CNO FINANCIAL GROUP, INC., 10-K filed on 2/24/2021
Annual Report
v3.20.4
Cover Page - USD ($)
$ in Billions
12 Months Ended
Dec. 31, 2020
Feb. 09, 2021
Jun. 30, 2020
Document Information      
Document Type 10-K    
Document Annual Report true    
Document Period End Date Dec. 31, 2020    
Current Fiscal Year End Date --12-31    
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 Well-known Seasoned Issuer Yes    
Entity Voluntary Filers No    
Entity Current Reporting Status Yes    
Entity Interactive Data Current Yes    
Entity Filer Category Large Accelerated Filer    
Entity Small Business false    
Entity Emerging Growth false    
ICFR Auditor Attestation Flag true    
Entity Shell Company false    
Entity Public Float     $ 2.2
Entity Common Stock, Shares Outstanding   134,644,290  
Documents Incorporated by Reference Portions of the Registrant's definitive proxy statement for the 2021 annual meeting of shareholders are incorporated by reference into Part III of this report.    
Entity Central Index Key 0001224608    
Document Fiscal Year Focus 2020    
Document Fiscal Period Focus FY    
Amendment Flag false    
Common Stock, par value $0.01 per share      
Document Information      
Title of 12(b) Security Common Stock, par value $0.01 per share    
Trading Symbol CNO    
Security Exchange Name NYSE    
Rights to purchase Series E Junior Participating Preferred Stock      
Document Information      
Title of 12(b) Security Rights to purchase Series E Junior Participating Preferred Stock    
Security Exchange Name NYSE    
No Trading Symbol Flag true    
5.125% Subordinated Debentures due 2060      
Document Information      
Title of 12(b) Security 5.125% Subordinated Debentures due 2060    
Trading Symbol CNOpA    
Security Exchange Name NYSE    
v3.20.4
CONSOLIDATED BALANCE SHEET - USD ($)
$ in Millions
Dec. 31, 2020
Dec. 31, 2019
Investments:    
Fixed maturities, available for sale, at fair value (net of allowance for credit losses: 2020 - $2.2; amortized cost: 2020 - $19,921.1; 2019 - $19,179.5) $ 23,383.6 $ 21,295.2
Equity securities at fair value 151.2 44.1
Mortgage loans (net of allowance for credit losses: 2020 - $11.8) 1,358.7 1,566.1
Policy loans 123.0 124.5
Trading securities 232.0 243.9
Investments held by variable interest entities (net of allowance for credit losses: 2020 - $15.1; amortized cost: 2020 - $1,211.3; 2019 - $1,206.3) 1,189.4 1,188.6
Other invested assets 1,146.4 1,118.5
Total investments 27,584.3 25,580.9
Cash and cash equivalents - unrestricted 937.8 580.0
Cash and cash equivalents held by variable interest entities 54.1 74.7
Accrued investment income 205.8 205.9
Present value of future profits 249.4 275.4
Deferred acquisition costs 1,027.8 1,215.5
Reinsurance receivables (net of allowance for credit losses: 2020 - $4.0) 4,584.3 4,785.7
Income tax assets, net 199.4 432.6
Assets held in separate accounts 4.2 4.2
Other assets 492.8 476.0
Total assets 35,339.9 33,630.9
Liabilities for insurance products:    
Policyholder account liabilities 12,540.6 12,132.3
Future policy benefits 11,744.2 11,498.5
Liability for policy and contract claims 561.8 522.3
Unearned and advanced premiums 252.6 260.5
Liabilities related to separate accounts 4.2 4.2
Other liabilities 821.8 750.2
Investment borrowings 1,642.5 1,644.3
Borrowings related to variable interest entities 1,151.8 1,152.5
Notes payable – direct corporate obligations 1,136.2 989.1
Total liabilities 29,855.7 28,953.9
Commitments and Contingencies
Shareholders' equity:    
Common stock ($0.01 par value, 8,000,000,000 shares authorized, shares issued and outstanding: 2020 - 135,279,119; 2019 - 148,084,178) 1.3 1.5
Additional paid-in capital 2,544.5 2,767.3
Accumulated other comprehensive income 2,186.1 1,372.5
Retained earnings 752.3 535.7
Total shareholders' equity 5,484.2 4,677.0
Total liabilities and shareholders' equity $ 35,339.9 $ 33,630.9
v3.20.4
CONSOLIDATED BALANCE SHEET (Parenthetical) - USD ($)
$ in Millions
Dec. 31, 2020
Dec. 31, 2019
Investments:    
Fixed maturities, available for sale, allowance for credit losses $ 2.2 $ 2.1
Fixed maturities, available for sale, amortized cost 19,921.1 19,179.5
Mortgage loans, allowance for credit losses 11.8 6.7
Investments held by variable interest entities, allowance for credit losses 15.1  
Investments held by variable interest entities, amortized cost 1,211.3 $ 1,206.3
Reinsurance receivables, allowance for credit losses $ 4.0  
Shareholders' equity:    
Common stock, par value (in USD 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) 135,279,119 148,084,178
Common stock, shares outstanding (in shares) 135,279,119 148,084,178
v3.20.4
CONSOLIDATED STATEMENT OF OPERATIONS - USD ($)
shares in Thousands, $ in Millions
12 Months Ended
Dec. 31, 2020
Dec. 31, 2019
Dec. 31, 2018
Revenues:      
Insurance policy income $ 2,511.3 $ 2,480.8 $ 2,593.1
Net investment income:      
General account assets 1,079.0 1,098.0 1,272.5
Policyholder and other special-purpose portfolios 143.5 264.9 33.7
Realized investment gains (losses):      
Net realized gains on the transfer of assets related to reinsurance transaction 0.0 0.0 363.4
Other net realized investment gains (losses), excluding impairment losses (17.7) 40.6 (8.7)
Change in allowance for credit losses and other-than-temporary impairment losses [1] (18.5) (12.4) (2.6)
Total realized gains (36.2) 28.2 352.1
Fee revenue and other income 123.5 143.9 62.1
Total revenues 3,821.1 4,015.8 4,313.5
Benefits and expenses:      
Insurance policy benefits 2,157.9 2,417.0 2,278.6
Loss related to reinsurance transaction 0.0 0.0 1,067.6
Interest expense 108.8 152.3 149.8
Amortization 268.1 232.1 264.3
Loss on extinguishment of debt 0.0 7.3 0.0
Loss on extinguishment of borrowings related to variable interest entities 0.0 0.0 3.8
Other operating costs and expenses 942.0 932.9 814.2
Total benefits and expenses 3,476.8 3,741.6 4,578.3
Income (loss) before income taxes 344.3 274.2 (264.8)
Income tax expense (benefit):      
Tax expense (benefit) on period income 76.5 58.5 (57.6)
Valuation allowance for deferred tax assets and other tax items (34.0) (193.7) 107.8
Net income (loss) $ 301.8 $ 409.4 $ (315.0)
Basic:      
Weighted average shares outstanding (in shares) 142,096 156,040 165,457
Net income (loss) (in USD per share) $ 2.12 $ 2.62 $ (1.90)
Diluted:      
Weighted average shares outstanding (in shares) 143,164 157,148 165,457
Net income (loss) (in USD per share) $ 2.11 $ 2.61 $ (1.90)
[1] No portion of the other-than-temporary impairments recognized in 2019 and 2018 was included in accumulated other comprehensive income.
v3.20.4
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME - USD ($)
$ in Millions
12 Months Ended
Dec. 31, 2020
Dec. 31, 2019
Dec. 31, 2018
Statement of Comprehensive Income [Abstract]      
Net income (loss) $ 301.8 $ 409.4 $ (315.0)
Other comprehensive income, before tax:      
Unrealized gains (losses) for the period 1,332.8 1,830.2 (1,579.9)
Amortization of present value of future profits and deferred acquisition costs (116.0) (165.6) 125.5
Amount related to premium deficiencies assuming the net unrealized gains (losses) had been realized (204.0) (133.0) 512.0
Reclassification adjustments:      
For net realized investment gains (losses) included in net income (loss) 27.1 (6.3) (356.9)
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) (2.4) 0.6 (0.4)
Other comprehensive income (loss) before tax 1,037.5 1,525.9 (1,299.7)
Income tax (expense) benefit related to items of accumulated other comprehensive income (loss) (223.9) (331.1) 281.6
Other comprehensive income (loss), net of tax 813.6 1,194.8 (1,018.1)
Comprehensive income (loss) $ 1,115.4 $ 1,604.2 $ (1,333.1)
v3.20.4
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY - USD ($)
$ in Millions
Total
Cumulative Effect, Period of Adoption, Adjustment
Cumulative Effect, Period of Adoption, Adjusted Balance
Common stock
Common stock
Cumulative Effect, Period of Adoption, Adjusted Balance
Additional paid-in capital
Additional paid-in capital
Cumulative Effect, Period of Adoption, Adjusted Balance
Accumulated other comprehensive income
Accumulated other comprehensive income
Cumulative Effect, Period of Adoption, Adjustment
Accumulated other comprehensive income
Cumulative Effect, Period of Adoption, Adjusted Balance
Retained earnings
Retained earnings
Cumulative Effect, Period of Adoption, Adjustment
Retained earnings
Cumulative Effect, Period of Adoption, Adjusted Balance
Balance, beginning of year (in shares) at Dec. 31, 2017       166,858,000 166,858,000                
Balance, beginning of year at Dec. 31, 2017 $ 4,847.5 $ 0.0 $ 4,847.5 $ 1.7 $ 1.7 $ 3,073.3 $ 3,073.3 $ 1,212.1 $ (16.3) $ 1,195.8 $ 560.4 $ 16.3 $ 576.7
Increase (Decrease) in Stockholders' Equity [Roll Forward]                          
Net income (loss) (315.0)                   (315.0)    
Change in unrealized appreciation (depreciation) of investments (net of applicable income tax expense (benefit)) (1,017.0)             (1,017.0)          
Change in noncredit component of impairment losses on fixed maturities, available for sale (net of applicable income tax benefit of less than) $ (1.1)             (1.1)          
Common stock repurchased (in shares) (5,500,000)     (5,486,000)                  
Common stock repurchased $ (100.9)     $ (0.1)   (100.8)              
Dividends on common stock (65.1)                   (65.1)    
Employee benefit plans, net of shares used to pay tax withholdings (in shares)       830,000                  
Employee benefits plans, net of shares used to pay tax withholdings 22.5         22.5              
Balance, end of year (in shares) at Dec. 31, 2018       162,202,000 162,202,000                
Balance, end of year at Dec. 31, 2018 3,370.9 (3.1) 3,367.8 $ 1.6 $ 1.6 2,995.0 2,995.0 177.7   177.7 196.6 (3.1) 193.5
Increase (Decrease) in Stockholders' Equity [Roll Forward]                          
Net income (loss) 409.4                   409.4    
Change in unrealized appreciation (depreciation) of investments (net of applicable income tax expense (benefit)) 1,194.9             1,194.9          
Change in noncredit component of impairment losses on fixed maturities, available for sale (net of applicable income tax benefit of less than) $ (0.1)             (0.1)          
Common stock repurchased (in shares) (15,400,000)     (15,408,000)                  
Common stock repurchased $ (252.3)     $ (0.1)   (252.2)              
Dividends on common stock (67.2)                   (67.2)    
Employee benefit plans, net of shares used to pay tax withholdings (in shares)       1,290,000                  
Employee benefits plans, net of shares used to pay tax withholdings $ 24.5         24.5              
Balance, end of year (in shares) at Dec. 31, 2019 148,084,178     148,084,000 148,084,000                
Balance, end of year at Dec. 31, 2019 $ 4,677.0 $ (17.8) $ 4,659.2 $ 1.5 $ 1.5 2,767.3 $ 2,767.3 1,372.5   $ 1,372.5 535.7 $ (17.8) $ 517.9
Increase (Decrease) in Stockholders' Equity [Roll Forward]                          
Net income (loss) 301.8                   301.8    
Change in unrealized appreciation (depreciation) of investments (net of applicable income tax expense (benefit)) $ 813.6             813.6          
Common stock repurchased (in shares) (14,500,000)     (14,471,000)                  
Common stock repurchased $ (263.0)     $ (0.2)   (262.8)              
Dividends on common stock (67.4)                   (67.4)    
Employee benefit plans, net of shares used to pay tax withholdings (in shares)       1,666,000                  
Employee benefits plans, net of shares used to pay tax withholdings $ 40.0         40.0              
Balance, end of year (in shares) at Dec. 31, 2020 135,279,119     135,279,000                  
Balance, end of year at Dec. 31, 2020 $ 5,484.2     $ 1.3   $ 2,544.5   $ 2,186.1     $ 752.3    
v3.20.4
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (Parentheticals) - USD ($)
$ in Millions
12 Months Ended
Dec. 31, 2020
Dec. 31, 2019
Dec. 31, 2018
Statement of Stockholders' Equity [Abstract]      
Unrealized appreciation (depreciation) of investments (net of applicable income tax expense (benefit)) $ 223.9 $ 331.1 $ (281.3)
Noncredit component of impairment losses on fixed maturities available for sale tax benefit   $ (0.1) $ (0.3)
v3.20.4
CONSOLIDATED STATEMENT OF CASH FLOWS - USD ($)
$ in Millions
12 Months Ended
Dec. 31, 2020
Dec. 31, 2019
Dec. 31, 2018
Cash flows from operating activities:      
Insurance policy income $ 2,331.0 $ 2,326.0 $ 2,433.4
Net investment income 1,097.4 1,122.3 1,321.2
Fee revenue and other income 123.5 132.6 62.1
Insurance policy benefits (1,582.9) (1,630.1) (1,910.7)
Payment to reinsurer pursuant to long-term care business reinsured 0.0 0.0 (365.0)
Interest expense (111.2) (151.2) (141.1)
Deferrable policy acquisition costs (275.8) (288.7) (261.8)
Other operating costs (818.1) (816.6) (788.5)
Income taxes (28.4) 2.4 (31.8)
Net cash from operating activities 735.5 696.7 317.8
Cash flows from investing activities:      
Sales of investments 1,480.0 2,899.2 3,210.2
Maturities and redemptions of investments 2,218.3 2,237.7 2,469.0
Purchases of investments (4,280.7) (5,576.4) (6,205.8)
Net sales (purchases) of trading securities 13.8 (14.1) 25.9
Other (39.8) (102.0) (25.0)
Net cash used by investing activities (608.4) (555.6) (525.7)
Cash flows from financing activities:      
Issuance of notes payable, net 145.8 494.2 0.0
Payments on notes payable 0.0 (425.0) 0.0
Expenses related to extinguishment of debt 0.0 (6.1) 0.0
Issuance of common stock 19.0 9.2 3.9
Payments to repurchase common stock (268.3) (254.5) (108.0)
Common stock dividends paid (67.0) (67.1) (64.8)
Amounts received for deposit products 1,620.1 1,743.1 1,588.5
Withdrawals from deposit products (1,235.6) (1,363.9) (1,312.3)
Issuance of investment borrowings:      
Federal Home Loan Bank 498.0 536.8 150.0
Related to variable interest entities 0.0 0.0 277.6
Payments on investment borrowings:      
Federal Home Loan Bank (499.8) (538.2) (150.9)
Related to variable interest entities and other (2.1) (271.5) (276.8)
Net cash provided (used) by financing activities 210.1 (143.0) 107.2
Net increase (decrease) in cash and cash equivalents 337.2 (1.9) (100.7)
Cash and cash equivalents - unrestricted and held by variable interest entities, beginning of year 654.7 656.6 757.3
Cash and cash equivalents - unrestricted and held by variable interest entities, end of year $ 991.9 $ 654.7 $ 656.6
v3.20.4
BUSINESS AND BASIS OF PRESENTATION
12 Months Ended
Dec. 31, 2020
Organization, Consolidation and Presentation of Financial Statements [Abstract]  
BUSINESS AND BASIS OF PRESENTATION BUSINESS AND BASIS OF PRESENTATION
CNO Financial Group, Inc., a Delaware corporation ("CNO"), is a holding company for a group of insurance companies operating throughout the United States that develop, market and administer health insurance, annuity, individual life insurance and other insurance products.  The terms "CNO Financial Group, Inc.", "CNO", the "Company", "we", "us", and "our" as used in these financial statements refer to CNO and its subsidiaries.  Such terms, when used to describe insurance business and products, refer to the insurance business and products of CNO's insurance subsidiaries.

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 exclusive agents, independent producers (some of whom sell one or more of our product lines exclusively) and direct marketing.

We prepare our financial statements in accordance with accounting principles generally accepted in the United States of America ("GAAP"). We have reclassified certain amounts from the prior periods to conform to the 2020 presentation. These reclassifications have no effect on net income or shareholders' equity.

The accompanying financial statements include the accounts of the Company and its subsidiaries. Our consolidated financial statements exclude transactions between us and our consolidated affiliates, or among our consolidated affiliates.

When we prepare financial statements in conformity with GAAP, we are required to make estimates and assumptions that significantly affect reported amounts of various assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting periods.  For example, we use significant estimates and assumptions to calculate values for deferred acquisition costs, the present value of future profits, fair value measurements of certain investments (including derivatives), allowance for credit losses and 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.
v3.20.4
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
12 Months Ended
Dec. 31, 2020
Accounting Policies [Abstract]  
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Investments

Fixed maturity securities include available for sale bonds and redeemable preferred stocks. We carry these investments at estimated fair value. We record any unrealized gain or loss, net of tax and related adjustments, as a component of shareholders’ equity.
Equity securities include investments in common stock, exchange-traded funds and non-redeemable preferred stock. We carry these investments at estimated fair value. Effective January 1, 2018, changes in the fair value of equity securities are recognized in net income as further described below under the caption "Recently Issued Accounting Standards - Adopted Accounting Standards". Prior to January 1, 2018, changes in the fair value of equity securities were recorded in "Accumulated other comprehensive income".

Mortgage loans held in our investment portfolio are carried at amortized unpaid balance, net of allowance for estimated credit losses. Interest income is accrued on the principal amount of the loan based on the loan's contractual interest rate. Payment terms specified for mortgage loans may include a prepayment penalty for unscheduled payoff of the investment. Prepayment penalties are recognized as investment income when received. The allowance for estimated credit losses is measured using a loss-rate method on an individual asset basis. Inputs used include asset-specific characteristics, current economic conditions, historical loss information and reasonable and supportable forecasts about future economic conditions.

Policy loans are stated at current unpaid principal balances. Policy loans are collateralized by the cash surrender value of the life insurance policy. Interest income is recorded as earned using the contractual interest rate.

Trading securities include: (i) investments purchased with the intent of selling in the near team to generate income; (ii) investments supporting certain insurance liabilities; and (iii) certain fixed maturity securities containing embedded derivatives
for which we have elected the fair value option. The change in fair value of the income generating investments and investments supporting insurance liabilities and reinsurance agreements is recognized in income from policyholder and other special-purpose portfolios (a component of net investment income). The change in fair value of securities with embedded derivatives is recognized in realized investment gains (losses). Investment income related to investments supporting certain insurance liabilities is substantially offset by the change in insurance policy benefits related to certain products.

Other invested assets include: (i) call options purchased in an effort to offset or hedge the effects of certain policyholder benefits related to our fixed index annuity and life insurance products; (ii) Company-owned life insurance ("COLI"); (iii) investments in the common stock of the Federal Home Loan Bank ("FHLB"); and (iv) certain non-traditional investments. We carry the call options at estimated fair value as further described in the section of this note entitled "Accounting for Derivatives". We carry COLI at its cash surrender value which approximates its net realizable value. Non-traditional investments include investments in certain limited partnerships and hedge funds which are accounted for using the equity method. In accounting for limited partnerships and hedge funds, we consistently use the most recently available financial information provided by the general partner or manager of each of these investments, which is one to three months prior to the end of our reporting period.

Interest income on fixed maturity securities is recognized when earned using a constant effective yield method giving effect to amortization of premiums and accretion of discounts. Prepayment fees are recognized when earned. Dividends on equity securities are recognized when declared.
When we sell a security (other than trading securities), we report the difference between the sale proceeds and amortized cost (determined based on specific identification) as a realized investment gain or loss.

When an available for sale fixed maturity security's fair value is below the amortized cost, the security is considered impaired. If a portion of the decline is due to credit-related factors, we separate the credit loss component of the impairment from the amount related to all other factors. The credit loss component is recorded as an allowance and reported in net realized investment gains (losses) (limited to the difference between estimated fair value and amortized cost). The impairment related to all other factors (non-credit factors) is reported in accumulated other comprehensive income along with unrealized gains related to fixed maturity investments, available for sale, net of tax and related adjustments. The allowance is adjusted for any additional credit losses and subsequent recoveries. When recognizing an allowance associated with a credit loss, the cost basis is not adjusted. When we determine a security is uncollectable, the remaining amortized cost will be written off.

In determining the credit loss component, we discount the estimated cash flows on a security by security basis. We consider the impact of macroeconomic conditions on inputs used to measure the amount of credit loss. 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 by considering asset type, rating, time to maturity, and applying an expected loss rate.
  
If we intend to sell an impaired fixed maturity security, available for sale, or identify an impaired fixed maturity security, available for sale, for which is it more likely than not we will be required to sell before anticipated recovery, the difference between the fair value and the amortized cost is included in net realized investment gains (losses) and the fair value becomes the new amortized cost. The new cost basis is not adjusted for any subsequent recoveries in fair value.

The Company reports accrued investment income separately from fixed maturities, available for sale, and has elected not to measure an allowance for credit losses for accrued investment income. Accrued investment income is written off through net investment income at the time the issuer of the bond defaults or is expected to default on payments.
Cash and Cash Equivalents

Cash and cash equivalents include commercial paper, invested cash and other investments purchased with original maturities of less than three months. We carry them at amortized cost, which approximates estimated fair value. It is the Company's policy to offset negative cash balances with positive balances in other accounts with the same counterparty when agreements are in place permitting legal right of offset.
Deferred Acquisition Costs

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

When we realize a gain or loss on investments backing our interest-sensitive life or annuity products, we adjust the amortization to reflect the change in estimated gross profits from the products due to the gain or loss realized and the effect on future investment yields. We also adjust deferred acquisition costs for the change in amortization that would have been recorded if our fixed maturity securities, available for sale, had been sold at their stated aggregate fair value and the proceeds reinvested at current yields. We limit the total adjustment related to the impact of unrealized losses to the total of costs capitalized plus interest related to insurance policies issued in a particular year. We include the impact of this adjustment in accumulated other comprehensive income (loss) within shareholders' equity.

We regularly evaluate the recoverability of the unamortized balance of the deferred acquisition costs. We consider estimated future gross profits or future premiums, expected mortality or morbidity, interest earned and credited rates, persistency and expenses in determining whether the balance is recoverable. If we determine a portion of the unamortized balance is not recoverable, it is charged to amortization expense. In certain cases, the unamortized balance of the deferred acquisition costs may not be deficient in the aggregate, but our estimates of future earnings indicate that profits would be recognized in early periods and losses in later periods. In this case, we increase the amortization of the deferred acquisition costs over the period of profits, by an amount necessary to offset losses that are expected to be recognized in the later years.
Present Value of Future Profits

The present value of future profits is the value assigned to the right to receive future cash flows from policyholder insurance contracts existing at September 10, 2003 (the "Effective Date", the effective date of the bankruptcy reorganization of Conseco, Inc., an Indiana corporation (our "Predecessor")). The discount rate we used to determine the present value of future profits was 12 percent. The balance of this account is amortized and evaluated for recovery in the same manner as described above for deferred acquisition costs.  We also adjust the present value of future profits for the change in amortization that would have been recorded if the fixed maturity securities, available for sale, had been sold at their stated aggregate fair value and the proceeds reinvested at current yields, similar to the manner described above for deferred acquisition costs.  We limit the total adjustment related to the impact of unrealized losses to the total present value of future profits plus interest.
Recognition of Insurance Policy Income and Related Benefits and Expenses on Insurance Contracts

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

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

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

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

We establish claim reserves based on our estimate of the loss to be incurred on reported claims plus estimates of incurred but unreported claims based on our past experience.
Accounting for Long-term Care Premium Rate Increases

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

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

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

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

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

Bankers Life and Casualty Company ("Bankers Life") has entered into various distribution and marketing agreements with other insurance companies to use Bankers Life's exclusive agents to distribute prescription drug and Medicare Advantage
plans. These agreements allow Bankers Life to offer these products to current and potential future policyholders without investment in management and infrastructure. We receive fee income related to the plans sold through our distribution channels and incur distribution expenses paid to our agents who sell such products.

The recognition of fee revenue and the distribution expenses paid to our agents results from approval of an application by the third-party insurance companies, which we define as our customers. We recognize revenue and distribution fees related to these sales in accordance with the new revenue recognition guidance which was effective January 1, 2018 (see "Recently Issued Accounting Standards - Adopted Accounting Standards" below). This guidance requires us to recognize the net lifetime revenue expected to be earned on these sales, but only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur. Prior to the fourth quarter of 2019, our revenue recognition was constrained due to the limited historical data available. In the fourth quarter of 2019, we had accumulated additional historical data with respect to some Medicare Advantage plan sales, and certain assumptions and constraints related to our revenue recognition were updated to reflect this change in estimate. To the extent we make changes to the assumptions we use to calculate revenue on these products, we will recognize the impact of the changes in the period in which the change is made.
Reinsurance

In the normal course of business, we seek to limit our loss exposure on any single insured or to certain groups of policies by ceding reinsurance to other insurance enterprises. We currently retain no more than $0.8 million of mortality risk on any one policy. We diversify the risk of reinsurance loss by using a number of reinsurers that have strong claims-paying ratings. In each case, the ceding CNO subsidiary is directly liable for claims reinsured in the event the assuming company is unable to pay.

The cost of reinsurance ceded totaled $262.5 million, $260.6 million and $144.5 million in 2020, 2019 and 2018, respectively.  We deduct this cost from insurance policy income.  Reinsurance recoveries netted against insurance policy benefits totaled $403.8 million, $439.8 million and $173.5 million in 2020, 2019 and 2018, respectively. The cost of reinsurance and reinsurance recovered amounts include the impacts of the reinsurance transaction with Wilton Reassurance Company ("Wilton Re") described below.

From time to time, we assume insurance from other companies.  Any costs associated with the assumption of insurance are amortized consistent with the method used to amortize deferred acquisition costs.  Reinsurance premiums assumed totaled $23.0 million, $25.1 million and $28.0 million in 2020, 2019 and 2018, respectively. Insurance policy benefits related to reinsurance assumed totaled $31.4 million, $36.4 million and $36.4 million in 2020, 2019 and 2018, respectively.

On September 27, 2018, the Company completed a long-term care reinsurance transaction pursuant to which its wholly-owned subsidiary, Bankers Life, entered into an agreement with Wilton Re to cede all of its legacy (prior to 2003) comprehensive and nursing home long-term care policies (with statutory reserves of $2.7 billion) through 100% indemnity coinsurance. Bankers Life paid a ceding commission of $825 million to reinsure the block, funded through excess capital in the insurance subsidiaries and at the holding company. Bankers Life transferred to Wilton Re assets equal to the statutory liabilities supporting the block plus the ceding commission (subject to a customary post-closing adjustment). CNO recognized a charge related to the transaction of $661.1 million, net of taxes and gains recognized on the assets transferred to Wilton Re. The charge is primarily attributable to loss recognition on the block due to the ceding commission.

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

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

Our income tax expense includes deferred income taxes arising from temporary differences between the financial reporting and tax bases of assets and liabilities and net operating loss carryforwards ("NOLs"). Deferred tax assets and liabilities are measured using enacted tax rates expected to apply in the years in which temporary differences are expected to be
recovered or paid.  The effect of a change in tax rates on deferred tax assets and liabilities is recognized in earnings in the period when the changes are enacted.

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

We have concluded that we are the primary beneficiary with respect to certain variable interest entities ("VIEs"), which are consolidated in our financial statements. All of the VIEs are collateralized loan trusts that were established to issue securities to finance the purchase of corporate loans and other permitted investments.  The assets held by the trusts are legally isolated and not available to the Company.  The liabilities of the VIEs are expected to be satisfied from the cash flows generated by the underlying loans held by the trusts, not from the assets of the Company.  The Company has no financial obligation to the VIEs beyond its investment in each VIE.

The investment portfolios held by the VIEs are primarily comprised of commercial bank loans to corporate obligors which are almost entirely rated below-investment grade.  Refer to the note to the consolidated financial statements entitled "Investments in Variable Interest Entities" for additional information about VIEs.

In addition, the Company, in the normal course of business, makes passive investments in structured securities issued by VIEs for which the Company is not the investment manager.  These structured securities include asset-backed securities, agency residential mortgage-backed securities, non-agency residential mortgage-backed securities, collateralized loan obligations and commercial mortgage-backed securities.  Our maximum exposure to loss on these securities is limited to our cost basis in the investment.  We have determined that we are not the primary beneficiary of these structured securities due to the relative size of our investment in comparison to the total principal amount of the individual structured securities and the level of credit subordination which reduces our obligation to absorb gains or losses.

At December 31, 2020, we held investments in various limited partnerships and hedge funds, in which we are not the primary beneficiary, totaling $562.7 million (classified as other invested assets).  At December 31, 2020, we had unfunded commitments to these partnerships totaling $91.9 million.  Our maximum exposure to loss on these investments is limited to the amount of our investment.
Investment Borrowings

Three of the Company's insurance subsidiaries (Bankers Life, Washington National Insurance Company ("Washington National") and Colonial Penn Life Insurance Company) are members of the FHLB.  As members of the FHLB, our insurance subsidiaries have the ability to borrow on a collateralized basis from the FHLB.  We are required to hold certain minimum amounts of FHLB common stock as a condition of membership in the FHLB, and additional amounts based on the amount of the borrowings.  New guidance effective January 1, 2018, requiring equity investments to be measured at fair value (as described in the section of this note entitled "Recently Issued Accounting Standards - Adopted Accounting Standards") does not apply to FHLB common stock and prohibits such investments from being classified as equity securities subject to the new guidance. Accordingly, our investment in the FHLB common stock is classified as other invested assets. At December 31, 2020, the carrying value of the FHLB common stock was $71.0 million.  As of December 31, 2020, collateralized borrowings from the FHLB totaled $1.6 billion and the proceeds were used to purchase fixed maturity securities.  The borrowings are classified as investment borrowings in the accompanying consolidated balance sheet.  The borrowings are collateralized by investments with an estimated fair value of $2.0 billion at December 31, 2020, which are maintained in a custodial account for the benefit of the FHLB.  Substantially all of such investments are classified as fixed maturities, available for sale, in our consolidated balance sheet.
The following summarizes the terms of the borrowings from the FHLB by our insurance subsidiaries (dollars in millions):
AmountMaturityInterest rate at
borroweddateDecember 31, 2020
$27.4 August 2021
Fixed rate – 2.550%
22.0 May 2022
Variable rate – .574%
100.0 May 2022
Variable rate – .575%
10.0 June 2022
Variable rate – .844%
50.0 July 2022
Variable rate – .591%
50.0 July 2022
Variable rate – .595%
50.0 July 2022
Variable rate – .602%
50.0 August 2022
Variable rate – .603%
50.0 December 2022
Variable rate – .525%
50.0 December 2022
Variable rate – .525%
22.4 March 2023
Fixed rate – 2.160%
50.0 July 2023
Variable rate – .543%
100.0 July 2023
Variable rate – .543%
50.0 February 2024
Variable rate – .541%
50.0 May 2024
Variable rate – .634%
21.8 May 2024
Variable rate – .632%
100.0 May 2024
Variable rate – .633%
50.0 May 2024
Variable rate – .678%
75.0 June 2024
Variable rate – .561%
100.0 July 2024
Variable rate – .544%
15.5 July 2024
Fixed rate – 1.990%
34.5 July 2024
Variable rate – .763%
15.0 July 2024
Variable rate – .663%
25.0 September 2024
Variable rate – .786%
21.7 May 2025
Variable rate – .484%
19.5 June 2025
Fixed rate – 2.940%
125.0 September 2025
Variable rate – .440%
100.0 October 2025
Variable rate – .630%
100.0 October 2025
Variable rate – .635%
57.7 October 2025
Variable rate – .610%
50.0 November 2025
Variable rate – .603%
$1,642.5   

The variable rate borrowings are pre-payable on each interest reset date without penalty.  The fixed rate borrowings are pre-payable subject to payment of a yield maintenance fee based on prevailing market interest rates.  At December 31, 2020, the aggregate yield maintenance fee to prepay all fixed rate borrowings was $5.8 million.

Interest expense of $21.2 million, $46.2 million and $41.9 million in 2020, 2019 and 2018, respectively, was recognized related to total borrowings from the FHLB.
Accounting for Derivatives

Our fixed index annuity products provide a guaranteed minimum rate of return and a higher potential return that is based on a percentage (the "participation rate") of the amount of increase in the value of a particular index, such as the Standard & Poor's 500 Index, over a specified period.  Typically, on each policy anniversary date, a new index period begins.  We are generally able to change the participation rate at the beginning of each index period during a policy year, subject to contractual minimums.  The Company accounts for the options attributed to the policyholder for the estimated life of the contract as embedded derivatives. We are required to record the embedded derivatives related to our fixed index annuity products at estimated fair value.

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

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

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

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

We typically buy call options (including call spreads) referenced to the applicable indices in an effort to offset or hedge potential increases to policyholder benefits resulting from increases in the particular index to which the policy's return is linked.

We purchase certain fixed maturity securities that contain embedded derivatives that are required to be held at fair value on the consolidated balance sheet. We have elected the fair value option to carry the entire security at fair value with changes in fair value reported in net income.
Sales Inducements

Certain of our annuity products offer sales inducements to contract holders in the form of enhanced crediting rates or bonus payments in the initial period of the contract.  Certain of our life insurance products offer persistency bonuses credited to the contract holder's balance after the policy has been outstanding for a specified period of time.  These enhanced rates and persistency bonuses are considered sales inducements in accordance with GAAP.  Such amounts are deferred and amortized in the same manner as deferred acquisition costs.  Sales inducements deferred totaled $14.1 million, $24.9 million and $11.6 million during 2020, 2019 and 2018, respectively.  Amounts amortized totaled $15.4 million, $7.7 million and $10.6 million during 2020, 2019 and 2018, respectively.  The unamortized balance of deferred sales inducements was $59.4 million and $60.7 million at December 31, 2020 and 2019, respectively.
Out-of-Period Adjustments

In 2018, we recorded the net effect of out-of-period adjustments related to the calculation of certain insurance liabilities which increased insurance policy benefits by $2.5 million (of which, $1.4 million related to long-term care reserves and $1.1 million related to a closed block of payout annuities), decreased tax expense by $0.5 million and increased our net loss by $2.0 million (or 1 cent per diluted share). We evaluated these adjustments taking into account both qualitative and quantitative factors and considered the impact of these adjustments in relation to each period, as well as the periods in which they originated. The impact of recognizing these adjustments in prior years was not significant to any individual period. Management believes these adjustments are immaterial to the consolidated financial statements and all previously issued financial statements.
Recently Issued Accounting Standards

Pending Accounting Standards

In August 2018, the Financial Accounting Standards Board (the "FASB") issued authoritative guidance that makes targeted improvements to the accounting for long-duration contracts. The new guidance: (i) improves the timeliness of recognizing changes in the liability for future benefits and modifies the rate used to discount future cash flows; (ii) simplifies and improves the accounting for certain market-based options or guarantees associated with deposit (or account balance) contracts; (iii) simplifies the amortization of deferred acquisition costs; and (iv) requires enhanced disclosures, including disaggregated rollforwards of the liability for future policy benefits, policyholder account liabilities, market risk benefits and deferred acquisition costs. Additionally, qualitative and quantitative information about expected cash flows, estimates and assumptions will be required. The new measurement guidance for traditional and limited-payment contract liabilities and the new guidance for the amortization of deferred acquisition costs are required to be adopted on a modified retrospective transition approach, with an option to elect a full retrospective transition if certain criteria are met. The transition approach for deferred acquisition costs is required to be consistent with the transition applied to the liability for future policyholder benefits. Under the modified retrospective approach, for contracts in-force at the transition date, an entity would continue to use the existing locked-in investment yield interest rate assumption to calculate the net premium ratio, rather than the upper-medium grade fixed-income corporate instrument yield. However, for balance sheet remeasurement purposes, the current upper-medium grade fixed-income corporate instrument yield would be used at transition through accumulated other comprehensive income and subsequently through other comprehensive income. For market risk benefits, retrospective application is required, with the ability to use hindsight to measure fair value components to the extent assumptions in a prior period are unobservable or otherwise unavailable. In November 2020, the FASB issued authoritative guidance which delayed the effective date of this guidance for the Company by one year (until January 1, 2023). The Company has not yet determined the expected impact of adoption of this guidance on its consolidated financial position, results of operations or cash flows.

Adopted Accounting Standards

In February 2016, the FASB issued authoritative guidance related to accounting for leases, requiring lessees to report most leases on their balance sheets, regardless of whether the lease is classified as a finance lease or an operating lease. For lessees, the initial lease liability is equal to the present value of future lease payments, and a corresponding asset, adjusted for certain items, is also recorded. Expense recognition for lessees will remain similar to current accounting requirements for capital and operating leases. The accounting applied by a lessor is largely unchanged from that applied under previous GAAP. In transition, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The guidance was effective for the Company on January 1, 2019. Based on lease contracts in effect at January 1, 2019, the impact of implementation of the new leasing guidance was the recognition of a "right to use" asset (included in other assets) and a "lease liability" (included in other liabilities) of $72.0 million and there was no cumulative effect adjustment to retained earnings as of January 1, 2019. The Company elected to apply practical expedients related to the adoption of the new guidance including: not reassessing whether a contract includes an embedded lease at adoption; not reassessing the previously determined classification of a lease as operating or capital; not reassessing our previously recorded initial direct costs; election of an accounting policy that permits inclusion of both the lease and non-lease components as a single component and account for it as a lease; and election of an accounting policy to exclude lease accounting requirements for leases that have terms of less than twelve months. Refer to the note to the consolidated financial statements entitled "Litigation and Other Legal Proceedings - Leases and Certain Other Long-Term Commitments" for additional disclosures.
In June 2016, the FASB issued authoritative guidance related to the measurement of credit losses on financial instruments. The new guidance replaces the incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to form credit loss estimates. The guidance requires financial assets measured at amortized cost basis to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset to present the net carrying value at the amount expected to be collected on the financial asset. Credit losses on available for sale debt securities are measured in a manner similar to current GAAP. However, the guidance requires that credit losses be presented as an allowance rather than as a writedown. The guidance was effective for the Company on January 1, 2020. The impact of adoption, using the modified retrospective approach, was as follows (dollars in millions):

January 1, 2020
Amounts prior to effect of adoption of authoritative guidanceEffect of adoption of authoritative guidanceAs adjusted
Fixed maturities, available for sale$21,295.2 $(2.1)$21,293.1 
Mortgage loans1,566.1 (6.7)1,559.4 
Investments held by variable interest entities1,188.6 (9.9)1,178.7 
Income tax assets, net432.6 4.9 437.5 
Reinsurance receivables4,785.7 (4.0)4,781.7 
Total assets33,630.9 (17.8)33,613.1 
Retained earnings535.7 (17.8)517.9 
Total shareholders' equity4,677.0 (17.8)4,659.2 

In March 2017, the FASB issued authoritative guidance related to the premium amortization on purchased callable debt securities. The guidance shortens the amortization period for certain callable debt securities held at a premium. Specifically, the new guidance requires the premium to be amortized to the earliest call date. The guidance does not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. The guidance was effective for the Company on January 1, 2019. The guidance was applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of January 1, 2019. The impact of adoption was as follows (dollars in millions):
January 1, 2019
Amounts prior to effect of adoption of authoritative guidanceEffect of adoption of authoritative guidanceAs adjusted
Fixed maturities, available for sale$18,447.7 $(4.0)$18,443.7 
Income tax assets, net630.0 .9 630.9 
Total assets31,439.8 (3.1)31,436.7 
Retained earnings196.6 (3.1)193.5 
Total shareholders' equity3,370.9 (3.1)3,367.8 
In January 2017, the FASB issued authoritative guidance that removes Step 2 of the goodwill impairment test under current guidance, which requires a hypothetical purchase price allocation. The new guidance requires an impairment charge to be recognized for the amount by which the carrying amount exceeds the reported unit's fair value. Upon adoption, the guidance is to be applied prospectively. The guidance was effective for the Company on January 1, 2020. The adoption of this guidance did not have a material impact on the Company's consolidated financial position, results of operations or cash flows.
In August 2017, the FASB issued authoritative guidance related to derivatives and hedging. The new guidance expands and refines hedge accounting for both nonfinancial and financial risk components and aligns the recognition and presentation of the effects of the hedging instruments and the hedged item in the financial statements. The new guidance also includes certain targeted improvements to ease the application of current guidance related to the assessment of hedge effectiveness. The guidance was effective for the Company on January 1, 2019. Based on the Company's current use of derivatives and hedging activities, the adoption of this guidance had no impact on the Company's consolidated financial position, results of operations or cash flows.

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

In May 2014, the FASB issued authoritative guidance for recognizing revenue from contracts with customers. Certain contracts with customers are specifically excluded from this guidance, including insurance contracts. The core principle of the new guidance is that an entity should recognize revenue when it transfers promised goods or services in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance also requires additional disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The guidance was effective for the Company on January 1, 2018. The adoption of this new guidance impacted the timing of certain revenues and expenses between quarters of a calendar year for various distribution and marketing agreements with other insurance companies pursuant to which Bankers Life's exclusive agents distribute third party products including prescription drug and Medicare Advantage plans. See "Accounting for Certain Marketing Agreements" above, for a description of our accounting under this standard. Furthermore, we recognized distribution expenses in the same period that the associated fee revenue was earned.

In January 2016, the FASB issued authoritative guidance related to the recognition and measurement of financial assets and financial liabilities which made targeted improvements to GAAP as follows:

(i)    Require equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. However, an entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer.
(ii)    Simplify the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. When a qualitative assessment indicates that impairment exists, an entity is required to measure the investment at fair value.
(iii)    Eliminate the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet.
(iv)    Require public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes.
(v)    Require an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments.
(vi)    Require separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements.
(vii)    Clarify that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available for sale securities in combination with the entity's other deferred tax assets.
The guidance was effective for the Company on January 1, 2018. Accordingly, the Company recorded a cumulative effect adjustment to the balance sheet as of January 1, 2018, related to certain equity investments that are measured at fair value. The impact of adoption was as follows (dollars in millions):
January 1, 2018
Amounts prior to effect of adoption of authoritative guidanceEffect of adoption of authoritative guidanceAs adjusted
Accumulated other comprehensive income$1,212.1 $(16.3)$1,195.8 
Retained earnings560.4 16.3 576.7 
Total shareholders' equity4,847.5 — 4,847.5 
In August 2016, the FASB issued authoritative guidance related to how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The guidance addresses eight specific cash flow issues including debt prepayment or debt extinguishment costs, proceeds from the settlement of corporate-owned life insurance policies, distributions received from equity method investees, and others. The guidance was effective for the Company on January 1, 2018. The adoption of this guidance resulted in reclassifications to certain cash receipts and payments within our consolidated statement of cash flows, but had no impact on our consolidated financial position, results of operations or cash flows.

In November 2016, the FASB issued authoritative guidance to address the diversity in practice that currently exists regarding the classification and presentation of changes in restricted cash on the statement of cash flows. The new guidance requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. Entities are also required to disclose information about the nature of their restricted cash and restricted cash equivalents. Additionally, if cash, cash equivalents, restricted cash and restricted cash equivalents are presented in more than one line item in the statement of financial position, entities will be required to present a reconciliation, either on the face of the statement of cash flows or disclosed in the notes, of the totals in the statement of cash flows to the related line item captions in the statement of financial position. The guidance was effective for the Company on January 1, 2018. The adoption of this guidance impacted the presentation of our consolidated statement of cash flows and related cash flow disclosures, but did not have an impact on our consolidated financial position, results of operations or cash flows.

In May 2017, the FASB issued authoritative guidance related to which changes to the terms or conditions of a share-based award require an entity to apply modification accounting. The guidance was effective for the Company for fiscal years beginning after December 15, 2017. The guidance is to be applied prospectively to an award modified on or after the adoption date. The adoption of this guidance did not have a material impact to the Company's consolidated financial position, results of operations or cash flows.
v3.20.4
INVESTMENTS
12 Months Ended
Dec. 31, 2020
Investments, Debt and Equity Securities [Abstract]  
INVESTMENTS INVESTMENTS
At December 31, 2020, the amortized cost, gross unrealized gains, gross unrealized losses, allowance for credit losses and estimated fair value of fixed maturities, available for sale, were as follows (dollars in millions):
Amortized
cost
Gross
unrealized
gains
Gross
unrealized
losses
Allowance for credit lossesEstimated
fair
value
Investment grade (a):    
Corporate securities$11,243.2 $2,638.9 $(3.4)$(.2)$13,878.5 
United States Treasury securities and obligations of United States government corporations and agencies163.8 71.9 (.2)— 235.5 
States and political subdivisions2,284.1 358.9 (1.3)(.2)2,641.5 
Foreign governments82.2 20.4 — — 102.6 
Asset-backed securities935.0 42.9 (4.4)— 973.5 
Agency residential mortgage-backed securities52.7 5.7 — — 58.4 
Non-agency residential mortgage-backed securities921.0 45.4 (.4)— 966.0 
Collateralized loan obligations461.9 .6 (3.6)— 458.9 
Commercial mortgage-backed securities1,783.9 114.4 (6.9)— 1,891.4 
Total investment grade fixed maturities, available for sale17,927.8 3,299.1 (20.2)(.4)21,206.3 
Below-investment grade (a) (b):    
Corporate securities811.5 57.4 (6.5)(1.7)860.7 
States and political subdivisions12.5 — — (.1)12.4 
Foreign governments.2 — — — .2 
Asset-backed securities89.4 2.2 (3.0)— 88.6 
Non-agency residential mortgage-backed securities992.5 135.8 (1.7)— 1,126.6 
Commercial mortgage-backed securities87.2 2.0 (.4)— 88.8 
Total below-investment grade fixed maturities, available for sale1,993.3 197.4 (11.6)(1.8)2,177.3 
Total fixed maturities, available for sale$19,921.1 $3,496.5 $(31.8)$(2.2)$23,383.6 
_______________
(a)Investment ratings are assigned the second lowest rating by Nationally Recognized Statistical Rating Organizations ("NRSROs") (Moody's Investor Services, Inc. ("Moody's"), S&P Global Ratings ("S&P") or Fitch Ratings ("Fitch")), or if not rated by such firms, the rating assigned by the National Association of Insurance Commissioners (the "NAIC").  NAIC designations of "1" or "2" include fixed maturities generally rated investment grade (rated "Baa3" or higher by Moody's or rated "BBB-" or higher by S&P and Fitch).  NAIC designations of "3" through "6" are referred to as below-investment grade (which generally are rated "Ba1" or lower by Moody's or rated "BB+" or lower by S&P and Fitch).  References to investment grade or below-investment grade throughout our consolidated financial statements are determined as described above.
(b)Certain structured securities rated below-investment grade by NRSROs may be assigned a NAIC 1 or NAIC 2 designation based on the cost basis of the security relative to estimated recoverable amounts as determined by the NAIC. Refer to the table below for a summary of our fixed maturity securities, available for sale, by NAIC designations.

The NAIC evaluates the fixed maturity investments of insurers for regulatory and capital assessment purposes and assigns securities to one of six credit quality categories called NAIC designations, which are used by insurers when preparing their annual statements based on statutory accounting principles. The NAIC designations are generally similar to the credit quality designations of the NRSROs for marketable fixed maturity securities, except for certain structured securities. However,
certain structured securities rated below investment grade by the NRSROs can be assigned NAIC 1 or NAIC 2 designations depending on the cost basis of the holding relative to estimated recoverable amounts as determined by the NAIC. The following summarizes the NAIC designations and NRSRO equivalent ratings:
NAIC DesignationNRSRO Equivalent Rating
1AAA/AA/A
2BBB
3BB
4B
5CCC and lower
6In or near default


A summary of our fixed maturity securities, available for sale, by NAIC designations (or for fixed maturity securities held by non-regulated entities, based on NRSRO ratings) as of December 31, 2020 is as follows (dollars in millions):
NAIC designationAmortized costEstimated fair valuePercentage of total estimated fair value
1$10,512.8 $12,262.4 52.4 %
28,267.9 9,915.0 42.4 
Total NAIC 1 and 2 (investment grade)18,780.7 22,177.4 94.8 
3845.8 908.4 3.9 
4272.7 276.5 1.2 
520.9 21.3 .1 
61.0 — — 
Total NAIC 3,4,5 and 6 (below-investment grade)1,140.4 1,206.2 5.2 
$19,921.1 $23,383.6 100.0 %
At December 31, 2019, the amortized cost, gross unrealized gains and losses, estimated fair value and other-than-temporary impairments in accumulated other comprehensive income of fixed maturities, available for sale, were as follows (dollars in millions):
Amortized
cost
Gross
unrealized
gains
Gross
unrealized
losses
Estimated
fair
value
Other-than-temporary impairments included in accumulated other comprehensive income
Investment grade:    
Corporate securities$10,802.6 $1,516.0 $(8.7)$12,309.9 $— 
United States Treasury securities and obligations of United States government corporations and agencies161.4 43.3 (.1)204.6 — 
States and political subdivisions2,002.1 246.1 (1.5)2,246.7 — 
Foreign governments82.6 13.0 — 95.6 — 
Asset-backed securities1,289.0 35.7 (1.0)1,323.7 — 
Agency residential mortgage-backed securities89.2 5.8 — 95.0 — 
Non-agency residential mortgage-backed securities768.2 23.3 (.9)790.6 (.2)
Collateralized loan obligations404.1 .1 (3.4)400.8 — 
Commercial mortgage-backed securities1,732.2 72.3 (1.0)1,803.5 — 
Total investment grade fixed maturities, available for sale17,331.4 1,955.6 (16.6)19,270.4 (.2)
Below-investment grade:    
Corporate securities600.9 28.1 (3.6)625.4 — 
Asset-backed securities63.9 1.1 (.8)64.2 — 
Non-agency residential mortgage-backed securities1,102.8 149.0 (.1)1,251.7 (0.1)
Commercial mortgage-backed securities80.5 3.0 — 83.5 — 
Total below-investment grade fixed maturities, available for sale1,848.1 181.2 (4.5)2,024.8 (.1)
Total fixed maturities, available for sale$19,179.5 $2,136.8 $(21.1)$21,295.2 $(.3)
Accumulated other comprehensive income is primarily comprised of the net effect of unrealized appreciation (depreciation) on our investments.  These amounts, included in shareholders' equity as of December 31, 2020 and 2019, were as follows (dollars in millions):
20202019
Net unrealized appreciation on fixed maturity securities, available for sale, on which an other-than-temporary impairment loss has been recognized$— $1.1 
Net unrealized gains on all other fixed maturity securities, available for sale— 2,095.3 
Net unrealized gains on investments having no allowance for credit losses3,466.3 — 
Unrealized losses on investments with an allowance for credit losses(10.0)— 
Adjustment to present value of future profits (a)(10.2)(18.9)
Adjustment to deferred acquisition costs(458.0)(227.9)
Adjustment to insurance liabilities(197.5)(96.5)
Deferred income tax liabilities(604.5)(380.6)
Accumulated other comprehensive income$2,186.1 $1,372.5 
________
(a)The present value of future profits is the value assigned to the right to receive future cash flows from contracts existing at September 10, 2003, the date our Predecessor emerged from bankruptcy.

At December 31, 2020, adjustments to the present value of future profits, deferred acquisition costs, insurance liabilities and deferred tax assets included $(8.6) million, $(133.4) million, $(197.5) million and $73.7 million, respectively, for premium deficiencies that would exist on certain blocks of business if unrealized gains on the assets backing such products had been realized and the proceeds from the sales of such assets were invested at then current yields.

At December 31, 2019, adjustments to the present value of future profits, deferred acquisition costs, insurance liabilities and deferred tax assets included $(12.2) million, $(26.8) million, $(96.5) million and $29.4 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.

Below-Investment Grade Securities

At December 31, 2020, the amortized cost of the Company's below-investment grade fixed maturity securities, available for sale, was $1,993.3 million, or 10 percent of the Company's fixed maturity portfolio (or $1,140.4 million, or 6 percent, of the Company's fixed maturity portfolio measured based on credit quality ratings assigned by the NAIC). The estimated fair value of the below-investment grade portfolio was $2,177.3 million, or 109 percent of the amortized cost.

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

The following table sets forth the amortized cost and estimated fair value of fixed maturities, available for sale, at December 31, 2020, 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, agency residential mortgage-backed securities, non-agency residential mortgage-backed securities, collateralized loan obligations and commercial mortgage-backed securities, 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$388.7 $396.4 
Due after one year through five years987.4 1,052.9 
Due after five years through ten years1,540.4 1,715.6 
Due after ten years11,681.0 14,566.5 
Subtotal14,597.5 17,731.4 
Structured securities5,323.6 5,652.2 
Total fixed maturities, available for sale$19,921.1 $23,383.6 

Net Investment Income

Net investment income consisted of the following (dollars in millions):
202020192018
General account assets:
Fixed maturities$924.8 $952.4 $1,100.3 
Equity securities3.0 3.2 22.8 
Mortgage loans79.5 77.1 82.0 
Policy loans8.5 8.3 8.0 
Other invested assets84.0 65.3 72.0 
Cash and cash equivalents2.6 13.3 10.9 
Policyholder and other special-purpose portfolios:
Trading securities28.1 8.9 8.5 
Options related to fixed index products:
Option income (loss)35.0 (21.2)122.3 
Change in value of options4.5 173.1 (165.3)
Other special-purpose portfolios75.9 104.1 68.2 
Gross investment income1,245.9 1,384.5 1,329.7 
Less investment expenses23.4 21.6 23.5 
Net investment income$1,222.5 $1,362.9 $1,306.2 

At December 31, 2020, the amortized cost and carrying value of fixed maturities that were non-income producing during 2020 totaled $1.0 million and nil, respectively.
Net Realized Investment Gains (Losses)

The following table sets forth the net realized investment gains (losses) for the periods indicated (dollars in millions):
 202020192018
Fixed maturity securities, available for sale: 
Gross realized gains on sale$48.6 $86.5 $65.7 
Gross realized losses on sale(53.7)(55.5)(65.8)
Change in allowance for credit losses and other-than-temporary impairment losses (a)(8.2)(9.4)(.5)
Net realized investment gains (losses) from fixed maturities(13.3)21.6 (.6)
Equity securities, including change in fair value (b)(5.1)11.9 (38.2)
Mortgage loans(1.9)— (1.3)
Change in allowance for credit losses and impairments of other investments (c)(10.3)(3.0)(2.1)
Loss on dissolution of variable interest entities— (5.1)— 
Other (d) (e)(5.6)2.8 30.9 
Net realized investment gains (losses) before net realized gains on the transfer of assets related to reinsurance transaction(36.2)28.2 (11.3)
Net realized gains on the transfer of assets related to reinsurance transaction— — 363.4 
Net realized investment gains (losses)$(36.2)$28.2 $352.1 
_________________
(a)    No portion of the other-than-temporary impairments recognized in 2019 and 2018 was included in accumulated other comprehensive income.
(b)    Changes in the estimated fair value of equity securities (and are still held as of the end of the respective years) were $(1.7) million, $3.7 million and $(29.7) million for the years ended December 31, 2020, 2019 and 2018, respectively.
(c)    The change in allowance for credit losses in 2020 includes $(5.2) million related to investments held by VIEs.
(d)    Changes in the estimated fair value of trading securities that we have elected the fair value option (and are still held as of the end of the respective years) were $0.4 million, $8.3 million and $(2.2) million for the years ended December 31, 2020, 2019 and 2018, respectively.
(e)    In April 2016, the Company announced that it had invested in a non-controlling minority interest in Tennenbaum Capital Partners, LLC ("TCP"), a Los Angeles-based investment management firm. In August 2018, Blackrock, Inc. announced the completion of its acquisition of TCP. The sale of our interest in TCP resulted in a significant portion of the net realized gains in 2018.

During 2020, we recognized net realized investment losses of $36.2 million, which were comprised of: (i) $15.1 million of net losses from the sales of investments; (ii) $5.1 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 $0.1 million; (iv) the increase in fair value of embedded derivatives related to a modified coinsurance agreement of $2.6 million; and (v) an increase in the allowance for credit losses and other-than-temporary impairment losses of $18.5 million.

During 2019, we recognized net realized investment gains of $28.2 million, which were comprised of: (i) $20.2 million of net gains from the sales of investments; (ii) $5.1 million of losses on the dissolution of a VIE; (iii) $11.9 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 $8.3 million; (v) the increase in fair value of embedded derivatives related to a modified coinsurance agreement of $5.3 million; and (vi) $12.4 million of writedowns of investments for other than temporary declines in fair value recognized through net income.

During 2019, a VIE that was required to be consolidated was dissolved. We recognized a loss of $5.1 million in 2019 representing the difference between the borrowings of such VIE and the contractual distributions required following the liquidation of the underlying assets.
During 2018, we recognized net realized investment gains of $352.1 million, which were comprised of: (i) $40.1 million of net gains from the sales of investments; (ii) $363.4 million of gains on the transfer of assets (substantially all of which were fixed maturities) related to a reinsurance transaction; (iii) $38.2 million of losses related to equity securities, including the change in fair value; (iv) the decrease in fair value of certain fixed maturity investments with embedded derivatives of $5.5 million; (v) the decrease in fair value of embedded derivatives related to a modified coinsurance agreement of $5.1 million; and (vi) $2.6 million of writedowns of investments for other than temporary declines in fair value recognized through net income.

At December 31, 2020, there were no fixed maturity investments in default.

During 2020, the $53.7 million of realized losses on sales of $507.1 million of fixed maturity securities, available for sale, included: (i) $16.2 million related to various corporate securities; (ii) $26.1 million related to commercial mortgage-backed securities; (iii) $9.6 million related to asset-backed securities; and (iv) $1.8 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 2019, the $55.5 million of realized losses on sales of $971.2 million of fixed maturity securities, available for sale included: (i) $48.1 million related to various corporate securities; (ii) $5.4 million related to collateralized loan obligations; and (iii) $2.0 million related to various other investments.

During 2019, we recognized $12.4 million of impairment losses recorded in earnings which included: (i) $9.4 million related to corporate securities due to issuer specific events; and (ii) $3.0 million related to commercial bank loans held by the VIEs.

During 2018, the $65.8 million of realized losses on sales of $1,295.8 million of fixed maturity securities, available for sale, included: (i) $54.0 million related to various corporate securities; (ii) $4.1 million related to commercial mortgage-backed securities; (iii) $4.1 million related to asset-backed securities; and (iv) $3.6 million related to various other investments.  

During 2018, we recognized $2.6 million of impairment losses recorded in earnings which included: (i) $2.1 million related to a mortgage loan due to issuer specific events; and (ii) $0.5 million related to a corporate security.

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

The following summarizes the investments sold at a loss during 2020 which had been continuously in an unrealized loss position exceeding 20 percent of the amortized cost basis prior to the sale for the period indicated (dollars in millions):
At date of sale
Number
of issuers
Amortized costFair value
Less than 6 months prior to sale18$51.6 $36.6 
Greater than or equal to 6 months and less than 12 months prior to sale13.1 1.9 
Greater than 12 months prior to sale11.1 — 
 20$55.8 $38.5 

Prior to January 1, 2020, we regularly evaluated all of our investments with unrealized losses for possible impairment.  Our assessment of whether unrealized losses were "other than temporary" required significant judgment.  Factors
considered included: (i) the extent to which fair value is less than the cost basis; (ii) the length of time that the fair value had been less than cost; (iii) whether the unrealized loss was 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 was investment-grade and/or has been downgraded since its purchase; (vi) whether the issuer was current on all payments in accordance with the contractual terms of the investment and was expected to meet all of its obligations under the terms of the investment; (vii) whether we intended to sell the investment or it was more likely than not that circumstances would 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 would 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.

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

We estimated 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 was 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 varied depending on the type of security.

For most structured securities, cash flow estimates were based on bond-specific facts and circumstances that included 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 were 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 became the security's new cost basis.  We accreted the new cost basis to the estimated future cash flows over the expected remaining life of the security, except when the security was in default or considered nonperforming.

The remaining noncredit impairment, which was recorded in accumulated other comprehensive income, was 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 represented changes in the market interest rates, current market liquidity and risk premiums.

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.

Mortgage loans were impaired when it was probable that we would not collect the contractual principal and interest on the loan. We measured impairment based upon the difference between the carrying value of the loan and the estimated fair value of the collateral securing the loan less cost to sell.
The following table summarizes the amount of credit losses recognized in earnings on fixed maturity securities, available for sale, held at the beginning of the period, for which a portion of the other-than-temporary impairment was also recognized in accumulated other comprehensive income (dollars in millions):
Year ended
December 31,
 20192018
Credit losses on fixed maturity securities, available for sale, beginning of period$(.2)$(2.8)
Add:  credit losses on other-than-temporary impairments not previously recognized— — 
Less:  credit losses on securities sold— 2.6 
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$(.2)$(.2)
__________
(a)Represents securities for which the amount previously recognized in accumulated other comprehensive income was recognized in earnings because we intend to sell the security or we more likely than not will be required to sell the security before recovery of its amortized cost basis.

Investments with Unrealized Losses

The following table sets forth the amortized cost and estimated fair value of those fixed maturities, available for sale, with unrealized losses at December 31, 2020, by contractual maturity.  Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without penalties.  Structured securities frequently include provisions for periodic principal payments and permit periodic unscheduled payments.
Amortized
cost
Estimated
fair
value
 (Dollars in millions)
Due in one year or less$8.0 $8.0 
Due after one year through five years51.7 50.4 
Due after five years through ten years86.4 84.8 
Due after ten years181.3 170.6 
Subtotal327.4 313.8 
Structured securities1,088.3 1,067.9 
Total$1,415.7 $1,381.7 

The following summarizes the investments in our portfolio rated below-investment grade which have been continuously in an unrealized loss position exceeding 20 percent of the cost basis for the period indicated as of December 31, 2020 (dollars in millions):
Number
of issuers
Cost
basis
Unrealized
loss
Estimated
fair value
Less than 6 months1$14.1 $(2.9)$11.2 
The following table summarizes the gross unrealized losses and fair values of our investments with unrealized losses for which an allowance for credit losses has not been recorded, aggregated by investment category and length of time that such securities have been in a continuous unrealized loss position, at December 31, 2020 (dollars in millions):
 Less than 12 months12 months or greaterTotal
Description of securitiesFair
value
Unrealized
losses
Fair
value
Unrealized
losses
Fair
value
Unrealized
losses
Corporate securities$110.0 $(2.6)$5.6 $(.2)$115.6 $(2.8)
United States Treasury securities and obligations of United States government corporations and agencies17.9 (.2)— — 17.9 (.2)
States and political subdivisions8.6 (.1)— — 8.6 (.1)
Asset-backed securities146.9 (4.1)26.0 (3.3)172.9 (7.4)
Non-agency residential mortgage-backed securities173.2 (1.5)42.2 (.6)215.4 (2.1)
Collateralized loan obligations151.4 (1.5)178.7 (2.1)330.1 (3.6)
Commercial mortgage-backed securities277.0 (6.3)72.3 (1.0)349.3 (7.3)
Total fixed maturities, available for sale$885.0 $(16.3)$324.8 $(7.2)$1,209.8 $(23.5)
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, 2019 (dollars in millions):
 Less than 12 months12 months or greaterTotal
Description of securitiesFair
value
Unrealized
losses
Fair
value
Unrealized
losses
Fair
value
Unrealized
losses
Corporate securities$305.5 $(6.6)$96.8 $(5.7)$402.3 $(12.3)
United States Treasury securities and obligations of United States government corporations and agencies7.0 (.1)3.5 — 10.5 (.1)
States and political subdivisions110.1 (1.5)— — 110.1 (1.5)
Foreign governments3.4 — — — 3.4 — 
Asset-backed securities75.7 (.4)45.5 (1.4)121.2 (1.8)
Agency residential mortgage-backed securities8.8 — — — 8.8 — 
Non-agency residential mortgage-backed securities137.4 (.7)67.2 (.3)204.6 (1.0)
Collateralized loan obligations220.7 (1.1)115.4 (2.3)336.1 (3.4)
Commercial mortgage-backed securities394.2 (1.0)12.8 — 407.0 (1.0)
Total fixed maturities, available for sale$1,262.8 $(11.4)$341.2 $(9.7)$1,604.0 $(21.1)

Based on management's current assessment of investments with unrealized losses at December 31, 2020, 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.
The following table summarizes changes in the allowance for credit losses related to fixed maturities, available for sale, for the year ended December 31, 2020 (dollars in millions):
Corporate securitiesStates and political subdivisionsForeign governmentsNon-agency residential mortgage-backed securitiesAsset-backed securitiesTotal
Allowance at January 1, 2020$2.1 $— $— $— $— $2.1 
Additions for securities for which credit losses were not previously recorded23.6 .7 .1 1.0 .3 25.7 
Additions for purchased securities with deteriorated credit— — — — — — 
Additions (reductions) for securities where an allowance was previously recorded(22.3)(.4)(.1)(1.0)(.3)(24.1)
Reduction for securities sold during the period(1.5)— — — — (1.5)
Reduction for securities for which the Company made the decision to sell where an allowance was previously recorded— — — — — — 
Write-offs— — — — — — 
Recoveries of previously written-off amount— — — — — — 
Allowance at December 31, 2020$1.9 $.3 $— $— $— $2.2 

Structured Securities

At December 31, 2020, fixed maturity investments included structured securities with an estimated fair value of $5.7 billion (or 24.2 percent of all fixed maturity securities).  The yield characteristics of structured securities generally differ in some respects from those of traditional corporate fixed-income securities or government securities.  For example, interest and principal payments on structured securities may occur more frequently, often monthly.  In many instances, we are subject to variability in the amount and timing of principal and interest payments.  For example, in many cases, partial prepayments may occur at the option of the issuer and prepayment rates are influenced by a number of factors that cannot be predicted with certainty, including:  the relative sensitivity of prepayments on the underlying assets backing the security to changes in interest rates and asset values; the availability of alternative financing; a variety of economic, geographic and other factors; the timing, pace and proceeds of liquidations of defaulted collateral; and various security-specific structural considerations (for example, the repayment priority of a given security in a securitization structure).  In addition, the total amount of payments for non-agency structured securities may be affected by changes to cumulative default rates or loss severities of the related collateral.

Historically, the rate of prepayments on structured securities has tended to increase when prevailing interest rates have declined significantly in absolute terms and also relative to the interest rates on the underlying collateral. The yields recognized on structured securities purchased at a discount to par will generally increase (relative to the stated rate) when the underlying collateral prepays faster than expected. The yields recognized on structured securities purchased at a premium will decrease (relative to the stated rate) when the underlying collateral prepays faster than expected. When interest rates decline, the proceeds from prepayments may be reinvested at lower rates than we were earning on the prepaid securities. When interest rates increase, prepayments may decrease below expected levels. When this occurs, the average maturity and duration of structured securities increases, decreasing the yield on structured securities purchased at discounts and increasing the yield on those purchased at a premium because of a decrease in the annual amortization of premium.
For structured securities included in fixed maturities, available for sale, that were purchased at a discount or premium, we recognize investment income using an effective yield based on anticipated future prepayments and the estimated final maturity of the securities. Actual prepayment experience is periodically reviewed and effective yields are recalculated when differences arise between the prepayments originally anticipated and the actual prepayments received and currently anticipated. For credit sensitive mortgage-backed and asset-backed securities, and for securities that can be prepaid or settled in a way that we would not recover substantially all of our investment, the effective yield is recalculated on a prospective basis. Under this method, the amortized cost basis in the security is not immediately adjusted and a new yield is applied prospectively. For all other structured and asset-backed securities, the effective yield is recalculated when changes in assumptions are made, and reflected in our income on a retrospective basis. Under this method, the amortized cost basis of the investment in the securities is adjusted to the amount that would have existed had the new effective yield been applied since the acquisition of the securities. Such adjustments were not significant in 2020.

For purchased credit impaired securities, at acquisition, the difference between the undiscounted expected future cash flows and the recorded investment in the securities represents the initial accretable yield, which is accreted into net investment income over the securities’ remaining lives on a level-yield basis. Subsequently, effective yields recognized on purchased credit impaired securities are recalculated and adjusted prospectively to reflect changes in the contractual benchmark interest rates on variable rate securities and any significant increases in undiscounted expected future cash flows arising due to reasons other than interest rate changes. Significant decreases in expected cash flows arising from credit events would result in impairment if such security's fair value is below amortized cost.

The amortized cost and estimated fair value of structured securities at December 31, 2020, summarized by type of security, were as follows (dollars in millions):
  Estimated fair value
TypeAmortized
cost
AmountPercent
of fixed
maturities
Asset-backed securities$1,024.4 $1,062.1 4.5 %
Agency residential mortgage-backed securities52.7 58.4 .3 
Non-agency residential mortgage-backed securities1,913.5 2,092.6 8.9 
Collateralized loan obligations461.9 458.9 2.0 
Commercial mortgage-backed securities1,871.1 1,980.2 8.5 
Total structured securities$5,323.6 $5,652.2 24.2 %

Residential mortgage-backed securities ("RMBS") include transactions collateralized by agency-guaranteed and non-agency mortgage obligations.  Non-agency RMBS investments are primarily categorized by underlying borrower credit quality: Prime, Alt-A, Non-Qualified Mortgage ("Non-QM"), and Subprime.  Prime borrowers typically default with the lowest frequency, Alt-A and Non-QM default at higher rates, and Subprime borrowers default with the highest frequency.  In addition to borrower credit categories, RMBS investments include Re-Performing Loan ("RPL") and Credit Risk Transfer ("CRT") transactions.  RPL transactions include borrowers with prior difficulty meeting the original mortgage terms and were subsequently modified, resulting in a sustainable payback arrangement.  CRT securities are collateralized by Government-Sponsored Enterprise ("GSE") conforming mortgages and Prime borrowers, but without an agency guarantee against default losses.

Commercial mortgage-backed securities ("CMBS") are secured by commercial real estate mortgages, generally income producing properties that are managed for profit. Property types include multi-family dwellings including apartments, retail centers, hotels, restaurants, hospitals, nursing homes, warehouses, and office buildings. While most CMBS have call protection features whereby underlying borrowers may not prepay their mortgages for stated periods of time without incurring prepayment penalties, recoveries on defaulted collateral may result in involuntary prepayments.
Mortgage Loans

Mortgage loans are carried at amortized unpaid balance, net of allowance for estimated credit losses. Interest income is accrued on the principal amount of the loan based on the loan's contractual interest rate. Payment terms specified for mortgage loans may include a prepayment penalty for unscheduled payoff of the investment. Prepayment penalties are recognized as investment income when received.

The allowance for estimated credit losses is measured using a loss-rate method on an individual asset basis. Inputs used include asset-specific characteristics, current economic conditions, historical loss information and reasonable and supportable forecasts about future economic conditions.

At December 31, 2020, the mortgage loan balance was primarily comprised of commercial mortgage loans. Approximately 14 percent, 10 percent, 8 percent and 7 percent of the commercial mortgage loan balance were on properties located in California, Texas, Maryland and Wisconsin, respectively. No other state comprised greater than six percent of the commercial mortgage loan balance. At December 31, 2020, there were no commercial mortgage loans in process of foreclosure. At December 31, 2020, we held residential mortgage loan investments with a carrying value of $84.8 million and a fair value of $84.9 million. At December 31, 2020, there were 19 residential mortgage loans that were noncurrent with a carrying value of $6.1 million (of which, 15 such loans with a carrying value of $5.1 million were in forbearance and 3 loans with a carrying value of $0.5 million were in foreclosure). There were no other mortgage loans that were noncurrent at December 31, 2020.

The following table provides the amortized cost by year of origination and estimated fair value of our outstanding commercial mortgage loans and the underlying collateral as of December 31, 2020 (dollars in millions):
Estimated fair
value
Loan-to-value ratio (a)20202019201820172016PriorTotal amortized costMortgage loansCollateral
Less than 60%
$29.0 $81.5 $139.7 $84.1 $76.7 $608.0 $1,019.0 $1,074.4 $2,899.3 
60% to less than 70%
— 7.3 8.6 10.8 19.4 72.7 118.8 121.7 182.0 
70% to less than 80%
18.8 12.2 — — — 43.1 74.1 73.8 101.0 
80% to less than 90%
— — — — — 63.8 63.8 61.2 76.5 
90% or greater
— — — — 10.0 — 10.0 8.8 10.7 
Total$47.8 $101.0 $148.3 $