CNO Financial Group Annual Report 2018

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FY2018 Annual Report · CNO Financial Group

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ANNUAL
REPORT

CNO Financial Group, Inc.
11825 N. Pennsylvania Street
Carmel, IN 46032
(317) 817-6100

CNOinc.com

Table of Contents

A Letter to Shareholders from CEO Gary C. Bhojwani

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

158

165

166

Investor Information

Meeting of Shareholders
Our annual meeting of shareholders will be held at
8:00 a.m. (EDT) on May 10, 2019, in the auditorium of CNO Financial
Group 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.

if you would

Shareholder Services
If you are a registered shareholder and have a question
about your account, or
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
help@astfinancial.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 quarterly results as soon as they
are announced, please sign up for CNO Financial 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 common stock is listed on the
New York Stock Exchange (trading symbol: CNO).

350107_190122_2018_Annual_Report_COVER_FINAL.indd 2

3/21/19 1:07 AM

A Letter to Shareholders from CEO Gary C. Bhojwani

To our shareholders:
As I reflect on my first year as chief executive officer of CNO Financial Group, I am proud of what we accomplished in 2018. I also know with
equal certainty that we have more work to do to build a stronger, more competitive company. The amount of work yet to be done is second
only to our promise and potential.

Before I provide my perspective on our 2018 performance and share with you why I believe CNO remains a good investment, I wish to thank
several important groups of people.

I begin by recognizing Neal Schneider for his service as chairman of the CNO board of directors. Neal retired as board chairman in May
2018, a position he held since 2011. He continues to serve as a director and as a member of both the Audit and Enterprise Risk Committee
and the Governance and Nominating Committee. Neal joined the CNO board of directors in 2003. During his tenure as a director and later
as board chairman, he helped successfully guide the company through our financial restructuring as well as the global financial crisis. Neal
has been (and continues to be) an advocate for our customers and providing products that meet their financial security needs. For his
dedicated stewardship on behalf of CNO over the past 15 years, I extend my sincere thanks.

Next, I wish to acknowledge Dan Maurer, our newly elected board chairman. Dan joined the CNO Financial board in May 2015 after
having served in senior leadership roles at Intuit, Procter & Gamble and Campbell Soup Company. On behalf of the entire CNO executive
leadership group, we thank Dan and the entire CNO board for their ongoing commitment to CNO.

Finally, to our 3,300 full-time associates and our more than 4,800 agents, I extend my appreciation for their unwavering dedication to
serving the health and retirement needs of our policyholders nationwide. I also wish to thank our customers and shareholders for the trust
they place in CNO Financial Group and our insurance companies: Bankers Life, Washington National and Colonial Penn.

2018 Performance
I have been asked frequently: “How should we view CNO’s performance in 2018?”

First, we can’t overlook the loss CNO posted in 2018. However, the bottom line does not tell the full story. Our 2018 results were negatively
impacted by a transformative long-term care (LTC) reinsurance transaction that fundamentally changed the risk and earnings profile of
our business. While the loss generated from this transaction is material, we firmly believe this transaction is critical to CNO’s long- term
success and serves the best interests of our shareholders (more on this later). Fourth quarter equity market volatility also unfavorably
impacted our performance, although we view this as temporary.

I am especially proud that CNO successfully reduced our LTC exposure and significantly de-risked the balance sheet as compared to one
year ago. In 2018, we ceded $2.7 billion of statutory reserves to Wilton Re. The transaction included 100% of our legacy (prior to 2003)
comprehensive and nursing home policies, which had the most potential tail risk and volatility.

CNO was the only company that completed a significant LTC reinsurance transaction in 2018. This should provide considerable comfort that
the portion of our LTC block that remains has a very different profile from the other long-term care blocks in the marketplace that continue
to generate negative headlines.

In completing this transaction, we achieved our stated objective to reduce our exposure to the most unpredictable portion of our LTC
business. We materially reduced the possibility of a future reserve strengthening charge. Bankers Life paid a ceding commission of $825
million, which drove a loss of $661 million, or $4.00 per share. Although expensive, we are confident this was a prudent long-term move.

Absent this block of business, we expect a meaningful increase in our free cash flow generation and return on equity (ROE). Moody’s was the first to
recognize this fundamental change, upgrading CNO to investment grade this past October. We remain on positive outlook with both S&P and Fitch.

The second—and arguably more important— part of our 2018 story is growth. When I look at the recurring measures of our business, I
believe we executed well against our strategy and delivered strong operational and financial performance. Highlights include:

• Generated growth in all five of our key scorecard metrics in both the third and fourth quarters, compared to the same periods in the prior year.

• Grew first year collected premiums by 8%; total collected premiums by 3%.

• Returned $166 million to shareholders.

•

Paid more than $2.1 billion in claims.

I was particularly encouraged that many of the growth initiatives implemented over the past six to eight quarters began to drive strong
production across all our companies. Total sales in our three businesses reflected sales growth in both the third and fourth quarters,
compared to the same periods in the prior year. It has been many years since this has been the case at CNO.

After a slow start, Life and Health New Annualized Premium (NAP) growth accelerated in the second half of the year to grow by 5%
compared to the same period in the prior year. Collected premiums at our operating segments increased 10% in the fourth quarter and 4.5%
for the full year. Annuity collected premiums increased 30% for the fourth quarter and 13% for 2018 overall.

Third, I cannot overstate the importance of another force influencing our execution: changing our culture to embrace growth. During our
company’s “fix and focus” chapter, CNO appropriately had a risk-averse culture, which sometimes meant sacrificing efficiency, speed and
innovation. With our focus having shifted squarely toward growth, we are becoming increasingly comfortable with taking smart, calculated
risks. Continuously evaluating how we approach our day-to-day business will allow us to get better, faster.

It is not easy to change a risk-averse culture, but we’re gaining momentum. Our product development cycle is moving at a faster pace than
ever before with 12 new products and product enhancements launched in 2018. We also invested in technology. A large-scale initiative to
improve agent productivity was introduced at Bankers Life at the end of 2018. Colonial Penn improved sales and advertising results due in
part to agent and web technology enhancements to improve the customer experience and increase lead productivity.

Finally, we remain committed to deploying 100% of our excess free cash flow to its highest and best use over time. CNO maintains strong
free cash flow generation that provides significant optionality for us to reinvest in the business and to return capital to shareholders in the
form of dividends and share repurchases. Since 2011, we have spent $2.1 billion to repurchase our common stock and have $284 million
remaining on our current authorization to repurchase shares.

In 2018, we repurchased $100 million of common stock, including $40 million in the fourth quarter, taking advantage of market volatility
and a depressed stock price. We intend to remain flexible and opportunistic with these decisions, as well as responsive to changing market
conditions. We believe strongly that our free cash flow generation and capital deployment will prove to be a key source of long-term value
creation. However, we also believe that investing in growth and returning capital to shareholders are not mutually exclusive.

Bankers Life 2018 Results
I am pleased to report that the impact of the various growth initiatives implemented at Bankers Life over the past six to eight quarters
began to take hold in earnest in 2018. Total collected premiums were up 5% for the full year, including 12% in the fourth quarter alone.

Investments in reshaping the agency force contributed to the improving production results in 2018. While low unemployment creates
significant headwinds to our efforts to recruit agents to a commission-based career opportunity, in 2018, we grew agent yield and agent
productivity while recruiting fewer agents. New agent training, innovative recruiting tactics and retention initiatives helped drive a 4%
increase in our quarterly average producing agent counts, plus a significant improvement in first-year agent retention. Changes to the
incentive structure coupled with technology enhancements contributed positive results in agent productivity.

Bankers Life is also proving that we can successfully reach slightly younger, wealthier customers within the middle market as our “expand to the
right” strategy gains traction. The average annuity face value increased 10% in 2018, and more than 40% in the past three years. Annuity collected
premiums were up 13% for the full year. One in eight (13%) Bankers Life agents is now dually licensed as a financial advisor. Our Broker-Dealer and
Registered Investment Advisor (BD/RIA) business now has client assets of more than $1.1 billion. This is an important indicator for us as consumer
relationships tend to be much stronger when we provide not just protection products, but also income and retirement solutions.

However, not everything went well at Bankers Life in 2018. We experienced an elevated benefit ratio in our Medicare supplement business
during the second half of the year and raised our guidance for 2019 benefit ratios. Notably, we are able to adjust Medicare supplement rates
annually, so we expect to return margins to more normalized levels within a year or so. Importantly, even at the slightly elevated levels, our
Medicare supplement business remains healthy and profitable.

The Bankers Life business continues to generate significant earnings and cash flow. Now that we are returning to growth, I am even more
optimistic about its long-term prospects.

Washington National 2018 Results
Washington National performed well in 2018, with NAP from life and health products up 3% for the full year (including a record 11% in the
fourth quarter) and total collected premiums up 3% over prior year.

I am especially pleased with the performance of our worksite business, which delivered record production in 2018. Worksite sales were up
18% for the full year, and up 38% for the fourth quarter alone. Worksite now represents more than 40% of total Washington National sales
and we are committed to continue investing in these capabilities.

Washington National’s 2018 performance was driven by growth initiatives implemented over the past six to eight quarters. This includes
the 14-state geographic expansion initiative, which delivered an impressive level of incremental NAP in 2018. Since we only recently entered
these new states, market penetration remains low, providing opportunity for continued growth.

Washington National’s efforts to enhance the product portfolio also has momentum that is carrying into 2019. Hospital Assure, our new
hospitality indemnity product launched in late 2018, has been well received by both consumers and our distribution force. Product portfolio
diversification continued through short-term care and life insurance sales, the latter comprising 10% of the segment’s overall sales mix.

While worksite outperformed in 2018, the individual part of the business fell short of expectations. A depressed farm and rural economy
contributed in part to lower than projected sales. We have also not made enough progress in PMA agent recruiting. That said, quarterly
average producing agents were up 6% in the fourth quarter. I am confident we will generate improvement in both areas.

Colonial Penn 2018 Results
After a slow start to the first half of the year due to telesales agent staffing challenges, Colonial Penn delivered an impressive turnaround. I am
pleased to report we ended the year with sales up 5%, total collected premiums up 2% over the prior year, and normalized telesales agent levels.

Efforts to expand and diversify Colonial Penn’s lead generation sources beyond the company’s traditional model of direct response
television (DRTV) are part of Colonial Penn’s 2018 highlights. In fact, 2018 web and digital sales grew 27% versus the prior year and now
account for 16% of total sales. Investments in technology initiatives such as voice signature and an enhanced website user experience have
also led to meaningful improvements in lead conversion and agent productivity.

While Colonial Penn turned in a strong performance in 2018, I would like to see us move even faster to extend the Colonial Penn brand,
expand its product portfolio and further our investments in direct-to-consumer (DTC) technology.

Why Invest in CNO Financial Group
I am a strong believer in CNO and I want to share why. Understanding how changing consumer demographics and macro-economic factors
influence the insurance market provides important context for assessing an investment in any insurance company.

Most Americans are not financially prepared for retirement. Research conducted by our Bankers Life Center for a Secure Retirement found
that nearly seven in 10 (69%) middle-income Boomers do not believe or do not know if they have enough money to live comfortably to age
85, the average life expectancy of a 65-year-old Boomer today. This finding is especially worrisome and critical within the middle market,
which includes consumers with annual household incomes of between $30,000 and $100,000 with less than $500,000 in investable assets.
The impact of outliving one’s retirement savings or the cost of an unexpected medical bill is especially devastating for families at this
income level. As a child of first-generation immigrants, I can relate. Many of you may feel this connection too.

The market for those needing financial security products continues to grow. Boomers currently account for approximately 20% of the
U.S. population. The youngest Boomers turned age 54 in 2018. This means that from now until 2030, 10,000 people per day will turn age
65, qualify for Medicare and be eligible to take early Social Security benefits. The oldest Boomers are now required to take their required
minimum distributions (RMDs) from their retirement accounts, which leads to a need for assistance on how to manage this income.

Furthermore, middle-market consumers are often underserved by large insurance carriers. These companies believe (incorrectly in our
opinion) that it is more profitable to focus on the affluent or mass affluent consumers. This creates a disproportionate number of middle-
income retirees and pre-retirees who do not receive professional advice or product recommendations when planning for retirement.

Against these demographic and societal factors, the natural question is: “What makes CNO Financial a good investment?”

The attributes that make CNO unique are also the very reasons to invest in our company:

• Market Focus: CNO is among a small number of companies focused exclusively on the middle-income market. This has long been our focus
and it remains unchanged. Even as we advance with our “expand to the right” strategy targeting slightly younger, wealthier consumers, we
stay squarely focused on the middle market. Since these households are often overlooked by larger carriers, CNO has a natural advantage.

• Distribution: Unlike other insurance carriers, we have a unique network of distribution channels that allows us to reach these consumers
according to their specific preferences. Bankers Life has career agents, we have wholly-owned and independent distributors at Washington
National, and we operate a direct-to-consumer business at Colonial Penn. Our diversified infrastructure is a significant competitive
advantage and allows us to experiment and cross-pollinate ideas from each channel.

• Health and Wealth Solutions: As consumers approach age 65 and prepare to transition to Medicare, nearly all look for guidance and
solutions to fill the gaps in their healthcare coverage. As a result, Medicare supplement products are as close to a nonvoluntary product
as exists in our industry. Bankers Life is one of a handful of insurers that both manufactures and distributes Medicare supplement
insurance (Bankers Life also distributes third-party Medicare Advantage products). Initial Medicare-related sales have proven to be a key
door opener for agents to further assess consumer needs and recommend additional products, such as life insurance, long-term care
insurance or an annuity. One in three Medicare supplement customers purchase a second product from Bankers Life.

•

Insurance and Securities Solutions: Consumer relationships are stronger and more persistent when we offer a complete retirement needs
assessment, not just protection products. An insurance purchase conversation may begin as transactional. The relationship evolves into a more
holistic, long-term approach when we also advise on the wealth accumulation and income preservation needs of our consumers. It also provides
a career advancement path for insurance agents to move up to become securities-licensed financial advisors, which improves retention. In 2016,
we started a Broker-Dealer and Registered Investment Advisor (BD/RIA) business and now have client assets of more than $1.1 billion.

Finally, our 2018 performance speaks to the strategic changes taking place at CNO. Our strong free cash flow generation, lower-risk balance
sheet and renewed focus on growth are all markers of that success and rationale for continued investment in CNO. We believe we are the
only insurance group that has all of these unique attributes.

Commitment to Social Responsibility
We realize that our success is tied to the well-being of our customers, associates, neighbors and the way we conduct our business. In
recognition of the increased importance that investors now place on environment, social and governance criteria (ESG), we recently formed
a management committee comprised of senior management and other leaders to formulate and drive the execution of the company’s social
responsibility and sustainability strategy. We expect this strategy to focus on four key areas: community development and philanthropy,
employee well-being, ethics and governance, and environmental responsibility and enterprise risk management.

Commitment to Associate Relations
No business can thrive without committed associates who make up the workforce that serves our customers. This is particularly true in
insurance, where we do not have factories or durable goods to sell. Our associates are our primary and most valuable asset. They develop
products, advise clients, service customers and support the efficient running of the organization.

At CNO, we know that top-to-bottom associate alignment will help us achieve sustained success. During the second quarter, we
leveraged the benefit of tax reform to introduce an enhanced compensation program for our employees. Like many companies, we had
the opportunity to offer a one-time bonus payout to employees in 2018. Instead, we opted to invest in a broader, enhanced compensation
program, which includes an annual cash bonus program, a one-time stock option grant and an employee stock purchase plan. We believe
the ongoing cash bonus and employee stock purchase plan will not only benefit and incent associates, but also more closely connect them
with the company’s success.

What to Expect in 2019
CNO strategic priorities remain unchanged. We will continue to grow the franchise; launch new products and services; expand to the right
to reach slightly younger, wealthier consumers within the middle market; and deploy our robust free cash flow to its highest and best use.
Cultivating a workplace culture that rewards taking smart, calculated risks is also a priority and a personal goal against which I measure my
own performance.

We expect that ongoing market volatility in 2019 will generate increased interest in financial planning products, particularly within the middle
market. With our singular focus on this demographic, CNO is extremely well positioned to serve middle-market consumers with their income
protection needs. As they look for stability, our products and guidance from our agents and advisors will be needed more than ever.

At its core, our capital deployment strategy has remained consistent. While we recognize the long-term importance of investing in growing
the business, when our shares are trading at a significant discount to book value, we recognize that we would be hard-pressed to find an
acquisition or internal investment that could generate a similar or better risk-adjusted return.

Given our robust free cash flow generation and strong balance sheet, we believe that share repurchases, organic investments and M&A
need not be mutually exclusive in any given year. We will take a very disciplined approach to the use of capital. Any capital outlay must have
clear strategic value and compelling financial attributes.

In closing, I’m very proud of our 2018 accomplishments, and we have entered 2019 with good momentum. Many of our growth initiatives
are just now starting to gain traction, leaving significant runway for further growth and shareholder value creation. We are building a
stronger, more competitive company. CNO remains extremely well positioned for 2019 and beyond.

Thank you for your continued support of, and interest in, CNO.

Regards,

Gary C. Bhojwani
Chief Executive Officer
CNO Financial Group, Inc.

March 11, 2019

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, 2018

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

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act.

YES

✔

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 every Interactive Data File
required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months
(or for such shorter period that the registrant was required to submit 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, a smaller reporting
company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and
“emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ✔ Accelerated filer
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period
for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Emerging growth company

Smaller reporting company

Non-accelerated filer

✔

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):

✔

At June 30, 2018, 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 8, 2019: 160,715,150

DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant’s definitive proxy statement for the 2019 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
8

Item 1.
Business of CNO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8
Item 1A. Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23
Item 1B. Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .39
Item 2.
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .39
Item 3.
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .39
Item 4. Mine Safety Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Executive Officers of the Registrant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40

PART II

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

Issuer Purchases of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .41
Selected Consolidated Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .43

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

Results of Operations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Item 7A. Quantitative and Qualitative Disclosures About Market Risk. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .95
Item 8.
Consolidated Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .95
Item 9.
Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .155
Item 9A. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .155
Item 9B. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .156

PART III

157
Item 10. Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 157
Item 11.
Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 157
Item 12.
Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 157
Item 13. Certain Relationships and Related Transactions, and Director Independence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 157
Item 14.
Principal Accountant Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 157

PART IV

158
Item 15. Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 158
Item 16.
Form 10-K Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . 158

CNO FINANCIAL GROUP, INC. - Form 10-KPART 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, 2018, we had shareholders’ equity
of $3.4 billion and assets of $31.4 billion. For the year ended
December 31, 2018, we had revenues of $4.3 billion and a net loss
of $315.0 million (including a loss on a reinsurance transaction
of $661.1 million, net of taxes and gains recognized on the assets
transferred in the transaction). 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; long-term care in run-off; and corporate operations,
comprised of holding company activities and certain noninsurance
company businesses. On September 27, 2018, the Company
completed a long-term care reinsurance transaction pursuant to
which its wholly-owned subsidiary, Bankers Life and Casualty
Company (“Bankers Life”), entered into an agreement with Wilton
Reassurance Company (“Wilton Re”) to cede all of its legacy (prior
to 2003) comprehensive and nursing home long-term care policies
(with statutory reserves of $2.7 billion) through 100% indemnity
coinsurance. In anticipation of the reinsurance agreement, the
Company reorganized its business segments to move the block to
be ceded from the “Bankers Life segment” to the “Long-term care
in run-off segment” in the third quarter of 2018. All prior period
segment disclosures have been revised to conform to management’s
current view of the Company’s operating segments.

CNO FINANCIAL GROUP, INC. - Form 10-K

The Company’s insurance segments are described below:

Bankers Life, which underwrites, markets and distributes
Medicare supplement insurance, interest-sensitive life 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. 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.

Washington National, which underwrites, markets and
distributes supplemental health (including specified disease,
accident and hospital indemnity insurance products) and life
insurance to middle-income consumers at home and at the
worksite. These products are marketed through Performance
Matters Associates, 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: (i) the long-term care
business that was recaptured due to the termination of certain
reinsurance agreements effective September 30, 2016 (such
business is not actively marketed and was issued or acquired
by Washington National and Bankers Conseco Life Insurance
Company (“BCLIC”)); and (ii) certain legacy (prior to 2003)
comprehensive and nursing home long-term care policies which
were ceded to Wilton Re in September 2018 (such business was
not actively marketed and was issued by Bankers Life).

Our Strategic Direction

At CNO, our mission is to enrich lives by providing financial
solutions that help protect the health and retirement needs of
middle-income Americans, while building enduring value for all
our stakeholders. We remain committed to our strategic priorities
to grow the franchise, launch new products and services, expand
to the right to reach slightly younger, wealthier consumers within
the middle market, and deploy excess capital to its highest and
best use.

Our middle-market focus and diverse distribution is a key
strength and opportunity for CNO. We have career agents at
Bankers Life, wholly-owned and independent distributors at
Washington National and a direct-to-consumer business at
Colonial Penn to reach consumers according to their preferences.
Our product portfolio mix is well-aligned to the retirement,
healthcare, supplemental health and income accumulation needs
of working-age consumers as well as those in and near retirement.
As Americans live longer into their retirement years, consumers
need holistic retirement income planning, which includes our
insurance and annuity solutions, and the investments offered
by our broker-dealer and growing force of registered investment
advisors. Specifically, we are focused on the following priorities:

Growth

•

Maximize our product portfolio to ensure it meets our
customers’ needs for integrated products and advice covering
a broad range of their financial goals
Respond effectively to evolving customer preferences

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.
Copies of these filings are also available, without charge, from
CNO Investor Relations, 11825 N. Pennsylvania Street, Carmel,
IN 46032.

Our website also includes the charters of our Audit and Enterprise
Risk Committee, Executive Committee, Governance and
Nominating Committee, Human Resources and Compensation
Committee and Investment Committee, as well as our Corporate
Governance Operating Principles and our Code of Business
Conduct and Ethics that applies to all officers, directors and
employees. Copies of these documents are available free of
charge on our website at www.CNOinc.com or from CNO
Investor Relations at the address shown above. Within the time
period specified by the SEC and the New York Stock Exchange,
we will post on our website any amendment to our Code of

PART I
ITEM 1 Business of CNO

•

Expand and enhance elements of our broker-dealer and
registered investment advisor program
Continue our “expand to the right” strategy to reach slightly
younger and wealthier consumers within the middle-income
market
Increase the speed-to-market for new products that are a
good fit for our customers
Make strategic, measured changes to our business practices
to improve our competitive advantage
Continue to invest in technology to support agent
productivity and relationships with our customers

Increase profitability and return on equity

•

Maintain our strong capital position and favorable financial
metrics

• Work to increase our return on equity
• Maintain pricing discipline

Effectively manage risk and deploy capital

• Maintain an active enterprise risk management process
• Utilize excess cash flow to maximize long-term returns
• Maintain a competitive dividend payout ratio

Continue to invest in talent

•

Attract, retain and develop the best talent to help us drive
sustainable growth

• Recruit, develop and retain our agent force

Business Conduct and Ethics and any waiver applicable to our
principal executive officer, principal financial officer or principal
accounting officer.

In June 2018, 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
2018 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, 2018 (as the context implies), unless otherwise indicated.

CNO FINANCIAL GROUP, INC. - Form 10-KPART I
ITEM 1 Business of CNO

Marketing and Distribution

Insurance

Our insurance subsidiaries develop, market and administer
health insurance, annuity, individual life insurance and other
insurance products. We sell these products through three primary
distribution channels: career agents, independent producers (some
of whom sell one or more of our product lines exclusively) and
direct marketing. We had premium collections of $3.8 billion,
$3.7 billion and $3.6 billion in 2018, 2017 and 2016, respectively.

Our insurance subsidiaries collectively hold licenses to market our
insurance products in all fifty states, the District of Columbia,
and certain protectorates of the United States. Sales to residents
of the following states accounted for at least five percent of our
2018 collected premiums: Florida (10 percent), Pennsylvania
(6 percent), Texas (5 percent) and Iowa (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 4,100 producing agents
working from over 265 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 2018, the Bankers Life segment had total
collected premiums related to this distribution channel of $2.6
billion, or 70 percent, of our total collected premiums. These
agents sell Bankers Life policies, as well as Medicare Advantage
plans through distribution arrangements with third-party

Products

insurance companies, and typically visit the prospective
policyholder’s home to conduct personalized “kitchen-table”
sales presentations. After the sale of an insurance policy, the
agent serves as a contact person for policyholder questions, claims
assistance and additional insurance needs.

Independent Producers. The products of the Washington National
segment are primarily sold through our wholly-owned marketing
organization, PMA. In addition, Washington National’s products
are sold through a diverse network of independent agents,
insurance brokers and marketing organizations. The general
agency and insurance brokerage distribution system is comprised
of independent licensed agents doing business in all fifty states,
the District of Columbia, and certain protectorates of the United
States. In 2018, this distribution channel accounted for $692.8
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 using direct response marketing techniques. New
policyholder leads are generated primarily from television, print
advertising, direct response mailings and the internet. In 2018,
this channel accounted for $298.3 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, 2018, 2017 and
2016 (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

TOTAL PREMIUM COLLECTIONS

CNO FINANCIAL GROUP, INC. - Form 10-K

2018

1,019.0
659.3
1.7
145.8
1,825.8

1,163.2
1.3
1,164.5

466.0
32.2
296.6
794.8
3,785.1

2017

2016

1,025.1 $
642.5
2.0
205.2
1,874.8

1,030.6
.9
1,031.5

462.4
30.0
289.6
782.0
3,688.3 $

1,028.5
628.4
2.4
211.5
1,870.8

970.0
1.5
971.5

461.1
29.4
277.8
768.3
3,610.6

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

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:

PART I
ITEM 1 Business of CNO

2018

734.3
46.3
1.5
782.1

255.1
145.8
400.9

23.6
611.3
634.9

2017

739.4 $
51.6
1.9
792.9

257.0
205.2
462.2

22.6
589.1
611.7

6.0
1.7
.2
7.9
1,825.8

6.1
1.8
.1
8.0
1,874.8 $

2016

739.3
61.0
2.3
802.6

261.8
211.5
473.3

21.2
565.5
586.7

6.2
1.9
.1
8.2
1,870.8

Medicare Supplement

Long-Term Care

Medicare supplement collected premiums were $782.1 million
during 2018, or 21 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 62 percent of new sales of Medicare supplement
policies in 2018 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 $400.9 million during
2018, or 10 percent of our total collected premiums. Excluding
the collected premiums related to the legacy long-term care
business that was ceded under a 100% indemnity coinsurance
agreement in September 2018, long-term care collected premiums
were $270.4 million during 2018, or 7 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.

We continue to sell long-term care insurance through the Bankers
Life career agent distribution channel. The business currently
being sold is underwritten using stricter underwriting and pricing
standards and has shorter benefit periods than the long-term care
policies that were ceded pursuant to a reinsurance transaction
completed in September 2018. During 2018, 98 percent of new
sales of long-term care products in the Bankers Life segment had
benefit periods of two years or less and 25 percent of all new
sales are reinsured with a third party. At December 31, 2018, 94
percent of the long-term care policies in the Bankers Life segment
have benefit periods of less than four years and 55 percent of
such long-term care policies have benefit periods of one year or
less. In the third quarter of 2018, we ceased sales of home health
care only long-term care policies. In addition, we ceased sales of
comprehensive and nursing home long-term care policies with
benefit periods exceeding three years. Comprehensive policies
cover both nursing home care and home healthcare. Home
healthcare benefits included in comprehensive policies cover

CNO FINANCIAL GROUP, INC. - Form 10-KPART I
ITEM 1 Business of CNO

incurred charges after a deductible or elimination period and are
subject to a weekly or monthly maximum dollar amount, and
an overall benefit maximum. 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.

Supplemental Health Products

Supplemental health collected premiums were $634.9 million
during 2018, 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 74 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,

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

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 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 $7.9 million
during 2018. 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.

2018

2017

1,112.0
1.1
1,113.1

51.2
.2
51.4
1,164.5

964.7 $
.6
965.3

65.9
.3
66.2
1,031.5 $

2016

868.1
1.2
869.3

101.9
.3
102.2
971.5

During 2018, we collected annuity premiums of $1,164.5 million,
or 31 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 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.

CNO FINANCIAL GROUP, INC. - Form 10-K

The following describes the major annuity products:

Fixed Index Annuities
These products accounted for $1,113.1 million, or 30 percent, of
our total premium collections during 2018. The account value
(or “accumulation value”) of these annuities is credited in an
amount that is based on changes in a particular index during a
specified period of time. Within each contract issued, each fixed
index annuity specifies:

• The index to be used.

• The time period during which the change in the index is
measured. At the end of the time period, the change in the index
is applied to the account value. The time period of the contract
ranges from 1 to 4 years.

• The method used to measure the change in the index.

• The measured change in the index is multiplied by a “participation
rate” (percentage of change in the index) before the credit is
applied. Some policies guarantee the initial participation rate for
the life of the contract, and some vary the rate for each period.

• The measured change in the index may also be limited by a “cap”
before the credit is applied. Some policies guarantee the initial
cap for the life of the contract, and some vary the cap for each
period.

• The measured change in the index may also be limited to the
excess in the measured change over a “margin” before the credit
is applied. Some policies guarantee the initial margin for the life
of the contract, and some vary the margin for each period.

These products have guaranteed minimum cash surrender
values, regardless of actual index performance and the resulting
indexed-based interest credits applied. 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.

In 2018, a significant portion of our new annuity sales were
“bonus interest” products. These products typically specify
a bonus interest rate that generally ranges from 2 percent to 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 is established.

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 $51.4 million, or 1 percent, of our
total premium collections during 2018, of which SPDAs and
FPDAs comprised $43.6 million. Our fixed rate SPDAs and

PART I
ITEM 1 Business of CNO

FPDAs typically have a crediting rate that is guaranteed by the
Company for the first policy year, after which we have the ability
to change the crediting rate to any rate not below a guaranteed
minimum rate. The guaranteed rates on annuities written
recently are 1 percent, and the guaranteed rates on all policies
inforce range from 1.0 percent to 5.5 percent. As of December 31,
2018, the average crediting rate on our outstanding traditional
annuities was 3 percent.

The initial crediting rate is largely a function of:

• the interest rate we can earn on invested assets acquired with the

new annuity fund deposits;

• the costs related to marketing and maintaining the annuity

products; and

• the rates offered on similar products by our competitors.

For subsequent adjustments to crediting rates, we take into
account current and prospective yields on investments, annuity
surrender assumptions, competitive industry pricing and the
crediting rate history for particular groups of annuity policies
with similar characteristics.

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 $7.8 million of our total premiums collected
in 2018. SPIAs are designed to provide a series of periodic
payments for a fixed period of time or for life, according to the
policyholder’s choice at the time of issuance. Once the payments
begin, the amount, frequency and length of time over which they
are payable are fixed. SPIAs often are purchased by persons at
or near retirement age who desire a steady stream of payments
over a future period of years. The single premium is often the
payout from a fixed rate contract. The implicit interest rate on
SPIAs is based on market conditions when the policy is issued.
The implicit interest rate on our outstanding SPIAs averaged
6.7 percent at December 31, 2018.

CNO FINANCIAL GROUP, INC. - Form 10-KPART I
ITEM 1 Business of CNO

Life Insurance

LIFE INSURANCE PREMIUM COLLECTIONS (DOLLARS IN MILLIONS)

Interest-sensitive life products:

Bankers Life
Washington National
Colonial Penn

Total interest-sensitive life premium collections

Traditional life:
Bankers Life
Washington National
Colonial Penn

Total traditional life premium collections

TOTAL LIFE INSURANCE PREMIUM COLLECTIONS

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 2018, we collected life insurance premiums of
$794.8 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
$193.1 million, or 5 percent, of our total collected premiums in
2018. 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 $601.7 million, or 16 percent, of
our total collected premiums in 2018. 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

Investments

2018

170.8
22.1
.2
193.1

295.2
10.1
296.4
601.7
794.8

2017

162.5 $
19.1
.2
181.8

299.9
10.9
289.4
600.2
782.0 $

2016

175.0
18.0
.3
193.3

286.1
11.4
277.5
575.0
768.3

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 insurance products are offered on an
individual basis primarily to persons age 50 to 85, principally in
face amounts of $400 to $25,000, without medical examination
or evidence of insurability. Premiums are paid as frequently as
monthly. Benefits paid are less than the face amount of the policy
during the first two years, except in cases of accidental death. Our
Colonial Penn segment markets graded benefit life policies under
its own brand name using direct response marketing techniques.
New policyholder leads are generated primarily from television,
print advertisements, direct response mailings and the internet.

Traditional life products also include single premium whole life
insurance. This product requires one initial lump sum payment
in return for providing life insurance protection for the insured’s
entire lifetime. Single premium whole life products accounted for
$40.4 million of our total collected premiums in 2018.

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 $22.9 billion of assets (at fair value)
under management at December 31, 2018, of which $22.8 billion

were our assets (including investments held by variable interest
entities (“VIEs”) that are included on our consolidated balance
sheet) and $.1 billion were assets managed for third parties. Our
general account investment strategies are to:

CNO FINANCIAL GROUP, INC. - Form 10-K

PART I
ITEM 1 Business of CNO

• provide largely stable investment income from a diversified high

quality fixed income portfolio;

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

• maximize and maintain a stable spread between our investment

• purchasing options on equity indices with similar payoff

income and the yields we pay on insurance products;

characteristics; and

• sustain adequate liquidity levels to meet operating cash
including a margin for potential adverse

requirements,
developments;

• 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

• maximize total return through active strategic asset allocation

and 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, 2018, the average yield, computed on the cost basis
of our fixed maturity portfolio, was 5.1 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 4.6 percent.

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.

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

The prices of the options we purchase to manage the equity-
based risk component of our fixed index annuities vary based
on market conditions. All other factors held constant, the prices
of the options generally increase with increases in the volatility
of the applicable indices, which may reduce the profitability of
the fixed index products, cause us to lower participation rates,
or both. 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 overall compensation for risk
required by the market as well as issuer specific changes in credit
quality). 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, 2018, 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 8.6 years
and 8.4 years, respectively.

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

CNO FINANCIAL GROUP, INC. - Form 10-KPART I
ITEM 1 Business of CNO

supplement insurance products include Blue Cross and Blue
Shield Plans, United HealthCare and Mutual of Omaha. Our
main competitors for life insurance sold through direct marketing
channels include Gerber Life, Mutual of Omaha, New York
Life and subsidiaries of Torchmark Corporation. 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 Corporation.

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 subsidiary
ranked sixth in new annualized premiums of individual long-
term care insurance in the first half of 2018 with a market share
of approximately 7 percent, the top five writers of individual
long-term care insurance had new annualized premiums with a
combined market share of approximately 79 percent during the
period. In addition, while, based on a 2017 Medicare Supplement
Loss Ratios report, we ranked sixth in direct premiums earned for
Medicare supplement insurance in 2017 with a market share of 2.7
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
advertising appropriate for Colonial Penn’s campaigns fluctuates
from period to period and will impact the average cost to generate
a TV lead.

An important competitive factor for life insurance companies is the
financial strength ratings they receive from nationally recognized
rating organizations. Agents, insurance brokers and marketing
companies who market our products and prospective purchasers

CNO FINANCIAL GROUP, INC. - Form 10-K

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.
Financial strength ratings provided by A.M. Best Company
(“A.M. Best”), Moody’s Investor Services, Inc. (“Moody’s”), Fitch
Ratings (“Fitch”) and S&P Global Ratings (“S&P”) 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 January 9, 2019, A.M. Best affirmed its “A-” financial strength
ratings of our primary insurance subsidiaries. The outlook
for these ratings remains 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 October 4, 2018, Moody’s upgraded the financial strength
ratings of our primary insurance subsidiaries to “A3” from “Baa1”
and the outlook for these ratings is stable. Moody’s actions
resulted from the Company’s announcement that Bankers
Life had closed on its agreement to cede certain long-term care
policies as further described in the note to the consolidated
financial statements entitled “Reinsurance”. 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 “A”
offers good financial security, however, certain elements may be
present which suggests a susceptibility to impairment sometime
in the future. Moody’s has twenty-one possible ratings. There
are six ratings above the “A3” rating of our primary insurance
subsidiaries and fourteen ratings that are below that rating.

On August 2, 2018, Fitch affirmed its “BBB+” financial strength
ratings of our primary insurance subsidiaries and revised the
outlook for these ratings to positive from stable. The positive
outlook for these ratings reflected Fitch’s view that such ratings
could be upgraded over the next 12 to 18 months based on the
Company’s announcement that Bankers Life had entered into
an agreement to cede certain long-term care policies as further
described in the note to the consolidated financial statements
entitled “Reinsurance”. 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.

PART I
ITEM 1 Business of CNO

On August 2, 2018, S&P affirmed the financial strength ratings
of “BBB+” of our primary insurance subsidiaries and revised the
outlook for these ratings to positive from stable. S&P’s actions
resulted from the Company’s announcement that Bankers Life
had entered into an agreement to cede certain long-term care
policies as further described in the note to the consolidated
financial statements entitled “Reinsurance”. 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.

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

Insurance Underwriting

Under regulations developed by the National Association of
Insurance Commissioners (the “NAIC”) (an association of state
regulators and their staffs) and adopted by the states, we are
prohibited from underwriting our Medicare supplement policies
for certain first-time purchasers. If a person applies for insurance
within six months after becoming eligible by reason of age, or
disability in certain limited circumstances, the application may
not be rejected due to medical conditions. Some states prohibit
underwriting of all Medicare supplement policies. For other
prospective Medicare supplement policyholders, such as senior
citizens who are transferring to our products, the underwriting
procedures are relatively limited, except for policies providing
prescription drug coverage.

Before issuing long-term care products, we generally apply
detailed underwriting procedures to assess and quantify the
insurance risks. We require medical examinations of applicants
(including blood and urine tests, where permitted) for certain
health insurance products and for life insurance products which
exceed prescribed policy amounts. These requirements vary
according to the applicant’s age and may vary by type of policy
or product. We also rely on medical records and the potential
policyholder’s written application. In recent years, there have
been significant regulatory changes with respect to underwriting
certain types of health insurance. An increasing number of states
prohibit underwriting and/or charging higher premiums for

Liabilities for Insurance Products

substandard risks. We monitor changes in state regulation that
affect our products, and consider these regulatory developments
in determining the products we market and where we market
them.

Our supplemental health policies are individually underwritten
using a simplified issue application. Based on an applicant’s
responses on the application, the underwriter either: (i) approves
the policy as applied for; (ii) approves the policy with reduced
benefits; or (iii) rejects the application.

Our life insurance products include policies that are underwritten
individually and low face-amount life insurance products that
utilize standardized underwriting procedures. After initial
processing, insurance underwriters obtain the information needed
to make an underwriting decision (such as medical examinations,
doctors’ statements and special medical tests). After collecting and
reviewing the information, the underwriter either: (i) approves
the policy as applied for; (ii) approves the policy with an extra
premium charge because of unfavorable factors; or (iii) rejects the
application.

We underwrite group
insurance policies based on the
characteristics of the group and its past claim experience.
Graded benefit life insurance policies are issued without medical
examination or evidence of insurability. There is minimal
underwriting on annuities.

At December 31, 2018, the total balance of our liabilities
for insurance products was $23.5 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.

for

insurance products are calculated using
Liabilities
management’s best judgments, based on our past experience and
standard actuarial tables, of mortality, morbidity, lapse rates,

investment experience and expense levels with due consideration
of provision for adverse development where prescribed by
accounting principles generally accepted in the United States
of America (“GAAP”). For all of our insurance products, we
establish an active life reserve, a liability for due and unpaid
claims, claims in the course of 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

CNO FINANCIAL GROUP, INC. - Form 10-KPART I
ITEM 1 Business of CNO

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, 2018, the policy risk retention limit of our
insurance subsidiaries was generally $.8 million or less. Reinsurance
ceded by CNO represented 12 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, 2018 were as follows (dollars in millions):

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

Reinsurance receivables Ceded life insurance inforce
1,129.8
$
$
642.3
102.9
636.3
518.5
80.9
210.6
3,321.3

3,046.4
1,323.8
258.0
3.7
3.2
1.3
289.0
4,925.4

A.M. Best rating
A+
A+
A+
A+
A+
A+

(a) In addition to the life insurance business, Wilton Re has assumed certain long-term care business through a 100% indemnity coinsurance agreement. Such business

had total insurance policy liabilities of $2.8 billion at December 31, 2018.

(b) 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 $1.0 billion at December 31, 2018.

(c) RGA Reinsurance Company has assumed a portion of the long-term care business of Bankers Life on a coinsurance basis.
(d) No other single reinsurer represents more than 3 percent of the reinsurance receivables balance or has assumed greater than 2 percent of the total ceded life

insurance business inforce.

Employees

At December 31, 2018, we had approximately 3,300 full time
employees, including 1,280 employees supporting our Bankers
Life segment, 290 employees supporting our Colonial Penn
segment and 1,730 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:

• grant and revoke business licenses;

• regulate and supervise sales practices and market conduct;

CNO FINANCIAL GROUP, INC. - Form 10-K

• establish guaranty associations;

• license agents;

• approve policy forms;

• approve premium rates and premium rate increases for some lines
of business such as long-term care and Medicare supplement;

• establish reserve requirements;

• prescribe the form and content of required financial statements

and reports;

• determine the reasonableness and adequacy of statutory capital

and surplus;

• perform financial, market conduct and other examinations;

• define acceptable accounting principles; and

• regulate the types and amounts of permitted investments.

In addition, the NAIC develops model laws and regulations,
many of which have been adopted by state legislators and/or
insurance regulators, relating to:

• reserve requirements;

• risk-based capital (“RBC”) standards;

• codification of insurance accounting principles;

• investment restrictions;

• restrictions on an insurance company’s ability to pay dividends;

• credit for reinsurance; and

• product illustrations.

The Company’s insurance subsidiaries are required to file
detailed annual reports, in accordance with prescribed statutory
accounting rules, with regulatory authorities in each of the
jurisdictions in which they do business. As part of their routine
oversight process, state insurance departments conduct periodic
detailed examinations, generally once every three to five years,
of the books, records and accounts of insurers domiciled in their
states. These examinations are generally 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 for
life insurance products 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 became effective on January 1, 2017, and there
is a three-year transition period where the approach is optional
until it is required to be used for all life insurance products issued
on or after January 1, 2020. The new approach will impact
the financial statements of our insurance subsidiaries prepared
under statutory accounting principles prescribed or permitted by
regulatory authorities. The Company is implementing the new
approach to its reserves on new life insurance products as they are
introduced through the transition period.

PART I
ITEM 1 Business of CNO

State regulatory authorities and industry groups have developed
several initiatives regarding market conduct, including the
form and content of disclosures to consumers, advertising,
sales practices and complaint handling. Various state insurance
departments periodically examine the market conduct activities
of domestic and non-domestic insurance companies doing
business in their states, including our insurance subsidiaries. The
purpose of these market conduct examinations is to determine if
operations are consistent with the laws and regulations of the state
conducting the examination. In addition, market conduct has
become one of the criteria used by rating agencies to establish the
financial strength 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.

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.

CNO FINANCIAL GROUP, INC. - Form 10-KPART I
ITEM 1 Business of CNO

The NAIC has adopted a model law governing cybersecurity
consumer protections in 2017 with enactment by states thereafter.
In addition, effective March 1, 2017, the New York Department
of Financial Services (the “NYDFS”) has a new cybersecurity
regulation which includes transitional phase-in periods up to
two years. An annual Certification of Compliance involving our
cybersecurity program is required to be filed with the NYDFS.

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. Generally, all transactions between an
insurance company and an affiliate must be fair and reasonable.
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 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.

• statutory net gain from operations or statutory net income for

the prior year; or

• 10 percent of statutory capital and surplus at the end of the

preceding year.

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.

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 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

CNO FINANCIAL GROUP, INC. - Form 10-K

resulted in inquiries from insurance departments, to which we
have responded. These inquiries have not led to any restrictions
affecting our operations.

The NAIC’s RBC requirements provide a tool for insurance
regulators to determine the levels of statutory capital and surplus an
insurer must maintain in relation to its insurance and investment
risks and the need for possible regulatory attention. The basis of
the system is a formula that applies prescribed factors to various
risk elements in an insurer’s business to report a minimum capital
requirement proportional to the amount of risk assumed by the
insurer. The life and health insurer RBC formula is designed to
measure annually: (i) the risk of loss from asset defaults and asset
value fluctuations; (ii) the risk of loss from adverse mortality and
morbidity experience; (iii) the risk of loss from mismatching of
assets and liability cash flow due to changing interest rates; and
(iv) business risks.

In addition, the RBC requirements currently provide for a trend
test if a company’s total adjusted capital is between 100 percent
and 150 percent of its RBC at the end of the year. The trend
test calculates the greater of the decrease in the margin of total
adjusted capital over RBC:

• between the current year and the prior year; and

• for the average of the last 3 years.

It assumes that such decrease could occur again in the coming
year. Any company whose trended total adjusted capital is less
than 95 percent of its RBC would trigger a requirement to submit
a comprehensive plan to the regulatory authority proposing
corrective actions aimed at improving its capital position. The
2018 statutory annual statements of each of our insurance
subsidiaries reflect total adjusted capital in excess of the levels that
would subject our 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

PART I
ITEM 1 Business of CNO

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 complied in all material respects with such
investment regulations as of December 31, 2018.

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.

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
laundering (“AML”)
subsidiaries have adopted anti-money
programs that include policies, procedures and controls to detect
and prevent money laundering, have designated compliance
officers to oversee the programs, provide for on-going employee
training and ensure periodic independent testing of the programs.
CNO’s and the insurance subsidiaries’ AML programs, to the
extent required, also establish and enforce customer identification
programs and provide for the monitoring and the reporting to the
Department of the Treasury of certain suspicious transactions.

In addition, the Dodd-Frank Wall Street Reform and Consumer
Protection Act of 2010 (the “Dodd-Frank Act”) generally provides
for enhanced federal supervision of financial institutions,
including insurance companies in certain circumstances, and
financial activities that represent a systemic risk to financial
stability or the U.S. economy. Under the Dodd-Frank Act, a
Federal Insurance Office has been established within the U.S.
Treasury Department to monitor all aspects of the insurance

CNO FINANCIAL GROUP, INC. - Form 10-KPART I
ITEM 1 Business of CNO

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.

Federal Income Taxation

On December 22, 2017, President Trump signed into law the
“Tax Cuts and Jobs Act” (the “Tax Reform Act”) which enacted a
broad range of changes to the Internal Revenue Code (the “Code”)
including individual and corporate reforms and numerous
changes to U.S. international tax provisions. The Tax Reform Act
reduced the corporate tax rate to 21 percent and made significant
changes to the taxation of life insurance companies. Among
other things, the Tax Reform Act modified the computation
of life insurance reserves, increased the capitalization rate and
extended the amortization period for policy acquisition costs,
imposed limitations on the deductibility of performance-based
compensation to “covered employees” and interest expense, and
allowed for the expensing of certain capital expenditures. For net
operating losses (“NOLs”) arising after December 31, 2017, the
Tax Reform Act limits the ability to utilize NOL carryforwards to
80% of taxable income. In addition, NOLs arising after 2017 can
be carried forward indefinitely, but carryback is prohibited. Our
net deferred tax assets and liabilities were revalued at the newly
enacted U.S. corporate rate, and the impact was recognized in our
tax expense in 2017, the year of enactment.

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.

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 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, 2018, 2017 and 2016, we have established a
valuation allowance equal to the portion of the net deferred tax
assets whose realization is uncertain. The determination of the
amount of valuation allowance established is made by assessing
the effects of limitations or issues on the value of our net deferred
tax assets expected to be fully recognized in the future.

CNO FINANCIAL GROUP, INC. - Form 10-K

PART I
ITEM 1A Risk Factors

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.

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, 2018 (dollars in millions):

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.

Fixed interest and fixed
index annuities
.3
29.1
816.4
1,817.0
710.6
5,576.2
8,949.6

Universal
life
10.1
273.1
44.2
218.1
25.2
410.6
981.3

Total
10.4
302.2
860.6
2,035.1
735.8
5,986.8
9,930.9

1.66%

2.64%

1.76%

In the fourth quarter of 2018, we completed a comprehensive
review of interest rate assumptions on all of our products which
were updated to reflect the projected returns on our current
investment portfolio. 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 4.65 percent
to 5.67 percent for one year (unchanged from prior year) and then
grade over 5 years from these levels to an ultimate new money
rate ranging from 5.23 percent to 6.00 percent (previously ranged
from 5.73 percent to 6.50 percent), depending on the specific
product. While subject to many uncertainties, we believe our
assumptions for future new money rates are reasonable.

CNO FINANCIAL GROUP, INC. - Form 10-KPART I
ITEM 1A Risk Factors

The remaining profit margins for the life contingent payout
annuities in the Colonial Penn and Washington National
segments and for the long-term care blocks in run-off are
extremely low. Accordingly, future unfavorable changes to our
assumptions are more likely to reduce earnings in the period such
changes occur.

The following hypothetical scenarios illustrate the sensitivity
of changes in interest rates to our products (based on our 2018
comprehensive actuarial review):

reduce margins by approximately $25 million but would
not result in a charge because margins would continue to
be positive.

• A second scenario assumes that current new money rates
available to invest cash flows from the retained long-term care
blocks immediately decrease to approximately 5.49 percent and
remain at that level indefinitely. This scenario would reduce
margins in the block by approximately $34 million but would
also not result in a charge.

• 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
$52 million would occur if assumed spreads related to our
interest-sensitive life and annuity products immediately and
permanently decreased by 10 basis points.

• An additional scenario assumes that current new money rates
available to invest cash flows from our long-term care blocks
immediately decrease by approximately 220 basis points and
remain at that level indefinitely. This scenario would result in
a charge of $32 million and reduce margins in the blocks by
approximately $195 million.

• 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 $1 million related to
an increase in deficiency reserves related to life contingent payout
annuities and reduce future margins for all non-interest sensitive
products by $95 million.

• The third scenario assumes current new money rates increase
modestly such that our current portfolio yield remains level.
We estimate that this scenario would result in no charges, but
would reduce margins for all non-interest sensitive products by
$115 million.

• The fourth scenario assumes that new money rates decrease 200
basis points and remain at that level indefinitely. We estimate that
this scenario would result in a pre-tax charge of approximately
$50 million related to an increase in deficiency reserves related to
life contingent payout annuities and our long-term care in run-off
business. For all non-interest sensitive products combined, this
scenario would reduce future margins by $551 million.

The long-term care reinsurance transaction entered into in
September 2018 significantly reduced our exposure to adverse
experience from this business. However, the retained blocks are
still vulnerable to a variety of factors including lower interest
rates, higher morbidity and higher persistency. Our 2018
comprehensive actuarial review of our retained long-term care
blocks (the retained blocks in the Bankers Life and Long-term
care in run-off segments) reflects the reduced exposure and
updates to key assumptions including morbidity, mortality,
voluntary termination rates, and interest rate assumptions. Such
review indicated margins increased by $10 million in 2018 to
approximately $242 million, or approximately 10 percent of
related insurance liabilities net of insurance intangibles (such
margins in the retained Bankers Life block increased $25 million
to approximately $235 million, or approximately 13 percent of
related insurance liabilities net of insurance intangibles). Given
the potential interest rate exposure in these blocks of business,
we are separately disclosing the results of the three hypothetical
scenarios summarized above for these blocks only to illustrate
the sensitivity of changes in interest rates on long-term care
products (based on our 2018 comprehensive actuarial review):

• One scenario assumes that the new money rates available to
invest cash flows from our retained long-term care blocks
remain at their current level indefinitely. This scenario would

CNO FINANCIAL GROUP, INC. - Form 10-K

Although the hypothetical revisions described in the scenarios
summarized above are not currently required or anticipated,
we believe similar changes could occur based on past variances
in experience and our expectations of the ranges of future
experience that could reasonably occur. We have assumed that
revisions to assumptions resulting in such adjustments would
occur equally among policy types, ages and durations within
each product classification. Any actual adjustment would be
dependent on the specific policies affected and, therefore, may
differ from such estimates. In addition, the impact of actual
adjustments would reflect the net effect of all changes in
assumptions during the period.

Sustained periods of low or declining interest rates may adversely
affect our results of operations, financial position and cash flows.

There are risks to our business associated with broad
economic conditions.

From 2008 to 2010, the U.S. economy experienced unusually
severe credit and liquidity contraction and underwent a recession.
Following several years of rapid credit expansion, a contraction in
mortgage lending coupled with substantial declines in home prices
and rising mortgage defaults resulted in significant write-downs
of asset values by financial institutions, including government-
sponsored entities and major commercial and investment banks.
These write-downs, initially of mortgage-backed securities but
spreading to many sectors of the related credit markets, and to
related credit default swaps and other derivative securities, caused
many financial institutions to seek additional capital, to merge
with larger and stronger institutions, to be subsidized by the U.S.
government or, in some cases, to fail. These factors, combined
with declining business and consumer confidence and increased
unemployment, precipitated an economic slowdown.

General factors such as the availability of credit, consumer
spending, business investment, capital market conditions and
inflation affect our business. For example, in an economic
downturn, higher unemployment, lower family income, lower
corporate earnings,
lower
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.

investment and

lower business

Our business is exposed to the performance of the debt and
equity markets. Adverse market conditions can affect the
liquidity and value of our investments. The manner in which
debt and equity market performance and changes in interest rates
have affected, and will continue to affect, our business, financial
condition, growth and profitability include, but are not limited
to, the following:

• The value of our investment portfolio has been materially
affected in the past by changes in market conditions which
resulted in substantial changes in realized and/or unrealized
losses. Future adverse capital market conditions could result in
additional realized and/or unrealized losses.

• Changes in interest rates also affect our investment portfolio. In
periods of increasing interest rates, life insurance policy loans,
surrenders and withdrawals could increase as policyholders
seek higher returns. This could require us to sell invested assets
at a time when their prices may be depressed by the increase
in interest rates, which could cause us to realize investment
losses. 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. Further, reductions in interest rates
could result in an acceleration of the amortization of deferred
acquisition costs and the present value of future profits and a
reduction in our projected loss recognition testing margins.

• 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,

PART I
ITEM 1A Risk Factors

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 the long-term care block in the Long-term care in run-off
segment and a portion of the Bankers Life long-term care block
have 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, these blocks experienced benefit ratios well in excess
of 100 percent. For example, for 2018, 2017 and 2016, the
annual benefit ratios in the Bankers Life segment ranged from
113.9 percent to 119.0 percent and the annual benefit ratios on
the long-term care block in the Long-term care in run-off segment
ranged from 163.6 percent to 182.8 percent.

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

CNO FINANCIAL GROUP, INC. - Form 10-KPART I
ITEM 1A Risk Factors

of business is limited by the guaranteed renewal feature of most
of our insurance policies. Due to this feature, we cannot exit such
lines of business without regulatory approval, and accordingly, we
may be required to continue to service those products at a loss for
an extended period of time.

If we are successful in obtaining regulatory approval to raise
premium rates, the increased premium rates may reduce the
volume of our new sales and cause existing policyholders to allow
their policies to lapse. This could result in a significantly higher
ratio of claim costs to premiums if healthier policyholders allow
their policies to lapse, while policies of less healthy policyholders
continue inforce. This would reduce our premium income and
profitability in future periods.

Our Medicare supplement health policies allow us to increase
premium rates when warranted by our actual claims experience.
These rate increases must be approved by the applicable state
insurance departments, and we are required to submit actuarial
claims data to support the need for such rate increases. The re-rate
application and approval process on Medicare supplement health
products is a normal recurring part of our business operations
and reasonable rate increases are typically approved by the state
departments as long as they are supported by actual claims
experience and are not unusually large in either dollar amount
or percentage increase. For policy types on which rate increases
are a normal recurring event, our estimates of insurance
liabilities assume we will be able to raise rates if experience on the
blocks warrants such increases in the future.

As a result of higher persistency and resultant higher claims in our
long-term care block in the Bankers Life segment than assumed in
the original pricing, our premium rates were too low. Accordingly,
we have been seeking approval from regulatory authorities for rate
increases on portions of this business. Many of the rate increases
have been approved by regulators and implemented, but it has
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

CNO FINANCIAL GROUP, INC. - Form 10-K

rates, investment experience and expense levels. For our health
insurance business, we establish an active life reserve; a liability
for due and unpaid claims, claims in the course of settlement and
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 and Long-term care in run-off segments. The
insurance policy benefits incurred for our long-term care products
in our Bankers Life segment were $304.3 million, $302.4 million
and $298.7 million in 2018, 2017 and 2016, respectively. The
benefit ratios for our long-term care products in our Bankers Life
segment were 119.0 percent, 116.2 percent and 113.9 percent in
2018, 2017 and 2016, respectively. The insurance policy benefits
incurred for our long-term care products in our Long-term
care in run-off segment were $271.3 million, $344.2 million
and $355.0 million in 2018, 2017 and 2016, respectively. The
benefit ratios for our long-term care products in our Long-term
care in run-off segment were 182.8 percent, 163.6 percent and
166.1 percent in 2018, 2017 and 2016, 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 future
claims are higher than our assumptions, 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

PART I
ITEM 1A Risk Factors

operations and our financial condition. See “Item 7 Management’s
Discussion and Analysis of Consolidated Financial Condition
and Results of Operations, Critical Accounting Policies, Present
Value of Future Profits and Deferred Acquisition Costs.”

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.

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, 2018,
approximately 22 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, 2018, the vast
majority of our products with contractual guaranteed minimum
rates had crediting rates set at the minimum. In addition,
approximately 19 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; 28 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

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 sustaining 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, the effect of changes
in market interest rates shall have largely offsetting effects on the
value of the related assets and liabilities. At December 31, 2018, the
estimated durations of our fixed income securities (as modified to
reflect estimated prepayments and call premiums) and insurance
liabilities were approximately 8.6 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
$345 million if interest rates were to increase by 10 percent from
rates as of December 31, 2018. 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.

Additionally, on July 27, 2017, the United Kingdom’s (“U.K.”)
Financial Conduct Authority announced that it will no longer
persuade or compel banks to submit rates for the calculation of
the LIBOR rates after 2021, which is expected to result in these
widely used reference rates no longer being available. At this time,
it is not possible to predict the effect of any such changes, any
establishment of alternative reference rates or any other reforms to
LIBOR that may be enacted in the U.K. or elsewhere. Uncertainty
as to the nature of such potential changes, alternative reference
rates or other reforms may adversely affect the trading market for
LIBOR-based securities, including those held in our investment
portfolio. Also, some of our liabilities reference LIBOR including
our revolving credit agreement, borrowings from the Federal
Home Loan Bank (“FHLB”) and borrowings related to VIEs.

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.

CNO FINANCIAL GROUP, INC. - Form 10-KPART I
ITEM 1A Risk Factors

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 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.

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, 2018, our reinsurance receivables and ceded
life insurance inforce totaled $4.9 billion and $3.3 billion,
respectively. Our six largest reinsurers accounted for 94 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.

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:

• changes in interest rates and credit spreads, which can reduce
the value of our investments as further discussed in the risk
factor entitled “Changing interest rates may adversely affect our
results of operations”;

• changes in patterns of relative liquidity in the capital markets for

various asset classes;

• changes in the perceived or actual ability of issuers to make timely
repayments, which can reduce the value of our investments.
This risk is significantly greater with respect to below-

CNO FINANCIAL GROUP, INC. - Form 10-K

investment grade securities, which comprised 12 percent of the
cost basis of our available for sale fixed maturity investments as
of December 31, 2018; and

• changes in the estimated timing of receipt of cash flows.
For example, our structured securities, which comprised
28 percent of our available for sale fixed maturity investments
at December 31, 2018, 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: $2.6 million
in 2018; $22.8 million in 2017; and $32.3 million in 2016
($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 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 impact the value of our investments and such
changes, if material, could lead us to determine that writedowns
are appropriate.

PART I
ITEM 1A Risk Factors

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.

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.

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 investment 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
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.

impairments requires significant

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, 2018 and 2017, our total unrealized net investment
gains before adjustments for insurance intangibles and deferred
income taxes were $.3 billion and $2.2 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

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 2018 statutory annual statements of each of
our insurance subsidiaries reflect RBC ratios in excess of the levels
that would subject our insurance subsidiaries to any regulatory
action.

In addition to the RBC requirements, certain states have
established minimum capital requirements
insurance
companies licensed to do business in their state. These regulators
have the discretionary authority, in connection with the

for

CNO FINANCIAL GROUP, INC. - Form 10-KPART I
ITEM 1A Risk Factors

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.

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 broker-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 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
CNO and 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

CNO FINANCIAL GROUP, INC. - Form 10-K

consolidated financial statements entitled “Litigation and Other
Legal Proceedings.” The ultimate outcome of these lawsuits,
regulatory proceedings and investigations cannot be predicted
with certainty. In the event of an unfavorable outcome in one or
more of these matters, the ultimate liability may be in excess of
liabilities we have established and could have a material adverse
effect on our business, financial condition, results of operations or
cash flows. We could also suffer significant reputational harm as a
result of such litigation, regulatory proceedings or investigations,
including harm flowing from actual or threatened revocation of
licenses to do business, regulator actions to assert supervision or
control over our business, and other sanctions which could have
a material adverse effect on our business, financial condition,
results of operations or cash flows.

Managing operational risks may not be effective in
mitigating risk and loss to us.

We are subject to operational risks including, among other
things, fraud, errors, failure to document transactions properly
or to obtain proper internal authorization, failure to comply with
regulatory requirements or obligations under our agreements,
information technology failures including cyber security attacks
and failure of our service providers (such as investment custodians
and information technology and policyholder service providers)
to comply with our services agreements. The associates and
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

PART I
ITEM 1A Risk Factors

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.

Interruption in telecommunication, information
technology and other operational systems, or a failure
to maintain the security, confidentiality or privacy of
sensitive data residing on such systems, could harm our
business.

We depend heavily on our telecommunication, information
technology and other operational systems and on the integrity
and timeliness of data we use to run our businesses and service
our customers. These systems may fail to operate properly or
become disabled as a result of events or circumstances which
may be wholly or partly beyond our control. Further, we face the
risk of operational and technology failures by others, including
financial intermediaries, vendors and parties that provide services
to us. If these parties do not perform as anticipated, we may
experience operational difficulties, increased costs and other
adverse effects on our business. Despite our implementation
of a variety of security measures, our information technology
and other systems have been and may continue to be subject to
attacks and unauthorized access, such as physical or electronic
break-ins, unauthorized tampering or other security breaches,
which could in turn compromise the security, confidentiality or
privacy of sensitive data, including personal financial and health
information relating to customers. There can be no assurance that
a future breach will not occur or, if any does occur, that it can be
promptly detected and sufficiently remediated without materially
impacting our business or our operations.

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

CNO FINANCIAL GROUP, INC. - Form 10-KPART I
ITEM 1A Risk Factors

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.

Our business could be interrupted or compromised
if we experience difficulties arising from outsourcing
relationships.

We outsource certain information technology and policy
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, 2018, we had an aggregate principal amount
of indebtedness of $925.0 million. Our indebtedness will require
approximately $145 million in cash to service in 2019 (based on
the principal amounts outstanding and applicable interest rates
as of December 31, 2018). 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 on May 19, 2015, and made an initial
drawing of $100.0 million, resulting in $50.0 million available

for additional borrowings. On October 13, 2017, the Company
entered into an amendment and restatement agreement (the
“Amendment Agreement”) with respect to its revolving credit
agreement (as amended by the Amendment Agreement, the
“Revolving Credit Agreement”). The Amendment Agreement,
among other things, increased the total commitments available
under the revolving credit facility from $150.0 million to
$250.0 million, increased the aggregate amount of additional
incremental loans the Company may incur from $50.0 million to
$100.0 million and extended the maturity date of the revolving
credit facility from May 19, 2019 to the earlier of October 13,
2022 and the date that is six months prior to the maturity date
of the 4.500% Senior Notes due 2020 (the “2020 Notes”), which
is November 30, 2019. The amount drawn under the Revolving
Credit Agreement continues to be $100.0 million. On May 19,
2015, the Company also issued $325.0 million aggregate principal
amount of 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.

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, we 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

CNO FINANCIAL GROUP, INC. - Form 10-K

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:

• subsidiary debt;

• liens;

• restrictive agreements;

• restricted payments during the continuance of an event

of default;

• disposition of assets and sale and leaseback transactions;

• transactions with affiliates;

• change in business;

• fundamental changes;

• modification of certain agreements; and

• 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 35.0 percent (30.0 percent prior to the Amendment
Agreement) (such ratio was 22.5 percent at December 31, 2018);
(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 393 percent at December 31, 2018); 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 $3,193.2 million at December 31, 2018 compared to the
minimum requirement of $2,687.4 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:

• non-payment;

• breach of representations, warranties or covenants;

• cross-default and cross-acceleration;

• bankruptcy and insolvency events;

• judgment defaults;

• actual or asserted invalidity of documentation with respect to

the Revolving Credit Agreement;

• change of control; and

• customary ERISA defaults.

PART I
ITEM 1A Risk Factors

If an event of default under the Revolving Credit Agreement
occurs and is continuing, KeyBank National Association (as the
administrative 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:

• incur certain subsidiary indebtedness without also guaranteeing

the Notes;

• create liens;

• enter into sale and leaseback transactions;

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

• 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 all
but one 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

CNO FINANCIAL GROUP, INC. - Form 10-KPART I
ITEM 1A Risk Factors

“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):

• statutory net gain from operations or statutory net income for

the prior year, or

• 10 percent of statutory capital and surplus as of the end of the

preceding year.

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

CNO FINANCIAL GROUP, INC. - Form 10-K

the director or commissioner of the applicable state insurance
department. In 2018, our insurance subsidiaries paid dividends
of $213.9 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 329 percent at December 31, 2018.
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.
CDOC made a capital contribution of $265.0 million to its
insurance subsidiaries in 2018.

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 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, 2018, we had approximately $3.3 billion of
federal tax NOLs resulting in deferred tax assets of approximately
$.7 billion (of which $.5 billion expires in years 2023 through
2035 and $.2 billion has no expiration date). 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, 2018, 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 has been amended and extended by the CNO Board
of Directors on three occasions. The Amended Section 382 Rights
Agreement provides a strong economic disincentive for any one
shareholder knowingly, and without the approval of the Board
of Directors, to become an owner of more than 4.99% of the
Company’s outstanding common stock (or any other interest in
CNO that would be treated as “stock” under applicable Section
382 regulations) and for any owner of more than 4.99% of
CNO’s outstanding common stock as of the date of the Amended
Section 382 Rights Agreement to increase their ownership stake
by more than 1 percent of the shares of CNO’s common stock
then outstanding, and thus limits the uncertainty with regard
to the potential for future ownership changes. However, despite
the strong economic disincentives of the Amended Section
382 Rights Agreement, shareholders may elect to increase their
ownership, including beyond the limits set by the Amended
Section 382 Rights Agreement, and thus adversely affect CNO’s
ownership shift calculations. To further protect against the
possibility of triggering an ownership change under Section 382,
CNO’s shareholders approved in 2010 an amendment to CNO’s

PART I
ITEM 1A Risk Factors

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
2013 and in 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 (2.51 percent at December 31,
2018), 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, 2018, we had net deferred tax assets of
$604.7 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,
2018 reflects the current Federal corporate income tax rate of
21 percent. A reduction in the corporate income tax rate would
cause a writedown of our net deferred tax assets, which may have
a material adverse effect on our results of operations and financial
condition.

CNO FINANCIAL GROUP, INC. - Form 10-KPART I
ITEM 1A Risk Factors

From time to time we may become subject to tax
audits, tax litigation or similar proceedings, and as
a result we may owe additional taxes, interest and
penalties, or our NOLs may be reduced, in amounts
that may be material.

In determining our provisions for income taxes and our
accounting for tax-related matters in general, we are required
to exercise judgment. We regularly make estimates where the
ultimate tax determination is uncertain. The final determination
of any tax audit, appeal of the decision of a taxing authority, tax
litigation or similar proceedings may be materially different from
that reflected in our financial statements. The assessment of
additional taxes, interest and penalties could be materially adverse
to our current and future results of operations and financial
condition. See the note to the consolidated financial statements
entitled “Income Taxes” for further information.

Our results of operations may be negatively impacted if
our initiatives to restructure our insurance operations
or our efforts to become more efficient are unsuccessful.

We have implemented or are in the process of implementing
several initiatives to improve operating results, including: (i)
focusing sales efforts on higher margin products; (ii) reducing
operating expenses by eliminating or reducing marketing costs
of certain products; (iii) streamlining administrative procedures
and reducing personnel; (iv) using third party service providers to
improve service and reduce expenses; and (v) increasing retention
rates on our more profitable blocks of inforce business. Many
of our initiatives address issues resulting from the substantial
number of acquisitions of our Predecessor. Between 1982 and
1997, our Predecessor completed 19 transactions involving the
acquisitions of 44 separate insurance companies. These prior
acquisitions have contributed to the complexity and cost of
our current administrative operating environment and make it
challenging, in some instances, to operate our business within
the expense levels assumed in the pricing of our products. If we
are unsuccessful in our efforts to become more efficient, our
future earnings will be adversely affected.

In the event one or more of our third party service providers to
whom we outsource certain of our functions becomes unable
to continue to provide services or experiences a failure in their
systems, our business could be adversely impacted.

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 financial strength ratings they receive from nationally
recognized rating organizations. Agents, insurance brokers and

CNO FINANCIAL GROUP, INC. - Form 10-K

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, Moody’s, Fitch and S&P are “A-”,
“A3”, “BBB+” and “BBB+”, respectively. 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. Moody’s has twenty-one possible ratings.
There are six ratings above the “A3” rating of our primary
insurance subsidiaries and fourteen ratings that are below that
rating. 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. 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.

If our ratings are downgraded, we may experience declining sales
of certain of our insurance products, defections of our independent
and career sales force, and increased policies being redeemed or
allowed to lapse. These events would adversely affect our financial
results, which could then lead to ratings downgrades.

Competition from companies that have greater market
share, higher ratings, greater financial resources and
stronger brand recognition, may impair our ability
to retain existing customers and sales representatives,
attract new customers and sales representatives and
maintain or improve our financial results.

The supplemental health insurance, annuity and individual life
insurance markets are highly competitive. Competitors include
other life and accident and health insurers, commercial banks,
thrifts, mutual funds and broker-dealers.

Our principal competitors vary by product line. Our main
competitors for agent-sold long-term care insurance products
include Northwestern Mutual, Mutual of Omaha and New York
Life. Our main competitors for agent-sold Medicare supplement
insurance products include Blue Cross and Blue Shield Plans,
United HealthCare and Mutual of Omaha. Our main competitors
for life insurance sold through direct marketing channels include
Gerber Life, Mutual of Omaha, New York Life and subsidiaries of
Torchmark Corporation. 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 Corporation.

long-term care insurance had new annualized premiums with a
combined market share of approximately 79 percent during the
period. In addition, while, based on a 2017 Medicare Supplement
Loss Ratios report, we ranked sixth in direct premiums earned
for Medicare supplement insurance in 2017 with a market share
of 2.7 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 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

PART I
ITEM 1A Risk Factors

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.

insurance

During recent years, the health
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 has decreased sales of the traditional
Medicare supplement products we sell. Some current proposals
contain government provided long-term care insurance which
could affect the sales of our long-term care products.

Proposals currently pending in Congress and some state
legislatures may also affect our financial results. These proposals
include the implementation of minimum consumer protection
standards in all long-term care policies, including: guaranteed
premium rates; protection against inflation; limitations on
waiting periods for pre-existing conditions; setting standards
for sales practices for long-term care insurance; and guaranteed
consumer access to information about insurers, including
information regarding lapse and replacement rates for policies
and the percentage of claims denied. Enactment of any proposal
that would limit the amount we can charge for our products, such
as guaranteed premium rates, or that would increase the benefits
we must pay, such as limitations on waiting periods, or that would
otherwise increase the costs of our business, could adversely affect
our financial results.

On July 21, 2010, the Dodd-Frank Act was enacted and signed
into law. The Dodd-Frank Act made extensive changes to the laws
regulating financial services firms and requires various federal
agencies to adopt a broad range of new rules and regulations.
Among other provisions, the Dodd-Frank Act provides for a

CNO FINANCIAL GROUP, INC. - Form 10-KPART I
ITEM 1A Risk Factors

new framework of regulation of over-the-counter derivatives
markets. This requires 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.

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.

The Dodd-Frank Act also establishes a Financial Stability
Oversight Council, which is authorized to subject nonbank
financial companies deemed systemically significant to stricter
prudential standards and other requirements and to subject such a
company to a special orderly liquidation process outside the federal
bankruptcy code, administered by the Federal Deposit Insurance
Corporation (although insurance company subsidiaries would
remain subject to liquidation and rehabilitation proceedings under
state law). In addition, the Dodd-Frank Act establishes a Federal
Insurance Office within the Department of the Treasury. While
not having a general supervisory or regulatory authority over the
business of insurance, the director of this office will perform
various functions with respect to insurance, including serving as a
non-voting member of the Financial Stability Oversight Council
and making recommendations to the Council regarding insurers
to be designated for more stringent regulation. The director is also
required to conduct a study on how to modernize and improve
the system of insurance regulation in the United States, including
by increased national uniformity through either a federal charter
or effective action by the states.

Federal agencies have been given significant discretion in drafting
the rules and regulations that will implement the Dodd-Frank
Act. Consequently, many of the details and much of the impact
of the Dodd-Frank Act may not be known for some time. In
addition, this legislation mandated multiple studies and reports
for Congress, which could result in additional legislative or
regulatory action.

We cannot predict the requirements of the regulations ultimately
adopted under the Dodd-Frank Act, the effect such regulations
will have on financial markets generally, or on our businesses
specifically, the additional costs associated with compliance with
such regulations, or any changes to our operations that may be
necessary to comply with the Dodd-Frank Act, any of which
could have a material adverse effect 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

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.

We may not be able to protect our intellectual property
and may be subject to infringement claims.

We rely on a combination of contractual rights and copyright,
trademark and trade secret laws to establish and protect our
intellectual property. Although we use a broad range of measures
to protect our intellectual property rights, third parties may
infringe or misappropriate our intellectual property. We may
have to litigate to enforce and protect our copyrights, trademarks,
trade secrets and know-how or to determine their scope, validity
or enforceability, which represents a diversion of resources that
may be significant in amount and may not prove successful. The
loss of intellectual property protection or the inability to secure
or enforce the protection of our intellectual property assets could
adversely impact our business and its ability to compete effectively.

We also may be subject to costly litigation in the event that
another party alleges our operations or activities infringe upon
that party’s intellectual property rights. We may also be subject
to claims by third parties for breach of copyright, trademark,
trade secret or license usage rights. Any such claims and any
resulting litigation could result in significant expense and liability
for damages or we could be enjoined from providing certain
products or services to our customers or utilizing and benefiting
from certain methods, processes, copyrights, trademarks, trade
secrets or licenses, or alternatively, we could be required to enter
into costly licensing arrangements with third parties, all of which
could have a material adverse effect on our business, results of
operations and financial condition.

CNO FINANCIAL GROUP, INC. - Form 10-K

ITEM 1B. Unresolved Staff Comments.

None.

PART I
ITEM 3 Legal Proceedings

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 450,000 square feet of space.

Our Bankers Life segment is primarily administered from
downtown Chicago, Illinois. We currently lease approximately
135,000 square feet of office space under an agreement which
expires in 2023. We also lease 269 sales offices in various states

totaling approximately 885,000 square feet. These leases generally
are short-term in length, with remaining lease terms expiring
between 2019 and 2025.

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-KPART 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, 54

2012

Gary C. Bhojwani, 51

2016

Yvonne K. Franzese, 60

2017

Scott L. Goldberg, 48

2004

Michael D. Heard, 53

2013

Erik M. Helding, 46

2004

Eric R. Johnson, 58

1997

John R. Kline, 61

Gerardo Monroy, 51

Joel Schwartz, 55

1990

2001

2014

Matthew J. Zimpfer, 51

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 January 2018, chief executive officer. From April 2016 to December 2017, 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 November 2017, executive vice president and chief human resources officer of CNO.
From 2016 until joining CNO, chief human capital officer of TCF Bank. From 2007 to 2016,
Ms. Franzese held various human resource positions at Allianz, including the chief human
resources role for Allianz of North America.
Since September 2013, president of Bankers Life. Mr. Goldberg has held various other positions
since joining CNO in 2004.
Since March 2017, president of Washington National. From 2013 to March 2017, senior vice
president of enterprise operations for 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, executive vice president and chief investment officer of CNO and president
and chief executive officer of 40|86 Advisors, CNO’s wholly-owned registered investment advisor.
Since January 2018, executive in charge of corporate development activities. 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 March 2017, chief marketing officer of CNO. From August 2012 to March 2017, president
of Colonial Penn. Mr. Monroy has held various other positions since joining CNO in 2001.
Since March 2017, president of Colonial Penn. From 2014 to March 2017, Mr. Schwartz held
various positions with Colonial Penn. Prior to joining CNO, he spent nine years with Lincoln
Financial Group.
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

Part II

ITEM 5. Market for Registrant’s Common Equity,

Related Stockholder Matters and Issuer
Purchases of Equity Securities.

Market Information And Dividends

The Company’s common stock is listed and traded on the
New York Stock Exchange under the symbol “CNO”.

As of February 5, 2019, there were approximately 22,000 holders
of the outstanding shares of common stock, including individual
participants in securities position listings.

We commenced the payment of a dividend on our common stock
in the second quarter of 2012. The dividend on our common stock
is declared each quarter by our Board of Directors. In determining
dividends, our Board of Directors takes into consideration our
financial condition, including current and expected earnings and
projected cash flows.

Performance Graph

The performance graph below compares CNO’s cumulative
total shareholder return on its common stock for the period
from December 31, 2013 through December 31, 2018 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, 2013 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-KCOMPARISON 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

$180

$160

$140

$120

$100

$80

$60

$40

$20

$-
12/13

12/14

12/15

12/16

12/17

12/18

CNO Financial Group, Inc.

S&P 500

S&P Life & Health Insurance

S&P MidCap 400

$100 invested on 12/31/13 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

12/13
100.00 $
100.00
100.00
100.00

12/14
100.58 $
114.87
103.48
110.93

12/15
112.44 $
116.36
96.48
108.49

12/16
113.33 $
129.05
119.26
129.65

12/17
148.49
157.22
138.85
150.71

12/18
91.28
150.33
110.01
134.01

Issuer Purchases of Equity Securities

Period (in 2018)
October 1 through October 31
November 1 through November 30
December 1 through December 31

tOtaL

total number
of shares
(or units)

— $

20,674
2,470,385
2,491,059

average price
paid per share
(or unit)
—
17.95
16.25
16.26

total number of shares
(or units) purchased as
part of publicly announced
plans or programs
—
18,791
2,468,810
2,487,601

Maximum number (or approximate dollar
value) of shares (or units) that may yet be
purchased under the plans or programs(a)
(dollars in millions)
325.1
324.7
284.6
284.6

(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, November 2015 and May 2017, the Company’s Board of Directors approved, in aggregate, an additional $1,900.0 million to repurchase the
Company’s outstanding securities.

CNO FINANCIAL GROUP, INC. - Form 10-K

PART IIITEM 5 Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity SecuritiesEquity Compensation Plan Information

The following table summarizes information, as of December 31, 2018, relating to our common stock that may be issued under the CNO
Financial Group, Inc. Amended and Restated Long-Term Incentive Plan.

Part II
ITEM 6 Selected Consolidated Financial Data

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
and rights
6,539,168 $

—

6,539,168 $

Weighted-average
exercise price of
outstanding options
and rights
17.77
—
17.77

Number of securities remaining
available for future issuance under
equity compensation plans (excluding
securities reflected in first column)
5,296,134
—
5,296,134

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 (loss) before income taxes
Income tax expense (benefit)
Net income (loss)
PER SHARE DATA
Net income (loss), basic
Net income (loss), 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,

2018

2017

2016

2015

2014

2,593.1 $
1,306.2
352.1
4,313.5
149.8
4,578.3
(264.8)
50.2
(315.0)

(1.90) $
(1.90)
.39
20.78
165.5
165.5
162.2

22,995.4 $
31,439.8
916.8
28,068.9
3,370.9

1,652.8 $
233.3
1,886.1

2,647.3
1,551.3
50.3
4,297.2
123.7
3,816.7
480.5
304.9
175.6

1.03
1.02
.35
29.05
170.0
172.1
166.9

27,854.1
33,110.3
914.6
28,262.8
4,847.5

1,904.4
246.8
2,151.2

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

1,654.4
203.1
1,857.5

(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-KITEM 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, 2018, 2017 and 2016 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:

• changes in or sustained low interest rates causing reductions in
investment income, the margins of our fixed annuity and life
insurance businesses, and sales of, and demand for, our products;

• expectations of lower future investment earnings may cause us
to accelerate amortization, write down the balance of insurance
acquisition costs or establish additional liabilities for insurance
products;

• general economic, market and political conditions and
uncertainties, including the performance and fluctuations of the
financial markets which may affect the value of our investments
as well as our ability to raise capital or refinance existing
indebtedness and the cost of doing so;

• the ultimate outcome of lawsuits filed against us and other legal

and regulatory proceedings to which we are subject;

• our ability to make anticipated changes to certain non-

guaranteed elements of our life insurance products;

• our ability to obtain adequate and timely rate increases on our

health products, including our long-term care business;

• the receipt of any required regulatory approvals for dividend
and surplus debenture interest payments from our insurance
subsidiaries;

• mortality, morbidity, the increased cost and usage of health
care services, persistency, the adequacy of our previous reserve
estimates, changes in the health care market and other factors
which may affect the profitability of our insurance products;

• changes in our assumptions related to deferred acquisition costs

or the present value of future profits;

• the recoverability of our deferred tax assets and the effect of
potential ownership changes and tax rate changes on their value;

• our assumption that the positions we take on our tax return

filings will not be successfully challenged by the IRS;

• changes in accounting principles and the interpretation thereof;

• our ability to continue to satisfy the financial ratio and balance

requirements and other covenants of our debt agreements;

• our ability to achieve anticipated expense reductions and levels
of operational efficiencies including improvements in claims
adjudication and continued automation and rationalization of
operating systems;

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

• our ability to identify products and markets in which we can
compete effectively against competitors with greater market
share, higher ratings, greater financial resources and stronger
brand recognition;

• our ability to generate sufficient liquidity to meet our debt

service obligations and other cash needs;

• changes in capital deployment opportunities;

• our ability to maintain effective controls over financial reporting;

• our ability to continue to recruit and retain productive agents

and distribution partners;

CNO FINANCIAL GROUP, INC. - Form 10-K

PART IIITEM 7 Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations• customer response to new products, distribution channels and

marketing initiatives;

• our ability to achieve additional upgrades of the financial strength
ratings of CNO and our insurance company subsidiaries as well
as the impact of our ratings on our business, our ability to access
capital, and the cost of capital;

• regulatory changes or actions, including: those relating to
regulation of the financial affairs of our insurance companies,
such as the calculation of risk-based capital and minimum
capital requirements, and payment of dividends and surplus
debenture interest to us; regulation of the sale, underwriting and
pricing of products; and health care regulation affecting health
insurance products;

• changes in the Federal income tax laws and regulations which
may affect or eliminate the relative tax advantages of some of
our products or affect the value of our deferred tax assets;

• availability and effectiveness of reinsurance arrangements, as well
as the impact of any defaults or failure of reinsurers to perform;

• the performance of third party service providers and potential

difficulties arising from outsourcing arrangements;

• the growth rate of sales, collected premiums, annuity deposits

and assets;

Overview

We are a holding company for a group of insurance companies
operating throughout the United States that develop, market and
administer health insurance, annuity, individual life insurance
and other insurance products. We focus on serving the senior
and middle-income markets, which we believe are attractive,
underserved, high growth markets. We sell our products through
three distribution channels: career agents, independent producers
(some of whom sell one or more of our product lines exclusively)
and direct marketing.

We measure segment performance by excluding the loss related
to reinsurance transactions, 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, income taxes and other non-
operating items consisting primarily of 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.

• interruption in telecommunication, information technology or
other operational systems or failure to maintain the security,
confidentiality or privacy of sensitive data on such systems;

• events of terrorism, cyber attacks, natural disasters or other
catastrophic events, including losses from a disease pandemic;

• ineffectiveness of risk management policies and procedures in

identifying, monitoring and managing risks; and

• the risk factors or uncertainties listed from time to time in our

filings with the SEC.

Other factors and assumptions not identified above are also
relevant to the forward-looking statements, and if they prove
incorrect, could also cause actual results to differ materially from
those projected.

All written or oral forward-looking statements attributable to us
are expressly qualified in their entirety by the foregoing cautionary
statement. Our forward-looking statements speak only as of the
date made. We assume no obligation to update or to publicly
announce the results of any revisions to any of the forward-looking
statements to reflect actual results, future events or developments,
changes in assumptions or changes in other factors affecting the
forward-looking statements.

The reporting of RBC measures is not intended for the purpose of
ranking any insurance company or for use in connection with any
marketing, advertising or promotional activities.

related to the agent deferred compensation plan and other non-
operating items consisting primarily of 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.

On September 27, 2018, the Company completed a long-term
care reinsurance transaction pursuant to which its wholly-owned
subsidiary, Bankers Life, entered into an agreement to cede all of
its legacy (prior to 2003) comprehensive and nursing home long-
term care policies (with statutory reserves of $2.7 billion) through
100% indemnity coinsurance. In anticipation of the reinsurance
agreement, the Company reorganized its business segments to
move the block to be ceded from the “Bankers Life segment”
to the “Long-term care in run-off segment” in the third quarter
of 2018. All prior period segment disclosures have been revised
to conform to management’s current view of the Company’s
operating segments.

PART IIITEM 7 Management’s Discussion and Analysis of Consolidated Financial Condition and Results of OperationsCNO FINANCIAL GROUP, INC. - Form 10-Kagencies including worksite marketing. The products being
marketed are underwritten by Washington National. This
segment’s business also includes certain closed blocks of
annuities and Medicare supplement policies which are no
longer being actively marketed by this segment and were
primarily issued or acquired by Washington National.

• Colonial Penn, which markets primarily graded benefit and
simplified issue life insurance directly to customers in the
senior middle-income market through television advertising,
direct mail, the internet and telemarketing. The Colonial Penn
segment includes primarily the business of Colonial Penn.

• Long-term care in run-off consists of: (i) the long-term care
business that was recaptured due to the termination of certain
reinsurance agreements effective September 30, 2016 (such
business is not actively marketed and was issued or acquired
by Washington National and BCLIC); and (ii) certain legacy
(prior to 2003) comprehensive and nursing home long-term care
policies which were ceded in September 2018 (such business is
not actively marketed and was issued by Bankers Life).

The Company’s insurance segments are described below:

supplement

interest-sensitive

• Bankers Life, which underwrites, markets and distributes
Medicare
life
insurance,
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.

• Washington National, which underwrites, 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

CNO FINANCIAL GROUP, INC. - Form 10-K

PART IIITEM 7 Management’s Discussion and Analysis of Consolidated Financial Condition and Results of OperationsThe following summarizes our earnings for the three years ending December 31, 2018 (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

Net realized investment gains from sales and impairments (net of related amortization)
Net change in market value of investments recognized in earnings
Fair value changes in embedded derivative liabilities (net of related amortization)
Fair value changes and amendment related to agent deferred compensation plan
Loss related to reinsurance transactions
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 (LOSS)

Per diluted share:

Net operating income
Net realized investment gains from sales and impairments (net of related amortization and taxes)
Net change in market value of investments recognized in earnings (net of 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 related to reinsurance transactions (net of taxes)
Valuation allowance for deferred tax assets and other tax items
Other

NEt INCOME (LOSS)

2018

2017

2016

340.6
121.9
14.8
22.9
500.2
(71.0)
429.2
(48.0)
381.2
78.1
303.1
37.9
(48.8)
55.5
11.9
(704.2)
1.7
(646.0)

(135.7)
107.8
(618.1)
(315.0)

1.83
.18
(.23)
.27
.06
(4.00)
(.02)
.01
(1.90)

367.5
98.3
22.6
53.1
541.5
(40.3)
501.2
(46.5)
454.7
153.8
300.9
34.3
15.0
(2.5)
(12.2)
—
(8.8)
25.8

9.0
142.1
(125.3)
175.6

1.75
.13
.06
(.01)
(.05)
—
(.83)
(.03)
1.02

375.6
102.9
1.7
18.4
498.6
(42.5)
456.1
(45.8)
410.3
147.8
262.5
9.0
(1.4)
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

(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) loss related to reinsurance transaction, including impact of taxes; (ii) net realized investment gains or losses from sales and impairments, net of related
amortization and taxes; (iii) net change in market value of investments recognized in earnings, net of 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) changes in the valuation allowance for deferred tax assets and other tax items; and (vii) other non-operating items
consisting primarily of earnings attributable to VIEs. Adjusted 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 apparent. However, Adjusted 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, Adjusted 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. Adjusted 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 Adjusted EBIT and net operating income are not necessarily
comparable to other similarly titled measures used by other companies due to different methods of calculation.

PART IIITEM 7 Management’s Discussion and Analysis of Consolidated Financial Condition and Results of OperationsCNO FINANCIAL GROUP, INC. - Form 10-K
At CNO, our mission is to enrich lives by providing financial
solutions that help protect the health and retirement needs of
middle-income Americans, while building enduring value for all
our stakeholders. We remain committed to our strategic priorities
to grow the franchise, launch new products and services, expand to
the right to reach slightly younger, wealthier consumers within the
middle market, and deploy excess capital to its highest and best use.

Our middle-market focus and diverse distribution is a key strength
and opportunity for CNO. We have career agents at Bankers Life,
wholly-owned and independent distributors at Washington National
and a direct-to-consumer business at Colonial Penn to reach
consumers according to their preferences. Our product portfolio
mix is well-aligned to the retirement, healthcare, supplemental
health and income accumulation needs of working-age consumers
as well as those in and near retirement. As Americans live longer into
their retirement years, consumers need holistic retirement income
planning, which includes our insurance and annuity solutions, and
the investments offered by our broker-dealer and growing force of
registered investment advisors. Specifically, we are focused on the
following priorities:

Growth

•

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

• Respond effectively to evolving customer preferences
•

Expand and enhance elements of our broker-dealer and
registered investment advisor program

Critical Accounting Policies

The preparation of financial statements in accordance with GAAP
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses
during the reporting period. Management has made estimates in
the past that we believed to be appropriate but were subsequently
revised to reflect actual experience. If our future experience differs
materially from these estimates and assumptions, our results of
operations and financial condition could be materially affected.

We base our estimates on historical experience and other 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, 2018, the carrying value of our investment
portfolio was $23.0 billion.

Interest income on fixed maturity securities is recognized when
earned using a constant effective yield method giving effect to
amortization of premiums and accretion of discounts. Prepayment
fees are recognized when earned. Dividends on equity securities
are recognized when declared.

CNO FINANCIAL GROUP, INC. - Form 10-K

•

Continue our “expand to the right” strategy to reach
slightly younger and wealthier consumers within the
middle-income market
Increase the speed-to-market for new products that are a
good fit for our customers
Make strategic, measured changes to our business practices
to improve our competitive advantage
Continue to invest in technology to support agent
productivity and relationships with our customers

Increase profitability and return on equity

•

•
•

Maintain our strong capital position and favorable financial
metrics
Work to increase our return on equity
Maintain pricing discipline

Effectively manage risk and deploy capital

•
•
•

Maintain an active enterprise risk management process
Utilize excess cash flow to maximize long-term returns
Maintain a competitive dividend payout ratio

Continue to invest in talent

•

Attract, retain and develop the best talent to help us drive
sustainable growth
Recruit, develop and retain our agent force

Our evaluation of investments for impairment requires significant
judgments, including: (i) the identification of potentially impaired
securities; (ii) the determination of their estimated fair value; and
(iii) the assessment of whether any decline in estimated fair value
is other than temporary.

We regularly evaluate all of our investments with unrealized losses
for possible impairment. Our assessment of whether unrealized
losses are “other than temporary” requires significant judgment.
Factors considered include: (i) the extent to which fair value is
less than the cost basis; (ii) the length of time that the fair value
has been less than cost; (iii) whether the unrealized loss is event
driven, credit-driven or a result of changes in market interest
rates or risk premium; (iv) the near-term prospects for specific
events, developments or circumstances likely to affect the value
of the investment; (v) the investment’s rating and whether the
investment is investment-grade and/or has been downgraded since
its purchase; (vi) whether the issuer is current on all payments
in accordance with the contractual terms of the investment and
is expected to meet all of its obligations under the terms of the
investment; (vii) whether we intend to sell the investment or it is
more likely than not that circumstances will require us to sell the
investment before recovery occurs; (viii) the underlying current and
prospective asset and enterprise values of the issuer and the extent
to which the recoverability of the carrying value of our investment
may be affected by changes in such values; (ix) projections of,
and unfavorable changes in, cash flows on structured securities
including mortgage-backed and asset-backed securities; (x) our
best estimate of the value of any collateral; and (xi) other objective
and subjective factors.

PART IIITEM 7 Management’s Discussion and Analysis of Consolidated Financial Condition and Results of OperationsFuture 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.

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
overcollateralization, excess spread, subordination and guarantees.
For corporate bonds, cash flow estimates are derived from scenario-
based outcomes of expected corporate restructurings or the
disposition of assets using bond-specific facts and circumstances.
The previous amortized cost basis less the impairment recognized
in net income becomes the security’s new cost basis. We accrete the
new cost basis to the estimated future cash flows over the expected
remaining life of the security, except when the security is in default
or considered nonperforming.

The remaining noncredit impairment, which is recorded in
accumulated other comprehensive income, is the difference
between the security’s estimated fair value and our best estimate
of future cash flows discounted at the effective interest rate prior
to impairment. The remaining noncredit impairment typically
represents changes in the market interest rates, current market
liquidity and risk premiums. As of December 31, 2018, other-
than-temporary impairments included in accumulated other
comprehensive income totaled $.5 million (before taxes and
related amortization).

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.

• 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.

• 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

• 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

PART IIITEM 7 Management’s Discussion and Analysis of Consolidated Financial Condition and Results of OperationsCNO FINANCIAL GROUP, INC. - Form 10-Kinclude 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 2018, we sold $1,295.8 million of fixed
maturity investments which resulted in gross investment losses
(before income taxes) of $65.8 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, the effect of changes in market interest rates shall have
largely offsetting effects on the value of the related assets and
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, 2018 as follows: 10
percent in 2019, 9 percent in 2020, 8 percent in 2021, 8 percent in
2022 and 7 percent in 2023.

Deferred acquisition costs represent incremental direct costs related
to the successful acquisition of new or renewal insurance contracts.
For interest-sensitive life or annuity products, we amortize these
costs in relation to the estimated gross profits using the interest
rate credited to the underlying policies. For other products, we
generally amortize these costs in relation to future anticipated
premium revenue using the projected investment earnings rate.

Insurance acquisition costs are amortized to expense over the
lives of the underlying policies in relation to future anticipated
premiums or gross profits. The insurance acquisition costs for
policies other than interest-sensitive life and annuity products are
amortized with interest (using the projected investment earnings
rate) over the estimated premium-paying period of the policies, in
a manner which recognizes amortization expense in proportion
to each year’s premium income. The insurance acquisition costs
for interest-sensitive life and annuity products are amortized with
interest (using the interest rate credited to the underlying policy)
in proportion to estimated gross profits. The interest, mortality,
morbidity and persistency assumptions used to amortize insurance
acquisition costs are consistent with those assumptions used to
estimate liabilities for insurance products. For interest-sensitive
life and annuity products, these assumptions are reviewed on a
regular basis. When actual profits or our current best estimates
of future profits are different from previous estimates, we adjust
cumulative amortization of insurance acquisition costs to maintain
amortization expense as a constant percentage of gross profits over
the entire life of the policies.

When we realize a gain or loss on investments backing our interest-
sensitive life or annuity products, we adjust the amortization of
insurance acquisition costs to reflect the change in estimated
gross profits from the products due to the gain or loss realized and
the effect on future investment yields. We increased (decreased)
amortization expense for such changes by $(.4) million, $1.0 million
and $.7 million during the years ended December 31, 2018, 2017
and 2016, 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

CNO FINANCIAL GROUP, INC. - Form 10-K

PART IIITEM 7 Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operationsrecognition 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 $45.3 million at December 31, 2018 (including
$2.5 million for premium deficiencies that would exist on certain
blocks of business 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, 2017 was a decrease of $682.4 million
(including $514.5 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, 2018, the balance of insurance acquisition costs
was $1.7 billion. The recoverability of this amount is dependent
on the future profitability of the related business. Each year,
we evaluate the recoverability of the unamortized balance of
insurance acquisition costs. These evaluations are performed to
determine whether estimates of the present value of future cash
flows, in combination with the related liability for insurance
products, will support the unamortized balance. These future cash
flows are based on our best estimate of future premium income,
less benefits and expenses. The present value of these cash flows,
plus the related balance of liabilities for insurance products, is then
compared with the unamortized balance of insurance acquisition

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
5% decrease to assumed mortality
No increase in new money rate assumption after one year

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. The long-term care
business in the Long-term care in run-off segment is not expected
to generate significant future profits. While we expect the long-
term care business in the Bankers Life segment to generate future
profits, the margins are relatively thin. Accordingly, both of these
long-term care blocks 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)

(31)
31
(12)
12
(10)
10
(13)
15

(81)
98
(9)
9
(42)
42

(24)
(5)
(1)

(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.

PART IIITEM 7 Management’s Discussion and Analysis of Consolidated Financial Condition and Results of OperationsCNO FINANCIAL GROUP, INC. - Form 10-KThe following summarizes the persistency of our major blocks of insurance business summarized by segment and line of business:

Years ended December 31,

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)

Long-term care in run-off(1)

2018

85.1%
90.1%
90.9%
83.0%
88.5%

84.9%
89.3%
91.8%

83.1%
90.7%

2017

2016

85.0%
89.9%
91.2%
85.2%
87.5%

85.3%
89.2%
90.6%

83.4%
91.2%

85.9%
89.6%
91.5%
85.8%
87.1%

85.8%
89.2%
91.2%

83.0%
90.8%

(1) Based on number of inforce policies.
(2) Based on the percentage of the inforce block persisting.

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.

(Dollars in millions)
Amounts classified as future policy benefits:

Active life reserves
Reserves for the present value of amounts not yet due on claims
Future loss reserves
Premium deficiency reserves assuming net unrealized gains had been realized

Amounts classified as liability for policy and contract claims:

Liability for due and unpaid claims, claims in the course of settlement and incurred but not reported claims

Total

Reinsurance receivables

LONG-tErM CarE rESErVES, NEt OF rEINSUraNCE rECEIVaBLES

2018

2017

3,873.3
1,404.6
—
—

211.7
5,489.6
3,030.3
2,459.3

3,846.0
1,366.9
190.0
266.1

200.1
5,869.1
221.5
5,647.6

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.

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 historical

At December 31, 2017, we had established a future loss reserve of
$190.0 million related to our long-term care business as the aggregate
liability was not deficient, but our projections of estimated future
profits (losses) indicated that profits would be recognized in earlier
periods, followed by losses in later periods. Such reserves were
calculated based on our estimate of the amount necessary to offset
the losses in future periods and were established during the period
the block was profitable. We estimated the future losses based
on our current best estimates of morbidity, persistency, premium

CNO FINANCIAL GROUP, INC. - Form 10-K

PART IIITEM 7 Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operationsrates, maintenance expense and investment yields, which estimates
were generally updated annually. As a result of the reinsurance
transaction in September 2018, our projections of estimated future
profits on the retained long-term care business indicated that there
were no aggregate losses in future periods. Accordingly, the future
loss reserve on this block of business was no longer required and the
reserve was released and reflected as a component of the loss on the
reinsurance transaction.

At December 31, 2017, we increased our long-term care reserves by
$266.1 million to reflect the deficiency reserves 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. At December 31, 2018, such an
increase is no longer required given the change in projected future
profits (losses) reflecting the reinsurance transaction completed
in September 2018 and the unrealized gains related to our fixed
maturity securities, available for sale, at December 31, 2018.

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 2017 claim reserve deficiency
for long-term care claim reserves in our Bankers Life segment, as
measured at December 31, 2018, was approximately $6.4 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 2018
related to our long-term care business would have resulted in an
immediate decrease in our earnings of approximately $13 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
and incur distribution expenses paid to our agents who sell such
products. As further discussed in the note to the consolidated
financial statements entitled “Summary of Significant Accounting
Policies - Recently Issued Accounting Standards - Adopted
Accounting Standards”, we adopted the new revenue recognition
guidance which was effective January 1, 2018. The adoption of
this new guidance had no impact on the fee revenue we recognized
in any calendar year, but did impact the amounts we recognized
during each quarterly period within a calendar year.

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

2018

30.3
2.9
33.2
13.3
19.9

2017

24.6 $
3.3
27.9
10.9
17.0 $

2016

23.2
3.1
26.3
9.3
17.0

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 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 valuation allowance for deferred tax assets is needed. This
assessment requires significant judgment and considers, among
other matters, the nature, frequency and severity of current and
cumulative losses, forecasts of future profitability, the duration of
carryforward periods, our experience with operating loss and tax
credit carryforwards expiring unused, and tax planning strategies.
We evaluate the need to establish a valuation allowance for our
deferred income tax assets on an ongoing basis. The realization
of our deferred tax assets depends upon generating sufficient
future taxable income of the appropriate type during the periods
in which our temporary differences become deductible and before
our NOLs expire.

PART IIITEM 7 Management’s Discussion and Analysis of Consolidated Financial Condition and Results of OperationsCNO FINANCIAL GROUP, INC. - Form 10-Kat December 31, 2018 ($189.9 million of which relates to our net
federal operating loss carryforwards and $3.8 million relates to
state operating deferred tax assets). As a result of the completion of
the long-term care reinsurance transaction in the third quarter of
2018, we increased the valuation allowance for deferred tax assets
by $104.8 million. The increase in life company NOLs generated
by the tax loss on the reinsurance transaction is expected to impact
our ability to utilize non-life NOLs in the future. Accordingly,
we increased the valuation allowance for deferred taxes by $104.8
million. 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.

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.

At December 31, 2018, 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 approximately 3.5 percent for the next five years, and
level taxable income thereafter. In the projections used for our
analysis, our adjusted average taxable income of approximately
$465 million consisted of $85 million of non-life taxable income
and $380 million of life taxable income.

Based on our assessment, we recognized a decrease to the
allowance for deferred tax assets of $104.6 million in 2018. 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, 2015

Increase in 2016

Balance, December 31, 2016

Decrease in 2017
Cumulative effect of accounting change

Balance, December 31, 2017

Increase in 2018

BaLaNCE, DECEMBEr 31, 2018

213.5
26.7(a)
240.2
(166.8)(b)
15.7(c)
89.1
104.6(d)
193.7

(c)

The 2016 increase to the deferred tax valuation allowance primarily resulted from additional non-life NOLs due to the settlement with the IRS.

(a)
(b) The 2017 decrease to the deferred tax valuation allowance includes: (i) $138.1 million related to a reduction in the federal corporate income tax rate and other changes
from the Tax Reform Act; (ii) $13.4 million of reductions to the deferred tax valuation allowance primarily related to the recognition of capital gains; and (iii) $15.3
million of reductions in the deferred tax valuation allowance reflecting higher current year taxable income than previously reflected in our deferred tax valuation model.
Effective January 1, 2017, the Company adopted 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. The Company had NOL carryforwards of $15.7 million related to deductions for stock options and restricted stock on the date
of adoption. However, a corresponding valuation allowance of $15.7 million was recognized as a result of adopting this guidance. Therefore, there was no impact to our
consolidated financial statements related to the initial adoption of this provision of the new guidance.

(d) The 2018 increase to the deferred tax valuation allowance includes: (i) an increase of $104.8 million due to the life NOLs generated by the tax loss on the long-term care

reinsurance transaction; and (ii) other changes netting to $(.2) million.

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). This
limitation is the primary reason a valuation allowance for NOLs
is required. 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).

Section 382 of the Code imposes limitations on a corporation’s
ability to use its NOLs when the company undergoes a 50 percent
ownership change over a three-year period. 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

CNO FINANCIAL GROUP, INC. - Form 10-K

PART IIITEM 7 Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operationsexempt rate (2.51 percent at December 31, 2018), 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, 2018, we were below the 50 percent ownership
change level that would trigger further impairment of our ability
to utilize our NOLs.

Pursuant to the Tax Reform Act, NOLs generated subsequent to 2017 do not have an expiration date. We have $3.3 billion of federal
NOLs as of December 31, 2018, as summarized below (dollars in millions):

Year of expiration
2023
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035

Total federal non-life NOLs

Post 2017 life NOLs with no expiration

tOtaL FEDEraL NOLs

Net operating loss
carryforwards
1,751.9
85.2
149.9
10.8
80.3
213.2
.3
.2
44.4
.6
.9
.8
2,338.5
923.9
3,262.4

The loss on the reinsurance transaction that was completed in
September 2018 resulted in a life NOL of $930.7 million. The life
NOL is expected to be used to offset 80 percent of our future life
insurance company taxable income due to limitations prescribed
in the Tax Reform Act. Our life NOL has no expiration date and
we expect it to be fully utilized over the next three to four years,
depending on the level of life taxable income during such period.
Our non-life NOLs can be used to offset 35 percent of remaining
life insurance company taxable income after application of the life
NOLs, until all non-life NOLs are utilized or expire.

The Company’s various state income tax returns are generally open
for tax years beginning in 2015, 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.

We also had deferred tax assets related to NOLs for state income
taxes of $14.5 million and $9.3 million at December 31, 2018 and
2017, respectively. The related state NOLs are available to offset
future state taxable income in certain states through 2033.

There were no unrecognized tax benefits in either 2018 or 2017.

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.

Liabilities for Insurance Products

At December 31, 2018, the total balance of our liabilities for
insurance products was $23.5 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

PART IIITEM 7 Management’s Discussion and Analysis of Consolidated Financial Condition and Results of OperationsCNO FINANCIAL GROUP, INC. - Form 10-Kinterest, less withdrawals and the amounts assessed against
the policyholder through the end of the period. In addition,
policyholder account values for certain interest-sensitive life
products are impacted by our assumptions related to changes of
certain NGEs that we are allowed to make under the terms of the
policy, such as cost of insurance charges, expense loads, credited
interest rates and policyholder bonuses. Therefore, our reserves
and liabilities are necessarily based on numerous estimates and
assumptions as well as historical experience. Establishing reserves
is an uncertain process, and it is possible that actual claims
will materially exceed our reserves and have a material adverse
effect on our results of operations and financial condition. Our
financial results depend significantly upon the extent to which
our actual claims experience is consistent with the assumptions
we used in determining our reserves and pricing our products.
If our assumptions with respect to future claims are incorrect,
and our reserves are insufficient to cover our actual losses and
expenses, we would be required to increase our liabilities,
which would negatively affect our operating results. Liabilities
for insurance products are calculated using management’s best
judgments, based on our past experience and standard actuarial
tables, of mortality, morbidity, lapse rates, investment experience
and expense levels.

Accounting for Long-term Care Premium Rate
Increases

Many of our long-term care policies have been subject to premium
rate increases. In some cases, these premium rate increases were
materially consistent with the assumptions we used to value the
particular block of business at the Effective Date. With respect to
certain premium rate increases, some of our policyholders were
provided an option to cease paying their premiums and receive a
non-forfeiture option in the form of a paid-up policy with limited
benefits. In addition, our policyholders could choose to reduce
their coverage amounts and premiums in the same proportion,
when permitted by our contracts or as required by regulators. The
following describes how we account for these policyholder options:

• Premium rate increases - If premium rate increases reflect a change
in our previous rate increase assumptions, the new assumptions
are not reflected prospectively in our reserves. Instead, the
additional premium revenue resulting from the rate increase is
recognized as earned and original assumptions continue to be
used to determine changes to liabilities for insurance products
unless a premium deficiency exists.

• Benefit reductions - If there is a premium rate increase on
one of our long-term care policies, a policyholder may choose
reduced coverage with a proportionate reduction in premium,
when permitted by our contracts. This option does not require
additional underwriting. Benefit reductions are treated as a
partial lapse of coverage, and the balance of our reserves and
deferred insurance acquisition costs is reduced in proportion to
the reduced coverage.

• Non-forfeiture benefits offered in conjunction with a rate increase - In
some cases, non-forfeiture benefits are offered to policyholders who
wish to lapse their policies at the time of a significant rate increase.
In these cases, exercise of this option is treated as an extinguishment
of the original contract and issuance of a new contract. The balance

of our reserves and deferred insurance acquisition costs are released,
and a reserve for the new contract is established.

Some of our policyholders may receive a non-forfeiture benefit
if they cease paying their premiums pursuant to their original
contract (or pursuant to changes made to their original contract as
a result of a litigation settlement made prior to the Effective Date
or an order issued by the Florida Office of Insurance Regulation).
In these cases, exercise of this option is treated as the exercise of
a policy benefit, and the reserve for premium paying benefits is
reduced, and the reserve for the non-forfeiture benefit is adjusted
to reflect the election of this benefit.

Liabilities for Loss Contingencies Related to
Lawsuits

The Company and its subsidiaries are involved in various legal
actions in the normal course of business, in which claims for
compensatory and punitive damages are asserted, some for
substantial amounts. We recognize an estimated loss from these
loss contingencies when we believe it is probable that a loss has been
incurred and the amount of the loss can be reasonably estimated.
Some of the pending matters have been filed as purported class
actions and some actions have been filed in certain jurisdictions
that permit punitive damage awards that are disproportionate to
the actual damages incurred. The amounts sought in certain of
these actions are often large or indeterminate and the ultimate
outcome of certain actions is difficult to predict. In the event
of an adverse outcome in one or more of these matters, there is
a possibility that the ultimate liability may be in excess of the
liabilities we have established and could have a material adverse
effect on our business, financial condition, results of operations
and cash flows. In addition, the resolution of pending or future
litigation may involve modifications to the terms of outstanding
insurance policies or could impact the timing and amount of rate
increases, which could adversely affect the future profitability of
the related insurance policies. Based upon information presently
available, and in light of legal, factual and other defenses available
to the Company and its subsidiaries, the Company does not believe
that it is probable that the ultimate liability from either pending
or threatened legal actions, after consideration of existing loss
provisions, will have a material adverse effect on the Company’s
consolidated financial condition, operating results or cash flows.
However, given the inherent difficulty in predicting the outcome
of legal proceedings, there exists the possibility that such legal
actions could have a material adverse effect on the Company’s
consolidated financial condition, operating results or cash flows.

CNO FINANCIAL GROUP, INC. - Form 10-K

PART IIITEM 7 Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operationsoutcome of pending appeals or motions; (ii) there are significant
factual issues to be resolved; and/or (iii) there are novel legal issues
presented. Accordingly, the Company cannot reasonably estimate
the possible loss or range of loss in excess of amounts accrued,
if any, or predict the timing of the eventual resolution of these

matters. The Company reviews these matters on an ongoing basis.
When assessing reasonably possible and probable outcomes, the
Company bases its assessment on the expected ultimate outcome
following all appeals.

Results of Operations

The following tables and narratives summarize the operating results of our segments (dollars in millions):

2018

2017

2016

Pre-tax operating earnings (a non-GAAP measure)(a):

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

Loss related to reinsurance transactions:

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

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

Income (loss) before income taxes:

Bankers Life
Washington National
Colonial Penn
Long-term care in run-off
Corporate operations
INCOME (LOSS) BEFOrE INCOME taXES

340.6
121.9
14.8
22.9
(119.0)
381.2

(704.2)
(704.2)

13.5
(9.9)
(2.4)
(4.5)
(7.6)
(10.9)

55.0
.5
55.5

1.6

11.9

409.1
112.5
12.4
18.4
(817.2)
(264.8)

367.5
98.3
22.6
53.1
(86.8)
454.7

—
—

29.8
11.7
—
10.8
(3.0)
49.3

(2.7)
.2
(2.5)

(8.8)

—

(12.2)

394.6
110.2
22.6
63.9
(110.8)
480.5

375.6
102.9
1.7
18.4
(88.3)
410.3

(75.4)
(75.4)

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

9.4
.2
9.6

(2.0)

—

3.1

379.7
122.5
1.5
14.8
(165.3)
353.2

(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 related to
reinsurance transactions, 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, other non-operating items consisting primarily of earnings attributable to VIEs 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 related to reinsurance transactions, 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 and other non-
operating items consisting primarily of earnings attributable to VIEs. 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 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.

PART IIITEM 7 Management’s Discussion and Analysis of Consolidated Financial Condition and Results of OperationsCNO FINANCIAL GROUP, INC. - Form 10-K
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 apparent. 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.
We also have a Long-term care in run-off segment that consists
of: (i) the long-term care business that was recaptured due to the

termination of certain reinsurance agreements effective September
30, 2016 (such business is not actively marketed and was issued or
acquired by Washington National and BCLIC); and (ii) certain
legacy (prior to 2003) comprehensive and nursing home long-term
care policies that were ceded in September 2018 (such business is
not actively marketed and was issued by Bankers Life). Beginning
in the fourth quarter of 2018, the earnings of this segment only
reflect the long-term care business that was recaptured in September
2016 as the legacy long-term care business was ceded under a
100% indemnity coinsurance agreement in September 2018.

CNO FINANCIAL GROUP, INC. - Form 10-K

PART IIITEM 7 Management’s Discussion and Analysis of Consolidated Financial Condition and Results of OperationsBankers 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

Broker dealer and registered investment advisor client assets:

Net new client assets(a)

Brokerage
Advisory

Total

Client assets at end of period(b)

Brokerage
Advisory
Total
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 net realized investment gains (losses), net of related amortization, and fair value
changes in embedded derivative liabilities, net of related amortization, 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

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

2018

2017

2016

1,163.2
1,019.0
466.0
2,648.2

5,788.9
2,590.1

147.9
144.1

1,907.1
314.3
59.8

829.1
1,159.8
12,941.1

40.5
157.0
197.5

794.1
310.8
1,104.9

1,458.5

804.4
(41.5)
51.9
2,273.3

1,030.6
1,025.1
462.4
2,518.1

5,139.6
2,899.5

160.5
149.0

1,805.1
334.9
55.9

970.0
1,028.5
461.1
2,459.6

4,527.8
3,188.2

174.9
153.7

1,703.2
336.8
50.3

778.2
1,089.9
12,412.6

714.6
1,018.0
11,867.5

35.0
116.0
151.0

831.3
171.3
1,002.6

1,473.7

1,450.2

764.7
153.5
44.1
2,436.0

724.2
27.3
34.4
2,236.1

1,175.3

1,151.6

1,080.0

98.1
81.4
(42.9)
171.3
29.7
419.8
1,932.7

340.6
13.2
.3
13.5
66.7
(11.7)
55.0
409.1

105.0
63.7
154.6
153.3
19.8
420.5
2,068.5

367.5
30.8
(1.0)
29.8
(3.4)
.7
(2.7)
394.6

110.8
66.1
26.3
163.9
13.2
400.2
1,860.5

375.6
(4.9)
(.4 )
(5.3)
10.7
(1.3)
9.4
379.7

PART IIITEM 7 Management’s Discussion and Analysis of Consolidated Financial Condition and Results of OperationsCNO FINANCIAL GROUP, INC. - Form 10-KHealth benefit ratios:
All health lines:

Insurance policy benefits
Benefit ratio(c)

Medicare supplement:

Insurance policy benefits
Benefit ratio(c)
Long-term care:

Insurance policy benefits
Benefit ratio(c)
Interest-adjusted benefit ratio(d)

2018

2017

2016

876.1
85.6%

571.8

74.5%

304.3
119.0%
76.0%

853.0
82.2%

550.6
70.8%

302.4
116.2%
75.0%

854.9

82.6%

556.2

71.9%

298.7
113.9%
75.3%

(a) Net new client assets includes total inflows of cash and securities into brokerage and managed advisory accounts less outflows. Inflows include interest and dividends

and exclude changes due to market fluctuations.

(b) Client assets include cash and securities in brokerage and managed advisory accounts.
(c) We calculate benefit ratios by dividing the related product’s insurance policy benefits by insurance policy income.
(d) 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 $110.1
million, $107.1 million and $101.2 million in 2018, 2017 and 2016, respectively.

Bankers Life is the marketing brand of various affiliated companies
of CNO Financial Group including, Bankers Life and Casualty
Company, Bankers Life Securities, Inc., and Bankers Life Advisory
Services, Inc. Non-affiliated insurance products are offered
through Bankers Life General Agency, Inc. (dba BL General
Insurance Agency, Inc., AK, AL, CA, NV, PA). Agents who are
financial advisors are registered with Bankers Life Securities, Inc.

Securities and variable annuity products and services are offered
by Bankers Life Securities, Inc. Member FINRA/SIPC, (dba BL
Securities, Inc., AL, GA, IA, IL, MI, NV, PA). Advisory products
and services are offered by Bankers Life Advisory Services, Inc.
SEC Registered Investment Adviser (dba BL Advisory Services,
Inc., AL, GA, IA, MT, NV, PA). Home Office: 111 East Wacker
Drive, Suite 1900, Chicago, IL 60601.

Total premium collections were $2,648.2 million in 2018, up 5.2
percent from 2017, and $2,518.1 million in 2017, up 2.4 percent
from 2016. See “Premium Collections” for further analysis of
Bankers Life’s premium collections.

Average liabilities for insurance products, net of reinsurance
ceded were $12.9 billion in 2018, up 4.3 percent from 2017 and
$12.4 billion in 2017, up 4.6 percent from 2016. The increase in
average liabilities for insurance products is primarily due to new
sales and the amounts added to policyholder account balances on
interest-sensitive products.

Broker dealer and registered investment advisor client assets
totaled $1,104.9 million and $1,002.6 million at December 31,
2018 and 2017, respectively, with net inflows of $197.5 million and
$151.0 million in 2018 and 2017, respectively.

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.

Net investment income on general account invested assets
(which excludes income on policyholder portfolios) increased
5.2 percent, to $804.4 million, in 2018 and increased 5.6 percent,
to $764.7 million, in 2017. In 2018 and 2017, net investment
income reflects higher investment income from alternative
investments compared to 2016. Such increases reflect higher
returns from credit, private equity, and equity related strategies
and a larger average alternative investment portfolio compared
to 2016. Investment income from alternative investments was
$48.7 million and $26.2 million in 2018 and 2017, respectively.
In addition, prepayment income (including call premiums) was
$18.6 million and $27.7 million in 2018 and 2017, respectively.

Net investment income related to fixed index products
represents the change in the estimated fair value of options which
are purchased in an effort to offset or hedge certain potential
benefits accruing to the policyholders of our fixed index products.
Our fixed index products are designed so that investment

CNO FINANCIAL GROUP, INC. - Form 10-K

PART IIITEM 7 Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations
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 $(41.5) million, $153.5 million and $27.3 million in 2018,
2017 and 2016, 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 $51.9 million, $44.1 million
and $34.4 million in 2018, 2017 and 2016, respectively. We
recognized fee income of $33.2 million, $27.9 million and
$26.3 million in 2018, 2017 and 2016, respectively, pursuant to
distribution and marketing agreements to sell Medicare Advantage
and PDP products of other insurance companies. The remaining
increase in 2018 and 2017 is primarily attributable to fee income
earned by our broker-dealer and registered investment advisor
subsidiaries.

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 2018, we completed our comprehensive
review of actuarial assumptions. Such review resulted in a decrease
to reserves of $5.2 million and an increase in amortization of
$8.3 million including the net impact from changes to spread and
persistency assumptions related to fixed index and fixed interest
annuities. In the fourth quarter of 2017, our comprehensive review
resulted in a decrease in reserves of $9.0 million and a decrease
in amortization of $1.8 million including the net impact of
changes to mortality assumptions related to interest-sensitive life
products. In the fourth quarter of 2016, our comprehensive 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.

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
74.5 percent, 70.8 percent and 71.9 percent in 2018, 2017 and
2016, respectively. The benefit ratio in 2018 reflected lower
margins due to the expansion of the use of the Medicare crossover
claims process for all of this segment’s Medicare supplement
business. The Medicare crossover process is a claims payment
platform that provides for straight through processing of provider
claims. As expected, this new process increased the reporting
of smaller claims, resulting in a higher benefit ratio in 2018.

Implementation of this process is expected to increase efficiency,
improve payment accuracy and increase customer satisfaction over
time. The 2018 benefit ratio was also impacted by the following:
(i) our claim experience in 2017 and 2016 was favorable compared
to our expectations, resulting in lower premium increases for
2018; and (ii) we have observed unfavorable trends in our claims,
especially with respect to claims for physician administered drugs.
Annually, we review our loss experience on these products and
when appropriate, apply for actuarially justified rate increases.
The next effective date for rate increases for the majority of these
policies is January 1, 2020. Our insurance policy benefits reflected
favorable (unfavorable) reserve developments of prior period claim
reserves of approximately $.7 million, $6.0 million and $(1.9)
million in 2018, 2017 and 2016, respectively. Excluding the effects
of prior period claim reserve redundancies and deficiencies, our
benefit ratios would have been 74.5 percent, 71.5 percent and
71.7 percent in 2018, 2017 and 2016, respectively. We currently
expect the benefit ratio on this Medicare supplement business to
be in the range of 73 percent to 77 percent during 2019.

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 119.0 percent, 116.2 percent and 113.9 percent in 2018, 2017
and 2016, respectively. The interest-adjusted benefit ratio on this
business was 76.0 percent, 75.0 percent and 75.3 percent in 2018,
2017 and 2016, respectively. The interest-adjusted benefit ratio in
2017 was favorably impacted by $3.4 million of one-time reserve
releases which was comprised of: (i) $1.9 million related to lower
persistency (including the results of procedures performed to
identify policies that had terminated prior to June 30, 2017 due
to death); (ii) $.9 million related to an out-of-period adjustment
that reduced reserves; and (iii) $.6 million related to the impact of
policyholder decisions to surrender or reduce coverage following
rate increases. The interest-adjusted benefit ratio in 2016 was
favorably impacted by reserve releases of $2.6 million related to
policyholder decisions to surrender or reduce coverage following
rate increases. The interest-adjusted benefit ratio in 2017 and
2016, excluding such favorable reserve releases, was 76.3 percent
in both years.

We currently expect the interest-adjusted benefit ratio on this long-
term care business to be in the range of 74 percent to 79 percent
during 2019. 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. When policies lapse,
active life reserves for such lapsed policies are released, resulting
in decreased insurance policy benefits (although such decrease is
somewhat offset by additional amortization expense).

Amounts added to policyholder account balances - cost
of interest credited to policyholders were $98.1 million,
$105.0 million and $110.8 million in 2018, 2017 and 2016,
respectively. The weighted average crediting rates for these products
was 2.8 percent in 2018, 2017 and 2016. The average liabilities of
the fixed interest annuity block were $2.6 billion, $2.9 billion and

PART IIITEM 7 Management’s Discussion and Analysis of Consolidated Financial Condition and Results of OperationsCNO FINANCIAL GROUP, INC. - Form 10-K$3.2 billion in 2018, 2017 and 2016, 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

Commission expense and agent manager benefits
Other operating expenses

tOtaL

Net realized investment gains (losses) fluctuate each period.
During 2018, we recognized net realized investment gains of
$13.2 million, which were comprised of: (i) $43.7 million of net
gains from the sales of investments; (ii) a $24.1 million unfavorable
change in the fair value of equity securities; (iii) the decrease in
fair value of certain fixed maturity investments with embedded
derivatives of $6.0 million; and (iv) $.4 million of writedowns
of investments for other than temporary declines in fair value
recognized through net income. During 2017, we recognized net
realized investment gains of $30.8 million, which were comprised
of: (i) $22.1 million of net gains from the sales of investments; and
(ii) the increase in fair value of certain fixed maturity investments
with embedded derivatives of $8.7 million. During 2016, we
recognized net realized investment losses of $4.9 million, which
were comprised of: (i) $13.9 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) $19.0 million of writedowns of investments for other than
temporary declines in fair value recognized through net income
($21.5 million, prior to the $2.5 million of impairment losses
recognized in accumulated other comprehensive income (loss)).

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. Amortization
was impacted in each year by our comprehensive review of actuarial
assumptions discussed above under insurance policy benefits. In
addition, the lower amortization in 2017 generally reflected the
favorable persistency experienced as compared to the prior year.

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 is primarily due to higher interest rates
on the variable rate investment borrowings.

Other operating costs and expenses in our Bankers Life segment
were $419.8 million in 2018, down .2 percent from 2017, and were
$420.5 million in 2017, up 5.1 percent from 2016. Such expenses
in 2017 include $3.5 million for estimated future state guaranty
association assessments, net of premium tax offsets, related to the
liquidation of Penn Treaty Network America Insurance Company
(“Penn Treaty”). Other operating costs and expenses include the
following (dollars in millions):

2018
69.0
350.8
419.8

2017
69.5 $
351.0
420.5 $

2016
70.1
330.1
400.2

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 $(.3) million, $1.0 million and $.4 million in
2018, 2017 and 2016, 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 IIITEM 7 Management’s Discussion and Analysis of Consolidated Financial Condition and Results of OperationsWashington 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 (loss):

General account invested assets
Fixed index products
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 net realized investment gains (losses) and fair value changes in embedded
derivative liabilities, net of related amortization, 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

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

2018

613.0
46.3
32.2
1.3
692.8

283.3
90.3

219.5
270.6
4.8

2,867.5
20.7
11.8

149.2
166.6
4,084.3

687.6

261.1
(1.5)
.2
.9
948.3

540.9

12.8
4.6
(1.8)
55.8
10.8
203.3
826.4

121.9
(10.0)
.1
(9.9)
1.6
(1.1)
.5
112.5

2017

589.1
51.6
30.0
.9
671.6

314.2
97.9

232.1
269.5
4.7

2,732.0
24.8
13.5

149.2
175.0
4,012.9

671.4

257.5
9.0
3.7
1.0
942.6

550.7

12.9
4.4
13.1
58.8
6.3
198.1
844.3

98.3
11.7
—
11.7
.5
(.3)
.2
110.2

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

PART IIITEM 7 Management’s Discussion and Analysis of Consolidated Financial Condition and Results of OperationsCNO FINANCIAL GROUP, INC. - Form 10-KHealth benefit ratios:

Supplemental health:

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

Medicare supplement:

Insurance policy benefits
Benefit ratio(a)

2018

2017

2016

486.0
79.5%
55.4%

32.8
68.9%

489.8
83.2%
59.1%

37.0
68.1%

469.3
83.0%
59.0%

42.7
68.4%

(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
$147.2 million, $141.7 million and $135.6 million in 2018, 2017 and 2016, respectively.

Total premium collections were $692.8 million in 2018,
up 3.2 percent from 2017, and $671.6 million in 2017, up
1.9 percent from 2016, 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 $4,084.3 million in 2018, up 1.8 percent from
2017, and $4,012.9 million in 2017, up 1.5 percent from 2016,
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 $261.1 million in 2018, $257.5 million in 2017
and $256.2 million in 2016. Prepayment income (including call
premiums) was $3.8 million, $5.9 million and $5.1 million in
2018, 2017 and 2016, respectively.

Net investment income related to fixed index products
represents the change in the estimated fair value of options
which are purchased in an effort to offset or hedge certain
potential benefits accruing to the policyholders of our fixed

index products. Our fixed index products are designed so that
investment income spread is expected to be more than adequate
to cover the cost of the options and other costs related to these
policies. Net investment income (loss) related to fixed index
products was $(1.5) million, $9.0 million and $1.9 million
in 2018, 2017 and 2016, 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 2018, we completed our comprehensive
annual review of actuarial assumptions. Such review resulted
in a decrease in amortization of $2.4 million, partially offset
by an increase in reserves of $.2 million, primarily related to
interest-sensitive life products. In the fourth quarter of 2017,
our comprehensive review resulted in a $1 million increase in

CNO FINANCIAL GROUP, INC. - Form 10-K

PART IIITEM 7 Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations
amortization of deferred acquisition costs related to interest-
sensitive life products. In the fourth quarter of 2016, our
comprehensive review had no material impact on this segment.

Amounts added to policyholder account balances - cost of
interest credited to policyholders were $12.8 million, $12.9
million and $13.8 million in 2018, 2017 and 2016, respectively.

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
$125.3 million, $98.7 million and $96.2 million in 2018, 2017
and 2016, respectively. The increase in margin on this block of
business in 2018 reflects higher insurance policy income due to
higher sales and growth in the block, as well as favorable claims
and favorable development of prior period claim reserves. The
benefit ratio on these products was 79.5 percent, 83.2 percent and
83.0 percent in 2018, 2017 and 2016, respectively. The interest-
adjusted benefit ratio on this supplemental health business was
55.4 percent, 59.1 percent and 59.0 percent in 2018, 2017 and
2016, respectively. We currently expect the interest-adjusted
benefit ratio on this supplemental health business to be in the
range of 55 percent to 58 percent during 2019.

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
$14.8 million, $17.4 million and $19.8 million in 2018, 2017
and 2016, respectively. Such decrease reflects the run-off of this
block of business.

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
$10.8 million, $6.3 million and $3.7 million of interest
expense on collateralized borrowings in 2018, 2017 and 2016,
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 is due to higher interest rates on the variable
rate investment borrowings.

Other operating costs and expenses were $203.3 million,
$198.1 million and $189.0 million in 2018, 2017 and 2016,
respectively. Such expenses in 2017 include $1.3 million for
estimated future state guaranty association assessments, net of
premium tax offsets, related to the liquidation of Penn Treaty.
Other operating costs and expenses also include commission
expense of $73.9 million, $69.8 million and $70.2 million in
2018, 2017 and 2016, respectively. The increase in commission
expense is consistent with the growth in the supplemental
health block.

Net realized investment gains (losses) fluctuate each period.
During 2018, we recognized net realized investment losses
of $10.0 million, which were comprised of: (i) $1.8 million
of net gains from the sales of investments; (ii) a $7.5 million
unfavorable change in the fair value of equity securities; (iii) an
increase in fair value of certain fixed maturity investments with
embedded derivatives of $.9 million; (iv) the decrease in fair
value of embedded derivatives related to a modified coinsurance
agreement of $5.1 million; and (v) $.1 million of writedowns
of investments for other than temporary declines in fair value
which were recorded in earnings. During 2017, we recognized net
realized investment gains of $11.7 million, which were comprised
of: (i) $7.4 million of net gains from the sales of investments; (ii)
the increase in fair value of certain fixed maturity investments
with embedded derivatives of $2.5 million; (iii) the increase in fair

PART IIITEM 7 Management’s Discussion and Analysis of Consolidated Financial Condition and Results of OperationsCNO FINANCIAL GROUP, INC. - Form 10-Kvalue of embedded derivatives related to a modified coinsurance
agreement of $2.8 million; and (iv) $1.0 million of writedowns of
investments for other than temporary declines in fair value which
were recorded in earnings. 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)).

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.

Amortization related to fair value changes in embedded
derivative liabilities is the increase or decrease in the
amortization of insurance acquisition costs which results from
changes in interest rates used to discount embedded derivative
liabilities related to our fixed index annuities.

Colonial Penn (dollars in millions)

Premium collections:

Life
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 losses and income taxes
Net realized investment losses

INCOME BEFORE INCOME TAXES

2018

296.6
1.7
298.3

69.6

5.0
3.7

14.7
739.8
832.8

298.6
44.6
1.8
345.0

206.6
.6
17.8
1.4
103.8
330.2
14.8
(2.4)
12.4

2017

289.6 $
2.0
291.6 $

2016

277.8
2.4
280.2

73.0 $

74.1

5.7
4.1

15.5
717.5
815.8 $

291.8 $
44.4
1.3
337.5

199.0
.6
16.3
.9
98.1
314.9
22.6
—
22.6 $

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

CNO FINANCIAL GROUP, INC. - Form 10-K

PART IIITEM 7 Management’s Discussion and Analysis of Consolidated Financial Condition and Results of OperationsThis 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 currently expect this segment to report earnings (before net
realized investment gains (losses) and income taxes) in 2019 in the
range of $12 million to $20 million, but because of the seasonality
of advertising spend, we expect a loss in the range of $1 million to
$3 million in the first quarter of 2019.

collections

increased 2.3 percent,

Total premium
to
$298.3 million, in 2018 and 4.1 percent, to $291.6 million, in
2017. The increase was driven by recent sales activity 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 2018 and 2017 primarily due to the increase
in invested assets as a result of growth in this segment.

Insurance policy benefits in 2018 and 2017 reflect growth in this
segment. In addition, insurance policy benefits in 2018 reflect a
$1.1 million out-of-period adjustment which increased reserves
on a closed block of payout annuities in the first quarter of 2018.
Insurance policy benefits in 2017 reflect: (i) the favorable changes
to liabilities for insurance products including a $2.5 million out-of-
period adjustment and a $.5 million refinement to the calculation;
and (ii) favorable mortality as compared to 2016. Insurance policy
benefits in 2016 also 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 2018 as compared to 2017. The demand and cost
of television advertising appropriate for Colonial Penn’s campaigns
has fluctuated widely in certain periods. We are disciplined with
our marketing expenditures and will increase or decrease our
advertising spend depending on prices.

Net realized investment gains (losses) fluctuate each period.
During 2018, we recognized net realized investment losses of
$2.4 million, which were comprised of: (i) $1.8 million of net
losses from the sales of investments; (ii) the decrease in fair value of
certain fixed maturity investments with embedded derivatives of
$.2 million; and (iii) a $.4 million unfavorable change in the fair
value of equity securities. During 2017, we recognized net realized
investment gains of nil, which was comprised of: (i) $.7 million of
net gains from the sales of investments; (ii) the increase in fair value
of certain fixed maturity investments with embedded derivatives of
$.3 million; and (iii) $1.0 million of writedowns of investments for
other than temporary declines in fair value which were recorded
in earnings. 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.

Management believes that an analysis of Adjusted EBIT for
Colonial Penn, separated between in-force and new business,
provides increased clarity for this segment as 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. Adjusted
EBIT from new business includes pre-tax revenues and expenses
associated with new sales of our insurance products during the
first year after the sale is completed. Adjusted EBIT from in-force
business includes all pre-tax revenues and expenses associated
with sales of insurance products that were completed more than
one year before the end of the reporting period. The allocation of
certain revenues and expenses between new and in-force business
is based on estimates, which we believe are reasonable.

PART IIITEM 7 Management’s Discussion and Analysis of Consolidated Financial Condition and Results of OperationsCNO FINANCIAL GROUP, INC. - Form 10-KRecognizing 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 in-force
and new business for Colonial Penn (dollars in millions):

ADJUSTED EBIT FROM IN-FORCE BUSINESS
Revenues:

Insurance policy income
Net investment income and other

Total revenues
Benefits and expenses:

Insurance policy benefits
Amortization
Other expenses

Total benefits and expenses

Adjusted EBIT from In-force 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 IN-FORCE AND NEW BUSINESS
Revenues:

Insurance policy income
Net investment income and other

Total revenues
Benefits and expenses:

Insurance policy benefits
Amortization
Other expenses

Total benefits and expenses

ADJUSTED EBIT FROM IN-FORCE AND NEW BUSINESS

2018

2017

2016

251.6
46.4
298.0

178.6
17.2
36.4
232.2
65.8

47.0
—
47.0

28.6
.6
68.8
98.0
(51.0)

298.6
46.4
345.0

207.2
17.8
105.2
330.2
14.8

241.8
45.7
287.5

169.2
15.6
33.9
218.7
68.8

50.0
—
50.0

30.4
.7
65.1
96.2
(46.2) $

291.8
45.7
337.5

199.6
16.3
99.0
314.9
22.6

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

The Adjusted EBIT from in-force business in the Colonial
Penn segment decreased in 2018, as compared to 2017, reflecting:
(i) a $1.1 million out-of-period adjustment which increased
reserves on a closed block of payout annuities in the first quarter
of 2018; and (ii) the aforementioned $3.0 million favorable impact
related to liabilities for insurance products in the third quarter of

2017. The Adjusted EBIT from new business in the Colonial
Penn segment in 2018 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 IIITEM 7 Management’s Discussion and Analysis of Consolidated Financial Condition and Results of OperationsLong-term care in run-off (dollars in millions)

The long-term care in run-off segment consists of: (i) the long-
term care business that was recaptured due to the termination of
certain reinsurance agreements effective September 30, 2016 (such
business is not actively marketed and was issued or acquired by
Washington National and BCLIC); and (ii) certain legacy (prior
to 2003) comprehensive and nursing home long-term care policies
that were ceded in September 2018 (such business is not actively
marketed and was issued by Bankers Life). Beginning in the fourth

quarter of 2018, the earnings of this segment only reflect the long-
term care business that was recaptured in September 2016 as the
legacy long-term care business was ceded under a 100% indemnity
coinsurance agreement in September 2018. Accordingly, we
expect this segment to report normalized earnings before net
realized investment gains (losses) of approximately breakeven over
the long-term. However, this segment’s quarterly results can be
volatile.

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
Amortization
Other operating costs and expenses

Total benefits and expenses

Income (loss) before net realized investment gains (losses) and income taxes

Net realized investment gains (losses)

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

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

2018

145.8

2,857.7

148.4
172.7
321.1

271.3
7.0
19.9
298.2
22.9
(4.5)
18.4

271.3
182.8%
79.1%

2017

205.2

3,754.7

210.4
223.7
434.1

344.2
10.3
26.5
381.0
53.1
10.8
63.9

344.2
163.6%
69.1%

2016

211.5

3,433.2

213.7
194.7
408.4

355.0
12.6
22.4
390.0
18.4
(3.6)
14.8

355.0
166.1%
81.5%

(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 $153.9 million,
$198.8 million and $180.8 million in 2018, 2017 and 2016, respectively.

Average liabilities for long-term care products decreased
in 2018 as a result of the legacy long-term care business which
was ceded under a 100% indemnity coinsurance agreement in
September 2018. In addition, the average liabilities were increased
by $130 million and $184 million in 2017 and 2016, 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.

Insurance policy benefits were $271.3 million, $344.2 million
and $355.0 million in 2018, 2017 and 2016, respectively. The
interest-adjusted benefit ratio on the business in this segment

PART IIITEM 7 Management’s Discussion and Analysis of Consolidated Financial Condition and Results of OperationsCNO FINANCIAL GROUP, INC. - Form 10-K
was 79.1 percent, 69.1 percent and 81.5 percent in 2018, 2017
and 2016, respectively. The interest-adjusted benefit ratio in
2017 was impacted by favorable claim experience as well as the
favorable impact of $7.9 million of one-time reserve releases
which were comprised of: (i) $4.6 million related to lower
persistency (including the results of procedures performed to
identify policies that had terminated prior to June 30, 2017 due
to death); (ii) $.8 million related to an out-of-period adjustment
that reduced reserves; and (iii) $2.5 million related to the
impact of policyholder decisions to surrender or reduce coverage
following rate increases. The interest-adjusted benefit ratio in
both 2018 and 2017 also reflected no increase to the future loss
reserve, given the outcome of the year-end 2016 actuarial review,
compared to an increase of $33.0 million in 2016. Our 2018
comprehensive actuarial review of this block reflected relatively
low margins. Accordingly, this segment’s results can be volatile
from period to period. This block of business is particularly
sensitive to changes in assumptions.

Net realized investment losses fluctuated each period.
During 2018, we recognized net realized investment losses of
$4.5 million, which were comprised of: (i) $.3 million of net
losses from the sales of investments; (ii) a $1.9 million unfavorable
change in the fair value of equity securities; (iii) the decrease in
fair value of certain fixed maturity investments with embedded
derivatives of $.2 million; and (iv) $2.1 million of writedowns
of investments for other than temporary declines in fair value
recognized through net income. During 2017, we recognized net
realized investment gains of $10.8 million, which were comprised
of: (i) $29.1 million of net gains from the sales of investments;
and (ii) $18.3 million of writedowns of investments for other
than temporary declines in fair value recognized through net
income. During 2016, we recognized net realized investment
losses of $3.6 million, which were comprised of: (i) $1.5 million
of net losses from the sales of investments; and (ii) $2.1 million
of writedowns of investments for other than temporary declines
in fair value recognized through net income.

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
Other trading account activities

Fee revenue and other income
Other operating costs and expenses

Loss before net realized investment losses, earnings attributable to VIEs, fair value
changes and amendment related to agent deferred compensation plan, loss related to
reinsurance transactions, net revenue pursuant to transition services agreement and
income taxes

Net realized investment losses
Earnings attributable to VIEs
Fair value changes and amendment related to agent deferred compensation plan
Loss related to reinsurance transactions
Net revenue pursuant to transition services agreement

LOSS BEFORE INCOME TAXES

2018

2017

2016

(48.0)

(46.5)

(45.8)

6.6

(17.8)
(2.7)
8.3
6.7
(72.1)

(119.0)
(7.6)
1.6
11.9
(704.2)
.1
(817.2)

5.6

17.4
3.4
9.1
8.5
(84.3)

(86.8)
(3.0)
(8.8)
(12.2)
—
—
(110.8)

4.8

(.3)
1.1
11.0
10.0
(69.1)

(88.3)
(2.7)
(2.0)
3.1
(75.4)
—
(165.3)

Interest expense on corporate debt was $48.0 million,
$46.5 million and $45.8 million in 2018, 2017 and 2016,
respectively. Our average corporate debt outstanding was
$925.0 million in 2018, 2017 and 2016. The average interest rate
on our debt was 4.8 percent, 4.8 percent and 4.7 percent in 2018,
2017 and 2016, respectively.

Net investment income on general investment portfolio
fluctuates based on the amount and type of invested assets in the
corporate operations segment.

Net investment income on other special-purpose portfolios
includes the income (loss) from: (i) investments related to deferred
compensation plans held in a rabbi trust (which is offset by
amounts included in other operating costs and expenses as the
investment results are allocated to participants’ account balances);
(ii) trading account activities; (iii) income (loss) from 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 alternative strategies.
COLI is utilized as an investment vehicle to fund Bankers Life’s

CNO FINANCIAL GROUP, INC. - Form 10-K

PART IIITEM 7 Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operationsagent 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 $4.0 million related to the COLI in
2017. At December 31, 2018, our COLI assets had a carrying value
of $171.7 million. Since this segment’s earnings reflect the changes
in values of the underlying investments supporting the insurance
contracts (including mutual funds investing in bonds, common
stock and real estate) and any death benefits received, such income
can be volatile.

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 VIEs. This fee revenue fluctuates
consistent with the size of the loan portfolios.

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 lower in 2018 as compared to
2017. The increase in such expenses in 2017, compared to 2016, is
due to higher legal expenses primarily from matters related to the
recapture of the long-term care business in September 2016.

Net realized investment losses often fluctuate each period.
During 2018, net realized investment losses in this segment were
$7.6 million and were comprised of: (i) a $4.3 million unfavorable
change in the fair value of equity securities (none of which was
recognized by the VIEs); and (ii) $3.3 million of net losses from the
sales of investments (including $3.6 million of net losses recognized
by the VIEs and $.3 million of net gains on other investment sales).
During 2017, net realized investment losses in this segment were
$3.0 million and were comprised of: (i) $3.8 million of net gains
from the sales of investments (including $1.2 million of net gains
recognized by the VIEs and $2.6 million of net gains on other
investment sales); (ii) $4.3 million of losses on the dissolution of a
VIE; and (iii) $2.5 million of writedowns of investments held by
VIEs due to other-than-temporary declines in value. 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.

Earnings attributable to VIEs represent the earnings attributable
to VIEs that we are required to consolidate, net of affiliated
amounts. Such earnings are not indicative of, 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 related to reinsurance transactions in 2018 resulted from
ceding our legacy (prior to 2003) comprehensive and nursing
home long-term care policies in September 2018 through 100%
indemnity coinsurance. We recognized a pre-tax loss related to the
reinsurance transaction of $704.2 million (net of realized gains on
the transfer of assets related to the transaction of $363.4 million).
The loss related to reinsurance transaction of $75.4 million in
2016 resulted from the termination of the reinsurance agreements
with Beechwood Re Ltd. and recapture of the ceded business
as further described in the note to the consolidated financial
statements entitled “Summary of Significant Accounting Policies -
Reinsurance”.

Net revenue pursuant to transition services agreement
represents the difference between the fees we receive from Wilton
Re and the overhead costs incurred to provide such services under
the agreement in connection with the completion of a long-term
care reinsurance transaction in September 2018.

PART IIITEM 7 Management’s Discussion and Analysis of Consolidated Financial Condition and Results of OperationsCNO FINANCIAL GROUP, INC. - Form 10-KPremium 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.

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

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

from A.M. Best, Moody’s, Fitch and S&P are “A-”, “A3”, “BBB+”
and “BBB+”, 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.

Total premium collections were $3,785.1 million in 2018, up
2.6 percent from 2017, and $3,688.3 million in 2017, up 2.2 percent
from 2016. First year collected premiums were $1,484.5 million
in 2018, up 8.0 percent from 2017, and $1,374.1 million in
2017, up 2.2 percent from 2016. Total premiums collected are
summarized as follows (dollars in millions):

2018

1,361.1
76.5
46.9
1,484.5

1,287.1
616.3
251.4
145.8
2,300.6
3,785.1

2017

2016

1,245.6
78.4
50.1
1,374.1

1,272.5
595.0
241.5
205.2
2,314.2
3,688.3

1,211.8
78.2
54.8
1,344.8

1,247.8
581.1
225.4
211.5
2,265.8
3,610.6

CNO FINANCIAL GROUP, INC. - Form 10-K

PART IIITEM 7 Management’s Discussion and Analysis of Consolidated Financial Condition and Results of OperationsTotal 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

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:

2018

2017

2016

1,112.0
45.8
5.4
51.2
1,163.2

61.9
672.4
734.3
15.6
239.5
255.1
4.4
19.2
23.6
.8
5.2
6.0
1,019.0

71.6
223.6
295.2
49.0
121.8
170.8
466.0

964.7 $
59.8
6.1
65.9
1,030.6

69.3
670.1
739.4
16.0
241.0
257.0
5.0
17.6
22.6
.8
5.3
6.1
1,025.1

82.6
217.3
299.9
47.4
115.1
162.5
462.4

868.1
95.7
6.2
101.9
970.0

75.6
663.7
739.3
17.4
244.4
261.8
5.5
15.7
21.2
.1
6.1
6.2
1,028.5

78.8
207.3
286.1
70.6
104.4
175.0
461.1

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

TOTAL COLLECTIONS ON INSURANCE PRODUCTS

1,361.1
1,287.1
2,648.2

1,245.6
1,272.5
2,518.1 $

1,211.8
1,247.8
2,459.6

Annuities in this segment include fixed index and other fixed
interest annuities sold to the senior market. Annuity collections in
this segment increased 13 percent, to $1,163.2 million in 2018 and
6.2 percent, to $1,030.6 million, in 2017. The increase in premium
collections from our fixed index products in 2018 and 2017 is
primarily due to: (i) sales of annuity contracts with living benefits
following the introduction of that product in the third quarter of
2016; and (ii) the general stock market performance which made
these products attractive to certain customers. Premium collections
from our other fixed interest products decreased in 2018 and 2017
due to lower sales of these products in the current low interest rate
environment and consumer preference for fixed index products.

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 $734.3 million, $739.4 million and

$739.3 million in 2018, 2017 and 2016, respectively. The decrease
in collected premiums in 2018 reflects a decrease in new Medicare
supplement policies sold. We have experienced a shift in the sale of
Medicare supplement policies to the sale of Medicare Advantage
policies. Medicare Advantage policies are sold through Bankers
Life’s agency force for other providers in exchange for fee income.
Bankers Life sold 33,800 Medicare supplement policies in 2018, a
decrease of 13 percent compared to 2017 and 33,400 third party
Medicare Advantage policies were sold in 2018, an increase of
33 percent compared to 2017.

Premiums collected on Bankers Life’s long-term care policies
decreased .7 percent, to $255.1 million in 2018 and 1.8 percent, to
$257.0 million in 2017.

Life products in this segment include traditional and interest-
sensitive life products. Life premiums collected in this segment
increased .8 percent, to $466.0 million, in 2018 and .3 percent, to
$462.4 million, in 2017. Collected premiums in 2018 were slightly
higher than 2017, reflecting stable persistency; partially offset by
lower first-year premiums.

PART IIITEM 7 Management’s Discussion and Analysis of Consolidated Financial Condition and Results of OperationsCNO FINANCIAL GROUP, INC. - Form 10-KWashington 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:

2018

2017

2016

46.3
70.2
541.1
611.3
.2
1.5
1.7
659.3

.6
9.5
10.1
5.4
16.7
22.1
32.2

.1
1.0
1.1
.2
1.3

51.6
73.2
515.9
589.1
.3
1.5
1.8
642.5

.7
10.2
10.9
4.2
14.9
19.1
30.0

—
.6
.6
.3
.9

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

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

TOTAL COLLECTIONS ON INSURANCE PRODUCTS

76.5
616.3
692.8

78.4
595.0
673.4

78.2
581.1
659.3

Health products in the Washington National segment include
Medicare supplement, supplemental health and other insurance
products. Our profits on health policies depend on the overall level
of sales, the length of time the business remains inforce, investment
yields, claim experience and expense management.

in
Collected premiums on Medicare supplement policies
the Washington National segment decreased 10 percent, to
$46.3 million, in 2018 and 15 percent, to $51.6 million, in 2017
due to the run-off of this block of business.

Premiums collected on supplemental health products (including
specified disease, accident and hospital indemnity insurance

products) increased 3.8 percent, to $611.3 million, in 2018 and
4.2 percent, to $589.1 million, in 2017. Such increases are due to
new sales in recent periods and persistency.

Life premiums collected in the Washington National segment
increased 7.3 percent, to $32.2 million, in 2018 and 2.0 percent,
to $30.0 million, in 2017.

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

PART IIITEM 7 Management’s Discussion and Analysis of Consolidated Financial Condition and Results of OperationsColonial 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

2018

2017

2016

46.9
249.5
296.4
.2
296.6

1.5
.2
1.7

50.1
239.3
289.4
.2
289.6

1.9
.1
2.0

46.9
251.4
298.3

50.1
241.5
291.6

54.8
222.7
277.5
.3
277.8

2.3
.1
2.4

54.8
225.4
280.2

Life products in this segment are sold primarily to the senior
market. Life premiums collected in this segment increased
2.4 percent, to $296.6 million, in 2018 and 4.2 percent, to
$289.6 million, in 2017. Premiums collected reflect both recent
sales activity and steady persistency.

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. We do not currently market these products through
this segment.

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

Premiums collected by product:

Health:

Long-term care (renewal)

2018

2017

2016

145.8

205.2

211.5

The Long-term care in run-off segment only includes the premiums collected from: (i) the long-term care business that was recaptured due
to the termination of certain reinsurance agreements effective September 30, 2016 (such business is not actively marketed and was issued
or acquired by Washington National and BCLIC); and (ii) certain legacy (prior to 2003) comprehensive and nursing home long-term care
policies which were ceded in September 2018 (such business was not actively marketed and was issued by Bankers Life). Such collected
premiums have decreased in 2018 as the legacy long-term care business was ceded under a 100% indemnity coinsurance agreement in
September 2018.

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 strategic asset allocation and investment

management. Consistent with this strategy, investments in fixed
maturity securities and mortgage loans made up 87 percent of
our $23.0 billion investment portfolio at December 31, 2018. The
remainder of the invested assets was trading securities, investments
held by VIEs, various types of alternative investments, equity
securities, policy loans and other invested assets.

PART IIITEM 7 Management’s Discussion and Analysis of Consolidated Financial Condition and Results of OperationsCNO FINANCIAL GROUP, INC. - Form 10-KThe following table summarizes the composition of our investment portfolio as of December 31, 2018 (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
18,447.7
291.0
1,602.1
119.7
233.1
1,468.4
171.7
661.7
22,995.4

Percent of total
investments

80%
1
7
1
1
6
1
3
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, 2018 (dollars in millions):

Asset-backed securities
States and political subdivisions
Commercial mortgage-backed securities
Utilities
Insurance
Banks
Healthcare/pharmaceuticals
Energy
Food/beverage
Collateralized mortgage obligations
Real estate/REITs
Transportation
Cable/media
Brokerage
Capital goods
Chemicals
Technology
Telecom
Collateralized debt obligations
Aerospace/defense
U.S. Treasury and Obligations
Autos
Building materials
Other

TOTAL FIXED MATURITIES, AVAILABLE FOR SALE $

Carrying value
2,674.8
1,867.8
1,518.0
1,165.1
1,149.5
1,146.3
1,065.1
864.4
804.6
625.4
526.5
442.0
441.4
437.4
391.7
383.6
368.5
351.5
322.8
239.8
174.8
154.7
150.3
1,181.7
18,447.7

Percent of fixed
maturities

14.5% $
10.1
8.2
6.3
6.2
6.2
5.8
4.7
4.4
3.4
2.8
2.4
2.4
2.4
2.1
2.1
2.0
1.9
1.8
1.3
.9
.9
.8
6.4

100.0% $

Gross unrealized
losses
7.6
2.6
21.7
16.8
21.0
44.0
39.0
41.0
39.9
4.1
8.0
8.7
20.5
21.0
5.5
14.9
16.0
8.5
15.2
3.2
.2
10.1
16.4
37.4
423.3

Percent of gross
unrealized losses

1.8%
.6
5.1
4.0
5.0
10.4
9.2
9.7
9.4
1.0
1.9
2.1
4.8
4.9
1.3
3.5
3.8
2.0
3.6
.7
.1
2.4
3.9
8.8
100.0%

CNO FINANCIAL GROUP, INC. - Form 10-K

PART IIITEM 7 Management’s Discussion and Analysis of Consolidated Financial Condition and Results of OperationsThe following table summarizes the gross unrealized losses of our fixed maturity securities, available for sale, by category and ratings
category as of December 31, 2018 (dollars in millions):

Below-investment grade

B+ and below

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

governments
Business services
Packaging
Gaming
Textiles
United States Treasury securities and
obligations of United States government
corporations and agencies
Other

TOTAL FIXED MATURITIES,
AVAILABLE FOR SALE

Investment grade

AAA/AA/A

6.1 $
1.6
.3
1.8
18.5
2.3
3.3
.3
6.2
—
.6
6.1
.2
1.9
1.1
—
.1
4.2
—
—
.4
—
3.9
—
—
—
1.3

.5
—
—
—
—

.2
2.7

BBB
37.9
29.5
37.2
33.5
1.9
18.0
17.2
13.8
9.4
14.2
11.1
7.4
13.2
5.9
7.6
7.9
7.1
2.5
6.1
5.3
4.0
4.0
—
1.9
2.6
1.1
1.3

1.2
.2
—
.1
—

—
1.5

BB
— $
4.9
1.5
1.6
1.3
.8
.3
3.5
.5
2.3
3.8
1.7
1.5
1.8
.1
.3
.4
.3
—
.6
.6
.1
—
1.6
—
.5
—

—
1.1
.4
.7
.4

—
—

Total gross
unrealized losses
44.0
41.0
39.9
39.0
21.7
21.1
21.0
20.5
16.8
16.5
16.0
15.2
14.9
10.1
8.8
8.4
8.0
7.6
7.4
5.9
5.4
5.3
4.1
3.5
3.1
3.0
2.6

— $
5.0
.9
2.1
—
—
.2
2.9
.7
—
.5
—
—
.5
—
.2
.4
.6
1.3
—
.4
1.2
.2
—
.5
1.4
—

—
.3
.8
.4
—

—
2.0

1.7
1.6
1.2
1.2
.4

.2
6.2

63.6 $

304.6

32.6 $

22.5

423.3

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 strategic
asset allocation and 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 7 percent of our total fixed maturity
securities portfolio.

PART IIITEM 7 Management’s Discussion and Analysis of Consolidated Financial Condition and Results of OperationsCNO FINANCIAL GROUP, INC. - Form 10-KFair 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.

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

• 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

CNO FINANCIAL GROUP, INC. - Form 10-K

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:

• 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 default rates, expected recovery
rates, and issue specific information including, but not limited
to, collateral type, seniority and vintage.

PART IIITEM 7 Management’s Discussion and Analysis of Consolidated Financial Condition and Results of OperationsEquity
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.

• 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.

• 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 a particular price received from a third party is
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 other relevant 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 35 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.

PART IIITEM 7 Management’s Discussion and Analysis of Consolidated Financial Condition and Results of OperationsCNO FINANCIAL GROUP, INC. - Form 10-KThe categorization of fair value measurements, by input level, for our financial instruments carried at fair value on a recurring basis at
December 31, 2018 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

— $

11,044.4 $

158.6 $ 11,203.0

—
—
—
—
—
—
—
—
—
181.1

—
—
—
—
—
—
—
181.1 $

174.8
1,867.8
58.5
2,662.8
322.8
1,518.0
1.6
625.4
18,276.1
100.4

86.5
93.6
53.0
233.1
1,468.4
26.6
4.4

20,109.0 $

—
—
1.0
12.0
—
—
—
—
171.6
9.5

174.8
1,867.8
59.5
2,674.8
322.8
1,518.0
1.6
625.4
18,447.7
291.0

—
—
—
—
—
—
—

86.5
93.6
53.0
233.1
1,468.4
26.6
4.4
181.1 $ 20,471.2

— $

1,289.0 $

1,289.0

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:

Asset-backed securities
Commercial mortgage-backed securities
Collateralized mortgage obligations

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

CNO FINANCIAL GROUP, INC. - Form 10-K

PART IIITEM 7 Management’s Discussion and Analysis of Consolidated Financial Condition and Results of OperationsThe 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, 2018 (dollars in millions):

December 31, 2018

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

Beginning
balance as of
December 31,
2017

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,
2018

Amount of
total gains
(losses) for the
year ended
December 31,
2018 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

Total fixed maturities,
available for sale
Equity securities -
corporate securities
Investments held by
variable interest entities -
corporate securities

LIABILITIES:

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

230.4

(24.6)

(5.3)

12.7

(54.8)

158.6

3.9
24.2

258.5

21.2

(2.9)
(11.5)

(39.0)

(10.9)

4.9

—

(.1)
—

(.8)

—

.1
(.7)

—
—

1.0
12.0

(5.9)

12.7

(54.8)

171.6

—

(4.9)

9.5

—

(.5)

—
—

(.5)

—

(1,334.8)

(62.0)

107.8

—

(1,289.0)

107.8

(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.
The following summarizes such activity for the year ended December 31, 2018 (dollars in millions):

PART IIITEM 7 Management’s Discussion and Analysis of Consolidated Financial Condition and Results of OperationsCNO FINANCIAL GROUP, INC. - Form 10-KASSETS:

Fixed maturities, available for sale:

Corporate securities
Debt securities issued by foreign governments
Asset-backed securities

Total fixed maturities, available for sale

Equity securities - corporate securities

LIABILITIES:

Purchases

Sales

Issuances

Settlements

Purchases, sales,
issuances and
settlements, net

32.4
3.0
—
35.4
—

(57.0) $
(5.9)
(11.5)
(74.4)
(10.9)

— $
—
—
—
—

(24.6)
(2.9)
(11.5)
(39.0)
(10.9)

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

(177.6)

16.5

16.7

82.4

(62.0)

At December 31, 2018, 53 percent of our Level 3 fixed maturities,
available for sale, were investment grade and 92 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 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, 2018, classified by
ratings (dollars in millions):

Estimated fair value

Amount
1,415.0
1,704.1
4,473.8
2,486.8
3,503.9
2,545.9
16,129.5
178.3
282.1
337.4
1,520.4
2,318.2
18,447.7

Percent of fixed
maturities

8%
9
24
13
19
14
87
1
2
2
8
13
100%

Amortized cost
1,403.9
1,609.4
4,248.8
2,457.7
3,543.5
2,614.4
15,877.7
186.2
289.9
349.2
1,404.8
2,230.1
18,107.8

Investment rating
AAA
AA
A
BBB+
BBB
BBB-

Investment grade

BB+
BB
BB-
B+ and below

Below-investment grade

TOTAL FIXED MATURITY SECURITIES

CNO FINANCIAL GROUP, INC. - Form 10-K

PART IIITEM 7 Management’s Discussion and Analysis of Consolidated Financial Condition and Results of OperationsThe 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

2018
23,668.0
1,282.8

2017
23,819.5
1,290.3

2016
22,539.5
1,219.3

5.42%

5.41%

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, 2018, the average yield, computed on the cost basis
of our fixed maturity portfolio, was 5.1 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 4.6 percent.

Fixed Maturities, Available for Sale

Our fixed maturity portfolio at December 31, 2018, 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, 2018, our fixed maturity portfolio had
$763.2 million of unrealized gains and $423.3 million of
unrealized losses, for a net unrealized gain of $339.9 million.
Estimated fair values of fixed maturity investments were
determined based on estimates from: (i) nationally recognized
pricing services (94 percent of the portfolio); and (ii) internally
developed methods (6 percent of the portfolio).

At December 31, 2018, approximately 10 percent of our invested
assets (13 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, 2018, our below-investment
grade fixed maturity investments had an amortized cost of
$2,230.1 million and an estimated fair value of $2,318.2 million.

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 2018, we recognized
net realized investment gains of $352.1 million, which were
comprised of: (i) $40.1 million of net gains from the sales of
investments; (ii) $363.4 million of gains on the transfer of
assets (substantially all of which were fixed maturities) related
to reinsurance transaction; (iii) $38.2 million of losses related
to equity securities, including the change in fair value; (iv) the
decrease in fair value of certain fixed maturity investments
with embedded derivatives of $5.5 million; (v) the decrease
in fair value of embedded derivatives related to a modified
coinsurance agreement of $5.1 million; and (vi) $2.6 million of
writedowns of investments for other than temporary declines
in fair value recognized through net income.

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

Our investment strategy is to maximize, over a sustained period
and within acceptable parameters of quality and risk, investment
income and total investment return through active strategic asset
allocation and 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, 2018, we had $12.6 million of investments in
substantive default (i.e., in default due to nonpayment of interest
or principal). There were no other investments about which we
had serious doubts as to the recoverability of the carrying value of
the investment.

PART IIITEM 7 Management’s Discussion and Analysis of Consolidated Financial Condition and Results of OperationsCNO FINANCIAL GROUP, INC. - Form 10-KWhen 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
interest accruals, if we determine that such amounts will not be
ultimately realized in full.

At December 31, 2018, fixed maturity investments included
structured securities with an estimated fair value of $5.1 billion (or
28 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.

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 2018.

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, 2018 (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
1,826.2
1,868.9
1,160.0
178.5
69.9
229.1
5,332.6

Amortized
cost
1,688.5
1,764.6
1,080.4
167.1
70.5
229.2
5,000.3

Estimated
fair value
1,731.4
1,812.5
1,121.0
173.8
74.2
229.7
5,142.6

The amortized cost and estimated fair value of structured securities at December 31, 2018, 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

CNO FINANCIAL GROUP, INC. - Form 10-K

Estimated fair value

Amount
546.3
72.0
1,518.0
2,674.8
322.8
8.7
5,142.6

Percent of fixed
maturities

3.0%
.4
8.2
14.5
1.8
—
27.9%

Amortized cost
514.3
64.4
1,522.9
2,552.1
338.0
8.6
5,000.3

PART IIITEM 7 Management’s Discussion and Analysis of Consolidated Financial Condition and Results of OperationsPass-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 2018, we sold $1,295.8 million of fixed maturity
investments which resulted in gross investment losses (before
income taxes) of $65.8 million. Securities are generally sold at
a loss following unforeseen issue-specific events or conditions

or shifts in perceived relative values. These reasons include but
are not limited to: (i) changes in the investment environment;
(ii) expectation that the market value could deteriorate; (iii) our
desire to reduce our exposure to an asset class, an issuer or an
industry; (iv) prospective or actual changes in credit quality; or (v)
changes in expected portfolio cash flows.

Other Investments

At December 31, 2018, we held commercial mortgage
loan investments with a carrying value of $1,452.5 million
(or 6.3 percent of total invested assets) and a fair value of
$1,475.4 million. We had one mortgage loan that was in the
process of foreclosure at December 31, 2018. During 2018,
2017 and 2016, we recognized $2.1 million, $5.2 million and
nil, respectively, of impairments on commercial mortgage loans.
Our commercial mortgage loan portfolio is comprised of large
commercial mortgage loans. Our loans have risk characteristics
that are
individually unique. Accordingly, we measure
potential losses on a loan-by-loan basis rather than establishing
an allowance for losses on mortgage loans. Approximately
13 percent, 10 percent, 8 percent and 6 percent of the mortgage
loan balance were on properties located in California, Texas,
Maryland and North Carolina, respectively. No other state
comprised greater than five percent of the mortgage loan
balance. At December 31, 2018, we held residential mortgage
loan investments with a carrying value of $149.6 million and a
fair value of $149.1 million.

The following table shows the distribution of our commercial mortgage loan portfolio by property type as of December 31, 2018 (dollars
in millions):

Retail
Industrial
Multi-family
Office building
Other

TOTAL COMMERCIAL MORTGAGE LOANS

Number of loans Carrying value
278.8
292.6
458.7
259.5
162.9
1,452.5

78
35
32
26
19
190 $

The following table shows our commercial mortgage loan portfolio by loan size as of December 31, 2018 (dollars in millions):

Under $5 million
$5 million but less than $10 million
$10 million but less than $20 million
Over $20 million

TOTAL COMMERCIAL MORTGAGE LOANS

Number of loans Carrying value
142.0
420.6
545.6
344.3
1,452.5

76
61
38
15
190 $

PART IIITEM 7 Management’s Discussion and Analysis of Consolidated Financial Condition and Results of OperationsCNO FINANCIAL GROUP, INC. - Form 10-KThe following table summarizes the distribution of maturities of our commercial mortgage loans as of December 31, 2018 (dollars in millions):

2019
2020
2021
2022
2023
after 2023

TOTAL COMMERCIAL MORTGAGE LOANS

Number of loans Carrying value
19.2
14.9
11.5
89.5
166.9
1,150.5
1,452.5

16
7
6
14
13
134
190

The following table provides the carrying value and estimated fair value of our outstanding commercial mortgage loans and the underlying
collateral as of December 31, 2018 (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

918.2 $
315.2
173.2
13.7
32.2
1,452.5 $

936.9 $
318.2
176.1
13.1
31.1
1,475.4 $

Collateral
2,425.1
496.7
236.3
16.5
34.5
3,209.1

(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, 2018, we held $233.1 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 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
and real estate investments held for sale.

At December 31, 2018, we held investments with an amortized cost
of $1,534.2 million and an estimated fair value of $1,468.4 million
related to VIEs that we are required to consolidate. The investment
portfolio held by the VIEs 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,
2018 and December 31, 2017, primarily reflect: (i) our net loss for
2018; (ii) changes in the fair value of our fixed maturity securities,
available for sale; (iii) completion of a long-term care reinsurance
transaction in September 2018, as further described in the note
to the consolidated financial statements entitled “Summary of
Significant Accounting Policies - Reinsurance”; and (iv) payments
to repurchase common stock of $100.9 million.

In accordance with GAAP, we record our fixed maturity securities,
available for sale, 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, 2018, the net unrealized gains on such
investments were $272.5 million.

CNO FINANCIAL GROUP, INC. - Form 10-K

PART IIITEM 7 Management’s Discussion and Analysis of Consolidated Financial Condition and Results of OperationsOur capital structure as of December 31, 2018 and December 31, 2017 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, 2018

December 31, 2017

916.8

914.6

1.6
2,995.0
177.7
196.6
3,370.9
4,287.7

1.7
3,073.3
1,212.1
560.4
4,847.5
5,762.1

The following table summarizes certain financial ratios as of and for the years ended December 31, 2018 and December 31, 2017:

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, 2018
$

20.78
19.69

(b)

21.4%
22.3%

December 31, 2017
$

29.05
21.79
2.94X

15.9%
20.1%

(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.

(b) For such ratio, earnings were $264.8 million less than fixed charges due to the loss recognized related to the long-term care reinsurance transaction completed in

September 2018.

Contractual Obligations

The Company’s significant contractual obligations as of December 31, 2018, 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
54,608.4
1,121.6
1,779.8
1,839.6
259.1

399.6
60,008.1

Payment due in
2020-2021
6,923.8
384.9
1,003.2
152.0
15.8

2022-2023
6,412.2
52.5
620.5
550.8
16.9

2019
3,254.4
144.8
137.3
64.8
7.5

Thereafter
38,018.0
539.4
18.8
1,072.0
218.9

298.8
3,907.6

67.6
8,547.3

31.8
7,684.7

1.4
39,868.5

(a) These cash flows represent our estimates of the payments we expect to make to our policyholders, without consideration of future premiums or reinsurance recoveries.
These estimates are based on numerous assumptions (depending on the product type) related to mortality, morbidity, lapses, withdrawals, future premiums, future
deposits, interest rates on investments, credited rates, expenses and other factors which affect our future payments. The cash flows presented are undiscounted for
interest. As a result, total outflows for all years exceed the corresponding liabilities of $23.5 billion included in our consolidated balance sheet as of December 31, 2018.
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:
•

For products such as immediate annuities and structured settlement annuities without life contingencies, the payment obligation is fixed and determinable based
on the terms of the policy.

•

For products such as universal life, ordinary life, long-term care, supplemental health and fixed rate annuities, the future payments are not due until the occurrence
of an insurable event (such as death or disability) or a triggering event (such as a surrender or partial withdrawal). We estimated these payments using actuarial
models based on historical experience and our expectation of the future payment patterns.

For short-term insurance products such as Medicare supplement insurance, the future payments relate only to amounts necessary to settle all outstanding claims,
including those that have been incurred but not reported as of the balance sheet date. We estimated these payments based on our historical experience and our
expectation of future payment patterns.

The average interest rate we assumed would be credited to our total insurance liabilities (excluding interest rate bonuses for the first policy year only and excluding
the effect of credited rates attributable to variable or fixed index products) over the term of the contracts was 4.6 percent.

PART IIITEM 7 Management’s Discussion and Analysis of Consolidated Financial Condition and Results of OperationsCNO FINANCIAL GROUP, INC. - Form 10-K

(b) Includes projected interest payments based on interest rates, as applicable, as of December 31, 2018. 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, 2018.

(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:

•

An adverse decision in pending or future litigation.

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

Worse than anticipated claims experience.

Lower than expected dividends and/or surplus
debenture interest payments from our insurance
subsidiaries (resulting from inadequate earnings or
capital or regulatory requirements).

An inability to meet and/or maintain the covenants in
our Revolving Credit Agreement.

A significant increase in policy surrender levels.

A significant increase in investment defaults.

An inability of our reinsurers to meet their financial
obligations.

While we actively manage the relationship between the duration
and cash flows of our invested assets and the estimated duration
and cash flows of benefit payments arising from contract
liabilities, there could be significant variations in the timing
of such cash flows. Although we believe our current estimates
properly project future claim experience, if these estimates prove
to be wrong, and our experience worsens (as it did in some prior
periods), our future liquidity could be adversely affected.

Liquidity for Insurance Operations

Our insurance companies generally receive adequate cash flows
from premium collections and investment income to meet their
obligations. Life insurance, long-term care insurance and annuity
liabilities are generally long-term in nature. Life and annuity
policyholders may, however, withdraw funds or surrender their
policies, subject to any applicable penalty provisions; there are
generally no withdrawal or surrender benefits for long-term care
insurance. We actively manage the relationship between the
duration of our invested assets and the estimated duration of
benefit payments arising from contract liabilities.

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, 2018, the carrying value of the FHLB common
stock was $71.1 million. As of December 31, 2018, 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 $1.9 billion at
December 31, 2018, which are maintained in custodial accounts
for the benefit of the FHLB.

CNO FINANCIAL GROUP, INC. - Form 10-K

PART IIITEM 7 Management’s Discussion and Analysis of Consolidated Financial Condition and Results of OperationsThe following summarizes the terms of the borrowings from the FHLB by our insurance subsidiaries (dollars in millions):

Amount borrowed
$

50.0
21.8
15.0
50.0
21.8
25.0
100.0
50.0
75.0
100.0
50.0
100.0
100.0
57.7
28.2
125.0
50.0
22.0
100.0
10.0
50.0
50.0
50.0
50.0
50.0
50.0
23.9
50.0
100.0
20.4
1,645.8

Maturity date
February 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
May 2022
May 2022
June 2022
July 2022
July 2022
July 2022
August 2022
December 2022
December 2022
March 2023
July 2023
July 2023
June 2025

Interest rate at December 31, 2018
Variable rate – 2.719%
Variable rate – 2.969%
Variable rate – 3.022%
Variable rate – 2.975%
Fixed rate – 1.960%
Variable rate – 3.449%
Variable rate – 3.166%
Variable rate – 3.166%
Variable rate – 2.923%
Variable rate – 2.518%
Variable rate – 3.047%
Variable rate – 2.986%
Variable rate – 2.956%
Variable rate – 3.112%
Fixed rate – 2.550%
Variable rate – 2.986%
Variable rate – 3.229%
Variable rate – 3.057%
Variable rate – 2.952%
Variable rate – 3.381%
Variable rate – 2.790%
Variable rate – 2.867%
Variable rate – 2.889%
Variable rate – 2.979%
Variable rate – 3.038%
Variable rate – 3.038%
Fixed rate – 2.160%
Variable rate – 2.845%
Variable rate – 2.845%
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 393 percent
at December 31, 2018, reflects: (i) an estimated consolidated
statutory loss from operations before net realized capital gains
of $337.1 million (including a $544.4 million loss related to a
long-term care reinsurance transaction); (ii) a $265.0 million
capital contribution; and (iii) the payment of insurance company
dividends to the holding company of $213.9 million during 2018.
While the Tax Reform Act will reduce the taxes our insurance
subsidiaries pay, the revisions to the RBC calculation for the
reduction of the corporate tax rate have the effect of increasing
required capital, resulting in an overall decrease in our consolidated
RBC ratio. The RBC ratio at December 31, 2018, reflects changes
to the RBC calculation related to tax factors, certain pre-tax
factors for various investment classes and collateral held for FHLB
advances. The net impact of these changes decreased the RBC
ratio by approximately 27 percentage points. In addition, financial

market dislocations in the fourth quarter of 2018 contributed to a
decrease in the RBC ratio of approximately 24 percentage points
including: (i) a reduction in statutory earnings related to statutory
accounting requirements which resulted in the change in reserves
not entirely offsetting the decrease in market values of the options
backing our fixed index annuity products and the decrease in the
value of investments backing COLI which, in total, reduced the
risk-based capital ratio by approximately 13 percentage points;
and (ii) unrealized investment losses included in statutory capital
which reduced the risk-based capital ratio by approximately 11
percentage points. Our objective is to target an RBC ratio in the
400 percent to 425 percent range over the long-run.

During 2018, the financial statements of two 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 and BCLIC were $119.0 million and $34.5 million,
respectively, at December 31, 2018. 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

PART IIITEM 7 Management’s Discussion and Analysis of Consolidated Financial Condition and Results of OperationsCNO FINANCIAL GROUP, INC. - Form 10-Kof 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.

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, Moody’s, Fitch
and S&P and are the rating agency’s opinions of the ability of our
insurance subsidiaries to pay policyholder claims and obligations
when due.

On October 4, 2018, Moody’s upgraded the financial strength
ratings of our primary insurance subsidiaries to “A3” from “Baa1”
and the outlook for these ratings is stable. Moody’s actions resulted
from the Company’s announcement that Bankers Life had closed
on its agreement to cede certain long-term care policies as further
described in the note to the consolidated financial statements
entitled “Reinsurance”. 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 “A” offers good
financial security, however, certain elements may be present which
suggests a susceptibility to impairment sometime in the future.
Moody’s has twenty-one possible ratings. There are six ratings
above the “A3” rating of our primary insurance subsidiaries and
fourteen ratings that are below that rating.

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.

On August 2, 2018, S&P affirmed the financial strength ratings
of “BBB+” of our primary insurance subsidiaries and revised the
outlook for these ratings to positive from stable. S&P’s actions
resulted from the Company’s announcement that Bankers Life had
entered into an agreement to cede certain long-term care policies
as further described in the note to the consolidated financial
statements entitled “Reinsurance”. 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.

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, 2018, CNO, CDOC and our other non-
insurance subsidiaries held: (i) unrestricted cash and cash
equivalents of $200.4 million; and (ii) fixed income investments of
$20.0 million. On September 27, 2018, the Company completed
a long-term care reinsurance transaction pursuant to which its
wholly-owned subsidiary, Bankers Life, entered into an agreement
to cede all of its legacy (prior to 2003) comprehensive and
nursing home long-term care policies through 100% indemnity
coinsurance, as further described in the note to the consolidated
financial statements entitled “Summary of Significant Accounting
Policies - Reinsurance”. Bankers Life paid a ceding commission of
$825 million to reinsure the block, funded through excess capital

CNO FINANCIAL GROUP, INC. - Form 10-K

PART IIITEM 7 Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operationsin the insurance subsidiaries and at the holding company. We
funded a portion of the ceding commission paid in the transaction
through a capital contribution from the holding company of
$265.0 million. The capital contribution was funded from cash,
cash equivalents and liquid investments held at the holding
company. We expect to maintain holding company liquidity of at
least $150 million at all times, which represents approximately two
years of interest and other holding company expenses.

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.

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):

Net dividends (contributions) from/to insurance subsidiaries
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,

2018
(51.1)
58.2
108.9

2017
357.7
56.8
108.1

2016
74.3
56.0
78.6

116.0

522.6

208.9

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 2018, our insurance subsidiaries paid
dividends to CDOC totaling $213.9 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 329 percent at December
31, 2018. CDOC also holds a surplus debenture from Colonial

PART IIITEM 7 Management’s Discussion and Analysis of Consolidated Financial Condition and Results of OperationsCNO FINANCIAL GROUP, INC. - Form 10-KPenn 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.

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, 2018, the subsidiaries of CLTX had earned surplus (deficit) as summarized below (dollars in millions):

Subsidiary of CLTX

Bankers Life
Colonial Penn

Earned surplus
(deficit)
131.6
(325.2)

Additional
information
(a)
(b)

(a) Bankers Life paid dividends of $145.0 million to CLTX in 2018. Bankers Life may pay dividends without regulatory approval or prior notice for any 12-month
period if such dividends are less than the greater of: (i) statutory net income for the prior year; or (ii) 10 percent of statutory capital and surplus as of the end of the
preceding year. Dividends in excess of these levels require 30 days prior notice. If a company has negative unassigned surplus, any dividend payments require prior
approval. Bankers Life recognized a statutory loss in 2018 due to the closing of the reinsurance transaction as further described in the note to the consolidated financial
statements entitled “Summary of Significant Accounting Policies - Reinsurance”. Accordingly, any dividends paid in 2019 in excess of 10 percent of Bankers Life’s
statutory capital and surplus will require 30 days prior notice.

(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 maintain or
strengthen their surplus, and these decisions could limit the
amount available at our top tier insurance subsidiaries to pay
dividends to the holding companies.

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

2019
2020
2021
2022
2023
2024 and thereafter

Principal

100.0(b)
325.0
—
—
—
500.0
925.0

Interest(a)
44.8
33.6
26.3
26.2
26.3
39.4
196.6

(a) Based on interest rates as of December 31, 2018.
(b) The maturity date of the Revolving Credit Agreement is the earlier of October 13, 2022 and the date that is six months prior to the maturity date of the Company’s

4.50% senior notes due 2020, which is November 30, 2019.

On October 13, 2017, the Company entered
into the
Amendment Agreement with respect to its Revolving Credit
Agreement. The Amendment Agreement, among other things,
increased the total commitments available under the revolving
credit facility from $150.0 million to $250.0 million, increased
the aggregate amount of additional incremental loans the
Company may incur from $50.0 million to $100.0 million and
extended the maturity date of the revolving credit facility from
May 19, 2019 to the earlier of October 13, 2022 and the date
that is six months prior to the maturity date of the Company’s
4.50% senior notes due 2020, which is November 30, 2019.
The amount drawn under the Revolving Credit Agreement
continues to be $100.0 million.

The interest rate applicable to loans under the Revolving Credit
Agreement continues to be calculated as the eurodollar rate or
the base rate, at the Company’s option, plus a margin based on
the Company’s unsecured debt rating. The margins under the

Revolving Credit Agreement range from 1.375% to 2.125% (1.75%
to 2.25% prior to the Amendment Agreement), in the case of loans
at the eurodollar rate, and 0.375% to 1.125% (.75% to 1.25% prior
to the Amendment Agreement), in the case of loans at the base
rate. The commitment fee under the Revolving Credit Agreement
continues to be based on the Company’s unsecured debt rating.

Additionally, the Revolving Credit Agreement revised the debt to
total capitalization ratio that the Company is required to maintain
from not more than 30.0 percent to not more than 35.0 percent.
The Revolving Credit Agreement continues to contain certain
other restrictive covenants with which the Company must comply.

In May 2011, the Company adopted a common share repurchase
program. In 2018, we repurchased 5.5 million shares of common
stock for $100.9 million under our securities repurchase program.
The Company had remaining repurchase authority of $284.6
million as of December 31, 2018. Free cash flow before the
increase in statutory capital necessary to support our growth is

CNO FINANCIAL GROUP, INC. - Form 10-K

PART IIITEM 7 Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operationsexpected to be between $300 million and $350 million per year.
The Company is committed to deploying 100 percent of its
free cash flow into investments to accelerate profitable growth,
(including opportunities to invest in our business and acquisition
transactions), common stock dividends and share repurchases.
The amount and timing of the securities repurchases (if any) will
be based on business and market conditions and other factors
including, but not limited to, available capital, the current price
of our common stock, opportunities to invest in our business or
acquisition transactions.

On January 9, 2019, A.M. Best affirmed its “bbb-” issuer credit
and senior unsecured debt ratings. The outlook for these ratings
remains 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 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 October 4, 2018, Moody’s upgraded our senior unsecured
debt rating to “Baa3” from “Ba1” and the outlook for these
ratings is stable. Moody’s actions resulted from the Company’s
announcement that Bankers Life had closed on its agreement to
cede certain long-term care policies as further described in the note
to the consolidated financial statements entitled “Reinsurance”.
In Moody’s view, obligations rated “Baa” are subject to moderate
credit risk and may possess certain speculative characteristics.
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 nine
ratings above CNO’s “Baa3” rating and eleven ratings that are
below its rating.

On August 2, 2018, Fitch affirmed its “BB+” rating on our senior
unsecured debt and revised the outlook for these ratings to positive
from stable. The positive outlook for these ratings reflected Fitch’s

view that such ratings could be upgraded over the next 12 to 18
months based on the Company’s announcement that Bankers
Life had entered into an agreement to cede certain long-term
care policies as further described in the note to the consolidated
financial statements entitled “Reinsurance”. 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 August 2, 2018, S&P affirmed our issuer credit and unsecured
debt ratings of “BB+” and revised the outlook for these ratings to
positive from stable. S&P’s actions were based on the Company’s
announcement that Bankers Life had entered into an agreement to
cede certain long-term care policies as further described in the note
to the consolidated financial statements entitled “Reinsurance”.
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.

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,
2018, approximately 22 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 our investment portfolio. 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 sustaining 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.

PART IIITEM 7 Management’s Discussion and Analysis of Consolidated Financial Condition and Results of OperationsCNO FINANCIAL GROUP, INC. - Form 10-KOur 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 strategic asset
allocation and 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.

The profitability of many of our products depends on the spread
between the interest earned on investments and the rates credited
on our insurance liabilities. In addition, changes in competition
and other factors, including the level of surrenders and withdrawals,
may limit our ability to adjust or to maintain crediting rates at
levels necessary to avoid narrowing of spreads under certain
market conditions. As of December 31, 2018, approximately
19 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; 28 percent had credited rates
which approximate the income earned by the Company; and the
remainder had no explicit interest rates. At December 31, 2018,
the average yield, computed on the cost basis of our fixed maturity
portfolio, was 5.1 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
4.6 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, 2018, 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 8.6 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
$345 million if interest rates were to increase by 10 percent from
their levels at December 31, 2018. 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 2018,

we recognized net realized investment gains of $352.1 million,
which were comprised of: (i) $40.1 million of net gains from the
sales of investments; (ii) $363.4 million of gains on the transfer
of assets (substantially all of which were fixed maturities) related
to reinsurance transaction; (iii) $38.2 million of losses related
to equity securities, including the change in fair value; (iv) the
decrease in fair value of certain fixed maturity investments with
embedded derivatives of $5.5 million; (v) the decrease in fair
value of embedded derivatives related to a modified coinsurance
agreement of $5.1 million; and (vi) $2.6 million of writedowns
of investments for other than temporary declines in fair value
recognized through net income. During 2017, we recognized net
realized investment gains of $50.3 million, which were comprised
of: (i) $63.1 million of net gains from the sales of investments; (ii)
$4.3 million of losses on the dissolution of VIEs; (iii) the increase
in fair value of certain fixed maturity investments with embedded
derivatives of $11.5 million; (iv) the increase in fair value of
embedded derivatives related to a modified coinsurance agreement
of $2.8 million; and (v) $22.8 million of writedowns of investments
for other than temporary declines in fair value recognized through
net income. 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).

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.

CNO FINANCIAL GROUP, INC. - Form 10-K

PART IIITEM 7 Management’s Discussion and Analysis of Consolidated Financial Condition and Results of OperationsITEM 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.

ITEM 8. Consolidated Financial Statements.

Index to Consolidated Financial Statements

Page
Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95
Consolidated Balance Sheet at December 31, 2018 and 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97
Consolidated Statement of Operations for the years ended December 31, 2018, 2017 and 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99
Consolidated Statement of Comprehensive Income for the years ended December 31, 2018, 2017 and 2016 . . . . . . . . . . . . . . . . 100
Consolidated Statement of Shareholders’ Equity for the years ended December 31, 2018, 2017 and 2016 . . . . . . . . . . . . . . . . . . . 101
Consolidated Statement of Cash Flows for the years ended December 31, 2018, 2017 and 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103

Report of Independent Registered Public Accounting Firm

To the Shareholders and Board of Directors of CNO Financial
Group, Inc.:

Basis for Opinions

Opinions on the Financial Statements and
Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheet of
CNO Financial Group, Inc. and its subsidiaries (the “Company”)
as of December 31, 2018 and 2017, and the related consolidated
statements of operations, comprehensive income, shareholders’
equity, and cash flows for each of the three years in the period
ended December 31, 2018, including the related notes and
financial statement schedules listed in the index appearing under
item 15(a)2 (collectively referred to as the “consolidated financial
statements”). We also have audited the Company’s internal control
over financial reporting as of December 31, 2018, based on criteria
established in Internal Control - Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO).

In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position
of the Company as of December 31, 2018 and 2017, and the results
of its operations and its cash flows for each of the three years in the
period ended December 31, 2018 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, 2018, based on criteria established in Internal Control -
Integrated Framework (2013) issued by the COSO.

The Company’s management is responsible for these consolidated
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 Item
9A: Management’s Report on Internal Control over Financial
Reporting. Our responsibility is to express opinions on the
Company’s consolidated financial statements and on the
Company’s internal control over financial reporting based on
our audits. We are a public accounting firm registered with the
Public Company Accounting Oversight Board (United States)
(PCAOB) and are required to be independent with respect to the
Company in accordance with the U.S. federal securities laws and
the applicable rules and regulations of the Securities and Exchange
Commission and the PCAOB.

We conducted our audits in accordance with the standards of
the PCAOB. Those standards require that we plan and perform
the audits to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement,
whether due to error or fraud, and whether effective internal
control over financial reporting was maintained in all material
respects.

Our audits of the consolidated financial statements included
performing procedures to assess the risks of material misstatement
of the consolidated financial statements, whether due to error or
fraud, and performing procedures that respond to those risks.
Such procedures included examining, on a test basis, evidence
regarding the amounts and disclosures in the consolidated

PART IIITEM 8 Consolidated Financial StatementsCNO FINANCIAL GROUP, INC. - Form 10-Kfinancial statements. Our audits also included evaluating the
accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the
consolidated financial statements. 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.

Definition and Limitations of Internal Control
over Financial Reporting

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 25, 2019

We have served as the Company’s auditor since 1983.

CNO FINANCIAL GROUP, INC. - Form 10-K

PART IIITEM 8 Consolidated Financial StatementsConsolidated Balance Sheet

December 31, 2018 and 2017

(Dollars in millions)
ASSETS
Investments:

Fixed maturities, available for sale, at fair value (amortized cost: 2018 - $18,107.8; 2017 - $20,702.1)
Equity securities at fair value (cost: 2018 - $319.8; 2017 - $420.0)
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.

2018

2017

18,447.7
291.0
1,602.1
119.7
233.1
1,468.4
833.4
22,995.4
594.2
62.4
205.2
343.6
1,322.5
4,925.4
630.0
4.4
356.7
31,439.8

22,910.9
440.6
1,650.6
116.0
284.6
1,526.9
924.5
27,854.1
578.4
178.9
245.9
359.6
1,026.8
2,175.2
366.9
5.0
319.5
33,110.3

PART IIITEM 8 Consolidated Financial StatementsCNO FINANCIAL GROUP, INC. - Form 10-KConsolidated Balance Sheet, continued

December 31, 2018 and 2017

(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:
2018 - 162,201,692; 2017 - 166,857,931)
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.

2018

2017

11,594.1
11,082.4
521.9
253.9
4.4
632.4
1,645.8
1,417.2
916.8
28,068.9

1.6
2,995.0
177.7
196.6
3,370.9
31,439.8

11,220.7
11,521.3
530.3
261.7
5.0
751.8
1,646.7
1,410.7
914.6
28,262.8

1.7
3,073.3
1,212.1
560.4
4,847.5
33,110.3

CNO FINANCIAL GROUP, INC. - Form 10-K

PART IIITEM 8 Consolidated Financial StatementsConsolidated Statement of Operations

for the years ended December 31, 2018, 2017 and 2016

(Dollars in millions, except per share data)
Revenues:

Insurance policy income
Net investment income:
General account assets
Policyholder and other special-purpose portfolios

Realized investment gains (losses):

Net realized gains on the transfer of assets related to reinsurance transaction
Other net realized investment gains, 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
Loss on dissolution of variable interest entities

Total realized gains
Fee revenue and other income

Total revenues
Benefits and expenses:

Insurance policy benefits
Loss related to reinsurance transactions
Interest expense
Amortization
Loss on extinguishment of borrowings related to variable interest entities
Other operating costs and expenses

Total benefits and expenses

Income (loss) before income taxes

Income tax expense (benefit):

Tax expense (benefit) on period income
Valuation allowance for deferred tax assets and other tax items

NET INCOME (LOSS)
Earnings per common share:

Basic:

Weighted average shares outstanding
NET INCOME (LOSS)

Diluted:

Weighted average shares outstanding
NET INCOME (LOSS)

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

2018

2017

2016

2,593.1

2,647.3

2,601.1

1,279.7
26.5

363.4
(8.7)

(2.6)

—
(2.6)
—
352.1
62.1
4,313.5

2,278.6
1,067.6
149.8
264.3
3.8
814.2
4,578.3
(264.8)

(57.6)
107.8
(315.0)

1,285.4
265.9

—
77.4

1,204.1
121.1

—
47.9

(21.9)

(35.9)

(.9)
(22.8)
(4.3)
50.3
48.3
4,297.2

2,602.7
—
123.7
239.3
9.5
841.5
3,816.7
480.5

162.8
142.1
175.6

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

165,457,000
(1.90)

170,025,000
1.03

176,638,000
2.03

165,457,000
(1.90)

172,144,000
1.02

178,323,000
2.01

PART IIITEM 8 Consolidated Financial StatementsCNO FINANCIAL GROUP, INC. - Form 10-KConsolidated Statement of Comprehensive Income

for the years ended December 31, 2018, 2017 and 2016

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

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 (loss)

Other comprehensive income (loss), net of tax
COMPREHENSIVE INCOME (LOSS)

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

2018
(315.0)

2017
175.6

(1,579.9)
125.5

959.3
(29.7)

512.0

(310.5)

(356.9)

(40.2)

(.4)
(1,299.7)
—
(1,299.7)
281.6
(1,018.1)
(1,333.1)

1.0
579.9
—
579.9
(195.6)
384.3
559.9

2016
358.2

424.4
(27.9)

(46.9)

(18.6)

.7
331.7
8.6
340.3
(120.7)
219.6
577.8

100

CNO FINANCIAL GROUP, INC. - Form 10-K

PART IIITEM 8 Consolidated Financial StatementsConsolidated Statement of Shareholders’ Equity

(Dollars in millions)
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

Cumulative effect of accounting change

Balance, January 1, 2017

Net income
Change in unrealized appreciation (depreciation) of investments
(net of applicable income tax expense of $194.4)
Change in noncredit component of impairment losses on fixed maturities,
available for sale (net of applicable income tax expense of $1.2)
Reclassification of stranded income tax effects from the Tax Cuts and
Jobs Act
Cost of common stock repurchased
Dividends on common stock
Stock options, restricted stock and performance units

Balance, December 31, 2017

Cumulative effect of accounting change

Balance, January 1, 2018

Net loss
Change in unrealized appreciation (depreciation) of investments
(net of applicable income tax benefit of $281.3)
Change in noncredit component of impairment losses on fixed
maturities, available for sale (net of applicable income tax benefit of $.3)
Cost of common stock repurchased
Dividends on common stock
Stock options, restricted stock and performance units

BALANCE, DECEMBER 31, 2018

Common stock
and additional
paid-in capital
3,388.6
$
—

Accumulated other
comprehensive
income
402.8
—

—

—
(203.0)
—
28.2
3,213.8
.9
3,214.7
—

—

—
(167.1)
—
27.4
3,075.0
—
3,075.0
—

221.1

(1.5)
—
—
—
622.4
—
622.4
—

382.1

2.2

205.4
—
—
—
1,212.1
(16.3)
1,195.8
—

Retained
earnings
347.1
358.2

Total
4,138.5
358.2

—

221.1

—
—
(54.6)
—
650.7
(.6)
650.1
175.6

—

(205.4)
—
(59.9)
—
560.4
16.3
576.7
(315.0)

(1.5)
(203.0)
(54.6)
28.2
4,486.9
.3
4,487.2
175.6

382.1

2.2

—
(167.1)
(59.9)
27.4
4,847.5
—
4,847.5
(315.0)

—

(1,017.0)

—

(1,017.0)

—
(100.9)
—
22.5
2,996.6

(1.1)
—
—
—
177.7

—
—
(65.1)
—
196.6

(1.1)
(100.9)
(65.1)
22.5
3,370.9

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

101

PART IIITEM 8 Consolidated Financial StatementsCNO FINANCIAL GROUP, INC. - Form 10-KConsolidated Statement of Cash Flows

for the years ended December 31, 2018, 2017 and 2016

(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
Other

NET CASH USED BY INVESTING ACTIVITIES

Cash flows from financing activities:

Issuance of common stock
Payments to repurchase common stock
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
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES
Net increase (decrease) in cash and cash equivalents

Cash and cash equivalents - unrestricted and held by variable interest entities, beginning of year
CASH AND CASH EQUIVALENTS - UNRESTRICTED AND HELD BY VARIABLE
INTEREST ENTITIES, END OF YEAR

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

2018

2017

2016

2,433.4
1,321.2
62.1
—
(1,910.7)
(365.0)
(141.1)
(261.8)
(788.5)
(31.8)
317.8

3,210.2
2,469.0
(6,205.8)
25.9
(25.0)
(525.7)

3.9
(108.0)
(64.8)
1,588.5
(1,312.3)

150.0
277.6

(150.9)
(276.8)
107.2
(100.7)
757.3

2,483.2
1,256.3
48.3
—
(1,973.1)
—
(120.5)
(236.1)
(747.4)
(77.4)
633.3

2,460.7
3,324.6
(6,141.0)
108.9
(23.4)
(270.2)

8.3
(168.3)
(59.6)
1,445.9
(1,232.6)

432.0
981.6

(432.7)
(1,248.6)
(274.0)
89.1
668.2

2,457.0
1,213.9
50.5
73.6
(1,916.0)
—
(106.0)
(242.7)
(747.9)
(6.7)
775.7

2,828.9
2,507.2
(6,159.8)
(84.2)
(22.5)
(930.4)

8.4
(210.0)
(54.8)
1,386.7
(1,181.6)

432.7
493.2

(333.5)
(514.9)
26.2
(128.5)
796.7

656.6

757.3

668.2

102

CNO FINANCIAL GROUP, INC. - Form 10-K

PART IIITEM 8 Consolidated Financial StatementsNotes 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. On September 27, 2018, the Company
completed a long-term care reinsurance transaction pursuant to
which its wholly-owned subsidiary, Bankers Life and Casualty
Company (“Bankers Life”), entered into an agreement with
Wilton Reassurance Company (“Wilton Re”) to cede all of its
legacy (prior to 2003) comprehensive and nursing home long-
term care policies (with statutory reserves of $2.7 billion) through
100% indemnity coinsurance, as further described in the note
to the consolidated financial statements entitled “Summary of
Significant Accounting Policies - Reinsurance”. In anticipation of
the reinsurance agreement, the Company reorganized its business
segments to move the block to be ceded from the “Bankers
Life segment” to the “Long-term care in run-off segment” in
the third quarter of 2018. All prior period segment disclosures
have been revised to conform to management’s current view of the
Company’s operating segments.

supplement

interest-sensitive

• Bankers Life, which underwrites, markets and distributes
Medicare
life
insurance,
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. 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.

• Washington National, which underwrites, markets and
distributes supplemental health (including specified disease,
accident and hospital indemnity insurance products) and life

insurance to middle-income consumers at home and at the
worksite. These products are marketed through Performance
Matters Associates, Inc. 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.

• Long-term care in run-off consists of: (i) the long-term care
business that was recaptured due to the termination of certain
reinsurance agreements effective September 30, 2016 (such
business is not actively marketed and was issued or acquired
by Washington National and Bankers Conseco Life Insurance
Company (“BCLIC”); and (ii) certain legacy (prior to 2003)
comprehensive and nursing home long-term care policies
which were ceded in September 2018 (such business is not
actively marketed and was issued by Bankers Life).

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 2018 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
investments, assets
impairments of
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.

103

PART IIITEM 8 Consolidated Financial StatementsCNO FINANCIAL GROUP, INC. - Form 10-K2. 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 investments in common stock, exchange-
traded funds and non-redeemable preferred stock. We carry these
investments at estimated fair value. Effective January 1, 2018,
changes in the fair value of equity securities are recognized in net
income as further described below under the caption “Recently
Issued Accounting Standards - Adopted Accounting Standards”.
Prior to January 1, 2018, changes in the fair value of equity
securities were recorded in “Accumulated other comprehensive
income”.

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; 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 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 is substantially
offset by the change in insurance policy benefits related to certain
products.

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”); (iii) investments in
the common stock of the Federal Home Loan Bank (“FHLB”);
and (iv) 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. It is the Company’s policy
to offset negative cash balances with positive balances in other
accounts with the same counterparty when agreements are in
place permitting legal right of offset.

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.

104

CNO FINANCIAL GROUP, INC. - Form 10-K

PART IIITEM 8 Consolidated Financial StatementsWe 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.

Recognition of Insurance Policy Income and
Related Benefits and Expenses on Insurance
Contracts

For interest-sensitive life and annuity contracts that do not involve
significant mortality or morbidity risk, the amounts collected
from policyholders are considered deposits and are not included in
revenue. Revenues for these contracts consist of charges for policy
administration, cost of insurance charges and surrender charges
assessed against policyholders’ account balances. Such revenues
are recognized when the service or coverage is provided, or when
the policy is surrendered.

We establish liabilities for annuity and interest-sensitive life
products equal to the accumulated policy account values, which
include an accumulation of deposit payments plus credited interest,
less withdrawals and the amounts assessed against the policyholder
through the end of the period. In addition, policyholder account
values for certain interest-sensitive life products are impacted by
our assumptions related to changes of certain non-guaranteed
elements that we are allowed to make under the terms of the policy,
such as cost of insurance charges, expense loads, credited interest
rates and policyholder bonuses. Sales inducements provided to
the policyholders of these products are recognized as liabilities
over the period that the contract must remain in force to qualify
for the inducement. The options attributed to the policyholder
related to our fixed index annuity products are accounted for
as embedded derivatives as described in the section of this note
entitled “Accounting for Derivatives”.

Premiums from individual life products (other than interest-
sensitive life contracts) and health products are recognized
when due. When premiums are due over a significantly shorter
period than the period over which benefits are provided, any
gross premium in excess of the net premium (i.e., the portion
of the gross premium required to provide for all expected future
benefits and expenses) is deferred and recognized into revenue in
a constant relationship to insurance in force. Benefits are recorded
as an expense when they are incurred.

We establish liabilities for traditional life, accident and health
insurance, and
life contingent payment annuity products
using mortality tables in general use in the United States,
which are modified to reflect the Company’s actual experience
when appropriate. We establish liabilities for accident and
health insurance products using morbidity tables based on the
Company’s actual or expected experience. These reserves are
computed at amounts that, with additions from estimated future
premiums received and with interest on such reserves at estimated
future rates, are expected to be sufficient to meet our obligations
under the terms of the policy. Liabilities for future policy benefits
are computed on a net-level premium method based upon
assumptions as to future claim costs, investment yields, mortality,
morbidity, withdrawals, policy dividends and maintenance
expenses determined when the policies were issued (or with
respect to policies inforce at August 31, 2003, the Company’s best
estimate of such assumptions on the Effective Date). We make an
additional provision to allow for potential adverse deviation for
some of our assumptions. Once established, assumptions on these
products are generally not changed unless a premium deficiency
exists. In that case, a premium deficiency reserve is recognized
and the future pattern of reserve changes is modified to reflect
the relationship of premiums to benefits based on the current
best estimate of future claim costs, investment yields, mortality,
morbidity, withdrawals, policy dividends and maintenance
expenses, determined without an additional provision for potential
adverse deviation.

We establish claim reserves based on our estimate of the loss to
be incurred on reported claims plus estimates of incurred but
unreported claims based on our past experience.

Accounting for Long-term Care Premium
Rate Increases

Many of our long-term care policies have been subject to premium
rate increases. In some cases, these premium rate increases were
materially consistent with the assumptions we used to value the
particular block of business at the Effective Date. With respect
to certain premium rate increases, some of our policyholders
were provided an option to cease paying their premiums and
receive a non-forfeiture option in the form of a paid-up policy
with limited benefits. In addition, our policyholders could
choose to reduce their coverage amounts and premiums in the
same proportion, when permitted by our contracts or as required
by regulators. The following describes how we account for these
policyholder options:

105

PART IIITEM 8 Consolidated Financial StatementsCNO FINANCIAL GROUP, INC. - Form 10-Krate increase is recognized as earned and original assumptions
continue to be used to determine changes to liabilities for
insurance products unless a premium deficiency exists.

• Benefit reductions - A policyholder may choose reduced
coverage with a proportionate reduction in premium, when
permitted by our contracts. This option does not require
additional underwriting. Benefit reductions are treated as a
partial lapse of coverage, and the balance of our reserves and
deferred insurance acquisition costs is reduced in proportion
to the reduced coverage.

• Non-forfeiture benefits offered in conjunction with a rate
increase - In some cases, non-forfeiture benefits are offered to
policyholders who wish to lapse their policies at the time of a
significant rate increase. In these cases, exercise of this option
is treated as an extinguishment of the original contract and
issuance of a new contract. The balance of our reserves and
deferred insurance acquisition costs are released, and a reserve
for the new contract is established.

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 and incur distribution expenses paid to our agents who
sell such products. As further discussed below under the caption
“Recently Issued Accounting Standards - Adopted Accounting
Standards”, we adopted the new revenue recognition guidance
which was effective January 1, 2018. The adoption of this new
guidance had no impact on the fee revenue we recognized in any
calendar year, but did impact the amounts we recognized during
each quarterly period within a calendar year.

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 $144.5 million,
$105.0 million and $123.9 million in 2018, 2017 and 2016,
respectively. We deduct this cost from insurance policy income.
Reinsurance recoveries netted against insurance policy benefits
totaled $173.5 million, $88.6 million and $130.1 million in 2018,
2017 and 2016, 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
$28.0 million, $30.4 million and $34.0 million in 2018, 2017 and
2016, respectively. Insurance policy benefits related to reinsurance
assumed totaled $36.4 million, $44.7 million and $47.5 million in
2018, 2017 and 2016, respectively.

On September 27, 2018, the Company completed a long-term
care reinsurance transaction pursuant to which its wholly-owned
subsidiary, Bankers Life, entered into an agreement with Wilton
Re to cede all of its legacy (prior to 2003) comprehensive and
nursing home long-term care policies (with statutory reserves of
$2.7 billion) through 100% indemnity coinsurance. Bankers Life
paid a ceding commission of $825 million to reinsure the block,
funded through excess capital in the insurance subsidiaries and
at the holding company. Bankers Life transferred to Wilton Re
assets equal to the statutory liabilities supporting the block plus
the ceding commission (subject to a customary post-closing
adjustment). In anticipation of the reinsurance agreement, the
Company reorganized its business segments to move the block
to be ceded from the “Bankers Life segment” to the “Long-term
care in run-off segment” in the third quarter of 2018. Accordingly,
the Company evaluates and tests for loss recognition separately
for the ceded block included in the “Long-term care in run-off
segment”. CNO recognized a charge related to the transaction of
$661.1 million, net of taxes and gains recognized on the assets
transferred to Wilton Re. The charge is primarily attributable
to loss recognition on the block due to the ceding commission.
Including cash flows related to reinsurance in loss recognition
testing is consistent with the Company’s past practices and policies.

In addition to the reinsurance agreement, Bankers Life and
another CNO subsidiary entered into certain other agreements
with Wilton Re, including a trust agreement, an administrative
services agreement and a transition services agreement.

Wilton Re established a trust account for the benefit of Bankers
Life to secure its obligations under the coinsurance agreement. The
trust account is required to hold qualified assets with book values
equal to the statutory liabilities of the block plus an additional
amount, initially $500 million, which declines over time.

In December 2013, two of our insurance subsidiaries entered
into 100% coinsurance agreements ceding $495 million of long-
term care reserves to Beechwood Re Ltd. (“BRe”). Pursuant to
the agreements, the insurance subsidiaries paid an additional
premium of $96.9 million to BRe and an amount equal to the
related net liabilities. The insurance subsidiaries’ ceded reserve
credits were secured by assets in market-value trusts subject to
a 7% overcollateralization, investment guidelines and periodic
true-up provisions. Future payments into the trusts to maintain
collateral requirements were the responsibility of BRe.

106

CNO FINANCIAL GROUP, INC. - Form 10-K

PART IIITEM 8 Consolidated Financial StatementsIn 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

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 and net operating loss carryforwards
(“NOLs”). Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply in the years in which temporary
differences are expected to be recovered or paid. The effect of a
change in tax rates on deferred tax assets and liabilities is recognized
in earnings in the period when the changes are enacted.

A reduction of the net carrying amount of deferred tax assets by
establishing a valuation allowance is required if, based on the
available evidence, it is more likely than not that such assets will
not be realized. In assessing the need for a valuation allowance, all
available evidence, both positive and negative, shall be considered
to determine whether, based on the weight of that evidence,
a valuation allowance for deferred tax assets is needed. This
assessment requires significant judgment and considers, among
other matters, the nature, frequency and severity of current and
cumulative losses, forecasts of future profitability, the duration of
carryforward periods, our experience with operating loss and tax
credit carryforwards expiring unused, and tax planning strategies.
We evaluate the need to establish a valuation allowance for our
deferred income tax assets on an ongoing basis. The realization
of our deferred tax assets depends upon generating sufficient
future taxable income of the appropriate type during the periods
in which our temporary differences become deductible and before
our NOLs expire.

At December 31, 2018, our valuation allowance for our net
deferred tax assets was $193.7 million, as we have determined that
it is more likely than not that a portion of our deferred tax assets
will not be realized. This determination was made by evaluating
each component of the deferred tax assets and assessing the
effects of limitations and/or interpretations on the value of such
component to be fully recognized in the future.

Investments in Variable Interest Entities

We have concluded that we are the primary beneficiary with respect
to certain variable interest entities (“VIEs”), which are consolidated
in our financial statements. All 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

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

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.

commercial mortgage-backed

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
debt obligations,
securities,
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, 2018, we held investments in various limited
partnerships and hedge funds, in which we are not the primary
beneficiary, totaling $507.3 million (classified as other invested
assets). At December 31, 2018, we had unfunded commitments to
these partnerships and hedge funds totaling $183.8 million. Our
maximum exposure to loss on these investments is limited to the
amount of our investment.

Investment borrowings

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. New
guidance effective January 1, 2018, requiring equity investments
to be measured at fair value (as described in the section of this
note entitled “Recently Issued Accounting Standards - Adopted
Accounting Standards”) does not apply to FHLB common stock
and prohibits such investments from being classified as equity

107

PART IIITEM 8 Consolidated Financial StatementsCNO FINANCIAL GROUP, INC. - Form 10-Ksecurities subject to the new guidance. Accordingly, we have
classified our investment in the FHLB common stock as other
invested assets. In order to conform to the current presentation,
the prior period investment in the FHLB common stock has been
reclassified to other invested assets. At December 31, 2018, the
carrying value of the FHLB common stock was $71.1 million. As
of December 31, 2018, 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 $1.9 billion at December 31, 2018, 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, 2018
Variable rate – 2.719%
Variable rate – 2.969%
Variable rate – 3.022%
Variable rate – 2.975%
Fixed rate – 1.960%
Variable rate – 3.449%
Variable rate – 3.166%
Variable rate – 3.166%
Variable rate – 2.923%
Variable rate – 2.518%
Variable rate – 3.047%
Variable rate – 2.986%
Variable rate – 2.956%
Variable rate – 3.112%
Fixed rate – 2.550%
Variable rate – 2.986%
Variable rate – 3.229%
Variable rate – 3.057%
Variable rate – 2.952%
Variable rate – 3.381%
Variable rate – 2.790%
Variable rate – 2.867%
Variable rate – 2.889%
Variable rate – 2.979%
Variable rate – 3.038%
Variable rate – 3.038%
Fixed rate – 2.160%
Variable rate – 2.845%
Variable rate – 2.845%
Fixed rate – 2.940%

50.0
21.8
15.0
50.0
21.8
25.0
100.0
50.0
75.0
100.0
50.0
100.0
100.0
57.7
28.2
125.0
50.0
22.0
100.0
10.0
50.0
50.0
50.0
50.0
50.0
50.0
23.9
50.0
100.0
20.4
1,645.8

The variable rate borrowings are pre-payable on each interest
reset date without penalty. The fixed rate borrowings are pre-
payable subject to payment of a yield maintenance fee based
on prevailing market interest rates. At December 31, 2018,
the aggregate yield maintenance fee to prepay all fixed rate
borrowings was $.1 million.

108

CNO FINANCIAL GROUP, INC. - Form 10-K

Interest expense of $41.9 million, $27.0 million and $17.5 million
in 2018, 2017 and 2016, respectively, was recognized related to
total borrowings from the FHLB.

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 policy minimums. The Company accounts
for the options attributed to the policyholder for the estimated life
of the policy as embedded derivatives. We are required to record the
embedded derivatives related to our fixed index annuity products at
estimated fair value.

The value of the embedded derivative is based on the estimated cost
to fulfill our commitment to fixed indexed annuity policyholders
to purchase a series of annual forward options over the duration
of the policy that back the potential return based on a percentage
of the amount of increase in the value of the appropriate index.
In valuing these options, we are required to make assumptions
regarding: (i) future index values to determine both the future
notional amounts at each anniversary date and the future prices of
the forward starting options; (ii) future annual participation rates;
and (iii) non-economic factors related to policy persistency. These
assumptions are used to estimate the future cost to purchase the
options.

The value of the embedded derivatives is determined based on the
present value of estimated future option costs discounted using
a risk-free rate adjusted for our non-performance risk and risk
margins for non-capital market inputs. The non-performance risk
adjustment is determined by taking into consideration publicly
available information related to spreads in the secondary market for
debt with credit ratings similar to ours. These observable spreads are
then adjusted to reflect the priority of these liabilities and the claim
paying ability of the issuing insurance subsidiaries.

Risk margins are established to capture non-capital market risks
which represent the additional compensation a market participant
would require to assume the risks related to the uncertainties
regarding the embedded derivatives, including future policyholder
behavior related to persistency. The determination of the risk
margin is highly judgmental given the lack of a market to assume
the risks solely related to the embedded derivatives of our fixed index
annuity products.

The determination of the appropriate risk-free rate and non-
performance risk is sensitive to the economic and interest rate
environment. Accordingly, the value of the derivative is volatile
due to external market sensitivities, which may materially affect
net income. Additionally, changes in the judgmental assumptions
regarding the appropriate risk margin can significantly impact the
value of the derivative.

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.

PART IIITEM 8 Consolidated Financial StatementsWe 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.

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 holder’s 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 $11.6 million, $2.0 million and $3.4 million during
2018, 2017 and 2016, respectively. Amounts amortized totaled
$10.6 million, $8.9 million and $11.4 million during 2018, 2017
and 2016, respectively. The unamortized balance of deferred sales
inducements was $43.5 million and $42.5 million at December 31,
2018 and 2017, respectively.

Out-of-Period Adjustments

In 2018, we recorded the net effect of out-of-period adjustments
related to the calculation of certain insurance liabilities which
increased insurance policy benefits by $2.5 million (of which,
$1.4 million related to long-term care reserves in the Bankers
Life segment and $1.1 million related to a closed block of payout
annuities in the Colonial Penn segment), decreased tax expense
by $.5 million and increased our net loss by $2.0 million
(or 1 cent per diluted share). In 2017, we recorded the net effect
of out-of-period adjustments which decreased insurance policy
benefits by $4.2 million, increased other operating costs and
expenses by $2.0 million, increased tax expense by $.8 million and
increased our net income by $1.4 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. The impact of recognizing these
adjustments in prior years was not significant to any individual
period. Management believes these adjustments are immaterial
to the consolidated financial statements and all previously issued
financial statements.

Recently Issued Accounting Standards

Pending Accounting Standards

In February 2016, the Financial Accounting Standards Board (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. Based on lease
contracts in effect at December 31, 2018, the Company’s analysis
currently indicates that the primary impact of implementation
of the new leasing guidance will be the recognition of a “right to
use” asset and a “lease liability” of approximately $65 million. The
cumulative effect adjustment to retained earnings as of January 1,
2019 is not material.

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 in 2020,
including interim periods within the fiscal year. Early adoption
is permitted as of the fiscal years beginning after December 15,
2018, including interim periods within those fiscal years. The
Company has not yet determined the expected impact of adoption
of this guidance on its consolidated financial position, results of
operations or cash flows.

In January 2017, the FASB issued authoritative guidance that
removes Step 2 of the goodwill impairment test under current
guidance, which requires a hypothetical purchase price allocation.
The new guidance requires an impairment charge to be recognized
for the amount by which the carrying amount exceeds the reported
unit’s fair value. Upon adoption, the guidance is to be applied
prospectively. The guidance will be effective for the Company
on January 1, 2020, with early adoption permitted. The adoption
of this guidance is not expected to have a material impact on the
Company’s consolidated financial position, results of operations or
cash flows.

In March 2017, the FASB issued authoritative guidance related to
the premium amortization on purchased callable debt securities.
The guidance shortens the amortization period for certain callable
debt securities held at a premium. Specifically, the new guidance
requires the premium to be amortized to the earliest call date. The
guidance does not require an accounting change for securities held
at a discount; the discount continues to be amortized to maturity.
The guidance will be effective for the Company for fiscal years,
and interim periods within those fiscal years, beginning after
December 15, 2018. The guidance should be applied on a modified
retrospective basis through a cumulative-effect adjustment directly
to retained earnings as of the beginning of the period of adoption.
The adoption of this guidance is not expected to have a material
impact on the Company’s consolidated financial position, results
of operations or cash flows based on the investments held by
the Company at December 31, 2018, that are applicable to this
guidance.

In August 2017, the FASB issued authoritative guidance related
to derivatives and hedging. The new guidance expands and
refines hedge accounting for both nonfinancial and financial
risk components and aligns the recognition and presentation of
the effects of the hedging instruments and the hedged item in

109

PART IIITEM 8 Consolidated Financial StatementsCNO FINANCIAL GROUP, INC. - Form 10-Kthe financial statements. The new guidance also includes certain
targeted improvements to ease the application of current guidance
related to the assessment of hedge effectiveness. The guidance
will be effective for the Company for fiscal years beginning after
December 15, 2018, and interim periods within those fiscal
years. Based on the Company’s current use of derivatives and
hedging activities, the adoption of this guidance is not expected
to have a material impact on the Company’s consolidated
financial position, results of operations or cash flows.

In August 2018, the FASB issued authoritative guidance that will
result in significant changes in the manner we account for and
report our insurance contracts, including certain contract riders
and deferred acquisition costs. The effective date is January 1, 2021.

The significant provisions of the new standard and differences
from current methods are summarized below:

• Under the current standard, liabilities for future policy
benefits for long-duration products are established based
on assumptions set at the issue date which are not changed
unless there is a premium deficiency. Under the new standard,
mortality, morbidity, persistency and expense assumptions
must be reviewed for potential changes at least annually.
For these assumption changes, the liability for future policy
benefits is recomputed and a cumulative catch-up adjustment
is recorded in current year income. The interest rate used to
discount future cash flows will be based on the current yield of
an upper-medium grade fixed income instrument and must be
updated each reporting period; changes in the liability resulting
from interest rate changes are recorded in accumulated other
comprehensive income. Under current methods, the interest
rate is based on expected yields on the underlying investment
portfolio estimated at the issue date.

• We will no longer be permitted to include a provision for
adverse deviation in calculations of the liability for future
policy benefits.

• Since assumptions are updated regularly, there is no longer a

need for premium deficiency testing.

• The new guidance introduces the concept of market risk
benefits for product features such as guaranteed minimum
death or income benefits, which must be accounted for at fair
value.

• Deferred acquisition costs will generally be amortized on a
constant level basis over the expected term of the contracts.
Amortization based on estimated gross profits or gross margins
will no longer be permitted. Deferred acquisition costs will
no longer need to be tested for impairment and no interest
is accreted. Adjustments for the change in amortization that
would have occurred if fixed maturity securities, available
for sale, had been sold at their aggregate fair value and the
proceeds reinvested at current yields (commonly referred to as
“shadow adjustments”) will no longer be required.

• Significant additional annual and interim disclosures will be
required including requirements for disaggregated rollforwards
of the liability for future policy benefits, policyholder account
balances, market risk benefits and deferred acquisition costs,
as well as qualitative and quantitative information about
expected cash flows, estimates and assumptions.

110

CNO FINANCIAL GROUP, INC. - Form 10-K

The new guidance is generally required to be adopted on a
modified retrospective transition approach, with an option to
elect a full retrospective transition if certain criteria are met.
The transition approach for deferred acquisition costs is required
to be consistent with the transition applied to the liability for
future policyholder benefits. Under the modified retrospective
approach, an entity would continue to use the existing locked-
in investment yield interest rate assumption to calculate the
net premium ratio for contracts in-force at the transition
date. However, for balance sheet remeasurement purposes,
the current upper-medium grade fixed-income corporate
instrument yield would be used with the difference in values
recognized through accumulated other comprehensive income
at transition and subsequently through other comprehensive
income. For market risk benefits, retrospective application is
required, with the ability to use hindsight to measure fair value
components to the extent assumptions in a prior period are
unobservable or otherwise unavailable. We are currently in the
early stages of implementing our project plan with respect to
the new standard. Accordingly, we are continuing to evaluate
the impact of adopting this new standard on our consolidated
financial condition and results of operations.

In August 2018, the FASB issued authoritative guidance
related to changes to the disclosure requirements for fair value
measurement. The new guidance removes, modifies and adds
certain disclosure requirements. The guidance will be effective
for the Company on January 1, 2020. The adoption of such
guidance will impact certain fair value disclosures, but will not
impact our consolidated financial position, results of operations
or cash flows.

Adopted Accounting Standards

In May 2014, the FASB issued authoritative guidance for
recognizing revenue from contracts with customers. Certain
contracts with customers are specifically excluded from this
guidance, including insurance contracts. The core principle
of the new guidance is that an entity should recognize revenue
when it transfers promised goods or services in an amount that
reflects the consideration to which the entity expects to be
entitled in exchange for those goods or services. The guidance
also requires additional disclosures about the nature, amount,
timing and uncertainty of revenue and cash flows arising
from contracts with customers. The guidance was effective for
the Company on January 1, 2018. The adoption of this new
guidance impacted the timing of certain revenues and expenses
between quarters of a calendar year for various distribution and
marketing agreements with other insurance companies pursuant
to which Bankers Life’s career agents distribute third party
products including prescription drug and Medicare Advantage
plans. The annual fee income earned during a calendar year did
not change, but the amount recognized during each quarterly
period varied based on the sales of such products in each period.
Furthermore, we recognized distribution expenses in the same
period that the associated fee revenue was earned. Periods prior
to the January 1, 2018 adoption date were not restated to reflect
the new guidance.

PART IIITEM 8 Consolidated Financial StatementsIn 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)

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.

(ii)

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.

(iii)

Eliminate the requirement for public business entities to
disclose the method(s) and significant assumptions used to

(iv)

(v)

(vi)

estimate the fair value that is required to be disclosed for
financial instruments measured at amortized cost on the
balance sheet.

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

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.

The guidance was effective for the Company on January 1, 2018. Accordingly, the Company recorded a cumulative effect adjustment to
the balance sheet as of January 1, 2018, related to certain equity investments that are measured at fair value. The impact of adoption was
as follows (dollars in millions):

Accumulated other comprehensive income
Retained earnings
Total shareholders’ equity

January 1, 2018

Amounts prior
to effect of
adoption of
authoritative
guidance
1,212.1
560.4
4,847.5

Effect of
adoption of
authoritative
guidance

(16.3) $
16.3
—

As adjusted
1,195.8
576.7
4,847.5

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 was effective for the
Company on January 1, 2018. The adoption of this guidance
resulted in reclassifications to certain cash receipts and payments
within our consolidated statement of cash flows, but had no
impact on our consolidated financial position, results of operations
or cash flows. Periods prior to the January 1, 2018 adoption date
have been restated to reflect the new guidance.

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 are also
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 was
effective for the Company on January 1, 2018. The adoption
of this guidance impacted the presentation of our consolidated
statement of cash flows and related cash flow disclosures, but did
not have an impact on our consolidated financial position, results
of operations or cash flows. Periods prior to the January 1, 2018
adoption date have been restated to reflect the new guidance.

111

PART IIITEM 8 Consolidated Financial StatementsCNO FINANCIAL GROUP, INC. - Form 10-KThe impact of adopting the cash flow guidance described above was as follows (dollars in millions):

2017

Amounts
prior to effect
of adoption of
authoritative
guidance

Restricted
cash

COLI death
benefits

Distributions
received
from equity
method
investments

As adjusted

Cash flows from operating activities:

Net investment income
Other operating costs
Net cash flow from operating activities

Cash flows from investing activities:

1,229.6 $
(740.9)
613.1

— $
—
—

— $

(6.5)
(6.5)

26.7 $
—
26.7

Sales of investments
Change in cash and cash equivalents held by variable interest entities
Other
Net cash provided (used) by investing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents - unrestricted and held by variable interest
entities, beginning of period
Cash and cash equivalents - unrestricted and held by variable interest
entities, end of period

2,487.4
10.4
(29.9)
(239.6)
99.5

478.9

578.4

—
(10.4)
—
(10.4)
(10.4)

189.3

178.9

(26.7)
—
—
(26.7)
—

—

—
—
6.5
6.5
—

—

2016

1,256.3
(747.4)
633.3

2,460.7
—
(23.4)
(270.2)
89.1

668.2

757.3

Amounts prior
to effect of
adoption of
authoritative
guidance

Distributions
received from
equity method
investments

Restricted
cash

As adjusted

Cash flows from operating activities:

Net investment income
Net cash flow from operating activities

Cash flows from investing activities:

1,201.0
762.8

— $
—

12.9
12.9

Sales of investments
Change in cash and cash equivalents held by variable interest entities
Net cash provided (used) by investing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents - unrestricted and held by variable interest
entities, beginning of period
Cash and cash equivalents - unrestricted and held by variable interest
entities, end of period

2,841.8
175.1
(742.4)
46.6

432.3

478.9

—
(175.1)
(175.1)
(175.1)

364.4

189.3

(12.9)
—
(12.9)
—

—

1,213.9
775.7

2,828.9
—
(930.4)
(128.5)

796.7

668.2

In May 2017, the FASB issued authoritative guidance related to
which changes to the terms or conditions of a share-based award
require an entity to apply modification accounting. The guidance
was effective for the Company for fiscal years beginning after
December 15, 2017. Early adoption was permitted, including
adoption in an interim period. The guidance is to be applied
prospectively to an award modified on or after the adoption date.
The adoption of this guidance did not have a material impact to the
Company’s consolidated financial position, results of operations or
cash flows.

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 was effective for the
Company on January 1, 2017. The adoption of this guidance had
no effect on our consolidated financial statements.

112

CNO FINANCIAL GROUP, INC. - Form 10-K

PART IIITEM 8 Consolidated Financial StatementsIn March 2016, the FASB issued authoritative guidance related to several aspects of the accounting for share-based payment transactions,
including the income tax consequences, accounting policy for forfeiture rate assumptions, 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 was effective for the Company on January 1, 2017. The
impact of adoption was as follows (dollars in millions):

Income tax assets
Valuation allowance for deferred income tax assets

Income tax assets, net

Total assets
Additional paid-in capital
Retained earnings
Total shareholders’ equity
Total liabilities and shareholders’ equity

Amounts
prior to effect
of adoption of
authoritative
guidance
1,029.9
(240.2)
789.7
31,975.2
3,212.1
650.7
4,486.9
31,975.2

January 1, 2017
Effect of Adoption of
Authoritative Guidance
Election to
account for
forfeitures as
they occur
.3
—
.3
.3
.9
(.6)
.3
.3

Recognition
of excess tax
benefits
15.7
(15.7)
—
—
—
—
—
—

As adjusted
1,045.9
(255.9)
790.0
31,975.5
3,213.0
650.1
4,487.2
31,975.5

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 was effective
for the Company on January 1, 2017. The adoption of this
guidance had no impact on our consolidated financial statements.

In February 2018, the FASB issued authoritative guidance that
allows a reclassification from accumulated other comprehensive
income to retained earnings for the stranded tax effects resulting
from the Tax Cuts and Jobs Act (the “Tax Reform Act”) enacted
by the U.S. federal government on December 22, 2017. Such
guidance only relates to the reclassification of the income tax

effects of the Tax Reform Act. The Company early adopted this
guidance and elected to reclassify the income tax effects of the
Tax Reform Act from accumulated other comprehensive income
as of December 31, 2017. As a result of such reclassification,
retained earnings decreased by $205.4 million and accumulated
other comprehensive income increased by $205.4 million. Such
amount represents the decrease in the income tax rate from
35 percent to 21 percent on the net unrealized gains of our fixed
maturity securities, available for sale, equity securities and certain
other invested assets, net of related adjustments, included in
accumulated other comprehensive income. Refer to the note to
the consolidated financial statements entitled “Income Taxes” for
additional information related to the Tax Reform Act.

113

PART IIITEM 8 Consolidated Financial StatementsCNO FINANCIAL GROUP, INC. - Form 10-K3.

INVESTMENTS

At December 31, 2018, 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, 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

—

—
—
—
—
—
—
—
(.2)
(.2)

—
—
—
—
(.3)
(.3)
(.5)

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
Asset-backed securities
Collateralized debt obligations
Commercial mortgage-backed securities
Collateralized mortgage obligations

$ 10,306.1

402.4

(319.2) $ 10,389.3 $

152.9
1,725.8
60.3
1,513.2
325.3
1,445.0
1.5
347.6
15,877.7

862.4
1,038.9
12.7
77.9
238.2
2,230.1

22.1
144.6
.9
21.9
—
16.6
.1
11.4
620.0

2.3
108.4
—
.2
32.3
143.2
763.2 $

(.2)
(2.6)
(1.7)
(6.7)
(13.5)
(20.4)
—
(3.9)
(368.2)

(51.0)
(.9)
(1.7)
(1.3)
(.2)
(55.1)

174.8
1,867.8
59.5
1,528.4
311.8
1,441.2
1.6
355.1
16,129.5

813.7
1,146.4
11.0
76.8
270.3
2,318.2

(423.3) $ 18,447.7 $

Total below-investment grade fixed maturities, available for sale
TOTAL FIXED MATURITIES, AVAILABLE FOR SALE $ 18,107.8 $

(a) 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 depending 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

114

CNO FINANCIAL GROUP, INC. - Form 10-K

PART IIITEM 8 Consolidated Financial StatementsA 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, 2018 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
8,836.9
$
8,353.6
17,190.5
674.1
218.0
19.7
5.5
917.3
18,107.8

Estimated fair
value
9,311.7
8,270.0
17,581.7
641.4
200.3
18.9
5.4
866.0
18,447.7

Percentage of total
estimated fair value

50.5%
44.8
95.3
3.5
1.1
.1
—
4.7
100.0%

At December 31, 2017, 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:

Total investment grade fixed maturities, available for sale

Below-investment grade:
Corporate securities
States and political subdivisions
Asset-backed securities
Commercial mortgage-backed securities
Collateralized mortgage obligations

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

EQUITY SECURITIES

$ 12,419.3 $

1,670.7 $

(14.6) $ 14,075.4 $

146.4
1,819.9
79.5
1,730.7
257.1
1,304.1
1.8
293.9
18,052.7

31.5
234.8
3.8
39.7
2.3
33.2
.2
16.4
2,032.6

(.2)
(.4)
(.2)
(3.2)
—
(9.1)
—
(.2)
(27.9)

177.7
2,054.3
83.1
1,767.2
259.4
1,328.2
2.0
310.1
20,057.4

867.0
2.0
1,355.2
49.9
375.3
2,649.4
$ 20,702.1 $
420.0 $
$

28.4
—
132.9
.6
56.8
218.7
2,251.3 $
23.6 $

(12.4)
—
(.9)
(1.2)
(.1)
(14.6)
(42.5) $ 22,910.9 $

883.0
2.0
1,487.2
49.3
432.0
2,853.5

(3.0) $

440.6

—

—
—
—
—
—
—
—
(.2)
(.2)

—
—
—
—
(.8)
(.8)
(1.0)

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, 2018 and 2017, were as follows (dollars in millions):

Net unrealized appreciation 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
Deferred income tax liabilities

ACCUMULATED OTHER COMPREHENSIVE INCOME

2018

1.2
271.3
(4.5)
(38.3)
(2.5)
(49.5)
177.7

2017

2.6
2,227.3
(94.0)
(292.6)
(295.8)
(335.4)
1,212.1

(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.

115

PART IIITEM 8 Consolidated Financial StatementsCNO FINANCIAL GROUP, INC. - Form 10-KAt December 31, 2018, adjustments to the insurance liabilities
and deferred tax assets included $(2.5) million and $.5 million,
respectively, for premium deficiencies that would exist on certain
blocks of business 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, 2017, adjustments to the present value of future
profits, deferred acquisition costs, insurance liabilities and deferred
tax assets included $(83.8) million, $(134.9) million, $(295.8)
million and $111.1 million, respectively, for premium deficiencies
that would exist on certain blocks of business (primarily long-
term care products) if unrealized gains on the assets backing such
products had been realized and the proceeds from the sales of such
assets were invested at then current yields.

Below-Investment Grade Securities

At December 31, 2018, the amortized cost of the Company’s
below-investment grade fixed maturity securities was $2,230.1
million, or 12 percent of the Company’s fixed maturity portfolio.
The estimated fair value of the below-investment grade portfolio
was $2,318.2 million, or 104 percent of the amortized cost.

Below-investment grade corporate debt securities typically have
different characteristics than investment grade corporate debt
securities. Based on historical performance, probability of default

by the borrower is significantly greater for below-investment
grade corporate debt securities and in many cases severity of loss
is relatively greater as such securities are generally unsecured and
often subordinated to other indebtedness of the issuer. Also, issuers
of below-investment grade corporate debt securities frequently
have higher levels of debt relative to investment-grade issuers,
hence, all other things being equal, are generally more sensitive to
adverse economic conditions. The Company attempts to reduce
the overall risk related to its investment in below-investment grade
securities, as in all investments, through careful credit analysis,
strict investment policy guidelines, and diversification by issuer
and/or guarantor and by industry.

Contractual Maturity

The following table sets forth the amortized cost and estimated
fair value of fixed maturities, available for sale, at December 31,
2018, 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

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 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

Amortized cost
405.6
$
1,346.8
1,648.2
9,706.9
13,107.5
5,000.3
18,107.8

Estimated fair value
409.8
1,377.1
1,625.7
9,892.5
13,305.1
5,142.6
18,447.7

2018

2017

2016

1,100.3
22.8
82.0
8.0
79.2
10.9

1,133.8
22.5
91.5
7.7
47.2
5.9

1,081.4
19.4
91.0
7.3
26.4
2.0

8.5

12.8

12.2

122.3
(165.3)
61.0
1,329.7
23.5
1,306.2

110.3
52.2
90.6
1,574.5
23.2
1,551.3

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

(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 nil, $3.8 million

and $(.2) million for the years ended December 31, 2018, 2017 and 2016, respectively.

116

CNO FINANCIAL GROUP, INC. - Form 10-K

PART IIITEM 8 Consolidated Financial StatementsAt December 31, 2018, the carrying value of fixed maturities and mortgage loans that were non-income producing during 2018 totaled
$4.8 million and $7.8 million, 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, including change in fair value(a)
Mortgage loans
Impairments of other investments
Loss on dissolution of variable interest entities
Other(a) (b)

2018

2017

2016

65.7
(65.8)

68.0
(24.2)

137.7
(95.2)

(.5)

—
(.5)
(.6)
(38.2)
(1.3)
(2.1)
—
30.9

(12.5)

(.9)
(13.4)
30.4
11.6
1.1
(9.4)
(4.3)
20.9

50.3
—
50.3

(15.2)

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

8.3
—
8.3

Net realized investment gains (losses) before net realized gains on the transfer of assets
related to reinsurance transaction

Net realized gains on the transfer of assets related to reinsurance transaction

NET REALIZED INVESTMENT GAINS (LOSSES)

(11.3)
363.4
352.1

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

years) were $(31.9) million, $12.8 million and $(.5) million for the years ended December 31, 2018, 2017 and 2016, respectively.

(b) In April 2016, the Company announced that it had invested in a non-controlling minority interest in Tennenbaum Capital Partners, LLC (“TCP”), a Los Angeles-
based investment management firm. In August 2018, Blackrock, Inc. announced the completion of its acquisition of TCP. The sale of our interest in TCP resulted
in a significant portion of the net realized gains in 2018.

During 2018, we recognized net realized investment gains of
$352.1 million, which were comprised of: (i) $40.1 million of net
gains from the sales of investments; (ii) $363.4 million of gains
on the transfer of assets (substantially all of which were fixed
maturities) related to reinsurance transaction; (iii) $38.2 million
of losses related to equity securities, including the change in fair
value; (iv) the decrease in fair value of certain fixed maturity
investments with embedded derivatives of $5.5 million; (v) the
decrease in fair value of embedded derivatives related to a modified
coinsurance agreement of $5.1 million; and (vi) $2.6 million of
writedowns of investments for other than temporary declines in
fair value recognized through net income.

During 2017 and 2016, VIEs that were required to be consolidated
were dissolved. We recognized losses of $4.3 million and
$7.3 million during 2017 and 2016, respectively, representing
the difference between the borrowings of such VIEs and the
contractual distributions required following the liquidation of the
underlying assets.

During 2017, we recognized net realized investment gains of
$50.3 million, which were comprised of: (i) $63.1 million of net
gains from the sales of investments; (ii) $4.3 million of losses
on the dissolution of VIEs; (iii) the increase in fair value of
certain fixed maturity investments with embedded derivatives of
$11.5 million; (iv) the increase in fair value of embedded derivatives
related to a modified coinsurance agreement of $2.8 million; and
(v) $22.8 million of writedowns of investments for other than
temporary declines in fair value recognized through net income.

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).

At December 31, 2018, there were no fixed maturity investments
in default.

During 2018, the $65.8 million of realized losses on sales of
$1,295.8 million of fixed maturity securities, available for sale,
included: (i) $54.0 million related to various corporate securities;
(ii) $4.1 million related to commercial mortgage-backed
securities; (iii) $4.1 million related to asset-backed securities;
and (iv) $3.6 million related to various other investments.
Securities are generally sold at a loss following unforeseen issuer-
specific events or conditions or shifts in perceived relative values.
These reasons include but are not limited to: (i) changes in the
investment environment; (ii) expectation that the market value
could deteriorate; (iii) our desire to reduce our exposure to an asset
class, an issuer or an industry; (iv) prospective or actual changes
in credit quality; or (v) changes in expected portfolio cash flows.

117

PART IIITEM 8 Consolidated Financial StatementsCNO FINANCIAL GROUP, INC. - Form 10-KDuring 2018, we recognized $2.6 million of impairment losses
recorded in earnings which included: (i) $2.1 million related to
a mortgage loan due to issuer specific events; and (ii) $.5 million
related to a corporate security.

During 2017, the $24.2 million of realized losses on sales of
$427.6 million of fixed maturity securities, available for sale
included: (i) $16.8 million related to various corporate securities;
(ii) $3.6 million related to commercial mortgage-backed securities;
and (iii) $3.8 million related to various other investments.

During 2017, we recognized $22.8 million of impairment
losses recorded in earnings which included: (i) $6.7 million
of writedowns on fixed maturities in the energy sector;
(ii) $5.2 million of writedowns related to a mortgage loan; and
(iii) $10.9 million of writedowns on other investments. Factors
considered in determining the writedowns of investments in 2017
included changes in the estimated recoverable value of the assets
related to each investment and the timing of and complexities
related to the recovery process.

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.

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 losses 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 low oil prices on
issuers in the energy sector.

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 2018 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 12 months prior to sale

than

losses are “other

We regularly evaluate all of our investments with unrealized
losses for possible impairment. Our assessment of whether
unrealized
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.

118

CNO FINANCIAL GROUP, INC. - Form 10-K

At date of sale

Number of issuers
5
1
6

Amortized cost
56.3
$
.1
56.4

Fair value
44.0
—
44.0

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.

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.

PART IIITEM 8 Consolidated Financial Statementssecurity 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
overcollateralization, 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.

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 the years ended December 31, 2018, 2017 and 2016 (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,

2018
(2.8)
—
2.6
—
—
—

2017
(5.5) $

—
4.7
—
(2.0)
—

2016
(2.6)
(3.0)
.1
—
—
—

(.2)

(2.8) $

(5.5)

(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.

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, 2018, 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
61.3
285.4
1,081.1
4,633.4
6,061.2
2,137.8
8,199.0 $

Estimated fair value
61.0
$
278.9
1,028.8
4,317.8
5,686.5
2,089.2
7,775.7

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, 2018 (dollars in millions):

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

Number
of issuers
4
2

Cost
basis
18.4
12.1
30.5

Unrealized
loss
(4.5) $
(4.6)
(9.1) $

Estimated
fair value
13.9
7.5
21.4

119

PART IIITEM 8 Consolidated Financial StatementsCNO FINANCIAL GROUP, INC. - Form 10-KThe 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, 2018 (dollars in millions):

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

Less than 12 months

12 months or greater

Total

Fair value

Unrealized
losses

Unrealized

Fair value

losses Fair value

Unrealized
losses

2.0
91.3
16.8
4,702.9
572.4
318.9
560.3
46.1
$ 6,310.7

— $

(1.3)
(.7)
(280.9)
(3.7)
(15.2)
(6.2)
(.6)
(308.6)

19.2
33.3
15.1
805.9
238.0
—
281.1
72.4
$ 1,465.0

(.2) $
(1.3)
(1.0)
(89.3)
(4.0)
—
(15.4)
(3.5)

21.2
124.6
31.9
5,508.8
810.4
318.9
841.4
118.5
(114.7) $ 7,775.7

(.2)
(2.6)
(1.7)
(370.2)
(7.7)
(15.2)
(21.6)
(4.1)
(423.3)

The following table summarizes the gross unrealized losses and fair values of our investments with unrealized losses that are not deemed to
be other-than-temporarily impaired, aggregated by investment category and length of time that such securities have been in a continuous
unrealized loss position, at December 31, 2017 (dollars in millions):

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

28.2
18.3
7.7
470.5
601.4
3.0
276.8
20.5
$ 1,426.4
58.7
$

$
$

(.2)
(.1)
(.1)
(6.8)
(2.0)
—
(1.7)
(.2)
(11.1)
(1.7)

$
$

.7
14.9
5.4
359.7
122.2
—
218.2
11.5
732.6
21.2

$
$

— $
(.3)
(.1)
(20.2)
(2.1)
—
(8.6)
(.1)

28.9
33.2
13.1
830.2
723.6
3.0
495.0
32.0
(31.4) $ 2,159.0
79.9

(1.3) $

$
$

(.2)
(.4)
(.2)
(27.0)
(4.1)
—
(10.3)
(.3)
(42.5)
(3.0)

Based on management’s current assessment of investments with
unrealized losses at December 31, 2018, the Company believes
the issuers of the securities will continue to meet their obligations.
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

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.

120

CNO FINANCIAL GROUP, INC. - Form 10-K

PART IIITEM 8 Consolidated Financial Statementssecurities 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.

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 2018.

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
1,826.2
1,868.9
1,160.0
178.5
69.9
229.1
5,332.6

Amortized
cost
1,688.5
1,764.6
1,080.4
167.1
70.5
229.2
5,000.3

Estimated
fair value
1,731.4
1,812.5
1,121.0
173.8
74.2
229.7
5,142.6

The amortized cost and estimated fair value of structured securities at December 31, 2018, summarized by type of security, were as follows
(dollars in millions):

TOTAL STRUCTURED SECURITIES

Estimated fair value

Amount
546.3
72.0
1,518.0
2,674.8
322.8
8.7
5,142.6

Percent of fixed
maturities

3.0%
.4
8.2
14.5
1.8
—
27.9%

Amortized cost
514.3
64.4
1,522.9
2,552.1
338.0
8.6
5,000.3

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).

121

PART IIITEM 8 Consolidated Financial StatementsCNO FINANCIAL GROUP, INC. - Form 10-Ksecurities are

Mortgage Loans

At December 31, 2018, the mortgage loan balance was primarily
comprised of commercial mortgage loans. Approximately
13 percent, 10 percent, 8 percent and 6 percent of the commercial

mortgage loan balance were on properties located in California,
Texas, Maryland and North Carolina, respectively. No other
state comprised greater than five percent of the commercial
mortgage loan balance. At December 31, 2018, there was one
mortgage loan in process of foreclosure with a carrying value
of $7.8 million. There were no other mortgage loans that were
noncurrent at December 31, 2018. Our commercial mortgage
loan portfolio is comprised of large commercial mortgage 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. At December 31, 2018, we held residential mortgage loan
investments with a carrying value of $149.6 million and a fair
value of $149.1 million.

The following table provides the carrying value and estimated fair value of our outstanding commercial mortgage loans and the underlying
collateral as of December 31, 2018 (dollars in millions):

Estimated fair value

Loan-to-value ratio(a)
Less than 60%
60% to 70%
Greater than 70% to 80%
Greater than 80% to 90%
Greater than 90%

TOTAL

Carrying value Mortgage loans
936.9
$
318.2
176.1
13.1
31.1
1,475.4

918.2
315.2
173.2
13.7
32.2
1,452.5

Collateral
2,425.1
496.7
236.3
16.5
34.5
3,209.1

(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 $39.0 million and
$38.5 million at December 31, 2018 and 2017, respectively.

The Company had no fixed maturity investments that were in
excess of 10 percent of shareholders’ equity at December 31, 2018
and 2017.

122

CNO FINANCIAL GROUP, INC. - Form 10-K

PART IIITEM 8 Consolidated Financial Statements4. 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.

• 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.

• 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.

• 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
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.

insurance

liabilities

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:

• 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.

123

PART IIITEM 8 Consolidated Financial StatementsCNO FINANCIAL GROUP, INC. - Form 10-K

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 default
rates, expected recovery rates, 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.

• 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.

• 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.

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 a particular price received from a
third party is 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 other relevant 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
35 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.

124

CNO FINANCIAL GROUP, INC. - Form 10-K

PART IIITEM 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, 2018 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

— $

11,044.4

158.6

$ 11,203.0

ASSETS:

Fixed maturities, available for sale:

Total fixed maturities, available for sale

Equity securities - corporate securities
Trading securities:

Asset-backed securities
Commercial mortgage-backed securities
Collateralized mortgage obligations

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

—
—
—
—
—
—
—
—
—
181.1

—
—
—
—
—
—
—
181.1

174.8
1,867.8
58.5
2,662.8
322.8
1,518.0
1.6
625.4
18,276.1
100.4

86.5
93.6
53.0
233.1
1,468.4
26.6
4.4
20,109.0

—
—
1.0
12.0
—
—
—
—
171.6
9.5

—
—
—
—
—
—
—
181.1

174.8
1,867.8
59.5
2,674.8
322.8
1,518.0
1.6
625.4
18,447.7
291.0

86.5
93.6
53.0
233.1
1,468.4
26.6
4.4
$ 20,471.2

— $

1,289.0

125

PART IIITEM 8 Consolidated Financial StatementsCNO FINANCIAL GROUP, INC. - Form 10-KThe categorization of fair value measurements, by input level, for our financial instruments carried at fair value on a recurring basis at
December 31, 2017 is as follows (dollars in millions):

ASSETS:

Fixed maturities, available for sale:

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

Quoted prices in active
markets for identical
assets or liabilities
(Level 1)

Significant
other observable
inputs
(Level 2)

Significant
unobservable
inputs
(Level 3)

Total

— $

14,728.0

230.4 $

14,958.4

—
—
—
—
—
—
—
—
—
287.8

—

—
—
—
—
—
2.8
2.8
—
—
—
290.6

177.7
2,056.3
79.2
3,230.2
259.4
1,377.5
2.0
742.1
22,652.4
131.6

—
—
3.9
24.2
—
—
—
—
258.5
21.2

177.7
2,056.3
83.1
3,254.4
259.4
1,377.5
2.0
742.1
22,910.9
440.6

21.6

—

21.6

.5
95.8
2.7
92.5
68.7
—
281.8
1,522.0
170.2
5.0
24,763.0

—
—
—
—
—
—
—
4.9
—
—

.5
95.8
2.7
92.5
68.7
2.8
284.6
1,526.9
170.2
5.0
284.6 $ 25,338.2

— $

1,334.8 $

1,334.8

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, 2018
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

126

CNO FINANCIAL GROUP, INC. - Form 10-K

— $
—

1,624.5 $ 1,624.5 $ 1,602.1
119.7

119.7

—

594.2
62.4

—
—
—
—

171.7

—
—

—
1,645.9
1,399.8
896.3

—

—
—

171.7

594.2
62.4

11,594.1
—
—
—

11,594.1
1,645.9
1,399.8
896.3

11,594.1
1,645.8
1,417.2
916.8

PART IIITEM 8 Consolidated Financial StatementsAssets:

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

Quoted prices in active
markets for identical
assets or liabilities
(Level 1)

December 31, 2017
Significant
other observable
inputs
(Level 2)

Significant
unobservable
inputs
(Level 3)

Total
estimated
fair value

Total
carrying
amount

— $
—

1,677.3 $ 1,677.3 $ 1,650.6
116.0

116.0

—

578.4
178.9

—
—
—
—

182.3

—
—

—
1,648.8
1,432.9
962.3

—

—
—

182.3

578.4
178.9

11,220.7
—
—
—

11,220.7
1,648.8
1,432.9
962.3

11,220.7
1,646.7
1,410.7
914.6

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, 2018 (dollars in millions):

December 31, 2018

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

Beginning
balance as
of December
31, 2017

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, 2018

Amount of
total gains
(losses) for the
year ended
December 31,
2018 included
in our net
income
relating to
assets and
liabilities still
held as of the
reporting date

230.4 $

(24.6) $

.2 $

(5.3) $

12.7 $

(54.8) $

158.6 $

3.9
24.2

258.5

21.2

(2.9)
(11.5)

(39.0)

(10.9)

4.9

—

(.1)
—

(.8)

—

.1
(.7)

—
—

1.0
12.0

(5.9)

12.7

(54.8)

171.6

—

(4.9)

9.5

—

(.5)

—
—

(.5)

—

(1,334.8)

(62.0)

107.8

—

(1,289.0)

107.8

ASSETS:

Fixed maturities,
available for sale:

Corporate securities
Debt securities issued
by foreign governments
Asset-backed securities

Total fixed maturities,
available for sale
Equity securities -
corporate securities
Investments held by
variable interest entities -
corporate securities

LIABILITIES:

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

(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, 2018 (dollars in millions):

127

PART IIITEM 8 Consolidated Financial StatementsCNO FINANCIAL GROUP, INC. - Form 10-KASSETS:

Fixed maturities, available for sale:

Corporate securities
Debt securities issued by foreign governments
Asset-backed securities

Total fixed maturities, available for sale

Equity securities - corporate securities

LIABILITIES:

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

Purchases

Sales

Issuances

Settlements

Purchases, sales, issuances
and settlements, net

32.4 $
3.0
—
35.4
—

(57.0) $
(5.9)
(11.5)
(74.4)
(10.9)

— $
—
—
—
—

(177.6)

16.5

16.7

82.4

(24.6)
(2.9)
(11.5)
(39.0)
(10.9)

(62.0)

December 31, 2017

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

Beginning
balance as
of December
31, 2016

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, 2017

Amount of
total gains
(losses) for the
year ended
December 31,
2017 included
in our net
income
relating to
assets and
liabilities still
held as of the
reporting date

258.5 $

(70.4) $

5.8 $

5.3 $

31.2 $

— $

230.4 $

(8.0)

3.9
60.4

5.4

—
(4.3)

(2.5)

32.0

(1.2)

360.2

(78.4)

25.2

(8.5)

—

4.9

—
—

—

5.9

6.3

—

—
.7

—

(.1)

5.9

(1.8)

—

—
—

—

—
(32.6)

(2.9)

(30.8)

3.9
24.2

—

—
—

—

31.2

(66.3)

258.5

(8.0)

—

21.2

4.9

—

(1,092.3)

(267.5)

25.0

—

(1,334.8)

25.0

ASSETS:

Fixed maturities,
available for sale:

Corporate securities
Debt securities issued
by foreign governments
Asset-backed securities
Collateralized
debt obligations
Commercial
mortgage-backed
securities

Total fixed maturities,
available for sale
Equity securities -
corporate securities
Investments held by
variable interest entities -
corporate securities

LIABILITIES:

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

(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, 2017 (dollars in millions):

128

CNO FINANCIAL GROUP, INC. - Form 10-K

PART IIITEM 8 Consolidated Financial StatementsASSETS:

Fixed maturities, available for sale:

Corporate securities
Asset-backed securities
Collateralized debt obligations
Commercial mortgage-backed securities
Total fixed maturities, available for sale

Equity securities - corporate securities
Investments held by variable interest entities -
corporate securities
LIABILITIES:

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

Purchases

Sales

Issuances

Settlements

Purchases, sales,
issuances and
settlements, net

76.6 $
—
—
—
76.6
—

(147.0) $
(4.3)
(2.5)
(1.2)
(155.0)
(8.5)

— $
—
—
—
—
—

8.9

(4.0)

—

— $
—
—
—
—
—

—

(70.4)
(4.3)
(2.5)
(1.2)
(78.4)
(8.5)

4.9

(178.9)

5.4

(159.3)

65.3

(267.5)

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.

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.

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, 2018 (dollars in millions):

Fair value at
December 31, 2018

Valuation techniques

Unobservable inputs Range (weighted average)

ASSETS:

Corporate securities(a)

Corporate securities(b)
Asset-backed securities(c)
Equity securities(d)

Equity securities(e)
Other assets categorized as Level 3(f)

Total
LIABILITIES:

Future policy benefits(g)

91.1

4.8
11.9
1.2

Discounted cash flow analysis

Recovery method
Discounted cash flow analysis
Market comparables

8.3
Recovery method
63.8 Unadjusted third-party price source
181.1

Discount margins
Percent of recovery
expected
Discount margins
EBITDA multiples
Percent of recovery
expected
Not applicable

1.55% - 9.52% (4.47%)

61.03%
2.30%
1.1X
59.27% - 100.00%
(59.52%)
Not applicable

1,289.0

Discounted projected embedded
derivatives

5.11% - 5.15% (5.11%)
Projected portfolio yields
Discount rates
2.20% - 4.02% (2.75%)
Surrender rates 1.30% - 37.30% (12.40%)

(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 these 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 multiples of earnings before interest, taxes,
depreciation and amortization (“EBITDA”). Generally, increases (decreases) in the EBITDA multiples would result in higher (lower) fair value measurements.
(e) Equity securities - The significant unobservable input used in the fair value measurement of these equity 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.

(f) Other assets categorized as Level 3 - For these assets, there were no adjustments to quoted market prices obtained from third-party pricing sources.

129

PART IIITEM 8 Consolidated Financial StatementsCNO FINANCIAL GROUP, INC. - Form 10-K(g) 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 risk free rates (U.S. Treasury rates for similar durations) adjusted for our non-performance risk and risk margins
for non-capital market inputs. 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.
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, 2017 (dollars in millions):

Fair value at
December 31, 2017

Valuation techniques

Unobservable inputs Range (weighted average)

ASSETS:

Corporate securities(a)

Corporate securities(b)
Asset-backed securities(c)
Equity securities(d)

Equity securities(e)
Other assets categorized as Level 3(f)

Total
LIABILITIES:
Future policy benefits(g)

149.2

Discounted cash flow analysis

2.8
24.2
1.1

Recovery method
Discounted cash flow analysis
Market comparables

20.1
Recovery method
87.2 Unadjusted third-party price source
284.6

Discount margins
Percent of recovery
expected
Discount margins
EBITDA multiples
Percent of recovery
expected
Not applicable

1.45% - 71.29% (6.96%)

0% - 21.73% (18.42%)
1.80% - 3.71% (2.67%)
1.1X

59.1%
Not applicable

1,334.8

Discounted projected embedded
derivatives

5.15% - 5.61% (5.60%)
Projected portfolio yields
0.92% - 2.51% (2.00%)
Discount rates
Surrender rates 1.20% - 46.40% (12.30%)

(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 these 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 EBITDA multiples. Generally, increases

(decreases) in EBITDA multiples would result in higher (lower) fair value measurements.

(e) Equity securities - The significant unobservable input used in the fair value measurement of these equity 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.

(f) Other assets categorized as Level 3 - For these assets, there were no adjustments to quoted market prices obtained from third-party pricing sources.
(g) 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 risk free rates (U.S. Treasury rates for similar durations) adjusted for our non-performance risk and risk margins
for non-capital market inputs. 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

2018

2017

6% $

5,277.9

5,669.0

2,461.6

2,944.5

30.3

2,401.2

2,812.0

44.9

368.1
11,082.4

594.2
11,521.3

(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.

130

CNO FINANCIAL GROUP, INC. - Form 10-K

PART IIITEM 8 Consolidated Financial StatementsOur policyholder account balances are summarized as follows (dollars in millions):

Fixed index annuities
Other annuities
Interest-sensitive life insurance contracts
TOTAL

2018
6,657.8
3,793.8
1,142.5
11,594.1

2017
5,942.2
4,183.8
1,094.7
11,220.7

The Company establishes reserves for insurance policy benefits
based on assumptions as to investment yields, mortality, morbidity,
withdrawals, lapses and maintenance expenses. These reserves
include amounts for estimated future payment of claims based

on actuarial assumptions. The balance includes provision for the
Company’s best estimate of the future policyholder benefits to be
incurred on this business, given recent and expected future changes
in experience.

Changes in the unpaid claims reserve (included in claims payable) and disabled life reserves related to accident and health insurance
(included in the liability for future policy benefits) were as follows (dollars in millions):

Balance, beginning of year

Less reinsurance (receivables) payables

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

Reserves ceded pursuant to reinsurance transaction
Net balance, end of year

Add reinsurance receivables (payables)

BALANCE, END OF YEAR

2018
1,828.2
15.1
1,843.3

1,480.0
(41.5)
1,438.5
71.8

(849.4)
(630.6)
(1,480.0)
(956.7)
916.9
951.1
1,868.0

2017
1,777.6
14.0
1,791.6

1,548.1
(26.7)
1,521.4
78.4

(845.5)
(702.6)
(1,548.1)
—
1,843.3
(15.1)
1,828.2

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

(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 annual effective tax rate

Tax benefit on long-term care reinsurance transaction
Income tax expense on discrete items:

Change in valuation allowance
Impact of federal tax reform
Change in valuation allowance related to federal tax reform
IRS settlement
Other items

TOTAL INCOME TAX EXPENSE (BENEFIT)

2018
(2.8)
93.1
8.9
99.2
(147.9)

95.7
—
—
—
3.2
50.2

2017
90.8
72.0
(15.3)
147.5
—

(13.4)
310.6
(138.1)
—
(1.7)
304.9

2016
(45.2)
173.0
(14.0)
113.8
—

40.7
—
—
(170.4)
10.9
(5.0)

On December 22, 2017, the Tax Reform Act was signed into law
and enacted a broad range of changes to the Internal Revenue
Code (the “Code”) including individual and corporate reforms
and numerous changes to U.S. international tax provisions. The
Tax Reform Act reduced the corporate tax rate to 21 percent
from 35 percent effective January 1, 2018, and made significant
changes to the taxation of life insurance companies. Among

other things, the Tax Reform Act modified the computation
of life insurance reserves, increased the capitalization rate and
extended the amortization period for policy acquisition costs,
imposed limitations on the deductibility of performance-based
compensation to “covered employees” and interest expense, and
allowed for the expensing of certain capital expenditures. For
NOLs arising after December 31, 2017, the Tax Reform Act

131

PART IIITEM 8 Consolidated Financial StatementsCNO FINANCIAL GROUP, INC. - Form 10-Klimits the ability to utilize NOL carryforwards to 80% of taxable
income. In addition, NOLs arising after 2017 can be carried
forward indefinitely, but carryback is prohibited. As a result of the
reduction in the federal corporate income tax rate, we reduced
the value of our net deferred tax assets by $172.5 million (net
of the reduction in the valuation allowance for deferred tax assets)
which was recorded as additional income tax expense for the year
ended December 31, 2017.

The $172.5 million adjustment to our net deferred tax assets was
a provisional amount as defined in the Securities and Exchange
Commission’s (the “SEC”) Staff Accounting Bulletin No. 118

(“SAB 118”), issued in December 2017 to address complexities
in completing the calculations resulting from the Tax Reform
Act. Although we were able to make a reasonable estimate of
the impact of the Tax Reform Act based on the information
available, we required additional time within the measurement
period permitted under SAB 118 to complete our analysis of the
calculations of life insurance tax reserves and future period taxable
income used to estimate our deferred tax valuation allowance. We
completed our analysis in the fourth quarter of 2018 and there
were no material changes to our previous estimates.

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 federal tax reform
Change in valuation allowance related to federal tax reform
Impact of IRS settlement
Other items

EFFECTIVE TAX RATE

2018
21.0%
(39.5)
.6
(1.1)
—
—
—
—
(19.0)%

2017
35.0%
(6.0)
(2.0)
.6
64.7
(28.8)
—
—
63.5%

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
Investments
Insurance liabilities
Other

Gross deferred tax assets

Deferred tax liabilities:

Investments
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

2018

685.1
14.5
—
283.9
46.3
1,029.8

(10.1)
(171.1)
(50.2)
(231.4)
798.4
(193.7)
604.7
25.3
630.0

2016
35.0%
7.6
(1.1)
2.2
—
—
(48.2)
3.1
(1.4)%

2017

489.6
9.3
4.3
415.8
48.9
967.9

—
(165.4)
(337.2)
(502.6)
465.3
(89.1)
376.2
(9.3)
366.9

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

132

CNO FINANCIAL GROUP, INC. - Form 10-K

PART IIITEM 8 Consolidated Financial Statementsof 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 NOLs expire.

Based on our assessment, it appears more likely than not that
$604.7 million of our total deferred tax assets of $798.4 million will
be realized through future taxable earnings. Accordingly, we have
established a deferred tax valuation allowance of $193.7 million
at December 31, 2018 ($189.9 million of which relates to our net
federal operating loss carryforwards and $3.8 million relates to
state operating loss carryforwards). As a result of the completion
of the long-term care reinsurance transaction in the third quarter
of 2018, we increased the valuation allowance for deferred tax
assets by $104.8 million. The increase in life company NOLs
generated by the tax loss on the reinsurance transaction is
expected to impact our ability to utilize non-life NOLs in the
future. Accordingly, we increased the valuation allowance for
deferred taxes by $104.8 million. 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 the Tax Reform Act, 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.

Based on our assessment, we recognized an increase to the
allowance for deferred tax assets of $104.6 million in 2018. 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, 2015

Increase in 2016

Balance, December 31, 2016

Decrease in 2017
Cumulative effect of accounting change

Balance, December 31, 2017

Increase in 2018

BALANCE, DECEMBER 31, 2018

213.5
26.7(a)
240.2
(166.8)(b)
15.7(c)
89.1
104.6(d)
193.7

(a) The 2016 increase to the deferred tax valuation allowance primarily resulted from additional non-life NOLs due to the settlement with the Internal Revenue Service

(the “IRS”).

(b) The 2017 decrease to the deferred tax valuation allowance includes: (i) $138.1 million related to a reduction in the federal corporate income tax rate and other changes from
the Tax Reform Act; (ii) $13.4 million of reductions to the deferred tax valuation allowance primarily related to the recognition of capital gains; and (iii) $15.3 million
of reductions in the deferred tax valuation allowance reflecting higher current year taxable income than previously reflected in our deferred tax valuation model.

(c) Effective January 1, 2017, the Company adopted 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. The Company had NOL carryforwards of $15.7 million related to deductions for stock options and restricted stock
on the date of adoption. However, a corresponding valuation allowance of $15.7 million was recognized as a result of adopting this guidance. Therefore, there was no
impact to our consolidated financial statements related to the initial adoption of this provision of the new guidance.

(d) The 2018 increase to the deferred tax valuation allowance includes: (i) an increase of $104.8 million due to the life NOLs generated by the tax loss on the long-term care

reinsurance transaction; and (ii) other changes netting to $(.2) million.
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.

is required. 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).

Section 382 of the Code imposes limitations on a corporation’s
ability to use its NOLs when the company undergoes a 50 percent
ownership change over a three year period. 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

133

PART IIITEM 8 Consolidated Financial StatementsCNO FINANCIAL GROUP, INC. - Form 10-Koutstanding common stock for their own account. Many of these
transactions are beyond our control. If an additional ownership
change were to occur for purposes of Section 382, we would be
required to calculate an annual restriction on the use of our NOLs
to offset future taxable income. The annual restriction would be
calculated based upon the value of CNO’s equity at the time of
such ownership change, multiplied by a federal long-term tax
exempt rate (2.51 percent at December 31, 2018), 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, 2018, we were below the 50 percent ownership
change level that would trigger further impairment of our ability
to utilize our NOLs.

In 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. The Section 382 Rights
Agreement has been amended three times, most recently effective
November 13, 2017 (the “Third Amended Section 382 Rights
Agreement”). The Third Amended Section 382 Rights Agreement
extended the expiration date of the Section 382 Rights Agreement
to November 13, 2020, updated the purchase price of the rights
described below and provided for a new series of preferred stock
relating to the rights that is substantially identical to the prior
series of preferred stock. The Third Amended Section 382 Rights
Agreement was approved by the Company’s stockholders at the
Company’s 2018 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 Third 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.

In 2010, our shareholders approved an amendment to CNO’s
certificate of incorporation designed to prevent certain transfers of
common stock which could otherwise adversely affect our ability to
use our NOLs (the “Original Section 382 Charter Amendment”).
Subject to the provisions set forth in the Original Section 382
Charter Amendment, transfers of our common stock would be
void and of no effect if the effect of the purported transfer would
be to: (i) increase the direct or indirect ownership of our common
stock by any person or public group (as such term is defined in the
regulations under Section 382) from less than 5% to 5% or more
of our common stock; (ii) increase the percentage of our common
stock owned directly or indirectly by a person or public group
owning or deemed to own 5% or more of our common stock; or
(iii) create a new public group. The Original Section 382 Charter
Amendment was amended and extended in 2013 and in 2016 (the
“2016 Section 382 Charter Amendment”). The expiration date for
the 2016 Section 382 Charter Amendment is July 31, 2019.

Year of expiration
2023
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
Total federal non-life NOLs

Post 2017 life NOLs with no expiration

TOTAL FEDERAL NOLs

Net operating loss
carryforwards

1,751.9
85.2
149.9
10.8
80.3
213.2
.3
.2
44.4
.6
.9
.8
2,338.5
923.9
3,262.4

we expect it to be fully utilized over the next three to four years,
depending on the level of life taxable income during such period.
Our non-life NOLs can be used to offset 35 percent of remaining
life insurance company taxable income after application of the life
NOLs, until all non-life NOLs are utilized or expire.

134

CNO FINANCIAL GROUP, INC. - Form 10-K

PART IIITEM 8 Consolidated Financial StatementsWe also had deferred tax assets related to NOLs for state income
taxes of $14.5 million and $9.3 million at December 31, 2018 and
2017, respectively. The related state NOLs are available to offset
future state taxable income in certain states through 2033.

There were no unrecognized tax benefits in either 2018 or 2017.

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 Company’s various state income tax returns are generally
open for tax years beginning in 2015, 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.

7. NOTES PAYABLE - DIRECT CORPORATE OBLIGATIONS

The following notes payable were direct corporate obligations of the Company as of December 31, 2018 and 2017 (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; (ii) to redeem and satisfy
and discharge all of the outstanding 6.375% Senior Secured Notes
due October 2020; and (iii) to pay fees and expenses related to
the offering of the Notes and the foregoing transactions. The
remaining proceeds 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.

2018
325.0
500.0
100.0
(8.2)
916.8

2017
325.0
500.0
100.0
(10.4)
914.6

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 the Revolving Credit Agreement (as defined
below). 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.

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.

135

PART IIITEM 8 Consolidated Financial StatementsCNO FINANCIAL GROUP, INC. - Form 10-KThe Indenture contains covenants that restrict the Company’s
ability, with certain exceptions, to:

• incur certain subsidiary indebtedness without also guaranteeing

the Notes;

• create liens;

• enter into sale and leaseback transactions;

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

• 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 a $150.0 million
four-year unsecured revolving credit facility 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 facility, resulting in $50.0 million available for
additional borrowings. On October 13, 2017, the Company entered
into an amendment and restatement agreement (the “Amendment
Agreement”) with respect to its revolving credit agreement
(as amended by the Amendment Agreement, the “Revolving
Credit Agreement”). The Amendment Agreement, among other
things, increased the total commitments available under the
revolving credit facility from $150.0 million to $250.0 million,
increased the aggregate amount of additional incremental loans
the Company may incur from $50.0 million to $100.0 million and
extended the maturity date of the revolving credit facility from
May 19, 2019 to the earlier of October 13, 2022 and the date that
is six months prior to the maturity date of the 2020 Notes, which
is November 30, 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 $100.0 million provided that
there are no events of default and subject to certain other terms
and conditions including the delivery of certain documentation.

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 based on the Company’s

unsecured debt rating), or a eurodollar rate plus an applicable
margin based on the Company’s unsecured debt rating. The
margins under the Revolving Credit Agreement range from
1.375 percent to 2.125 percent (1.75 percent to 2.25 percent
prior to the Amendment Agreement), in the case of loans at the
eurodollar rate, and 0.375 percent to 1.125 percent (.75 percent to
1.25 percent prior to the Amendment Agreement), in the case of
loans at the base rate. At December 31, 2018, the interest rate on
the amounts outstanding under the Revolving Credit Agreement
was 4.15 percent. In addition, the daily average undrawn portion
of the Revolving Credit Agreement accrues 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.

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:

• subsidiary debt;

• liens;

• restrictive agreements;

• restricted payments during the continuance of an event of

default;

• disposition of assets and sale and leaseback transactions;

• transactions with affiliates;

• change in business;

• fundamental changes;

• modification of certain agreements; and

• 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 35.0 percent (30.0 percent prior to the Amendment
Agreement) (such ratio was 22.5 percent at December 31, 2018); (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 393 percent at
December 31, 2018); 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 $3,193.2 million at December 31, 2018
compared to the minimum requirement of $2,687.4 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:

• non-payment;

• breach of representations, warranties or covenants;

136

CNO FINANCIAL GROUP, INC. - Form 10-K

PART IIITEM 8 Consolidated Financial Statements• cross-default and cross-acceleration;

• bankruptcy and insolvency events;

• judgment defaults;

• actual or asserted invalidity of documentation with respect to

the Revolving Credit Agreement;

• change of control; and

• 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.

Scheduled Repayment of our Direct Corporate Obligations

The scheduled repayment of our direct corporate obligations was as follows at December 31, 2018 (dollars in millions):

Year ending December 31,
2019
2020
2021
2022
2023
Thereafter

100.0(a)
325.0
—
—
—
500.0
925.0

(a) The maturity date of the Revolving Credit Agreement is the earlier of October 13, 2022 and the date that is six months prior to the maturity date of the Company’s

4.50% senior notes due 2020, which is November 30, 2019.

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.

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.

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

137

PART IIITEM 8 Consolidated Financial StatementsCNO FINANCIAL GROUP, INC. - Form 10-Kfaith. 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, fraud/
fraudulent concealment, 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 (“Platinum”).
On April 27, 2017, an amended complaint was filed adding
Beechwood Capital Group, LLC as a defendant. On March 13,
2018, the District Court granted defendants’ motion to
compel arbitration of Washington National’s and BCLIC’s
claims and the litigation is now stayed pending the outcome
of the arbitration. Washington National and BCLIC intend to
vigorously pursue their claims for damages and other remedies
in the arbitration and the litigation described above.

By public notice dated July 26, 2017, the Cayman Islands
Monetary Authority advised that, effective July 25, 2017, two
individuals (the “Controllers”) had been appointed pursuant
to Section 24(2)(h) of the Cayman Islands Insurance Law to
assume control of the affairs of BRe. According to the public
notice, effective with their appointment, the Controllers
assumed immediate control of the affairs of BRe and have all
the powers necessary to administer the affairs of BRe including
power to terminate its insurance business. The Controllers
are responsible for assessing the financial position of BRe and
submitting a report to the Cayman Islands Monetary Authority.
On August 10, 2018, the Cayman Islands Monetary Authority
filed a public petition in the Grand Court of the Cayman
Islands to officially wind up BRe, concluding that BRe was now
of doubtful solvency. On November 27, 2018, the Grand Court
of the Cayman Islands granted the petition to officially wind up
BRe and appointed the current Controllers of BRe to be its Joint
Official Liquidators.

On December 19, 2018, Melanie Cyganowski, as Equity Receiver
for Platinum Partners Credit Opportunities Master Fund, LP
and other Platinum entities (the “PPCO Receiver”) brought
an action in the United States District Court for the Southern
District of New York, Cyganowski v. Beechwood Re Ltd, et al.,
Case No. 18-cv-12018, alleging, among other claims, fraud,
aiding and abetting fraud, fraudulent transfer and violation
of the Racketeer Influenced and Corrupt Organizations Act
against numerous defendants, including BRe and many of its
affiliates, CNO Financial Group, Inc., BCLIC, Washington
National and 40|86 Advisors, Inc. The PPCO Receiver alleges
that Platinum insiders conspired with BRe and its principals and
affiliates in a massive fraudulent scheme to enrich the Platinum
and BRe insiders to the detriment of Platinum investors and
creditors. The PPCO Receiver alleges that CNO Financial
Group, Inc., BCLIC, Washington National and 40|86 Advisors,

Inc. have liability for the fraudulent scheme of the Platinum and
BRe insiders under a theory that they turned a blind eye to the
fraudulent scheme due to their desire to transfer unprofitable
legacy portfolios of long-term care insurance via the reinsurance
transactions with BRe. CNO Financial Group, Inc., BCLIC,
Washington National and 40|86 Advisors, Inc. are vigorously
contesting the PPCO Receiver’s claims.

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
related to the use of data available on the U.S. Social Security
Administration’s Death Master File (“SSADMF”) 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 40 states and the District of Columbia participated in
this examination. In November 2018, we entered into a Global
Resolution Agreement for compliance with laws and regulations
concerning the identification, reporting and escheatment of
unclaimed contract benefits or abandoned funds. Under the terms
of the Global Resolution Agreement, a third-party auditor acting
on behalf of the signatory jurisdictions will compare expanded
matching criteria to the SSADMF to identify deceased insureds
and contract holders where a valid claim has not been made.

Guaranty Fund Assessments

The balance sheet at December 31, 2018, included: (i) accruals of
$10.6 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, 2018; and (ii) receivables of $18.0 million
that we estimate will be recovered through a reduction in future

138

CNO FINANCIAL GROUP, INC. - Form 10-K

PART IIITEM 8 Consolidated Financial Statementspremium taxes as a result of such assessments. At December 31,
2017, such guaranty fund assessment accruals were $14.1 million
and such receivables were $20.0 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 $2.3 million, $11.0 million and $2.8 million in
2018, 2017 and 2016, 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 $23.5 million and
$24.2 million at December 31, 2018 and 2017, 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 $67.0 million, $61.4 million
and $56.8 million in 2018, 2017 and 2016, respectively. Future
required minimum payments as of December 31, 2018, were as
follows (dollars in millions):

2019
2020
2021
2022
2023
Thereafter
Total

22.2
18.7
14.3
11.0
8.7
1.4
76.3

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.

cash surrender value (which approximates net realizable value) of the
COLI assets are recorded as net investment income (loss) on special-
purpose portfolios and totaled $(10.6) million, $24.6 million and
$6.9 million in 2018, 2017 and 2016, 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 $155.7 million
and $168.2 million at December 31, 2018 and 2017, respectively.
Expenses incurred on this plan were $(5.2) million, $18.8 million
and $8.1 million during 2018, 2017 and 2016, respectively (including
the recognition of gains (losses) of $11.9 million, $(12.2) million
and $3.1 million in 2018, 2017 and 2016, 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
$171.7 million and $182.3 million at December 31, 2018 and 2017,
respectively. Death benefits related to the COLI and changes in the

We used the following assumptions for the deferred compensation
plan to calculate:

Benefit obligations:
Discount rate
Net periodic cost:
Discount rate

2018

2017

4.25%

3.75%

4.25%

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, 2018 were as follows
(dollars in millions):

2019
2020
2021
2022
2023
2024 - 2028

7.5
7.8
8.0
8.3
8.6
45.7

One of our insurance subsidiaries has another unfunded
nonqualified deferred compensation program for qualifying
members of its career agency force. Such agents may defer a certain
percentage of their net commissions into the program. In addition,
annual Company contributions are made based on the agent’s
production and vest over a period of five to 10 years. The liability
recognized in the consolidated balance sheet for this program

139

PART IIITEM 8 Consolidated Financial StatementsCNO FINANCIAL GROUP, INC. - Form 10-Kwas $28.4 million and $22.9 million at December 31, 2018 and
2017, respectively. Company contribution expense totaled $5.5
million, $6.6 million and $4.4 million in 2018, 2017 and 2016,
respectively. We purchased Trust-Owned Life Insurance (“TOLI”)
as an investment vehicle to fund the program. The TOLI assets are
not assets of the program, and as a result, are accounted for outside
the program and are recorded in the consolidated balance sheet as
other invested assets. The carrying value of the TOLI assets was
$22.9 million and $18.0 million at December 31, 2018 and 2017,
respectively.

10. DERIVATIVES

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 $5.8 million, $5.5 million and $5.3 million
in 2018, 2017 and 2016, 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
Reinsurance receivables

TOTAL ASSETS
Liabilities:

Future policy benefits:
Fixed index products
TOTAL LIABILITIES

Fair value

2018

26.6
(6.5)
20.1

1,289.0
1,289.0

$
$

2017

170.2
(1.4)
168.8

1,334.8
1,334.8

$
$

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:

Fixed index annuities - embedded derivative
Fixed index call options

(a) Dollars in millions.

Measurement
Policies
Notional (a)

December 31,
2017
104,689
3,005.8 $

Additions
12,189
3,043.2 $

Maturities/
terminations
(8,048)
(3,028.5) $

December 31,
2018
108,830
3,020.5

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 $123 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 other special-purpose portfolios:

Fixed index call options
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

2018

2017

2016

(43.0) $

162.5

29.2

—
(5.1)
(5.1)

—
2.8
2.8

107.8
59.7

25.0
190.3

(1.1)
.8
(.3)

60.8
89.7

140

CNO FINANCIAL GROUP, INC. - Form 10-K

PART IIITEM 8 Consolidated Financial StatementsDerivative 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, 2018, 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.

The following table summarizes information related to derivatives with master netting arrangements or collateral as of December 31, 2018
and 2017 (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

26.6

— $

26.6

— $

26.6

170.2

—

170.2

—

170.2

December 31, 2018:

Fixed index call options

December 31, 2017:

Fixed index call options

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(a)
Restricted and performance stock vested(b)

BALANCE, END OF YEAR

2018
166,858
(5,486)
378
452
162,202

2017
173,754
(7,808)
725
187
166,858

2016
184,029
(11,688)
978
435
173,754

(a) In 2018, such amount was reduced by 69 thousand shares which were tendered to the Company for the payment of the exercise price and required federal and state

tax withholdings.

(b) In 2018, 2017 and 2016, such amount was reduced by 242 thousand, 103 thousand and 191 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, November
2015 and May 2017, the Company’s Board of Directors approved,
in aggregate, an additional $1,900.0 million to repurchase the
Company’s outstanding securities. In 2018, 2017 and 2016,
we repurchased 5.5 million, 7.8 million and 11.7 million
shares, respectively, for $100.9 million, $167.1 million and
$203.0 million, respectively, under the securities repurchase
program. The Company had remaining repurchase authority of
$284.6 million as of December 31, 2018.

In 2018, 2017 and 2016, dividends declared on common stock
totaled $65.1 million ($0.39 per common share), $59.6 million
($0.35 per common share) and $54.8 million ($0.31 per
common share), respectively. In May 2018, the Company
increased its quarterly common stock dividend to $0.10 per
share from $0.09 per share. In May 2017, the Company
increased its quarterly common stock dividend to $0.09 per
share from $0.08 per share. In May 2016, the Company
increased its quarterly common stock dividend to $0.08 per
share from $0.07 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, restricted stock units, 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, 2018, 5.3 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 through 2018 generally vest on a
graded basis over a three year service term and expire ten years from
the date of grant. In 2018, one grant of 1.6 million stock options
vests on a graded basis over a five year service term and expires ten
years from the date of grant. The vesting periods for our awards
of restricted stock and restricted stock units (collectively “restricted
stock”) range from immediate vesting to a period of three years.

141

PART IIITEM 8 Consolidated Financial StatementsCNO FINANCIAL GROUP, INC. - Form 10-KA summary of the Company’s stock option activity and related information for 2018 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
15.95
21.03
(10.94)
(20.29)
17.77

Shares
5,121
2,112
(447)
(247)
6,539
3,247
5,296

Weighted average
remaining life
(in years)

Aggregate
intrinsic value

5.8 $
3.5 $

3.1

44.4
26.7

A summary of the Company’s stock option activity and related information for 2017 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
14.73
21.06
(17.81)
(11.43)
15.95

Shares
5,354
729
(237)
(725)
5,121
2,440
7,488

Weighted average
remaining life
(in years)

Aggregate
intrinsic value

$
$

5.4
3.0

5.2

37.2
19.2

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

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

We recognized compensation expense related to stock options
totaling $5.6 million ($4.5 million after income taxes) in 2018,
$6.3 million ($4.1 million after income taxes) in 2017 and $12.2
million ($7.9 million after income taxes) in 2016. Compensation
expense related to stock options reduced both basic and diluted
earnings per share by three cents in 2018, two cents in 2017 and

four cents in 2016. At December 31, 2018, the unrecognized
compensation expense for non-vested stock options totaled
$8.9 million which is expected to be recognized over a weighted
average period of 3.5 years. Cash received by the Company from
the exercise of stock options was $3.9 million, $8.3 million and
$8.4 million during 2018, 2017 and 2016, 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

142

CNO FINANCIAL GROUP, INC. - Form 10-K

2018 Grants

2017 Grants

2016 Grants

2.9%
1.9%
27%
6.4
5.49

2.2%
1.5%
32%
6.3
6.20

1.4%
1.6%
36%
6.3
5.48

PART IIITEM 8 Consolidated Financial StatementsThe 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 2018, 2017 and 2016.

The following table summarizes information about stock options outstanding at December 31, 2018 (shares in thousands):

Options outstanding

Options exercisable

Range of exercise prices
$6.77 - $7.51
$10.88 - $16.22
$16.42 - $21.57

Number
outstanding
339
635
5,565
6,539

Remaining life
(in years)
0.2
1.2
6.7

Average exercise
price
7.50
10.99
19.17

Number
exercisable

Average exercise
price
7.50
10.98
17.54

339 $
634
2,274
3,247

During 2018, 2017 and 2016, the Company granted restricted
stock of .4 million, .3 million and .4 million, respectively, to
certain directors, officers and employees of the Company at
a weighted average fair value of $22.36 per share, $20.87 per
share and $18.17 per share, respectively. The fair value of such

grants totaled $9.7 million, $6.9 million and $7.3 million in
2018, 2017 and 2016, 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 2018 is presented below (shares in thousands):

Non-vested shares, beginning of year

Granted
Vested
Forfeited

NON-VESTED SHARES, END OF YEAR

Shares
535
434
(216)
(18)
735

Weighted average grant
date fair value
19.65
22.36
(19.28)
(21.56)
21.31

At December 31, 2018, the unrecognized compensation expense for
non-vested restricted stock totaled $7.7 million which is expected
to be recognized over a weighted average period of 2.0 years. At
December 31, 2017, the unrecognized compensation expense for
non-vested restricted stock totaled $5.5 million. We recognized
compensation expense related to restricted stock awards totaling
$7.1 million, $6.1 million and $3.1 million in 2018, 2017 and
2016, respectively. The fair value of restricted stock that vested
during 2018, 2017 and 2016 was $4.2 million, $2.7 million and
$2.1 million, respectively.

Effective January 1, 2017, the Company adopted new authoritative
guidance related to several aspects of the accounting for share-
based payment transactions, including the accounting policy
for forfeiture rate assumptions. Under the new guidance, we
elected to account for forfeitures as they occur. The impact of
adoption of this provision of the guidance increased additional
paid-in capital by $.9 million, decreased retained earnings by
$.6 million and increased income tax assets by $.3 million.

Prior to 2017, authoritative guidance required us to estimate the
amount of unvested stock-based awards that would be forfeited in
future periods and reduce the amount of compensation expense
recognized over the applicable service period to reflect such
estimate.

In 2018, 2017 and 2016 the Company granted performance units
totaling 319,920, 452,900 and 507,976, 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 2018, 2017 and
2016 provide for a payout of up to 200 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.

143

PART IIITEM 8 Consolidated Financial StatementsCNO FINANCIAL GROUP, INC. - Form 10-KA summary of the Company’s performance units is presented below (shares in thousands):

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

Granted in 2017
Additional shares issued pursuant to achieving certain performance criteria(a)
Shares vested in 2017
Forfeited

Awards outstanding at December 31, 2017

Granted in 2018
Additional shares issued pursuant to achieving certain performance criteria(a)
Shares vested in 2018
Forfeited

AWARDS OUTSTANDING AT DECEMBER 31, 2018

Total
shareholder
return awards
549
254
87
(261)
(59)
570
226
—
—
(167)
629
160
—
(160)
(61)
568

Operating
return on equity
awards
549
254
65
(239)
(59)
570
226
30
(144)
(53)
629
160
123
(318)
(26)
568

(a) The performance units that vested in 2016, 2017 and 2018 provided for a payout of up to 150 percent, 150 percent and 200 percent, respectively, of the award if

certain performance levels were achieved.

The grant date fair value of the performance units awarded was
$8.1 million and $11.2 million in 2018 and 2017, respectively. We
recognized compensation expense of $12.0 million, $9.0 million
and $7.7 million in 2018, 2017 and 2016, 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 in 2009 and
has amended and extended the Section 382 Rights Agreement on
three occasions. The Section 382 Rights Agreement, as amended,
is designed to protect shareholder value by preserving the value
of our tax assets primarily associated with NOLs. At the time the
Section 382 Rights Agreement was adopted, the Company declared
a dividend of one preferred share purchase right (a “Right”) for
each outstanding share of common stock. The dividend was
payable on January 30, 2009, to the shareholders of record as of

the close of business on that date and a Right is also attached to
each share of CNO common stock issued after that date. Pursuant
to the Section 382 Rights Agreement, as amended, each Right
entitles the shareholder to purchase from the Company one one-
thousandth of a share of Series D Junior Participating Preferred
Stock, par value $.01 per share (the “Junior Preferred Stock”) of the
Company at a price of $90.00 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 (LOSS) FOR DILUTED EARNINGS PER SHARE
Shares:

Weighted average shares outstanding for basic earnings per share
Effect of dilutive securities on weighted average shares:
Stock options, restricted stock and performance units

WEIGHTED AVERAGE SHARES OUTSTANDING FOR DILUTED
EARNINGS PER SHARE

2018
(315.0)

2017
175.6

2016
358.2

165,457

170,025

176,638

—

2,119

1,685

165,457

172,144

178,323

In 2018, equivalent common shares of 2,104,000 (related to
stock options, restricted stock and performance units) were not
included in the diluted weighted average shares outstanding,
because their inclusion would have been antidilutive due to the
net loss recognized by the Company in such period.

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 were
exercised and restricted stock was vested. The dilution from
options and restricted shares is calculated using the treasury
stock method. Under this method, we assume the proceeds from
the exercise of the options (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 (or the vesting of the
restricted stock and performance units).

144

CNO FINANCIAL GROUP, INC. - Form 10-K

PART IIITEM 8 Consolidated Financial Statements12. 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

2018
4,150.3
27.8
(156.2)
4,021.9
6.5

(1,588.5)
2,439.9
153.2
2,593.1

2017
4,013.4
30.2
(114.4)
3,929.2
19.0

(1,445.9)
2,502.3
145.0
2,647.3

2016
3,942.7
33.8
(132.9)
3,843.6
6.2

(1,386.7)
2,463.1
138.0
2,601.1

The four states with the largest shares of 2018 collected premiums were Florida (10 percent), Pennsylvania (6 percent), Texas (5 percent)
and Iowa (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

2018
122.8
233.2
458.2
814.2

2017
115.6
237.3
488.6
841.5

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 changes in unrealized investment gains (losses) on fixed maturities,
available for sale

BALANCE, END OF YEAR

2018
359.6
(45.1)
(60.4)

89.5
343.6

2017
401.8
(54.4)
—

12.2
359.6

2016
110.5
231.0
454.8
796.3

2016
449.0
(62.2)
—

15.0
401.8

Based on current conditions and assumptions as to future
events on all policies inforce, the Company expects to amortize
approximately 10 percent of the December 31, 2018 balance of
the present value of future profits in 2019, 9 percent in 2020,
8 percent in 2021, 8 percent in 2022 and 7 percent in 2023. 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, 2018, 2017 and 2016.

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 changes in unrealized investment gains (losses) on fixed maturities,
available for sale

BALANCE, END OF YEAR

2018
1,026.8
261.8
(219.2)
(1.2)

254.3
1,322.5

2017
1,044.7
236.1
(184.9)
—

(69.1)
1,026.8

2016
1,083.3
242.7
(191.1)
—

(90.2)
1,044.7

145

PART IIITEM 8 Consolidated Financial StatementsCNO FINANCIAL GROUP, INC. - Form 10-K13. 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 (loss)
Adjustments to reconcile net income to net cash from operating activities:

Amortization and depreciation
Income taxes
Insurance liabilities
Accrual and amortization of investment income
Deferral of policy acquisition costs
Net realized investment (gains) losses
Net realized gains on the transfer of assets related to reinsurance transaction
Loss related to reinsurance transactions
Payment to reinsurer pursuant to long-term care business reinsured
Cash and cash equivalents received upon recapture of reinsurance
Loss on extinguishment of borrowings related to variable interest entities
Other

2018

2017

2016

(315.0)

175.6

358.2

292.2
18.4
207.8
14.9
(261.7)
11.3
(363.4)
1,067.6
(365.0)
—
3.8
6.9
317.8

265.4
227.5
464.7
(294.9)
(236.1)
(50.3)
—
—
—
—
9.5
71.9
633.3

275.0
(11.7)
332.8
(111.3)
(242.7)
(8.3)
—
75.4
—
73.6
—
34.7
775.7

NET CASH FROM OPERATING ACTIVITIES

The following summarizes the impact of the reinsurance transaction completed on September 27, 2018 (dollars in millions):

Investments transferred
Cash paid to reinsurer
Accrued interest on investments transferred
Present value of future profits and deferred acquisition costs written-off
Reinsurance receivables
Transaction expenses and other
Release of future loss reserve

Subtotal

Realized gains on investments transferred

PRE-TAX LOSS RELATED TO REINSURANCE TRANSACTION

(a) Such non-cash amounts are not included in the consolidated statement of cash flows.

(3,582.1)(a)
(365.0)
(51.6)
(61.6)
2,818.0
(14.6)
189.3
(1,067.6)
363.4
(704.2)

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

2018
24.7

—

2017
21.4

—

2016
23.0

431.1

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

146

CNO FINANCIAL GROUP, INC. - Form 10-K

2018
1,652.8
233.3
425.0
2,311.1

2017
1,904.4
246.8
487.0
2,638.2

PART IIITEM 8 Consolidated Financial StatementsStatutory capital and surplus included investments in upstream
affiliates of $42.6 million at both December 31, 2018 and 2017,
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
(loss) (a non-GAAP measure) of our insurance subsidiaries
was $(293.3) million (including approximately $541 million
loss related to a reinsurance transaction), $352.3 million and
$256.6 million (including approximately $110 million loss on
the recapture of long-term care business) in 2018, 2017 and 2016,
respectively. Included in such net income were net realized capital
gains (losses), net of income taxes, of $43.8 million, $(9.9) million
and $(29.7) million in 2018, 2017 and 2016, respectively. In
addition, such net income included pre-tax amounts for fees
and interest paid to CNO or its non-life subsidiaries totaling
$159.2 million, $158.3 million and $153.9 million in 2018, 2017
and 2016, respectively.

Insurance regulators may prohibit the payment of dividends
or other payments by our insurance subsidiaries to parent
companies if they determine that such payment could be adverse
to our policyholders or contract holders. Otherwise, the ability
of our insurance subsidiaries to pay dividends is subject to state
insurance department regulations. Insurance regulations generally
permit dividends to be paid from statutory earned surplus of the
insurance company without regulatory approval for any 12-month
period in amounts equal to the greater of (or in some states, the
lesser of): (i) statutory net gain from operations or statutory net
income for the prior year; or (ii) 10 percent of statutory capital and
surplus as of the end of the preceding year. 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 2018, our insurance subsidiaries
paid dividends of $213.9 million to CDOC. CDOC made a
capital contribution of $265.0 million to its insurance subsidiaries
in 2018.

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.

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 2018 statutory annual statements
of each of our insurance subsidiaries reflect total adjusted capital
in excess of the levels that would subject our 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, 2018, 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.

147

PART IIITEM 8 Consolidated Financial StatementsCNO FINANCIAL GROUP, INC. - Form 10-K15. BUSINESS SEGMENTS

The Company manages its business through the following operating
segments: Bankers Life, Washington National and Colonial Penn,
which are defined on the basis of product distribution; long-term
care in run-off; and corporate operations, comprised of holding
company activities and certain noninsurance company businesses.
On September 27, 2018, the Company completed a long-term
care reinsurance transaction pursuant to which its wholly-owned
subsidiary, Bankers Life, entered into an agreement to cede all of
its legacy (prior to 2003) comprehensive and nursing home long-
term care policies (with statutory reserves of $2.7 billion) through
100% indemnity coinsurance, as further described in the note
to the consolidated financial statements entitled “Summary of
Significant Accounting Policies - Reinsurance”. In anticipation of
the reinsurance agreement, the Company reorganized its business
segments to move the block to be ceded from the “Bankers Life
segment” to the “Long-term care in run-off segment” in the third
quarter of 2018. All prior period segment disclosures have been
revised to conform to management’s current view of the Company’s
operating segments.

deferred compensation plan, income taxes and other non-operating
items consisting primarily of 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 related to reinsurance transactions, 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 and other non-operating
items consisting primarily of 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.

148

CNO FINANCIAL GROUP, INC. - Form 10-K

PART IIITEM 8 Consolidated Financial StatementsOperating 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)

2018

2017

2016

18.5
1,023.3
416.7
762.9
51.9
2,273.3

20.3
1,038.2
415.2
918.2
44.1
2,436.0

22.0
1,035.2
393.0
751.5
34.4
2,236.1

1.4
658.9
27.3
259.8
.9
948.3

1.7
296.9
44.6
1.8
345.0

148.4
172.7
321.1

2.1
642.9
26.4
270.2
1.0
942.6

2.1
289.7
44.4
1.3
337.5

210.4
223.7
434.1

2.9
627.9
25.0
259.3
1.3
916.4

2.6
278.8
44.2
1.1
326.7

213.7
194.7
408.4

(5.6)
6.7
1.1
3,888.8

35.5
8.5
44.0
4,194.2

16.6
10.0
26.6
3,914.2

149

PART IIITEM 8 Consolidated Financial StatementsCNO FINANCIAL GROUP, INC. - Form 10-KExpenses:

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
Amortization
Other operating costs and expenses

Total Long-term care in run-off expenses

Corporate operations:

Interest expense on corporate debt
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

(continued from previous page)

2018

2017

2016

1,311.9
171.3
29.7
419.8
1,932.7

1,474.9
153.3
19.8
420.5
2,068.5

1,283.2
163.9
13.2
400.2
1,860.5

556.5
55.8
10.8
203.3
826.4

207.2
17.8
1.4
103.8
330.2

271.3
7.0
19.9
298.2

48.0
72.1
120.1
3,507.6

340.6
121.9
14.8
22.9
(119.0)
381.2

581.1
58.8
6.3
198.1
844.3

199.6
16.3
.9
98.1
314.9

344.2
10.3
26.5
381.0

46.5
84.3
130.8
3,739.5

367.5
98.3
22.6
53.1
(86.8)
454.7

561.7
59.1
3.7
189.0
813.5

201.9
15.3
.6
107.2
325.0

355.0
12.6
22.4
390.0

45.8
69.1
114.9
3,503.9

375.6
102.9
1.7
18.4
(88.3)
410.3

PRE-TAX OPERATING EARNINGS

(a) It is not practicable to provide additional components of revenue by product or services.

150

CNO FINANCIAL GROUP, INC. - Form 10-K

PART IIITEM 8 Consolidated Financial StatementsA 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)
Net realized gains on the transfer of assets related to reinsurance transaction
Revenues related to earnings attributable to VIEs
Fee revenue related to transition and support services agreements

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 attributable to VIEs
Fair value changes and amendment related to agent deferred compensation plan
Loss related to reinsurance transactions
Expenses related to transition and support services agreements

Consolidated expenses
Income (loss) before tax
Income tax expense (benefit):

Tax expense (benefit) on period income (loss)
Valuation allowance for deferred tax assets and other tax items

NET INCOME (LOSS)

Segment balance sheet information was as follows (dollars in millions):

2018
3,888.8 $
(11.3)
363.4
67.4
5.2
4,313.5
3,507.6
(68.3)
12.8
(.4)
65.8
(11.9)
1,067.6
5.1
4,578.3
(264.8)

(57.6)
107.8
(315.0) $

2017
4,194.2 $
50.3
—
52.7
—
4,297.2
3,739.5
2.9
(.4)
1.0
61.5
12.2
—
—
3,816.7
480.5

162.8
142.1
175.6 $

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

127.8
(132.8)
358.2

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

2018

2017

17,457.0 $
7,385.0
1,031.3
3,419.9
2,146.6
31,439.8 $

15,262.0 $
6,079.2
940.0
3,348.8
2,438.9
28,068.9 $

17,474.5
7,674.3
1,059.3
4,353.3
2,548.9
33,110.3

14,747.6
6,101.5
921.0
3,864.4
2,628.3
28,262.8

151

PART IIITEM 8 Consolidated Financial StatementsCNO FINANCIAL GROUP, INC. - Form 10-KThe following table presents selected financial information of our segments (dollars in millions):

Segment
2018

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

TOTAL

2017

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

TOTAL

Present value of
future profits

Deferred
acquisition costs

Insurance
liabilities

86.5
226.9
30.2
—
343.6

81.1
243.7
34.8
—
359.6

863.2
342.7
116.6
—
1,322.5

606.5
310.8
109.5
—
1,026.8

13,714.6
5,556.1
845.7
3,340.3
23,456.7

13,257.2
5,590.7
834.4
3,856.7
23,539.0

16. 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):

2018
Revenues
Income (loss) before income taxes
Income tax expense (benefit)
NET INCOME (LOSS)
Earnings per common share:

Basic:

Net income (loss)

Diluted:

Net income (loss)

2017
Revenues
Income before income taxes
Income tax expense
NET INCOME (LOSS)
Earnings per common share:

Basic:

Net income (loss)

Diluted:

Net income (loss)

1st Qtr.
1,007.8 $
108.1 $
23.8
84.3 $

2nd Qtr.

1,046.3 $
129.8 $
27.6
102.2 $

3rd Qtr.
1,481.2 $
(539.8) $
(10.0)
(529.8) $

4th Qtr.
778.2
37.1
8.8
28.3

.50 $

.62 $

(3.22) $

.17

.50 $

1st Qtr.
1,070.7 $
96.7 $
34.4
62.3 $

.61 $

(3.22) $

2nd Qtr.

1,057.1 $
128.5 $
45.1
83.4 $

3rd Qtr.
1,079.3 $
129.9 $
29.1
100.8 $

.17
4th Qtr. (a)
1,090.1
125.4
196.3
(70.9)

.36 $

.49 $

.60 $

.36 $

.48 $

.59 $

(.42)

$
$

(a) In the fourth quarter of 2017, our net loss reflected the unfavorable impact of $172.5 million related to the Tax Reform Act which was enacted in December 2017.

152

CNO FINANCIAL GROUP, INC. - Form 10-K

PART IIITEM 8 Consolidated Financial Statements17. 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 2017 and 2016, VIEs that were required to be
consolidated were dissolved. We recognized losses of $4.3 million
and $7.3 million during 2017 and 2016, respectively, 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:
$3.6 million in 2019; $2.1 million in 2020; $27.6 million in 2021;
$99.7 million in 2022; $340.5 million in 2023; $314.1 million in
2024; $183.3 million in 2025; $120.1 million in 2026; $63.4 million
in 2027; $268.7 million in 2028; and $7.0 million in 2030. The
Company has no financial obligation to the VIEs beyond its
investment in each VIE.

Certain of our 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 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 subsidiaries

TOTAL LIABILITIES

ASSETS:

Investments held by variable interest entities
Notes receivable of VIEs held by insurance subsidiaries
Cash and cash equivalents held by variable interest entities
Accrued investment income
Income tax assets, net
Other assets

TOTAL ASSETS

LIABILITIES:

Other liabilities
Borrowings related to variable interest entities
Notes payable of VIEs held by insurance subsidiaries

TOTAL LIABILITIES

December 31, 2018

VIEs

Eliminations

Net effect on
consolidated
balance sheet

1,468.4 $
—
62.4
2.3
15.3
5.3
1,553.7 $

53.9 $

1,417.2
155.2
1,626.3 $

— $

(142.8)
—
—
—
(2.6)
(145.4) $

(5.3) $

—
(155.2)
(160.5) $

1,468.4
(142.8)
62.4
2.3
15.3
2.7
1,408.3

48.6
1,417.2
—
1,465.8

December 31, 2017

VIEs

Eliminations

Net effect on
consolidated
balance sheet

1,526.9 $
—
178.9
2.6
.7
10.0
1,719.1 $

158.3 $

1,410.7
167.6
1,736.6 $

— $

(155.5)
—
(.1)
—
(1.5)
(157.1) $

(4.4) $

—
(167.6)
(172.0) $

1,526.9
(155.5)
178.9
2.5
.7
8.5
1,562.0

153.9
1,410.7
—
1,564.6

153

PART IIITEM 8 Consolidated Financial StatementsCNO FINANCIAL GROUP, INC. - Form 10-KPART II
ITEM 8 Consolidated Financial Statement

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 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
Loss on extinguishment of borrowings

INCOME BEFORE INCOME TAXES

2018

81.5
7.6
89.1

59.9
2.1
62.0
27.1
(3.6)
(3.8)
19.7

2017

2016

69.8
5.9
75.7

50.2
1.8
52.0
23.7
(5.6)
(9.5)
8.6

78.9
6.4
85.3

53.1
1.5
54.6
30.7
(20.4)
—
10.3

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, 2018, such loans had an amortized cost of $1,534.2 million; gross unrealized
gains of $1.2 million; gross unrealized losses of $67.0 million; and an estimated fair value of $1,468.4 million.

The following table sets forth the amortized cost and estimated fair value of the investments held by the VIEs at December 31, 2018, by
contractual maturity. Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay
obligations with or without penalties.

(Dollars in millions)
Due after one year through five years
Due after five years through ten years

TOTAL

Amortized cost
621.9
912.3
1,534.2

Estimated fair value
594.5
873.9
1,468.4

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, 2018, by contractual maturity. Actual maturities will differ from contractual maturities because borrowers may have the
right to call or prepay obligations with or without penalties.

(Dollars in millions)
Due after one year through five years
Due after five years through ten years

TOTAL

Amortized cost
615.6
904.7
1,520.3

Estimated fair value
587.0
866.3
1,453.3

During 2018, the VIEs recognized net realized investment
losses of $3.6 million from the sales of fixed maturities. During
2017, the VIEs recognized net realized investment losses
of $5.6 million which were comprised of: (i) $1.2 million of
net gains from the sales of fixed maturities; (ii) $4.3 million
of losses on the dissolution of VIEs; and (iii) $2.5 million of
writedowns of investments for other than temporary declines
in fair value recognized through net income. 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.

At December 31, 2018, there were no investments held by the
VIEs that were in default.

During 2018, $57.2 million of investments held by the VIEs
were sold which resulted in gross investment losses (before
income taxes) of $3.8 million. During 2017, $109.6 million of
investments held by the VIEs were sold which resulted in gross
investment losses (before income taxes) of $3.0 million. 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.

At December 31, 2018, the VIEs held: (i) investments with
a fair value of $1,315.7 million and gross unrealized losses of
$55.7 million that had been in an unrealized loss position for
less than twelve months; and (ii) investments with a fair value
of $137.6 million and gross unrealized losses of $11.3 million
that had been in an unrealized loss position for greater than
twelve months.

At December 31, 2017, the VIEs held: (i) investments with a
fair value of $445.4 million and gross unrealized losses of
$4.9 million that had been in an unrealized loss position for
less than twelve months; and (ii) investments with a fair value
of $28.4 million and gross unrealized losses of $1.7 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.

154

CNO FINANCIAL GROUP, INC. - Form 10-K

PART II
ITEM 9A Controls and Procedures

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, 2018, 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
SEC’s 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, 2018.

The effectiveness of our internal control over financial reporting as
of December 31, 2018 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, 2018, that have
materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.

155

CNO FINANCIAL GROUP, INC. - Form 10-KPART II
ITEM 9B Other Information

ITEM 9B. Other Information.

On February 20, 2019, the CNO Board of Directors (the “Board”)
amended and restated the Company’s By-Laws to implement
proxy access and to update the notice, procedural, disclosure and
other requirements for stockholder nominations and proposals
of business not intended to be included in the Company’s proxy
statement for an annual meeting of stockholders. In particular, the
By-Laws were amended to include a new Article II, Section 12,
which permits a stockholder or group of up to 20 stockholders
owning 3% or more of the Company’s common stock continuously
for at least three years to nominate for election to the Board, and
include in the Company’s proxy materials for its annual meeting
of stockholders, nominees constituting up to the greater of 20% of
the number of directors then serving on the Board (rounding down
to the closest whole number) or two individuals, subject to certain
limitations and provided that such nominating stockholder(s)
and nominee(s) satisfy the applicable requirements specified in

the By-Laws. In connection with the Company’s adoption of
proxy access and in order to ensure full disclosure for all director
nominations and proposals, the Company’s By-Laws were also
amended to require any notice provided pursuant to Article II,
Section 11 and Article III, Section 5(b) (the Company’s traditional
advance notice provisions) to disclose additional information
regarding each person proposed for nomination for election as
a director, the stockholder giving the notice, and the beneficial
owner, if any, on whose behalf the nomination or proposal is
made, including disclosure of securities ownership, derivative and
short positions and certain interests, as well as to make other non-
substantive changes.

The foregoing description is qualified in its entirety by reference
to the Amended and Restated By-Laws that are attached hereto as
Exhibit 3.2 and incorporated herein by reference.

156

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.

157

CNO FINANCIAL GROUP, INC. - Form 10-KPART IV

ITEM 15. Exhibits and Financial Statement Schedules.

(a)

1. Financial Statements. See Index to Consolidated Financial Statements

for a list of financial statements included in this Report. ....................................................................

2. Financial Statement Schedules:

Schedule II — Condensed Financial Information of Registrant (Parent Company)

Balance Sheet at December 31, 2018 and 2017 ..............................................................................

Statement of Operations for the years ended December 31, 2018, 2017 and 2016 ........................

Statement of Cash Flows for the years ended December 31, 2018, 2017 and 2016 ........................

Notes to Condensed Financial Information ...................................................................................

Schedule IV — Reinsurance for the years ended December 31, 2018, 2017 and 2016 ......................

Page

160

161

162

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.

158

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.

CNO FINANCIAL GROUP, INC.
Dated: February 25, 2019
By: /s/ Gary C. Bhojwani
Gary C. Bhojwani
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/ GARY C. BHOJWANI
Gary C. Bhojwani
/s/ ERIK M. HELDING
Erik M. Helding
/s/ JOHN R. KLINE
John R. Kline
/s/ ELLYN L. BROWN
Ellyn L. Brown
/s/ STEPHEN DAVID
Stephen David
/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

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 25, 2019

February 25, 2019

159

CNO FINANCIAL GROUP, INC. - Form 10-KPART IVSignatureSCHEDULE II Condensed Financial Information of Registrant (Parent Company)

Balance Sheet as of December 31, 2018 and 2017

(Dollars in millions)
ASSETS

Cash and cash equivalents - unrestricted
Equity securities at fair value (cost: 2018 - $20.3; 2017 - $225.7)
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: 2018 - 162,201,692; 2017 - 166,857,931)
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.

2018

2017

205.9
20.0
4,115.6
137.1
4.6
1.7
4,484.9

916.8
135.7
61.5
1,114.0

2,996.6
177.7
196.6
3,370.9
4,484.9

161.1
243.6
5,440.7
129.6
6.3
12.7
5,994.0

914.6
143.0
88.9
1,146.5

3,075.0
1,212.1
560.4
4,847.5
5,994.0

SCHEDULE II Condensed Financial Information of Registrant (Parent Company)

Statement of Operations for the years ended December 31, 2018, 2017 and 2016

(Dollars in millions)
Revenues:

Net investment income
Net realized investment gains (losses)

Total revenues

Expenses:

Interest expense
Intercompany expenses (eliminated in consolidation)
Operating costs and expenses

Total expenses
Loss before income taxes and equity in undistributed earnings of subsidiaries

Income tax expense (benefit)

Loss before equity in undistributed earnings of subsidiaries

Equity in undistributed earnings (losses) of subsidiaries (eliminated in consolidation)

NET INCOME (LOSS)

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

2018

14.3
(4.3)
10.0

48.0
2.9
40.0
90.9
(80.9)
(20.8)
(60.1)
(254.9)
(315.0)

2017

14.2
2.4
16.6

46.5
1.7
75.4
123.6
(107.0)
27.4
(134.4)
310.0
175.6

2016

15.6
17.7
33.3

45.8
.9
48.2
94.9
(61.6)
(54.6)
(7.0)
365.2
358.2

160

CNO FINANCIAL GROUP, INC. - Form 10-K

PART IVSCHEDULE 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, 2018, 2017 and 2016

(Dollars in millions)
Cash flows from operating activities
Cash flows from investing activities:

Sales of investments
Purchases of investments
Net sales of trading securities
Dividends received from consolidated subsidiary, net of capital contributions of $265.0
in 2018, nil in 2017 and $200.0 in 2016*
Net cash provided by investing activities

Cash flows from financing activities:

Issuance of common stock
Payments to repurchase common stock
Common stock dividends paid
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.

2018
(107.2)

2017
(181.8)

250.1
(30.9)
8.3

(40.1)
187.4

3.9
(108.0)
(64.8)
227.7
(94.2)
(35.4)
44.8
161.1
205.9

54.9
(123.6)
9.1

363.5
303.9

8.3
(168.3)
(59.6)
310.8
(158.3)
(67.1)
55.0
106.1
161.1

2016
(110.7)

305.0
(198.4)
12.0

92.5
211.1

8.4
(210.0)
(54.8)
217.1
(83.9)
(123.2)
(22.8)
128.9
106.1

161

CNO FINANCIAL GROUP, INC. - Form 10-KPART IVSCHEDULE 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, 2018, 2017 and 2016

(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

2018

2017

2016

27,662.8
114.4
(3,321.3)
24,455.9

.5%

2018

2,556.4
28.0
(144.5)
2,439.9

27,154.3
120.5
(3,452.6)
23,822.2

.5%

2017

2,576.9
30.4
(105.0)
2,502.3

27,048.1
128.7
(3,604.0)
23,572.8
.5%

2016

2,553.0
34.0
(123.9)
2,463.1

1.1%

1.2%

1.4%

162

CNO FINANCIAL GROUP, INC. - Form 10-K

PART IVSCHEDULE II Condensed Financial Information of Registrant (Parent Company)This page intentionally left blank.This page intentionally left blank.

Directors of CNO Financial Group, Inc.

Daniel R. Maurer (Chair)
Retired Executive,
Intuit Inc.

Gary C. Bhojwani
Chief Executive Officer,
CNO Financial Group, Inc.

Ellyn L. Brown
Retired Principal,
Brown & Associates

Stephen David
Senior Advisor,
The Boston Consulting Group

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

Neal C. Schneider
Former Chairman of the Board,
PMA Capital Corporation

Frederick J. Sievert
Retired President,
New York Life Insurance Company

Table of Contents

A Letter to Shareholders from CEO Gary C. Bhojwani

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

158

165

166

Investor Information

if you would

AST
Operations Center
6201 15th Avenue
Brooklyn, NY 11219

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

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

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CNO Financial Group, Inc.
11825 N. Pennsylvania Street
Carmel, IN 46032
(317) 817-6100

CNOinc.com

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