risk.

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.

PART I
ITEM 1A Risk Factors

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 which may restrict
our ability to take advantage of business, strategic or
financing opportunities.

As of December 31, 2016, we had an aggregate principal amount of
indebtedness of $925.0 million. CNO’s indebtedness will require
approximately $44 million in cash to service in 2017 (based on
the principal amounts outstanding and applicable interest rates
as of December 31, 2016). Our substantial indebtedness and the
obligations under our debt agreements may restrict our ability to
take advantage of business, strategic or financing opportunities.

In conjunction with the refinancing of its existing debt in 2015,
the Company entered into a $150.0 million four-year unsecured
revolving credit agreement (the “Revolving Credit Agreement”)
on May 19, 2015, and made an initial drawing of $100.0 million,
resulting in $50.0 million available for additional borrowings. The
Revolving Credit Agreement matures on May 19, 2019. On May 19,
2015, the Company also issued $325.0 million aggregate principal
amount of 4.500% Senior Notes due 2020 (the “2020 Notes”)
and $500.0 million aggregate principal amount of 5.250% Senior
Notes due 2025 (together with the 2020 Notes, the “Notes”).
The Revolving 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 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 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 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 Revolving 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.

CNO FINANCIAL GROUP, INC. - Form 10-K 35

PART I
ITEM 1A Risk Factors

The Revolving Credit Agreement and the Indenture
for the 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 Revolving Credit
Agreement and the Notes to be due and payable.

Pursuant to the Revolving 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 may be affected by events
beyond our control. There are several conditions or circumstances
that could lead to an event of default under the Revolving Credit
Agreement, as described below.

The Revolving Credit Agreement contains certain financial,
affirmative and negative covenants. The negative covenants in
the Revolving Credit Agreement include restrictions that relate to,
among other things and subject to customary baskets, exceptions
and limitations for facilities of this type:

(cid:116) subsidiary debt;

(cid:116) liens;

(cid:116) restrictive agreements;

(cid:116) restricted payments during the continuance of an event of default;

(cid:116) disposition of assets and sale and leaseback transactions;

(cid:116) transactions with affiliates;

(cid:116) change in business;

(cid:116) fundamental changes;

(cid:116) modification of certain agreements; and

(cid:116) changes to fiscal year.

The Revolving Credit Agreement requires the Company to
maintain (each as calculated in accordance with the Revolving
Credit Agreement): (i) a debt to total capitalization ratio of not
more than 30.0 percent (such ratio was 19.4 percent at December
31, 2016); (ii) 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 estimated to be 459 percent at December 31, 2016); and
(iii) a minimum consolidated net worth of not less than the sum
of (x) $2,674 million plus (y) 50.0% of the net equity proceeds
received by the Company from the issuance and sale of equity
interests in the Company (the Company’s consolidated net worth
was $3,864.5 million at December 31, 2016 compared to the
minimum requirement of $2,680.8 million).

The Revolving Credit Agreement provides for customary events
of default (subject in certain cases to customary grace and cure
periods), which include, without limitation, the following:

(cid:116) non-payment;

(cid:116) breach of representations, warranties or covenants;

(cid:116) cross-default and cross-acceleration;

CNO FINANCIAL GROUP, INC. - Form 10-K

(cid:116) bankruptcy and insolvency events;

(cid:116) judgment defaults;

(cid:116) actual or asserted invalidity of documentation with respect to the

Revolving Credit Agreement;

(cid:116) change of control; and

(cid:116) customary ERISA defaults.

If an event of default under the Revolving Credit Agreement
occurs and is continuing, the Agent may accelerate the amounts
and terminate all commitments outstanding under the Revolving
Credit Agreement.

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 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 Revolving Credit
Agreement elect to accelerate the amounts due, the holders of the
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.

The Indenture contains covenants that restrict the Company’s
ability, with certain exceptions, to:

(cid:116) incur certain subsidiary indebtedness without also guaranteeing

the Notes;

(cid:116) create liens;

(cid:116) enter into sale and leaseback transactions;

(cid:116) issue, sell, transfer or otherwise dispose of any shares of capital
stock of any Insurance Subsidiary (as defined in the Indenture);
and

(cid:116) consolidate or merge with or into other companies or transfer all

or substantially all of the Company’s assets.

The 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 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, Wilmington
Trust, National Association or holders of at least 25% in principal
amount of the then outstanding Notes may declare the principal of
and accrued but unpaid interest, including any additional interest,
on all of the Notes to be due and payable.

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 unsecured 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 unsecured debt ratings, as

well as conditions in the credit markets generally, could restrict
our access to such capital and adversely affect its cost. Disruptions,
volatility and uncertainty in the financial markets, and our below
investment grade rating could limit our ability to access external
capital markets at times and on terms which allow us to meet
our capital and liquidity needs. See “Management’s Discussion
and Analysis of Financial Condition and Results of Operations-
Liquidity of the Holding Companies” for more information.

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, Inc. (“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 some states, the lesser of):

(cid:116) statutory net gain from operations or statutory net income for

the prior year, or

(cid:116) 10 percent of statutory capital and surplus as of the end of the

preceding year.

PART I
ITEM 1A Risk Factors

However, as each of the immediate insurance subsidiaries of
CDOC has negative earned surplus, any dividend payments from
the insurance subsidiaries to CNO require the prior approval of
the director or commissioner of the applicable state insurance
department. In 2016, our insurance subsidiaries paid dividends
of $274.3 million to CDOC. 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 Conseco Life Insurance
Company of Texas (“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 400 percent at December 31, 2016. 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 the RBC compliance
requirements under the Revolving Credit Agreement. CNO made
$200.0 million of capital contributions to its insurance subsidiaries
in 2016 as further described in “Management’s Discussion and
Analysis of Consolidated Financial Condition and Results of
Operations - Consolidated Financial Condition - Termination
of Long-Term Care Reinsurance Agreements and Recapture of
Related Long-Term Care Business in Run-off”.

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 which were subsequently remediated. We have emphasized

CNO FINANCIAL GROUP, INC. - Form 10-K 37

PART I
ITEM 1A Risk Factors

the
importance of performing and reviewing calculations
consistent with the design of our internal control structure in an
effort to ensure controls operate effectively.

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
Revolving Credit Agreement.

As of December 31, 2016, we had approximately $2.5 billion of
federal tax NOLs resulting in deferred tax assets of approximately
$.9 billion, expiring in years 2023 through 2034. 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, 2016, 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

CNO FINANCIAL GROUP, INC. - Form 10-K

protect against the possibility of triggering an ownership change
under Section 382, CNO’s shareholders approved in May 2010 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. CNO’s shareholders approved
amendments and extensions of the Original Section 382 Charter
Amendment in May 2013 and in May 2016 (the “2016 Section
382 Charter Amendment”). The 2016 Section 382 Charter
Amendment became effective July 31, 2016 and is scheduled to
expire on July 31, 2019.

See the note to the consolidated financial statements entitled
“Income Taxes” for further information regarding the Amended
Section 382 Rights Agreement, the 2016 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 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 (1.68 percent at December 31, 2016), and the
annual restriction could 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
Revolving 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, 2016, we had net deferred tax assets of
$785.6 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 carryforwards 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 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, 2016
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. A decrease in the Federal corporate income tax rate

to 15 percent would result in an immediate writedown of our
deferred income tax assets of approximately $450 million based on
the December 31, 2016 balances (or approximately $112 million
reduction in the balance for each 5 percentage point decrease
in the tax rate). The entire impact of the rate change would be
recorded through net income, including the impact of a rate
change on the taxes on accumulated other comprehensive income
which has the impact of reducing the charge by approximately
$200 million based on December 31, 2016 balances. A decrease
in the Federal corporate income tax rate to 15 percent would also
result in a decrease to the statutory capital and surplus of our
insurance subsidiaries of approximately $115 million due to a
decrease in admissible deferred taxes based on December 31, 2016
balances. Such decrease in statutory capital could result in the need
to contribute additional capital to our insurance subsidiaries in
order to maintain current RBC ratios. A reduction in the Federal
corporate income tax rate would have no impact on the tax we
pay on non-life income during the time our non-life net operating
loss carryforwards remain available. However, a reduction in the
Federal corporate income tax rate will have a positive impact on the
future cash flows of our insurance subsidiaries. During the period
our non-life net operating loss carryforwards remain available and
assuming a decrease in the Federal corporate income tax rate to
15 percent, our insurance subsidiaries would pay tax at a rate of
9.75 percent compared to the current rate of 22.75 percent.

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

PART I
ITEM 1A Risk Factors

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.

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, Fitch, S&P and Moody’s are “A-”,
“BBB+”, “BBB+” and “Baa1”, respectively. A.M. Best has sixteen
possible ratings. There are three ratings above our “A-” rating
and twelve ratings that are below our rating. Fitch has nineteen
possible ratings. There are seven ratings above our “BBB+” 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. Moody’s
has twenty-one possible ratings. There are seven ratings above
our “Baa1” rating and thirteen 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.

CNO FINANCIAL GROUP, INC. - Form 10-K 39

PART I
ITEM 1A Risk Factors

Our principal competitors vary by product line. Our main
competitors for agent-sold long-term care insurance products
include Northwestern Mutual, Mutual of Omaha, New York Life
and Genworth. 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, Massachusetts Mutual Life Insurance Company 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 new premiums of individual long-
term care insurance in the first half of 2016 with a market share
of approximately 5 percent, the top eight writers of individual
long-term care insurance had annualized new premiums with a
combined market share of approximately 86 percent during the
period. In addition, while, based on a 2015 Medicare Supplement
Loss Ratios report, we ranked sixth in direct premiums earned for
Medicare supplement insurance in 2015 with a market share of 3.1
percent, the top writer of Medicare supplement insurance had direct
premiums with a market share of 35 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.

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

CNO FINANCIAL GROUP, INC. - Form 10-K

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,
financial services companies and other entities 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. In recent periods,
our Bankers Life segment has faced challenges in retaining new
agents, which has impacted sales of its products.

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.

In April 2016, the DOL issued a final regulation that expands the
range of activities considered to be fiduciary investment advice
under the Employee Retirement Income Security Act of 1974 and

the Code. The DOL also issued a new “best interest contract”
prohibited transaction exemption regarding how such advice can
be provided to retirement investors. These regulations focus in large
part on conflicts of interest related to investment recommendations
made by financial advisors, registered investment advisors, insurance
agents and other investment professionals to retirement investors,
how financial advisors are able to discuss IRA rollovers, as well as
how financial advisors and affiliates can transact with retirement
investors. These regulations will impact primarily our Bankers Life
segment. Implementation of these new regulations will be phased in
beginning in April 2017 with the regulations in full effect by January
1, 2018. CNO and its advisors have spent considerable time analyzing
the potential effect of the regulations on our business and identifying
actions to be taken in order to comply with the regulations. We have
determined that we will utilize the best interest contract exemption.
Transaction compensation will continue to be paid for covered
products and additional compensation impacts are currently under
review. We currently expect the implementation expenses associated
with the DOL regulations to be in the range of $8 million to
$10 million in 2017, with annual expenses thereafter expected to be
approximately $2 million. President Trump has issued a Presidential
Memorandum requiring the DOL to re-examine these regulations.
Such examination may result in a delay in the effective date of the
rule or the regulation may be modified, repealed or replaced. At this
time, our current implementation strategy is continuing, which will
allow us to be in compliance with the current regulations.

The NAIC has developed a principle-based reserving approach
which will replace the current formulaic approach to determining
policy reserves with an approach that more closely reflects the risks
of the products. The principle-based approach will become effective
on January 1, 2017, and there is a three-year transition period where
the approach is optional until it is required to be applied. The new
approach will impact the financial statements of our insurance
subsidiaries prepared under
statutory accounting principles
prescribed or permitted by regulatory authorities. Certain states, such
as New York, have not yet adopted the new approach. The Company
is reviewing the application of the new approach to its reserves.

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
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

PART I
ITEM 1A Risk Factors

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.

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.

CNO FINANCIAL GROUP, INC. - Form 10-K 41

PART I
ITEM 3. Legal Proceedings

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 five buildings on the campus
with approximately 430,000 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 303 sales offices in
various states totaling approximately 940,000 square feet. These
leases generally are short-term in length, with remaining lease
terms expiring between 2017 and 2023.

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) With CNO Since
Bruce Baude, 52

2012

Gary C. Bhojwani, 49

2016

Edward J. Bonach, 62

2007

Erik M. Helding, 44

2004

Eric R. Johnson, 56

1997

John R. Kline, 59

1990

Susan L. Menzel, 51
Christopher J. Nickele, 60

2005
2005

Matthew J. Zimpfer, 49

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.
Since April 2016, president of CNO. From April 2015 until joining CNO, chief executive officer
of GCB, LLC, an insurance and financial services consulting company that he founded. Mr.
Bhojwani served as a member of the board of management at Allianz SE, Chairman of Allianz of
America, Allianz Life Insurance Company, and Fireman’s Fund Insurance Company from 2012 to
January 1, 2015. From 2007 to 2012, he served as president of Allianz Life Insurance Company of
North America.
Since October 2011, chief executive officer. From May 2007 to January 2012, chief financial officer of
CNO.
Since April 2016, executive vice president and chief financial officer. From August 2012 to April
2016, senior vice president, treasury and investor relations. Prior to August 2012, Mr. Helding
was vice president, financial planning and analysis and he has held various finance positions since
joining CNO in 2004.
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 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 43

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, 2015.

Period
2015:

First Quarter
Second Quarter
Third Quarter
Fourth Quarter

2016:

First Quarter
Second Quarter
Third Quarter
Fourth Quarter

Market price
High

Dividends declared
and paid

Low

17.53 $
19.49
19.28
20.88

18.71 $
20.55
18.70
19.89

14.89
16.88
16.06
17.93

14.66
16.00
14.30
14.65

0.06
0.07
0.07
0.07

0.07
0.08
0.08
0.08

As of February 9, 2017, there were approximately 20,000 holders
of the outstanding shares of common stock, including individual
participants in securities position listings.

dividends, our Board of Directors takes into consideration our
financial condition, including current and expected earnings and
projected cash flows.

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

Performance Graph

The performance graph below compares CNO’s cumulative
total shareholder return on its common stock for the period
from December 31, 2011 through December 31, 2016 with the
cumulative total return of the Standard & Poor’s 500 Composite
Stock Price Index (the “S&P 500 Index”), the Standard & Poor’s
Life and Health Insurance Index (the “S&P Life and Health
Insurance Index”) and the Standard & Poor’s MidCap 400 Index
(the “S&P MidCap 400 Index”). The comparison for each of the

periods assumes that $100 was invested on December 31, 2011 in
each of CNO common stock, the stocks included in the S&P 500
Index, the stocks included in the S&P Life and Health Insurance
Index and the stocks included in the S&P MidCap 400 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, the S&P Life & Health Insurance Index, and the S&P MidCap 400 Index

$350

$300

$250

$200

$150

$100

$50

$-
12/11

12/12

12/13

12/14

12/15

12/16

CNO Financial Group, Inc.

S&P 500

S&P Life & Health Insurance

S&P MidCap 400

$100 invested on 12/31/11 in stock or index, including reinvestment of dividends.

CNO Financial Group, Inc.
S&P 500 Index
S&P Life & Health Insurance Index
S&P MidCap 400 Index

12/11
100.00 $
100.00
100.00
100.00

12/12
148.93 $
116.00
114.59
117.88

12/13
284.65 $
153.57
187.33
157.37

12/14
280.92 $
174.60
190.98
172.74

12/15
316.09
177.01
178.93
168.98

12/16
322.60
198.18
223.41
204.03

Issuer Purchases of Equity Securities

Period (in 2016)
October 1 through October 31
November 1 through November 30
December 1 through December 31

TOTAL

Total number
of shares
(or units)

— $
276
936
1,212

Average price
paid per share
(or unit)
—
15.06
19.56
18.54

Total number of shares
(or units) purchased as
part of publicly announced
plans or programs
—
—
—
—

Maximum number (or approximate dollar
value) of shares (or units) that may yet be
purchased under the plans or programs(a)
(dollars in millions)
252.7
252.7
252.7
252.7

(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,
November 2014 and November 2015, the Company’s Board of Directors approved, in aggregate, an additional $1,600.0 million to repurchase the Company’s
outstanding securities.

CNO FINANCIAL GROUP, INC. - Form 10-K 45

PART II
ITEM 6 Selected Consolidated Financial Data

Equity Compensation Plan Information

The following table summarizes information, as of December 31, 2016, 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
14.73
—
14.73

Number of securities remaining
available for future issuance under
equity compensation plans (excluding
securities reflected in first column)
4,620,199
—
4,620,199

5,353,758 $

—

5,353,758 $

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 (losses)
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,

2016

2015

2014

2013

2012

2,601.1
1,325.2
8.3
3,985.1
116.4
3,631.9
353.2
(5.0)
358.2

2.03
2.01
.31
25.82
176.6
178.3
173.8

26,237.6
31,975.2
912.9
27,488.3
4,486.9

1,956.8
253.3
2,210.1

2,556.0
1,233.6
(36.6)
3,811.9
94.9
3,444.2
367.7
97.0
270.7

1.40
1.39
.27
22.49
193.1
195.2
184.0

24,487.1
31,125.1
911.1
26,986.6
4,138.5

1,739.2
196.9
1,936.1

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
31,155.9
780.3
26,467.7
4,688.2

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
34,750.2
838.0
29,795.0
4,955.2

1,654.4
203.1
1,857.5

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
34,103.7
986.1
29,054.4
5,049.3

1,560.4
222.2
1,782.6

(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, 2016, 2015 and 2014 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,” “guidance,” “outlook” 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:

(cid:116)(cid:1) 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;

(cid:116) 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;

(cid:116) general economic, market and political conditions and uncertainties,
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;

(cid:116) the ultimate outcome of lawsuits filed against us and other legal

and regulatory proceedings to which we are subject;

(cid:116) our ability to make anticipated changes to certain non-guaranteed

elements of our life insurance products;

(cid:116)(cid:1) our ability to obtain adequate and timely rate increases on our

health products, including our long-term care business;

(cid:116) the receipt of any required regulatory approvals for dividend
and surplus debenture interest payments from our insurance
subsidiaries;

(cid:116) 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;

(cid:116) changes in our assumptions related to deferred acquisition costs

or the present value of future profits;

(cid:116) the recoverability of our deferred tax assets and the effect of
potential ownership changes and tax rate changes on their value;

(cid:116) our assumption that the positions we take on our tax return

filings will not be successfully challenged by the IRS;

(cid:116) changes in accounting principles and the interpretation thereof;

(cid:116) our ability to continue to satisfy the financial ratio and balance

requirements and other covenants of our debt agreements;

(cid:116) 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;

(cid:116) performance and valuation of our investments, including the
impact of realized losses (including other-than-temporary
impairment charges);

(cid:116) 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;

(cid:116) our ability to generate sufficient liquidity to meet our debt

service obligations and other cash needs;

(cid:116) our ability to maintain effective controls over financial reporting;

(cid:116) our ability to continue to recruit and retain productive agents

and distribution partners;

CNO FINANCIAL GROUP, INC. - Form 10-K 47

PART II
ITEM 7 Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations

(cid:116) customer response to new products, distribution channels and

marketing initiatives;

(cid:116) 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;

(cid:116) 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;

(cid:116) 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;

(cid:116) availability and effectiveness of reinsurance arrangements, as

well as any defaults or failure of reinsurers to perform;

(cid:116) the amount we may need to pay to a reinsurer in connection

with a long-term care reinsurance transaction;

(cid:116) the performance of third party service providers and potential

difficulties arising from outsourcing arrangements;

(cid:116) the growth rate of sales, collected premiums, annuity deposits

and assets;

Overview

(cid:116) interruption in telecommunication, information technology or
other operational systems or failure to maintain the security,
confidentiality or privacy of sensitive data on such systems;

(cid:116) events of terrorism, cyber attacks, natural disasters or other
catastrophic events, including losses from a disease pandemic;

(cid:116) ineffectiveness of risk management policies and procedures in

identifying, monitoring and managing risks; and

(cid:116) 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.

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.

We measure segment performance by excluding the loss on
the sale of a subsidiary, gain (loss) on reinsurance transactions
and transition expenses, the earnings of CLIC prior to being
sold on July 1, 2014, net realized investment gains (losses), fair
value changes in embedded derivative liabilities (net of related
amortization), fair value changes and amendment related to the
agent deferred compensation plan, loss on extinguishment or
modification of debt, income taxes and other non-operating items
consisting primarily of equity in earnings of certain non-strategic
investments and earnings attributable to VIEs (“pre-tax operating
earnings”) because we believe that this performance measure is a
better indicator of the ongoing business and trends in our business.

Our primary investment focus is on investment income to support
our liabilities for insurance products as opposed to the generation
of net realized investment gains (losses), and a long-term focus is
necessary to maintain profitability over the life of the business.

The loss on the sale of subsidiary, gain (loss) on reinsurance
transactions and transition expenses, the earnings of subsidiary
prior to being sold, net realized investment gains (losses), fair
value changes in embedded derivative liabilities (net of related
amortization), fair value changes and amendment related to the
agent deferred compensation plan, loss on extinguishment or
modification of debt and other non-operating items consisting
primarily of equity
in earnings of certain non-strategic
investments and earnings attributable to VIEs depend on market
conditions or represent unusual items that do not necessarily
relate to the underlying business of our segments. Net realized
investment gains (losses) and fair value changes in embedded
derivative liabilities (net of related amortization) may affect
future earnings levels since our underlying business is long-term
in nature and changes in our investment portfolio may impact
our ability to earn the assumed interest rates needed to maintain
the profitability of our business.

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 Company’s insurance segments are described below:

life

insurance,

interest-sensitive

(cid:116)(cid:1) 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, financial
and investment advisors, 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 has various distribution
and marketing agreements with other insurance companies
to use Bankers Life’s career agents to distribute Medicare
Advantage and PDP products in exchange for a fee.

(cid:116)(cid:1) 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.

(cid:116)(cid:1) 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.

(cid:116)(cid:1) Long-term care in run-off consists of the long-term care
business that was recaptured due to the termination of certain
reinsurance agreements effective September 30, 2016. This
business is not actively marketed and was issued or acquired by
Washington National and BCLIC.

from BRe as

In the fourth quarter of 2016, we began reporting the
long-term care block recaptured
further
in “Management’s Discussion and Analysis
described
of Consolidated Financial Condition and Results of
Operations - Consolidated Financial Condition - Termination
of Long-Term Care Reinsurance Agreements and Recapture of
Related Long-Term Care Business in Run-off” as an additional
business segment.

CNO FINANCIAL GROUP, INC. - Form 10-K 49

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, 2016 (dollars in millions, except per share data):

Adjusted EBIT (a non-GAAP financial measure)(a):

Bankers Life
Washington National
Colonial Penn
Long-term care in run-off

Adjusted EBIT from business segments

Corporate Operations, excluding corporate interest expense

Adjusted EBIT

Corporate interest expense

Operating earnings before taxes

Tax expense on operating income

Net operating income

Earnings of subsidiary prior to being sold
Loss on sale of subsidiary, gain (loss) on reinsurance transactions and transition expenses
Net realized investment gains (losses) (net of related amortization)
Fair value changes in embedded derivative liabilities (net of related amortization)
Fair value changes and amendment related to agent deferred compensation plan
Loss on reinsurance transaction(b)
Loss on extinguishment or modification of debt
Other

Non-operating income (loss) before taxes

Income tax expense (benefit):

On non-operating income (loss)
Valuation allowance for deferred tax assets and other tax items

Net non-operating income (loss)

NET INCOME

Per diluted share:

Net operating income
Earnings of subsidiary prior to being sold (net of taxes)
Loss on sale of subsidiary, gain (loss) on reinsurance transactions and transition expenses
(including impact of taxes)
Net realized investment gains (losses) (net of related amortization and taxes)
Fair value changes in embedded derivative liabilities (net of related amortization and taxes)
Fair value changes and amendment related to agent deferred compensation plan (net of taxes)
Loss on reinsurance transaction (net of taxes)
Loss on extinguishment or modification of debt (net of taxes)
Valuation allowance for deferred tax assets and other tax items
Other

NET INCOME

2016

2015

2014

397.9
102.9
1.7
(3.9)
498.6
(42.5)
456.1
(45.8)
410.3
147.8
262.5
—
—
7.6
9.6
3.1
(75.4)
—
(2.0)
(57.1)

(20.0)
(132.8)
95.7
358.2

1.47
—

—
.03
.04
.01
(.27)
—
.74
(.01)
2.01

369.6
111.5
5.6
—
486.7
(18.9)
467.8
(45.0)
422.8
148.1
274.7
—
—
(36.1)
11.9
15.1
—
(32.8)
(13.2)
(55.1)

(18.6)
(32.5)
(4.0)
270.7

1.41
—

—
(.12)
.04
.05
—
(.11)
.17
(.05)
1.39

386.9
111.2
.8
—
498.9
(27.6)
471.3
(43.9)
427.4
150.5
276.9
23.4
(239.8)
32.9
(36.0)
(26.8)
—
(.6)
(5.4)
(252.3)

8.7
(35.5)
(225.5)
51.4

1.27
.07

(1.24)
.10
(.11)
(.08)
—
—
.25
(.02)
.24

(a) Management believes that an analysis of net operating income provides a clearer comparison of the operating results of the Company from period to period because it
excludes: (i) the loss on the sale of a subsidiary, gain (loss) on reinsurance transactions and transition expenses, including impact of taxes; (ii) the earnings of subsidiary prior
to being sold on July 1, 2014, 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) fair value changes and
amendment related to the agent deferred compensation plan, net of taxes; (vi) loss on extinguishment or modification of debt, net of taxes; (vii) changes in the valuation
allowance for deferred tax assets and other tax items; and (viii) 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. EBIT is presented as net
operating income excluding corporate interest expense and income tax expense. The table above reconciles the non-GAAP measure to the corresponding GAAP measure.
In addition, management uses these non-GAAP financial measures 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. However, EBIT and net operating income are not measurements of
financial performance under GAAP and should not be considered as alternatives to cash flow from operating activities, as measures of liquidity, or as alternatives to net income
as measures of our operating performance or any other measures of performance derived in accordance with GAAP. In addition, EBIT and net operating income should not be
construed as an inference that our future results will be unaffected by unusual or non-recurring items. EBIT and net operating income have limitations as analytical tools, and
you should not consider such measures either in isolation or as substitutes for analyzing our results as reported under GAAP. Our definitions and calculation of EBIT and net
operating income are not necessarily comparable to other similarly titled measures used by other companies due to different methods of calculation.

(b) In September 2016, we terminated the reinsurance agreements with BRe and recaptured the ceded business as further described in “Management’s Discussion
and Analysis of Consolidated Financial Condition and Results of Operations - Consolidated Financial Condition - Termination of Long-Term Care Reinsurance
Agreements and Recapture of Related Long-Term Care Business in Run-off ”.

CNO FINANCIAL GROUP, INC. - Form 10-K

PART II
ITEM 7 Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations

Our vision is to become the leader in meeting Middle America’s
needs for financial security and readiness for the life of their
retirement. Our strategic plans are focused on continuing to grow
and deliver long-term value for all our stakeholders. In the last year,
we have continued to see change, including innovative technology,
economic shifts, the presidential election, changing regulations and
increasing competition. These changes impact all of our constituents:
our customers, investors, agents, associates and business. In this
ever-changing environment, in order to achieve the level of growth
we want and need, our strategy in 2017 and beyond is designed to
position CNO as the preferred provider of products and services
that meet Middle-Income Americans’ dynamic financial needs.
Specifically, we are focused on the following priorities:

(cid:116) Growth

(i)

Maximize our product portfolio to ensure it meets our
customers’ needs for integrated products and advice covering
a broad range of their financial needs

(ii) Position marketing and our distribution channels to better

respond to evolving customer preferences

(iii) Expand and enhance elements of our broker-dealer and

registered investment advisor program

(iv) Expand our reach within certain demographics of the
middle-income market based on our improved customer
segmentation analytics

(cid:116) Increase profitability and return on equity

(i)

Maintain our strong capital position and favorable financial
metrics

(ii) Work to increase our return on equity

(iii) Maintain pricing discipline

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 assumptions
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, 2016, the carrying value of our investment
portfolio was $26.2 billion.

(cid:116) Effectively manage risk and deploy capital

(i) Active enterprise risk management process

(ii) Continue to cost effectively repurchase our common stock,

absent compelling alternatives

(iii) Maintain a competitive dividend payout ratio

(iv) Reduce relative legacy long-term care exposure

(cid:116) Capitalize on investments made in our businesses

(i)

Leverage our recent investments to identify opportunities, drive
increased productivity, improve efficiencies and profitability,
and increase the speed-to-market for new products

(ii) Create a strong enterprise data strategy using our platforms and
state-of-the-art tools to drive growth on a cost-effective basis

(iii) Continue to invest in technology partnerships that will support
our field force and relationships with our customers, and
leverage data to run our business profitably

(iv) Pilot various models across the agent lifecycle to drive increased

growth, productivity and retention

(cid:116) Continue to invest in talent

(i) Attract, retain and develop the best talent to help us drive
sustainable growth, and provide them with development
opportunities

(ii) Recruit, develop and retain our agent force

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.

CNO FINANCIAL GROUP, INC. - Form 10-K 51

PART II
ITEM 7 Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations

is expected to meet all of its obligations under the terms of the
investment; (vii) whether we intend to sell the investment or it is
more likely than not that circumstances will require us to sell the
investment before recovery occurs; (viii) the underlying current and
prospective asset and enterprise values of the issuer and the extent
to which the recoverability of the carrying value of our investment
may be affected by changes in such values; (ix) projections of,
and unfavorable changes in, cash flows on structured securities
including mortgage-backed and asset-backed securities; (x) our
best estimate of the value of any collateral; and (xi) other objective
and subjective factors.

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

Impairment losses on equity securities are recognized in net
income. The manner in which impairment losses on fixed
maturity securities, available for sale, are recognized in the
financial statements is dependent on the facts and circumstances
related to the specific security. If we intend to sell a security or it
is more likely than not that we would be required to sell a security
before the recovery of its amortized cost, the security is other-than-
temporarily impaired and the full amount of the impairment is
recognized as a loss through earnings. If we do not expect to recover
the amortized cost basis, we do not plan to sell the security, and
if it is not more likely than not that we would be required to sell a
security before the recovery of its amortized cost, less any current
period credit loss, the recognition of the other-than-temporary
impairment is bifurcated. We recognize the credit loss portion in
net income and the noncredit loss portion in accumulated other
comprehensive income.

We estimate the amount of the credit loss component of a fixed
maturity security impairment as the difference between amortized
cost and the present value of the expected cash flows of the
security. The present value is determined using the best estimate of
future cash flows discounted at the effective interest rate implicit
to the security at the date of purchase or the current yield to accrete
an asset-backed or floating rate security. The methodology and
assumptions for establishing the best estimate of future cash flows
vary depending on the type of security.

For most structured securities, cash flow estimates are based on
bond specific facts and circumstances that may include collateral
characteristics, expectations of delinquency and default rates, loss
severity, prepayment speeds and structural support, including
excess spread, subordination and guarantees. For corporate bonds,
cash flow estimates are derived from scenario-based outcomes of
expected corporate restructurings or the disposition of assets using
bond specific facts and circumstances. The previous amortized
cost basis less the impairment recognized in net income becomes
the security’s new cost basis. We 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.

CNO FINANCIAL GROUP, INC. - Form 10-K

represents changes in the market interest rates, current market
liquidity and risk premiums. As of December 31, 2016, other-
than-temporary impairments included in accumulated other
comprehensive income totaled $8.0 million (before taxes and
related amortization).

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, separate account assets and embedded derivatives.
We carry our Company-owned life insurance policy (“COLI”),
which is invested in a series of mutual funds, at its cash surrender
value which approximates fair value. In addition, we disclose fair
value for certain financial instruments, including mortgage loans,
policy loans, cash and cash equivalents, insurance liabilities for
interest-sensitive products, investment borrowings, notes payable
and borrowings related to VIEs.

The degree of judgment utilized in measuring the fair value
of financial instruments is largely dependent on the level to
which pricing is based on observable inputs. Observable inputs
reflect market data obtained from independent sources, while
unobservable inputs reflect our view of market assumptions in the
absence of observable market information. Financial instruments
with readily available active quoted prices would be considered to
have fair values based on the highest level of observable inputs,
and little judgment would be utilized in measuring fair value.
Financial instruments that rarely trade would often have fair value
based on a lower level of observable inputs, and more judgment
would be utilized in measuring fair value.

Valuation Hierarchy

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

(cid:116) 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 cash
equivalents and exchange traded securities.

(cid:116) 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 investments; most short-term investments;
and non-exchange-traded derivatives such as call options.
Financial
investment
in this category
borrowings, notes payable and borrowings related to VIEs.

liabilities

include

PART II
ITEM 7 Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations

(cid:116) 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.
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 2016, we sold $790.2 million of fixed
maturity investments which resulted in gross investment losses
(before income taxes) of $95.2 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, 2016 as follows:
11 percent in 2017, 10 percent in 2018, 9 percent in 2019, 8 percent
in 2020 and 7 percent in 2021.

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.

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

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 (decreased)
amortization expense for such changes by $.7 million, $(.5) million
and $1.0 million during the years ended December 31, 2016, 2015
and 2014, 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 $343.2 million at December 31, 2016 (including
$204.0 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, 2015
was a decrease of $269.1 million (including $157.1 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.)

At December 31, 2016, 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

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
20% increase to assumed lapses
20% 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
50 basis point decrease to investment earnings rate
5% decrease to assumed mortality

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 business
in the Bankers Life segment to generate future profits, the margins
are relatively thin and are vulnerable to changes in assumptions.

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.

Estimated adjustment to income before income
taxes based on revisions to certain assumptions

(dollars in millions)

(18)
19
(6)
6
(5)
5
(5)
6

(113)
90
(6)
6
(30)
30

(330)
(5)
(4)

(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,

2016

2015

2014

85.9%
90.0%
91.5%
85.8%
87.1%

85.8%
89.2%
91.2%

83.0%

86.3%
90.4%
91.2%
85.1%
87.3%

83.7%
89.0%
91.8%

82.6%

82.8%
91.1%
90.8%
85.2%
87.3%

84.2%
88.4%
92.5%

83.2%

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 and Long-term Care
in Run-off segments. Reinsurance receivables at December 31, 2015 included the long-term care reserves that were ceded to BRe prior to
their recapture.

(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

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

2016

3,816.4
1,338.4
191.3

187.5
5,533.6
194.3
5,339.3

2015

3,707.8
1,306.1
158.3

194.1
5,366.3
657.4
4,708.9

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.

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.

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

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,

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

persistency, premium rates, maintenance expense and investment
yields, which estimates are generally updated annually. During
2016, we increased the future loss reserves related to our long-term
care blocks of business by $33.0 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 2015 claim reserve redundancy
for long-term care claim reserves in our Bankers Life segment, as
measured at December 31, 2016, was $11.1 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 2016 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:

(cid:116) We recognize fee 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.

(cid:116)(cid:1)(cid:1)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.

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

CNO FINANCIAL GROUP, INC. - Form 10-K

2016

23.2
3.1
26.3
9.3
17.0

2015

23.1 $
3.2
26.3
9.4
16.9 $

2014

22.4
3.0
25.4
10.4
15.0

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 capital loss carryforwards and life and non-life NOLs expire.

Based on our assessment, it appears more likely than not that
$785.6 million of our total deferred tax assets of $1,025.8 million
will be realized through future taxable earnings. Accordingly,
we have established a deferred tax valuation allowance of $240.2
million at December 31, 2016 ($230.2 million of which relates
to our net federal operating loss carryforwards and $10.0 million
relates to state operating loss carryforwards). 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 from investment strategies, the impact of the sale or
reinsurance of business and the recapture of business previously
ceded. Our estimates of future taxable income are based on
evidence we consider to be objective and verifiable.

PART II
ITEM 7 Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations

At December 31, 2016, our projection of future taxable income
for purposes of determining the valuation allowance is based on
our adjusted average annual taxable income which is assumed to
increase by 3 percent for the next five years, and level taxable income
is assumed thereafter. In the projections used for our analysis, our
adjusted average taxable income, adjusted for the reinsurance
recapture, of approximately $335 million consisted of $85 million
of non-life taxable income and $250 million of life taxable income.

Based on our assessment, we recognized an increase to the
allowance for deferred tax assets of $26.7 million in 2016. 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, 2013

Decrease in 2014

Balance, December 31, 2014

Decrease in 2015

Balance, December 31, 2015

Increase in 2016

BALANCE, DECEMBER 31, 2016

294.8
(48.8)(a)
246.0
(32.5)(b)
213.5
26.7(c)

240.2

(a) The 2014 reduction to the deferred tax valuation allowance primarily resulted from tax examination adjustments and the tax gain on the sale of CLIC.
(b) The 2015 reduction to the deferred tax valuation allowance primarily resulted from higher actual and projected non-life income.
(c) The 2016 increase to the deferred tax valuation allowance primarily resulted from additional non-life NOLs due to the settlement with the IRS.

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 NOL 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 (1.68 percent at December 31, 2016), 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,
2016, we were below the 50 percent ownership change level that
would trigger further impairment of our ability to utilize our NOLs.

As of December 31, 2016, we had $2.5 billion of federal NOLs, (all of which are non-life NOLs). The following table summarizes the
expiration dates of our loss carryforwards (dollars in millions):

Year of expiration
2023
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034

TOTAL FEDERAL NOLS

Net operating loss
carryforwards
1,936.0
85.2
149.9
10.8
80.3
213.2
.3
.2
44.4
.6
1.7
2,522.6

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

We also had deferred tax assets related to NOLs for state income taxes of $12.3 million and $14.1 million at December 31, 2016 and 2015,
respectively. The related state NOLs are available to offset future state taxable income in certain states through 2029.

A reconciliation of the beginning and ending amount of unrecognized tax benefits for the years ended December 31, 2016 and 2015 is as
follows (dollars in millions):

Balance at beginning of year

Increase based on tax positions taken in prior years
Decrease in unrecognized tax benefits related to settlements with taxing authorities

BALANCE AT END OF YEAR

Years ended December 31,

2016
234.2
3.4
(237.6)
—

2015
228.7
5.5
—
234.2

As of December 31, 2016 and 2015, nil and $155.4 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, 2016. The liability for accrued interest was nil and
$3.2 million at December 31, 2016 and 2015, respectively.

In the fourth quarter of 2016, we reached a settlement with the IRS
related to two uncertain tax positions: (i) $280.7 million of life NOLs
and $130.0 million of non-life NOLs related to the classification of the
loss on our investment in Conseco Senior Health Insurance Company
when it was transferred to an independent trust in 2008; and (ii)
$66.7 million of non-life NOLs related to a bad debt deduction with
respect to a stock purchase loan made by our Predecessor to a member
of its board of directors. The settlement resulted in a reduction to tax
expense of approximately $118.7 million in the fourth quarter of 2016
(the period in which these matters were settled and the fully executed
documentation was received). The $118.7 million benefit includes:
(i) a $98.2 million tax benefit related to additional life NOLs; (ii) a
$17.1 million tax benefit related to additional non-life NOLs (net of
an increase to the deferred tax valuation allowance of $51.7 million);
and (iii) a $3.4 million reduction in interest recognized in prior periods
on alternative minimum tax that will no longer be required to be paid.

The additional life NOLs related to the settlement offset our life taxable
income in the third and fourth quarters of 2016 and the tax gain realized
on the recapture of the ceded long-term care business from BRe. The
settlement also reduced the amount of current income tax accrued at
December 31, 2016, by approximately $50 million.

All of the additional life NOLs were utilized by December 31, 2016.
Accordingly, we will begin making federal tax payments equal to the
prescribed federal tax rate applied to 65 percent of our life insurance
company taxable income due to the limitations on the extent to which
we can use non-life NOLs to offset life insurance company taxable
income. We will continue to pay tax on 65 percent of our life insurance
company taxable income until all non-life NOLs are utilized or expire.

The IRS is also conducting an examination of 2011 through 2014.
In connection with this exam, we have agreed to extend the statute
of limitations for 2011 through 2013 to September 30, 2018. The
Company’s various state income tax returns are generally open for tax
years beginning in 2013, based on individual state statutes of limitation.
Generally, for tax years which generate NOLs, capital losses or tax credit
carryforwards, the statute remains open until the expiration of the
statute of limitations for the tax year in which such carryforwards are

utilized. The outcome of tax audits cannot be predicted with certainty.
If the Company’s tax audits are not resolved in a manner consistent with
management’s expectations, the Company may be required to adjust its
provision for income taxes.

Liabilities for Insurance Products

At December 31, 2016, the total balance of our liabilities for insurance
products was $22.7 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 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.

CNO FINANCIAL GROUP, INC. - Form 10-K

PART II
ITEM 7 Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations

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:

(cid:116) 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.

(cid:116) 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.

(cid:116) 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

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, 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.

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

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
Long-term care in run-off
Corporate operations

Gain (loss) on reinsurance transactions:

Bankers Life
Washington National
Corporate operations

Net realized investment gains (losses), net of related amortization:

Bankers Life
Washington National
Colonial Penn
Long-term care in run-off
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

Fair value changes and amendment related to agent deferred compensation plan:

Corporate operations

Transition expenses:

Corporate operations

Loss on extinguishment or modification of debt:

Corporate operations

Amounts related to subsidiary prior to being sold:

Earnings of subsidiary prior to being sold
Loss on sale of subsidiary

Income (loss) before income taxes:

Bankers Life
Washington National
Colonial Penn
Long-term care in run-off
Corporate operations
Amount related to subsidiary prior to being sold

2016

2015

2014

397.9
102.9
1.7
(3.9)
(88.3)
410.3

—
—
(75.4)
(75.4)

(3.6)
19.4
(.2)
(5.3)
(2.7)
7.6

9.4
.2
9.6

(2.0)

—

3.1

—

—
—
—

369.6
111.5
5.6
—
(63.9)
422.8

—
—
—
—

(16.7)
(9.6)
1.2
—
(11.0)
(36.1)

11.7
.2
11.9

(6.7)

2.5

15.1

(9.0)

(32.8)

—
—
—

386.9
111.2
.8
—
(71.5)
427.4

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

(26.8)

—

(.6)

23.4
(269.7)
(246.3)

403.7
122.5
1.5
(9.2)
(165.3)
—
353.2

364.6
102.1
6.8
—
(105.8)
—
367.7

385.2
148.5
1.9
—
(114.2)
(246.3)
175.1

INCOME BEFORE INCOME TAXES
(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 loss on the sale
of subsidiary and gain (loss) on reinsurance transactions, the earnings of a subsidiary prior to being sold, net realized investment gains (losses), fair value changes
in embedded derivative liabilities, net of related amortization, fair value changes and amendment related to the agent deferred compensation plan, equity in
earnings of certain non-strategic investments and earnings attributable to VIEs, net revenue (expense) 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 loss on the sale of subsidiary and gain (loss) on reinsurance transactions, the earnings of a
subsidiary prior to being sold, realized investment gains (losses), fair value changes in embedded derivative liabilities, net of related amortization, fair value changes

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 amendment related to the agent deferred compensation plan, 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, fair value changes related
to the agent deferred compensation plan 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.

In the fourth quarter of 2016, we began reporting as an additional
business segment, the long-term care block recaptured from BRe
as further described in “Management’s Discussion and Analysis
of Consolidated Financial Condition and Results of Operations
- Consolidated Financial Condition - Termination of Long-Term
Care Reinsurance Agreements and Recapture of Related Long-
Term Care Business in Run-off”.

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

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 (losses)
Amortization related to net realized investment gains (losses)

Net realized investment gains (losses), 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

2016
970.0
1,235.3
461.1
2,666.4

4,527.8
3,188.2

174.9
153.7

4,998.0
336.8
50.3

714.6
1,018.0
15,162.3

1,659.1

909.5
27.3
34.4
2,630.3

2015
803.0
1,242.3
446.0
2,491.3

4,075.5
3,487.8

189.5
153.8

4,916.2
331.0
47.7

643.0
941.5
14,786.0

1,648.7

918.7
(34.0)
27.7
2,561.1

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

1,417.4

1,442.5

1,427.7

110.8
66.1
26.3
176.5
13.2
422.1
2,232.4

397.9
—
(3.2)
(.4)
(3.6)
10.7
(1.3)
9.4
403.7

118.5
60.3
(32.9)
187.1
8.8
407.2
2,191.5

369.6
—
(17.2)
.5
(16.7)
14.9
(3.2)
11.7
364.6

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

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)
Long-term care:

Insurance policy benefits
Benefit ratio(a)
Interest-adjusted benefit ratio(b)

PDP:

Insurance policy benefits
Benefit ratio(a)

2016

2015

2014

1,192.3

95.8%

556.2
71.9%

636.1
135.0%
76.7%

—
—%

1,205.1

96.3%

536.1
69.6%

669.0
139.2%
82.8%

—
—%

1,190.6

92.5%

529.3

68.4%

656.0
129.7%
77.2%

5.3
77.9%

(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
$274.7 million, $271.2 million and $265.5 million in 2016, 2015 and 2014, 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 $2,666.4 million in 2016, up 7.0
percent from 2015, and $2,491.3 million in 2015, up .4 percent
from 2014. The increase in premium collections in 2016 is
primarily attributable to an increase in premiums from annuity
products and strong persistency in the Medicare supplement and
life blocks of business. See “Premium Collections” for further
analysis of Bankers Life’s premium collections.

Average liabilities for insurance products, net of reinsurance
ceded were $15.2 billion in 2016, up 2.5 percent from 2015 and
$14.8 billion in 2015, up 3.4 percent from 2014. Such average
insurance liabilities for certain long-term care products were
increased by $184 million, $196 million and $126 million
in 2016, 2015 and 2014, 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. Excluding the impact of the
aforementioned item, 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 in
2014, related to our terminated PDP quota-share reinsurance
agreement with Coventry. The PDP premiums collected in 2014
represent adjustments to premiums on such business related to
periods prior to the termination of the agreement.

Net investment income on general account invested assets
(which excludes income on policyholder portfolios) decreased
1.0 percent, to $909.5 million, in 2016 and increased
2.6 percent, to $918.7 million, in 2015. Prepayment income
was $11.7 million, $26.6 million and $16.9 million in 2016,
2015 and 2014, 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

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

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 $27.3 million, $(34.0) million and $61.9
million in 2016, 2015 and 2014, respectively. Such amounts
were substantially 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 $34.4 million, $27.7 million
and $29.3 million in 2016, 2015 and 2014, respectively. The
increase in 2016 is primarily attributable to fee income earned by
our broker-dealer and registered investment advisor subsidiaries.
We recognized fee income of $26.3 million, $26.3 million and
$25.4 million in 2016, 2015 and 2014, respectively, pursuant
to distribution and marketing agreements to sell Medicare
Advantage and PDP products of other insurance companies. In
2014, we also received a $3 million settlement from Coventry
related to the termination of our PDP quota-share agreement.

Insurance policy benefits fluctuated as a result of the factors
summarized below for benefit ratios. Benefit ratios are
calculated by dividing the related insurance product’s insurance
policy benefits by insurance policy income.

In the fourth quarter of 2016, we completed our comprehensive
review of actuarial assumptions. Such review resulted in a decrease
in reserves of $42.6 million and a decrease in amortization of
$3.2 million including the net impact from changes to spread
and persistency assumptions related to fixed index annuities. In
the fourth quarter of 2015, our comprehensive review resulted
in a decrease in reserves of $21.9 million and a decrease in
amortization of $3.9 million primarily reflecting the net impact
from changes in assumptions related to mortality and the spread
earned on fixed index annuities. In the fourth quarter of 2014,
our comprehensive 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.

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 71.9 percent, 69.6 percent and 68.4 percent
in 2016, 2015 and 2014, respectively. Our insurance policy

benefits reflected favorable (unfavorable) reserve developments
of prior period claim reserves of approximately $(1.9) million,
$(1.1) million and $2.3 million in 2016, 2015 and 2014,
respectively. Excluding the effects of prior period claim reserve
redundancies and deficiencies, our benefit ratios would have
been 71.7 percent, 69.4 percent and 68.7 percent in 2016, 2015
and 2014, respectively, excluding the reserve-related impacts
of rate increase actions. We currently expect the benefit ratio
on this Medicare supplement business to be in the range of 71
percent to 74 percent during 2017.

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 135.0 percent, 139.2 percent and 129.7 percent
in 2016, 2015 and 2014, respectively. The interest-adjusted
benefit ratio on this business was 76.7 percent, 82.8 percent and
77.2 percent in 2016, 2015 and 2014, respectively. The interest-
adjusted benefit ratio in 2016 and 2015 was favorably impacted
by reserve releases of $22 million and $6.3 million, respectively,
related to policyholder decisions to surrender or reduce coverage
following rate increases. The interest-adjusted benefit ratio in
2016 and 2015, excluding the favorable reserve releases related
to rate increases, was 81.4 percent and 84.1 percent, respectively.
In 2014, the impact of rate increases was not material.

The increase in the interest-adjusted benefit ratio in 2015
(compared to 2014) reflects the impacts of refinements initiated
in the first quarter of 2015 used to determine the increase in
our future loss reserves. The refinements were not a result of
any adjustment to our total expectations of projected profits
and losses on the long-term care block, and only impact the
timing of the future loss reserve increases. The refinements had
no impact on insurance liabilities determined in accordance
with statutory accounting principles. 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.

We currently expect the interest-adjusted benefit ratio on this
long-term care business to be in the range of 77 percent to
82 percent during 2017, excluding the reserve-related impacts
of rate increase actions. We expect rate increases will have less
of an impact on the interest-adjusted benefit ratio in 2017 than
in 2016. Since the insurance product liabilities we establish for
the 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 $11.1 million, $16.2 million and $21.2 million in 2016,
2015 and 2014, respectively. Excluding the effects of prior year
claim reserve redundancies, our benefit ratios would have been
137.3 percent, 142.5 percent and 133.8 percent in 2016, 2015
and 2014, respectively. When policies lapse, active life reserves

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 such lapsed policies are released, resulting in decreased
insurance policy benefits (although such decrease is somewhat
offset by additional amortization expense).

The insurance policy benefits on our PDP business resulted
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 in 2014.
In August 2013, we received a notice of Coventry’s intent to
terminate our PDP quota-share reinsurance agreement. The
PDP results in 2014 represent adjustments to earnings on
such business related to periods prior to the termination of the
agreement.

Amounts added to policyholder account balances - cost of
interest credited to policyholders were $110.8 million,
$118.5 million and $127.2 million in 2016, 2015 and 2014,
respectively. The weighted average crediting rates for these
products was 2.8 percent in 2016, 2015 and 2014. The average
liabilities of the fixed interest annuity block was $3.2 billion,
$3.5 billion and $3.8 billion in 2016, 2015 and 2014, respectively.
The decrease in the liabilities related to these annuities reflects
the lower sales of these products in the current low interest rate
environment and consumer preference for fixed index products.

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
deferred acquisition costs and the present value of future profits.
Deferred acquisition costs and the present value of future profits

are collectively referred to as “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 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.
The lower amortization in 2016 reflects higher persistency in
the Medicare supplement and annuity blocks. Amortization
was also impacted in each year by our comprehensive review of
actuarial assumptions discussed above under insurance policy
benefits.

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”.
The increase in interest expense in 2016 is primarily due to
higher interest rates on the variable rate investment borrowings.

Other operating costs and expenses in our Bankers Life
segment were $422.1 million in 2016, up 3.7 percent from 2015,
and were $407.2 million in 2015, up 1.5 percent from 2014.
The increase in commission and agent manager benefits in 2016
reflects commissions on products sold through our broker-dealer
and registered investment advisor and higher benefit expense,
which was more than offset by the benefit recognized due to an
amendment to the agent deferred compensation plan recorded
in the Corporate operations segment. Other operating costs and
expenses include the following (dollars in millions):

Commission expense and agent manager benefits
Other operating expenses

TOTAL

2016
71.6
350.5
422.1

2015
64.4 $

342.8
407.2 $

2014
57.2
344.0
401.2

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 2016, we recognized net realized investment losses of
$3.2 million, which were comprised of: (i) $17.0 million of net
gains from the sales of investments; (ii) the increase in fair value of
certain fixed maturity investments with embedded derivatives of
$.2 million; and (iii) $20.4 million of writedowns of investments
for other than temporary declines in fair value recognized through
net income ($22.9 million, prior to the $2.5 million of impairment
losses recognized in accumulated other comprehensive income

(loss)). During 2015, we recognized net realized investment losses
of $17.2 million, which were comprised of: (i) $1.2 million of net
gains from the sales of investments; (ii) the decrease in fair value of
certain fixed maturity investments with embedded derivatives of
$6.7 million; and (iii) $11.7 million of writedowns of investments
for other than temporary declines in fair value recognized through
net income ($14.0 million, prior to the $2.3 million of impairment
losses recognized in accumulated other comprehensive income
(loss)). 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.

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

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 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
(decrease) in the amortization of insurance acquisition costs of
$.4 million, $(.5) million and $.5 million in 2016, 2015 and 2014,
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

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 derivative related to modified coinsurance agreement
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 (losses) and fair
value changes in embedded derivative liabilities, net of related amortization, and income taxes

Gain on reinsurance transaction
Net realized investment gains (losses)
Amortization related to net realized investment gains (losses)

Net realized investment gains (losses), 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

2016

567.4
61.0
29.4
1.5
659.3

350.2
107.0

248.6
267.2
4.7

2,604.4
28.3
14.1

150.3
179.8
3,954.6

655.8

256.2
1.9
—
—
1.2
1.3
916.4

538.2

13.8
5.8
3.9
59.1
3.7
189.0
813.5

102.9
—
19.7
(.3)
19.4
.6
(.4)
.2
122.5

2015

547.0
72.6
27.7
2.4
649.7

386.0
119.1

258.4
260.5
5.2

2,494.0
30.9
15.0

151.9
185.9
3,906.9

643.8

256.0
(2.2)
—
—
(.2)
1.3
898.7

528.4

14.6
6.3
(2.7)
55.2
2.0
183.4
787.2

111.5
—
(9.6)
—
(9.6)
.8
(.6)
.2
102.1

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

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

Health benefit ratios:

Supplemental health:

Insurance policy benefits
Benefit ratio(a)
Interest-adjusted benefit ratio(b)

Medicare supplement:

Insurance policy benefits
Benefit ratio(a)

2016

2015

2014

469.3
83.0%
59.0%

42.7
68.4%

455.3
84.0%
59.6%

47.9
65.0%

408.7

80.1%
54.6%

55.2
63.3%

(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
$135.6 million, $132.6 million and $130.2 million in 2016, 2015 and 2014, respectively.

Total premium collections were $659.3 million in 2016, up
1.5 percent from 2015, and $649.7 million in 2015, up 2.9 percent
from 2014, driven by sales and persistency of the segment’s
supplemental health block; partially offset by lower Medicare
supplement collected premiums due to the run-off of this block of
business. 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 $3,954.6 million in 2016, up 1.2 percent from 2015,
and $3,906.9 million in 2015, up 1.5 percent from 2014, 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 portfolios and reinsurer
accounts) was $256.2 million in 2016, $256.0 million in 2015 and
$266.5 million in 2014.

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
$1.9 million, $(2.2) million and $6.3 million in 2016, 2015 and
2014, respectively. Such amounts were substantially 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 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 2016, we completed our comprehensive
annual review of actuarial assumptions. Such review had no
material impact on this segment. In the fourth quarter of 2015, our
comprehensive review resulted in a $1 million decrease in reserves.
In the fourth quarter of 2014, our review of actuarial assumptions
resulted in a $10 million increase in reserves primarily related to a
closed block of payout annuities due to changes in our interest rate
and mortality assumptions for this block.

CNO FINANCIAL GROUP, INC. - Form 10-K

PART II
ITEM 7 Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations

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 $96.2 million,
$86.4 million and $101.8 million in 2016, 2015 and 2014,
respectively. The benefit ratio on these products was 83.0 percent,
84.0 percent and 80.1 percent in 2016, 2015 and 2014, respectively.
The interest-adjusted benefit ratio on this supplemental health
business was 59.0 percent, 59.6 percent and 54.6 percent in 2016,
2015 and 2014, respectively. In 2015, the insurance margin on
these products was reduced by approximately $9 million due to the
unfavorable development of prior period incurred claim estimates
as further discussed below. In addition, the insurance margin on
supplemental health products was reduced by $2.5 million in 2014
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.
We currently expect the interest-adjusted benefit ratio on this
supplemental health business to be in the range of 58 percent to
61 percent during 2017.

The unfavorable reserve developments recognized in 2015 were
primarily based on the completion of an in-depth review of recent
claim trends in the block, including the impact of newer cancer
treatments on claims. At that time, we had observed and disclosed
increases in insurance policy benefits for our supplemental health
products. As these developments emerged, we initiated an in-
depth claim review. The review revealed some recent claim trends
on certain blocks of supplemental health business that warranted
additional analysis. The additional analysis revealed longer and
higher treatment patterns for cancer claims than previously
recognized in our claim reserving process. An example of changes
in cancer treatment we noticed was an increase in the use of
expensive oral drugs rather than intravenous chemotherapy. We
also observed an increase in the length of time claimants remain
on a treatment regimen. Claim reserves for supplemental health
business are developed using data that extends over a time period

that is sufficient in an effort to produce credible averages and avoid
over-reacting to normal ranges of claim volatility. We believe this
approach fully recognized the new emerging treatment patterns.

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 $19.8 million, $25.7 million and
$31.9 million in 2016, 2015 and 2014, respectively. Such decrease
reflects the run-off of this block of business.

Amounts added to policyholder account balances - cost of interest
credited to policyholders were $13.8 million, $14.6 million and
$14.9 million in 2016, 2015 and 2014, 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
$3.7 million, $2.0 million and $1.7 million of interest expense on
collateralized borrowings in 2016, 2015 and 2014, respectively,
as further described in the note to the consolidated financial
statements entitled “Summary of Significant Accounting
Policies - Investment Borrowings”. The increase in interest
expense in 2016 is due to higher interest rates on the variable
rate investment borrowings.

Other operating costs and expenses were $189.0 million,
$183.4 million and $189.5 million in 2016, 2015 and 2014,
respectively. Other operating costs and expenses include commission
expense of $70.2 million, $68.3 million and $64.6 million in 2016,
2015 and 2014, respectively. The increase in commission expense is
consistent with the growth in the supplemental health block.

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

Gain on reinsurance transaction of $3.8 million related to the
recapture of a modified coinsurance agreement in the second
quarter of 2014.

modified coinsurance agreement of $2.0 million; and $3.4 million
of writedowns of investments for other than temporary declines in
fair value recognized through net income.

Net realized investment gains (losses) fluctuate each period.
During 2016, we recognized net realized investment gains of
$19.7 million, which were comprised of: (i) $24.7 million of net
gains from the sales of investments; (ii) the decrease in fair value of
certain fixed maturity investments with embedded derivatives of
$.5 million; (iii) the increase in fair value of embedded derivatives
related to a modified coinsurance agreement of $.8 million; and
(iv) $5.3 million of writedowns of investments for other than
temporary declines in fair value recognized through net income
($6.4 million, prior to the $1.1 million of impairment losses
recognized in accumulated other comprehensive income (loss)).
During 2015, we recognized $2.8 million of net gains from the sales
of investments; the decrease in fair value of embedded derivatives
related to a modified coinsurance agreement of $7.0 million;
the decrease in fair value of certain fixed maturity investments
with embedded derivatives of $2.1 million; and $3.3 million of
writedowns of investments for other than temporary declines in
fair value recognized through net income ($3.7 million, prior to
the $.4 million of impairment losses recognized in accumulated
other comprehensive income (loss)). During 2014, net realized
investment gains in this segment included $35.8 million of net
gains from the sales of investments (primarily fixed maturities);
the increase in fair value of embedded derivatives related to a

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
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 $.3 million,
nil and $.5 million in 2016, 2015 and 2014, respectively.

Colonial Penn (dollars in millions)

Premium collections:

Life
Medicare supplement and other 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
Interest expense on investment borrowings
Other operating costs and expenses
Total benefits and expenses
Income before net realized investment gains (losses) and income taxes
Net realized investment gains (losses)
INCOME BEFORE INCOME TAXES

CNO FINANCIAL GROUP, INC. - Form 10-K

2016

277.8
2.4
280.2

74.1

6.5
4.2

16.2
689.4
790.4

281.4
44.2
1.1
326.7

201.2
.7
15.3
.6
107.2
325.0
1.7
(.2)
1.5

2015

259.9 $
3.0
262.9 $

2014

241.7
3.4
245.1

73.1 $

69.6

7.7
4.4

16.5
670.1
771.8 $

263.5 $
43.0
1.0
307.5

188.3
.7
14.4
.1
98.4
301.9
5.6
1.2
6.8 $

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

PART II
ITEM 7 Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations

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
amount of our investment in new business during a particular
period will have a significant impact on this segment’s results.
We expect this segment to report earnings (before net realized
investment gains (losses) and income taxes) in 2017 in the range
of $5 million to $15 million, but because of the seasonality of the
advertising spend, we expect a loss in the $1 million to $3 million
range in the first quarter of 2017.

Total premium collections increased 6.6 percent, to $280.2
million, in 2016 and 7.3 percent, to $262.9 million, in 2015. The
increase was driven by increased sales and steady persistency. See
“Premium Collections” for further analysis of Colonial Penn’s
premium collections.

Average liabilities for insurance products, net of reinsurance
ceded have increased as a result of growth in the core graded
benefit and simplified issue life insurance block 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 graded benefit and
simplified issue life insurance business.

Net investment income on general account invested assets
increased slightly in 2016 and 2015 primarily due to the increase
in invested assets as a result of growth in this segment.

Insurance policy benefits have increased as a result of the growth
in this segment. Also, in 2016, insurance policy benefits reflected
a $2.5 million increase in reserves related to the impact of loss
recognition on a closed block of payout annuities resulting from
changes in long-term interest rates and mortality assumptions.

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
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. Marketing expenses were higher
in 2016 as compared to 2015 primarily due to investments in new
business and higher advertising costs (including the impacts of the
political elections on television advertising costs). 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 (losses) fluctuate each period.
During 2016, we recognized net realized investment losses of
$.2 million, which were comprised of: (i) $.7 million of net gains
from the sales of investments; (ii) the decrease in fair value of
certain fixed maturity investments with embedded derivatives of
$.1 million; and (iii) $.8 million of writedowns of investments for
other than temporary declines in fair value recognized through
net income. During 2015, we recognized $2.2 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 $.4 million; and $.6 million of
writedowns of investments for other than temporary declines in
fair value recognized through net income ($.9 million, prior to
the $.3 million of impairment losses recognized in accumulated
other comprehensive income (loss)). During 2014, we recognized
$1.1 million of net gains from the sales of investments (primarily
fixed maturities).

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

Recognizing the accounting standard that requires us to expense
certain direct response advertising costs (rather than deferring such
costs as deferred acquisition costs), the amount of our investment
in new business in the Colonial Penn segment during a particular

period will have a significant impact on the segment results. The
following summarizes our earnings, separated between inforce
and new business for Colonial Penn (dollars in millions):

ADJUSTED EBIT FROM INFORCE 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

Adjusted EBIT from Inforce Business
ADJUSTED 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

Adjusted EBIT from New Business

ADJUSTED EBIT FROM INFORCE 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

ADJUSTED EBIT FROM INFORCE AND NEW BUSINESS

The Adjusted EBIT from inforce business in the Colonial Penn
segment in 2016 reflects: (i) a $2.5 million reduction in earnings
related to the impact of loss recognition on a closed block of payout
annuities resulting from changes in long-term interest rates and
mortality assumptions; and (ii) higher mortality and expenses as
compared to prior years. The Adjusted EBIT from new business

2016

2015

2014

226.5
45.3
271.8

168.5
14.5
34.4
217.4
54.4

54.9
—
54.9

33.4
.8
73.4
107.6
(52.7)

281.4
45.3
326.7

201.9
15.3
107.8
325.0
1.7

212.0
44.0
256.0

159.4
13.7
29.3
202.4
53.6

51.5
—
51.5

29.6
.7
69.2
99.5
(48.0) $

263.5
44.0
307.5

189.0
14.4
98.5
301.9
5.6

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

in the Colonial Penn segment in 2016 primarily reflects higher
marketing costs. The vast majority of the costs to generate new
business in this segment are not deferrable and Adjusted EBIT
will fluctuate based on management’s decisions on how much
marketing costs to incur in each 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

Long-term care in run-off (dollars in millions)

In September 2016, we terminated the reinsurance agreements
with BRe and recaptured the ceded business as further described
in “Management’s Discussion and Analysis of Consolidated
Financial Condition and Results of Operations - Consolidated
- Termination of Long-Term Care
Financial Condition

Reinsurance Agreements and Recapture of Related Long-Term
Care Business in Run-off”. The long-term care in run-off segment
is comprised of the long-term care business that was recaptured
from BRe. The information summarized below represents the pre-
tax losses related to the recaptured business.

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
Total benefits and expenses

Loss before net realized investment losses and income taxes

Net realized investment losses

LOSS BEFORE INCOME TAXES
Health benefit ratios:
Long-term care:

Insurance policy benefits
Benefit ratio(a)
Interest-adjusted benefit ratio(b)

2016

4.7

138.4

4.8
9.4
14.2

17.6
.5
18.1
(3.9)
(5.3)
(9.2)

17.6
365.8%
213.5%

(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 this 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 $7.3 million
in 2016.

Insurance policy benefits in 2016 included the unfavorable
impact of $2.6 million related to the impact of loss recognition
on this closed block of long-term care business from changes in
long-term interest rates and mortality assumptions. Since this
block of long-term care business is in loss recognition status, our
valuation assumptions reflect no profits or losses on the block
over its remaining life. Accordingly, changes in assumptions
which adversely impact future earnings will result in an
immediate charge to current earnings. This block of business

is particularly sensitive to changes in assumptions related to
expected future investment yields. For example, we estimate
that a 50 basis point reduction in the ultimate new money rate
assumption would result in a $10 million pre-tax charge.

Net realized investment losses in 2016 were comprised of: (i)
$4.6 million of net losses from the sales of investments; and
(ii) $.7 million of writedowns of investments for other than
temporary declines in fair value recognized through net income.

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

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
Interest expense on investment borrowings
Other operating costs and expenses

Loss before net realized investment losses, equity in earnings of certain non-strategic
investments and earnings attributable to non-controlling interests, fair value changes
and amendment related to agent deferred compensation plan, loss on reinsurance
transaction, net revenue pursuant to transition and support services agreements,
transition expenses, loss on extinguishment or modification of debt and income taxes

Net realized investment losses
Equity in earnings of certain non-strategic investments and earnings attributable to non-
controlling interests
Fair value changes and amendment related to agent deferred compensation plan
Loss on reinsurance transaction
Net revenue pursuant to transition and support services agreements
Transition expenses
Loss on extinguishment or modification of debt

LOSS BEFORE INCOME TAXES

2016

2015

2014

(45.8)

(45.0)

(43.9)

4.8

(.3)
1.1
—
11.0
10.0
—
(69.1)

(88.3)
(2.7)

(2.0)
3.1
(75.4)
—
—
—
(165.3)

6.9

(6.4)
(.1)
—
10.9
8.6
(.2)
(38.6)

(63.9)
(11.0)

(6.7)
15.1
—
2.5
(9.0)
(32.8)
(105.8)

8.5

(1.3)
.4
(2.8)
10.1
6.7
(.1)
(49.1)

(71.5)
(9.9)

(8.0)
(26.8)
—
2.6
—
(.6)
(114.2)

Interest expense on corporate debt has been primarily impacted
by: (i) the debt refinancing transactions completed in May 2015;
and (ii) the timing and amount of debt repayments in 2015
and 2014, along with the mix of interest rates on the related
outstanding borrowings. 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 $925.0 million, $888.6 million and $838.2
million in 2016, 2015 and 2014, respectively. The average interest
rate on our debt was 4.7 percent, 4.7 percent and 4.5 percent in
2016, 2015 and 2014, respectively. Interest expense in periods
subsequent to the debt refinancing transactions also reflects lower
amortization of discount and issuance costs primarily due to the
extended maturity profile of the debt incurred in our refinancing
transactions.

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 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 recognized death benefits, net of cash surrender
value, of $1.1 million and $1.7 million related to the COLI in
2015 and 2014, respectively. The corporate segment sold all of its
investments in hedge funds in the fourth quarter of 2014.

Fee revenue and other income includes the fees our wholly-
owned investment advisor earns for managing portfolios of
commercial bank loans for investment trusts. These trusts are
consolidated as VIEs in our consolidated financial statements, but
the fees are reflected as revenues and the fee expense is reflected
in the earnings attributable to non-controlling interests. This fee
revenue fluctuates consistent with the size of the loan portfolios.

CNO FINANCIAL GROUP, INC. - Form 10-K

PART II
ITEM 7 Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations

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 and were higher in 2016, as compared
to 2015, reflecting: (i) higher legal costs of $10 million (including
a $5.5 million increase to legal reserves related to legacy business
of our predecessor); (ii) higher expenses of $8 million related to
various corporate initiatives and strategies (including costs to
comply with new Department of Labor requirements); and (iii)
$10 million of higher compensation and benefit accruals including
accelerated stock compensation expense related to retirement
eligible employees, severance costs and performance-based
compensation expense. Since certain stock-based compensation
awards granted to retirement eligible employees do not require
the employee to provide any further service to retain the award.
Other operating costs and expenses in the first three months of
2014 included higher expenses of $3 million primarily related to
accrual adjustments for incentive compensation.

Net realized investment losses often fluctuate each period. During
2016, net realized investment losses in this segment were $2.7 million
and were comprised of: (i) $5.8 million of net gains from the sales
of investments (including $11.9 million of net losses recognized by
the VIEs and $17.7 million of net gains on other investment sales);
(ii) $7.3 million of losses on the dissolution of a VIE; and (iii) $1.2
million of writedowns of investments held by VIEs due to other-than-
temporary declines in value. During 2015, net realized investment
losses in this segment included: (i) $2.0 million of net gains from the
sales of investments (including $1.3 million of losses recognized by the
VIEs and $3.3 million of net gains on other sales of investments); (ii)
an $11.3 million gain on the dissolution of a VIE; (iii) a $7.9 million
writedown of a legacy investment in a private company that was
liquidated; and (iv) $16.4 million of writedowns of investments held
by VIEs due to other-than-temporary declines in value. We no longer
have any investment exposure to legacy private company investments.
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.

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.

Fair value changes and amendment related to agent deferred
compensation plan relate to: (i) changes in the underlying
actuarial assumptions used to value liabilities for our agent deferred
compensation plan; and (ii) an amendment made to the plan in
the third quarter of 2016. The agent deferred compensation plan
was amended to: (i) freeze participation in the plan; (ii) freeze
benefits accrued under the plan; and (iii) add a limited cashout
feature. During the third quarter of 2016, we made lump sum
settlement distributions to plan participants with account balances
that were below a certain threshold consistent with the provision
of the amended plan. We recognized a pre-tax gain of $6.3 million
related to the settlement distributions in the third quarter of 2016.

Loss on reinsurance transaction of $75.4 million in 2016
resulted from the termination of the reinsurance agreements with
BRe and recapture of the ceded business as further described in
“Consolidated Financial Condition - Termination of Long-Term
Care Reinsurance Agreements and Recapture of Related Long-
Term Care Business in Run-off”.

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.

Transition expenses include one-time expenses associated with
our comprehensive agreement with Cognizant for our application
development, maintenance and testing functions as well as select
information technology infrastructure operations.

Loss on extinguishment or modification of debt in 2015 of
$32.8 million consisted of: (i) $15.0 million related to the write-off
of unamortized discount and issuance costs due to the repayment
of our previous senior secured credit agreement and the 6.375%
Senior Secured Notes due October 2020 (the “6.375% Notes”);
and (ii) a make-whole redemption premium of $17.8 million due to
the repayment of the 6.375% Notes. The loss on extinguishment
of debt of $.6 million in 2014 resulted from: (i) expenses related to
the amendment of our previous senior secured credit agreement in
May 2014; and (ii) the repurchase of the remaining $3.5 million
principal amount of 7.0% Senior Debentures due 2016 for a
purchase price of $3.7 million. These transactions are further
discussed in the note to the consolidated financial statements
entitled “Notes Payable - Direct Corporate Obligations”.

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

Amounts related to subsidiary 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)

The information summarized above represents the pre-tax
earnings related to the operations of a subsidiary prior to being
sold (which occurred on July 1, 2014) as well as the loss on the sale
of the subsidiary. Operating expenses exclude overhead expense

that was expected to continue after the sale of the subsidiary. Refer
to the note to the consolidated financial statements entitled “Sale
of Subsidiary” for additional information.

CNO FINANCIAL GROUP, INC. - Form 10-K

PART II
ITEM 7 Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations

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 wholly-owned subsidiary that
specializes in marketing and distributing health products, and
through independent marketing organizations and insurance
agencies, including worksite marketing.

from A.M. Best, Fitch, S&P and Moody’s are “A-”, “BBB+”,
“BBB+” and “Baa1”, 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.

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

Total premium collections were $3.6 billion in 2016, up 6.1 percent
from 2015, and $3.4 billion in 2015, up 1.3 percent from 2014
(excluding premium collections related to the business of CLIC
prior to being sold in 2014). First year collected premiums were
$1,344.8 million in 2016, up 12 percent from 2015, and $1,197.4
million in 2015, down 0.6 percent from 2014. Total premiums
collected are summarized as follows (dollars in millions):

First year:

Bankers Life
Washington National
Colonial Penn

Total first year

Renewal:

Bankers Life
Washington National
Colonial Penn
Long-term care in run-off

Total renewal

TOTAL PREMIUMS COLLECTED

2016

1,211.8
78.2
54.8
1,344.8

1,454.6
581.1
225.4
4.7
2,265.8
3,610.6

2015

1,065.7
80.2
51.5
1,197.4

1,425.6
569.5
211.4
—
2,206.5
3,403.9

2014(a)

1,080.8
77.6
45.7
1,204.1

1,401.5
553.9
199.4
—
2,154.8
3,358.9

(a) Excludes $71.2 million of premium collections related to the business of CLIC prior to being sold in July 2014.

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

Total premium collections by segment were as follows:

Bankers Life (dollars in millions)

Premiums collected by product:

Annuities:

Fixed index (first-year)
Other fixed interest (first-year)
Other fixed interest (renewal)

Subtotal - other fixed interest 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 (renewal)
Supplemental health (first-year)
Supplemental health (renewal)

Subtotal – supplemental health

Other health (first-year)
Other health (renewal)

Subtotal - other health

Total health

Life insurance:

Traditional (first-year)
Traditional (renewal)

Subtotal - traditional

Interest-sensitive (first-year)
Interest-sensitive (renewal)

Subtotal - interest-sensitive

Total life insurance
Collections on insurance products:

2016

2015

2014

868.1
95.7
6.2
101.9
970.0

75.6
663.7
739.3
17.4
451.2
468.6
—
5.5
15.7
21.2
.1
6.1
6.2
1,235.3

78.8
207.3
286.1
70.6
104.4
175.0
461.1

706.6 $
89.6
6.8
96.4
803.0

80.3
659.1
739.4
16.7
459.9
476.6
—
6.1
13.1
19.2
.1
7.0
7.1
1,242.3

83.0
193.9
276.9
83.3
85.8
169.1
446.0

646.2
129.1
7.0
136.1
782.3

88.6
654.7
743.3
16.8
483.8
500.6
6.8
7.6
8.7
16.3
.7
7.4
8.1
1,275.1

91.6
163.5
255.1
100.2
69.6
169.8
424.9

Total first-year premium collections on insurance products
Total renewal premium collections on insurance products

TOTAL COLLECTIONS ON INSURANCE PRODUCTS

1,211.8
1,454.6
2,666.4

1,065.7
1,425.6
2,491.3 $

1,080.8
1,401.5
2,482.3

Annuities in this segment include fixed index and other fixed
interest annuities sold to the senior market. Annuity collections in
this segment increased 21 percent, to $970.0 million in 2016 and
2.6 percent, to $803.0 million, in 2015. The increase in premium
collections in 2016 is consistent with our marketing efforts to
increase fixed index annuity sales. Premium collections from our
fixed index products were also favorably impacted in 2016 and
2015 by the general stock market performance which made these
products attractive to certain customers.

Health products include Medicare supplement, long-term care
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 were $739.3 million, $739.4 million and
$743.3 million in 2016, 2015 and 2014, respectively.

Premiums collected on Bankers Life’s long-term care policies
decreased 1.7 percent, to $468.6 million in 2016 and 4.8 percent, to
$476.6 million in 2015, reflecting the run-off of this business and a
continuing shift in the mix of new business to shorter duration long-
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. The premiums collected in 2014 represent
adjustments to premiums on such business related to periods prior
to the termination of the agreement.

Life products in this segment include traditional and interest-
sensitive life products. Life premiums collected in this segment
increased 3.4 percent, to $461.1 million, in 2016 and 5.0 percent,
to $446.0 million, in 2015. Collected premiums in 2016 and
2015 reflect strong persistency; partially offset by lower first-year
premiums.

CNO FINANCIAL GROUP, INC. - Form 10-K

PART II
ITEM 7 Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations

Washington National (dollars in millions)

Premiums collected by product:

Health:

Medicare supplement (renewal)
Supplemental health (first-year)
Supplemental health (renewal)

Subtotal – supplemental health

Other health (first-year)
Other health (renewal)

Subtotal – other health

Total health

Life insurance:

Traditional (first-year)
Traditional (renewal)

Subtotal - traditional

Interest-sensitive (first-year)
Interest-sensitive (renewal)

Subtotal - interest-sensitive

Total life insurance

Annuities:

Fixed index (first-year)
Fixed index (renewal)

Subtotal - fixed index annuities

Other fixed interest (renewal)

Total annuities

Collections on insurance products:

2016

2015

2014

61.0
72.2
493.3
565.5
.2
1.7
1.9
628.4

.9
10.5
11.4
4.7
13.3
18.0
29.4

.2
1.0
1.2
.3
1.5

72.6
74.9
469.9
544.8
.2
2.0
2.2
619.6

.7
11.4
12.1
4.3
11.3
15.6
27.7

.1
1.8
1.9
.5
2.4

85.2
72.8
442.6
515.4
.2
2.2
2.4
603.0

.6
12.3
12.9
3.8
9.2
13.0
25.9

.2
1.8
2.0
.6
2.6

Total first-year premium collections on insurance products
Total renewal premium collections on insurance products

TOTAL COLLECTIONS ON INSURANCE PRODUCTS

78.2
581.1
659.3

80.2
569.5
649.7

77.6
553.9
631.5

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 $61.0 million,
in 2016 and 15 percent, to $72.6 million, in 2015 due to the run-off
of this block of business. We discontinued new sales of Medicare
supplement policies in this segment in 2012.

Premiums collected on supplemental health products (including
specified disease, accident and hospital indemnity insurance
products) increased 3.8 percent, to $565.5 million, in 2016 and
5.7 percent, to $544.8 million, in 2015. Such increases are due to
new sales in recent periods and persistency.

Overall, excluding premiums from the Washington National
Medicare supplement and annuity blocks which are in run-off,
collected premiums were up 3.8 percent in 2016 compared to
2015, driven by sales in recent periods and persistency.

Life premiums collected in the Washington National segment
increased 6.1 percent, to $29.4 million, in 2016 and 6.9 percent, to
$27.7 million, in 2015.

Annuities in this segment include fixed index and other fixed
interest annuities. We are no longer actively pursuing sales of
annuity products in this segment.

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

Colonial Penn (dollars in millions)

Premiums collected by product:

Life insurance:

Traditional (first-year)
Traditional (renewal)

Subtotal - traditional

Interest-sensitive (all 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
6.9 percent, to $277.8 million, in 2016 and 7.5 percent, to
$259.9 million, in 2015. Graded benefit life products sold
through our direct response marketing channel accounted for
$275.9 million, $257.6 million and $239.5 million of collected
premiums in 2016, 2015 and 2014, respectively. Premiums
collected reflect strong sales in 2016 and 2015 reflecting lead
generation and diversification and sales productivity initiatives.

Long-term care in run-off (dollars in millions)

Premiums collected by product:

Health:

Long-term care (renewal)

2016

2015

2014

54.8
222.7
277.5
.3
277.8

2.3
.1
2.4

51.5
208.2
259.7
.2
259.9

2.7
.3
3.0

54.8
225.4
280.2

51.5
211.4
262.9

45.7
195.6
241.3
.4
241.7

3.2
.2
3.4

45.7
199.4
245.1

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.

2016

4.7

The Long-term care in run-off segment reflected the long-term care premiums collected from the business recaptured from BRe in
September 2016 as further described in “Management’s Discussion and Analysis of Consolidated Financial Condition and Results of
Operations - Consolidated Financial Condition - Termination of Long-Term Care Reinsurance Agreements and Recapture of Related
Long-Term Care Business in Run-off”.

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 and mortgage
loans made up 87 percent of our $26.2 billion investment portfolio
at December 31, 2016. The remainder of the invested assets was
trading securities, investments held by variable interest entities,
equity securities, policy loans and other invested assets.

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 composition of our investment portfolio as of December 31, 2016 (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
21,096.2
584.2
1,768.0
112.0
363.4
1,724.3
165.0
424.5
26,237.6

Percent of total
investments

80%
2
7
—
1
7
1
2
100%

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, 2016 (dollars in millions):

Asset-backed securities
States and political subdivisions
Energy
Utilities
Commercial mortgage-backed securities
Insurance
Healthcare/pharmaceuticals
Banks
Collateralized mortgage obligations
Food/beverage
Cable/media
Real estate/REITs
Capital goods
Transportation
Chemicals
Telecom
Brokerage
Aerospace/defense
Technology
Business services
Paper
Autos
Collateralized debt obligations
Other

TOTAL FIXED MATURITIES, AVAILABLE FOR SALE $

Carrying value
2,710.3
1,988.9
1,539.4
1,538.4
1,536.2
1,456.1
1,434.5
992.6
915.5
894.4
737.9
558.9
522.5
455.0
421.2
420.9
312.1
275.9
273.4
256.7
245.9
245.4
230.7
1,133.4
21,096.2

Percent of fixed
maturities

12.8% $

9.4
7.3
7.3
7.3
6.9
6.8
4.7
4.3
4.2
3.5
2.6
2.5
2.2
2.0
2.0
1.5
1.3
1.3
1.2
1.2
1.2
1.1
5.4

100.0% $

Gross unrealized
losses
15.5
9.6
21.4
5.4
27.9
12.7
19.0
9.5
1.6
1.7
20.3
1.0
3.9
2.9
10.3
2.6
2.5
.3
3.3
4.2
.6
1.4
.3
16.4
194.3

Percent of gross
unrealized losses

8.0%
4.9
11.0
2.8
14.4
6.6
9.8
4.9
.8
.9
10.5
.5
2.0
1.5
5.3
1.3
1.3
.1
1.7
2.2
.3
.7
.2
8.3
100.0%

At December 31, 2016, the carrying value of the Company’s fixed maturity securities in the energy sector was $1.5 billion, with gross
unrealized gains of $126.8 million and gross unrealized losses of $21.4 million. Although these securities are of high quality (88 percent
are rated investment grade) and diversified (75 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. At December 31, 2015, the carrying value of our fixed maturity securities in the
energy sector was $1.5 billion, with gross unrealized gains of $59.4 million and gross unrealized losses of $160.9 million.

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

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, 2016 (dollars in millions):

Below-investment grade

B+ and below

Commercial mortgage-backed securities
Energy
Cable/media
Healthcare/pharmaceuticals
Asset-backed securities
Insurance
Chemicals
States and political subdivisions
Banks
Utilities
Business services
Capital goods
Retail
Technology
Transportation
Telecom
Brokerage
Metals and mining
Food/beverage
Collateralized mortgage obligations
Building materials
Autos
Real estate/REITs
Paper
Debt securities issued by foreign

governments
Consumer products
Collateralized debt obligations
Aerospace/defense
Other

TOTAL FIXED MATURITIES,
AVAILABLE FOR SALE

Investment grade

AAA/AA/A

22.3 $
.1
.2
2.5
2.7
2.2
.8
4.8
2.6
2.0
—
.6
—
—
—
—
—
—
—
.2
—
—
—
—

—
—
.3
—
4.9

BBB
4.3
10.0
16.7
14.5
6.0
10.5
4.1
3.1
6.9
3.0
.1
2.8
.2
3.0
2.7
1.5
1.7
.3
1.7
—
—
1.4
1.0
.6

.4
.3
—
—
.9

BB
1.3 $
8.5
3.1
.2
.3
—
5.4
—
—
—
4.1
.2
—
.3
—
1.0
—
1.3
—
.3
1.5
—
—
—

—
—
—
—
1.0

Total gross
unrealized losses
27.9
21.4
20.3
19.0
15.5
12.7
10.3
9.6
9.5
5.4
4.2
3.9
3.7
3.3
2.9
2.6
2.5
1.9
1.7
1.6
1.5
1.4
1.0
.6

— $
2.8
.3
1.8
6.5
—
—
1.7
—
.4
—
.3
3.5
—
.2
.1
.8
.3
—
1.1
—
—
—
—

—
—
—
.3
1.8

.4
.3
.3
.3
8.6

46.2 $

97.7

28.5 $

21.9

194.3

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 9 percent of our total fixed maturity
securities portfolio.

Fair Value of Investments

Fair value is the price that would be received to sell an asset or paid
to transfer a liability in an orderly transaction between market
participants at the measurement date and, therefore, represents an
exit price, not an entry price. We carry certain assets and liabilities
at fair value on a recurring basis, including fixed maturities,
equity securities, trading securities, investments held by VIEs,
derivatives, separate account assets and embedded derivatives. We
carry our COLI, which is invested in a series of mutual funds, at
its cash surrender value which approximates fair value. In addition,
we disclose fair value for certain financial instruments, including
mortgage loans, policy loans, cash and cash equivalents, insurance
liabilities for interest-sensitive products, investment borrowings,
notes payable and borrowings related to VIEs.

CNO FINANCIAL GROUP, INC. - Form 10-K

PART II
ITEM 7 Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations

Valuation Hierarchy

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

liabilities

include

(cid:116) 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.

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. Our Level 2
assets are valued as follows:

(cid:116) Fixed maturities available for sale, equity securities and trading

securities

Corporate securities are generally priced using market and income
approaches. Inputs generally consist of trades of identical or
similar securities, quoted prices in inactive markets, issuer rating,
benchmark yields, maturity, and credit spreads.

U.S. Treasuries and obligations of U.S. Government corporations
and agencies are generally priced using the market approach.
Inputs generally consist of trades of identical or similar securities,
quoted prices in inactive markets and maturity.

States and political subdivisions are generally priced using the
market approach. Inputs generally consist of trades of identical
or similar securities, quoted prices in inactive markets, new
issuances and credit spreads.

Asset-backed securities, collateralized debt obligations, commercial
mortgage-backed securities, mortgage pass-through securities and
collateralized mortgage obligations are generally priced using
market and income approaches. Inputs generally consist of
quoted prices in inactive markets, spreads on actively traded
securities, expected prepayments, expected credit default rates,
delinquencies, and issue specific information including, but not
limited to, collateral type, seniority and vintage.

Equity
securities (primarily comprised of non-redeemable
preferred stock) are generally priced using the market approach.
Inputs generally consist of trades of identical or similar securities,
quoted prices in inactive markets, issuer rating, benchmark
yields, maturity, and credit spreads.

(cid:116) Investments held by VIEs

Corporate securities are generally priced using market and income
approaches using pricing vendors. Inputs generally consist of
issuer rating, benchmark yields, maturity, and credit spreads.

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

(cid:116) Other invested assets - derivatives

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 quotes; time value
and volatility factors underlying options; market interest rates;
and non-performance risk.

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.

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 such 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.

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 45 percent of our Level 3 fixed maturity
securities were valued using unadjusted broker quotes or broker-
provided valuation inputs. The remaining Level 3 fixed maturity
investments do not have readily determinable market prices
and/or observable inputs. For these securities, we use internally
developed valuations. Key assumptions used to determine fair
value for these securities may include risk premiums, projected
performance of underlying collateral and other factors involving
significant assumptions which may not be reflective of an active
market. For certain investments, we use a matrix or model
process to develop a security price where future cash flow
expectations are discounted at an estimated market rate. The
pricing matrix incorporates term interest rates as well as a spread
level based on the issuer’s credit rating, other factors relating to
the issuer, and the security’s maturity. In some instances issuer-
specific spread adjustments, which can be positive or negative,
are made based upon internal analysis of security specifics such
as liquidity, deal size, and time to maturity.

For certain embedded derivatives, we use actuarial assumptions
in the determination of fair value which we consider to be Level
3 inputs.

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 categorization of fair value measurements, by input level, for our financial instruments carried at fair value on a recurring basis at
December 31, 2016 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

— $

13,252.4 $

258.5 $ 13,510.9

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
Collateralized debt obligations
Commercial mortgage-backed 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

—
—
—
—
—
—
—
—
—
359.9

—

—
—
—
—
—
4.9
4.9
—
—
—
364.8 $

164.3
1,988.9
33.0
2,649.9
225.3
1,504.2
2.5
915.5
20,736.0
199.1

19.0

.5
94.3
2.4
163.9
78.4
—
358.5
1,724.3
111.9
4.7

23,134.5 $

—
—
3.9
60.4
5.4
32.0
—
—
360.2
25.2

164.3
1,988.9
36.9
2,710.3
230.7
1,536.2
2.5
915.5
21,096.2
584.2

—

19.0

—
—
—
—
—
—
—
—
—
—

.5
94.3
2.4
163.9
78.4
4.9
363.4
1,724.3
111.9
4.7
385.4 $ 23,884.7

— $

1,092.3 $

1,092.3

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 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, 2016 (dollars in millions):

December 31, 2016

Purchases,
sales,
issuances
and
settlements,
net(b)

Beginning
balance as of
December 31,
2015

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)

Ending
balance
as of
December 31,
2016

Amount of
total gains
(losses) for the
year ended
December 31,
2016 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
Debt securities issued by
foreign governments
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

170.4

76.5

(10.7)

9.1

20.3

(7.1)

258.5

(10.9)

—
35.9

—

1.1

4.0
9.7

5.4

16.9

(.1)

207.5

112.4

32.0

39.9

5.5

—

—
—

—

(10.7)

(12.7)

—

(.1)
2.2

—

—
26.3

—

13.9

—

—
(13.7)

—

11.3

60.5

(20.8)

—

3.9
60.4

5.4

32.0

—

360.2

25.2

—
—

—

(10.9)

(12.7)

(39.9)

—

(1,057.1)

(96.0)

60.8

—

(1,092.3)

60.8

(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.

(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.
In addition, such activity includes the investments received upon the recapture of reinsurance agreements with BRe on September 29, 2016. The following summarizes
such activity for the year ended December 31, 2016 (dollars in millions):

CNO FINANCIAL GROUP, INC. - Form 10-K

PART II
ITEM 7 Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations

Received in
reinsurance
recapture

Purchases

Sales

Issuances

Settlements

Purchases, sales,
issuances and
settlements, net

ASSETS:

Fixed maturities, available for sale:

Corporate securities
Debt securities issued by foreign governments
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 - corporate securities

LIABILITIES:

Future policy benefits - embedded derivatives
associated with fixed index annuity products

18.5
4.0
16.9
5.4
17.0
—
61.8
3.3
.2

89.2
—
—
—
—
—
89.2
2.2
—

(31.2) $
—
(7.2)
—
(.1)
(.1)
(38.6)
—
(.2)

— $
—
—
—
—
—
—
—
—

76.5
4.0
9.7
5.4
16.9
(.1)
112.4
5.5
—

(148.3)

—

21.2

(28.9)

60.0

(96.0)

At December 31, 2016, 46 percent of our Level 3 fixed maturities,
available for sale, were investment grade and 72 percent of our
Level 3 fixed maturities, available for sale, consisted of corporate
securities.

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.

Realized and unrealized investment gains and losses presented
in the preceding tables represent gains and losses during the time
the applicable financial instruments were classified as Level 3.

Realized and unrealized gains (losses) on Level 3 assets
are primarily reported in either net investment income for
policyholder and reinsurer accounts and other special-purpose
portfolios, net realized investment gains (losses) or insurance
policy benefits within the consolidated statement of operations or
accumulated other comprehensive income within shareholders’
equity based on the appropriate accounting treatment for the
instrument.

The amount presented for gains (losses) included in our net
loss for assets and liabilities still held as of the reporting date
primarily represents impairments for fixed maturities, available

Investment ratings are assigned the second lowest rating
by Nationally Recognized Statistical Rating Organizations
(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, 2016, 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
1,026.2
1,569.0
5,505.3
2,922.0
3,530.0
3,395.9
17,948.4
206.2
330.3
329.0
2,282.3
3,147.8
21,096.2

Percent of fixed
maturities

5%
7
26
14
17
16
85
1
2
1
11
15
100%

Amortized cost
992.4
1,434.8
5,009.2
2,668.7
3,353.1
3,274.9
16,733.1
210.3
333.7
330.8
2,195.2
3,070.0
19,803.1

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

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
December 31, 2016, the average yield, computed on the cost basis
of our fixed maturity portfolio, was 5.5 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, 2016, 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, 2016, our fixed maturity portfolio had $1,487.4
million of unrealized gains and $194.3 million of unrealized losses,
for a net unrealized gain of $1,293.1 million. Estimated fair values
of fixed maturity investments were determined based on estimates
from: (i) nationally recognized pricing services (91 percent of
the portfolio); (ii) broker-dealer market makers (1 percent of the
portfolio); and (iii) internally developed methods (8 percent of the
portfolio).

At December 31, 2016, approximately 12 percent of our invested
assets (15 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 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
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 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. At December 31, 2016, our below-investment
grade fixed maturity investments had an amortized cost of
$3,070.0 million and an estimated fair value of $3,147.8 million.

2016
22,539.5
1,219.3

2015
21,624.6
1,217.7

2014
22,939.9
1,304.3

5.41%

5.63%

5.69%

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 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
2016, we recognized net realized investment gains of $8.3 million,
which were comprised of: (i) $47.5 million of net gains from the
sales of investments; (ii) a $7.3 million loss on the dissolution of
a VIE; (iii) the decrease in fair value of certain fixed maturity
investments with embedded derivatives of $.4 million; (iv) the
increase in fair value of embedded derivatives related to a modified
coinsurance agreement of $.8 million; and (v) $32.3 million of
writedowns of investments for other than temporary declines in
fair value recognized through net income ($35.9 million, prior
to the $3.6 million of impairment losses recognized through
accumulated other comprehensive income).

Our investment portfolio is subject to the risk of declines in
realizable value. However, we attempt to mitigate this risk through
the diversification and active management of our portfolio.

Our investment strategy is to maximize, over a sustained period
and within acceptable parameters of quality and risk, investment
income and total investment return through active investment
management. Accordingly, we may sell securities at a gain or a loss
to enhance the projected total return of the portfolio as market
opportunities change, to reflect changing perceptions of risk, or
to better match certain characteristics of our investment portfolio
with the corresponding characteristics of our insurance liabilities.

As of December 31, 2016, we had $28.3 million of 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 $2.7 million in 2016 and less
than $.1 million in both 2015 and 2014.

At December 31, 2016, fixed maturity investments included
structured securities with an estimated fair value of $5.4 billion (or
26 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 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.

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 2016.

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, 2016 (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
1,993.9
1,757.6
1,772.2
388.1
55.8
138.7
6,106.3

Amortized
cost
1,523.5
1,592.5
1,602.2
348.0
56.2
138.1
5,260.5

Estimated
fair value
1,535.4
1,624.7
1,666.7
364.5
65.6
138.3
5,395.2

The amortized cost and estimated fair value of structured securities at December 31, 2016, 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
710.6
156.4
1,536.2
2,710.3
230.7
51.0
5,395.2

Percent of fixed
maturities

3.4%
.7
7.3
12.9
1.1
.2
25.6%

Amortized cost
664.8
142.5
1,531.0
2,641.5
230.0
50.7
5,260.5

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

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 2016, we sold $790.2 million of fixed maturity
investments which resulted in gross investment losses (before
income taxes) of $95.2 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, 2016, we held commercial mortgage loan
investments with a carrying value of $1,768.0 million (or 6.7 percent
of total invested assets) and a fair value of $1,800.1 million. We
had no mortgage loans that were in the process of foreclosure
at December 31, 2016. During 2016, 2015 and 2014, we
recognized nil, nil and $6.8 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 14 percent, 9 percent, 7 percent and 6 percent of
the mortgage loan balance were on properties located in California,
Texas, Maryland and Florida, 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, 2016 (dollars
in millions):

Retail
Multi-family
Office building
Industrial
Other

TOTAL COMMERCIAL MORTGAGE LOANS

Number of loans Carrying value
487.9
508.4
332.8
249.6
189.3
1,768.0

117
37
33
29
26
242

The following table shows our commercial mortgage loan portfolio by loan size as of December 31, 2016 (dollars in millions):

Number of loans Carrying value
187.7
457.9
546.8
575.6
1,768.0

113
65
40
24
242

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, 2016 (dollars in millions):

2017
2018
2019
2020
2021
after 2021

TOTAL COMMERCIAL MORTGAGE LOANS

Number of loans Carrying value
86.5
141.1
39.8
32.0
108.4
1,360.2
1,768.0

15
30
20
8
14
155
242

The following table provides the carrying value and estimated fair value of our outstanding mortgage loans and the underlying collateral
as of December 31, 2016 (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

976.5 $
394.7
282.3
75.3
39.2
1,768.0 $

1,004.2 $
396.7
286.2
74.0
39.0
1,800.1 $

Collateral
2,393.0
596.2
385.1
89.5
42.0
3,505.8

(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, 2016, we held $363.4 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 and certain nontraditional investments,
including investments in limited partnerships, promissory notes,
hedge funds and real estate investments held for sale.

At December 31, 2016, we held investments with an amortized
cost of $1,708.6 million and an estimated fair value of $1,724.3
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.

Consolidated Financial Condition

Changes in the Consolidated Balance Sheet

Changes in our consolidated balance sheet between December 31,
2016 and December 31, 2015, primarily reflect: (i) our net income
for 2016; (ii) changes in the fair value of our fixed maturity
securities, available for sale; and (iii) payments to repurchase
common stock of $203.0 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, 2016, we increased the
carrying value of such investments by $1.3 billion as a result of this
fair value adjustment.

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

Our capital structure as of December 31, 2016 and December 31, 2015 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, 2016

December 31, 2015

912.9

911.1

1.7
3,212.1
622.4
650.7
4,486.9
5,399.8

1.8
3,386.8
402.8
347.1
4,138.5
5,049.6

The following table summarizes certain financial ratios as of and for the years ended December 31, 2016 and December 31, 2015:

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, 2016
$

25.82
22.24
2.43X

December 31, 2015
$

22.49
20.30
2.59X

16.9%
19.1%

18.0%
19.6%

(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.

Termination of Long-Term Care Reinsurance
Agreements and Recapture of Related Long-
Term Care Business in Run-off

September 2016, Washington National and BCLIC expanded the
scope of the independent audit to include additional investments
for which we estimated the fair value to be approximately $63
million as of September 30, 2016.

In December 2013, two of our insurance subsidiaries with long-
term care business (Washington National and BCLIC) entered into
100% coinsurance agreements ceding $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. BRe was a reinsurer that was not
licensed or accredited by the states of domicile (Indiana and New
York, respectively) of the insurance subsidiaries ceding the long-
term care business and BRe was not rated by A.M. Best. As a result
of its non-accredited status, BRe was required to provide collateral
which meets the regulatory requirements of the states of domicile
in order for our insurance subsidiaries to obtain full credit in their
statutory financial statements for the reinsurance receivables due
from BRe. Such collateral was required to be held in market value
trusts subject to 7% over collateralization, investment guidelines
and periodic true-up provisions.

As a result of certain irregularities that had come to our attention
regarding BRe (including its relationship with Platinum Partners
LP (“Platinum”) and the valuation and appropriateness of the
collateral deposited in trusts by BRe for Washington National and
BCLIC), CNO commenced an independent third-party audit by
a forensic accounting firm in late June 2016 of certain investments
deposited in the trusts by BRe. Such investments included assets
valued at that time using unobservable inputs that contained
assumptions determined by BRe. The initial scope of CNO’s
audit was a subset of investments which had an estimated fair
value of approximately $62 million as of September 30, 2016. In

On September 29, 2016, the New York Department of Financial
Services (the “NYDFS”) issued a regulatory demand letter to
CNO. In the letter, the NYDFS said it had conducted a “detailed
analysis” of the assets in the primary BCLIC trust account,
after which it had “concluded that a substantial portion of the
current assets held within the Trust are not in compliance with
the standards set under 11 NYCRR § 126 (Insurance Regulation
114).” The NYDFS also said that “[a]ssets within the trust
were removed subsequent to the Department’s approval of the
reinsurance treaty and replaced with assets that do not comply
with 11 NYCRR § 126(a)(2), which states that ‘assets deposited
in the trust account shall be valued according to their current fair
market value, and shall consist only of cash (United States legal
tender), certificates of deposit (issued by a United States bank and
payable in United States legal tender), and investments of the types
specified in paragraphs (1), (2), (3), (8) and (10) of subsection (a)
of section 1404 of the New York Insurance Law.’” The NYDFS
directed BCLIC “to remediate this deficiency within ten days of
the date of this letter [i.e., by October 9, 2016] by ensuring the
assets held within the Trust meet the requirements of Insurance
Regulation 114.” The NYDFS said that “[f]ailure to bring the
Trust into compliance may result in the denial of reserve credit
and disciplinary action from the Department.”

On September 29, 2016, the Indiana Department of Insurance
(“IDOI”) issued a regulatory demand letter to CNO. In the
letter, the IDOI said that the reinsurance agreement between
Washington National and BRe and the related trust are not in

CNO FINANCIAL GROUP, INC. - Form 10-K

PART II
ITEM 7 Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations

compliance with 760 IAC 1-55-4. The letter states that credit for
reinsurance under the reinsurance agreement shall not be allowed
for Washington National “unless corrective measures, satisfactory
to the IDOI, are taken immediately.”

that BRe’s material breaches of the reinsurance agreements
are incurable, and that it is in the best interests of Washington
National and BCLIC policyholders and other key stakeholders to
terminate the reinsurance agreements.

On September 29, 2016, Washington National and BCLIC sent
written notices to Wilmington Trust, N.A., the trustee of the BRe
reinsurance trusts, pursuant to which Washington National and
BCLIC notified the trustee that they were exercising their rights
under the reinsurance agreements to withdraw all of the assets
from the reinsurance trust accounts. Assets included in these
accounts were subsequently transferred to accounts of Washington
National and BCLIC.

On September 29, 2016, Washington National and BCLIC gave
written notice to BRe that they were terminating their reinsurance
agreements with BRe effective immediately, after concluding

The aforementioned independent audit of these investments was
completed in the fourth quarter of 2016. The audit confirmed that
the assets in the initial scope of the audit bore some connection to
Platinum or to parties that have had past or present associations
with Platinum. Based on information obtained through the audit,
the investments included in the additional scope of the audit do
not appear to have clear connections to Platinum or to parties that
have had past or present associations with Platinum. However,
CNO and the auditor retained by CNO also concluded that many
of the values that had been assigned to these investments by BRe,
and summarized in reports prepared by its valuation firm, were
inaccurate due to the use of flawed methodologies.

In addition to the investments subject to the independent audits, Washington National and BCLIC received approximately $380 million
in other investments and cash balances in the recapture. A substantial portion of these investments have been sold or redeemed since the
recapture. We recognized net realized losses totaling $5.3 million in the quarter ended December 31, 2016, related to the transferred
investments (including the impacts of the audit findings and repositioning of the assets). The activity in the fourth quarter of 2016 with
respect to the assets received in the recapture is summarized below (dollars in millions):

Investments included in initial scope of audit
Investments included in additional scope of audit
Investments not included in scope of audit:
Fixed maturities and other invested assets
Cash and investment purchases subsequent to recapture

TOTAL INVESTMENTS

September 30,
2016 values
62.2
62.6

319.4
60.4
504.6

Net cash
flows(1)

(13.5) $
(11.6)

Realized
losses and
impairments(2)
.4
(1.7)

Other
activity(3)
3.9
1.9

(299.1)
324.2

(4.0)
—

— $

(5.3) $

.6
(3.9)
2.5

December 31,
2016 values
53.0
51.2

16.9
380.7
501.8

A summary of the values for the remaining investments that were included in the aforementioned independent audits as of December 31,
2016, is summarized below (dollars in millions):

Lease related investments
Mortgage loans secured by real estate
Senior secured loans to companies in the energy sector(4)
Senior secured loans to other companies
Life settlement financing
Secured term loan issued by Platinum Partners Credit Opportunity Master Fund L.P.
Preferred and common stock
Other

TOTAL INVESTMENTS

Investments
included in
initial scope
of audit
—
1.0
13.8
17.6
6.8
4.4
2.7
6.7
53.0

Investments
included in
additional scope
of audit
27.4
16.1
—
3.4
1.0
—
.9
2.4
51.2

Total
investments
included in
the scope of
audit
27.4
17.1
13.8
21.0
7.8
4.4
3.6
9.1
104.2

(1) Net cash flows from sales, redemptions and investment purchases during the quarter ended December 31, 2016.
(2) Includes $4.6 million of impairment charges and $.7 million of net realized losses recognized on the sale of transferred investments.
(3) Includes amortization of discount and premium and changes in estimated fair values of investments during the quarter ended December 31, 2016.
(4) Includes: (i) $5.0 million of loans issued by Golden Gate Oil, LLC with a par value of $11.6 million; and (ii) $6.7 million of loans issued by the parent of Agera Energy

LLC with a par value of $10.9 million. The issuers of this debt have been referred to in recent articles regarding Platinum.

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

We recognized a pre-tax loss of $75.4 million in the third quarter of 2016 related to the termination of the reinsurance agreements and the
recapture of the long-term care business as summarized below (dollars in millions):

Market value of investments
Insurance liabilities
Write-off of reinsurance receivables
Estimated transaction expenses
PRE-TAX LOSS

504.7
(552.2)
(17.9)
(10.0)
(75.4)

As a result of the recapture, related charge and additional capital required to support the assets and liabilities of this business, CNO
contributed $200 million to its insurance subsidiaries on September 30, 2016.

The impact of the recapture on our statutory earnings and surplus at September 30, 2016 is summarized below (dollars in millions):

Impact on surplus:
Market value of investments
Write-off of estimated receivable due from BRe
Insurance liabilities
Expenses incurred
Statutory earnings impact
Impact on admitted investments
Impact on admitted deferred tax assets
STATUTORY SURPLUS IMPACT

504.7
(17.9)
(587.2)
(10.0)
(110.4)
(11.0)
(14.5)
(135.9)

In order to increase its excess capital position, CNO suspended its share repurchase program for the remainder of 2016, but expects to
begin repurchasing shares in the first quarter of 2017, absent compelling alternatives.

Contractual Obligations

The Company’s significant contractual obligations as of December 31, 2016, were as follows (dollars in millions):

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
57,475.3
1,206.6
1,842.0
2,180.5
266.8

303.8
63,275.0

Payment due in
2018-2019
7,406.8
185.9
723.5
104.5
14.9

2020-2021
7,231.6
384.9
858.9
103.3
15.6

2017
3,650.9
43.9
186.6
68.7
7.0

Thereafter
39,186.0
591.9
73.0
1,904.0
229.3

118.6
4,075.7

152.7
8,588.3

26.6
8,620.9

5.9
41,990.1

(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 $22.7 billion included in our consolidated balance sheet as of December 31, 2016. As such payments are
based on numerous assumptions, the actual payments may vary significantly from the amounts shown.

In estimating the payments we expect to make to our policyholders, we considered the following:
(cid:116)

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.

(cid:116)

(cid:1)

(cid:116)

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.

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) Includes projected interest payments based on interest rates, as applicable, as of December 31, 2016. Refer to the note to the consolidated financial statements entitled

“Notes Payable - Direct Corporate Obligations” for additional information on notes payable.

(d) These borrowings represent the securities issued by VIEs and include projected interest payments based on interest rates, as applicable, as of December 31, 2016.

(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 4.25 percent.

(f) Includes amounts related to noncancellable operating leases, sponsorship agreements and commitments to purchase investments. Also included are obligations with

third parties for information technology services, software maintenance and license agreements and consulting services.

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:

(cid:116)

(cid:116)(cid:1)

(cid:116)

(cid:116)(cid:1)

(cid:116)

(cid:116)(cid:1)

An adverse decision in pending or future litigation.

An inability to obtain rate increases on certain of our
insurance products.

(cid:1)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).

(cid:1)An inability to meet and/or maintain the covenants in
our Revolving Credit Agreement.

(cid:1)A significant increase in policy surrender levels.

A significant increase in investment defaults.

(cid:1)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 95

PART II
ITEM 7 Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations

Three of the Company’s insurance subsidiaries (Washington
National, Bankers Life and Colonial Penn) are members of the
FHLB. As members of the FHLB, our insurance subsidiaries have
the ability to borrow on a collateralized basis from the FHLB.
We 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, 2016, the carrying value of the FHLB common

stock was $71.2 million. As of December 31, 2016, collateralized
borrowings from the FHLB totaled $1.6 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 $2.0 billion at
December 31, 2016, which are maintained in custodial accounts
for the benefit of the FHLB.

The following summarizes the terms of the borrowings from the FHLB by our insurance subsidiaries (dollars in millions):

Amount borrowed
$

50.0
50.0
50.0
50.0
22.0
100.0
50.0
50.0
10.0
50.0
50.0
100.0
21.8
15.0
50.0
21.8
25.0
100.0
50.0
75.0
100.0
50.0
100.0
57.7
100.0
28.2
125.0
50.0
25.4
20.5
1,647.4

Maturity date
January 2018
January 2018
February 2018
February 2018
February 2018
May 2018
July 2018
August 2018
December 2018
January 2019
February 2019
March 2019
July 2019
October 2019
May 2020
June 2020
September 2020
September 2020
September 2020
September 2020
October 2020
December 2020
July 2021
July 2021
August 2021
August 2021
August 2021
September 2021
March 2023
June 2025

Interest rate at December 31, 2016
Variable rate – 1.226%
Variable rate – 1.222%
Variable rate – 1.191%
Variable rate – 1.001%
Variable rate – 1.267%
Variable rate – 1.206%
Variable rate – 1.360%
Variable rate – 1.022%
Variable rate – 1.266%
Variable rate – 1.300%
Variable rate – 1.001%
Variable rate – 1.216%
Variable rate – 1.234%
Variable rate – 1.399%
Variable rate – 1.224%
Fixed rate – 1.960%
Variable rate – 1.622%
Variable rate – 1.416%
Variable rate – 1.416%
Variable rate – 1.118%
Variable rate – 1.109%
Variable rate – 1.335%
Variable rate – 1.431%
Variable rate – 1.411%
Variable rate – 1.400%
Fixed rate – 2.550%
Variable rate – 1.236%
Variable rate – 1.477%
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.

Our estimated consolidated statutory RBC ratio of 459 percent
at December 31, 2016, reflects estimated consolidated statutory
operating earnings of $286 million (including approximately
$110 million loss on the recapture of long-term care business),
$200.0 million of capital contributions to the insurance
subsidiaries from the holding company (related to the charge
and additional capital required to support the recapture of the
long-term care business) and dividends to the holding company
of $274.3 million during 2016.

CNO FINANCIAL GROUP, INC. - Form 10-K

During 2016, 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, BCLIC and Bankers Life were $111.0 million, $32.0
million and $186.4 million, respectively, at December 31, 2016.
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.

PART II
ITEM 7 Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations

Our insurance subsidiaries transfer exposure to certain risk to
others through reinsurance arrangements. When we obtain
reinsurance, we are still liable for those transferred risks in
the event 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 and our consolidated statutory
RBC ratio.

Financial Strength Ratings of our Insurance
Subsidiaries

Financial strength ratings provided by A.M. Best, Fitch, S&P
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 October 4, 2016, S&P affirmed the financial strength ratings
of “BBB+” of our primary insurance subsidiaries. The outlook
for these ratings is negative. S&P’s negative outlook reflects their
concerns related to the Company’s recapture of the ceded business
as further described under the caption “Termination of Long-Term
Care Reinsurance Agreements and Recapture of Related Long-
Term Care Business in Run-off”. 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 9, 2016, Moody’s affirmed the financial strength ratings
of “Baa1” of our primary insurance subsidiaries and the outlook
for these ratings is stable. 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 seven ratings
above the “Baa1” rating of our primary insurance subsidiaries and
thirteen ratings that are below that rating.

Rating agencies have increased the frequency and scope of their
credit reviews and requested additional information from the
companies that they rate, including us. They may also adjust
upward the capital and other requirements employed in the
rating agency models for maintenance of certain ratings levels.
We cannot predict what actions rating agencies may take, or what
actions we may take in response. Accordingly, downgrades and
outlook revisions related to us or the life insurance industry may
occur in the future at any time and without notice by any rating
agency. These could increase policy surrenders and withdrawals,
adversely affect relationships with our distribution channels,
reduce new sales, reduce our ability to borrow and increase our
future borrowing costs.

Liquidity of the Holding Companies

Availability and Sources and Uses of Holding
Company Liquidity; Limitations on Ability of
Insurance Subsidiaries to Make Dividend and
Surplus Debenture Interest Payments to the Holding
Companies; Limitations on Holding Company
Activities

At December 31, 2016, CNO, CDOC and our other non-
insurance subsidiaries held: (i) unrestricted cash and cash
equivalents of $107.6 million; (ii) fixed income investments
of $84.3 million; and (iii) equity securities of $71.7 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 97

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,

2016
74.3
56.0
78.6

2015
265.7
60.6
70.1

2014
174.0
63.3
92.5

208.9

396.4

329.8

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 without
regulatory approval for any 12-month period in amounts equal
to the greater of (or in some 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. However, as each of the immediate insurance
subsidiaries of CDOC has significant negative earned surplus,
any dividend payments from the insurance subsidiaries require
the prior approval of the director or commissioner of the
applicable state insurance department. In 2016, our insurance
subsidiaries paid dividends to CDOC totaling $274.3 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.

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 400 percent at December
31, 2016. 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.

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, 2016, the subsidiaries of CLTX had earned surplus (deficit) as summarized below (dollars in millions):

Subsidiary of CLTX

Bankers Life
Colonial Penn

Earned surplus
(deficit)
541.7
(296.1)

Additional
information
(a)
(b)

(a) Bankers Life paid dividends of $143.7 million to CLTX in 2016.
(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. As further described above
under the caption “Termination of Long-Term Care Reinsurance
Agreements and Recapture of Related Long-Term Care Business
in Run-off”, CNO made $200.0 million of capital contributions
to its insurance subsidiaries on September 30, 2016.

The scheduled principal and interest payments on our direct corporate obligations are as follows (dollars in millions):

2017
2018
2019
2020
2021
2022 and thereafter

(a) Based on interest rates as of December 31, 2016.

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, November 2014
and November 2015, the Company’s Board of Directors
approved, in aggregate, an additional $1,600.0 million to
repurchase the Company’s outstanding securities. In 2016,
we repurchased 11.7 million shares of common stock for
$203.0 million under our securities repurchase program. The
Company had remaining repurchase authority of $252.7 million
as of December 31, 2016. We currently anticipate repurchasing
a total of approximately $200 million to $275 million of our
common stock during 2017, absent compelling alternatives
including, but not limited to, investment in our business,
dividends on common stock, acquisition transactions or ceding
commissions related to reinsurance transactions. The amount
and timing of the securities repurchases (if any) will be based on
business and market conditions and other factors.

Principal
—
—
100.0
325.0
—
500.0
925.0

Interest(a)
43.9
43.9
42.0
33.6
26.3
91.9
281.6

negative margins and would likely require the payment of a
significant ceding commission in a reinsurance transaction.
The payment of a ceding commission by the Company would
likely result in the recognition of a loss upon the completion of
a reinsurance transaction. Due to our current tax position, it is
likely that a portion of the tax benefit recognized on the loss
would not be realized and we may be required to increase our
valuation allowance for deferred tax assets. Although we believe
reducing our exposure to the risk of long-term care business
through reinsurance would benefit the Company in the long
term, such a transaction could initially adversely impact certain
aspects of our financial position, results of operations and/or
cash flow, including the cash available to repurchase shares of
our common stock.

In 2016, 2015 and 2014, dividends declared and paid on
common stock totaled $54.8 million ($0.31 per common share),
$52.0 million ($0.27 per common share) and $51.0 million
($0.24 per common share), respectively. In May 2016, the
Company increased its quarterly common stock dividend to
$0.08 per share from $0.07 per share.

On February 8, 2017, A.M. Best affirmed our issuer credit
and senior unsecured debt ratings of “bbb-” and the outlook
for these ratings is stable. In A.M. Best’s view, a company
rated “bbb-” has an adequate ability to meet the terms of its
obligations; however, the issuer is more susceptible to changes
in economic or other conditions. Pluses and minuses show

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

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 nine ratings above CNO’s “bbb-” rating
and twelve ratings that are below its rating.

On January 12, 2017, Fitch affirmed its “BB+” rating on our
issuer credit and senior unsecured debt. The outlook for these
ratings is stable. 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 October 4, 2016, S&P affirmed our issuer credit and
unsecured debt ratings of “BB+”. The outlook for these ratings
is negative. S&P’s negative outlook reflects their concern related
to the Company’s recapture of the ceded business as further
described above under the caption “Termination of Long-
Term Care Reinsurance Agreements and Recapture of Related
Long-Term Care Business in Run-off”. 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 9, 2016, Moody’s affirmed our issuer credit and senior
unsecured debt ratings of “Ba1” and the outlook for these ratings
is stable. 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 ten ratings above CNO’s “Ba1” rating and ten ratings
that are below its rating.

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. There were no such
borrowings outstanding at December 31, 2016.

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,
2016, approximately 23 percent of our total insurance liabilities,
or approximately $5.2 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 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.
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

100

CNO FINANCIAL GROUP, INC. - Form 10-K

PART II
ITEM 7A Quantitative and Qualitative Disclosures About Market Risk

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, 2016, approximately
23 percent of our insurance liabilities had interest rates that may
be reset annually; 51 percent had a fixed explicit interest rate
for the duration of the contract; 24 percent had credited rates
which approximate the income earned by the Company; and the
remainder had no explicit interest rates. At December 31, 2016,
the average yield, computed on the cost basis of our fixed maturity
portfolio, was 5.5 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, absent
other factors, a change in the value of assets related to changes
in interest rates should be largely offset by a change in the value
of liabilities. At December 31, 2016, the estimated duration
of our fixed income securities (as modified to reflect estimated
prepayments and call premiums) and the estimated duration of our
insurance liabilities were approximately 8.0 years and 8.4 years,
respectively. 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
$365 million if interest rates were to increase by 10 percent from
their levels at December 31, 2016. 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
interest rates rise from their current low levels. During 2016, we
recognized net realized investment gains of $8.3 million, which
were comprised of: (i) $47.5 million of net gains from the sales of
investments; (ii) a $7.3 million loss on the dissolution of a VIE; (iii)
the decrease in fair value of certain fixed maturity investments with

embedded derivatives of $.4 million; (iv) the increase in fair value of
embedded derivatives related to a modified coinsurance agreement
of $.8 million; and (v) $32.3 million of writedowns of investments
for other than temporary declines in fair value recognized through
net income ($35.9 million, prior to the $3.6 million of impairment
losses recognized through accumulated other comprehensive
income). During 2015, we recognized net realized investment
losses of $36.6 million, which were comprised of: (i) $8.2 million
of net gains from the sales of investments; (ii) an $11.3 million
gain on the dissolution of a VIE; (iii) the decrease in fair value of
certain fixed maturity investments with embedded derivatives of
$9.2 million; (iv) the decrease in fair value of embedded derivatives
related to a modified coinsurance agreement of $7.0 million; and
(v) $39.9 million of writedowns of investments for other than
temporary declines in fair value recognized through net income
($42.9 million, prior to the $3.0 million of impairment losses
recognized through accumulated other comprehensive income).
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);
(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.

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.

CNO FINANCIAL GROUP, INC. - Form 10-K 101

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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .102
Consolidated Balance Sheet at December 31, 2016 and 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .103
Consolidated Statement of Operations for the years ended December 31, 2016, 2015 and 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .105
Consolidated Statement of Comprehensive Income for the years ended December 31, 2016, 2015 and 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . .106
Consolidated Statement of Shareholders’ Equity for the years ended December 31, 2016, 2015 and 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .107
Consolidated Statement of Cash Flows for the years ended December 31, 2016, 2015 and 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .108
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .109

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, 2016 and 2015,
and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 2016 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, 2016, 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 21, 2017

102

CNO FINANCIAL GROUP, INC. - Form 10-K

Consolidated Balance Sheet

December 31, 2016 and 2015

(Dollars in millions)
ASSETS
Investments:

Fixed maturities, available for sale, at fair value (amortized cost: 2016 - $19,803.1; 2015 - $18,947.0)
Equity securities at fair value (cost: 2016 - $580.7; 2015 - $447.4)
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.

PART II
ITEM 8 Consolidated Financial Statements

2016

2015

21,096.2
584.2
1,768.0
112.0
363.4
1,724.3
589.5
26,237.6
478.9
189.3
239.6
401.8
1,044.7
2,260.4
789.7
4.7
328.5
31,975.2

19,882.9
463.0
1,721.0
109.4
262.1
1,633.6
415.1
24,487.1
432.3
364.4
237.0
449.0
1,083.3
2,859.3
898.8
4.7
309.2
31,125.1

CNO FINANCIAL GROUP, INC. - Form 10-K 103

PART II
ITEM 8 Consolidated Financial Statements

Consolidated Balance Sheet, continued

December 31, 2016 and 2015

(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
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:
2016 - 173,753,614; 2015 - 184,028,511)
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.

2016

2015

10,912.7
10,953.3
500.6
282.5
4.7
611.4
1,647.4
1,662.8
912.9
27,488.3

1.7
3,212.1
622.4
650.7
4,486.9
31,975.2

10,762.3
10,602.1
487.8
286.3
4.7
707.8
1,548.1
1,676.4
911.1
26,986.6

1.8
3,386.8
402.8
347.1
4,138.5
31,125.1

104

CNO FINANCIAL GROUP, INC. - Form 10-K

PART II
ITEM 8 Consolidated Financial Statements

Consolidated Statement of Operations

for the years ended December 31, 2016, 2015 and 2014

(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 (losses), excluding impairment losses
Other-than-temporary impairments:

Total other-than-temporary impairment losses
Portion of other-than-temporary impairment losses recognized in accumulated
other comprehensive income
Net impairment losses recognized
Gain (loss) on dissolution of variable interest entities

Total realized gains (losses)
Fee revenue and other income

Total revenues
Benefits and expenses:

Insurance policy benefits
Loss on sale of subsidiary, (gain) loss on reinsurance transactions and transition expenses
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.

2016

2015

2014

2,601.1

2,556.0

2,629.7

1,204.1
121.1

47.9

(35.9)

3.6
(32.3)
(7.3)
8.3
50.5
3,985.1

2,390.5
75.4
116.4
253.3
—
796.3
3,631.9
353.2

127.8
(132.8)
358.2

1,203.6
30.0

(8.0)

(42.9)

3.0
(39.9)
11.3
(36.6)
58.9
3,811.9

2,308.3
9.0
94.9
260.0
32.8
739.2
3,444.2
367.7

129.5
(32.5)
270.7

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

176,638,000
2.03

193,054,000
1.40

212,917,000
.24

178,323,000
2.01

195,166,000
1.39

217,655,000
.24

CNO FINANCIAL GROUP, INC. - Form 10-K 105

PART II
ITEM 8 Consolidated Financial Statements

Consolidated Statement of Comprehensive Income

2016
358.2

2015
270.7

2014
51.4

942.9
(113.5)

(1,337.6)
157.9

495.3

(624.6)

29.6

(.5)
(655.3)
(.1)
(655.4)
232.9
(422.5)
(151.8) $

(59.0)

1.0
146.8
(1.4)
145.4
(51.9)
93.5
144.9

424.4
(27.9)

(46.9)

(18.6)

.7
331.7
8.6
340.3
(120.7)
219.6
577.8

for the years ended December 31, 2016, 2015 and 2014

(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 (losses)
had been realized
Reclassification adjustments:

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

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

106

CNO FINANCIAL GROUP, INC. - Form 10-K

Consolidated Statement of Shareholders’ Equity

PART II
ITEM 8 Consolidated Financial Statements

(Dollars in millions)
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

Balance, December 31, 2014

Net income
Change in unrealized appreciation (depreciation) of investments
(net of applicable income tax benefit of $231.7)
Change in noncredit component of impairment losses on fixed
maturities, available for sale (net of applicable income tax benefit of $1.2)
Cost of common stock repurchased
Dividends on common stock
Stock options, restricted stock and performance units

Balance, December 31, 2015

Net income
Change in unrealized appreciation (depreciation) of investments
(net of applicable income tax expense of $121.5)
Change in noncredit component of impairment losses on fixed
maturities, available for sale (net of applicable income tax benefit of $.8)
Cost of common stock repurchased
Dividends on common stock
Stock options, restricted stock and performance units

BALANCE, DECEMBER 31, 2016

Common stock
and additional
paid-in capital
4,095.0
$
—

Accumulated other
comprehensive
income
731.8
—

—

—
(376.5)
—
15.9
3,734.4
—

94.2

(.7)
—
—
—
825.3
—

Retained
earnings
128.4
51.4

Total
4,955.2
51.4

—

94.2

—
—
(51.3)
—
128.5
270.7

(.7)
(376.5)
(51.3)
15.9
4,688.2
270.7

—

(420.4)

—

(420.4)

—
(365.2)
—
19.4
3,388.6
—

—

—
(203.0)
—
28.2
3,213.8

(2.1)
—
—
—
402.8
—

221.1

(1.5)
—
—
—
622.4

—
—
(52.1)
—
347.1
358.2

(2.1)
(365.2)
(52.1)
19.4
4,138.5
358.2

—

221.1

—
—
(54.6)
—
650.7

(1.5)
(203.0)
(54.6)
28.2
4,486.9

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

CNO FINANCIAL GROUP, INC. - Form 10-K 107

PART II
ITEM 8 Consolidated Financial Statements

Consolidated Statement of Cash Flows

for the years ended December 31, 2016, 2015 and 2014

(Dollars in millions)
Cash flows from operating activities:

Insurance policy income
Net investment income
Fee revenue and other income
Cash and cash equivalents received upon recapture of reinsurance
Insurance policy benefits
Payment to reinsurer pursuant to long-term care business reinsured
Interest expense
Deferrable policy acquisition costs
Other operating costs
Income taxes

NET CASH FROM OPERATING ACTIVITIES

Cash flows from investing activities:

Sales of investments
Maturities and redemptions of investments
Purchases of investments
Net sales (purchases) 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
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 PROVIDED (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

2016

2015

2014

2,457.0
1,201.0
50.5
73.6
(1,916.0)
—
(106.0)
(242.7)
(751.2)
(6.7)
759.5

2,841.8
2,507.2
(6,159.8)
(84.2)
175.1
—
—
(22.5)
(742.4)

—
—
—
8.4
(206.7)
(54.8)
1,386.7
(1,181.6)

432.7
493.2

(333.5)
(514.9)
—
29.5
46.6
432.3
478.9

2,423.4
1,205.9
58.9
—
(1,879.4)
—
(90.0)
(246.4)
(724.4)
(4.1)
743.9

2,177.6
1,853.4
(4,767.2)
(12.3)
(296.1)
—
—
(25.0)
(1,069.6)

910.0
(797.1)
(17.8)
6.3
(361.5)
(52.0)
1,241.9
(1,225.0)

475.0
544.7

(425.7)
(132.0)
(20.4)
146.4
(179.3)
611.6
432.3

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

(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.

108

CNO FINANCIAL GROUP, INC. - Form 10-K

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.

The Company manages its business through the following
operating segments: Bankers Life, Washington National and
Colonial Penn, which are defined on the basis of product
distribution; long-term care in run off; and corporate operations,
comprised of holding company activities and certain noninsurance
company businesses. In the fourth quarter of 2016, we began
reporting as an additional business segment, the long-term care
block recaptured from Beechwood Re Ltd. (“BRe”), as further
described in the note to the consolidated financial statements
-
entitled “Summary of Significant Accounting Policies
Reinsurance”. The Company’s insurance segments are described
below:

life

insurance,

interest-sensitive

(cid:116)(cid:1)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, financial
and investment advisors, 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 has
various distribution and marketing agreements with other
insurance companies to use Bankers Life’s career agents to
distribute Medicare Advantage and prescription drug plan
products in exchange for a fee.

Inc. and

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.

(cid:116)(cid:1)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”).

(cid:116)(cid:1)Long-term care in run-off consists of the long-term care
business that was recaptured due to the termination of certain
reinsurance agreements effective September 30, 2016. This
business is not actively marketed and was issued or acquired
by Washington National and Bankers Conseco Life Insurance
Company (“BCLIC”).

We prepare our financial statements
in accordance with
accounting principles generally accepted in the United States of
America (“GAAP”). We have reclassified certain amounts from
the prior periods to conform to the 2016 presentation. These
reclassifications have no effect on net income or shareholders’
equity.

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.

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.

CNO FINANCIAL GROUP, INC. - Form 10-K 109

PART II
ITEM 8 Consolidated Financial Statements

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

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.

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.

110

CNO FINANCIAL GROUP, INC. - Form 10-K

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.

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.

PART II
ITEM 8 Consolidated Financial Statements

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.

CNO FINANCIAL GROUP, INC. - Form 10-K 111

PART II
ITEM 8 Consolidated Financial Statements

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:

(cid:116)(cid:1)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.

(cid:116)(cid:1)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.

(cid:116)(cid:1)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.

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:

(cid:116)(cid:1)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.

(cid:116)(cid:1)We also pay commissions to our agents who sell the plans.
These payments are deferred and amortized over the term of
the contract.

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 $123.9 million,
$133.6 million and $176.7 million in 2016, 2015 and 2014,
respectively. We deduct this cost from insurance policy income.
Reinsurance recoveries netted against insurance policy benefits
totaled $130.1 million, $167.7 million and $195.3 million in 2016,
2015 and 2014, 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
$34.0 million, $38.5 million and $35.0 million in 2016, 2015 and
2014, respectively.

In December 2013, two of our insurance subsidiaries entered into
100% coinsurance agreements ceding $495 million of long-term
care reserves to 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 were 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 were the
responsibility of BRe.

112

CNO FINANCIAL GROUP, INC. - Form 10-K

PART II
ITEM 8 Consolidated Financial Statements

In September 2016, we terminated the reinsurance agreements with BRe and recaptured the ceded business. As a result of the recapture,
we were required to value the assets and liabilities as of the date of recapture based on valuation methodologies that are consistent with the
methodologies used by CNO to value its other investments and insurance liabilities. Accordingly, we recognized a loss on the recapture of
the long-term care business as summarized below (dollars in millions):

Market value of investments
Insurance liabilities
Write-off of reinsurance receivables
Estimated transaction expenses

Pre-tax loss

Tax benefit
Increase in valuation allowance for deferred tax assets

AFTER-TAX LOSS

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.

At December 31, 2016, our valuation allowance for our net deferred
tax assets was $240.2 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

504.7
(552.2)
(17.9)
(10.0)
(75.4)
26.4
(4.1)
(53.1)

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 of the VIEs are
collateralized loan trusts that were established to issue securities
to finance the purchase of corporate loans and other permitted
investments. 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.

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 securities and 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.

At December 31, 2016, we held investments in various limited
partnerships, in which we are not the primary beneficiary,
totaling $251.9 million (classified as other invested assets). At
December 31, 2016, we had unfunded commitments to these
partnerships of $217.7 million. Our maximum exposure to loss
on these investments is limited to the amount of our investment.

CNO FINANCIAL GROUP, INC. - Form 10-K 113

PART II
ITEM 8 Consolidated Financial Statements

Investment borrowings

Three of the Company’s insurance subsidiaries (Washington
National, Bankers Life and Colonial Penn) are members of
the Federal Home Loan Bank (“FHLB”). As members of the
FHLB, our insurance subsidiaries have the ability to borrow on
a collateralized basis from the FHLB. We 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, 2016, the
carrying value of the FHLB common stock was $71.2 million. As
of December 31, 2016, collateralized borrowings from the FHLB
totaled $1.6 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 $2.0 billion at December 31, 2016, 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 our insurance subsidiaries (dollars in millions):

Amount
borrowed
$

Interest rate at
December 31, 2016
Variable rate – 1.226%
Variable rate – 1.222%
Variable rate – 1.191%
Variable rate – 1.001%
Variable rate – 1.267%
Variable rate – 1.206%
Variable rate – 1.360%
Variable rate – 1.022%
Variable rate – 1.266%
Variable rate – 1.300%
Variable rate – 1.001%
Variable rate – 1.216%
Variable rate – 1.234%
Variable rate – 1.399%
Variable rate – 1.224%
Fixed rate – 1.960%
Variable rate – 1.622%
Variable rate – 1.416%
Variable rate – 1.416%
Variable rate – 1.118%
Variable rate – 1.109%
Variable rate – 1.335%
Variable rate – 1.431%
Variable rate – 1.411%
Variable rate – 1.400%
Fixed rate – 2.550%
Variable rate – 1.236%
Variable rate – 1.477%
Fixed rate – 2.160%
Fixed rate – 2.940%

50.0
50.0
50.0
50.0
22.0
100.0
50.0
50.0
10.0
50.0
50.0
100.0
21.8
15.0
50.0
21.8
25.0
100.0
50.0
75.0
100.0
50.0
100.0
57.7
100.0
28.2
125.0
50.0
25.4
20.5
1,647.4

114

CNO FINANCIAL GROUP, INC. - Form 10-K

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, 2016, the aggregate
yield maintenance fee to prepay all fixed rate borrowings was
$2.6 million.

Interest expense of $17.5 million, $10.9 million and $18.7 million
in 2016, 2015 and 2014, 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 as further discussed in the note to the
consolidated financial statements entitled “Derivatives”. These
repurchase agreements are accounted for as collateralized financing
arrangements and not as a sale and subsequent repurchase of
securities. There were no such borrowings outstanding at
December 31, 2016. We had no such borrowings outstanding at
December 31, 2015.

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 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.

From time to time, 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.

PART II
ITEM 8 Consolidated Financial Statements

We purchase certain fixed maturity securities that contain
embedded derivatives that are required to be 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.

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.

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
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 $32.8 million
and $37.5 million related to multibucket annuity products as of
December 31, 2016 and 2015, 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 $3.4 million, $3.8 million and $5.1 million during
2016, 2015 and 2014, respectively. Amounts amortized totaled
$11.4 million, $13.8 million and $12.4 million during 2016, 2015
and 2014, respectively. The unamortized balance of deferred sales
inducements was $49.4 million and $57.4 million at December 31,
2016 and 2015, respectively. The balance of insurance liabilities
for persistency bonus benefits was $.5 million and $.9 million at
December 31, 2016 and 2015, 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). 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.

Recently Issued Accounting Standards

Pending Accounting Standards

In May 2014, the Financial Accounting Standards Board (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. In March 2016,
the FASB issued amendments that clarify the implementation
guidance on principal versus agent considerations. In July 2015, the
guidance was updated and will now be effective for the Company
on January 1, 2018 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 January 2016, the FASB issued authoritative guidance related to
the recognition and measurement of financial assets and financial
liabilities which made targeted improvements to GAAP as follows:

(i)

(ii)

(iii)

Require equity investments (except those accounted for
under the equity method of accounting or those that
result in consolidation of the investee) to be measured
at fair value with changes in fair value recognized in net
income. However, an entity may choose to measure equity
investments that do not have readily determinable fair
values at cost minus impairment, if any, plus or minus
changes resulting from observable price changes in orderly
transactions for the identical or a similar investment of the
same issuer.

Simplify the impairment assessment of equity investments
without readily determinable fair values by requiring a
qualitative assessment to identify impairment. When a
qualitative assessment indicates that impairment exists, an
entity is required to measure the investment at fair value.

Eliminate the requirement for public business entities to
disclose the method(s) and significant assumptions used to
estimate the fair value that is required to be disclosed for
financial instruments measured at amortized cost on the
balance sheet.

CNO FINANCIAL GROUP, INC. - Form 10-K 115

Require public business entities to use the exit price notion
when measuring the fair value of financial instruments for
disclosure purposes.

interim periods within fiscal years beginning after December 15,
2018. The Company is currently assessing the impact the guidance
will have upon adoption.

PART II
ITEM 8 Consolidated Financial Statements

(iv)

(v)

(vi)

separately

Require an entity
in other
to present
comprehensive income the portion of the total change in
the fair value of a liability resulting from a change in the
instrument-specific credit risk when the entity has elected to
measure the liability at fair value in accordance with the fair
value option for financial instruments.

Require separate presentation of financial assets and
financial liabilities by measurement category and form of
financial asset (that is, securities or loans and receivables) on
the balance sheet or the accompanying notes to the financial
statements.

(vii)

Clarify that an entity should evaluate the need for a valuation
allowance on a deferred tax asset related to available-for-sale
securities in combination with the entity’s other deferred
tax assets.

An entity should apply this guidance by means of a cumulative-
effect adjustment to the balance sheet as of the beginning of
the fiscal year of adoption. The amendments related to equity
securities without readily determinable fair values (including
disclosure requirements) should be applied prospectively to equity
investments that exist as of the date of adoption of the guidance.
The guidance will be effective for the Company for fiscal years
beginning after December 15, 2017, including interim periods
within those fiscal years. Early adoption of the guidance is not
permitted; except that item (v) above is permitted to be adopted
early as of the beginning of the fiscal year of adoption. The
Company is currently assessing the impact the guidance will have
upon adoption.

In February 2016, the FASB issued authoritative guidance related
to accounting for leases, requiring lessees to report most leases on
their balance sheets, regardless of whether the lease is classified as
a finance lease or an operating lease. For lessees, the initial lease
liability is equal to the present value of future lease payments,
and a corresponding asset, adjusted for certain items, is also
recorded. Expense recognition for lessees will remain similar to
current accounting requirements for capital and operating leases.
The accounting applied by a lessor is largely unchanged from that
applied under previous GAAP. In transition, lessees and lessors
are required to recognize and measure leases at the beginning
of the earliest period presented using a modified retrospective
approach. The guidance will be effective for the Company for
fiscal years beginning after December 15, 2018, including interim
periods within those fiscal years. Early adoption is permitted. The
Company is currently assessing the impact the guidance will have
upon adoption.

In March 2016, the FASB issued authoritative guidance that
clarifies the requirements for assessing whether contingent call
(put) options that can accelerate the payment of principal on debt
instruments are clearly and closely related to their debt hosts. An
entity performing the assessment under this guidance is required
to assess the embedded call (put) options solely in accordance with
a four-step decision sequence. The guidance will be effective for the
Company for fiscal years beginning after December 15, 2017, and

116

CNO FINANCIAL GROUP, INC. - Form 10-K

In March 2016, the FASB issued authoritative guidance related
to several aspects of the accounting for share-based payment
transactions, including the income tax consequences, classification
of awards as either equity or liabilities and classification on the
statement of cash flows. The new guidance requires all income
tax effects of stock-based compensation awards to be recognized
in the income statement when the awards vest or are settled. The
new guidance also allows an employer to withhold shares upon
settlement of an award to satisfy the employer’s tax withholding
requirements up to the highest marginal tax rate applicable to
employees, without resulting in liability classification of the award.
Current guidance strictly limits the withholding to the employer’s
minimum statutory tax withholding requirement. The guidance
will be effective for the Company for annual periods beginning
after December 15, 2016, and interim periods within those
annual periods. Transition guidance varies between retrospective,
modified retrospective and prospective depending on the specific
change required. Early adoption is permitted. The adoption of
this guidance will not have a material impact on our consolidated
financial statements.

In June 2016, the FASB issued authoritative guidance related to
the measurement of credit losses on financial instruments. The
new guidance replaces the incurred loss impairment methodology
with a methodology that reflects expected credit losses and requires
consideration of a broader range of reasonable and supportable
information to form credit loss estimates. The guidance will
be effective for the Company for fiscal years beginning after
December 15, 2019, including interim periods within those fiscal
years. Early adoption is permitted as of the fiscal years beginning
after December 15, 2018, including interim periods within those
fiscal years. The Company is currently assessing the impact the
guidance will have upon adoption.

In August 2016, the FASB issued authoritative guidance related
to how certain cash receipts and cash payments are presented and
classified in the statement of cash flows. The guidance addresses
eight specific cash flow issues including debt prepayment or debt
extinguishment costs, proceeds from the settlement of corporate-
owned life insurance policies, distributions received from equity
method investees, and others. The guidance will be effective for
the Company for fiscal years beginning after December 15, 2017,
and interim periods within those fiscal years. Early adoption is
permitted. The Company is currently assessing the impact the
guidance will have upon adoption.

In October 2016, the FASB issued authoritative guidance to
amend the consolidation guidance on how a reporting entity
that is the single decision maker of a VIE should treat indirect
interests in the entity held through related parties that are under
common control with the reporting entity when determining
whether it is the primary beneficiary of that VIE. The guidance
will be effective for the Company for fiscal years beginning after
December 15, 2016, including interim periods within those years.
The adoption of this guidance will not have a material impact on
our consolidated financial statements.

In November 2016, the FASB issued authoritative guidance to
address the diversity in practice that currently exists regarding
the classification and presentation of changes in restricted cash
on the statement of cash flows. The new guidance requires that
a statement of cash flows explain the change during the period in
the total of cash, cash equivalents and amounts generally described
as restricted cash or restricted cash equivalents. Therefore,
amounts generally described as restricted cash and restricted cash
equivalents should be included with cash and cash equivalents
when reconciling the beginning-of-period and end-of-period
total amounts shown on the statement of cash flows. Entities will
also be required to disclose information about the nature of their
restricted cash and restricted cash equivalents. Additionally, if cash,
cash equivalents, restricted cash and restricted cash equivalents are
presented in more than one line item in the statement of financial
position, entities will be required to present a reconciliation, either
on the face of the statement of cash flows or disclosed in the notes,
of the totals in the statement of cash flows to the related line item
captions in the statement of financial position. The guidance
will be effective for the Company for fiscal years beginning after
December 15, 2017, and interim periods within those fiscal years.
Early adoption is permitted, including adoption in an interim
period. The adoption of this guidance is expected to impact the
presentation of our consolidated statement of cash flows and
related cash flow disclosures. The guidance will not impact our
consolidated financial position or results of operations.

Adopted Accounting Standards

In April 2015, the FASB issued authoritative guidance which
requires debt issuance costs in financial statements to be presented
as a direct deduction from the carrying value of the associated
debt liability rather than as an asset on the balance sheet. This
guidance is effective beginning January 1, 2016, with early
adoption permitted. The Company adopted this guidance in the
fourth quarter of 2015.

In May 2015, the FASB issued authoritative guidance which
requires additional disclosures related to short-duration contracts.
The guidance will require insurance entities to disclose for annual
reporting periods information about the liability for unpaid
claims and claim adjustment expenses. The guidance also requires
insurance entities to disclose information about significant
changes in methodologies and assumptions used to calculate
the liability for unpaid claims and claim adjustment expenses,
including reasons for the change and the effects on the financial
statements. Additionally, the guidance requires insurance entities
to disclose for annual and interim reporting periods a rollforward
of the liability for unpaid claims and claim adjustment expenses.
For health insurance claims, the guidance requires the disclosure
of the total of incurred-but-not-reported liabilities plus expected
development on reported claims included in the liability for unpaid
claims and claim adjustment expenses. The guidance was effective
for the Company for annual periods beginning after December
15, 2015, and the interim periods within annual periods beginning
after December 15, 2016. The adoption of this guidance had no
effect on our consolidated financial statements.

In May 2015, the FASB issued authoritative guidance that removes
the requirement to categorize within the fair value hierarchy all
investments for which fair value is measured using the net asset

PART II
ITEM 8 Consolidated Financial Statements

value per share practical expedient. The guidance also removes the
requirement to make certain disclosures for all investments that
are eligible to be measured at fair value using the net asset value per
share practical expedient. The guidance is effective for fiscal years
beginning after December 15, 2015, and interim periods within
those fiscal years, with early adoption permitted. A reporting entity
should apply the guidance retrospectively to all periods presented.
The Company elected to early adopt this guidance as of December
31, 2015, and has removed certain investments that are measured
using the net asset value per share practical expedient from the
fair value hierarchy in all periods presented in 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 VIE 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 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 was effective for the Company for
interim and annual periods beginning in 2016. 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. The adoption of this guidance had no impact on our
consolidated financial statements.

In February 2015, the FASB issued authoritative guidance which
updates the analysis that a reporting entity must perform to
determine whether it should consolidate certain legal entities.
Such guidance: (i) modifies the evaluation of whether limited
partnerships and similar legal entities are VIEs or voting
interest entities; (ii) eliminates the presumption that a general
partner should consolidate a limited partnership; (iii) affects
the consolidation analysis of reporting entities that are involved
with VIEs, particularly those that have fee arrangements and
related party relationships; and (iv) provides a scope exception
from consolidation guidance for certain investment funds. The
guidance was effective for the Company for interim and annual
periods beginning in 2016. 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. The
adoption of this guidance did not have a material impact on our
consolidated financial statements.

CNO FINANCIAL GROUP, INC. - Form 10-K 117

PART II
ITEM 8 Consolidated Financial Statements

INVESTMENTS

At December 31, 2016, 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) (b):

Corporate securities
States and political subdivisions
Asset-backed securities
Collateralized debt obligations
Commercial mortgage-backed securities
Collateralized mortgage obligations

$ 11,582.6

1,073.9

(99.8) $ 12,556.7 $

143.8
1,798.2
37.1
1,169.6
227.5
1,467.2
2.3
304.8
16,733.1

967.3
13.6
1,471.9
2.5
63.8
550.9

20.5
186.7
.2
29.2
1.0
32.9
.2
14.6
1,359.2

26.1
—
55.1
—
.2
46.8

—
(7.9)
(.4)
(8.7)
(.3)
(26.6)
—
(.2)
(143.9)

(39.2)
(1.7)
(6.8)
—
(1.3)
(1.4)

164.3
1,977.0
36.9
1,190.1
228.2
1,473.5
2.5
319.2
17,948.4

954.2
11.9
1,520.2
2.5
62.7
596.3

Total below-investment grade fixed maturities,
available for sale
TOTAL FIXED MATURITIES, AVAILABLE FOR SALE $ 19,803.1 $
580.7 $

EQUITY SECURITIES

3,070.0

128.2
1,487.4 $
11.5 $

(50.4)

3,147.8

(194.3) $ 21,096.2 $

(8.0) $

584.2

—

—
—
—
—
—
—
—
—
—

(3.6)
(3.0)
—
—
—
(1.4)

(8.0)
(8.0)

(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”), S&P Global Ratings (“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.

(b) Certain structured securities rated below-investment grade by NRSROs may be assigned a NAIC 1 or NAIC 2 designation based on the cost basis of the security
relative to estimated recoverable amounts as determined by the NAIC. Refer to the table below for a summary of our fixed maturity securities, available for sale, by
NAIC designations.

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

118

CNO FINANCIAL GROUP, INC. - Form 10-K

PART II
ITEM 8 Consolidated Financial Statements

A summary of our fixed maturity securities, available for sale, by NAIC designations (or for fixed maturity securities held by non-regulated
entities, based on NRSRO ratings) as of December 31, 2016 is as follows (dollars in millions):

NAIC designation
1
2
Total NAIC 1 and 2 (investment grade)
3
4
5
6
Total NAIC 3,4,5 and 6 (below-investment grade)

Amortized cost
9,715.7
$
8,973.1
18,688.8
711.7
233.0
141.3
28.3
1,114.3
19,803.1

Estimated fair
value
10,463.2
9,526.4
19,989.6
705.4
229.4
138.3
33.5
1,106.6
21,096.2

Percentage of total
estimated fair value

49.6%
45.2
94.8
3.3
1.1
.6
.2
5.2
100.0%

At December 31, 2015, 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
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:
Corporate securities
States and political subdivisions
Debt securities issued by foreign governments
Asset-backed securities
Commercial mortgage-backed securities
Collateralized mortgage obligations

$ 11,477.5 $

929.4 $

(262.9) $ 12,144.0 $

172.5
1,889.6
18.9
979.8
188.5
1,531.7
3.1
450.9
16,712.5

798.5
13.6
2.4
838.0
49.9
532.1

22.3
208.6
—
22.1
.4
41.3
.3
17.0
1,241.4

8.3
—
—
25.7
—
49.0

(.3)
(3.7)
(.6)
(7.2)
(2.2)
(16.3)
—
(.6)
(293.8)

(82.3)
(3.9)
—
(6.2)
(1.3)
(1.0)

194.5
2,094.5
18.3
994.7
186.7
1,556.7
3.4
467.3
17,660.1

724.5
9.7
2.4
857.5
48.6
580.1

Total below-investment grade fixed maturities,
available for sale
TOTAL FIXED MATURITIES, AVAILABLE FOR SALE

EQUITY SECURITIES

2,234.5
$ 18,947.0 $
447.4 $
$

83.0
1,324.4 $
18.4 $

(94.7)

2,222.8

(388.5) $ 19,882.9 $

(2.8) $

463.0

—

—
—
—
—
—
—
—
—
—

—
(3.0)
—
—
—
(1.9)

(4.9)
(4.9)

CNO FINANCIAL GROUP, INC. - Form 10-K 119

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, 2016 and 2015, 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

2016

(1.1)
1,311.9
(106.2)
(223.5)
(13.5)
—
(345.2)
622.4

2015

1.6
903.4
(121.2)
(133.3)
(14.6)
(8.6)
(224.5)
402.8

(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, 2016, adjustments to the present value of future
profits, deferred acquisition costs, insurance liabilities and deferred
tax assets included $(94.1) million, $(96.4) million, $(13.5) million
and $72.5 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, 2015, adjustments to the present value of
future profits, deferred acquisition costs, insurance liabilities and
deferred tax assets included $(109.3) million, $(33.2) million,
$(14.6) million and $55.8 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.

Below-Investment Grade Securities

At December 31, 2016, the amortized cost of the Company’s below-
investment grade fixed maturity securities was $3,070.0 million,
or 16 percent of the Company’s fixed maturity portfolio. The
estimated fair value of the below-investment grade portfolio was
$3,147.8 million, or 103 percent of the amortized cost (refer to the
table on page 118 the composition of the below-investment grade
portfolio).

Contractual Maturity

The following table sets forth the amortized cost and estimated fair
value of fixed maturities, available for sale, at December 31, 2016, 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 (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.

(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

Amortized cost
354.7
$
2,243.8
1,549.1
10,395.0
14,542.6
5,260.5
19,803.1

Estimated fair value
359.8
2,399.5
1,620.8
11,320.9
15,701.0
5,395.2
21,096.2

120

CNO FINANCIAL GROUP, INC. - Form 10-K

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 (loss)
Change in value of options
Other special-purpose portfolios
Gross investment income

Less investment expenses

NET INVESTMENT INCOME

PART II
ITEM 8 Consolidated Financial Statements

2016

2015

2014

1,081.4
21.5
91.0
7.3
24.3
2.0

1,090.1
18.3
91.4
7.3
17.4
.8

1,175.8
13.9
104.2
11.0
17.1
.6

12.2

10.7

14.8

(40.1)
69.3
79.7
1,348.6
23.4
1,325.2

36.5
(72.7)
55.5
1,255.3
21.7
1,233.6

118.9
(49.4)
42.1
1,449.0
21.6
1,427.4

(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 $(.2) million,

$.4 million and $3.4 million for the years ended December 31, 2016, 2015 and 2014, respectively.

The carrying value of fixed maturities and mortgage loans not accruing investment income totaled $44.1 million and nil at December 31,
2016 and 2015, 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 (losses) from fixed maturities

Equity securities
Commercial mortgage loans
Impairments on preferred stock and other investments
Gain (loss) on dissolution of variable interest entities
Other(a)

2016

2015

137.7
(95.2)

95.7
(88.4)

(15.2)

3.6
(11.6)
30.9
20.9
—
(20.7)
(7.3)
(15.5)
8.3

(17.9)

3.0
(14.9)
(7.6)
3.7
(2.3)
(25.0)
11.3
(16.7)
(36.6) $

2014

64.4
(13.0)

—

—
—
51.4
10.1
(.1)
(27.3)
—
2.6
36.7

NET REALIZED INVESTMENT GAINS (LOSSES)

(a) Changes in the estimated fair value of trading securities that we have elected the fair value option (and still held as of the end of the respective periods) were

$(.5) million, $(9.2) million and $7.8 million for the years ended December 31, 2016, 2015 and 2014, respectively.

During 2016, we recognized net realized investment gains
of $8.3 million, which were comprised of: (i) $47.5 million of
net gains from the sales of investments; (ii) a $7.3 million loss
on the dissolution of a VIE; (iii) the decrease in fair value of
certain fixed maturity investments with embedded derivatives of
$.4 million; (iv) the increase in fair value of embedded derivatives

related to a modified coinsurance agreement of $.8 million; and
(v) $32.3 million of writedowns of investments for other than
temporary declines in fair value recognized through net income
($35.9 million, prior to the $3.6 million of impairment losses
recognized through accumulated other comprehensive income).

CNO FINANCIAL GROUP, INC. - Form 10-K 121

PART II
ITEM 8 Consolidated Financial Statements

During 2016 and 2015, VIEs that were required to be consolidated
were dissolved. We recognized a loss of $7.3 million during
2016 and a gain of $11.3 million during 2015, representing
the difference between the borrowings of such VIEs and the
contractual distributions required following the liquidation of the
underlying assets.

During 2015, we recognized net realized investment losses of
$36.6 million, which were comprised of: (i) $8.2 million of net
gains from the sales of investments; (ii) an $11.3 million gain
on the dissolution of a VIE; (iii) the decrease in fair value of
certain fixed maturity investments with embedded derivatives of
$9.2 million; (iv) the decrease in fair value of embedded derivatives
related to a modified coinsurance agreement of $7.0 million; and
(v) $39.9 million of writedowns of investments for other than
temporary declines in fair value recognized through net income
($42.9 million, prior to the $3.0 million of impairment losses
recognized through accumulated other comprehensive income).

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);
(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.

At December 31, 2016, there were five investments in default or
considered nonperforming with an aggregate amortized cost and
carrying value of $19.2 million and $28.3 million, respectively.

During 2016, the $95.2 million of realized losses on sales of
$790.2 million of fixed maturity securities, available for sale,
included: (i) $79.2 million related to various corporate securities
(including $63.5 million related to sales of investments in
the energy sector); (ii) $5.8 million related to commercial
mortgage-backed securities; (iii) $5.7 million related to asset-
backed securities; and (iv) $4.5 million related to various other
investments. 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 2016, we recognized $32.3 million of impairment
losses recorded in earnings which included: (i) $9.3 million
of writedowns on fixed maturities in the energy sector;

(ii) $3.7 million of writedowns on a direct loan due to borrower
specific events; (iii) $12.7 million of writedowns on a privately
placed preferred stock of an entity formed to construct and operate
a chemical plant; (iv) $1.2 million of writedowns of investments
held by VIEs due to other-than-temporary declines in value; and
(v) $5.4 million of writedowns on other investments. Factors
considered in determining the writedowns of investments in 2016
included the subordination status of each investment, the impact
of recent downgrades and issuer specific events, including the
impact of the current low oil prices on issuers in the energy sector.

During 2015, the $88.4 million of realized losses on sales of
$724.4 million of fixed maturity securities, available for sale,
primarily related to various corporate securities (including
$59.7 million related to sales of investments in the energy sector).

During 2015, we recognized $39.9 million of impairment
losses recorded in earnings which included: (i) $10.2 million
of writedowns on fixed maturities in the energy sector;
(ii) $16.4 million of writedowns on commercial bank loans held
by VIEs; (iii) $5.4 million of writedowns on other investments
(primarily fixed maturities); and (iv) a $7.9 million writedown of
a legacy investment in a private company that was liquidated. We
no longer have any exposure to legacy private companies related to
investments acquired by our Predecessor.

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.

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 had
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.

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 2016 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):

Less than 6 months prior to sale
Greater than or equal to 6 months and less than 12 months prior to sale

At date of sale

Number of issuers
19
7
26

Amortized cost
119.3
$
76.4
195.7

Fair value
79.2
45.6
124.8

122

CNO FINANCIAL GROUP, INC. - Form 10-K

PART II
ITEM 8 Consolidated Financial Statements

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.

impairment is bifurcated. We recognize the credit loss portion in
net income and the noncredit loss portion in accumulated other
comprehensive income.

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, 2016, other-
than-temporary impairments included in accumulated other
comprehensive income totaled $8.0 million (before taxes and
related amortization).

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, 2016, 2015 and 2014 (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,

2016
(2.6)
(3.0)
.1
—
—
—

2015
(1.0) $
(2.0)
.4
—
—
—

2014
(1.3)
—
.3
—
—
—

(5.5)

(2.6) $

(1.0)

(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.

CNO FINANCIAL GROUP, INC. - Form 10-K 123

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, 2016, 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
35.7
150.4
389.3
2,262.3
2,837.7
1,857.2
4,694.9 $

Estimated fair value
35.0
$
145.9
370.9
2,136.9
2,688.7
1,811.9
4,500.6

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, 2016 (dollars in millions):

Less than 6 months
Greater than 12 months

Number
of issuers
4
1

Cost
basis
53.8
.7
54.5

Unrealized
loss

(12.1) $
(.2)
(12.3) $

Estimated
fair value
41.7
.5
42.2

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, 2016 (dollars in millions):

Less than 12 months

12 months or greater

Total

Fair value

Unrealized
losses

Unrealized

Fair value

losses Fair value

Unrealized
losses

8.0
176.3
18.9
1,907.6
692.9
38.3
525.2
73.6
$ 3,440.8
239.4
$

— $

(7.8)
(.4)
(75.5)
(8.5)
(.1)
(16.6)
(.6)
(109.5)
(8.0)

18.3
—
559.6
262.5
30.8
154.0
34.6
$ 1,059.8
$

$
— $

$
$

— $

(1.8)
—
(63.5)
(7.0)
(.2)
(11.3)
(1.0)

8.0
194.6
18.9
2,467.2
955.4
69.1
679.2
108.2
(84.8) $ 4,500.6
239.4

— $

$
$

—
(9.6)
(.4)
(139.0)
(15.5)
(.3)
(27.9)
(1.6)
(194.3)
(8.0)

Description of securities
United States Treasury securities and obligations of
United States government corporations and agencies
States and political subdivisions
Debt securities issued by foreign governments
Corporate securities
Asset-backed securities
Collateralized debt obligations
Commercial mortgage-backed securities
Collateralized mortgage obligations

TOTAL FIXED MATURITIES, AVAILABLE FOR SALE

EQUITY SECURITIES

124

CNO FINANCIAL GROUP, INC. - Form 10-K

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

43.6
156.8
20.7
2,913.6
930.3
96.2
556.0
—
97.8
$ 4,815.0
140.1
$

$
$

(.3)
(4.1)
(.6)
(255.7)
(11.7)
(1.8)
(16.1)
—
(1.0)
(291.3)
(2.4)

— $

14.8
—
278.9
98.4
36.3
25.7
.1
40.8
495.0
2.4

$
$

— $

(3.5)
—
(89.5)
(1.7)
(.4)
(1.5)
—
(.6)

43.6
171.6
20.7
3,192.5
1,028.7
132.5
581.7
.1
138.6
(97.2) $ 5,310.0
142.5

(.4) $

$
$

(.3)
(7.6)
(.6)
(345.2)
(13.4)
(2.2)
(17.6)
—
(1.6)
(388.5)
(2.8)

Based on management’s current assessment of investments with
unrealized losses at December 31, 2016, the Company believes the
issuers of the securities will continue to meet their obligations (or
with respect to equity-type securities, the investment value will
recover to its cost basis). While we do not have the intent to sell
securities with unrealized losses and it is not more likely than not
that we will be required to sell securities with unrealized losses
prior to their anticipated recovery, our intent on an individual
security may change, based upon market or other unforeseen
developments. In such instances, if a loss is recognized from a
sale subsequent to a balance sheet date due to these unexpected
developments, the loss is recognized in the period in which we had
the intent to sell the security before its anticipated recovery.

Structured Securities

At December 31, 2016 fixed maturity investments included
structured securities with an estimated fair value of $5.4 billion (or
26 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 of alternative financing; a variety of economic,
geographic and other factors; the timing, pace and proceeds of
liquidations of defaulted collateral; and various security-specific
structural considerations (for example, the repayment priority of
a given security in a securitization structure). In addition, the total
amount of payments for non-agency structured securities may be
affected by changes to cumulative default rates or loss severities of
the related collateral.

Historically, the rate of prepayments on structured securities has
tended to increase when prevailing interest rates have declined
significantly in absolute terms and also relative to the interest rates
on the underlying collateral. The yields recognized on structured
securities purchased at a discount to par will generally increase
(relative to the stated rate) when the underlying collateral prepays
faster than expected. The yields recognized on structured securities
purchased at a premium will decrease (relative to the stated rate)
when the underlying collateral prepays faster than expected.
When interest rates decline, the proceeds from prepayments may
be reinvested at lower rates than we were earning on the prepaid
securities. When interest rates increase, prepayments may decrease
below expected levels. When this occurs, the average maturity and
duration of structured securities increases, decreasing the yield on
structured securities purchased at discounts and increasing the
yield on those purchased at a premium because of a decrease in the
annual amortization of premium.

CNO FINANCIAL GROUP, INC. - Form 10-K 125

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 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
1,993.9
1,757.6
1,772.2
388.1
55.8
138.7
6,106.3

Amortized
cost
1,523.5
1,592.5
1,602.2
348.0
56.2
138.1
5,260.5

Estimated
fair value
1,535.4
1,624.7
1,666.7
364.5
65.6
138.3
5,395.2

The amortized cost and estimated fair value of structured securities at December 31, 2016, summarized by type of security, were as follows
(dollars in millions):

TOTAL STRUCTURED SECURITIES

Estimated fair value

Amount
710.6
156.4
1,536.2
2,710.3
230.7
51.0
5,395.2

Percent of fixed
maturities

3.4%
.7
7.3
12.9
1.1
.2
25.6%

Amortized cost
664.8
142.5
1,531.0
2,641.5
230.0
50.7
5,260.5

Pass-throughs, sequentials and equivalent securities have unique
prepayment variability characteristics. Pass-through securities
typically return principal to the holders based on cash payments
from the underlying mortgage obligations. Sequential securities
return principal to tranche holders in a detailed hierarchy. Planned
amortization classes, targeted amortization classes and accretion-
directed bonds adhere to fixed schedules of principal payments
as long as the underlying mortgage loans experience prepayments
within certain estimated ranges. In most circumstances, changes
in prepayment rates are first absorbed by support or companion
classes insulating the timing of receipt of cash flows from the
consequences of both faster prepayments (average life shortening)
and slower prepayments (average life extension).

securities are

Commercial mortgage-backed
secured by
commercial real estate mortgages, generally income producing
properties that are managed for profit. Property types include
multi-family dwellings including apartments, retail centers, hotels,
restaurants, hospitals, nursing homes, warehouses, and office
buildings. While most commercial mortgage-backed securities
have call protection features whereby underlying borrowers may

not prepay their mortgages for stated periods of time without
incurring prepayment penalties, recoveries on defaulted collateral
may result in involuntary prepayments.

Commercial Mortgage Loans

At December 31, 2016, the mortgage loan balance was primarily
comprised of commercial mortgage
loans. Approximately
14 percent, 9 percent, 7 percent and 6 percent of the mortgage loan
balance were on properties located in California, Texas, Maryland
and Florida, 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, 2016.
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.

126

CNO FINANCIAL GROUP, INC. - Form 10-K

The following table provides the carrying value and estimated fair value of our outstanding mortgage loans and the underlying collateral
as of December 31, 2016 (dollars in millions):

Estimated fair value

PART II
ITEM 8 Consolidated Financial Statements

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
1,004.2
$
396.7
286.2
74.0
39.0
1,800.1

976.5
394.7
282.3
75.3
39.2
1,768.0

Collateral
2,393.0
596.2
385.1
89.5
42.0
3,505.8

(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 $36.7 million and $38.2 million
at December 31, 2016 and 2015, respectively.

The Company had no fixed maturity investments that were in
excess of 10 percent of shareholders’ equity at December 31, 2016
and 2015.

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, separate account assets and embedded derivatives. We
carry our COLI, which is invested in a series of mutual funds, at
its cash surrender value which approximates fair value. In addition,
we disclose fair value for certain financial instruments, including
mortgage loans, policy loans, cash and cash equivalents, insurance
liabilities for interest-sensitive products, 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.

(cid:116)(cid:1) 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 cash equivalents and exchange traded securities.

(cid:116)(cid:1) 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
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.

(cid:116)(cid:1) 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

CNO FINANCIAL GROUP, INC. - Form 10-K 127

PART II
ITEM 8 Consolidated Financial Statements

liabilities

insurance

our
interest-sensitive products,
for
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.

(cid:116)(cid:1) Fixed maturities available for sale, equity securities and trading

securities

Corporate securities are generally priced using market and
income approaches. Inputs generally consist of trades of
identical or similar securities, quoted prices in inactive markets,
issuer rating, benchmark yields, maturity, and credit spreads.

Equity securities (primarily comprised of non-redeemable
preferred stock) are generally priced using the market approach.
Inputs generally consist of trades of identical or similar securities,
quoted prices in inactive markets, issuer rating, benchmark
yields, maturity, and credit spreads.

128

CNO FINANCIAL GROUP, INC. - Form 10-K

(cid:116)(cid:1) Investments held by VIEs

Corporate securities are generally priced using market and
income approaches using pricing vendors. Inputs generally
consist of issuer rating, benchmark yields, maturity, and credit
spreads.

(cid:116)(cid:1) Other invested assets - derivatives

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
quotes; time value and volatility factors underlying options;
market interest rates; and non-performance risk.

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.

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 such 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.

PART II
ITEM 8 Consolidated Financial Statements

may not be reflective of an active market. For certain investments,
we use a matrix or model process to develop a security price where
future cash flow expectations are discounted at an estimated
market rate. The pricing matrix incorporates term interest rates
as well as a spread level based on the issuer’s credit rating, other
factors relating to the issuer, and the security’s maturity. In some
instances issuer-specific spread adjustments, which can be positive
or negative, are made based upon internal analysis of security
specifics such as liquidity, deal size, and time to maturity.

For certain embedded derivatives, we use actuarial assumptions
in the determination of fair value which we consider to be Level 3
inputs.

The categorization of fair value measurements, by input level, for our financial instruments carried at fair value on a recurring basis at
December 31, 2016 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

— $

13,252.4

258.5

$ 13,510.9

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

—
—
—
—
—
—
—
—
—
359.9

—

—
—
—
—
—
4.9
4.9
—
—
—
364.8

164.3
1,988.9
33.0
2,649.9
225.3
1,504.2
2.5
915.5
20,736.0
199.1

—
—
3.9
60.4
5.4
32.0
—
—
360.2
25.2

164.3
1,988.9
36.9
2,710.3
230.7
1,536.2
2.5
915.5
21,096.2
584.2

19.0

—

19.0

.5
94.3
2.4
163.9
78.4
—
358.5
1,724.3
111.9
4.7
23,134.5

—
—
—
—
—
—
—
—
—
—
385.4

.5
94.3
2.4
163.9
78.4
4.9
363.4
1,724.3
111.9
4.7
$ 23,884.7

— $

1,092.3

CNO FINANCIAL GROUP, INC. - Form 10-K 129

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, 2015 is as follows (dollars in millions):

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

Quoted prices in active
markets for identical
assets or liabilities
(Level 1)

Significant
other observable
inputs
(Level 2)

Significant
unobservable
inputs
(Level 3)

Total

— $

12,698.1

170.4 $

12,868.5

—
—
—
—
—
—
—
—
—
254.9

—

—
—
—
—
—
4.9
4.9
—
1.6
—
261.4

194.5
2,104.2
20.7
1,816.3
186.7
1,604.2
3.3
1,047.4
19,675.4
176.1

—
—
—
35.9
—
1.1
.1
—
207.5
32.0

194.5
2,104.2
20.7
1,852.2
186.7
1,605.3
3.4
1,047.4
19,882.9
463.0

21.5

—

21.5

1.9
35.5
2.1
118.1
38.2
—
217.3
1,633.6
41.0
4.7
21,748.1

—
—
—
39.9
—
—
39.9
—
—
—

1.9
35.5
2.1
158.0
38.2
4.9
262.1
1,633.6
42.6
4.7
279.4 $ 22,288.9

— $

1,057.1 $

1,057.1

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.

Liabilities for policyholder account balances. The estimated fair
value of insurance liabilities for policyholder account balances was
approximately equal to its carrying value as 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.

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.

130

CNO FINANCIAL GROUP, INC. - Form 10-K

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):

Quoted prices in active
markets for identical
assets or liabilities
(Level 1)

December 31, 2016
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

Cash and cash equivalents:

Unrestricted
Held by variable interest entities

Liabilities:

Policyholder account balances
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

Cash and cash equivalents:

Unrestricted
Held by variable interest entities

Liabilities:

Policyholder account balances
Investment borrowings
Borrowings related to variable interest entities
Notes payable – direct corporate obligations

— $
—

1,800.1 $ 1,800.1 $ 1,768.0
112.0

112.0

—

473.6
189.3

—
—
—
—

165.0

5.3
—

—
1,650.0
1,675.2
931.9

—

—
—

165.0

478.9
189.3

10,912.7
—
—
—

10,912.7
1,650.0
1,675.2
931.9

10,912.7
1,647.4
1,662.8
912.9

Quoted prices in active
markets for identical
assets or liabilities
(Level 1)

December 31, 2015
Significant
other observable
inputs
(Level 2)

Significant
unobservable
inputs
(Level 3)

Total
estimated
fair value

Total
carrying
amount

— $
—

1,772.4 $ 1,772.4 $ 1,721.0
109.4

109.4

—

432.3
364.4

—
—
—
—

158.1

—
—

—
1,549.8
1,673.6
937.8

—

—
—

158.1

432.3
364.4

10,762.3
—
—
—

10,762.3
1,549.8
1,673.6
937.8

10,762.3
1,548.1
1,676.4
911.1

CNO FINANCIAL GROUP, INC. - Form 10-K 131

PART II
ITEM 8 Consolidated Financial Statements

December 31, 2016

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,
2015

Transfers
into
Level 3(a)

Transfers
out of
Level 3(a)

Ending
balance as of
December 31,
2016

Amount of
total gains
(losses) for the
year ended
December 31,
2016 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
Debt securities issued
by foreign governments
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

170.4 $

76.5 $

(10.7) $

9.1 $

20.3 $

(7.1) $

258.5 $

(10.9)

—
35.9

—

1.1

4.0
9.7

5.4

16.9

(.1)

207.5

112.4

32.0

39.9

5.5

—

—
—

—

(10.7 )

(12.7 )

—

(.1 )
2.2

—

—
26.3

—

13.9

—

—
(13.7)

—

11.3

60.5

(20.8)

—

3.9
60.4

5.4

32.0

—

360.2

25.2

—
—

—

(10.9)

(12.7)

(39.9)

—

(1,057.1)

(96.0)

60.8

—

(1,092.3)

60.8

132

CNO FINANCIAL GROUP, INC. - Form 10-K

PART II
ITEM 8 Consolidated Financial Statements

(b) Purchases, sales, issuances and settlements, net, represent the activity that occurred during the period that results in a change of the asset or liability but does not
represent changes in fair value for the instruments held at the beginning of the period. Such activity primarily consists of purchases and sales of fixed maturity and
equity securities and changes to embedded derivative instruments related to insurance products resulting from the issuance of new contracts, or changes to existing
contracts. In addition, such activity includes the investments received upon the recapture of reinsurance agreements with BRe on September 29, 2016. The following
summarizes such activity for the year ended December 31, 2016 (dollars in millions):

ASSETS:

Fixed maturities, available for sale:

Corporate securities
Debt securities issued by foreign governments
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 - corporate securities

LIABILITIES:

Future policy benefits - embedded derivatives
associated with fixed index annuity products

Received in
reinsurance
recapture

Purchases

Sales

Issuances Settlements

Purchases, sales, issuances
and settlements, net

18.5 $
4.0
16.9
5.4
17.0
—
61.8
3.3
.2

89.2 $
—
—
—
—
—
89.2
2.2
—

(31.2) $
—
(7.2)
—
(.1)
(.1)
(38.6)
—
(.2)

— $
—
—
—
—
—
—
—
—

(148.3)

—

21.2

(28.9)

60.0

76.5
4.0
9.7
5.4
16.9
(.1)
112.4
5.5
—

(96.0)

CNO FINANCIAL GROUP, INC. - Form 10-K 133

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, 2015
(dollars in millions):

December 31, 2015

Purchases,
sales,
issuances
and
settlements,
net(b)

Beginning
balance as of
December 31,
2014

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)

Ending
balance as
of December
31, 2015

Amount of
total gains
(losses) for the
year ended
December 31,
2015 included
in our net
income
relating to
assets and
liabilities still
held as of the
reporting date

365.9 $

31.0 $

(2.2) $

(19.5) $

37.4 $

(242.2) $

170.4 $

35.5
59.2

1.2

462.2

28.0

28.6

(35.5)
6.7

(.1)

(.3)

1.8

4.0

9.5

—
—

—

—
(1.4)

—

—
—

—

—
(28.6)

—

—
35.9

1.1

(2.2)

(20.9)

37.4

(270.8)

207.5

—

1.8

—

32.0

39.9

—

—
—

—

1.8

(1,081.5)

(11.9)

36.3

—

(1,057.1)

36.3

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

(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.

(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, 2015 (dollars in millions):

134

CNO FINANCIAL GROUP, INC. - Form 10-K

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

62.2
—
13.7
—
—
75.9
4.0
9.5

(31.2) $
(35.5)
(7.0)
(.1)
(.3)
(74.1)
—
—

— $
—
—
—
—
—
—
—

(137.8)

64.4

(4.0)

65.5

31.0
(35.5)
6.7
(.1)
(.3)
1.8
4.0
9.5

(11.9)

At December 31, 2016, 46 percent of our Level 3 fixed maturities,
available for sale, were investment grade and 72 percent of our Level
3 fixed maturities, available for sale, consisted of corporate securities.

Realized and unrealized investment gains and losses presented in
the preceding tables represent gains and losses during the time the
applicable financial instruments were classified as Level 3.

investment gains (losses) or insurance policy benefits within
the consolidated statement of operations or accumulated other
comprehensive income within shareholders’ equity based on the
appropriate accounting treatment for the instrument.

The amount presented for gains (losses) included in our net loss
for assets and liabilities still held as of the reporting date primarily
represents impairments for fixed maturities, available for sale,
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, 2016 (dollars in millions):

Fair value at
December 31, 2016

Valuation techniques

Unobservable inputs Range (weighted average)

ASSETS:

Corporate securities(a)

148.5

Discounted cash flow analysis

Corporate securities(b)
Asset-backed securities(c)
Equity security(d)
Other assets categorized as Level 3(e)

Total
LIABILITIES:

Future policy benefits(f )

Recovery method
14.8
Discounted cash flow analysis
24.0
25.2
Market multiple
172.9 Unadjusted third-party price source
385.4

Discount margins 1.35% - 27.71% (13.52%)
Percent of recovery
expected
Discount margins
Projected cash flows
Not applicable

5% - 69% (55%)
2.06% - 3.64% (2.76%)
0.4% - 6.2% (5.9%)
Not applicable

1,092.3

Discounted projected embedded
derivatives

5.15% - 5.61% (5.59%)
Projected portfolio yields
Discount rates
0.18 - 3.06% (2.07%)
Surrender rates 0.94% - 46.48% (13.52%)

(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) Corporate securities - The significant unobservable input used in the fair value measurement of our corporate securities is percentage of recovery expected. Significant

increases (decreases) in percentage of recovery expected in isolation would result in a significantly higher (lower) fair value measurement.

(c) 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.

(d) Equity securities - The significant unobservable input used in the fair value measurement of these equity securities is projected cash flows. Generally, increases

(decreases) in the projected cash flows would result in higher (lower) fair value measurements.

(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.

CNO FINANCIAL GROUP, INC. - Form 10-K 135

PART II
ITEM 8 Consolidated Financial Statements

Fair value at
December 31, 2015

Valuation
techniques

Unobservable

inputs Range (weighted average)

ASSETS:

Corporate securities(a)
Asset-backed securities(b)
Equity security(c)
Other assets categorized as Level 3(d)

Total
LIABILITIES:

Future policy benefits(e)

Discounted cash flow analysis
76.9
Discounted cash flow analysis
22.2
32.0
Market approach
148.3 Unadjusted third-party price source
279.4

Discount margins
Discount margins
Projected cash flows
Not applicable

1.65% - 9.74% (5.35%)
2.83% - 4.45% (3.50%)
Not applicable
Not applicable

1,057.1

Discounted projected embedded
derivatives

5.15% - 5.61% (5.42%)
Projected portfolio yields
0.00 - 3.18% (1.94%)
Discount rates
Surrender rates 1.67% - 46.56% (14.09%)

(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.

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

2016

2015

6% $

5,346.1

5,172.2

2,322.1

2,695.6

52.2

2,248.7

2,589.9

44.7

537.3
10,953.3

546.6
10,602.1

(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.

Our policyholder account balances are summarized as follows (dollars in millions):

Fixed index annuities
Other annuities
Interest-sensitive life insurance contracts
TOTAL

2016
5,324.5
4,541.8
1,046.4
10,912.7

2015
4,884.4
4,885.1
992.8
10,762.3

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.

136

CNO FINANCIAL GROUP, INC. - Form 10-K

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):

PART II
ITEM 8 Consolidated Financial Statements

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 (payables)

BALANCE, END OF YEAR

2016
1,731.8
(130.0)
1,601.8

1,526.4
96.6
1,623.0
75.3

837.2
671.3
1,508.5
1,791.6
(14.0)
1,777.6

2015
1,679.5
(125.0)
1,554.5

1,481.0
(13.3)
1,467.7
71.0

841.8
649.6
1,491.4
1,601.8
130.0
1,731.8

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

(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 (benefit)
Deferred tax expense
Valuation allowance applicable to current year income

Income tax expense calculated based on estimated annual effective tax rate

Income tax expense on discrete items:

Tax expense related to the sale of Conseco Life Insurance Company(a)
Change in valuation allowance
IRS settlement
Other items

TOTAL INCOME TAX EXPENSE (BENEFIT)

2016
(45.2)
173.0
(14.0)
113.8

—
40.7
(170.4)
10.9
(5.0)

2015
10.7
118.6
—
129.3

—
(32.5)
—
.2
97.0

2014
15.6
143.6
—
159.2

14.2
(48.8)
—
(.9)
123.7

(a) Conseco Life Insurance Company (“CLIC”) was a wholly owned subsidiary prior to its sale on July 1, 2014.

A reconciliation of the U.S. statutory corporate tax rate to the effective rate reflected in the consolidated statement of operations is as
follows:

U.S. statutory corporate rate
Valuation allowance
Non-taxable income and nondeductible benefits, net
State taxes
Impact of IRS settlement
Impact of the sale of CLIC
Other items

EFFECTIVE TAX RATE

2016
35.0%
7.6
(1.1)
2.2
(48.2)
—
3.1
(1.4)%

2015
35.0%
(8.8)
(.2)
2.1
—
—
(1.7)
26.4%

2014
35.0%
(27.9)
(.9)
1.5
—
66.3
(3.4)
70.6%

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

PART II
ITEM 8 Consolidated Financial Statements

The components of the Company’s income tax assets and liabilities are summarized below (dollars in millions):

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 prepaid (accrued)

INCOME TAX ASSETS, NET

2016

882.9
12.3
.7
—
17.8
668.4
65.6
1,647.7

(277.8)
(344.1)
(621.9)
1,025.8
(240.2)
785.6
4.1
789.7

2015

916.3
14.1
55.3
13.8
26.5
600.3
63.0
1,689.3

(305.4)
(223.8)
(529.2)
1,160.1
(213.5)
946.6
(47.8)
898.8

relates to our net federal operating loss carryforwards and
$10.0 million relates to state operating loss carryforwards). 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.

At December 31, 2016, our projection of future taxable income
for purposes of determining the valuation allowance is based on
our adjusted average annual taxable income which is assumed
to increase by 3 percent for the next five years, and level taxable
income is assumed thereafter. In the projections used for our
analysis, our adjusted average taxable income, adjusted for the
reinsurance recapture, of approximately $335 million consisted of
$85 million of non-life taxable income and $250 million of life
taxable income.

Based on our assessment, we recognized an increase to the
allowance for deferred tax assets of $26.7 million in 2016. 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.

138

CNO FINANCIAL GROUP, INC. - Form 10-K

Changes in our valuation allowance are summarized as follows (dollars in millions):

Balance, December 31, 2013

Decrease in 2014

Balance, December 31, 2014

Decrease in 2015

Balance, December 31, 2015

Increase in 2016

BALANCE, DECEMBER 31, 2016

PART II
ITEM 8 Consolidated Financial Statements

294.8
(48.8)(a)
246.0
(32.5)(b)
213.5
26.7(c)

240.2

(the “IRS”).

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 NOLs
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 (1.68 percent at December
31, 2016), 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, 2016, 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 (as subsequently amended) extends the final
expiration date of the Amended Section 382 Rights Agreement to
November 13, 2017, updates the purchase price of the Rights and
provides for a new series of preferred stock relating to the Rights
that is substantially identical to the prior series of preferred stock.
The Second Amended Rights Agreement was approved by the
Company’s stockholders 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.

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

CNO FINANCIAL GROUP, INC. - Form 10-K 139

PART II
ITEM 8 Consolidated Financial Statements

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.

On May 4, 2016, our shareholders approved an amendment (the
“2016 Section 382 Charter Amendment”) to CNO’s certificate
of incorporation, which extended the expiration date for the
Extended Section 382 Charter Amendment until July 31, 2019.
The 2016 Section 382 Charter Amendment became effective on
July 31, 2016.

As of December 31, 2016, we had $2.5 billion of federal NOLs (all of which were non-life NOLs). The following table summarizes the
expiration dates of our loss carryforwards (dollars in millions):

Year of expiration
2023
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
TOTAL FEDERAL NOLs

Net operating loss
carryforwards

1,936.0
85.2
149.9
10.8
80.3
213.2
.3
.2
44.4
.6
1.7
2,522.6

A reconciliation of the beginning and ending amount of unrecognized tax benefits for the years ended December 31, 2016 and 2015 is as
follows (dollars in millions):

Balance at beginning of year

Increase based on tax positions taken in prior years
Decrease in unrecognized tax benefits related to settlements with taxing authorities

BALANCE AT END OF YEAR

Years ended December 31,

2016
234.2
3.4
(237.6)
—

2015
228.7
5.5
—
234.2

As of December 31, 2016 and 2015, nil and $155.4 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,
2016. The liability for accrued interest was nil and $3.2 million at
December 31, 2016 and 2015, respectively.

purchase loan made by our Predecessor to a member of its board
of directors. The settlement resulted in a reduction to tax expense
of approximately $118.7 million in the fourth quarter of 2016 (the
period in which these matters were settled and the fully executed
documentation was received). The $118.7 million benefit
includes: (i) a $98.2 million tax benefit related to additional
life NOLs; (ii) a $17.1 million tax benefit related to additional
non-life NOLs (net of an increase to the deferred tax valuation
allowance of $51.7 million); and (iii) a $3.4 million reduction in
interest recognized in prior periods on alternative minimum tax
that will no longer be required to be paid.

The additional life NOLs related to the settlement offset our life
taxable income in the third and fourth quarters of 2016 and the
tax gain realized on the recapture of the ceded long-term care
business from BRe. The settlement also reduced the amount of
current income tax accrued at December 31, 2016, as presented

140

CNO FINANCIAL GROUP, INC. - Form 10-K

PART II
ITEM 8 Consolidated Financial Statements

in the components of income tax assets and liabilities schedule
provided in this note to consolidated financial statements by
approximately $50 million.

audits are not resolved in a manner consistent with management’s
expectations, the Company may be required to adjust its provision
for income taxes.

All of the additional life NOLs were utilized by December 31,
2016. Accordingly, we will begin making federal tax payments
equal to the prescribed federal tax rate applied to 65 percent of
our life insurance company taxable income due to the limitations
on the extent to which we can use non-life NOLs to offset life
insurance company taxable income. We will continue to pay tax
on 65 percent of our life insurance company taxable income until
all non-life NOLs are utilized or expire.

The IRS is also conducting an examination of 2011 through 2014.
In connection with this exam, we have agreed to extend the statute
of limitations for 2011 through 2013 to September 30, 2018. The
Company’s various state income tax returns are generally open
for tax years beginning in 2013, based on individual state statutes
of limitation. Generally, for tax years which generate NOLs,
capital losses or tax credit carryforwards, the statute remains
open until the expiration of the statute of limitations for the tax
year in which such carryforwards are utilized. The outcome of tax
audits cannot be predicted with certainty. If the Company’s tax

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. The value of
NOL carryforwards of $15.7 million related to deductions for
stock options and restricted stock would have been reflected in
additional paid-in capital if realized. Effective January 1, 2017,
the Company will adopt new authoritative guidance related
to several aspects of the accounting for share-based payment
transactions, including the income tax consequences. Under the
new guidance, any excess tax benefits are recognized as an income
tax benefit in the income statement. The new guidance is applied
on a modified retrospective basis through a cumulative-effect
adjustment to retained earnings for all tax benefits that were not
previously recognized because the related tax deduction had not
reduced taxes payable. Since a corresponding valuation allowance
of $15.7 million will be recognized as a result of adopting this
guidance, there will be no impact to our consolidated financial
statements related to this provision of the new guidance.

7. NOTES PAYABLE - DIRECT CORPORATE OBLIGATIONS

The following notes payable were direct corporate obligations of the Company as of December 31, 2016 and 2015 (dollars in millions):

4.500% Senior Notes due May 2020
5.250% Senior Notes due May 2025
Revolving Credit Agreement (as defined below)
Unamortized debt issuance costs

DIRECT CORPORATE OBLIGATIONS

Notes

On May 19, 2015, the Company executed the Indenture, dated as
of May 19, 2015 (the “Base Indenture”) and the First Supplemental
Indenture, dated as of May 19, 2015 (the “Supplemental Indenture”
and, together with the Base Indenture, the “Indenture”), between
the Company and Wilmington Trust, National Association,
as trustee (the “Trustee”) pursuant to which the Company
issued $325.0 million aggregate principal amount of 4.500%
Senior Notes due 2020 (the “2020 Notes”) and $500.0 million
aggregate principal amount of 5.250% Senior Notes due 2025 (the
“2025 Notes” and, together with the 2020 Notes, the “Notes”).

The Company used the proceeds of the offering of the Notes,
together with borrowings under the Revolving Credit Agreement
(as defined below): (i) to repay all amounts outstanding under our
Previous Senior Secured Credit Agreement (as defined below);
(ii) to redeem and satisfy and discharge all of the outstanding
6.375% Senior Secured Notes due October 2020 (the “6.375%
Notes”); and (iii) to pay fees and expenses related to the offering of
the Notes and the foregoing transactions. The remaining proceeds

2016
325.0
500.0
100.0
(12.1)
912.9

2015
325.0
500.0
100.0
(13.9)
911.1

of the Notes and the borrowings under the Revolving Credit
Agreement were used for general corporate purposes, including
share repurchases.

The 2020 Notes mature on May 30, 2020, and the 2025 Notes
mature on May 30, 2025. Interest on the 2020 Notes is payable
at 4.500% per annum. Interest on the 2025 Notes is payable
at 5.250% per annum. Interest on the Notes is payable semi-
annually in cash in arrears on May 30 and November 30 of each
year, commencing on November 30, 2015.

The Notes are the Company’s senior unsecured obligations and
rank equally with the Company’s other senior unsecured and
unsubordinated debt from time to time outstanding, including
obligations under a $150.0 million four-year unsecured revolving
credit agreement (the “Revolving Credit Agreement”). The Notes
are effectively subordinated to all of the Company’s existing
and future secured indebtedness to the extent of the value of the
assets securing such indebtedness. The Notes are structurally
subordinated to all existing and future indebtedness and other
liabilities of the Company’s subsidiaries.

CNO FINANCIAL GROUP, INC. - Form 10-K 141

PART II
ITEM 8 Consolidated Financial Statements

The Company may redeem some or all of the 2020 Notes at
any time or from time to time at a “make-whole” redemption
price plus accrued and unpaid interest to, but not including, the
redemption date.

Prior to February 28, 2025, the Company may redeem some or all
of the 2025 Notes at any time or from time to time at a “make-
whole” redemption price plus accrued and unpaid interest to, but
not including, the redemption date. On and after February 28,
2025, the Company may redeem some or all of the 2025 Notes at
any time or from time to time at a redemption price equal to 100%
of the principal amount thereof plus accrued and unpaid interest
to, but not including, the redemption date.

Upon the occurrence of a Change of Control Repurchase Event (as
defined in the Indenture), the Company will be required to make
an offer to repurchase the Notes at a price equal to 101% of the
principal amount thereof, plus accrued and unpaid interest, if any,
to, but not including, the date of repurchase.

The Indenture contains covenants that restrict the Company’s
ability, with certain exceptions, to:

(cid:116)(cid:1) incur certain subsidiary indebtedness without also guaranteeing

the Notes;

(cid:116) create liens;

(cid:116) enter into sale and leaseback transactions;

(cid:116) issue, sell, transfer or otherwise dispose of any shares of
capital stock of any Insurance Subsidiary (as defined in the
Indenture); and

(cid:116) consolidate or merge with or into other companies or transfer

all or substantially all of the Company’s assets.

The 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 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 Notes may
declare the principal of and accrued but unpaid interest, including
any additional interest, on all of the Notes to be due and payable.

Revolving Credit Agreement

On May 19, 2015, the Company entered into the Revolving Credit
Agreement, with KeyBank National Association, as administrative
agent (the “Agent”), and the lenders from time to time party
thereto. On May 19, 2015, the Company made an initial drawing
of $100.0 million under the Revolving Credit Agreement,
resulting in $50.0 million available for additional borrowings. The
Revolving Credit Agreement matures on May 19, 2019.

The Revolving Credit Agreement includes an uncommitted
subfacility for swingline loans of up to $5.0 million, and up to
$5.0 million of the Revolving Credit Agreement is available for the
issuance of letters of credit. The Company may incur additional
incremental loans under the Revolving Credit Agreement in an
aggregate principal amount of up to $50.0 million, provided that
there are no events of default and subject to certain other terms
and conditions including the delivery of certain documentation.

142

CNO FINANCIAL GROUP, INC. - Form 10-K

The interest rates with respect to loans under the Revolving Credit
Agreement are based on, at the Company’s option, a floating base
rate (defined as a per annum rate equal to the highest of: (i) the
federal funds rate plus 0.50%; (ii) the “prime rate” of the Agent;
and (iii) the eurodollar rate for a one-month interest period plus an
applicable margin of initially 1.00% per annum), or a eurodollar
rate plus an applicable margin of initially 2.00% per annum. At
December 31, 2016, the interest rate on the amounts outstanding
under the Revolving Credit Agreement was 2.77 percent. In
addition, the daily average undrawn portion of the Revolving
Credit Agreement will accrue a commitment fee payable quarterly
in arrears. The applicable margin for, and the commitment fee
applicable to, the Revolving Credit Agreement, will be adjusted
from time-to-time pursuant to a ratings based pricing grid. In
addition, a fronting fee, in an amount equal to 0.125% per annum
on the aggregate face amount of the outstanding letters of credit,
will be payable to the issuers of such letters of credit.

(cid:116) subsidiary debt;

(cid:116)(cid:1)liens;

(cid:116)(cid:1)restrictive agreements;

(cid:116)(cid:1) restricted payments during the continuance of an event of

default;

(cid:116) disposition of assets and sale and leaseback transactions;

(cid:116)(cid:1)transactions with affiliates;

(cid:116)(cid:1)change in business;

(cid:116)(cid:1)fundamental changes;

(cid:116)(cid:1)modification of certain agreements; and

(cid:116)(cid:1)changes to fiscal year.

The Revolving Credit Agreement requires the Company to
maintain (each as calculated in accordance with the Revolving
Credit Agreement): (i) a debt to total capitalization ratio of
not more than 30.0 percent (such ratio was 19.4 percent at
December 31, 2016); (ii) 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 estimated to be 459 percent at December 31, 2016); and
(iii) a minimum consolidated net worth of not less than the sum
of (x) $2,674 million plus (y) 50.0% of the net equity proceeds
received by the Company from the issuance and sale of equity
interests in the Company (the Company’s consolidated net worth
was $3,864.5 million at December 31, 2016 compared to the
minimum requirement of $2,680.8 million).

The Revolving Credit Agreement provides for customary events
of default (subject in certain cases to customary grace and cure
periods), which include, without limitation, the following:

(cid:116) non-payment;

(cid:116)(cid:1)breach of representations, warranties or covenants;

PART II
ITEM 8 Consolidated Financial Statements

(cid:116)(cid:1)cross-default and cross-acceleration;

(cid:116)(cid:1)bankruptcy and insolvency events;

(cid:116)(cid:1)judgment defaults;

(cid:116)(cid:1) actual or asserted invalidity of documentation with respect to

the Revolving Credit Agreement;

(cid:116)(cid:1)change of control; and

(cid:116)(cid:1)customary ERISA defaults.

Previous Senior Secured Credit Agreement

The Company used a portion of the net proceeds from its offering
of the Notes, together with borrowings under the New Revolving
Credit Agreement, to repay all of the outstanding borrowings under
its credit agreement, dated as of September 28, 2012 (as amended
by the First Amendment to Credit Agreement dated May 20, 2013,
and as further amended by the Second Amendment to Credit
Agreement dated May 30, 2014, the “Previous Senior Secured
Credit Agreement”) among the Company, the lenders from time
to time party thereto, and JPMorgan Chase Bank, N.A., as agent.
The Previous Senior Secured Credit Agreement consisted of: (i) a
six-year term loan facility with $389.8 million outstanding prior to
repayment; (ii) a four-year term loan facility with $112.5 million
outstanding prior to repayment; and (iii) a $50.0 million three-year
revolving credit facility that had no outstanding principal balance.

Upon repayment of all such outstanding borrowings on May 19,
2015, all of the commitments under the Previous Senior Secured
Credit Agreement were terminated, all of the collateral securing
the facilities thereunder was released, the related security, guarantee
and intercreditor agreements were terminated and any remaining
restrictive covenants and certain additional events of default
contained in the Previous Senior Secured Credit Agreement ceased
to have effect.

In 2015, we made $19.8 million of scheduled quarterly principal
payments due under the Previous Senior Secured Credit
Agreement. In 2014, we made $59.4 million of scheduled quarterly
principal payments due under the Previous Senior Secured Credit
Agreement.

6.375% Notes

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
and the Trustee. On May 19, 2015, the Company deposited with
the Trustee for the 6.375% Notes sufficient funds to satisfy and
discharge the indenture governing the 6.375% Indenture and to
fund the make-whole redemption of the outstanding 6.375% Notes
and to pay accrued and unpaid interest on the redeemed notes
to, but not including, the June 10, 2015 redemption date. Upon
the satisfaction and discharge of the 6.375% Indenture, all of the
collateral securing the 6.375% Notes was released, the related
security and intercreditor agreements were terminated and any
remaining restrictive covenants and certain additional events of
default contained in the 6.375% Indenture ceased to have effect.

The following table sets forth the sources and uses of cash from the debt refinancing transactions discussed above (dollars in millions):

Sources:
Notes
New Revolving Credit Agreement

TOTAL SOURCES

Uses:

Repayment of Previous Senior Secured Credit Agreement
Repayment of 6.375% Notes, including redemption premium
Accrued interest
Debt issuance costs
General corporate purposes

TOTAL USES

825.0
100.0
925.0

502.3
292.8
4.3
16.0
109.6
925.0

Loss on Extinguishment of Debt

In 2015, we recognized a loss on extinguishment or modification of
debt totaling $32.8 million primarily related to: (i) the redemption
premium related to the repayment of the 6.375% Notes; and
(ii) the write-off of unamortized discount and issuance costs
associated with the repayment of the Previous Senior Secured
Credit Agreement and the 6.375% Notes.

In 2014, we recognized a loss on extinguishment or modification
of debt totaling $.6 million consisting of: (i) $.4 million of
expenses related to the amendment of a previous senior secured
credit agreement; and (ii) $.2 million related to the repurchase
of the remaining $3.5 million principal amount of 7.0% Senior
Debentures due 2016.

CNO FINANCIAL GROUP, INC. - Form 10-K 143

PART II
ITEM 8 Consolidated Financial Statements

Scheduled Repayment of our Direct Corporate Obligations

The scheduled repayment of our direct corporate obligations was as follows at December 31, 2016 (dollars in millions):

Year ending December 31,
2017
2018
2019
2020
2021
Thereafter

—
—
100.0
325.0
—
500.0
925.0

8. LITIGATION AND OTHER LEGAL PROCEEDINGS

Legal Proceedings

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.

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.

On September 29, 2016, Washington National and BCLIC
commenced an arbitration proceeding seeking compensatory,
consequential and punitive damages against BRe based upon
BRe’s incurable material breaches of the long-term care reinsurance
agreements, conversion, fraud, and breaches of fiduciary duties
and the obligation to deal honestly and in good faith. BRe filed
a counterclaim against Washington National and BCLIC in
the arbitration alleging damages relating to the reinsurance
agreements and their termination. In addition, on September 29,
2016, a complaint was filed by BCLIC and Washington National
in the United States District Court for the Southern District
of New York, Bankers Conseco Life Insurance Company and
Washington National Insurance Company v. Moshe M. Feuer,
Scott Taylor and David Levy, Case No. 16-cv-7646, alleging,
among other claims, breach of fiduciary duty, aiding and abetting
a breach of fiduciary duty, fraudulent misrepresentation/fraudulent
concealment, aiding and abetting a fraud, and violation of the
Racketeer Influenced and Corrupt Organizations Act. These
allegations relate to the long-term care reinsurance agreements
between BRe and Washington National and BCLIC, respectively,
and emanate from the undisclosed relationships between and
among the defendants (who were the principal owners and officers
of BRe) and Platinum Partners, LP and its affiliates. Washington
National and BCLIC intend to vigorously pursue their claims for
damages and other remedies in the arbitration and the litigation
described above.

144

CNO FINANCIAL GROUP, INC. - Form 10-K

On July 20, 2007, a complaint was filed in the Hamilton
County, Indiana Circuit Court, Signature Estates of Indiana,
Inc. d/b/a Gordon Marketing, Stephens-Matthews Marketing,
Inc., Shields Brokerage, Inc. and Edwin A Hildebrand d/b/a
Hildebrand Insurance Services v. Conseco Medical Insurance
Company, Conseco Medical Insurance Company a/k/a Washington
National Insurance Company and Washington National Insurance
Company, Cause No. 29D02- 0707-PL-790. The Plaintiffs
are independent insurance marketing organizations which
previously marketed Conseco Medical Insurance Company
(“CMIC”) individual major medical products and which are
claiming damages for allegedly fraudulent conduct by CMIC in
withdrawing from this business in 2002. The Plaintiffs contend
that they relied on CMIC’s alleged representations that its major
medical business was profitable and that CMIC was committed
to it. The Plaintiffs further allege that when CMIC exited the
market, it caused agents that were previously writing business
through their organizations to cease doing business with
them, thereby causing irreparable damage. CMIC merged into
Washington National, effective July 1, 2003. On December 16,
2016, following a jury trial, verdicts were entered in favor of the
plaintiffs, and compensatory damages aggregating $4.7 million
and punitive damages aggregating $6.0 million were awarded
to the plaintiffs. Washington National has filed post-trial
motions requesting the court correct errors, grant a new trial,
find that punitive damages were improper, and reduce both
compensatory and punitive damages. Plaintiffs filed motions
requesting pre-judgment interest and attorney fees. We believe
the case is without merit and intend to defend it vigorously.

Regulatory Examinations and Fines

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

PART II
ITEM 8 Consolidated Financial Statements

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, 2016, included: (i) accruals of
$24.9 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, 2016; and (ii) receivables of $26.7 million
that we estimate will be recovered through a reduction in future
premium taxes as a result of such assessments. At December 31,
2015, such guaranty fund assessment accruals were $24.0 million
and such receivables were $26.1 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 $2.8 million, $1.2 million and $1.1 million in 2016,
2015 and 2014, respectively.

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 $25.0 million and
$25.8 million at December 31, 2016 and 2015, 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
require future payments. Total expense pursuant to these lease
and sponsorship agreements was $56.8 million, $48.8 million
and $50.4 million in 2016, 2015 and 2014, respectively. Future
required minimum payments as of December 31, 2016, were as
follows (dollars in millions):

2017
2018
2019
2020
2021
Thereafter
Total

32.0
26.5
13.2
7.7
5.0
5.9
90.3

CNO FINANCIAL GROUP, INC. - Form 10-K 145

PART II
ITEM 8 Consolidated Financial Statements

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.

2015, respectively. Changes in the cash surrender value (which
approximates net realizable value) of the COLI assets are recorded
as net investment income and totaled $6.9 million, $.5 million and
$5.7 million in 2016, 2015 and 2014, respectively.

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. In 2016, the agent deferred compensation plan was
amended to: (i) freeze participation in the plan; (ii) freeze benefits
accrued under the plan; and (iii) add a limited cashout feature.
During the third quarter of 2016, we made lump sum settlement
distributions to plan participants with account balances that were
below a certain threshold consistent with the provision of the
amended plan. We recognized a pre-tax gain of $6.1 million related
to the settlement distributions in the third quarter of 2016.

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 $156.3 million
and $170.8 million at December 31, 2016 and 2015, respectively.
Expenses incurred on this plan were $8.1 million, $2.2 million and
$36.3 million during 2016, 2015 and 2014, respectively (including
the recognition of gains (losses) of $3.1 million, $15.2 million and
$(24.3) million in 2016, 2015 and 2014, respectively, primarily
resulting from: (i) changes in the discount rate assumption used to
determine the deferred compensation plan liability to reflect current
investment yields; (ii) changes in mortality table assumptions;
and (iii) the aforementioned settlement distributions in 2016).
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 $165.0 million and $158.1 million at December 31, 2016 and

10. DERIVATIVES

We used the following assumptions for the deferred compensation
plan to calculate:

Benefit obligations:
Discount rate
Net periodic cost:
Discount rate

2016

2015

4.25%

4.50%

4.15%

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.

The benefits expected to be paid pursuant to our agent deferred
compensation plan as of December 31, 2016 were as follows (dollars
in millions):

2017
2018
2019
2020
2021
2022 - 2026

7.0
7.4
7.5
7.7
7.9
43.1

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 $5.3 million, $5.0 million and $5.1 million in 2016,
2015 and 2014, respectively. Employer matching contributions are
discretionary.

Our freestanding and embedded derivatives, which are not designated as hedging instruments, are held at fair value and are
summarized as follows (dollars in millions):

Assets:

Other invested assets:

Fixed index call options
Interest rate futures
Reinsurance receivables

TOTAL ASSETS
Liabilities:

Future policy benefits:
Fixed index products
TOTAL LIABILITIES

146

CNO FINANCIAL GROUP, INC. - Form 10-K

Fair value
2016

111.9
—
(4.2)
107.7

1,092.3
1,092.3

$
$

2015

41.0
.1
(5.0)
36.1

1,057.1
1,057.1

$
$

PART II
ITEM 8 Consolidated Financial Statements

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,
2015
264
96,660
2,379.7 $

Additions
378
11,237
2,452.5 $

Maturities/
terminations
(642)
(7,085)
(2,377.1) $

December 31,
2016
—
100,812
2,455.1

We are required to establish an embedded derivative related to a modified coinsurance agreement pursuant to which we assume the risks of
a block of health insurance business. The embedded derivative represents the mark-to-market adjustment for approximately $135 million
in underlying investments held by the ceding reinsurer.

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):

Net investment income from policyholder and reinsurer accounts and
other special-purpose portfolios:

Fixed index call options
Embedded derivative related to reinsurance contract

TOTAL
Net realized gains (losses):
Interest rate futures
Embedded derivative related to modified coinsurance agreement

TOTAL
Insurance policy benefits:

Embedded derivative related to fixed index annuities

TOTAL

Derivative Counterparty Risk

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, 2016, all of our
counterparties were rated “A-” or higher by S&P.

From time to time, we enter into exchange-traded interest
rate future contracts. The contracts are marked to market and
margined on a daily basis. The Company has minimal exposure
to credit-related losses in the event of nonperformance.

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.

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

2016

2015

2014

29.2
—
29.2

(1.1)
.8
(.3)

(36.2) $
—
(36.2)

(2.7)
(7.0)
(9.7)

60.8
89.7

36.3
(9.6) $

69.5
(1.4)
68.1

(7.0)
2.0
(5.0)

(73.5)
(10.4)

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. There were no repurchase
agreements outstanding at December 31, 2016 and 2015.

CNO FINANCIAL GROUP, INC. - Form 10-K 147

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,
2016 and 2015 (dollars in millions):

Gross
amounts
recognized

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

Net amount

111.9
—

— $
—

111.9
—

41.0
.1

—
1.5

41.0
1.6

— $
—

—
—

— $
—

—
—

111.9
—

41.0
1.6

December 31, 2016:

Fixed index call options
Interest rate futures

December 31, 2015:

Fixed index call options
Interest rate futures

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
Stock options exercised
Restricted and performance stock vested(a)

BALANCE, END OF YEAR

2016
184,029
(11,688)
978
435
173,754

2015
203,324
(20,582)
769
518
184,029

2014
220,324
(18,489)
916
573
203,324

(a) In 2016, 2015 and 2014, such amount was reduced by 191 thousand, 237 thousand and 257 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.

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, November 2014 and November
2015, the Company’s Board of Directors approved, in aggregate, an
additional $1,600.0 million to repurchase the Company’s outstanding
securities. In 2016, 2015 and 2014, we repurchased 11.7 million,
20.6 million and 18.5 million shares, respectively, for $203.0 million,
$365.2 million and $319.1 million, respectively, 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. The Company had remaining
repurchase authority of $252.7 million as of December 31, 2016.

In 2016, 2015 and 2014, dividends declared and paid on common
stock totaled $54.8 million ($0.31 per common share), $52.0 million
($0.27 per common share) and $51.0 million ($0.24 per common
share), respectively. In May 2016, the Company increased its
quarterly common stock dividend to $0.08 per share from
$0.07 per share. In May 2015, the Company increased its quarterly
common stock dividend to $0.07 per share from $0.06 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, 2016, 4.6
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 and a maximum term of ten years. Our stock option awards
granted in 2007 through 2009 generally vested on a graded basis
over a three year service term and expired 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. Our stock options
granted in 2015 and 2016 generally vest on a graded basis over a
three year service term and expire ten 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 2016 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

148

CNO FINANCIAL GROUP, INC. - Form 10-K

Weighted average
exercise price
13.32
17.45
(8.70)
(20.41)
14.73

Shares
5,199
1,706
(978)
(573)
5,354
2,187
4,620

Weighted average
remaining life
(in years)

Aggregate
intrinsic value

5.9 $
2.7 $

6.1

37.1
15.1

PART II
ITEM 8 Consolidated Financial Statements

A summary of the Company’s stock option activity and related information for 2015 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
12.04
16.45
(8.20)
(17.70)
13.32

Shares
5,011
1,361
(769)
(404)
5,199
2,399
6,882

Weighted average
remaining life
(in years)

Aggregate
intrinsic value

$
$

4.8
2.5

4.8

38.4
15.3

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

We recognized compensation expense related to stock options
totaling $12.2 million ($7.9 million after income taxes) in 2016,
$9.6 million ($6.2 million after income taxes) in 2015 and $7.9 million
($5.1 million after income taxes) in 2014. Compensation expense
related to stock options reduced both basic and diluted earnings
per share by four cents in 2016, three cents in 2015 and two cents

in 2014. At December 31, 2016, the unrecognized compensation
expense for non-vested stock options totaled $6.9 million which
is expected to be recognized over a weighted average period of
1.4 years. Cash received by the Company from the exercise of stock
options was $8.4 million, $6.3 million and $5.0 million during
2016, 2015 and 2014, 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

2016 Grants

2015 Grants

2014 Grants

1.4%
1.6%
36%
6.3
5.48

1.7%
1.5%
85%
6.3
10.83

1.6%
1.3%
51%
4.8
7.65

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. The expected life is based on the average of the graded
vesting period and the contractual terms of the option.

The exercise price was equal to the market price of our stock on
the date of grant for all options granted in 2016, 2015 and 2014.

The following table summarizes information about stock options outstanding at December 31, 2016 (shares in thousands):

Options outstanding

Options exercisable

Range of exercise prices
$6.45 - $7.51
$10.88 - $16.22
$16.42 - $19.15

Number
outstanding
922
860
3,572
5,354

Remaining life
(in years)
1.6
3.2
7.7

Average exercise
price
7.29
11.09
17.52

Number
exercisable

922 $
846
419
2,187

Average exercise
price
7.29
11.02
19.08

CNO FINANCIAL GROUP, INC. - Form 10-K 149

PART II
ITEM 8 Consolidated Financial Statements

During 2016, 2015 and 2014, the Company granted .4 million,
.1 million and .1 million restricted shares, respectively, of CNO
common stock to certain directors, officers and employees of
the Company at a weighted average fair value of $18.17 per
share, $17.59 per share and $17.15 per share, respectively. The
fair value of such grants totaled $7.3 million, $1.7 million and

$1.9 million in 2016, 2015 and 2014, 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 2016 is presented below (shares in
thousands):

Non-vested shares, beginning of year

Granted
Vested
Forfeited

NON-VESTED SHARES, END OF YEAR

At December 31, 2016, the unrecognized compensation expense for
non-vested restricted stock totaled $5.0 million which is expected
to be recognized over a weighted average period of 2.3 years. At
December 31, 2015, the unrecognized compensation expense for
non-vested restricted stock totaled $0.9 million. We recognized
compensation expense related to restricted stock awards totaling
$3.1 million, $2.2 million and $3.0 million in 2016, 2015 and
2014, respectively. The fair value of restricted stock that vested
during 2016, 2015 and 2014 was $2.1 million, $2.7 million and
$3.7 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
95
401
(126)
(1)
369

Weighted average grant
date fair value
15.66
18.17
16.53
16.80
18.10

In 2016, 2015 and 2014 the Company granted performance units
totaling 507,976, 516,660 and 283,630, 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. The performance units granted in 2016 and 2015
provide for a payout of up to 200 percent of the award if certain
performance thresholds are achieved, and the performance units
granted prior to 2015 provide for a payout of up to 150 percent of
the award if certain performance thresholds are achieved. 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, 2013

Granted in 2014
Additional shares issued pursuant to achieving certain performance criteria(a)
Shares vested in 2014
Forfeited

Awards outstanding at December 31, 2014

Granted in 2015
Additional shares issued pursuant to achieving certain performance criteria(a)
Shares vested in 2015
Forfeited

Awards outstanding at December 31, 2015

Granted in 2016
Additional shares issued pursuant to achieving certain performance criteria(a)
Shares vested in 2016
Forfeited

AWARDS OUTSTANDING AT DECEMBER 31, 2016

Total
shareholder
return awards
382
142
—
—
(5)
519
258
85
(260)
(53)
549
254
87
(261)
(59)
570

Operating
return on equity
awards
204
142
—
—
(3)
343
258
—
—
(52)
549
254
65
(239)
(59)
570

Pre-tax
operating
income awards
470
—
142
(434)
(2)
176
—
85
(260)
(1)
—
—
—
—
—
—

(a) The performance units that vested in these years provided for a payout of up to 150 percent of the award if certain performance levels were achieved.

The grant date fair value of the performance units awarded was
$10.3 million and $9.4 million in 2016 and 2015, respectively. We
recognized compensation expense of $7.7 million, $5.3 million
and $4.7 million in 2016, 2015 and 2014, 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

150

CNO FINANCIAL GROUP, INC. - Form 10-K

PART II
ITEM 8 Consolidated Financial Statements

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 share (the
“Junior Preferred Stock”) of the Company at a price of $70.00 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 DILUTED EARNINGS PER SHARE

Weighted average shares outstanding for basic earnings per share
Effect of dilutive securities on weighted average shares:
Stock options, restricted stock and performance units
Warrants(a)

Dilutive potential common shares
WEIGHTED AVERAGE SHARES OUTSTANDING FOR DILUTED
EARNINGS PER SHARE

2016
358.2

2015
270.7

2014
51.4

176,638

193,054

212,917

1,685
—
1,685

2,112
—
2,112

2,505
2,233
4,738

178,323

195,166

217,655

(a) All outstanding warrants were repurchased in September 2014 as further discussed above. Accordingly, the warrants have no dilutive effect in periods beginning 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).

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

2016
3,942.7
33.8
(132.9)
3,843.6
6.2

(1,386.7)
2,463.1
138.0
2,601.1

2015
3,769.6
38.4
(142.8)
3,665.2
5.9

(1,241.9)
2,429.2
126.8
2,556.0

2014
3,856.2
34.5
(187.9)
3,702.8
9.1

(1,295.4)
2,416.5
213.2
2,629.7

The four states with the largest shares of 2016 collected premiums were Florida (9 percent), Pennsylvania (6 percent), Texas (5 percent)
and California (5 percent). No other state accounted for more than five percent of total collected premiums.

Other operating costs and expenses were as follows (dollars in millions):

Commission expense
Salaries and wages
Other
TOTAL OTHER OPERATING COSTS AND EXPENSES

2016
110.5
231.0
454.8
796.3

2015
103.8
205.2
430.2
739.2

2014
99.4
242.4
461.0
802.8

CNO FINANCIAL GROUP, INC. - Form 10-K 151

PART II
ITEM 8 Consolidated Financial Statements

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 changes in unrealized investment gains (losses) on fixed maturities,
available for sale

BALANCE, END OF YEAR

2016
449.0
(62.2)
—
—

15.0
401.8

2015
489.4
(69.1)
—
—

28.7
449.0

2014
679.3
(76.2)
5.0
(15.5)

(103.2)
489.4

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, 2016 balance of
the present value of future profits in 2017, 10 percent in 2018,
9 percent in 2019, 8 percent in 2020 and 7 percent in 2021. 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, 2016, 2015 and 2014.

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 changes in unrealized investment gains (losses) on fixed maturities,
available for sale

BALANCE, END OF YEAR

2016
1,083.3
242.7
(191.1)
—
—

(90.2)
1,044.7

2015
770.6
246.4
(190.9)
—
—

257.2
1,083.3

2014
968.1
242.8
(171.2)
24.0
(37.6)

(255.5)
770.6

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:

2016

2015

2014

358.2

270.7

51.4

Amortization and depreciation
Income taxes
Insurance liabilities
Accrual and amortization of investment income
Deferral of policy acquisition costs
Net realized investment (gains) losses
Payment to reinsurer pursuant to long-term care business reinsured
Loss on sale of subsidiary, (gain) loss on reinsurance transactions and transition expenses
Cash and cash equivalents received upon recapture of reinsurance
Loss on extinguishment or modification of debt
Other

NET CASH FROM OPERATING ACTIVITIES

275.0
(11.7)
332.8
(124.2)
(242.7)
(8.3)
—
75.4
73.6
—
31.4
759.5

283.4
92.9
297.4
(27.6)
(246.4)
36.6
—
9.0
—
32.8
(4.9)
743.9

274.2
119.7
398.2
(148.3)
(242.8)
(36.7)
(590.3)
239.8
—
.6
56.0
121.8(a)

(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.

152

CNO FINANCIAL GROUP, INC. - Form 10-K

PART II
ITEM 8 Consolidated Financial Statements

On July 1, 2014, Bankers Life recaptured the life business written by Bankers Life that was reinsured by Wilton Reassurance Company
(“Wilton Re”) in 2009. The following summarizes the impact of the recapture (dollars in millions):

Investments
Cash
Present value of future profits and deferred acquisition costs
Reinsurance receivables
Other liabilities

Gain on reinsurance transaction (classified as “Loss on sale of subsidiary, (gain) loss on
reinsurance transactions and transition expenses”)

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 investing and financing activities sections of the consolidated statement of cash flows
(dollars in millions):

Stock options, restricted stock and performance units
Market value of investments recaptured in connection with the
termination of reinsurance agreements with BRe

2016
23.0

431.1

2015
17.1

—

2014
15.6

—

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

2016
1,956.8
253.3
486.9
2,697.0

2015
1,739.2
196.9
476.0
2,412.1

Statutory capital and surplus included investments in upstream
affiliates of $42.6 million at both December 31, 2016 and 2015,
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
$256.6 million (including approximately $110 million loss on
the recapture of long-term care business), $332.6 million and
$364.3 million in 2016, 2015 and 2014, respectively. Included in
such net income were net realized capital losses, net of income
taxes, of $29.7 million, $18.0 million and $18.2 million in
2016, 2015 and 2014, respectively. In addition, such net income
included pre-tax amounts for fees and interest paid to CNO or its
non-life subsidiaries totaling $153.9 million, $154.2 million and
$157.5 million in 2016, 2015 and 2014, respectively.

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. However, as each of
the immediate insurance subsidiaries of CDOC, Inc. (“CDOC”,
our wholly owned subsidiary and the immediate parent of
Washington National and Conseco Life Insurance Company
of Texas) has negative earned surplus, any dividend payments
from the insurance subsidiaries to CNO requires the prior
approval of the director or commissioner of the applicable state
insurance department. During 2016, our insurance subsidiaries
paid dividends of $274.3 million to CDOC. As a result of the
recapture of long-term care business from BRe, related charge and
additional capital required to support the assets and liabilities of
this business, CNO made $200.0 million of capital contributions
to its insurance subsidiaries on September 30, 2016.

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 153

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

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 2016
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, 2016, the consolidated RBC ratio of our
insurance subsidiaries exceeded the minimum RBC requirement
included in our Revolving 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.

15. SALE OF SUBSIDIARY

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

154

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)

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 makes 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 received $30 million in the year ending June 30, 2015 and $20

16. BUSINESS SEGMENTS

We measure segment performance by excluding the loss on the
sale of a subsidiary, gain (loss) on reinsurance transactions and
transition expenses, the earnings of CLIC prior to being sold on July
1, 2014, net realized investment gains (losses), fair value changes
in embedded derivative liabilities (net of related amortization), fair
value changes and amendment in the agent deferred compensation
plan, loss on extinguishment or modification of debt, income
taxes and other non-operating items consisting primarily of equity
in earnings of certain non-strategic investments and earnings
attributable to VIEs (“pre-tax operating earnings”) because we
believe that this performance measure is a better indicator of
the ongoing business and trends in our business. Our primary
investment focus is on investment income to support our liabilities

PART II
ITEM 8 Consolidated Financial Statements

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 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.

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 loss on the sale of CLIC, gain (loss) on reinsurance transactions
and transition expenses, the earnings of CLIC prior to being
sold, net realized investment gains (losses), fair value changes in
embedded derivative liabilities (net of related amortization), fair
value changes and amendment in the agent deferred compensation
plan, loss on extinguishment or modification of debt and other
non-operating items consisting primarily of equity in earnings of
certain non-strategic investments and earnings attributable to VIEs
depend on market conditions or represent unusual items that do
not necessarily relate to the underlying business of our segments.
Net realized investment gains (losses) and fair value changes in
embedded derivative liabilities (net of related amortization) may
affect future earnings levels since our underlying business is long-
term in nature and changes in our investment portfolio may impact
our ability to earn the assumed interest rates needed to maintain
the profitability of our business.

CNO FINANCIAL GROUP, INC. - Form 10-K 155

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

Long-term care in run-off:

Insurance policy income - health
Net investment income(a)

Total Long-term care in run-off revenues

Corporate operations:

Net investment income
Fee revenue and other income
Total corporate revenues

Total revenues

(continued on next page)

2016

2015

2014

22.0
1,244.1
393.0
936.8
34.4
2,630.3

22.4
1,251.0
375.3
884.7
27.7
2,561.1

26.0
1,287.1
338.6
957.3
29.3
2,638.3

2.9
627.9
25.0
259.3
1.3
916.4

2.6
278.8
44.2
1.1
326.7

4.8
9.4
14.2

16.6
10.0
26.6
3,914.2

3.0
615.4
25.4
253.6
1.3
898.7

3.0
260.5
43.0
1.0
307.5

—
—
—

11.3
8.6
19.9
3,787.2

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

156

CNO FINANCIAL GROUP, INC. - Form 10-K

PART II
ITEM 8 Consolidated Financial Statements

(continued from previous page)

2016

2015

2014

1,620.6
176.5
13.2
422.1
2,232.4

1,588.4
187.1
8.8
407.2
2,191.5

1,667.6
174.7
7.9
401.2
2,251.4

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
Interest expense on investment borrowings
Other operating costs and expenses
Total Colonial Penn expenses

Long-term care in run-off:
Insurance policy benefits
Other operating costs and expenses

Total Long-term care in run-off expenses

Corporate operations:

Interest expense on corporate debt
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
Long-term care in run-off
Corporate operations

PRE-TAX OPERATING EARNINGS

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

561.7
59.1
3.7
189.0
813.5

201.9
15.3
.6
107.2
325.0

17.6
.5
18.1

45.8
—
69.1
114.9
3,503.9

397.9
102.9
1.7
(3.9)
(88.3)
410.3

546.6
55.2
2.0
183.4
787.2

189.0
14.4
.1
98.4
301.9

—
—
—

45.0
.2
38.6
83.8
3,364.4

369.6
111.5
5.6
—
(63.9)
422.8

536.2
64.6
1.7
189.5
792.0

173.2
15.3
—
99.4
287.9

—
—
—

43.9
.1
49.1
93.1
3,424.4

386.9
111.2
.8
—
(71.5)
427.4

CNO FINANCIAL GROUP, INC. - Form 10-K 157

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 (losses)
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 (losses)
Expenses related to certain non-strategic investments and expenses
(earnings) attributable to VIEs
Fair value changes and amendment related to agent deferred compensation plan
Loss on extinguishment or modification of debt
Loss on sale of subsidiary, (gain) loss on reinsurance transactions and transition expenses
Expenses related to transition and support services agreements
Expenses of CLIC prior to being sold
CONSOLIDATED EXPENSES
Income before tax
Income tax expense:

2016
3,914.2 $
8.3
52.6
10.0
—
3,985.1
3,503.9
(11.3)
1.7
.7

54.6
(3.1)
—
75.4
10.0
—
3,631.9
353.2

Tax expense on period income
Valuation allowance for deferred tax assets and other tax items

NET INCOME

127.8
(132.8)
358.2 $

2015
3,787.2 $
(36.6)
36.3
25.0
—
3,811.9
3,364.4
(15.7)
3.8
(.5)

43.0
(15.1)
32.8
9.0
22.5
—
3,444.2
367.7

129.5
(32.5)
270.7 $

2014
3,851.8
33.9
33.2
15.0
210.8
4,144.7
3,424.4
48.5
(12.5)
1.0

41.2
26.8
.6
239.8
12.4
187.4
3,969.6
175.1

159.2
(35.5)
51.4

Segment balance sheet information was as follows (dollars in millions):

2016

2015

19,876.4 $
7,555.7
1,022.9
656.2
2,864.0
31,975.2 $

17,144.9 $
6,096.9
898.5
562.2
2,785.8
27,488.3 $

19,067.8
7,948.5
985.4
—
3,123.4
31,125.1

16,612.0
6,665.1
869.3
—
2,840.2
26,986.6

Assets:

Bankers Life
Washington National
Colonial Penn
Long-term care in run-off
Corporate operations
TOTAL ASSETS

Liabilities:

Bankers Life
Washington National
Colonial Penn
Long-term care in run-off
Corporate operations

TOTAL LIABILITIES

158

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
2016

Bankers Life
Washington National
Colonial Penn
Long-term care in run-off

TOTAL

2015

Bankers Life
Washington National
Colonial Penn
TOTAL

Present value of
future profits

Deferred
acquisition costs

Insurance
liabilities

95.5
266.8
39.5
—
401.8

114.9
290.2
43.9
449.0

646.2
299.9
98.6
—
1,044.7

718.2
280.0
85.1
1,083.3

15,702.8
5,586.7
809.6
554.7
22,653.8

15,234.1
6,126.2
782.9
22,143.2

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):

2016
Revenues
Income before income taxes
Income tax expense (benefit)
NET INCOME
Earnings per common share:

Basic:

Net income

Diluted:

Net income

2015
Revenues
Income before income taxes
Income tax expense
NET INCOME
Earnings per common share:

Basic:

Net income

Diluted:

Net income

1st Qtr.
960.4
40.5
(5.0)
45.5

2nd Qtr.
1,003.9
82.7
22.8
59.9

$
$

3rd Qtr.
1,015.9
49.3
30.7
18.6

$
$

4th Qtr.
1,004.9
180.7
(53.5)
234.2

$
$

.25

.34

.11

1.35

.25
1st Qtr.
978.3
82.3
29.5
52.8

$
$

.33
2nd Qtr.
959.5
72.7
25.9
46.8

$
$

.11
3rd Qtr.
904.5
52.4
18.6
33.8

$
$

1.34
4th Qtr.
969.6
160.3
23.0
137.3

.26

.24

.18

.26

.24

.18

.74

.73

$
$

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.

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. 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. During 2016 and 2015, VIEs that were

required to be consolidated were dissolved. We recognized a loss
of $7.3 million during 2016 and a gain of $11.3 million during
2015, representing the difference between the borrowings of such
VIEs and the contractual distributions required following the
liquidation of the underlying assets. The scheduled repayment of
the remaining principal balance of the borrowings related to the
VIEs are as follows: $16.8 million in 2017; $.7 million in 2018;
$.8 million in 2019; $.2 million in 2020; $150.2 million in 2022;
$381.8 million in 2024; $326.9 million in 2026; $276.3 million in
2027; and $539.9 million in 2028. The Company has no financial
obligation to the VIEs beyond its investment in each VIE.

CNO FINANCIAL GROUP, INC. - Form 10-K 159

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, 2016

VIEs

Eliminations

Net effect on
consolidated
balance sheet

1,724.3 $
—
189.3
3.0
6.4
13.1
1,936.1 $

81.8 $

1,662.8
203.3
1,947.9 $

— $

(204.2)
—
(.1)
(1.3)
(1.8)
(207.4) $

(6.4) $

—
(203.3)
(209.7) $

1,724.3
(204.2)
189.3
2.9
5.1
11.3
1,728.7

75.4
1,662.8
—
1,738.2

December 31, 2015

VIEs

Eliminations

Net effect on
consolidated
balance sheet

1,633.6 $
—
364.4
3.3
26.0
1.4
2,028.7 $

196.6 $

1,676.4
204.0
2,077.0 $

— $

(204.3)
—
—
(1.9)
(1.5)
(207.7) $

(7.2) $

—
(204.0)
(211.2) $

1,633.6
(204.3)
364.4
3.3
24.1
(.1)
1,821.0

189.4
1,676.4
—
1,865.8

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

160

CNO FINANCIAL GROUP, INC. - Form 10-K

2016

2015

2014

78.9
6.4
85.3

53.1
1.5
54.6
30.7
(20.4)
10.3

62.1
1.6
63.7

38.8
2.0
40.8
22.9
(6.4)
16.5

47.2
1.1
48.3

30.1
1.2
31.3
17.0
(2.2)
14.8

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,

2016, such loans had an amortized cost of $1,708.6 million; gross
unrealized gains of $19.5 million; gross unrealized losses of $3.8
million; and an estimated fair value of $1,724.3 million.

The following table sets forth the amortized cost and estimated fair value of the investments held by the VIEs at December 31, 2016, 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 in one year or less
Due after one year through five years
Due after five years through ten years

TOTAL

Amortized cost
20.5
846.5
841.6
1,708.6

Estimated fair value
20.0
853.1
851.2
1,724.3

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, 2016, 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 in one year or less
Due after one year through five years
Due after five years through ten years

TOTAL

Amortized cost
10.5
175.2
55.8
241.5

Estimated fair value
9.9
172.5
55.3
237.7

During 2016, the VIEs recognized net realized investment losses
of $20.4 million, which were comprised of: (i) $11.9 million of
net losses from the sales of fixed maturities; (ii) a $7.3 million
loss on the dissolution of a VIE; and (iii) $1.2 million of
writedowns of investments for other than temporary declines
in fair value recognized through net income. During 2015, the
VIEs recognized net realized investment losses of $6.4 million
which were comprised of: (i) $1.3 million of net losses from
the sales of fixed maturities; (ii) an $11.3 million gain on the
dissolution of a VIE; and (iii) $16.4 million of writedowns of
investments for other than temporary declines in fair value
recognized through net income. During 2014, the VIEs
recognized net realized investment losses of $2.2 million from
the sales of fixed maturities.

At December 31, 2016, there were no investments held by the
VIEs that were in default.

During 2016, $192.2 million of investments held by the VIEs
were sold which resulted in gross investment losses (before
income taxes) of $20.3 million. During 2015, $46.1 million
of investments held by the VIEs were sold which resulted in
gross investment losses (before income taxes) of $1.8 million.

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.

At December 31, 2016, the VIEs held: (i) investments with a fair
value of $93.8 million and gross unrealized losses of $.9 million
that had been in an unrealized loss position for less than twelve
months; and (ii) investments with a fair value of $143.9 million
and gross unrealized losses of $2.9 million that had been in an
unrealized loss position for greater than twelve months.

At December 31, 2015, the VIEs held: (i) investments with
a fair value of $1,178.7 million and gross unrealized losses of
$23.9 million that had been in an unrealized loss position for
less than twelve months; and (ii) investments with a fair value
of $294.3 million and gross unrealized losses of $22.3 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.

CNO FINANCIAL GROUP, INC. - Form 10-K 161

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, 2016, 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, 2016.

The effectiveness of our internal control over financial reporting as
of December 31, 2016 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, 2016, that have
materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.

ITEM 9B. Other Information.

None.

162

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 163

PART IV

ITEM 15. Exhibits and Financial Statement Schedules.

(a)

1. Financial Statements. See Index to Consolidated
Financial Statements on page 102 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.

ITEM 16. Form 10-K Summary.

None.

164

CNO FINANCIAL GROUP, INC. - Form 10-K

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.

PART IV
Signature

CNO FINANCIAL GROUP, INC.
Dated: February 21, 2017
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/ ERIK M. HELDING
Erik M. Helding
/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/ CHARLES J. JACKLIN
Charles J. Jacklin
/s/ DANIEL R. MAURER
Daniel R. Maurer
/s/ NEAL C. SCHNEIDER
Neal C. Schneider
/s/ FREDERICK J. SIEVERT
Frederick J. Sievert
/s/ MICHAEL T. TOKARZ
Michael T. Tokarz

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 21, 2017

February 21, 2017

CNO FINANCIAL GROUP, INC. - Form 10-K 165

PART IV
Signature

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 21, 2017 appearing under Item 8 of this Form 10-K also included
an audit of the financial statement schedules at December 31, 2016 and 2015 and for the years ended December 31, 2016, 2015 and 2014
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 21, 2017

166

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, 2016 and 2015

(Dollars in millions)

ASSETS
Fixed maturities, available for sale, at fair value (amortized cost: 2016 - $-; 2015 - $5.0)
Cash and cash equivalents - unrestricted
Equity securities at fair value (cost: 2016 - $166.5; 2015 - $247.3)
Trading securities
Investment in wholly-owned subsidiaries (eliminated in consolidation)
Income tax assets, net
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: 2016 - 173,753,614; 2015 - 184,028,511)

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.

2016

2015

— $

106.1
167.9
—
5,220.3
99.5
2.0
1.8
5,597.6

912.9
128.4
69.4
1,110.7

3,213.8
622.4
650.7
4,486.9
5,597.6

5.0
128.9
254.9
1.0
4,809.2
58.5
3.8
3.1
5,264.4

911.1
135.9
78.9
1,125.9

3,388.6
402.8
347.1
4,138.5
5,264.4

SCHEDULE II Condensed Financial Information of Registrant (Parent Company)

Statement of Operations for the years ended December 31, 2016, 2015 and 2014

(Dollars in millions)
Revenues:

Net investment income
Net realized investment gains
Intercompany 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.

2016

15.6
17.7
—
33.3

45.8
.9
48.2
—
94.9
(61.6)
(54.6)
(7.0)
365.2
358.2

2015

2014

16.9
3.5
(1.5)
18.9

45.2
.4
21.0
32.8
99.4
(80.5)
(37.9)
(42.6)
313.3
270.7

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

CNO FINANCIAL GROUP, INC. - Form 10-K 167

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, 2016, 2015 and 2014

2016
(114.0)

2015
(55.1)

305.0
—
—
(198.4)
—
12.0

92.5
211.1

—
—
—
8.4
(206.7)
(54.8)
—
217.1
(83.9)
(119.9)
(22.8)
128.9
106.1

66.5
16.0
8.3
(68.6)
(3.4)
11.8

269.7
300.3

910.0
(797.1)
(17.8)
6.3
(361.5)
(52.0)
(20.4)
234.4
(104.8)
(202.9)
42.3
86.6
128.9

2014
(66.7)

229.8
18.3
—
(320.1)
(30.7)
9.9

423.5
330.7

—
(62.9)
(.6)
5.0
(376.5)
(51.0)
20.4
257.8
(100.7)
(308.5)
(44.5)
131.1
86.6

(Dollars in millions)
Cash flows from operating activities
Cash flows from investing activities:

Sales of investments
Sales of investments - affiliated*
Maturities and redemptions 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 $200.0 in
2016, nil in 2015 and $18.8 in 2014*

Net cash provided 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
Issuance of common stock
Payments to repurchase common stock and warrants
Common stock dividends paid
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.

168

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, 2016, 2015 and 2014

(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

2016

2015

2014

27,048.1
128.7
(3,604.0)
23,572.8

.5%

2016

2,553.0
34.0
(123.9)
2,463.1

25,807.0
137.4
(3,780.8)
22,163.6

.6%

2015

2,524.3
38.5
(133.6)
2,429.2

25,029.0
147.1
(3,660.1)
21,516.0

.7%

2014

2,558.2
35.0
(176.7)
2,416.5

1.4%

1.6%

1.4%

CNO FINANCIAL GROUP, INC. - Form 10-K 169

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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

Charles J. Jacklin
Retired Chairman,
Mellon Capital
Management Corporation

Daniel R. Maurer
Retired Executive,
Intuit Inc.

Fredrick J. Sievert
Retired President,
New York Life Insurance Company

Michael T. Tokarz
Chairman,
MVC Capital, Inc.

Investor Information

Meeting of Shareholders
Our annual meeting of shareholders will be held at
8:00 a.m. (EDT) on May 10, 2017, 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 Financial’s
transfer agent, American Stock Transfer & Trust Company LLC,
at (800) 937-5449 or (718) 921-8124. Shareholders may
reach American Stock Transfer at astfinancial.com, by email to
info@amstock.com, or by mail:

AST
Operations Center
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 Financial’s quarterly results as soon as they
are announced, please sign up for CNO Financial’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).

CNO Financial Group, Inc.
11825 N. Pennsylvania Street
Carmel, IN 46032
(317) 817-6100

CNOinc.com