CNO FINANCIAL GROUP, INC., 10-Q filed on 11/5/2018
Quarterly Report
v3.10.0.1
DOCUMENT AND ENTITY INFORMATION - shares
9 Months Ended
Sep. 30, 2018
Oct. 23, 2018
Document and Entity Information [Abstract]    
Entity Registrant Name CNO Financial Group, Inc.  
Entity Central Index Key 0001224608  
Document Type 10-Q  
Document Period End Date Sep. 30, 2018  
Current Fiscal Year End Date --12-31  
Document Fiscal Year Focus 2018  
Document Fiscal Period Focus Q3  
Entity Filer Category Large Accelerated Filer  
Amendment Flag false  
Entity Common Stock, Shares Outstanding   164,649,365
v3.10.0.1
CONSOLIDATED BALANCE SHEET - USD ($)
$ in Millions
Sep. 30, 2018
Dec. 31, 2017
Investments:    
Fixed maturities, available for sale, at fair value (amortized cost: September 30, 2018 - $17,929.5; December 31, 2017 - $20,702.1) $ 18,512.4 $ 22,910.9
Equity securities at fair value (cost: September 30, 2018 - $340.8; December 31, 2017 - $420.0) 335.5 440.6
Mortgage loans 1,680.6 1,650.6
Policy loans 117.4 116.0
Trading securities 239.0 284.6
Investments held by variable interest entities 1,550.5 1,526.9
Other invested assets 920.0 924.5
Total investments 23,355.4 27,854.1
Cash and cash equivalents - unrestricted 539.2 578.4
Cash and cash equivalents held by variable interest entities 56.4 178.9
Accrued investment income 224.7 245.9
Present value of future profits 351.6 359.6
Deferred acquisition costs 1,291.1 1,026.8
Reinsurance receivables 4,946.3 2,175.2
Income tax assets, net 577.8 366.9
Assets held in separate accounts 5.1 5.0
Other assets 299.6 319.5
Total assets 31,647.2 33,110.3
Liabilities for insurance products:    
Policyholder account balances 11,449.7 11,220.7
Future policy benefits 11,140.5 11,521.3
Liability for policy and contract claims 513.4 530.3
Unearned and advanced premiums 249.2 261.7
Liabilities related to separate accounts 5.1 5.0
Other liabilities 689.5 751.8
Investment borrowings 1,646.1 1,646.7
Borrowings related to variable interest entities 1,417.6 1,410.7
Notes payable – direct corporate obligations 916.2 914.6
Total liabilities 28,027.3 28,262.8
Commitments and Contingencies
Shareholders' equity:    
Common stock ($0.01 par value, 8,000,000,000 shares authorized, shares issued and outstanding: September 30, 2018 – 164,634,365; December 31, 2017 – 166,857,931) 1.6 1.7
Additional paid-in capital 3,030.0 3,073.3
Accumulated other comprehensive income 403.5 1,212.1
Retained earnings 184.8 560.4
Total shareholders' equity 3,619.9 4,847.5
Total liabilities and shareholders' equity $ 31,647.2 $ 33,110.3
v3.10.0.1
CONSOLIDATED BALANCE SHEET (Parenthetical) - USD ($)
$ in Millions
Sep. 30, 2018
Dec. 31, 2017
Investments:    
Fixed maturities, available for sale, amortized cost $ 17,929.5 $ 20,702.1
Equity securities cost $ 340.8 $ 420.0
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) 164,634,365 166,857,931
Common stock, shares outstanding (in shares) 164,634,365 166,857,931
v3.10.0.1
CONSOLIDATED STATEMENT OF OPERATIONS - USD ($)
shares in Thousands, $ in Millions
3 Months Ended 9 Months Ended
Sep. 30, 2018
Sep. 30, 2017
Sep. 30, 2018
Sep. 30, 2017
Revenues:        
Insurance policy income $ 656.9 $ 659.3 $ 1,976.6 $ 1,987.2
Net investment income:        
General account assets 332.0 325.9 989.3 960.3
Policyholder and other special-purpose portfolios 85.8 52.7 134.3 171.8
Realized investment gains (losses):        
Net realized gains on the transfer of assets related to reinsurance transaction 363.4 0.0 363.4 0.0
Other net realized investment gains, excluding impairment losses 33.3 34.5 29.1 74.8
Total other-than-temporary impairment losses (2.1) (4.7) (2.1) (17.3)
Portion of other-than-temporary impairment losses recognized in accumulated other comprehensive income 0.0 0.0 0.0 (0.9)
Net impairment losses recognized (2.1) (4.7) (2.1) (18.2)
Loss on dissolution of variable interest entities 0.0 (0.6) 0.0 (4.3)
Total realized gains 394.6 29.2 390.4 52.3
Fee revenue and other income 11.9 12.2 44.7 35.5
Total revenues 1,481.2 1,079.3 3,535.3 3,207.1
Benefits and expenses:        
Insurance policy benefits 646.9 638.1 1,851.7 1,941.6
Loss related to reinsurance transaction 1,067.6 0.0 1,067.6 0.0
Interest expense 38.8 30.1 110.1 92.3
Amortization 62.4 58.2 195.3 181.3
Loss on extinguishment of borrowings related to variable interest entities 0.0 5.5 3.8 5.5
Other operating costs and expenses 205.3 217.5 608.7 631.3
Total benefits and expenses 2,021.0 949.4 3,837.2 2,852.0
Income (loss) before income taxes (539.8) 129.9 (301.9) 355.1
Tax expense (benefit) on period income (loss) (114.8) 44.1 (63.4) 123.6
Valuation allowance for deferred tax assets and other tax items 104.8 (15.0) 104.8 (15.0)
Net income (loss) $ (529.8) $ 100.8 $ (343.3) $ 246.5
Basic:        
Weighted average shares outstanding (in shares) 164,551 168,684 165,903 170,890
Net income (loss) (in dollars per share) $ (3.22) $ 0.60 $ (2.07) $ 1.44
Diluted:        
Weighted average shares outstanding (in shares) 164,551 170,982 165,903 172,800
Net income (loss) (in dollars per share) $ (3.22) $ 0.59 $ (2.07) $ 1.43
v3.10.0.1
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME - USD ($)
$ in Millions
3 Months Ended 9 Months Ended
Sep. 30, 2018
Sep. 30, 2017
Sep. 30, 2018
Sep. 30, 2017
Statement of Comprehensive Income [Abstract]        
Net income (loss) $ (529.8) $ 100.8 $ (343.3) $ 246.5
Other comprehensive income, before tax:        
Unrealized gains (losses) for the period (149.1) 120.9 (1,264.1) 794.5
Adjustment to present value of future profits and deferred acquisition costs 18.7 (1.8) 107.4 (25.3)
Amount related to premium deficiencies assuming the net unrealized gains (losses) had been realized 106.5 (31.0) 509.5 (243.0)
Reclassification adjustments:        
For net realized investment gains included in net income (loss) (354.7) (27.7) (366.4) (44.0)
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) (0.5) 0.7 (0.1) 1.0
Other comprehensive income (loss) before tax (379.1) 61.1 (1,013.7) 483.2
Income tax (expense) benefit related to items of accumulated other comprehensive income (loss) 82.4 (22.0) 221.4 (172.0)
Other comprehensive income (loss), net of tax (296.7) 39.1 (792.3) 311.2
Comprehensive income (loss) $ (826.5) $ 139.9 $ (1,135.6) $ 557.7
v3.10.0.1
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY - USD ($)
$ in Millions
Total
Common stock and additional paid-in capital
Accumulated other comprehensive income
Retained earnings
Increase (Decrease) in Stockholders' Equity [Roll Forward]        
Cumulative effect of accounting change $ 0.3 $ 0.9   $ (0.6)
Balance, beginning of period at Dec. 31, 2016 4,486.9 3,213.8 $ 622.4 650.7
Increase (Decrease) in Stockholders' Equity [Roll Forward]        
Net income (loss) 246.5     246.5
Change in unrealized appreciation (depreciation) of investments (net of applicable income tax expense (benefit)) 309.1   309.1  
Change in noncredit component of impairment losses on fixed maturities, available for sale (net of applicable income tax expense (benefit)) 2.1   2.1  
Cost of common stock repurchased (140.1) (140.1)    
Dividends on common stock (44.7)     (44.7)
Stock options, restricted stock and performance units 21.6 21.6    
Balance, end of period at Sep. 30, 2017 4,881.7 3,096.2 933.6 851.9
Increase (Decrease) in Stockholders' Equity [Roll Forward]        
Cumulative effect of accounting change 0.0 0.0 (16.3) 16.3
Balance, beginning of period at Dec. 31, 2017 4,847.5 3,075.0 1,212.1 560.4
Increase (Decrease) in Stockholders' Equity [Roll Forward]        
Net income (loss) (343.3)     (343.3)
Change in unrealized appreciation (depreciation) of investments (net of applicable income tax expense (benefit)) (791.5)   (791.5)  
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 (60.5) (60.5)    
Dividends on common stock (48.6)     (48.6)
Stock options, restricted stock and performance units 17.1 17.1    
Balance, end of period at Sep. 30, 2018 $ 3,619.9 $ 3,031.6 $ 403.5 $ 184.8
v3.10.0.1
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (Parenthetical) - USD ($)
$ in Millions
9 Months Ended
Sep. 30, 2018
Sep. 30, 2017
Statement of Stockholders' Equity [Abstract]    
Change in unrealized appreciation (depreciation) of investments, applicable income tax expense (benefit) $ (221.2) $ 170.9
Change in noncredit component of impairment losses on fixed maturities, available for sale, applicable income tax expense (benefit) $ (0.2) $ 1.1
v3.10.0.1
CONSOLIDATED STATEMENT OF CASH FLOWS - USD ($)
$ in Millions
9 Months Ended
Sep. 30, 2018
Sep. 30, 2017
Cash flows from operating activities:    
Insurance policy income $ 1,848.1 $ 1,859.4
Net investment income 1,005.7 917.9
Fee revenue and other income 44.7 35.5
Insurance policy benefits (1,515.6) (1,491.7)
Payment to reinsurer pursuant to long-term care business reinsured (365.0) 0.0
Interest expense (92.8) (81.0)
Deferrable policy acquisition costs (187.2) (183.4)
Other operating costs (591.9) (549.2)
Income taxes (31.0) (58.0)
Net cash flow from operating activities 115.0 449.5
Cash flows from investing activities:    
Sales of investments 2,747.2 1,723.5
Maturities and redemptions of investments 1,966.7 2,543.0
Purchases of investments (5,037.6) (4,076.8)
Net sales of trading securities 25.4 94.8
Other (16.3) (20.4)
Net cash provided (used) by investing activities (314.6) 264.1
Cash flows from financing activities:    
Issuance of common stock 3.5 6.0
Payments to repurchase common stock (67.5) (142.3)
Common stock dividends paid (48.4) (44.5)
Amounts received for deposit products 1,129.7 1,067.2
Withdrawals from deposit products (980.5) (920.8)
Issuance of investment borrowings:    
Federal Home Loan Bank 150.0 332.0
Related to variable interest entities 277.6 387.3
Payments on investment borrowings:    
Federal Home Loan Bank (150.6) (332.6)
Related to variable interest entities (275.9) (862.3)
Net cash provided (used) by financing activities 37.9 (510.0)
Net increase (decrease) in cash and cash equivalents (161.7) 203.6
Cash and cash equivalents - unrestricted and held by variable interest entities, beginning of period 757.3 668.2
Cash and cash equivalents - unrestricted and held by variable interest entities, end of period $ 595.6 $ 871.8
v3.10.0.1
BUSINESS AND BASIS OF PRESENTATION
9 Months Ended
Sep. 30, 2018
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 2017 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 2018 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, 2017, 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.
v3.10.0.1
INVESTMENTS
9 Months Ended
Sep. 30, 2018
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 certain reinsurance agreements; and (iii) certain fixed maturity securities containing embedded derivatives for which we have elected the fair value option.  The change in fair value of the income generating investments and investments supporting insurance liabilities 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 September 30, 2018 and December 31, 2017, were as follows (dollars in millions):

 
September 30,
2018
 
December 31,
2017
Net unrealized appreciation (depreciation) on fixed maturity securities, available for sale, on which an other-than-temporary impairment loss has been recognized
$
1.6

 
$
2.6

Net unrealized gains on all other investments
577.2

 
2,227.3

Adjustment to present value of future profits (a)
(4.5
)
 
(94.0
)
Adjustment to deferred acquisition costs
(56.1
)
 
(292.6
)
Adjustment to insurance liabilities
(5.0
)
 
(295.8
)
Deferred income tax liabilities
(109.7
)
 
(335.4
)
Accumulated other comprehensive income
$
403.5

 
$
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 Conseco, Inc., an Indiana corporation, emerged from bankruptcy.

At September 30, 2018, adjustments to insurance liabilities and deferred tax assets included $5.0 million and $1.1 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 September 30, 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
$
11,266.5

 
$
468.8

 
$
(210.8
)
 
$
11,524.5

 
$

United States Treasury securities and obligations of United States government corporations and agencies
151.9

 
17.3

 
(.5
)
 
168.7

 

States and political subdivisions
1,749.7

 
141.9

 
(4.6
)
 
1,887.0

 

Debt securities issued by foreign governments
60.3

 
1.3

 
(1.4
)
 
60.2

 

Asset-backed securities
2,363.7

 
143.6

 
(8.2
)
 
2,499.1

 

Collateralized debt obligations
355.6

 
.4

 
(2.0
)
 
354.0

 

Commercial mortgage-backed securities
1,439.3

 
14.3

 
(20.3
)
 
1,433.3

 

Mortgage pass-through securities
1.5

 
.1

 

 
1.6

 

Collateralized mortgage obligations
541.0

 
48.1

 
(5.1
)
 
584.0

 
(.6
)
Total fixed maturities, available for sale
$
17,929.5

 
$
835.8

 
$
(252.9
)
 
$
18,512.4

 
$
(.6
)


At December 31, 2017, 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, 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
Corporate securities
$
13,286.3

 
$
1,699.1

 
$
(27.0
)
 
$
14,958.4

 
$

United States Treasury securities and obligations of United States government corporations and agencies
146.4

 
31.5

 
(.2
)
 
177.7

 

States and political subdivisions
1,821.9

 
234.8

 
(.4
)
 
2,056.3

 

Debt securities issued by foreign governments
79.5

 
3.8

 
(.2
)
 
83.1

 

Asset-backed securities
3,085.9

 
172.6

 
(4.1
)
 
3,254.4

 

Collateralized debt obligations
257.1

 
2.3

 

 
259.4

 

Commercial mortgage-backed securities
1,354.0

 
33.8

 
(10.3
)
 
1,377.5

 

Mortgage pass-through securities
1.8

 
.2

 

 
2.0

 

Collateralized mortgage obligations
669.2

 
73.2

 
(.3
)
 
742.1

 
(1.0
)
Total fixed maturities, available for sale
$
20,702.1

 
$
2,251.3

 
$
(42.5
)
 
$
22,910.9

 
$
(1.0
)
Equity securities
$
420.0

 
$
23.6

 
$
(3.0
)
 
$
440.6

 
 


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

 
Amortized
cost
 
Estimated
fair
value
 
(Dollars in millions)
Due in one year or less
$
367.7

 
$
372.8

Due after one year through five years
1,496.2

 
1,536.2

Due after five years through ten years
1,625.1

 
1,632.8

Due after ten years
9,739.4

 
10,098.6

Subtotal
13,228.4

 
13,640.4

Structured securities
4,701.1

 
4,872.0

Total fixed maturities, available for sale
$
17,929.5

 
$
18,512.4



The following table sets forth the amortized cost and estimated fair value of fixed maturities, available for sale, at December 31, 2017, by contractual maturity.

 
Amortized
cost
 
Estimated
fair
value
 
(Dollars in millions)
Due in one year or less
$
328.1

 
$
335.1

Due after one year through five years
1,947.3

 
2,052.3

Due after five years through ten years
1,508.7

 
1,601.3

Due after ten years
11,550.0

 
13,286.8

Subtotal
15,334.1

 
17,275.5

Structured securities
5,368.0

 
5,635.4

Total fixed maturities, available for sale
$
20,702.1

 
$
22,910.9


 
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
 
Nine months ended
 
September 30,
 
September 30,
 
2018
 
2017
 
2018
 
2017
Fixed maturity securities, available for sale:
 
 
 
 
 
 
 
Gross realized gains on sale
$
5.4

 
$
32.3

 
$
45.5

 
$
60.4

Gross realized losses on sale
(11.4
)
 
(8.5
)
 
(36.9
)
 
(16.4
)
Impairments:
 
 
 
 
 
 
 
Total other-than-temporary impairment losses

 
(3.2
)
 

 
(10.0
)
Other-than-temporary impairment losses recognized in accumulated other comprehensive income

 

 

 
(.9
)
Net impairment losses recognized

 
(3.2
)
 

 
(10.9
)
Net realized investment gains (losses) from fixed maturities
(6.0
)
 
20.6

 
8.6

 
33.1

Equity securities, including change in fair value (a)
(3.0
)
 
7.7

 
(13.3
)
 
9.6

Mortgage loans

 

 

 
1.0

Impairments of other investments
(2.1
)
 
(1.5
)
 
(2.1
)
 
(7.3
)
Loss on dissolution of variable interest entities

 
(.6
)
 

 
(4.3
)
Other (a) (b)
42.3

 
3.0

 
33.8

 
20.2

Net realized investment gains before net realized gains on the transfer of assets related to reinsurance transaction
31.2

 
29.2

 
27.0

 
52.3

Net realized gains on the transfer of assets related to reinsurance transaction
363.4

 

 
363.4

 

Net realized investment gains
$
394.6

 
$
29.2

 
$
390.4

 
$
52.3


_________________
(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 $(6.0) million and $13.0 million for the nine months ended September 30, 2018 and 2017, 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 the third quarter of 2018.

During the first nine months of 2018, we recognized net realized investment gains of $390.4 million, which were comprised of: (i) $50.4 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) $13.3 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 $3.0 million; (v) the decrease in fair value of embedded derivatives related to a modified coinsurance agreement of $5.0 million; and (vi) $2.1 million of writedowns of investments for other than temporary declines in fair value recognized through net income.

During the first nine months of 2017, we recognized net realized investment gains of $52.3 million, which were comprised of: (i) $60.1 million of net gains from the sales of investments; (ii) $4.3 million of losses on the dissolution of variable interest entities ("VIEs"); (iii) the increase in fair value of certain fixed maturity investments with embedded derivatives of $12.3 million; (iv) the increase in fair value of embedded derivatives related to a modified coinsurance agreement of $2.4 million; and (v) $18.2 million of writedowns of investments for other than temporary declines in fair value recognized through earnings.

During the first nine months of 2017, VIEs that were required to be consolidated were dissolved. A loss of $4.3 million was recognized representing the difference between the borrowings of such VIEs and the contractual distributions required following the liquidation of the underlying assets.

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 nine months of 2018, the $36.9 million of gross realized losses on sales of $1,040.4 million of fixed maturity securities, available for sale included: (i) $26.9 million related to various corporate securities; (ii) $4.0 million related to commercial mortgage-backed securities; and (iii) $6.0 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.

During the first nine months of 2018, we recognized $2.1 million of impairment losses recorded in earnings on a mortgage loan due to issuer specific events.

During the first nine months of 2017, we recognized $18.2 million of impairment losses recorded in earnings which included: (i) $5.7 million of writedowns on fixed maturities in the energy sector; (ii) $5.2 million of writedowns related to a real estate investment; and (iii) $7.3 million of writedowns on other investments.

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 September 30, 2018, other-than-temporary impairments included in accumulated other comprehensive income totaled $.6 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 nine months ended September 30, 2018 and 2017 (dollars in millions):

 
Three months ended
 
Nine months ended
 
September 30,
 
September 30,
 
2018
 
2017
 
2018
 
2017
Credit losses on fixed maturity securities, available for sale, beginning of period
$
(.3
)
 
$
(4.9
)
 
$
(2.8
)
 
$
(5.5
)
Add: credit losses on other-than-temporary impairments not previously recognized

 

 

 

Less: credit losses on securities sold
.1

 

 
2.6

 
1.6

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

 

 

 

Add: credit losses on previously impaired securities

 

 

 
(1.0
)
Less: increases in cash flows expected on previously impaired securities

 

 

 

Credit losses on fixed maturity securities, available for sale, end of period
$
(.2
)
 
$
(4.9
)
 
$
(.2
)
 
$
(4.9
)
__________
(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 September 30, 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
United States Treasury securities and obligations of United States government corporations and agencies
 
$
29.6

 
$
(.3
)
 
$
9.9

 
$
(.2
)
 
$
39.5

 
$
(.5
)
States and political subdivisions
 
174.2

 
(3.8
)
 
16.8

 
(.8
)
 
191.0

 
(4.6
)
Debt securities issued by foreign governments
 
24.4

 
(1.2
)
 
4.3

 
(.2
)
 
28.7

 
(1.4
)
Corporate securities
 
4,114.8

 
(178.8
)
 
315.9

 
(32.0
)
 
4,430.7

 
(210.8
)
Asset-backed securities
 
512.9

 
(4.1
)
 
165.3

 
(4.1
)
 
678.2

 
(8.2
)
Collateralized debt obligations
 
242.7

 
(2.0
)
 

 

 
242.7

 
(2.0
)
Commercial mortgage-backed securities
 
431.8

 
(6.4
)
 
209.3

 
(13.9
)
 
641.1

 
(20.3
)
Mortgage pass-through securities
 
.1

 

 

 

 
.1

 

Collateralized mortgage obligations
 
95.7

 
(4.3
)
 
16.8

 
(.8
)
 
112.5

 
(5.1
)
Total fixed maturities, available for sale
 
$
5,626.2

 
$
(200.9
)
 
$
738.3

 
$
(52.0
)
 
$
6,364.5

 
$
(252.9
)

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):

 
 
Less than 12 months
 
12 months or greater
 
Total
Description of securities
 
Fair
value
 
Unrealized
losses
 
Fair
value
 
Unrealized
losses
 
Fair
value
 
Unrealized
losses
United States Treasury securities and obligations of United States government corporations and agencies
 
$
28.2

 
$
(.2
)
 
$
.7

 
$

 
$
28.9

 
$
(.2
)
States and political subdivisions
 
18.3

 
(.1
)
 
14.9

 
(.3
)
 
33.2

 
(.4
)
Debt securities issued by foreign governments
 
7.7

 
(.1
)
 
5.4

 
(.1
)
 
13.1

 
(.2
)
Corporate securities
 
470.5

 
(6.8
)
 
359.7

 
(20.2
)
 
830.2

 
(27.0
)
Asset-backed securities
 
601.4

 
(2.0
)
 
122.2

 
(2.1
)
 
723.6

 
(4.1
)
Collateralized debt obligations
 
3.0

 

 

 

 
3.0

 

Commercial mortgage-backed securities
 
276.8

 
(1.7
)
 
218.2

 
(8.6
)
 
495.0

 
(10.3
)
Collateralized mortgage obligations
 
20.5

 
(.2
)
 
11.5

 
(.1
)
 
32.0

 
(.3
)
Total fixed maturities, available for sale
 
$
1,426.4

 
$
(11.1
)
 
$
732.6

 
$
(31.4
)
 
$
2,159.0

 
$
(42.5
)
Equity securities
 
$
58.7

 
$
(1.7
)
 
$
21.2

 
$
(1.3
)
 
$
79.9

 
$
(3.0
)


Based on management's current assessment of investments with unrealized losses at September 30, 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.
v3.10.0.1
EARNINGS PER SHARE
9 Months Ended
Sep. 30, 2018
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
 
Nine months ended
 
September 30,
 
September 30,
 
2018
 
2017
 
2018
 
2017
Net income (loss) for basic and diluted earnings per share
$
(529.8
)
 
$
100.8

 
$
(343.3
)
 
$
246.5

Shares:
 

 
 

 
 
 
 
Weighted average shares outstanding for basic earnings per share
164,551

 
168,684

 
165,903

 
170,890

Effect of dilutive securities on weighted average shares:
 

 
 

 
 
 
 
Stock options, restricted stock and performance units

 
2,298

 

 
1,910

Weighted average shares outstanding for diluted earnings per share
164,551

 
170,982

 
165,903

 
172,800



In the three and nine months ended September 30, 2018, equivalent common shares of 2,146,000 and 2,214,000, respectively, (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 periods.

Basic earnings per common share is computed by dividing net income (loss) 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).
v3.10.0.1
BUSINESS SEGMENTS
9 Months Ended
Sep. 30, 2018
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 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 approximately $2.7 billion) through 100% indemnity coinsurance, as further described in the note to the consolidated financial statements entitled "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. As a result of the reorganization of the Company's business segments, total assets of $2.8 billion were transferred from the "Banker Life segment" to the "Long-term care in run-off segment" as of September 30, 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 related to reinsurance transaction, 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 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 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
 
Nine months ended
 
September 30,
 
September 30,
 
2018
 
2017
 
2018
 
2017
Revenues:
 
 
 
 
 
 
 
Bankers Life:
 
 
 
 
 
 
 
Insurance policy income:
 
 
 
 
 
 
 
Annuities
$
4.3

 
$
3.7

 
$
13.7

 
$
15.5

Health
255.8

 
259.4

 
769.0

 
780.5

Life
103.9

 
103.7

 
312.8

 
310.4

Net investment income (a)
256.9

 
222.7

 
661.2

 
658.9

Fee revenue and other income (a)
10.7

 
11.3

 
40.9

 
32.5

Total Bankers Life revenues
631.6

 
600.8

 
1,797.6

 
1,797.8

Washington National:
 

 
 

 
 
 
 
Insurance policy income:
 

 
 

 
 
 
 
Annuities
.4

 
.5

 
1.1

 
1.6

Health
163.7

 
160.4

 
491.5

 
480.3

Life
6.7

 
6.5

 
20.2

 
20.1

Net investment income (a)
69.9

 
68.0

 
199.4

 
201.9

Fee revenue and other income (a)
.2

 
.3

 
.7

 
.8

Total Washington National revenues
240.9

 
235.7

 
712.9

 
704.7

Colonial Penn:
 

 
 

 
 
 
 
Insurance policy income:
 

 
 

 
 
 
 
Health
.4

 
.5

 
1.3

 
1.6

Life
74.7

 
72.6

 
222.4

 
217.5

Net investment income (a)
11.1

 
11.0

 
33.4

 
33.1

Fee revenue and other income (a)
.5

 
.3

 
1.4

 
.9

Total Colonial Penn revenues
86.7

 
84.4

 
258.5

 
253.1

Long-term care in run-off:
 
 
 
 
 
 
 
Insurance policy income - health
47.0

 
52.0

 
144.6

 
159.7

Net investment income (a)                                                                                           
54.1

 
54.7

 
164.2

 
168.0

Total Long-term care in run-off revenues
101.1

 
106.7

 
308.8

 
327.7

Corporate operations:
 

 
 

 
 
 
 
Net investment income
8.0

 
7.0

 
13.2

 
24.8

Fee and other income
1.6

 
1.8

 
4.9

 
6.5

Total corporate revenues
9.6

 
8.8

 
18.1

 
31.3

Total revenues
$
1,069.9

 
$
1,036.4

 
$
3,095.9

 
$
3,114.6



(continued on next page)

(continued from previous page)
 
Three months ended
 
Nine months ended
 
September 30,
 
September 30,
 
2018
 
2017
 
2018
 
2017
Expenses:
 
 
 
 
 
 
 
Bankers Life:
 
 
 
 
 
 
 
Insurance policy benefits
$
390.5

 
$
362.1

 
$
1,080.5

 
$
1,086.7

Amortization
37.3

 
35.9

 
119.4

 
118.3

Interest expense on investment borrowings
7.9

 
5.3

 
21.5

 
14.3

Other operating costs and expenses
101.5

 
102.2

 
313.6

 
310.4

Total Bankers Life expenses
537.2

 
505.5

 
1,535.0

 
1,529.7

Washington National:
 

 
 

 
 
 
 
Insurance policy benefits
143.5

 
144.7

 
423.7

 
436.7

Amortization
14.0

 
14.3

 
42.9

 
43.9

Interest expense on investment borrowings
3.0

 
1.7

 
7.8

 
4.5

Other operating costs and expenses
50.1

 
47.5

 
148.5

 
145.0

Total Washington National expenses
210.6

 
208.2

 
622.9

 
630.1

Colonial Penn:
 

 
 

 
 
 
 
Insurance policy benefits
49.8

 
47.7

 
157.1

 
150.8

Amortization
4.2

 
3.9

 
12.9

 
11.9

Interest expense on investment borrowings
.3

 
.3

 
1.0

 
.7

Other operating costs and expenses
26.3

 
23.5

 
77.5

 
73.0

Total Colonial Penn expenses
80.6

 
75.4

 
248.5

 
236.4

Long-term care in run-off:
 
 
 
 
 
 
 
Insurance policy benefits                                                                                 
91.3

 
86.5

 
259.9

 
257.6

Amortization
2.1

 
2.8

 
7.0

 
8.0

Other operating costs and expenses                                                                                 
5.6

 
6.8

 
19.3

 
19.9

Total Long-term care in run-off expenses
99.0

 
96.1

 
286.2

 
285.5

Corporate operations:
 

 
 

 
 
 
 
Interest expense on corporate debt
12.1

 
11.7

 
35.9

 
34.8

Other operating costs and expenses
21.4

 
23.7

 
59.4

 
68.3

Total corporate expenses
33.5

 
35.4

 
95.3

 
103.1

Total expenses
960.9

 
920.6

 
2,787.9

 
2,784.8

Pre-tax operating earnings by segment:
 

 
 

 
 
 
 
Bankers Life
94.4

 
95.3

 
262.6

 
268.1

Washington National
30.3

 
27.5

 
90.0

 
74.6

Colonial Penn
6.1

 
9.0

 
10.0

 
16.7

Long-term care in run-off
2.1

 
10.6

 
22.6

 
42.2

Corporate operations
(23.9
)
 
(26.6
)
 
(77.2
)
 
(71.8
)
Pre-tax operating earnings
$
109.0

 
$
115.8

 
$
308.0

 
$
329.8

___________________
(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 (loss) is as follows (dollars in millions):

 
Three months ended
 
Nine months ended
 
September 30,
 
September 30,
 
2018
 
2017
 
2018
 
2017
Total segment revenues                                                                                            
$
1,069.9

 
$
1,036.4

 
$
3,095.9

 
$
3,114.6

Net realized investment gains (losses)                                    
31.2

 
29.2

 
27.0

 
52.3

Net realized gains on the transfer of assets related to reinsurance transaction
363.4

 

 
363.4

 

Revenues related to VIEs
16.7

 
13.7

 
49.0

 
40.2

Consolidated revenues                                                                                       
1,481.2

 
1,079.3

 
3,535.3

 
3,207.1

 
 
 
 
 
 
 
 
Total segment expenses                                                                                            
960.9

 
920.6

 
2,787.9

 
2,784.8

Insurance policy benefits - fair value changes in embedded derivative liabilities
(28.2
)
 
(2.9
)
 
(69.5
)
 
9.8

Amortization related to fair value changes in embedded derivative liabilities
5.3

 
.6

 
13.2

 
(1.8
)
Amortization related to net realized investment gains
(.5
)
 
.7

 
(.1
)
 
1.0

Expenses related to VIEs
15.9

 
17.0

 
49.1

 
44.8

Fair value changes related to agent deferred compensation plan


13.4

 
(11.0
)
 
13.4

Loss related to reinsurance transaction
1,067.6

 

 
1,067.6

 

Consolidated expenses                                                                                       
2,021.0

 
949.4

 
3,837.2

 
2,852.0

Income (loss) before tax
(539.8
)
 
129.9

 
(301.9
)
 
355.1

Income tax expense (benefit):
 
 
 
 
 
 
 
Tax expense (benefit) on period income (loss)
(114.8
)
 
44.1

 
(63.4
)
 
123.6

Valuation allowance for deferr