CNO FINANCIAL GROUP, INC., 10-Q filed on 8/6/2019
Quarterly Report
v3.19.2
Cover Page - shares
6 Months Ended
Jun. 30, 2019
Jul. 23, 2019
Document Information [Line Items]    
Document Type 10-Q  
Document Quarterly Report true  
Document Period End Date Jun. 30, 2019  
Document Transition Report false  
Entity File Number 001-31792  
Entity Registrant Name CNO Financial Group, Inc.  
Entity Incorporation, State or Country Code DE  
Entity Tax Identification Number 75-3108137  
Entity Address, Address Line One 11825 N. Pennsylvania Street  
Entity Address, City or Town Carmel,  
Entity Address, State or Province IN  
Entity Address, Postal Zip Code 46032  
City Area Code (317)  
Local Phone Number  817-6100  
Entity Current Reporting Status Yes  
Entity Interactive Data Current Yes  
Entity Filer Category Large Accelerated Filer  
Entity Small Business false  
Entity Emerging Growth Company false  
Entity Shell Company false  
Entity Common Stock, Shares Outstanding   155,992,870
Entity Central Index Key 0001224608  
Current Fiscal Year End Date --12-31  
Document Fiscal Year Focus 2019  
Document Fiscal Period Focus Q2  
Amendment Flag false  
Common Stock, par value $0.01 per share    
Document Information [Line Items]    
Title of 12(b) Security Common Stock, par value $0.01 per share  
Trading Symbol CNO  
Security Exchange Name NYSE  
Rights to purchase Series D Junior Participating Preferred Stock    
Document Information [Line Items]    
Title of 12(b) Security Rights to purchase Series D Junior Participating Preferred Stock  
No Trading Symbol Flag true  
Security Exchange Name NYSE  
v3.19.2
CONSOLIDATED BALANCE SHEET - USD ($)
$ in Millions
Jun. 30, 2019
Dec. 31, 2018
Investments:    
Fixed maturities, available for sale, at fair value (amortized cost: June 30, 2019 - $18,773.1; December 31, 2018 - $18,107.8) $ 20,437.2 $ 18,447.7
Equity securities at fair value (cost: June 30, 2019 - $39.9; December 31, 2018 - $319.8) 38.8 291.0
Mortgage loans 1,596.5 1,602.1
Policy loans 121.6 119.7
Trading securities 248.3 233.1
Investments held by variable interest entities 1,215.2 1,468.4
Other invested assets 1,018.8 833.4
Total investments 24,676.4 22,995.4
Cash and cash equivalents - unrestricted 557.4 594.2
Cash and cash equivalents held by variable interest entities 50.5 62.4
Accrued investment income 211.2 205.2
Present value of future profits 299.3 343.6
Deferred acquisition costs 1,253.2 1,322.5
Reinsurance receivables 4,829.4 4,925.4
Income tax assets, net 348.3 630.0
Assets held in separate accounts 4.9 4.4
Other assets 485.4 356.7
Total assets 32,716.0 31,439.8
Liabilities for insurance products:    
Policyholder account balances 11,758.5 11,594.1
Future policy benefits 11,407.2 11,082.4
Liability for policy and contract claims 517.8 521.9
Unearned and advanced premiums 248.1 253.9
Liabilities related to separate accounts 4.9 4.4
Other liabilities 740.2 632.4
Investment borrowings 1,645.2 1,645.8
Borrowings related to variable interest entities 1,153.6 1,417.2
Notes payable – direct corporate obligations 988.3 916.8
Total liabilities 28,463.8 28,068.9
Commitments and Contingencies
Shareholders' equity:    
Common stock ($0.01 par value, 8,000,000,000 shares authorized, shares issued and outstanding: June 30, 2019 – 156,768,002; December 31, 2018 – 162,201,692) 1.6 1.6
Additional paid-in capital 2,903.2 2,995.0
Accumulated other comprehensive income 1,098.2 177.7
Retained earnings 249.2 196.6
Total shareholders' equity 4,252.2 3,370.9
Total liabilities and shareholders' equity $ 32,716.0 $ 31,439.8
v3.19.2
CONSOLIDATED BALANCE SHEET (Parenthetical) - USD ($)
$ in Millions
Jun. 30, 2019
Dec. 31, 2018
Investments:    
Fixed maturities, available for sale, amortized cost $ 18,773.1 $ 18,107.8
Equity securities, cost $ 39.9 $ 319.8
Shareholders' equity:    
Common stock, par value (in dollars per share) $ 0.01 $ 0.01
Common stock, shares authorized (in shares) 8,000,000,000 8,000,000,000
Common stock, shares issued (in shares) 156,768,002 162,201,692
Common stock, shares outstanding (in shares) 156,768,002 162,201,692
v3.19.2
CONSOLIDATED STATEMENT OF OPERATIONS - USD ($)
shares in Thousands, $ in Millions
3 Months Ended 6 Months Ended
Jun. 30, 2019
Jun. 30, 2018
Jun. 30, 2019
Jun. 30, 2018
Revenues:        
Insurance policy income $ 618.3 $ 659.8 $ 1,237.6 $ 1,319.7
Net investment income:        
General account assets 286.7 328.2 557.3 657.3
Policyholder and other special-purpose portfolios 47.8 35.7 133.0 48.5
Realized investment gains (losses):        
Net realized investment gains (losses), excluding impairment losses 5.3 11.0 23.6 (4.2)
Impairment losses recognized [1] 0.0 0.0 (2.2) 0.0
Total realized gains (losses) 5.3 11.0 21.4 (4.2)
Fee revenue and other income 21.7 11.6 53.5 32.8
Total revenues 979.8 1,046.3 2,002.8 2,054.1
Benefits and expenses:        
Insurance policy benefits 610.4 618.2 1,233.9 1,204.8
Interest expense 38.6 37.7 79.6 71.3
Amortization 46.2 61.0 104.4 132.9
Loss on extinguishment of debt 7.3 0.0 7.3 0.0
Loss on extinguishment of borrowings related to variable interest entities 0.0 3.8 0.0 3.8
Other operating costs and expenses 229.6 195.8 464.3 403.4
Total benefits and expenses 932.1 916.5 1,889.5 1,816.2
Income before income taxes 47.7 129.8 113.3 237.9
Income tax expense on period income 10.1 27.6 23.9 51.4
Net income $ 37.6 $ 102.2 $ 89.4 $ 186.5
Basic:        
Weighted average shares outstanding (in shares) 158,816 166,098 159,882 166,579
Net income (in dollars per share) $ 0.24 $ 0.62 $ 0.56 $ 1.12
Diluted:        
Weighted average shares outstanding (in shares) 159,735 167,978 160,962 168,828
Net income (in dollars per share) $ 0.24 $ 0.61 $ 0.56 $ 1.10
[1]
No portion of the other-than-temporary impairments recognized in the periods was included in accumulated other comprehensive income.

v3.19.2
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME - USD ($)
$ in Millions
3 Months Ended 6 Months Ended
Jun. 30, 2019
Jun. 30, 2018
Jun. 30, 2019
Jun. 30, 2018
Statement of Comprehensive Income [Abstract]        
Net income $ 37.6 $ 102.2 $ 89.4 $ 186.5
Other comprehensive income, before tax:        
Unrealized gains (losses) for the period 681.3 (461.3) 1,371.5 (1,115.0)
Adjustment to present value of future profits and deferred acquisition costs (66.2) 33.0 (116.7) 88.7
Amount related to premium deficiencies assuming the net unrealized gains (losses) had been realized (45.0) 191.4 (76.5) 403.0
Reclassification adjustments:        
For net realized investment gains included in net income (4.0) (11.3) (2.9) (11.7)
For amortization of the present value of future profits and deferred acquisition costs related to net realized investment gains (losses) included in net income 0.2 0.4 0.4 0.4
Other comprehensive income (loss) before tax 566.3 (247.8) 1,175.8 (634.6)
Income tax (expense) benefit related to items of accumulated other comprehensive income (loss) (123.0) 53.7 (255.3) 139.0
Other comprehensive income (loss), net of tax 443.3 (194.1) 920.5 (495.6)
Comprehensive income (loss) $ 480.9 $ (91.9) $ 1,009.9 $ (309.1)
v3.19.2
CONSOLIDATED STATEMENT OF CASH FLOWS - USD ($)
$ in Millions
6 Months Ended
Jun. 30, 2019
Jun. 30, 2018
Cash flows from operating activities:    
Insurance policy income $ 1,151.5 $ 1,243.5
Net investment income 559.4 646.9
Fee revenue and other income 53.5 32.8
Insurance policy benefits (819.5) (1,032.8)
Interest expense (79.6) (65.6)
Deferrable policy acquisition costs (143.0) (125.6)
Other operating costs (407.9) (425.1)
Income taxes 3.3 (30.4)
Net cash from operating activities 317.7 243.7
Cash flows from investing activities:    
Sales of investments 2,463.4 2,012.9
Maturities and redemptions of investments 1,094.6 1,412.0
Purchases of investments (3,675.2) (3,689.1)
Net sales (purchases) of trading securities (8.1) 36.3
Other (84.2) (13.0)
Net cash used by investing activities (209.5) (240.9)
Cash flows from financing activities:    
Issuance of notes payable, net 494.2 0.0
Payments on notes payable (425.0) 0.0
Expenses related to extinguishment of debt (6.1) 0.0
Issuance of common stock 3.6 0.8
Payments to repurchase common stock (103.8) (67.5)
Common stock dividends paid (33.8) (31.9)
Amounts received for deposit products 873.8 753.2
Withdrawals from deposit products (689.5) (671.3)
Issuance of investment borrowings:    
Federal Home Loan Bank 346.8 0.0
Related to variable interest entities 0.0 277.6
Payments on investment borrowings:    
Federal Home Loan Bank (347.4) (0.4)
Related to variable interest entities (269.7) (274.9)
Net cash used by financing activities (156.9) (14.4)
Net decrease in cash and cash equivalents (48.7) (11.6)
Cash and cash equivalents - unrestricted and held by variable interest entities, beginning of period 656.6 757.3
Cash and cash equivalents - unrestricted and held by variable interest entities, end of period $ 607.9 $ 745.7
v3.19.2
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY - USD ($)
$ in Millions
Total
Common stock
Additional paid-in capital
Accumulated other comprehensive income
Retained earnings
Balance, beginning of period (in shares) at Dec. 31, 2017   166,858,000      
Balance, beginning of period at Dec. 31, 2017 $ 4,847.5 $ 1.7 $ 3,073.3 $ 1,212.1 $ 560.4
Increase (Decrease) in Stockholders' Equity [Roll Forward]          
Net income 186.5       186.5
Change in unrealized appreciation (depreciation) of investments (net of applicable income tax expense (benefit)) (495.4)     (495.4)  
Change in noncredit component of impairment losses on fixed maturities, available for sale (net of applicable income tax expense (benefit)) (0.2)     (0.2)  
Cost of common stock repurchased (in shares)   (2,998,000)      
Cost of common stock repurchased (60.5) $ (0.1) (60.4)    
Dividends on common stock (32.0)       (32.0)
Employee benefit plans, net of shares used to pay tax withholdings (in shares)   573,000      
Employee benefit plans, net of shares used to pay tax withholdings 9.0   9.0    
Balance, end of period (in shares) at Jun. 30, 2018   164,433,000      
Balance, end of period at Jun. 30, 2018 4,454.9 $ 1.6 3,021.9 700.2 731.2
Balance, beginning of period (in shares) at Mar. 31, 2018   167,354,000      
Balance, beginning of period at Mar. 31, 2018 4,617.2 $ 1.7 3,075.5 894.3 645.7
Increase (Decrease) in Stockholders' Equity [Roll Forward]          
Net income 102.2       102.2
Change in unrealized appreciation (depreciation) of investments (net of applicable income tax expense (benefit)) (193.3)     (193.3)  
Change in noncredit component of impairment losses on fixed maturities, available for sale (net of applicable income tax expense (benefit)) (0.8)     (0.8)  
Cost of common stock repurchased (in shares)   (2,998,000)      
Cost of common stock repurchased (60.5) $ (0.1) (60.4)    
Dividends on common stock (16.7)       (16.7)
Employee benefit plans, net of shares used to pay tax withholdings (in shares)   77,000      
Employee benefit plans, net of shares used to pay tax withholdings 6.8   6.8    
Balance, end of period (in shares) at Jun. 30, 2018   164,433,000      
Balance, end of period at Jun. 30, 2018 $ 4,454.9 $ 1.6 3,021.9 700.2 731.2
Balance, beginning of period (in shares) at Dec. 31, 2018 162,201,692 162,202,000      
Balance, beginning of period at Dec. 31, 2018 $ 3,370.9 $ 1.6 2,995.0 177.7 196.6
Increase (Decrease) in Stockholders' Equity [Roll Forward]          
Net income 89.4       89.4
Change in unrealized appreciation (depreciation) of investments (net of applicable income tax expense (benefit)) 920.4     920.4  
Change in noncredit component of impairment losses on fixed maturities, available for sale (net of applicable income tax expense (benefit)) 0.1     0.1  
Cost of common stock repurchased (in shares)   (6,235,000)      
Cost of common stock repurchased (102.0)   (102.0)    
Dividends on common stock (33.7)       (33.7)
Employee benefit plans, net of shares used to pay tax withholdings (in shares)   801,000      
Employee benefit plans, net of shares used to pay tax withholdings $ 10.2   10.2    
Balance, end of period (in shares) at Jun. 30, 2019 156,768,002 156,768,000      
Balance, end of period at Jun. 30, 2019 $ 4,252.2 $ 1.6 2,903.2 1,098.2 249.2
Balance, beginning of period (in shares) at Mar. 31, 2019   159,955,000      
Balance, beginning of period at Mar. 31, 2019 3,837.9 $ 1.6 2,952.2 654.9 229.2
Increase (Decrease) in Stockholders' Equity [Roll Forward]          
Net income 37.6       37.6
Change in unrealized appreciation (depreciation) of investments (net of applicable income tax expense (benefit)) 443.3     443.3  
Cost of common stock repurchased (in shares)   (3,342,000)      
Cost of common stock repurchased (55.0)   (55.0)    
Dividends on common stock (17.6)       (17.6)
Employee benefit plans, net of shares used to pay tax withholdings (in shares)   155,000      
Employee benefit plans, net of shares used to pay tax withholdings $ 6.0   6.0    
Balance, end of period (in shares) at Jun. 30, 2019 156,768,002 156,768,000      
Balance, end of period at Jun. 30, 2019 $ 4,252.2 $ 1.6 $ 2,903.2 $ 1,098.2 $ 249.2
v3.19.2
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (Parenthetical) - USD ($)
$ in Millions
3 Months Ended 6 Months Ended
Jun. 30, 2019
Jun. 30, 2018
Jun. 30, 2019
Jun. 30, 2018
Statement of Stockholders' Equity [Abstract]        
Change in unrealized appreciation (depreciation) of investments, applicable income tax expense (benefit) $ 123.0 $ (53.4) $ 255.3 $ (138.9)
Change in noncredit component of impairment losses on fixed maturities, available for sale, applicable income tax expense (benefit) (less than for the three and six months ended June 30, 2019) $ 0.1 $ (0.3) $ 0.1 $ (0.1)
v3.19.2
BUSINESS AND BASIS OF PRESENTATION
6 Months Ended
Jun. 30, 2019
Organization, Consolidation and Presentation of Financial Statements [Abstract]  
BUSINESS AND BASIS OF PRESENTATION
BUSINESS AND BASIS OF PRESENTATION

The following notes should be read together with the notes to the consolidated financial statements included in our 2018 Annual Report on Form 10-K.

CNO Financial Group, Inc., a Delaware corporation ("CNO"), is a holding company for a group of insurance companies operating throughout the United States that develop, market and administer health insurance, annuity, individual life insurance and other insurance products.  The terms "CNO Financial Group, Inc.", "CNO", the "Company", "we", "us", and "our" as used in these financial statements refer to CNO and its subsidiaries.  Such terms, when used to describe insurance business and products, refer to the insurance business and products of CNO's insurance subsidiaries.

We focus on serving middle-income pre-retiree and retired Americans, which we believe are attractive, underserved, high growth markets.  We sell our products through three distribution channels: career agents, independent producers (some of whom sell one or more of our product lines exclusively) and direct marketing.

Our unaudited consolidated financial statements reflect normal recurring adjustments that, in the opinion of management, are necessary for a fair statement of our financial position, results of operations and cash flows for the periods presented.  As permitted by rules and regulations of the Securities and Exchange Commission (the "SEC") applicable to quarterly reports on Form 10-Q, we have condensed or omitted certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP").  We have reclassified certain amounts from the prior periods to conform to the 2019 presentation.  These reclassifications have no effect on net income or shareholders' equity.  Results for interim periods are not necessarily indicative of the results that may be expected for a full year.

The balance sheet at December 31, 2018, presented herein, has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by GAAP for complete financial statements.

When we prepare financial statements in conformity with GAAP, we are required to make estimates and assumptions that significantly affect reported amounts of various assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting periods.  For example, we use significant estimates and assumptions to calculate values for deferred acquisition costs, the present value of future profits, fair value measurements of certain investments (including derivatives), other-than-temporary impairments of investments, assets and liabilities related to income taxes, liabilities for insurance products, liabilities related to litigation and guaranty fund assessment accruals.  If our future experience differs from these estimates and assumptions, our financial statements would be materially affected.

The accompanying financial statements include the accounts of the Company and its subsidiaries. Our consolidated financial statements exclude transactions between us and our consolidated affiliates, or among our consolidated affiliates.
v3.19.2
INVESTMENTS
6 Months Ended
Jun. 30, 2019
Investments, Debt and Equity Securities [Abstract]  
INVESTMENTS
INVESTMENTS

We classify our fixed maturity securities into one of two categories: (i) "available for sale" (which we carry at estimated fair value with any unrealized gain or loss, net of tax and related adjustments, recorded as a component of shareholders' equity); or (ii) "trading" (which we carry at estimated fair value with changes in such value recognized as net investment income (classified as investment income from policyholder and other special-purpose portfolios)).

Our trading securities include: (i) investments purchased with the intent of selling in the near term to generate income; (ii) investments supporting certain insurance liabilities; 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 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.

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 June 30, 2019 and December 31, 2018, were as follows (dollars in millions):

 
June 30,
2019
 
December 31,
2018
Net unrealized appreciation (depreciation) on fixed maturity securities, available for sale, on which an other-than-temporary impairment loss has been recognized
$
1.3

 
$
1.2

Net unrealized gains on all other fixed maturity securities, available for sale
1,639.8

 
271.3

Adjustment to present value of future profits (a)
(15.1
)
 
(4.5
)
Adjustment to deferred acquisition costs
(153.6
)
 
(38.3
)
Adjustment to insurance liabilities
(69.4
)
 
(2.5
)
Deferred income tax liabilities
(304.8
)
 
(49.5
)
Accumulated other comprehensive income
$
1,098.2

 
$
177.7

________
(a)
The present value of future profits is the value assigned to the right to receive future cash flows from contracts existing at September 10, 2003, the date Conseco, Inc., an Indiana corporation, emerged from bankruptcy.

At June 30, 2019, adjustments to present value of future profits, deferred acquisition costs, insurance liabilities and deferred tax assets included $(5.7) million, $(3.9) million, $(69.4) million and $17.1 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 June 30, 2019, the amortized cost, gross unrealized gains and losses, estimated fair value, other-than-temporary impairments in accumulated other comprehensive income of fixed maturities, available for sale, were as follows (dollars in millions):
 
Amortized cost
 
Gross unrealized gains
 
Gross unrealized losses
 
Estimated fair value
 
Other-than-temporary impairments included in accumulated other comprehensive income
Corporate securities
$
11,448.6

 
$
1,121.9

 
$
(31.1
)
 
$
12,539.4

 
$

United States Treasury securities and obligations of United States government corporations and agencies
154.8

 
38.7

 
(.1
)
 
193.4

 

States and political subdivisions
1,896.3

 
233.7

 

 
2,130.0

 

Debt securities issued by foreign governments
76.5

 
8.2

 

 
84.7

 

Asset-backed securities
2,546.0

 
167.6

 
(2.3
)
 
2,711.3

 

Collateralized debt obligations
285.0

 
.1

 
(1.7
)
 
283.4

 

Commercial mortgage-backed securities
1,689.1

 
75.1

 
(5.2
)
 
1,759.0

 

Mortgage pass-through securities
1.3

 
.1

 

 
1.4

 

Collateralized mortgage obligations
675.5

 
59.2

 
(.1
)
 
734.6

 
(.5
)
Total fixed maturities, available for sale
$
18,773.1

 
$
1,704.6

 
$
(40.5
)
 
$
20,437.2

 
$
(.5
)


At December 31, 2018, the amortized cost, gross unrealized gains and losses, estimated fair value, other-than-temporary impairments in accumulated other comprehensive income of fixed maturities, available for sale, were as follows (dollars in millions):
 
Amortized cost
 
Gross unrealized gains
 
Gross unrealized losses
 
Estimated fair value
 
Other-than-temporary impairments included in accumulated other comprehensive income
Corporate securities
$
11,168.5

 
$
404.7

 
$
(370.2
)
 
$
11,203.0

 
$

United States Treasury securities and obligations of United States government corporations and agencies
152.9

 
22.1

 
(.2
)
 
174.8

 

States and political subdivisions
1,725.8

 
144.6

 
(2.6
)
 
1,867.8

 

Debt securities issued by foreign governments
60.3

 
.9

 
(1.7
)
 
59.5

 

Asset-backed securities
2,552.1

 
130.3

 
(7.6
)
 
2,674.8

 

Collateralized debt obligations
338.0

 

 
(15.2
)
 
322.8

 

Commercial mortgage-backed securities
1,522.9

 
16.8

 
(21.7
)
 
1,518.0

 

Mortgage pass-through securities
1.5

 
.1

 

 
1.6

 

Collateralized mortgage obligations
585.8

 
43.7

 
(4.1
)
 
625.4

 
(.5
)
Total fixed maturities, available for sale
$
18,107.8

 
$
763.2

 
$
(423.3
)
 
$
18,447.7

 
$
(.5
)


The following table sets forth the amortized cost and estimated fair value of fixed maturities, available for sale, at June 30, 2019, 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.

 
Amortized
cost
 
Estimated
fair
value
 
(Dollars in millions)
Due in one year or less
$
360.3

 
$
365.1

Due after one year through five years
1,169.3

 
1,216.9

Due after five years through ten years
1,426.0

 
1,506.7

Due after ten years
10,620.6

 
11,858.8

Subtotal
13,576.2

 
14,947.5

Structured securities
5,196.9

 
5,489.7

Total fixed maturities, available for sale
$
18,773.1

 
$
20,437.2



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.

 
Amortized
cost
 
Estimated
fair
value
 
(Dollars in millions)
Due in one year or less
$
405.6

 
$
409.8

Due after one year through five years
1,346.8

 
1,377.1

Due after five years through ten years
1,648.2

 
1,625.7

Due after ten years
9,706.9

 
9,892.5

Subtotal
13,107.5

 
13,305.1

Structured securities
5,000.3

 
5,142.6

Total fixed maturities, available for sale
$
18,107.8

 
$
18,447.7


 
Net Realized Investment Gains (Losses)

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

 
Three months ended
 
Six months ended
 
June 30,
 
June 30,
 
2019
 
2018
 
2019
 
2018
Fixed maturity securities, available for sale:
 
 
 
 
 
 
 
Gross realized gains on sale
$
5.9

 
$
31.9

 
$
66.8

 
$
40.1

Gross realized losses on sale
(.8
)
 
(17.8
)
 
(52.3
)
 
(25.5
)
Impairment losses recognized

 

 
(2.2
)
 

Net realized investment gains (losses) from fixed maturities
5.1

 
14.1

 
12.3

 
14.6

Equity securities, including change in fair value (a)
.1

 
2.2

 
10.8

 
(10.3
)
Loss on dissolution of variable interest entity
(5.1
)
 

 
(5.1
)
 

Other (a)
5.2

 
(5.3
)
 
3.4

 
(8.5
)
Net realized investment gains (losses)
$
5.3

 
$
11.0

 
$
21.4

 
$
(4.2
)

_________________
(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 periods) were $10.3 million and $(4.2) million for the six months ended June 30, 2019 and 2018, respectively.

During the first six months of 2019, we recognized net realized investment gains of $21.4 million, which were comprised of: (i) $5.3 million of net gains from the sales of investments; (ii) $5.1 million of losses on the dissolution of a VIE; (iii) $10.8 million of gains related to equity securities, including the change in fair value; (iv) the increase in fair value of certain fixed maturity investments with embedded derivatives of $7.7 million; (v) the increase in fair value of embedded derivatives related to a modified coinsurance agreement of $4.9 million; and (vi) $2.2 million of writedowns of investments for other than temporary declines in fair value recognized through net income.

During the first six months of 2018, we recognized net realized investment losses of $4.2 million, which were comprised of: (i) $11.8 million of net gains from the sales of investments; (ii) $10.3 million of losses related to equity securities, including the change in fair value; (iii) the decrease in fair value of certain fixed maturity investments with embedded derivatives of $1.5 million; and (iv) the decrease in fair value of embedded derivatives related to a modified coinsurance agreement of $4.2 million.

Our fixed maturity investments are generally purchased in the context of various long-term strategies, including funding insurance liabilities, so we do not generally seek to generate short-term realized gains through the purchase and sale of such securities.  In certain circumstances, including those in which securities are selling at prices which exceed our view of their underlying economic value, or when it is possible to reinvest the proceeds to better meet our long-term asset-liability objectives, we may sell certain securities.

During the first six months of 2019, the $52.3 million of gross realized losses on sales of $877.4 million of fixed maturity securities, available for sale included: (i) $45.2 million related to various corporate securities; and (ii) $7.1 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, including changes in relative value among potential investment strategies; (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.

During the first six months of 2019, we recognized $2.2 million of impairment losses recorded in earnings related to a corporate security due to an issuer specific event. There were no impairment losses recognized in the first six months of 2018.

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

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

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 June 30, 2019, other-than-temporary impairments included in accumulated other comprehensive income totaled $.5 million (before taxes and related amortization).

The following table summarizes the amount of credit losses recognized in earnings on fixed maturity securities, available for sale, held at the beginning of the period, for which a portion of the other-than-temporary impairment was also recognized in accumulated other comprehensive income for the three and six months ended June 30, 2019 and 2018 (dollars in millions):

 
Three months ended
 
Six months ended
 
June 30,
 
June 30,
 
2019
 
2018
 
2019
 
2018
Credit losses on fixed maturity securities, available for sale, beginning of period
$
(.2
)
 
$
(2.8
)
 
$
(.2
)
 
$
(2.8
)
Add: credit losses on other-than-temporary impairments not previously recognized

 

 

 

Less: credit losses on securities sold

 
2.5

 

 
2.5

Less: credit losses on securities impaired due to intent to sell (a)

 

 

 

Add: credit losses on previously impaired securities

 

 

 

Less: increases in cash flows expected on previously impaired securities

 

 

 

Credit losses on fixed maturity securities, available for sale, end of period
$
(.2
)
 
$
(.3
)
 
$
(.2
)
 
$
(.3
)
__________
(a)
Represents securities for which the amount previously recognized in accumulated other comprehensive income was recognized in earnings because we intend to sell the security or we more likely than not will be required to sell the security before recovery of its amortized cost basis.

Gross Unrealized Investment Losses

Our investment strategy is to maximize, over a sustained period and within acceptable parameters of quality and risk, investment income and total investment return through active 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 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 June 30, 2019 (dollars in millions):

 
 
Less than 12 months
 
12 months or greater
 
Total
Description of securities
 
Fair
value
 
Unrealized
losses
 
Fair
value
 
Unrealized
losses
 
Fair
value
 
Unrealized
losses
Corporate securities
 
$
254.2

 
$
(3.3
)
 
$
693.2

 
$
(27.8
)
 
$
947.4

 
$
(31.1
)
United States Treasury securities and obligations of United States government corporations and agencies
 

 

 
7.9

 
(.1
)
 
7.9

 
(.1
)
States and political subdivisions
 

 

 
2.1

 

 
2.1

 

Asset-backed securities
 
191.9

 
(.8
)
 
113.0

 
(1.5
)
 
304.9

 
(2.3
)
Collateralized debt obligations
 
109.2

 
(.7
)
 
65.2

 
(1.0
)
 
174.4

 
(1.7
)
Commercial mortgage-backed securities
 
60.9

 
(.1
)
 
115.6

 
(5.1
)
 
176.5

 
(5.2
)
Collateralized mortgage obligations
 
16.3

 

 
14.5

 
(.1
)
 
30.8

 
(.1
)
Total fixed maturities, available for sale
 
$
632.5

 
$
(4.9
)
 
$
1,011.5

 
$
(35.6
)
 
$
1,644.0

 
$
(40.5
)

The following table summarizes the gross unrealized losses and fair values of our investments with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that such securities have been in a continuous unrealized loss position, at December 31, 2018 (dollars in millions):

 
 
Less than 12 months
 
12 months or greater
 
Total
Description of securities
 
Fair
value
 
Unrealized
losses
 
Fair
value
 
Unrealized
losses
 
Fair
value
 
Unrealized
losses
Corporate securities
 
$
4,702.9

 
$
(280.9
)
 
$
805.9

 
$
(89.3
)
 
$
5,508.8

 
$
(370.2
)
United States Treasury securities and obligations of United States government corporations and agencies
 
2.0

 

 
19.2

 
(.2
)
 
21.2

 
(.2
)
States and political subdivisions
 
91.3

 
(1.3
)
 
33.3

 
(1.3
)
 
124.6

 
(2.6
)
Debt securities issued by foreign governments
 
16.8

 
(.7
)
 
15.1

 
(1.0
)
 
31.9

 
(1.7
)
Asset-backed securities
 
572.4

 
(3.6
)
 
238.0

 
(4.0
)
 
810.4

 
(7.6
)
Collateralized debt obligations
 
318.9

 
(15.2
)
 

 

 
318.9

 
(15.2
)
Commercial mortgage-backed securities
 
560.3

 
(6.3
)
 
281.1

 
(15.4
)
 
841.4

 
(21.7
)
Collateralized mortgage obligations
 
46.1

 
(.6
)
 
72.4

 
(3.5
)
 
118.5

 
(4.1
)
Total fixed maturities, available for sale
 
$
6,310.7

 
$
(308.6
)
 
$
1,465.0

 
$
(114.7
)
 
$
7,775.7

 
$
(423.3
)


Based on management's current assessment of investments with unrealized losses at June 30, 2019, 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.
v3.19.2
EARNINGS PER SHARE
6 Months Ended
Jun. 30, 2019
Earnings Per Share [Abstract]  
EARNINGS PER SHARE
EARNINGS PER SHARE

A reconciliation of net income (loss) and shares used to calculate basic and diluted earnings per share is as follows (dollars in millions and shares in thousands):

 
Three months ended
 
Six months ended
 
June 30,
 
June 30,
 
2019
 
2018
 
2019
 
2018
Net income for basic and diluted earnings per share
$
37.6

 
$
102.2

 
$
89.4

 
$
186.5

Shares:
 

 
 

 
 
 
 
Weighted average shares outstanding for basic earnings per share
158,816

 
166,098

 
159,882

 
166,579

Effect of dilutive securities on weighted average shares:
 

 
 

 
 
 
 
Amounts related to employee benefit plans
919

 
1,880

 
1,080

 
2,249

Weighted average shares outstanding for diluted earnings per share
159,735

 
167,978

 
160,962

 
168,828



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).
v3.19.2
BUSINESS SEGMENTS
6 Months Ended
Jun. 30, 2019
Segment Reporting [Abstract]  
BUSINESS SEGMENTS
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 and Casualty Company ("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.

We measure segment performance by excluding net realized investment gains (losses), fair value changes in embedded derivative liabilities (net of related amortization), fair value changes related to the agent deferred compensation plan, loss on extinguishment of debt, income taxes and other non-operating items consisting primarily of earnings attributable to variable interest entities ("VIEs") ("pre-tax operating earnings") because we believe that this performance measure is a better indicator of the ongoing business and trends in our business.  Our primary investment focus is on investment income to support our liabilities for insurance products as opposed to the generation of net realized investment gains (losses), and a long-term focus is necessary to maintain profitability over the life of the business.

The net realized investment gains (losses), fair value changes in embedded derivative liabilities (net of related amortization), fair value changes related to the agent deferred compensation plan, loss on extinguishment of debt 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.

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

 
Three months ended
 
Six months ended
 
June 30,
 
June 30,
 
2019
 
2018
 
2019
 
2018
Revenues:
 
 
 
 
 
 
 
Bankers Life:
 
 
 
 
 
 
 
Insurance policy income:
 
 
 
 
 
 
 
Annuities
$
4.2

 
$
4.8

 
$
10.7

 
$
9.4

Health
254.1

 
256.3

 
509.2

 
513.2

Life
104.2

 
105.0

 
207.8

 
208.9

Net investment income (a)
226.8

 
213.2

 
457.6

 
404.3

Fee revenue and other income (a)
12.7

 
10.6

 
38.5

 
30.2

Total Bankers Life revenues
602.0

 
589.9

 
1,223.8

 
1,166.0

Washington National:
 

 
 

 
 
 
 
Insurance policy income:
 

 
 

 
 
 
 
Annuities
.1

 
.2

 
.2

 
.7

Health
167.0

 
164.0

 
333.4

 
327.8

Life
7.6

 
6.8

 
14.9

 
13.5

Net investment income (a)
64.8

 
64.1

 
130.0

 
129.5

Fee revenue and other income (a)
3.3

 
.3

 
3.5

 
.5

Total Washington National revenues
242.8

 
235.4

 
482.0

 
472.0

Colonial Penn:
 

 
 

 
 
 
 
Insurance policy income:
 

 
 

 
 
 
 
Health
.4

 
.4

 
.8

 
.9

Life
77.2

 
74.1

 
153.5

 
147.7

Net investment income (a)
10.8

 
11.3

 
21.5

 
22.3

Fee revenue and other income (a)
.4

 
.4

 
.9

 
.9

Total Colonial Penn revenues
88.8

 
86.2

 
176.7

 
171.8

Long-term care in run-off:
 
 
 
 
 
 
 
Insurance policy income - health
3.5

 
48.2

 
7.1

 
97.6

Net investment income (a)                                                                                           
8.4

 
54.9

 
16.6

 
110.1

Total Long-term care in run-off revenues
11.9

 
103.1

 
23.7

 
207.7

Corporate operations:
 

 
 

 
 
 
 
Net investment income
7.6

 
4.0

 
29.3

 
5.2

Fee and other income
1.5

 
1.5

 
3.1

 
3.3

Total corporate revenues
9.1

 
5.5

 
32.4

 
8.5

Total revenues
$
954.6

 
$
1,020.1

 
$
1,938.6

 
$
2,026.0



(continued on next page)

(continued from previous page)
 
Three months ended
 
Six months ended
 
June 30,
 
June 30,
 
2019
 
2018
 
2019
 
2018
Expenses:
 
 
 
 
 
 
 
Bankers Life:
 
 
 
 
 
 
 
Insurance policy benefits
$
360.9

 
$
350.4

 
$
741.2

 
$
690.0

Amortization
37.2

 
37.7

 
83.7

 
82.1

Interest expense on investment borrowings
8.6

 
7.5

 
17.3

 
13.6

Commission expense and distribution fees
14.7

 
12.7

 
40.9

 
35.0

Other operating costs and expenses
94.2

 
90.9

 
191.2

 
177.1

Total Bankers Life expenses
515.6

 
499.2

 
1,074.3

 
997.8

Washington National:
 

 
 

 
 
 
 
Insurance policy benefits
143.3

 
142.5

 
284.2

 
280.2

Amortization
14.9

 
14.4

 
29.7

 
28.9

Interest expense on investment borrowings
3.3

 
2.7

 
6.6

 
4.8

Commission expense
21.5

 
18.7

 
42.6

 
36.5

Other operating costs and expenses
33.9

 
31.7

 
62.5

 
61.9

Total Washington National expenses
216.9

 
210.0

 
425.6

 
412.3

Colonial Penn:
 

 
 

 
 
 
 
Insurance policy benefits
52.5

 
50.6

 
108.7

 
107.3

Amortization
3.6

 
4.1

 
8.1

 
8.7

Interest expense on investment borrowings
.4

 
.4

 
.8

 
.7

Commission expense
.4

 
.3

 
.7

 
.6

Other operating costs and expenses
26.1

 
25.4

 
54.0

 
50.6

Total Colonial Penn expenses
83.0

 
80.8

 
172.3

 
167.9

Long-term care in run-off:
 
 
 
 
 
 
 
Insurance policy benefits                                                                                 
8.1

 
85.1

 
16.8

 
168.6

Amortization

 
2.3

 

 
4.9

Commission expense
.1

 
.4

 
.2

 
.8

Other operating costs and expenses                                                                                 
.5

 
6.8

 
1.0

 
12.9

Total Long-term care in run-off expenses
8.7

 
94.6

 
18.0

 
187.2

Corporate operations:
 

 
 

 
 
 
 
Interest expense on corporate debt
12.6

 
11.9

 
24.7

 
23.8

Other operating costs and expenses
21.1

 
19.5

 
43.6

 
38.0

Total corporate expenses
33.7

 
31.4

 
68.3

 
61.8

Total expenses
857.9

 
916.0

 
1,758.5

 
1,827.0

Pre-tax operating earnings by segment:
 

 
 

 
 
 
 
Bankers Life
86.4

 
90.7

 
149.5

 
168.2

Washington National
25.9

 
25.4

 
56.4

 
59.7

Colonial Penn
5.8

 
5.4

 
4.4

 
3.9

Long-term care in run-off
3.2

 
8.5

 
5.7

 
20.5

Corporate operations
(24.6
)
 
(25.9
)
 
(35.9
)
 
(53.3
)
Pre-tax operating earnings
$
96.7

 
$
104.1

 
$
180.1

 
$
199.0

___________________
(a)
It is not practicable to provide additional components of revenue by product or services.

A reconciliation of segment revenues and expenses to consolidated revenues and expenses and net income is as follows (dollars in millions):

 
Three months ended
 
Six months ended
 
June 30,
 
June 30,
 
2019
 
2018
 
2019
 
2018
Total segment revenues                                                                                            
$
954.6

 
$
1,020.1

 
$
1,938.6

 
$
2,026.0

Net realized investment gains (losses)                                    
5.3

 
11.0

 
21.4

 
(4.2
)
Revenues related to VIEs
14.9

 
15.2

 
32.8

 
32.3

Fee revenue related to transition services agreement
5.0

 

 
10.0

 

Consolidated revenues                                                                                       
979.8

 
1,046.3

 
2,002.8

 
2,054.1

 
 
 
 
 
 
 
 
Total segment expenses                                                                                            
857.9

 
916.0

 
1,758.5

 
1,827.0

Insurance policy benefits - fair value changes in embedded derivative liabilities
45.6

 
(10.4
)
 
83.0

 
(41.3
)
Amortization related to fair value changes in embedded derivative liabilities
(9.7
)
 
2.1

 
(17.5
)
 
7.9

Amortization related to net realized investment gains
.2

 
.4

 
.4

 
.4

Expenses related to VIEs
14.5

 
19.4

 
31.4

 
33.2

Fair value changes related to agent deferred compensation plan
11.6


(11.0
)
 
16.9

 
(11.0
)
Loss on extinguishment of debt
7.3

 

 
7.3

 

Expenses related to transition services agreement
4.7

 

 
9.5

 

Consolidated expenses                                                                                       
932.1

 
916.5

 
1,889.5

 
1,816.2

Income before tax
47.7

 
129.8

 
113.3

 
237.9

Tax expense on period income
10.1

 
27.6

 
23.9

 
51.4

Net income
$
37.6

 
$
102.2

 
$
89.4

 
$
186.5


v3.19.2
ACCOUNTING FOR DERIVATIVES
6 Months Ended
Jun. 30, 2019
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
ACCOUNTING FOR DERIVATIVES
ACCOUNTING FOR DERIVATIVES

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):

 
 
Fair value
 
 
June 30,
2019
 
December 31, 2018
Assets:
 
 
 
 
Other invested assets:
 
 
 
 
Fixed index call options
 
$
119.6

 
$
26.6

Reinsurance receivables
 
(1.6
)
 
(6.5
)
Total assets
 
$
118.0

 
$
20.1

Liabilities:
 
 
 
 
Future policy benefits:
 
 
 
 
Fixed index products
 
$
1,454.2

 
$
1,289.0

Total liabilities
 
$
1,454.2

 
$
1,289.0



Our fixed index annuity products provide a guaranteed minimum rate of return and a higher potential return that is based on a percentage (the "participation rate") of the amount of increase in the value of a particular index, such as the Standard &
Poor's 500 Index, over a specified period.  Typically, on each policy anniversary date, a new index period begins.  We are generally able to change the participation rate at the beginning of each index period during a policy year, subject to contractual minimums.  The Company accounts for the options attributed to the policyholder for the estimated life of the contract as embedded derivatives. These accounting requirements often create volatility in the earnings from these products. We typically buy call options (including call spreads) referenced to the applicable indices in an effort to offset