CNO FINANCIAL GROUP, INC., 10-K filed on 2/21/2017
Annual Report
DOCUMENT AND ENTITY INFORMATION (USD $)
In Billions, except Share data, unless otherwise specified
12 Months Ended
Dec. 31, 2016
Feb. 9, 2017
Jun. 30, 2016
Document and Entity Information [Abstract]
 
 
 
Entity Registrant Name
CNO Financial Group, Inc. 
 
 
Entity Central Index Key
0001224608 
 
 
Document Type
10-K 
 
 
Document Period End Date
Dec. 31, 2016 
 
 
Current Fiscal Year End Date
--12-31 
 
 
Document Fiscal Year Focus
2016 
 
 
Document Fiscal Period Focus
FY 
 
 
Entity Filer Category
Large Accelerated Filer 
 
 
Entity Voluntary Filers
No 
 
 
Entity Well-known Seasoned Issuer
Yes 
 
 
Entity Current Reporting Status
Yes 
 
 
Amendment Flag
false 
 
 
Entity Public Float
 
 
$ 3.1 
Entity Common Stock, Shares Outstanding
 
173,795,204 
 
CONSOLIDATED BALANCE SHEET (USD $)
In Millions, unless otherwise specified
Dec. 31, 2016
Dec. 31, 2015
Investments:
 
 
Fixed maturities, available for sale, at fair value
$ 21,096.2 
$ 19,882.9 
Equity securities at fair value
584.2 
463.0 
Mortgage loans
1,768.0 
1,721.0 
Policy loans
112.0 
109.4 
Trading securities
363.4 
262.1 
Investments held by variable interest entities
1,724.3 
1,633.6 
Other invested assets
589.5 
415.1 
Total investments
26,237.6 
24,487.1 
Cash and cash equivalents - unrestricted
478.9 
432.3 
Cash and cash equivalents held by variable interest entities
189.3 
364.4 
Accrued investment income
239.6 
237.0 
Present value of future profits
401.8 
449.0 
Deferred acquisition costs
1,044.7 
1,083.3 
Reinsurance receivables
2,260.4 
2,859.3 
Income tax assets, net
789.7 
898.8 
Assets held in separate accounts
4.7 
4.7 
Other assets
328.5 
309.2 
Total assets
31,975.2 
31,125.1 
Liabilities for insurance products:
 
 
Policyholder account balances
10,912.7 
10,762.3 
Future policy benefits
10,953.3 
10,602.1 
Liability for policy and contract claims
500.6 
487.8 
Unearned and advanced premiums
282.5 
286.3 
Liabilities related to separate accounts
4.7 
4.7 
Other liabilities
611.4 
707.8 
Investment borrowings
1,647.4 
1,548.1 
Borrowings related to variable interest entities
1,662.8 
1,676.4 
Notes payable – direct corporate obligations
912.9 
911.1 
Total liabilities
27,488.3 
26,986.6 
Commitments and Contingencies
   
   
Shareholders' equity:
 
 
Common stock ($0.01 par value, 8,000,000,000 shares authorized, shares issued and outstanding: 2016 - 173,753,614; 2015 - 184,028,511)
1.7 
1.8 
Additional paid-in capital
3,212.1 
3,386.8 
Accumulated other comprehensive income
622.4 
402.8 
Retained earnings
650.7 
347.1 
Total shareholders' equity
4,486.9 
4,138.5 
Total liabilities and shareholders' equity
$ 31,975.2 
$ 31,125.1 
CONSOLIDATED BALANCE SHEET (Parentheticals) (USD $)
In Millions, except Share data, unless otherwise specified
Dec. 31, 2016
Dec. 31, 2015
Investments:
 
 
Fixed maturities, available for sale, amortized cost
$ 19,803.1 
$ 18,947.0 
Equity securities cost
$ 580.7 
$ 447.4 
Shareholders' equity:
 
 
Common stock, par value (in dollars per share)
$ 0.01 
$ 0.01 
Common stock, shares authorized (in shares)
8,000,000,000 
8,000,000,000 
Common stock, shares issued (in shares)
173,753,614 
184,028,511 
Common stock, shares outstanding (in shares)
173,753,614 
184,028,511 
CONSOLIDATED STATEMENT OF OPERATIONS (USD $)
In Millions, except Share data in Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2016
Dec. 31, 2015
Dec. 31, 2014
Revenues:
 
 
 
Insurance policy income
$ 2,601.1 
$ 2,556.0 
$ 2,629.7 
Net investment income:
 
 
 
General account assets
1,204.1 
1,203.6 
1,301.0 
Policyholder and reinsurer accounts and other special-purpose portfolios
121.1 
30.0 
126.4 
Realized investment gains (losses):
 
 
 
Net realized investment gains (losses), excluding impairment losses
47.9 
(8.0)
64.0 
Other-than-temporary impairments:
 
 
 
Total other-than-temporary impairment losses
(35.9)
(42.9)
(27.3)
Portion of other-than-temporary impairment losses recognized in accumulated other comprehensive income
3.6 
3.0 
Net impairment losses recognized
(32.3)
(39.9)
(27.3)
Gain (loss) on dissolution of variable interest entities
(7.3)
11.3 
Total realized gains (losses)
8.3 
(36.6)
36.7 
Fee revenue and other income
50.5 
58.9 
50.9 
Total revenues
3,985.1 
3,811.9 
4,144.7 
Benefits and expenses:
 
 
 
Insurance policy benefits
2,390.5 
2,308.3 
2,586.2 
Loss on sale of subsidiary, (gain) loss on reinsurance transactions and transition expenses
75.4 
9.0 
239.8 
Interest expense
116.4 
94.9 
92.8 
Amortization
253.3 
260.0 
247.4 
Loss on extinguishment or modification of debt
32.8 
0.6 
Other operating costs and expenses
796.3 
739.2 
802.8 
Total benefits and expenses
3,631.9 
3,444.2 
3,969.6 
Income before income taxes
353.2 
367.7 
175.1 
Income tax expense (benefit):
 
 
 
Tax expense on period income
127.8 
129.5 
159.2 
Valuation allowance for deferred tax assets and other tax items
(132.8)
(32.5)
(35.5)
Net income
$ 358.2 
$ 270.7 
$ 51.4 
Basic:
 
 
 
Weighted average shares outstanding (in shares)
176,638 
193,054 
212,917 
Net income (in dollars per share)
$ 2.03 
$ 1.40 
$ 0.24 
Diluted:
 
 
 
Weighted average shares outstanding (in shares)
178,323 
195,166 
217,655 
Net income (in dollars per share)
$ 2.01 
$ 1.39 
$ 0.24 
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (USD $)
In Millions, unless otherwise specified
12 Months Ended
Dec. 31, 2016
Dec. 31, 2015
Dec. 31, 2014
Statement of Comprehensive Income [Abstract]
 
 
 
Net income
$ 358.2 
$ 270.7 
$ 51.4 
Other comprehensive income, before tax:
 
 
 
Unrealized gains (losses) for the period
424.4 
(1,337.6)
942.9 
Amortization of present value of future profits and deferred acquisition costs
(27.9)
157.9 
(113.5)
Amount related to premium deficiencies assuming the net unrealized gains (losses) had been realized
(46.9)
495.3 
(624.6)
Reclassification adjustments:
 
 
 
For net realized investment (gains) losses included in net income
(18.6)
29.6 
(59.0)
For amortization of the present value of future profits and deferred acquisition costs related to net realized investment gains (losses) included in net income
0.7 
(0.5)
1.0 
Unrealized gains (losses) on investments
331.7 
(655.3)
146.8 
Change related to deferred compensation plan
8.6 
(0.1)
(1.4)
Other comprehensive income (loss) before tax
340.3 
(655.4)
145.4 
Income tax (expense) benefit related to items of accumulated other comprehensive income
(120.7)
232.9 
(51.9)
Other comprehensive income (loss), net of tax
219.6 
(422.5)
93.5 
Comprehensive income (loss)
$ 577.8 
$ (151.8)
$ 144.9 
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (USD $)
In Millions, unless otherwise specified
Total
Common stock and additional paid-in capital [Member]
Accumulated other comprehensive income [Member]
Retained earnings (accumulated deficit) [Member]
Balance, beginning of period at Dec. 31, 2013
$ 4,955.2 
$ 4,095.0 
$ 731.8 
$ 128.4 
Increase (Decrease) in Stockholders' Equity [Roll Forward]
 
 
 
 
Net income
51.4 
 
 
51.4 
Change in unrealized appreciation (depreciation) of investments (net of applicable income tax expense (benefit))
94.2 
 
94.2 
 
Change in noncredit component of impairment losses on fixed maturities, available for sale (net of applicable income tax expense (benefit))
(0.7)
 
(0.7)
 
Cost of common stock and warrants repurchased
(376.5)
(376.5)
 
 
Dividends on common stock
(51.3)
 
 
(51.3)
Stock options, restricted stock and performance units
15.9 
15.9 
 
 
Balance, end of period at Dec. 31, 2014
4,688.2 
3,734.4 
825.3 
128.5 
Increase (Decrease) in Stockholders' Equity [Roll Forward]
 
 
 
 
Net income
270.7 
 
 
270.7 
Change in unrealized appreciation (depreciation) of investments (net of applicable income tax expense (benefit))
(420.4)
 
(420.4)
 
Change in noncredit component of impairment losses on fixed maturities, available for sale (net of applicable income tax expense (benefit))
(2.1)
 
(2.1)
 
Cost of common stock and warrants repurchased
(365.2)
(365.2)
 
 
Dividends on common stock
(52.1)
 
 
(52.1)
Stock options, restricted stock and performance units
19.4 
19.4 
 
 
Balance, end of period at Dec. 31, 2015
4,138.5 
3,388.6 
402.8 
347.1 
Increase (Decrease) in Stockholders' Equity [Roll Forward]
 
 
 
 
Net income
358.2 
 
 
358.2 
Change in unrealized appreciation (depreciation) of investments (net of applicable income tax expense (benefit))
221.1 
 
221.1 
 
Change in noncredit component of impairment losses on fixed maturities, available for sale (net of applicable income tax expense (benefit))
(1.5)
 
(1.5)
 
Cost of common stock and warrants repurchased
(203.0)
(203.0)
 
 
Dividends on common stock
(54.6)
 
 
(54.6)
Stock options, restricted stock and performance units
28.2 
28.2 
 
 
Balance, end of period at Dec. 31, 2016
$ 4,486.9 
$ 3,213.8 
$ 622.4 
$ 650.7 
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (Parentheticals) (USD $)
In Millions, unless otherwise specified
12 Months Ended
Dec. 31, 2016
Dec. 31, 2015
Dec. 31, 2014
Statement of Stockholders' Equity [Abstract]
 
 
 
Change in unrealized appreciation (depreciation) of investments, applicable income tax expense (benefit)
$ 121.5 
$ (231.7)
$ 52.3 
Change in noncredit component of impairment losses on fixed maturities, available for sale, applicable income tax expense (benefit)
$ (0.8)
$ (1.2)
$ (0.4)
CONSOLIDATED STATEMENT OF CASH FLOWS (USD $)
In Millions, unless otherwise specified
12 Months Ended
Dec. 31, 2016
Dec. 31, 2015
Dec. 31, 2014
Cash flows from operating activities:
 
 
 
Insurance policy income
$ 2,457.0 
$ 2,423.4 
$ 2,407.9 
Net investment income
1,201.0 
1,205.9 
1,279.0 
Fee revenue and other income
50.5 
58.9 
50.9 
Cash and cash equivalents received upon recapture of reinsurance
73.6 
Insurance policy benefits
(1,916.0)
(1,879.4)
(1,968.4)
Payment to reinsurer pursuant to long-term care business reinsured
(590.3)
Interest expense
(106.0)
(90.0)
(81.7)
Deferrable policy acquisition costs
(242.7)
(246.4)
(242.8)
Other operating costs
(751.2)
(724.4)
(728.8)
Income taxes
(6.7)
(4.1)
(4.0)
Net cash from operating activities
759.5 
743.9 
121.8 1
Cash flows from investing activities:
 
 
 
Sales of investments
2,841.8 
2,177.6 
2,090.0 
Maturities and redemptions of investments
2,507.2 
1,853.4 
1,618.2 
Purchases of investments
(6,159.8)
(4,767.2)
(3,731.6)
Net sales (purchases) of trading securities
(84.2)
(12.3)
4.9 
Change in cash and cash equivalents held by variable interest entities
175.1 
(296.1)
36.0 
Cash and cash equivalents held by subsidiary prior to being sold
(164.7)
Proceeds from sale of subsidiary
231.0 
Other
(22.5)
(25.0)
(27.5)
Net cash provided (used) by investing activities
(742.4)
(1,069.6)
56.3 
Cash flows from financing activities:
 
 
 
Issuance of notes payable, net
910.0 
Payments on notes payable
(797.1)
(62.9)
Expenses related to extinguishment or modification of debt
(17.8)
(0.6)
Issuance of common stock
8.4 
6.3 
5.0 
Payments to repurchase common stock and warrants
(206.7)
(361.5)
(376.5)
Common stock dividends paid
(54.8)
(52.0)
(51.0)
Amounts received for deposit products
1,386.7 
1,241.9 
1,295.4 
Withdrawals from deposit products
(1,181.6)
(1,225.0)
(1,347.3)
Issuance of investment borrowings:
 
 
 
Federal Home Loan Bank
432.7 
475.0 
350.0 
Related to variable interest entities
493.2 
544.7 
358.5 
Payments on investment borrowings:
 
 
 
Federal Home Loan Bank
(333.5)
(425.7)
(367.7)
Related to variable interest entities and other
(514.9)
(132.0)
(88.8)
Investment borrowings - repurchase agreements, net
(20.4)
20.4 
Net cash provided (used) by financing activities
29.5 
146.4 
(265.5)
Net increase (decrease) in cash and cash equivalents
46.6 
(179.3)
(87.4)
Cash and cash equivalents, beginning of year
432.3 
611.6 
699.0 
Cash and cash equivalents, end of year
$ 478.9 
$ 432.3 
$ 611.6 
BUSINESS AND BASIS OF PRESENTATION
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 three distribution channels: career agents, independent producers (some of whom sell one or more of our product lines exclusively) and direct marketing.

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

Bankers Life, which markets and distributes Medicare supplement insurance, interest-sensitive life insurance, traditional life insurance, fixed annuities and long-term care insurance products to the middle-income senior market through a dedicated field force of career agents, financial and investment advisors, and sales managers supported by a network of community-based sales offices.  The Bankers Life segment includes primarily the business of Bankers Life and Casualty Company ("Bankers Life").  Bankers Life also has various distribution and marketing agreements with other insurance companies to use Bankers Life's career agents to distribute Medicare Advantage and prescription drug plan products in exchange for a fee.

Washington National, which markets and distributes supplemental health (including specified disease, accident and hospital indemnity insurance products) and life insurance to middle-income consumers at home and at the worksite.  These products are marketed through Performance Matters Associates, Inc. and through independent marketing organizations and insurance agencies including worksite marketing.  The products being marketed are underwritten by Washington National Insurance Company ("Washington National"). This segment's business also includes certain closed blocks of annuities and Medicare supplement policies which are no longer being actively marketed by this segment and were primarily issued or acquired by Washington National.

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

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

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

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

When we prepare financial statements in conformity with GAAP, we are required to make estimates and assumptions that significantly affect reported amounts of various assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting periods.  For example, we use significant estimates and assumptions to calculate values for deferred acquisition costs, the present value of future profits, fair value measurements of certain investments (including derivatives), other-than-temporary impairments of investments, assets and liabilities related to income taxes, liabilities for insurance products, liabilities related to litigation and guaranty fund assessment accruals.  If our future experience differs from these estimates and assumptions, our financial statements would be materially affected.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 available for sale investments in common stock, exchange-traded funds and non-redeemable preferred stock. We carry these investments at estimated fair value. We record any unrealized gain or loss, net of tax and related adjustments, as a component of shareholders' equity.

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

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

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

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

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.

We regularly evaluate our investments for possible impairment as further described in the note to the consolidated financial statements entitled "Investments".

When a security defaults (including mortgage loans) or securities are other-than-temporarily impaired, our policy is to discontinue the accrual of interest and eliminate all previous interest accruals, if we determine that such amounts will not be ultimately realized in full.
Cash and Cash Equivalents

Cash and cash equivalents include commercial paper, invested cash and other investments purchased with original maturities of less than three months. We carry them at amortized cost, which approximates estimated fair value.
Deferred Acquisition Costs

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

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

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

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

Separate accounts are funds on which investment income and gains or losses accrue directly to certain policyholders. The assets of these accounts are legally segregated. They are not subject to the claims that may arise out of any other business of CNO. We report separate account assets at fair value; the underlying investment risks are assumed by the contractholders. We record the related liabilities at amounts equal to the separate account assets. We record the fees earned for administrative and contractholder services performed for the separate accounts in insurance policy income.
Recognition of Insurance Policy Income and Related Benefits and Expenses on Insurance Contracts

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

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 has entered into various distribution and marketing agreements with other insurance companies to use Bankers Life's career agents to distribute prescription drug and Medicare Advantage plans. These agreements allow Bankers Life to offer these products to current and potential future policyholders without investment in management and infrastructure. We receive fee income related to the plans sold through our distribution channels. We account for these distribution agreements as follows:

We recognize distribution income based on either: (i) a fixed fee per contract sold; or (ii) a percentage of premiums collected. This fee income is recognized over the calendar year term of the contract.

We also pay commissions to our agents who sell the plans. These payments are deferred and amortized over the term of the contract.
Reinsurance

In the normal course of business, we seek to limit our loss exposure on any single insured or to certain groups of policies by ceding reinsurance to other insurance enterprises. We currently retain no more than $.8 million of mortality risk on any one policy. We diversify the risk of reinsurance loss by using a number of reinsurers that have strong claims-paying ratings. In each case, the ceding CNO subsidiary is directly liable for claims reinsured in the event the assuming company is unable to pay.

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

From time-to-time, we assume insurance from other companies.  Any costs associated with the assumption of insurance are amortized consistent with the method used to amortize deferred acquisition costs.  Reinsurance premiums assumed totaled $34.0 million, $38.5 million and $35.0 million in 2016, 2015 and 2014, respectively.

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

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

Market value of investments
$
504.7

Insurance liabilities
(552.2
)
Write-off of reinsurance receivables
(17.9
)
Estimated transaction expenses
(10.0
)
Pre-tax loss
(75.4
)
Tax benefit
26.4

Increase in valuation allowance for deferred tax assets
(4.1
)
After-tax loss
$
(53.1
)


In the second quarter of 2014, we recaptured a block of interest-sensitive life business that was previously ceded under a modified coinsurance agreement. The recapture of this block resulted in a gain related to reinsurance transaction of $3.8 million.

As further described in the note to the financial statements entitled "Sale of Subsidiary", we recaptured a block of life insurance business in 2014 that was previously ceded under a coinsurance agreement.
Income Taxes

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

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

At December 31, 2016, our valuation allowance for our net deferred tax assets was $240.2 million, as we have determined that it is more likely than not that a portion of our deferred tax assets will not be realized. This determination was made by evaluating each component of the deferred tax assets and assessing the effects of limitations and/or interpretations on the value of such component to be fully recognized in the future.
Investments in Variable Interest Entities

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

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

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

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

Three of the Company's insurance subsidiaries (Washington National, Bankers Life and Colonial Penn) are members of the Federal Home Loan Bank ("FHLB").  As members of the FHLB, our insurance subsidiaries have the ability to borrow on a collateralized basis from the FHLB.  We are required to hold certain minimum amounts of FHLB common stock as a condition of membership in the FHLB, and additional amounts based on the amount of the borrowings.  At December 31, 2016, the carrying value of the FHLB common stock was $71.2 million.  As of December 31, 2016, collateralized borrowings from the FHLB totaled $1.6 billion and the proceeds were used to purchase fixed maturity securities.  The borrowings are classified as investment borrowings in the accompanying consolidated balance sheet.  The borrowings are collateralized by investments with an estimated fair value of $2.0 billion at December 31, 2016, which are maintained in a custodial account for the benefit of the FHLB.  Substantially all of such investments are classified as fixed maturities, available for sale, in our consolidated balance sheet.

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

Amount
 
Maturity
 
Interest rate at
borrowed
 
date
 
December 31, 2016
$
50.0

 
January 2018
 
Variable rate – 1.226%
50.0

 
January 2018
 
Variable rate – 1.222%
50.0

 
February 2018
 
Variable rate – 1.191%
50.0

 
February 2018
 
Variable rate – 1.001%
22.0

 
February 2018
 
Variable rate – 1.267%
100.0

 
May 2018
 
Variable rate – 1.206%
50.0

 
July 2018
 
Variable rate – 1.360%
50.0

 
August 2018
 
Variable rate – 1.022%
10.0

 
December 2018
 
Variable rate – 1.266%
50.0

 
January 2019
 
Variable rate – 1.300%
50.0

 
February 2019
 
Variable rate – 1.001%
100.0

 
March 2019
 
Variable rate – 1.216%
21.8

 
July 2019
 
Variable rate – 1.234%
15.0

 
October 2019
 
Variable rate – 1.399%
50.0

 
May 2020
 
Variable rate – 1.224%
21.8

 
June 2020
 
Fixed rate – 1.960%
25.0

 
September 2020
 
Variable rate – 1.622%
100.0

 
September 2020
 
Variable rate – 1.416%
50.0

 
September 2020
 
Variable rate – 1.416%
75.0

 
September 2020
 
Variable rate – 1.118%
100.0

 
October 2020
 
Variable rate – 1.109%
50.0

 
December 2020
 
Variable rate – 1.335%
100.0

 
July 2021
 
Variable rate – 1.431%
57.7

 
July 2021
 
Variable rate – 1.411%
100.0

 
August 2021
 
Variable rate – 1.400%
28.2

 
August 2021
 
Fixed rate – 2.550%
125.0

 
August 2021
 
Variable rate – 1.236%
50.0

 
September 2021
 
Variable rate – 1.477%
25.4

 
March 2023
 
Fixed rate – 2.160%
20.5

 
June 2025
 
Fixed rate – 2.940%
$
1,647.4

 
 
 
 


The variable rate borrowings are pre-payable on each interest reset date without penalty.  The fixed rate borrowings are pre-payable subject to payment of a yield maintenance fee based on prevailing market interest rates.  At December 31, 2016, the aggregate yield maintenance fee to prepay all fixed rate borrowings was $2.6 million.

Interest expense of $17.5 million, $10.9 million and $18.7 million in 2016, 2015 and 2014, respectively, was recognized related to total borrowings from the FHLB.

In addition to our borrowings from the FHLB, we may enter into repurchase agreements to increase our investment return as part of our investment strategy as further discussed in the note to the consolidated financial statements entitled "Derivatives". These repurchase agreements are accounted for as collateralized financing arrangements and not as a sale and subsequent repurchase of securities. There were no such borrowings outstanding at December 31, 2016. We had no such borrowings outstanding at December 31, 2015.

The primary risks associated with short-term collateralized borrowings are: (i) a substantial decline in the market value of the margined security; and (ii) that a counterparty may be unable to perform under the terms of the contract or be unwilling to extend such financing in future periods especially if the liquidity or value of the margined security has declined. Exposure is limited to any depreciation in value of the related securities.
Accounting for Derivatives

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

From time to time, we utilize United States Treasury interest rate futures primarily to hedge interest rate risk related to anticipated mortgage loan transactions.

In periods prior to the second quarter of 2014, we were required to establish an embedded derivative related to a modified coinsurance agreement which ceded the risks of a block of interest sensitive life business. We recaptured this block in the second quarter of 2014 resulting in a gain of $3.8 million. Prior to the recapture of this block, we maintained the investments related to the modified coinsurance agreement in our trading securities account, which we carried at estimated fair value with changes in such value recognized as investment income.  Such trading securities were sold in the second quarter of 2014 in conjunction with the reinsurance recapture.

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.
Multibucket Annuity Products

The Company's multibucket annuity is an annuity product that credits interest based on the experience of a particular market strategy. Policyholders allocate their annuity premium payments to several different market strategies based on different asset classes within the Company's investment portfolio. Interest is credited to this product based on the market return of the given strategy, less management fees, and funds may be moved between different strategies. The Company guarantees a minimum return of premium plus approximately 3 percent per annum over the life of the contract. The investments backing the market strategies of these products are designated by the Company as trading securities. The change in the fair value of these securities is recognized as investment income (classified as income from policyholder and reinsurer accounts and other special-purpose portfolios), which is substantially offset by the change in insurance policy benefits for these products. We hold insurance liabilities of $32.8 million and $37.5 million related to multibucket annuity products as of December 31, 2016 and 2015, respectively.
Sales Inducements

Certain of our annuity products offer sales inducements to contract holders in the form of enhanced crediting rates or bonus payments in the initial period of the contract.  Certain of our life insurance products offer persistency bonuses credited to the contract holders balance after the policy has been outstanding for a specified period of time.  These enhanced rates and persistency bonuses are considered sales inducements in accordance with GAAP.  Such amounts are deferred and amortized in the same manner as deferred acquisition costs.  Sales inducements deferred totaled $3.4 million, $3.8 million and $5.1 million during 2016, 2015 and 2014, respectively.  Amounts amortized totaled $11.4 million, $13.8 million and $12.4 million during 2016, 2015 and 2014, respectively.  The unamortized balance of deferred sales inducements was $49.4 million and $57.4 million at December 31, 2016 and 2015, respectively.  The balance of insurance liabilities for persistency bonus benefits was $.5 million and $.9 million at December 31, 2016 and 2015, respectively.
Out-of-Period Adjustments

In 2014, we recorded the net effect of an out-of-period adjustment related to the calculation of incentive compensation accruals which increased other operating costs and expenses by $2.4 million, decreased tax expense by $.8 million and decreased our net income by $1.6 million (or 1 cent per diluted share). We evaluated these adjustments taking into account both qualitative and quantitative factors and considered the impact of these adjustments in relation to each period, as well as the periods in which they originated. 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 May 2014, the Financial Accounting Standards Board (the "FASB") issued authoritative guidance for recognizing revenue from contracts with customers. Certain contracts with customers are specifically excluded from this guidance, including insurance contracts. The core principle of the new guidance is that an entity should recognize revenue when it transfers promised goods or services in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance also requires additional disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. In March 2016, the FASB issued amendments that clarify the implementation guidance on principal versus agent considerations. In July 2015, the guidance was updated and will now be effective for the Company on January 1, 2018 and permits two methods of transition upon adoption; full retrospective and modified retrospective. Under the full retrospective method, prior periods would be restated under the new revenue standard, providing for comparability in all periods presented. Under the modified retrospective method, prior periods would not be restated. Instead, revenues and other disclosures for pre-2017 periods would be provided in the notes to the financial statements as previously reported under the current revenue standard. The Company is currently assessing the impact the guidance will have upon adoption.

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

(i)
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.

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

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

In March 2016, the FASB issued authoritative guidance that clarifies the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts. An entity performing the assessment under this guidance is required to assess the embedded call (put) options solely in accordance with a four-step decision sequence. The guidance will be effective for the Company for fiscal years beginning after December 15, 2017, and interim periods within fiscal years beginning after December 15, 2018. The Company is currently assessing the impact the guidance will have upon adoption.
In March 2016, the FASB issued authoritative guidance related to several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. The new guidance requires all income tax effects of stock-based compensation awards to be recognized in the income statement when the awards vest or are settled. The new guidance also allows an employer to withhold shares upon settlement of an award to satisfy the employer's tax withholding requirements up to the highest marginal tax rate applicable to employees, without resulting in liability classification of the award. Current guidance strictly limits the withholding to the employer's minimum statutory tax withholding requirement. The guidance will be effective for the Company for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Transition guidance varies between retrospective, modified retrospective and prospective depending on the specific change required. Early adoption is permitted. The adoption of this guidance will not have a material impact on our consolidated financial statements.
In June 2016, the FASB issued authoritative guidance related to the measurement of credit losses on financial instruments. The new guidance replaces the incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to form credit loss estimates. The guidance will be effective for the Company for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted as of the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is currently assessing the impact the guidance will have upon adoption.

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

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

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

Adopted Accounting Standards

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

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

In May 2015, the FASB issued authoritative guidance that removes the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. The guidance also removes the requirement to make certain disclosures for all investments that are eligible to be measured at fair value using the net asset value per share practical expedient. The guidance is effective for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years, with early adoption permitted. A reporting entity should apply the guidance retrospectively to all periods presented. The Company elected to early adopt this guidance as of December 31, 2015, and has removed certain investments that are measured using the net asset value per share practical expedient from the fair value hierarchy in all periods presented in our consolidated financial statements.

In August 2014, the FASB issued authoritative guidance related to measuring the financial assets and the financial liabilities of a consolidated collateralized financing entity which provides a measurement alternative for an entity that consolidates collateralized financing entities. A collateralized financing entity is a VIE with no more than nominal equity that holds financial assets and issues beneficial interests in those financial assets; the beneficial interests have contractual recourse only to the related assets of the collateralized financing entity and are classified as financial liabilities. If elected, the alternative method results in the reporting entity measuring both the financial assets and the financial liabilities of the collateralized financing entity using the more observable of the two fair value measurements, which effectively removes measurement differences between the financial assets and the financial liabilities of the collateralized financing entity previously recorded as net income (loss) attributable to non-controlling and other beneficial interests and as an adjustment to appropriated retained earnings. The reporting entity continues to measure its own beneficial interests in the collateralized financing entity (other than those that represent compensation for services) at fair value. The guidance was effective for the Company for interim and annual periods beginning in 2016. A reporting entity may apply the guidance using a modified retrospective approach by recording a cumulative-effect adjustment to equity as of the beginning of the annual period of adoption. A reporting entity may also apply the guidance retrospectively to all relevant prior periods. The adoption of this guidance had no impact on our consolidated financial statements.

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

At December 31, 2016, the amortized cost, gross unrealized gains and losses, estimated fair value and other-than-temporary impairments in accumulated other comprehensive income of fixed maturities, available for sale, and equity securities were as follows (dollars in millions):

 
Amortized
cost
 
Gross
unrealized
gains
 
Gross
unrealized
losses
 
Estimated
fair
value
 
Other-than-temporary impairments included in accumulated other comprehensive income
Investment grade (a):
 
 
 
 
 
 
 
 
 
Corporate securities
$
11,582.6

 
$
1,073.9

 
$
(99.8
)
 
$
12,556.7

 
$

United States Treasury securities and obligations of United States government corporations and agencies
143.8

 
20.5

 

 
164.3

 

States and political subdivisions
1,798.2

 
186.7

 
(7.9
)
 
1,977.0

 

Debt securities issued by foreign governments
37.1

 
.2

 
(.4
)
 
36.9

 

Asset-backed securities
1,169.6

 
29.2

 
(8.7
)
 
1,190.1

 

Collateralized debt obligations
227.5

 
1.0

 
(.3
)
 
228.2

 

Commercial mortgage-backed securities
1,467.2

 
32.9

 
(26.6
)
 
1,473.5

 

Mortgage pass-through securities
2.3

 
.2

 

 
2.5

 

Collateralized mortgage obligations
304.8

 
14.6

 
(.2
)
 
319.2

 

Total investment grade fixed maturities, available for sale
16,733.1

 
1,359.2

 
(143.9
)
 
17,948.4

 

Below-investment grade (a) (b):
 

 
 

 
 

 
 

 
 
Corporate securities
967.3

 
26.1

 
(39.2
)
 
954.2

 
(3.6
)
States and political subdivisions
13.6

 

 
(1.7
)
 
11.9

 
(3.0
)
Asset-backed securities
1,471.9

 
55.1

 
(6.8
)
 
1,520.2

 

Collateralized debt obligations
2.5

 

 

 
2.5

 

Commercial mortgage-backed securities
63.8

 
.2

 
(1.3
)
 
62.7

 

Collateralized mortgage obligations
550.9

 
46.8

 
(1.4
)
 
596.3

 
(1.4
)
Total below-investment grade fixed maturities, available for sale
3,070.0

 
128.2

 
(50.4
)
 
3,147.8

 
(8.0
)
Total fixed maturities, available for sale
$
19,803.1

 
$
1,487.4

 
$
(194.3
)
 
$
21,096.2

 
$
(8.0
)
Equity securities
$
580.7

 
$
11.5

 
$
(8.0
)
 
$
584.2

 
 
_______________
(a)
Investment ratings – Investment ratings are assigned the second lowest rating by Nationally Recognized Statistical Rating Organizations ("NRSROs") (Moody's Investor Services, Inc. ("Moody's"), S&P Global Ratings ("S&P") or Fitch Ratings ("Fitch")), or if not rated by such firms, the rating assigned by the National Association of Insurance Commissioners (the "NAIC").  NAIC designations of "1" or "2" include fixed maturities generally rated investment grade (rated "Baa3" or higher by Moody's or rated "BBB-" or higher by S&P and Fitch).  NAIC designations of "3" through "6" are referred to as below-investment grade (which generally are rated "Ba1" or lower by Moody's or rated "BB+" or lower by S&P and Fitch).  References to investment grade or below-investment grade throughout our consolidated financial statements are determined as described above.
(b)
Certain structured securities rated below-investment grade by NRSROs may be assigned a NAIC 1 or NAIC 2 designation based on the cost basis of the security relative to estimated recoverable amounts as determined by the NAIC. Refer to the table below for a summary of our fixed maturity securities, available for sale, by NAIC designations.

The NAIC evaluates the fixed maturity investments of insurers for regulatory and capital assessment purposes and assigns securities to one of six credit quality categories called NAIC designations, which are used by insurers when preparing their annual statements based on statutory accounting principles. The NAIC designations are generally similar to the credit quality designations of the NRSROs for marketable fixed maturity securities, except for certain structured securities. However, certain structured securities rated below investment grade by the NRSROs can be assigned NAIC 1 or NAIC 2 designations dependent on the cost basis of the holding relative to estimated recoverable amounts as determined by the NAIC. The following summarizes the NAIC designations and NRSRO equivalent ratings:

NAIC Designation
 
NRSRO Equivalent Rating
1
 
AAA/AA/A
2
 
BBB
3
 
BB
4
 
B
5
 
CCC and lower
6
 
In 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, 2016 is as follows (dollars in millions):

NAIC designation
 
Amortized cost
 
Estimated fair value
 
Percentage of total estimated fair value
1
 
$
9,715.7

 
$
10,463.2

 
49.6
%
2
 
8,973.1

 
9,526.4

 
45.2

Total NAIC 1 and 2 (investment grade)
 
18,688.8

 
19,989.6

 
94.8

3
 
711.7

 
705.4

 
3.3

4
 
233.0

 
229.4

 
1.1

5
 
141.3

 
138.3

 
.6

6
 
28.3

 
33.5

 
.2

Total NAIC 3,4,5 and 6 (below-investment grade)
 
1,114.3

 
1,106.6

 
5.2

 
 
$
19,803.1

 
$
21,096.2

 
100.0
%


At December 31, 2015, the amortized cost, gross unrealized gains and losses, estimated fair value and other-than-temporary impairments in accumulated other comprehensive income of fixed maturities, available for sale, and equity securities were as follows (dollars in millions):

 
Amortized
cost
 
Gross
unrealized
gains
 
Gross
unrealized
losses
 
Estimated
fair
value
 
Other-than-temporary impairments included in accumulated other comprehensive income
Investment grade:
 
 
 
 
 
 
 
 
 
Corporate securities
$
11,477.5

 
$
929.4

 
$
(262.9
)
 
$
12,144.0

 
$

United States Treasury securities and obligations of United States government corporations and agencies
172.5

 
22.3

 
(.3
)
 
194.5

 

States and political subdivisions
1,889.6

 
208.6

 
(3.7
)
 
2,094.5

 

Debt securities issued by foreign governments
18.9

 

 
(.6
)
 
18.3

 

Asset-backed securities
979.8

 
22.1

 
(7.2
)
 
994.7

 

Collateralized debt obligations
188.5

 
.4

 
(2.2
)
 
186.7

 

Commercial mortgage-backed securities
1,531.7

 
41.3

 
(16.3
)
 
1,556.7

 

Mortgage pass-through securities
3.1

 
.3

 

 
3.4

 

Collateralized mortgage obligations
450.9

 
17.0

 
(.6
)
 
467.3

 

Total investment grade fixed maturities, available for sale
16,712.5

 
1,241.4

 
(293.8
)
 
17,660.1

 

Below-investment grade:
 

 
 

 
 

 
 

 
 
Corporate securities
798.5

 
8.3

 
(82.3
)
 
724.5

 

States and political subdivisions
13.6

 

 
(3.9
)
 
9.7

 
(3.0
)
Debt securities issued by foreign governments
2.4

 

 

 
2.4

 

Asset-backed securities
838.0

 
25.7

 
(6.2
)
 
857.5

 

Commercial mortgage-backed securities
49.9

 

 
(1.3
)
 
48.6

 

Collateralized mortgage obligations
532.1

 
49.0

 
(1.0
)
 
580.1

 
(1.9
)
Total below-investment grade fixed maturities, available for sale
2,234.5

 
83.0

 
(94.7
)
 
2,222.8

 
(4.9
)
Total fixed maturities, available for sale
$
18,947.0

 
$
1,324.4

 
$
(388.5
)
 
$
19,882.9

 
$
(4.9
)
Equity securities
$
447.4

 
$
18.4

 
$
(2.8
)
 
$
463.0

 
 


Accumulated other comprehensive income is primarily comprised of the net effect of unrealized appreciation (depreciation) on our investments.  These amounts, included in shareholders' equity as of December 31, 2016 and 2015, were as follows (dollars in millions):

 
2016
 
2015
Net unrealized appreciation (depreciation) on fixed maturity securities, available for sale, on which an other-than-temporary impairment loss has been recognized
$
(1.1
)
 
$
1.6

Net unrealized gains on all other investments
1,311.9

 
903.4

Adjustment to present value of future profits (a)
(106.2
)
 
(121.2
)
Adjustment to deferred acquisition costs
(223.5
)
 
(133.3
)
Adjustment to insurance liabilities
(13.5
)
 
(14.6
)
Unrecognized net loss related to deferred compensation plan

 
(8.6
)
Deferred income tax liabilities
(345.2
)
 
(224.5
)
Accumulated other comprehensive income
$
622.4

 
$
402.8

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

At December 31, 2016, adjustments to the present value of future profits, deferred acquisition costs, insurance liabilities and deferred tax assets included $(94.1) million, $(96.4) million, $(13.5) million and $72.5 million, respectively, for premium deficiencies that would exist on certain blocks of business (primarily long-term care products) if unrealized gains on the assets backing such products had been realized and the proceeds from the sales of such assets were invested at then current yields.

At December 31, 2015, adjustments to the present value of future profits, deferred acquisition costs, insurance liabilities and deferred tax assets included $(109.3) million, $(33.2) million, $(14.6) million and $55.8 million, respectively, for premium deficiencies that would exist on certain blocks of business (primarily long-term care products) if unrealized gains on the assets backing such products had been realized and the proceeds from the sales of such assets were invested at then current yields.

Below-Investment Grade Securities

At December 31, 2016, the amortized cost of the Company's below-investment grade fixed maturity securities was $3,070.0 million, or 16 percent of the Company's fixed maturity portfolio. The estimated fair value of the below-investment grade portfolio was $3,147.8 million, or 103 percent of the amortized cost (refer to the table on page 140 the composition of the below-investment grade portfolio).

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, 2016, by contractual maturity.  Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without penalties.  Structured securities (such as asset-backed securities, collateralized debt obligations, commercial mortgage-backed securities, mortgage pass-through securities and collateralized mortgage obligations, collectively referred to as "structured securities") frequently include provisions for periodic principal payments and permit periodic unscheduled payments.

 
Amortized
cost
 
Estimated
fair
value
 
(Dollars in millions)
Due in one year or less
$
354.7

 
$
359.8

Due after one year through five years
2,243.8

 
2,399.5

Due after five years through ten years
1,549.1

 
1,620.8

Due after ten years
10,395.0

 
11,320.9

Subtotal
14,542.6

 
15,701.0

Structured securities
5,260.5

 
5,395.2

Total fixed maturities, available for sale
$
19,803.1

 
$
21,096.2



Net Investment Income

Net investment income consisted of the following (dollars in millions):

 
2016
 
2015
 
2014
General account assets:
 
 
 
 
 
Fixed maturities
$
1,081.4

 
$
1,090.1

 
$
1,175.8

Equity securities
21.5

 
18.3

 
13.9

Mortgage loans
91.0

 
91.4

 
104.2

Policy loans
7.3

 
7.3

 
11.0

Other invested assets
24.3

 
17.4

 
17.1

Cash and cash equivalents
2.0

 
.8

 
.6

Policyholder and reinsurer accounts and other special-purpose portfolios:
 
 
 
 
 
Trading securities (a)
12.2

 
10.7

 
14.8

Options related to fixed index products:
 
 
 
 
 
Option income (loss)
(40.1
)
 
36.5

 
118.9

Change in value of options
69.3

 
(72.7
)
 
(49.4
)
Other special-purpose portfolios
79.7

 
55.5

 
42.1

Gross investment income
1,348.6

 
1,255.3

 
1,449.0

Less investment expenses
23.4

 
21.7

 
21.6

Net investment income
$
1,325.2

 
$
1,233.6

 
$
1,427.4

_________________
(a)
Changes in the estimated fair value for trading securities still held as of the end of the respective years and included in net investment income were $(.2) million, $.4 million and $3.4 million for the years ended December 31, 2016, 2015 and 2014, respectively.

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

Net Realized Investment Gains (Losses)

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

 
2016
 
2015
 
2014
Fixed maturity securities, available for sale:
 
 
 
 
 
Gross realized gains on sale
$
137.7

 
$
95.7

 
$
64.4

Gross realized losses on sale
(95.2
)
 
(88.4
)
 
(13.0
)
Impairments:
 
 
 
 
 
Total other-than-temporary impairment losses
(15.2
)
 
(17.9
)
 

Other-than-temporary impairment losses recognized in accumulated other comprehensive income
3.6

 
3.0

 

Net impairment losses recognized
(11.6
)
 
(14.9
)
 

Net realized investment gains (losses) from fixed maturities
30.9

 
(7.6
)
 
51.4

Equity securities
20.9

 
3.7

 
10.1

Commercial mortgage loans

 
(2.3
)
 
(.1
)
Impairments on preferred stock and other investments
(20.7
)
 
(25.0
)
 
(27.3
)
Gain (loss) on dissolution of variable interest entities
(7.3
)
 
11.3

 

Other (a)
(15.5
)
 
(16.7
)
 
2.6

Net realized investment gains (losses)
$
8.3

 
$
(36.6
)
 
$
36.7


_________________
(a)
Changes in the estimated fair value of trading securities that we have elected the fair value option (and still held as of the end of the respective periods) were $(.5) million, $(9.2) million and $7.8 million for the years ended December 31, 2016, 2015 and 2014, respectively.

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

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

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

During 2014, we recognized net realized investment gains of $36.7 million, which were comprised of: (i) $54.4 million of net gains from the sales of investments (primarily fixed maturities); (ii) the increase in fair value of certain fixed maturity investments with embedded derivatives of $7.6 million; (iii) the increase in fair value of embedded derivatives related to a modified coinsurance agreement of $2.0 million; and (iv) $27.3 million of writedowns of mortgage loans and other investments for other than temporary declines in fair value recognized through net income.

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

During 2016, the $95.2 million of realized losses on sales of $790.2 million of fixed maturity securities, available for sale, included: (i) $79.2 million related to various corporate securities (including $63.5 million related to sales of investments in the energy sector); (ii) $5.8 million related to commercial mortgage-backed securities; (iii) $5.7 million related to asset-backed securities; and (iv) $4.5 million related to various other investments. Securities are generally sold at a loss following unforeseen issue-specific events or conditions or shifts in perceived risks.  These reasons include but are not limited to:  (i) changes in the investment environment; (ii) expectation that the market value could deteriorate further; (iii) desire to reduce our exposure to an asset class, an issuer or an industry; (iv) prospective or actual changes in credit quality; or (v) changes in expected cash flows.

During 2016, we recognized $32.3 million of impairment losses recorded in earnings which included: (i) $9.3 million of writedowns on fixed maturities in the energy sector; (ii) $3.7 million of writedowns on a direct loan due to borrower specific events; (iii) $12.7 million of writedowns on a privately placed preferred stock of an entity formed to construct and operate a chemical plant; (iv) $1.2 million of writedowns of investments held by VIEs due to other-than-temporary declines in value; and (v) $5.4 million of writedowns on other investments. Factors considered in determining the writedowns of investments in 2016 included the subordination status of each investment, the impact of recent downgrades and issuer specific events, including the impact of the current low oil prices on issuers in the energy sector.

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

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

During 2014, the $13.0 million of realized losses on sales of $233.7 million of fixed maturity securities, available for sale, included: (i) $.7 million of losses related to the sales of securities issued by state and political subdivisions; and (ii) $12.3 million of additional losses primarily related to various corporate securities.  

During 2014, we recognized $27.3 million of impairment losses recorded in earnings which included: (i) a $6.8 million writedown of commercial mortgage loans as a result of our intent to sell the loans; (ii) $19.1 million of impairments related to two legacy private company investments where earnings and cash flows had not met the expectations assumed in our previous valuations; and (iii) $1.4 million of losses on other investments following unforeseen issue-specific events or conditions.

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

The following summarizes the investments sold at a loss during 2016 which had been continuously in an unrealized loss position exceeding 20 percent of the amortized cost basis prior to the sale for the period indicated (dollars in millions):

 
 
 
At date of sale
 
Number
of issuers
 
Amortized cost
 
Fair value
Less than 6 months prior to sale
19
 
$
119.3

 
$
79.2

Greater than or equal to 6 months and less than 12 months prior to sale
7
 
76.4

 
45.6

 
26
 
$
195.7

 
$
124.8



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

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

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

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

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

The remaining noncredit impairment, which is recorded in accumulated other comprehensive income, is the difference between the security's estimated fair value and our best estimate of future cash flows discounted at the effective interest rate prior to impairment.  The remaining noncredit impairment typically represents changes in the market interest rates, current market liquidity and risk premiums.  As of December 31, 2016, other-than-temporary impairments included in accumulated other comprehensive income totaled $8.0 million (before taxes and related amortization).

Mortgage loans are impaired when it is probable that we will not collect the contractual principal and interest on the loan. We measure impairment based upon the difference between the carrying value of the loan and the estimated fair value of the collateral securing the loan less cost to sell.

The following table summarizes the amount of credit losses recognized in earnings on fixed maturity securities, available for sale, held at the beginning of the period, for which a portion of the other-than-temporary impairment was also recognized in accumulated other comprehensive income for years ended December 31, 2016, 2015 and 2014 (dollars in millions):

 
Year ended
 
December 31,
 
2016
 
2015
 
2014
Credit losses on fixed maturity securities, available for sale, beginning of period
$
(2.6
)
 
$
(1.0
)
 
$
(1.3
)
Add:  credit losses on other-than-temporary impairments not previously recognized
(3.0
)
 
(2.0
)
 

Less:  credit losses on securities sold
.1

 
.4

 
.3

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
$
(5.5
)
 
$
(2.6
)
 
$
(1.0
)
__________
(a)
Represents securities for which the amount previously recognized in accumulated other comprehensive income was recognized in earnings because we intend to sell the security or we more likely than not will be required to sell the security before recovery of its amortized cost basis.

Investments with Unrealized Losses

The following table sets forth the amortized cost and estimated fair value of those fixed maturities, available for sale, with unrealized losses at December 31, 2016, by contractual maturity.  Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without penalties.  Structured securities frequently include provisions for periodic principal payments and permit periodic unscheduled payments.

 
Amortized
cost
 
Estimated
fair
value
 
(Dollars in millions)
Due in one year or less
$
35.7

 
$
35.0

Due after one year through five years
150.4

 
145.9

Due after five years through ten years
389.3

 
370.9

Due after ten years
2,262.3

 
2,136.9

Subtotal
2,837.7

 
2,688.7

Structured securities
1,857.2

 
1,811.9

Total
$
4,694.9

 
$
4,500.6



The following summarizes the investments in our portfolio rated below-investment grade which have been continuously in an unrealized loss position exceeding 20 percent of the cost basis for the period indicated as of December 31, 2016 (dollars in millions):

 
Number
of issuers
 
Cost
basis
 
Unrealized
loss
 
Estimated
fair value
Less than 6 months
4
 
$
53.8

 
$
(12.1
)
 
$
41.7

Greater than 12 months
1
 
.7

 
(.2
)
 
.5

 
 
 
$
54.5

 
$
(12.3
)
 
$
42.2


The following table summarizes the gross unrealized losses and fair values of our investments with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that such securities have been in a continuous unrealized loss position, at December 31, 2016 (dollars in millions):

 
 
Less than 12 months
 
12 months or greater
 
Total
Description of securities
 
Fair
value
 
Unrealized
losses
 
Fair
value
 
Unrealized
losses
 
Fair
value
 
Unrealized
losses
United States Treasury securities and obligations of United States government corporations and agencies
 
$
8.0

 
$

 
$

 
$

 
$
8.0

 
$

States and political subdivisions
 
176.3

 
(7.8
)
 
18.3

 
(1.8
)
 
194.6

 
(9.6
)
Debt securities issued by foreign governments
 
18.9

 
(.4
)
 

 

 
18.9

 
(.4
)
Corporate securities
 
1,907.6

 
(75.5
)
 
559.6

 
(63.5
)
 
2,467.2

 
(139.0
)
Asset-backed securities
 
692.9

 
(8.5
)
 
262.5

 
(7.0
)
 
955.4

 
(15.5
)
Collateralized debt obligations
 
38.3

 
(.1
)
 
30.8

 
(.2
)
 
69.1

 
(.3
)
Commercial mortgage-backed securities
 
525.2

 
(16.6
)
 
154.0

 
(11.3
)
 
679.2

 
(27.9
)
Collateralized mortgage obligations
 
73.6

 
(.6
)
 
34.6

 
(1.0
)
 
108.2

 
(1.6
)
Total fixed maturities, available for sale
 
$
3,440.8

 
$
(109.5
)
 
$
1,059.8

 
$
(84.8
)
 
$
4,500.6

 
$
(194.3
)
Equity securities
 
$
239.4

 
$
(8.0
)
 
$

 
$

 
$
239.4

 
$
(8.0
)

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, 2015 (dollars in millions):

 
 
Less than 12 months
 
12 months or greater
 
Total
Description of securities
 
Fair
value
 
Unrealized
losses
 
Fair
value
 
Unrealized
losses
 
Fair
value
 
Unrealized
losses
United States Treasury securities and obligations of United States government corporations and agencies
 
$
43.6

 
$
(.3
)
 
$

 
$

 
$
43.6

 
$
(.3
)
States and political subdivisions
 
156.8

 
(4.1
)
 
14.8

 
(3.5
)
 
171.6

 
(7.6
)
Debt securities issued by foreign governments
 
20.7

 
(.6
)
 

 

 
20.7

 
(.6
)
Corporate securities
 
2,913.6

 
(255.7
)
 
278.9

 
(89.5
)
 
3,192.5

 
(345.2
)
Asset-backed securities
 
930.3

 
(11.7
)
 
98.4

 
(1.7
)
 
1,028.7

 
(13.4
)
Collateralized debt obligations
 
96.2

 
(1.8
)
 
36.3

 
(.4
)
 
132.5

 
(2.2
)
Commercial mortgage-backed securities
 
556.0

 
(16.1
)
 
25.7

 
(1.5
)
 
581.7

 
(17.6
)
Mortgage pass-through securities
 

 

 
.1

 

 
.1

 

Collateralized mortgage obligations
 
97.8

 
(1.0
)
 
40.8

 
(.6
)
 
138.6

 
(1.6
)
Total fixed maturities, available for sale
 
$
4,815.0

 
$
(291.3
)
 
$
495.0

 
$
(97.2
)
 
$
5,310.0

 
$
(388.5
)
Equity securities
 
$
140.1

 
$
(2.4
)
 
$
2.4

 
$
(.4
)
 
$
142.5

 
$
(2.8
)


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

Structured Securities

At December 31, 2016 fixed maturity investments included structured securities with an estimated fair value of $5.4 billion (or 26 percent of all fixed maturity securities).  The yield characteristics of structured securities generally differ in some respects from those of traditional corporate fixed-income securities or government securities.  For example, interest and principal payments on structured securities may occur more frequently, often monthly.  In many instances, we are subject to variability in the amount and timing of principal and interest payments.  For example, in many cases, partial prepayments may occur at the option of the issuer and prepayment rates are influenced by a number of factors that cannot be predicted with certainty, including:  the relative sensitivity of prepayments on the underlying assets backing the security to changes in interest rates and asset values; the availability of alternative financing; a variety of economic, geographic and other factors; the timing, pace and proceeds of liquidations of defaulted collateral; and various security-specific structural considerations (for example, the repayment priority of a given security in a securitization structure).  In addition, the total amount of payments for non-agency structured securities may be affected by changes to cumulative default rates or loss severities of the related collateral.

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

For structured securities included in fixed maturities, available for sale, that were purchased at a discount or premium, we recognize investment income using an effective yield based on anticipated future prepayments and the estimated final maturity of the securities. Actual prepayment experience is periodically reviewed and effective yields are recalculated when differences arise between the prepayments originally anticipated and the actual prepayments received and currently anticipated. For credit sensitive mortgage-backed and asset-backed securities, and for securities that can be prepaid or settled in a way that we would not recover substantially all of our investment, the effective yield is recalculated on a prospective basis. Under this method, the amortized cost basis in the security is not immediately adjusted and a new yield is applied prospectively. For all other structured and asset-backed securities, the effective yield is recalculated when changes in assumptions are made, and reflected in our income on a retrospective basis. Under this method, the amortized cost basis of the investment in the securities is adjusted to the amount that would have existed had the new effective yield been applied since the acquisition of the securities. Such adjustments were not significant in 2016.

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 following table sets forth the par value, amortized cost and estimated fair value of structured securities, summarized by interest rates on the underlying collateral, at December 31, 2016 (dollars in millions):

 
Par
value
 
Amortized
cost
 
Estimated
fair value
Below 4 percent
$
1,993.9

 
$
1,523.5

 
$
1,535.4

4 percent – 5 percent
1,757.6

 
1,592.5

 
1,624.7

5 percent – 6 percent
1,772.2

 
1,602.2

 
1,666.7

6 percent – 7 percent
388.1

 
348.0

 
364.5

7 percent – 8 percent
55.8

 
56.2

 
65.6

8 percent and above
138.7

 
138.1

 
138.3

Total structured securities
$
6,106.3

 
$
5,260.5

 
$
5,395.2


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

 
 
 
Estimated fair value
Type
Amortized
cost
 
Amount
 
Percent
of fixed
maturities
Pass-throughs, sequential and equivalent securities
$
664.8

 
$
710.6

 
3.4
%
Planned amortization classes, target amortization classes and accretion-directed bonds
142.5

 
156.4

 
.7

Commercial mortgage-backed securities
1,531.0

 
1,536.2

 
7.3

Asset-backed securities
2,641.5

 
2,710.3

 
12.9

Collateralized debt obligations
230.0

 
230.7

 
1.1

Other
50.7

 
51.0

 
.2

Total structured securities
$
5,260.5

 
$
5,395.2

 
25.6
%


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

Commercial mortgage-backed securities 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 commercial mortgage-backed securities have call protection features whereby underlying borrowers may not prepay their mortgages for stated periods of time without incurring prepayment penalties, recoveries on defaulted collateral may result in involuntary prepayments.

Commercial Mortgage Loans

At December 31, 2016, the mortgage loan balance was primarily comprised of commercial mortgage loans. Approximately 14 percent, 9 percent, 7 percent and 6 percent of the mortgage loan balance were on properties located in California, Texas, Maryland and Florida, respectively. No other state comprised greater than five percent of the mortgage loan balance. None of the commercial mortgage loan balance was noncurrent at December 31, 2016. Our commercial mortgage loan portfolio is comprised of large commercial mortgage loans. We do not hold groups of smaller-balance homogeneous loans. Our loans have risk characteristics that are individually unique. Accordingly, we measure potential losses on a loan-by-loan basis rather than establishing an allowance for losses on mortgage loans.

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

 
 
 
Estimated fair
value
Loan-to-value ratio (a)
Carrying value
 
Mortgage loans
 
Collateral
Less than 60%
$
976.5

 
$
1,004.2

 
$
2,393.0

60% to 70%
394.7

 
396.7

 
596.2

Greater than 70% to 80%
282.3

 
286.2

 
385.1

Greater than 80% to 90%
75.3

 
74.0

 
89.5

Greater than 90%
39.2

 
39.0

 
42.0

Total
$
1,768.0

 
$
1,800.1