CNO FINANCIAL GROUP, INC., 10-Q filed on 5/7/2021
Quarterly Report
v3.21.1
Cover Page - shares
3 Months Ended
Mar. 31, 2021
Apr. 22, 2021
Document Information [Line Items]    
Document Type 10-Q  
Document Quarterly Report true  
Document Period End Date Mar. 31, 2021  
Document Transition Report false  
Entity File Number 001-31792  
Entity Registrant Name CNO Financial Group, Inc.  
Entity Incorporation, State or Country Code DE  
Entity Tax Identification Number 75-3108137  
Entity Address, Address Line One 11825 N. Pennsylvania Street  
Entity Address, City or Town Carmel,  
Entity Address, State or Province IN  
Entity Address, Postal Zip Code 46032  
City Area Code (317)  
Local Phone Number 817-6100  
Entity Current Reporting Status Yes  
Entity Interactive Data Current Yes  
Entity Filer Category Large Accelerated Filer  
Entity Small Business false  
Entity Emerging Growth Company false  
Entity Shell Company false  
Entity Common Stock, Shares Outstanding   131,567,271
Entity Central Index Key 0001224608  
Current Fiscal Year End Date --12-31  
Document Fiscal Year Focus 2021  
Document Fiscal Period Focus Q1  
Amendment Flag false  
Common Stock, par value $0.01 per share    
Document Information [Line Items]    
Title of 12(b) Security Common Stock, par value $0.01 per share  
Trading Symbol CNO  
Security Exchange Name NYSE  
Rights to purchase Series E Junior Participating Preferred Stock    
Document Information [Line Items]    
Title of 12(b) Security Rights to purchase Series E Junior Participating Preferred Stock  
No Trading Symbol Flag true  
Security Exchange Name NYSE  
5.125% Subordinated Debentures due 2060    
Document Information [Line Items]    
Title of 12(b) Security 5.125% Subordinated Debentures due 2060  
Trading Symbol CNOpA  
Security Exchange Name NYSE  
v3.21.1
CONSOLIDATED BALANCE SHEET - USD ($)
$ in Millions
Mar. 31, 2021
Dec. 31, 2020
Investments:    
Fixed maturities, available for sale, at fair value (net of allowance for credit losses: March 31, 2021 - $5.3 and December 31, 2020 - $2.2; amortized cost: March 31, 2021 - $20,351.6 and December 31, 2020 - $19,921.1) $ 22,610.4 $ 23,383.6
Equity securities at fair value 164.4 151.2
Mortgage loans (net of allowance for credit losses: March 31, 2021 - $8.8 and December 31, 2020 - $11.8) 1,297.7 1,358.7
Policy loans 121.0 123.0
Trading securities 242.6 232.0
Investments held by variable interest entities (net of allowance for credit losses: March 31, 2021 - $5.4 and December 31, 2020 - $15.1; amortized cost: March 31, 2021 - $1,234.3 and December 31, 2020 - $1,211.3) 1,224.0 1,189.4
Other invested assets 1,195.1 1,146.4
Total investments 26,855.2 27,584.3
Cash and cash equivalents - unrestricted 662.9 937.8
Cash and cash equivalents held by variable interest entities 76.0 54.1
Accrued investment income 216.8 205.8
Present value of future profits 241.3 249.4
Deferred acquisition costs 1,168.4 1,027.8
Reinsurance receivables (net of allowance for credit losses: March 31, 2021 - $4.0 and December 31, 2020 - $4.0) 4,509.3 4,584.3
Income tax assets, net 358.2 199.4
Assets held in separate accounts 4.3 4.2
Other assets 567.1 492.8
Total assets 34,659.5 35,339.9
Liabilities for insurance products:    
Policyholder account liabilities 12,571.3 12,540.6
Future policy benefits 11,546.6 11,744.2
Liability for policy and contract claims 558.7 561.8
Unearned and advanced premiums 262.4 252.6
Liabilities related to separate accounts 4.3 4.2
Other liabilities 925.2 821.8
Investment borrowings 1,642.0 1,642.5
Borrowings related to variable interest entities 1,151.7 1,151.8
Notes payable – direct corporate obligations 1,136.6 1,136.2
Total liabilities 29,798.8 29,855.7
Commitments and Contingencies
Shareholders' equity:    
Common stock ($0.01 par value, 8,000,000,000 shares authorized, shares issued and outstanding: March 31, 2021 – 132,268,255; December 31, 2020 – 135,279,119) 1.3 1.3
Additional paid-in capital 2,457.8 2,544.5
Accumulated other comprehensive income 1,518.1 2,186.1
Retained earnings 883.5 752.3
Total shareholders' equity 4,860.7 5,484.2
Total liabilities and shareholders' equity $ 34,659.5 $ 35,339.9
v3.21.1
CONSOLIDATED BALANCE SHEET (Parenthetical) - USD ($)
$ in Millions
Mar. 31, 2021
Dec. 31, 2020
Investments:    
Fixed maturities, available for sale, allowance for credit losses $ 5.3 $ 2.2
Fixed maturities, available for sale, amortized cost 20,351.6 19,921.1
Mortgage loans, allowance for credit losses 8.8 11.8
Investments held by variable interest entities, allowance for credit losses 5.4 15.1
Investments held by variable interest entities, amortized cost 1,234.3 1,211.3
Reinsurance receivables, allowance for current expected credit losses $ 4.0 $ 4.0
Shareholders' equity:    
Common stock, par value (in dollars per share) $ 0.01 $ 0.01
Common stock, shares authorized (in shares) 8,000,000,000 8,000,000,000
Common stock, shares issued (in shares) 132,268,255 135,279,119
Common stock, shares outstanding (in shares) 132,268,255 135,279,119
v3.21.1
CONSOLIDATED STATEMENT OF OPERATIONS - USD ($)
shares in Thousands, $ in Millions
3 Months Ended
Mar. 31, 2021
Mar. 31, 2020
Revenues:    
Insurance policy income $ 632.4 $ 628.7
Net investment income:    
General account assets 282.7 280.3
Policyholder and other special-purpose portfolios 55.5 (110.7)
Realized investment gains (losses):    
Net realized investment gains (losses) (12.4) (60.1)
Change in allowance for credit losses and other-than-temporary impairment losses 9.6 (55.4)
Total realized gains (losses) (2.8) (115.5)
Fee revenue and other income 38.2 34.4
Total revenues 1,006.0 717.2
Benefits and expenses:    
Insurance policy benefits 459.1 490.8
Interest expense 24.1 33.4
Amortization 99.7 50.2
Other operating costs and expenses 233.1 213.8
Total benefits and expenses 816.0 788.2
Income (loss) before income taxes 190.0 (71.0)
Income tax expense (benefit):    
Tax expense (benefit) on period income 42.6 (15.8)
Valuation allowance for deferred tax assets and other tax items 0.0 (34.0)
Net income (loss) $ 147.4 $ (21.2)
Basic:    
Weighted average shares outstanding (in shares) 134,140 145,829
Net income (loss) (in dollars per share) $ 1.10 $ (0.15)
Diluted:    
Weighted average shares outstanding (in shares) 136,653 145,829
Net income (loss) (in dollars per share) $ 1.08 $ (0.15)
v3.21.1
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME - USD ($)
$ in Millions
3 Months Ended
Mar. 31, 2021
Mar. 31, 2020
Statement of Comprehensive Income [Abstract]    
Net income (loss) $ 147.4 $ (21.2)
Other comprehensive income, before tax:    
Unrealized losses on investments (1,198.2) (1,325.4)
Adjustment to present value of future profits and deferred acquisition costs 83.6 136.3
Amount related to premium deficiencies assuming the net unrealized gains had been realized 262.5 135.5
Reclassification adjustments:    
For net realized investment (gains) losses included in net income (loss) (0.5) 65.6
For amortization of the present value of future profits and deferred acquisition costs related to net realized investment (gains) losses included in net income (loss) 0.0 (3.4)
Other comprehensive loss before tax (852.6) (991.4)
Income tax benefit related to items of accumulated other comprehensive income 184.6 214.1
Other comprehensive loss, net of tax (668.0) (777.3)
Comprehensive loss $ (520.6) $ (798.5)
v3.21.1
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY - USD ($)
$ in Millions
Total
Cumulative Effect, Period of Adoption, Adjustment
Cumulative Effect, Period of Adoption, Adjusted Balance
Common stock
Common stock
Cumulative Effect, Period of Adoption, Adjusted Balance
Additional paid-in capital
Additional paid-in capital
Cumulative Effect, Period of Adoption, Adjusted Balance
Accumulated other comprehensive income
Accumulated other comprehensive income
Cumulative Effect, Period of Adoption, Adjusted Balance
Retained earnings
Retained earnings
Cumulative Effect, Period of Adoption, Adjustment
Retained earnings
Cumulative Effect, Period of Adoption, Adjusted Balance
Balance, beginning of period (in shares) at Dec. 31, 2019       148,084,000                
Balance, beginning of period at Dec. 31, 2019 $ 4,677.0 $ (17.8) $ 4,659.2 $ 1.5 $ 1.5 $ 2,767.3 $ 2,767.3 $ 1,372.5 $ 1,372.5 $ 535.7 $ (17.8) $ 517.9
Increase (Decrease) in Stockholders' Equity [Roll Forward]                        
Net income (loss) (21.2)                 (21.2)    
Change in unrealized appreciation (depreciation) of investments (net of applicable income tax benefit) (777.3)             (777.3)        
Common stock repurchased (in shares)       (5,083,000)                
Common stock repurchased (83.0)     $ (0.1)   (82.9)            
Dividends on common stock (16.0)                 (16.0)    
Employee benefit plans, net of shares used to pay tax withholdings (in shares)       609,000                
Employee benefit plans, net of shares used to pay tax withholdings 4.1         4.1            
Balance, end of period (in shares) at Mar. 31, 2020       143,610,000                
Balance, end of period at Mar. 31, 2020 $ 3,765.8     $ 1.4   2,688.5   595.2   480.7    
Balance, beginning of period (in shares) at Dec. 31, 2020 135,279,119     135,279,000                
Balance, beginning of period at Dec. 31, 2020 $ 5,484.2     $ 1.3   2,544.5   2,186.1   752.3    
Increase (Decrease) in Stockholders' Equity [Roll Forward]                        
Net income (loss) 147.4                 147.4    
Change in unrealized appreciation (depreciation) of investments (net of applicable income tax benefit) (668.0)             (668.0)        
Common stock repurchased (in shares)       (4,109,000)                
Common stock repurchased (100.0)         (100.0)            
Dividends on common stock (16.2)                 (16.2)    
Employee benefit plans, net of shares used to pay tax withholdings (in shares)       1,098,000                
Employee benefit plans, net of shares used to pay tax withholdings $ 13.3         13.3            
Balance, end of period (in shares) at Mar. 31, 2021 132,268,255     132,268,000                
Balance, end of period at Mar. 31, 2021 $ 4,860.7     $ 1.3   $ 2,457.8   $ 1,518.1   $ 883.5    
v3.21.1
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (Parenthetical) - USD ($)
$ in Millions
3 Months Ended
Mar. 31, 2021
Mar. 31, 2020
Statement of Stockholders' Equity [Abstract]    
Change in unrealized appreciation (depreciation) of investments, applicable income tax benefit $ 184.6 $ 214.1
v3.21.1
CONSOLIDATED STATEMENT OF CASH FLOWS - USD ($)
$ in Millions
3 Months Ended
Mar. 31, 2021
Mar. 31, 2020
Cash flows from operating activities:    
Insurance policy income $ 598.9 $ 575.3
Net investment income 251.1 285.7
Fee revenue and other income 38.2 34.4
Insurance policy benefits (427.2) (429.2)
Interest expense (10.5) (20.3)
Deferrable policy acquisition costs (70.7) (68.2)
Other operating costs (273.7) (250.1)
Income taxes (16.7) (1.9)
Net cash from operating activities 89.4 125.7
Cash flows from investing activities:    
Sales of investments 509.2 417.9
Maturities and redemptions of investments 754.9 595.7
Purchases of investments (1,530.3) (1,178.2)
Net purchases of trading securities (14.2) (6.3)
Other (53.6) (7.3)
Net cash used by investing activities (334.0) (178.2)
Cash flows from financing activities:    
Issuance of common stock 12.4 2.7
Payments to repurchase common stock (102.7) (88.0)
Common stock dividends paid (16.3) (16.2)
Amounts received for deposit products 444.9 404.8
Withdrawals from deposit products (345.7) (354.0)
Issuance of investment borrowings:    
Federal Home Loan Bank 200.0 0.0
Payments on investment borrowings:    
Federal Home Loan Bank (200.5) (0.5)
Related to variable interest entities (0.5) (0.5)
Net cash used by financing activities (8.4) (51.7)
Net decrease in cash and cash equivalents (253.0) (104.2)
Cash and cash equivalents - unrestricted and held by variable interest entities, beginning of period 991.9 654.7
Cash and cash equivalents - unrestricted and held by variable interest entities, end of period $ 738.9 $ 550.5
v3.21.1
BUSINESS AND BASIS OF PRESENTATION
3 Months Ended
Mar. 31, 2021
Organization, Consolidation and Presentation of Financial Statements [Abstract]  
BUSINESS AND BASIS OF PRESENTATION
BUSINESS AND BASIS OF PRESENTATION

The following notes should be read together with the notes to the consolidated financial statements included in our 2020 Annual Report on Form 10-K.

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

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

Our unaudited consolidated financial statements reflect normal recurring adjustments that, in the opinion of management, are necessary for a fair statement of our financial position, results of operations and cash flows for the periods presented.  As permitted by rules and regulations of the Securities and Exchange Commission (the "SEC") applicable to quarterly reports on Form 10-Q, we have condensed or omitted certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP").  We have reclassified certain amounts from the prior periods to conform to the 2021 presentation.  These reclassifications have no effect on net income or shareholders' equity.  Results for interim periods are not necessarily indicative of the results that may be expected for a full year, especially when considering the risks and uncertainties associated with the novel coronavirus ("COVID-19") and the impact it may have on our business, results of operations and financial condition. Depending on the duration and severity of the pandemic, we foresee the potential for adverse impacts related to, among other things: (i) sales results; (ii) insurance product margin; (iii) net investment income; (iv) invested assets; (v) regulatory capital; (vi) liabilities for insurance products; (vii) deferred acquisition costs; (viii) the present value of future profits; and (ix) income tax assets. The full extent to which COVID-19 will impact our business, results of operations and financial condition remains uncertain.

The balance sheet at December 31, 2020, presented herein, has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by GAAP for complete financial statements.

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

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

In February 2021, we acquired DirectPath, LLC ("DirectPath"), a leading national provider of year-round, technology-driven employee benefits management services to employers and employees. DirectPath provides personalized benefits education, advocacy and transparency, and communications compliance services that help employers reduce healthcare costs and assist employees with making informed benefits decisions. The purchase price was approximately $50 million with an additional earn‐out if certain financial targets are achieved. The transaction was funded from holding company cash. The amount paid, net of cash held by DirectPath on the date of acquisition, was $47.4 million and is classified as other investing activities on the consolidated statement of cash flows. The net assets acquired totaled $56 million and were primarily comprised of goodwill and other intangible assets of approximately $50 million. The tangible assets acquired and liabilities assumed were recorded at their carrying values which approximated fair value. The intangible assets were recorded at fair value based on various assumptions determined by the Company to be reasonable at the date of acquisition including long-term growth rate, normalized net working capital, internal rate of return, economic life and discount rate. In addition, we recognized
advisory and legal expenses of $3 million in connection with the acquisition (of which, $2.5 million was recognized in the first quarter of 2021). The business of DirectPath is included in our fee income segment.

DirectPath's education services engage and enroll employees in worksite benefits plans through face-to-face, virtual and telephonic enrollment. The Company’s advocacy and transparency services help employees select cost-effective medical providers and resolve claims issues, while enabling employers to reduce administrative and healthcare costs. Its communications compliance services manage governance and regulatory communications for corporate benefits plans. DirectPath operates direct nationwide and serves 400 employers with a covered employee base of more than 2.5 million people. DirectPath's clients range in size from small- and medium-sized businesses to Fortune 100 companies.
v3.21.1
INVESTMENTS
3 Months Ended
Mar. 31, 2021
Investments, Debt and Equity Securities [Abstract]  
INVESTMENTS
INVESTMENTS

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

Trading securities include: (i) investments purchased with the intent of selling in the near term to generate income; and (ii) 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 is recognized in income from policyholder and other special-purpose portfolios (a component of net investment income). The change in fair value of securities with embedded derivatives is recognized in realized investment gains (losses).

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

In determining the credit loss component, we discount the estimated cash flows on a security by security basis. We consider the impact of macroeconomic conditions on inputs used to measure the amount of credit loss. For most structured securities, cash flow estimates are based on bond-specific facts and circumstances that may include collateral characteristics, expectations of delinquency and default rates, loss severity, prepayment speeds and structural support, including overcollateralization, excess spread, subordination and guarantees. For corporate bonds, cash flow estimates are derived by considering asset type, rating, time to maturity, and applying an expected loss rate.
  
If we intend to sell an impaired fixed maturity security, available for sale, or identify an impaired fixed maturity security, available for sale, for which is it more likely than not we will be required to sell before anticipated recovery, the difference between the fair value and the amortized cost is included in net realized investment gains (losses) and the fair value becomes the new amortized cost. The new cost basis is not adjusted for any subsequent recoveries in fair value.

The Company reports accrued investment income separately from fixed maturities, available for sale, and has elected not to measure an allowance for credit losses for accrued investment income. Accrued investment income is written off through net investment income at the time the issuer of the bond defaults or is expected to default on payments.
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 March 31, 2021 and December 31, 2020, were as follows (dollars in millions):
March 31,
2021
December 31,
2020
Net unrealized gains on investments having no allowance for credit losses $2,270.1 $3,466.3 
Unrealized losses on investments with an allowance for credit losses (12.5)(10.0)
Adjustment to present value of future profits (a)(9.7)(10.2)
Adjustment to deferred acquisition costs(296.9)(458.0)
Adjustment to insurance liabilities(13.0)(197.5)
Deferred income tax liabilities(419.9)(604.5)
Accumulated other comprehensive income$1,518.1 $2,186.1 
________
(a)The present value of future profits is the value assigned to the right to receive future cash flows from contracts existing at September 10, 2003, the date Conseco, Inc., an Indiana corporation, emerged from bankruptcy.

At March 31, 2021, adjustments to the present value of future profits, deferred acquisition costs, insurance liabilities and deferred tax assets included $(8.3) million, $(55.7) million, $(13.0) million and $16.7 million, respectively, for premium deficiencies that would exist on certain blocks of business if unrealized gains on the assets backing such products had been realized and the proceeds from the sales of such assets were invested at then current yields.

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

At March 31, 2021, the amortized cost, gross unrealized gains, gross unrealized losses, allowance for credit losses and estimated fair value of fixed maturities, available for sale, were as follows (dollars in millions):
Amortized costGross unrealized gainsGross unrealized lossesAllowance for credit lossesEstimated fair value
Corporate securities$12,494.8 $1,723.1 $(53.6)$(4.9)$14,159.4 
United States Treasury securities and obligations of United States government corporations and agencies163.6 40.2 (1.0)— 202.8 
States and political subdivisions2,366.8 245.4 (10.6)(.4)2,601.2 
Foreign governments82.3 10.8 (.1)— 93.0 
Asset-backed securities1,038.8 41.2 (3.5)— 1,076.5 
Agency residential mortgage-backed securities48.0 5.1 — — 53.1 
Non-agency residential mortgage-backed securities1,803.8 176.1 (2.8)— 1,977.1 
Collateralized loan obligations462.4 2.6 (.9)— 464.1 
Commercial mortgage-backed securities1,891.1 96.7 (4.6)— 1,983.2 
Total fixed maturities, available for sale$20,351.6 $2,341.2 $(77.1)$(5.3)$22,610.4 
At December 31, 2020, the amortized cost, gross unrealized gains, gross unrealized losses, allowance for credit losses and estimated fair value of fixed maturities, available for sale, were as follows (dollars in millions):
Amortized costGross unrealized gainsGross unrealized lossesAllowance for credit lossesEstimated fair value
Corporate securities$12,054.7 $2,696.3 $(9.9)$(1.9)$14,739.2 
United States Treasury securities and obligations of United States government corporations and agencies163.8 71.9 (.2)— 235.5 
States and political subdivisions2,296.6 358.9 (1.3)(.3)2,653.9 
Foreign governments82.4 20.4 — — 102.8 
Asset-backed securities1,024.4 45.1 (7.4)— 1,062.1 
Agency residential mortgage-backed securities52.7 5.7 — — 58.4 
Non-agency residential mortgage-backed securities1,913.5 181.2 (2.1)— 2,092.6 
Collateralized loan obligations461.9 .6 (3.6)— 458.9 
Commercial mortgage-backed securities1,871.1 116.4 (7.3)— 1,980.2 
Total fixed maturities, available for sale$19,921.1 $3,496.5 $(31.8)$(2.2)$23,383.6 
The following table sets forth the amortized cost and estimated fair value of fixed maturities, available for sale, at March 31, 2021, by contractual maturity.  Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without penalties.  Structured securities (such as asset-backed securities, agency residential mortgage-backed securities, non-agency residential mortgage-backed securities, collateralized loan obligations and commercial mortgage-backed securities, collectively referred to as "structured securities") frequently include provisions for periodic principal payments and permit periodic unscheduled payments.
Amortized
cost
Estimated
fair
value
 (Dollars in millions)
Due in one year or less$322.7 $329.0 
Due after one year through five years1,011.2 1,075.3 
Due after five years through ten years1,496.0 1,623.8 
Due after ten years12,277.6 14,028.3 
Subtotal15,107.5 17,056.4 
Structured securities5,244.1 5,554.0 
Total fixed maturities, available for sale$20,351.6 $22,610.4 

The following table sets forth the amortized cost and estimated fair value of fixed maturities, available for sale, at December 31, 2020, by contractual maturity.
Amortized
cost
Estimated
fair
value
 (Dollars in millions)
Due in one year or less$388.7 $396.4 
Due after one year through five years987.4 1,052.9 
Due after five years through ten years1,540.4 1,715.6 
Due after ten years11,681.0 14,566.5 
Subtotal14,597.5 17,731.4 
Structured securities5,323.6 5,652.2 
Total fixed maturities, available for sale$19,921.1 $23,383.6 

Gross Unrealized Investment Losses

Our investment strategy is to maximize, over a sustained period and within acceptable parameters of quality and risk, investment income and total investment return through active strategic asset allocation and investment management. Accordingly, we may sell securities at a gain or a loss to enhance the projected total return of the portfolio as market opportunities change, to reflect changing perceptions of risk, or to better match certain characteristics of our investment portfolio with the corresponding characteristics of our insurance liabilities.
The following table summarizes the gross unrealized losses and fair values of our investments with unrealized losses for which an allowance for credit losses has not been recorded, aggregated by investment category and length of time that such securities have been in a continuous unrealized loss position, at March 31, 2021 (dollars in millions):
 Less than 12 months12 months or greaterTotal
Description of securitiesFair
value
Unrealized
losses
Fair
value
Unrealized
losses
Fair
value
Unrealized
losses
Corporate securities$764.1 $(31.7)$18.3 $(.3)$782.4 $(32.0)
United States Treasury securities and obligations of United States government corporations and agencies18.6 (1.0)— — 18.6 (1.0)
States and political subdivisions316.6 (10.2)— — 316.6 (10.2)
Asset-backed securities66.7 (.6)35.4 (2.9)102.1 (3.5)
Non-agency residential mortgage-backed securities113.4 (2.0)96.0 (.8)209.4 (2.8)
Collateralized loan obligations49.7 (.2)156.6 (.7)206.3 (.9)
Commercial mortgage-backed securities175.7 (2.0)95.6 (2.6)271.3 (4.6)
Total fixed maturities, available for sale$1,504.8 $(47.7)$401.9 $(7.3)$1,906.7 $(55.0)

The following table summarizes the gross unrealized losses and fair values of our investments with unrealized losses for which an allowance for credit losses has not been recorded, aggregated by investment category and length of time that such securities have been in a continuous unrealized loss position, at December 31, 2020 (dollars in millions):
 Less than 12 months12 months or greaterTotal
Description of securitiesFair
value
Unrealized
losses
Fair
value
Unrealized
losses
Fair
value
Unrealized
losses
Corporate securities$110.0 $(2.6)$5.6 $(.2)$115.6 $(2.8)
United States Treasury securities and obligations of United States government corporations and agencies17.9 (.2)— — 17.9 (.2)
States and political subdivisions8.6 (.1)— — 8.6 (.1)
Asset-backed securities146.9 (4.1)26.0 (3.3)172.9 (7.4)
Non-agency residential mortgage-backed securities173.2 (1.5)42.2 (.6)215.4 (2.1)
Collateralized loan obligations151.4 (1.5)178.7 (2.1)330.1 (3.6)
Commercial mortgage-backed securities277.0 (6.3)72.3 (1.0)349.3 (7.3)
Total fixed maturities, available for sale$885.0 $(16.3)$324.8 $(7.2)$1,209.8 $(23.5)

Based on management's current assessment of investments with unrealized losses at March 31, 2021, the Company believes the issuers of the securities will continue to meet their obligations.  While we do not have the intent to sell securities with unrealized losses and it is not more likely than not that we will be required to sell securities with unrealized losses prior to their anticipated recovery, our intent on an individual security may change, based upon market or other unforeseen developments. In such instances, if a loss is recognized from a sale subsequent to a balance sheet date due to these unexpected developments, the loss is recognized in the period in which we had the intent to sell the security before its anticipated recovery.
The following table summarizes changes in the allowance for credit losses related to fixed maturities, available for sale, for the three months ended March 31, 2021 (dollars in millions):
Corporate securitiesStates and political subdivisionsTotal
Allowance at December 31, 2020$1.9 $.3 $2.2 
Additions for securities for which credit losses were not previously recorded1.7 .1 1.8 
Additions for purchased securities with deteriorated credit— — — 
Additions (reductions) for securities where an allowance was previously recorded1.5 — 1.5 
Reduction for securities sold during the period(.2)— (.2)
Reduction for securities for which the Company made the decision to sell where an allowance was previously recorded— — — 
Write-offs— — — 
Recoveries of previously written-off amount— — — 
Allowance at March 31, 2021$4.9 $.4 $5.3 
The following table summarizes changes in the allowance for credit losses related to fixed maturities, available for sale, for the three months ended March 31, 2020 (dollars in millions):
Corporate securitiesStates and political subdivisionsForeign governmentsNon-agency residential mortgage-backed securitiesTotal
Allowance at January 1, 2020$2.1 $— $— $— $2.1 
Additions for securities for which credit losses were not previously recorded17.5 .6 .1 1.0 19.2 
Additions for purchased securities with deteriorated credit— — — — — 
Additions (reductions) for securities where an allowance was previously recorded(1.1)— — — (1.1)
Reduction for securities sold during the period(.3)— — — (.3)
Reduction for securities for which the Company made the decision to sell where an allowance was previously recorded— — — — — 
Write-offs— — — — — 
Recoveries of previously written-off amount— — — — — 
Allowance at March 31, 2020$18.2 $.6 $.1 $1.0 $19.9 

Mortgage Loans

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

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

At March 31, 2021, the mortgage loan balance was primarily comprised of commercial mortgage loans. At March 31, 2021, there were no commercial mortgage loans in process of foreclosure. At March 31, 2021, we held residential mortgage loan investments with an amortized cost and fair value of $79.5 million and $80.3 million, respectively. At March 31, 2021, there were 15 residential mortgage loans that were noncurrent with a carrying value of $4.8 million (of which, 11 such loans with a carrying value of $3.7 million were in forbearance and 4 loans with a carrying value of $1.1 million were in foreclosure). There were no other mortgage loans that were noncurrent at March 31, 2021.
The following table provides the amortized cost by year of origination and estimated fair value of our outstanding commercial mortgage loans and the underlying collateral as of March 31, 2021 (dollars in millions):
Estimated fair
value
Loan-to-value ratio (a)(b)2020201920182017PriorTotal amortized costMortgage loansCollateral
Less than 60%$28.8 $88.2 $138.9 $83.6 $643.2 $982.7 $1,026.4 $2,838.7 
60% to less than 70%— — 8.5 10.7 78.0 97.2 99.3 148.8 
70% to less than 80%18.7 12.2 — — 42.6 73.5 71.6 101.0 
80% to less than 90%— — — — 63.6 63.6 60.0 76.5 
90% or greater— — — — 10.0 10.0 7.4 10.7 
Total$47.5 $100.4 $147.4 $94.3 $837.4 $1,227.0 $1,264.7 $3,175.7 
________________
(a)Loan-to-value ratios are calculated as the ratio of: (i) the amortized cost of the commercial mortgage loans; to (ii) the estimated fair value of the underlying collateral.
(b)There were no commercial mortgage loan originations in the first three months of 2021.

The following table summarizes changes in the allowance for credit losses related to mortgage loans for the three months ended March 31, 2021 (dollars in millions):
Mortgage loans
Allowance for credit losses at December 31, 2020$11.8 
Current period provision for expected credit losses(3.0)
Initial allowance recognized for purchased financial assets with credit deterioration— 
Write-offs charged against the allowance— 
Recoveries of amounts previously written off— 
Allowance for credit losses at March 31, 2021$8.8 

The following table summarizes changes in the allowance for credit losses related to mortgage loans for the three months ended March 31, 2020 (dollars in millions):
Mortgage loans
Allowance for credit losses at January 1, 2020$6.7 
Current period provision for expected credit losses1.6 
Initial allowance recognized for purchased financial assets with credit deterioration— 
Write-offs charged against the allowance— 
Recoveries of amounts previously written off— 
Allowance for credit losses at March 31, 2020$8.3 
Net Realized Investment Gains (Losses)

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

Three months ended
March 31,
 20212020
Fixed maturity securities, available for sale: 
Gross realized gains on sale$13.2 $11.9 
Gross realized losses on sale(13.8)(21.4)
Change in allowance for credit losses and other-than-temporary impairment losses(3.1)(25.9)
Net realized investment losses from fixed maturities(3.7)(35.4)
Equity securities, including change in fair value (a)(1.8)(15.7)
Change in allowance for credit losses and other-than-temporary impairment losses of other investments (b)12.7 (29.5)
Other (c)(10.0)(34.9)
Net realized investment losses$(2.8)$(115.5)
_________________
(a)    Changes in the estimated fair value of equity securities (that are still held as of the end of the respective periods) were $(1.3) million and $(15.7) million for the three months ended March 31, 2021 and 2020, respectively.
(b)    Changes in the allowance for credit losses in the three months ended March 31, 2021 and 2020 includes $9.7 million and $(27.8) million, respectively, related to investments held by variable interest entities ("VIEs").
(c)    Change in the estimated fair value of trading securities that we have elected the fair value option (that are still held as of the end of the respective periods) were $(1.6) million and $(26.8) million in the three months ended March 31, 2021 and 2020, respectively.

During the first three months of 2021, we recognized net realized investment losses of $2.8 million, which were comprised of: (i) $6.0 million of net losses from the sales of investments; (ii) $1.8 million of losses related to equity securities, including the change in fair value; (iii) the decrease in fair value of certain fixed maturity investments with embedded derivatives of $1.6 million; (iv) the decrease in fair value of embedded derivatives related to a modified coinsurance agreement of $3.0 million; and (v) a decrease in the allowance for credit losses of $9.6 million.

During the first three months of 2020, we recognized net realized investment losses of $115.5 million, which were comprised of: (i) $11.7 million of net losses from the sales of investments; (ii) $15.7 million of losses related to equity securities, including the change in fair value; (iii) the decrease in fair value of certain fixed maturity investments with embedded derivatives of $26.7 million; (iv) the decrease in fair value of embedded derivatives related to a modified coinsurance agreement of $6.0 million; and (v) an increase in the allowance for credit losses and other-than-temporary impairment losses of $55.4 million.

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

At March 31, 2021, there were no fixed maturity investments in default.

During the first three months of 2021, the $13.8 million of gross realized losses on sales of $215.5 million of fixed maturity securities, available for sale related to various corporate securities. Securities are generally sold at a loss following unforeseen issuer-specific events or conditions or shifts in perceived relative values.  These reasons include but are not limited to: (i) changes in the investment environment; (ii) expectation that the market value could deteriorate; (iii) our desire to reduce
our exposure to an asset class, an issuer or an industry; (iv) prospective or actual changes in credit quality; or (v) changes in expected portfolio cash flows.

During the first three months of 2020, the $21.4 million of gross realized losses on sales of $174.3 million of fixed maturity securities, available for sale, included: (i) $6.9 million related to various corporate securities; (ii) $11.7 million related to commercial mortgage-backed securities: and (iii) $2.8 million related to various other investments.

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.
v3.21.1
EARNINGS PER SHARE
3 Months Ended
Mar. 31, 2021
Earnings Per Share [Abstract]  
EARNINGS PER SHARE
EARNINGS PER SHARE

A reconciliation of net income and shares used to calculate basic and diluted earnings per share is as follows (dollars in millions and shares in thousands):
Three months ended
March 31,
 20212020 (a)
Net income (loss) for basic and diluted earnings per share$147.4 $(21.2)
Shares:  
Weighted average shares outstanding for basic earnings per share134,140 145,829 
Effect of dilutive securities on weighted average shares:  
Amounts related to employee benefit plans2,513 — 
Weighted average shares outstanding for diluted earnings per share136,653 145,829 
_________________
(a)    In the three months ended March 31, 2020, equivalent common shares of 768,000 (related to stock options, restricted stock and performance units) were not included in the diluted weighted average shares outstanding, because their inclusion would have been antidilutive due to the net loss recognized by the Company in such period.
Basic earnings per common share is computed by dividing net income by the weighted average number of common shares outstanding for the period.  Restricted shares (including our performance units) are not included in basic earnings per share until vested.  Diluted earnings per share reflect the potential dilution that could occur if outstanding stock options were exercised and restricted stock was vested.  The dilution from options and restricted shares is calculated using the treasury stock method.  Under this method, we assume the proceeds from the exercise of the options (or the unrecognized compensation expense with respect to restricted stock and performance units) will be used to purchase shares of our common stock at the average market price during the period, reducing the dilutive effect of the exercise of the options (or the vesting of the restricted stock and performance units).
v3.21.1
BUSINESS SEGMENTS
3 Months Ended
Mar. 31, 2021
Segment Reporting [Abstract]  
BUSINESS SEGMENTS
BUSINESS SEGMENTS

We view our operations as three insurance product lines (annuity, health and life) and the investment and fee revenue segments. Our segments are aligned based on their common characteristics, comparability of profit margins and the way management makes operating decisions and assesses the performance of the business.

Our insurance product line segments (including annuity, health and life) include marketing, underwriting and administration of the policies our insurance subsidiaries sell. The business written in each of the three product categories through all of our insurance subsidiaries is aggregated allowing management and investors to assess the performance of each product category. When analyzing profitability of these segments, we use insurance product margin as the measure of profitability, which is: (i) insurance policy income; and (ii) net investment income allocated to the insurance product lines; less (i) insurance policy benefits and interest credited to policyholders; and (ii) amortization, non-deferred commissions and advertising expense. Net investment income is allocated to the product lines using the book yield of investments backing the block of business, which is applied to the average insurance liabilities, net of insurance intangibles, for the block in each period.

Income from insurance products is the sum of the insurance margins of the annuity, health and life product lines, less expenses allocated to the insurance lines. It excludes the income from our fee income business, investment income not allocated to product lines, net expenses not allocated to product lines (primarily holding company expenses) and income taxes. Management believes insurance product margin and income from insurance products help provide a better understanding of the business and a more meaningful analysis of the results of our insurance product lines.

We market our insurance products through the Consumer and Worksite Divisions that reflect the customers served by the Company.

The Consumer Division serves individual consumers, engaging with them on the phone, online, face-to-face with agents, or through a combination of sales channels. This structure unifies consumer capabilities into a single division and integrates the strength of our agent sales forces and industry-leading direct-to-consumer business with proven experience in advertising, web/digital and call center support.

The Worksite Division focuses on worksite and group sales for businesses, associations, and other membership groups, interacting with customers at their place of employment. By creating a dedicated Worksite Division, we are bringing a sharper focus to this high-growth business while further capitalizing on the strength of our recent acquisitions of Web Benefits Design Corporation ("WBD") in April 2019 and DirectPath in February 2021. Sales in the Worksite Division have been particularly adversely impacted by the COVID-19 pandemic given the challenges of interacting with customers at their place of employment.

The Consumer and Worksite Divisions are primarily focused on marketing insurance products, several types of which are sold in both divisions and underwritten in the same manner. Sales of group underwritten policies are currently not significant, but are expected to increase within the Worksite Division.

The investment segment involves the management of our capital resources, including investments and the management of corporate debt and liquidity. Our measure of profitability of this segment is the total net investment income not allocated to the insurance products. Investment income not allocated to product lines represents net investment income less: (i) equity returns credited to policyholder account balances; (ii) the investment income allocated to our product lines; (iii) interest expense on notes payable and investment borrowings; and (iv) certain expenses related to benefit plans that are offset by special-purpose investment income. Investment income not allocated to product lines includes investment income on investments in excess of average insurance liabilities, investments held by our holding companies, the spread we earn from the Federal Home Loan Bank ("FHLB") investment borrowing program and variable components of investment income (including call and prepayment income, adjustments to returns on structured securities due to cash flow changes, income (loss) from company-owned life insurance ("COLI") and alternative investments income not allocated to product lines), net of interest expense on corporate debt.

Our fee and other revenue segment includes the earnings generated from sales of third-party insurance products, services provided by WBD (our wholly owned on-line benefit administration firm), DirectPath (a national provider of year-round technology-driven employee benefits management services) and the operations of our broker-dealer and registered investment advisor.
Expenses not allocated to product lines include the expenses of our corporate operations, excluding interest expense on debt.

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

The net realized investment gains (losses), fair value changes in embedded derivative liabilities (net of related amortization), fair value changes related to the agent deferred compensation plan and other non-operating items consisting primarily of earnings attributable to VIEs depend on market conditions or represent unusual items that do not necessarily relate to the underlying business of our segments.  Net realized investment gains (losses) and fair value changes in embedded derivative liabilities (net of related amortization) may affect future earnings levels since our underlying business is long-term in nature and changes in our investment portfolio may impact our ability to earn the assumed interest rates needed to maintain the profitability of our business.
Operating information by segment is as follows (dollars in millions):
Three months ended
March 31,
 20212020
Revenues:  
Annuity:  
Insurance policy income$5.4 $5.6 
Net investment income115.7 117.4 
Total annuity revenues121.1 123.0 
Health:
Insurance policy income416.5 429.0 
Net investment income71.5 70.4 
Total health revenues 488.0 499.4 
Life:
Insurance policy income210.5 194.1 
Net investment income35.8 34.3 
Total life revenues246.3 228.4 
Change in market values of the underlying options supporting the fixed index annuity and life products (offset by market value changes credited to policyholder balances)42.5 (136.5)
Investment income not allocated to product lines64.9 72.4 
Fee revenue and other income:
Fee income32.3 28.8 
Amounts netted in expenses not allocated to product lines6.8 1.8 
Total segment revenues$1,001.9 $817.3 


(continued on next page)
(continued from previous page)
Three months ended
March 31,
 20212020
Expenses:
Annuity:
Insurance policy benefits$6.2 $5.5 
Interest credited38.7 42.0 
Amortization and non-deferred commissions18.3 16.0 
Total annuity expenses 63.2 63.5 
Health:
Insurance policy benefits306.6 353.8 
Amortization and non-deferred commissions56.7 58.7 
Total health expenses363.3 412.5 
Life:
Insurance policy benefits163.6 131.9 
Interest credited 10.6 10.3 
Amortization, non-deferred commissions and advertising expense45.0 41.9 
Total life expenses219.2 184.1 
Allocated expenses 141.1 136.6 
Expenses not allocated to product lines28.8 15.6 
Market value changes of options credited to fixed index annuity and life policyholders42.5 (136.5)
Amounts netted in investment income not allocated to product lines:
Interest expense 18.2 22.7 
Other expenses 3.7 (7.7)
Expenses netted in fee revenue:
Distribution and commission expenses25.0 21.0 
Total segment expenses905.0 711.8 
Pre-tax measure of profitability:
Annuity margin57.9 59.5 
Health margin124.7 86.9 
Life margin27.1 44.3 
Total insurance product margin209.7 190.7 
Allocated expenses(141.1)(136.6)
Income from insurance products68.6 54.1 
Fee income7.3 7.8 
Investment income not allocated to product lines43.0 57.4 
Expenses not allocated to product lines(22.0)(13.8)
Operating earnings before taxes 96.9 105.5 
Income tax expense on operating income 21.7 21.2 
Net operating income $75.2 $84.3 
A reconciliation of segment revenues and expenses to consolidated revenues and expenses and net income (loss) is as follows (dollars in millions):
Three months ended
March 31,
 20212020
Total segment revenues$1,001.9 $817.3 
Net realized investment gains (losses)(2.8)(115.5)
Revenues related to earnings attributable to VIEs6.9 10.7 
Fee revenue related to transition services agreement— 4.7 
Consolidated revenues1,006.0 717.2 
Total segment expenses905.0 711.8 
Insurance policy benefits - fair value changes in embedded derivative liabilities
(109.1)83.8 
Amortization related to fair value changes in embedded derivative liabilities
27.0 (17.1)
Amortization related to net realized investment gains (losses)— (3.4)
Expenses attributable to VIEs6.3 11.0 
Fair value changes related to agent deferred compensation plan(13.2)— 
Expenses related to transition services agreement— 2.1 
Consolidated expenses816.0 788.2 
Income (loss) before tax190.0 (71.0)
Income tax expense (benefit):
Tax expense (benefit) on period income (loss)42.6 (15.8)
Valuation allowance for deferred tax assets and other tax items— (34.0)
Net income (loss)$147.4 $(21.2)
v3.21.1
ACCOUNTING FOR DERIVATIVES
3 Months Ended
Mar. 31, 2021
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
ACCOUNTING FOR DERIVATIVES
ACCOUNTING FOR DERIVATIVES

Our freestanding and embedded derivatives, which are not designated as hedging instruments, are held at fair value and are summarized as follows (dollars in millions):
Fair value
March 31,
2021
December 31, 2020
Assets:
Other invested assets:
Fixed index call options$235.5 $216.7 
Other2.5 — 
Reinsurance receivables(1.6)1.4 
Total assets$236.4 $218.1 
Liabilities:
Future policy benefits:
Fixed index products$1,549.3 $1,644.5 
Total liabilities$1,549.3 $1,644.5 

We are required to establish an embedded derivative related to a modified coinsurance agreement pursuant to which we assume the risks of a block of health insurance business. The embedded derivative represents the mark-to-market adjustment for approximately $110 million in underlying investments held by the ceding reinsurer at March 31, 2021.

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.  The notional amount of these options were $2.4 billion at both March 31, 2021 and December 31, 2020.

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 recognized in net income.
The following table provides the pre-tax gains (losses) recognized in net income for derivative instruments, which are not designated as hedges for the periods indicated (dollars in millions):
Three months ended
March 31,
20212020
Net investment income (loss) from policyholder and other special-purpose portfolios:
Fixed index call options$43.6 $(136.7)
Net realized gains (losses):
Embedded derivative related to modified coinsurance agreement(3.0)(6.0)
Insurance policy benefits:
Embedded derivative related to fixed index annuities163.5 (76.7)
Total$204.1 $(219.4)

Derivative Counterparty Risk

If the counterparties to the call options fail to meet their obligations, we may recognize a loss.  We limit our exposure to such a loss by diversifying among several counterparties believed to be strong and creditworthy.  At March 31, 2021, all of our counterparties were rated "A" or higher by S&P Global Ratings ("S&P").

The Company and its subsidiaries are parties to master netting arrangements with its counterparties related to entering into various derivative contracts.

The following table summarizes information related to derivatives with master netting arrangements or collateral as of March 31, 2021 and December 31, 2020 (dollars in millions):
Gross amounts not offset in the balance sheet
Gross amounts recognizedGross amounts offset in the balance sheetNet amounts of assets presented in the balance sheetFinancial instrumentsCash collateral receivedNet amount
March 31, 2021:
Fixed index call options$235.5 $— $235.5 $— $— $235.5 
December 31, 2020:
Fixed index call options216.7 — 216.7 — — 216.7 
v3.21.1
REINSURANCE
3 Months Ended
Mar. 31, 2021
Insurance [Abstract]  
REINSURANCE
REINSURANCE

The cost of reinsurance ceded totaled $54.8 million and $84.0 million in the first quarters of 2021 and 2020, respectively.  We deduct this cost from insurance policy income.  Reinsurance recoveries netted against insurance policy benefits totaled $92.3 million and $106.0 million in the first quarters of 2021 and 2020, 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 $5.3 million and $6.0 million in the first quarters of 2021 and 2020, respectively. Insurance policy benefits related to reinsurance assumed totaled $8.6 million and $8.4 million in the first quarters of 2021 and 2020, respectively.
v3.21.1
INCOME TAXES
3 Months Ended
Mar. 31, 2021
Income Tax Disclosure [Abstract]  
INCOME TAXES
INCOME TAXES

The Company's interim tax expense is based upon the estimated annual effective tax rate for the respective period. Under authoritative guidance, certain items are required to be excluded from the estimated annual effective tax rate calculation. Such items include changes in judgment about the realizability of deferred tax assets resulting from changes in projections of income expected to be available in future years, and items deemed to be unusual, infrequent, or that cannot be reliably estimated. In these cases, the actual tax expense or benefit applicable to that item is treated discretely and is reported in the same period as the related item. The components of income tax expense are as follows (dollars in millions):

Three months ended
March 31,
 20212020
Current tax expense (benefit)$14.0 $(63.6)
Deferred tax expense28.6 47.8 
Income tax expense (benefit) calculated based on estimated annual effective tax rate42.6 (15.8)
Income tax benefit on discrete items:
Carryback of net operating losses to years with a higher statutory corporate rate pursuant to provisions of the CARES Act (as defined below)— (34.0)
Total income tax expense (benefit)$42.6 $(49.8)

The Coronavirus Aid, Relief, and Economic Security (“CARES”) Act, a tax-and-spending package intended to provide economic relief to address the impact of the COVID-19 pandemic, was signed into law in March 2020. Provisions in the CARES Act permitted net operating loss carryforwards ("NOLs") arising in a taxable year beginning after December 31, 2017, and before January 1, 2021 to be allowed as a carryback to each of the five taxable years preceding the taxable year of such loss. Accordingly, we were able to carryback the NOL created in 2018 related to the long-term care reinsurance transaction to 2017 and 2016 resulting in a $34.0 million tax benefit in the first three months of 2020 due to the difference in tax rates between the current enacted rate of 21% and the enacted rate in 2016 and 2017 of 35%. This provision also accelerated the utilization of approximately $375 million of life NOLs and restored approximately $130 million of non-life NOLs. Further, the CARES Act temporarily repealed the 80 percent limitation for taxable years beginning before January 1, 2021 (as required under the Tax Cuts and Job Act (the "Tax Reform Act")). This provision resulted in the acceleration of approximately $105 million of life NOLs and restored approximately $35 million of non-life NOLs. Our current income tax asset at March 31, 2021 and December 31, 2020, includes a receivable of $99.2 million related to refunds resulting from the NOL utilization provisions of the CARES Act.

A reconciliation of the U.S. statutory corporate tax rate to the estimated annual effective rate, reflected in the consolidated statement of operations is as follows:
 
Three months ended
March 31,
 20212020
U.S. statutory corporate rate21.0 %21.0 %
Non-taxable income and nondeductible benefits, net(.3)2.7 
State taxes1.7 (1.4)
Estimated annual effective tax rate calculated before discrete items22.4 22.3 
Impact on effective tax rate from discrete items:
Carryback of net operating losses to years with a higher statutory corporate rate pursuant to provisions of the CARES Act— 47.8 
Effective tax rate22.4 %70.1 %

The components of the Company's income tax assets and liabilities are summarized below (dollars in millions):
March 31,
2021
December 31,
2020
Deferred tax assets:  
Net federal operating loss carryforwards$321.6 $339.2 
Net state operating loss carryforwards1.5 2.7 
Insurance liabilities370.4 386.4 
Indirect costs allocable to self-constructed real estate assets119.3 105.7 
Other29.3 43.0 
Gross deferred tax assets842.1 877.0 
Deferred tax liabilities:  
Investments(34.5)(29.5)
Present value of future profits and deferred acquisition costs(122.7)(133.8)
Accumulated other comprehensive income(419.4)(604.3)
Gross deferred tax liabilities(576.6)(767.6)
Net deferred tax assets265.5 109.4 
Current income taxes prepaid92.7 90.0 
Income tax assets, net$358.2 $199.4 

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

A 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 using a deferred tax valuation model. Our model is adjusted to reflect changes in our projections of future taxable income including changes resulting from the Tax Reform Act, investment strategies, the impact of the sale or reinsurance of business, the recapture of business previously ceded, tax planning strategies and the COVID-19 pandemic. Our estimates of future taxable income are based on evidence we consider to be objectively verifiable. At March 31, 2021, our projection of future taxable income for purposes of determining the valuation allowance is based on our estimates of such future taxable income through the date our NOLs expire. Such estimates are subject to the risks and uncertainties associated with the COVID-19 pandemic and the extent to which actual impacts differ from the assumptions used in our deferred tax valuation model. Based on our assessment, we have concluded that it is more likely than not that all our deferred tax assets of $265.5 million will be realized through future taxable earnings.

Recovery of our deferred tax asset is dependent on achieving the level of future taxable income projected in our deferred tax valuation model and failure to do so could result in an increase in the valuation allowance in a future period.  Any future increase in the valuation allowance may result in additional income tax expense and reduce shareholders' equity, and such an increase could have a significant impact upon our earnings in the future.
The Internal Revenue Code (the "Code") limits the extent to which losses realized by a non-life entity (or entities) may offset income from a life insurance company (or companies) to the lesser of: (i) 35 percent of the income of the life insurance company; or (ii) 35 percent of the total loss of the non-life entities (including NOLs of the non-life entities). There is no similar limitation on the extent to which losses realized by a life insurance entity (or entities) may offset income from a non-life entity (or entities).

Section 382 of the Code imposes limitations on a corporation's ability to use its NOLs when the company undergoes a 50 percent ownership change over a three-year period.  Future transactions and the timing of such transactions could cause an ownership change for Section 382 income tax purposes.  Such transactions may include, but are not limited to, additional repurchases under our securities repurchase program, issuances of common stock and acquisitions or sales of shares of CNO stock by certain holders of our shares, including persons who have held, currently hold or may accumulate in the future five percent or more of our outstanding common stock for their own account.  Many of these transactions are beyond our control.  If an additional ownership change were to occur for purposes of Section 382, we would be required to calculate an annual restriction on the use of our NOLs to offset future taxable income.  The annual restriction would be calculated based upon the value of CNO's equity at the time of such ownership change, multiplied by a federal long-term tax exempt rate (1.22 percent at March 31, 2021), and the annual restriction could limit our ability to use a substantial portion of our NOLs to offset future taxable income.  We regularly monitor ownership change (as calculated for purposes of Section 382) and, as of March 31, 2021, we were below the 50 percent ownership change level that could limit our ability to utilize our NOLs.

We have $1.5 billion of federal NOLs as of March 31, 2021, as summarized below (dollars in millions):
Net operating loss
Year of expirationcarryforwards
2023$945.0 
202585.2 
2026149.9 
202710.8 
202880.3 
2029213.2 
2030.3 
2031.2 
203244.4 
2033.6 
2034.9 
2035.8 
Total federal non-life NOLs$1,531.6 

Our life NOLs were fully utilized in 2020. Our non-life NOLs can be used to offset 35 percent of life insurance company taxable income and 100 percent of non-life company taxable income until all non-life NOLs are utilized or expire.
We also had deferred tax assets related to NOLs for state income taxes of $1.5 million and $2.7 million at March 31, 2021 and December 31, 2020, respectively.  The related state NOLs are available to offset future state taxable income in certain states and are expected to be fully utilized prior to expiration.
The federal statute of limitations remains open with respect to tax years 2016 through 2020. The Company’s various state income tax returns are generally open for tax years based on individual state statutes of limitation. Generally, for tax years which generate NOLs, capital losses or tax credit carryforwards, the statute remains open until the expiration of the statute of limitations for the tax year in which such carryforwards are utilized. The outcome of tax audits cannot be predicted with certainty. If the Company’s tax audits are not resolved in a manner consistent with management’s expectations, the Company may be required to adjust its provision for income taxes.
v3.21.1
NOTES PAYABLE - DIRECT CORPORATE OBLIGATIONS
3 Months Ended
Mar. 31, 2021
Debt Disclosure [Abstract]  
NOTES PAYABLE - DIRECT CORPORATE OBLIGATIONS
NOTES PAYABLE - DIRECT CORPORATE OBLIGATIONS

The following notes payable were direct corporate obligations of the Company as of March 31, 2021 and December 31, 2020 (dollars in millions):
March 31,
2021
December 31,
2020
5.250% Senior Notes due May 2025
$500.0 $500.0 
5.250% Senior Notes due May 2029
500.0 500.0 
5.125% Subordinated Debentures due November 2060
150.0 150.0 
Revolving Credit Agreement (as defined below)— — 
Unamortized debt issue costs(13.4)(13.8)
Direct corporate obligations$1,136.6 $1,136.2 

Revolving Credit Agreement

On May 19, 2015, the Company entered into a $150.0 million four-year unsecured revolving credit agreement with KeyBank National Association, as administrative agent (the "Agent"), and the lenders from time to time party thereto. On October 13, 2017, the Company entered into an amendment and restatement agreement (the "Amendment Agreement") with respect to its revolving credit agreement (as amended by the Amendment Agreement, the "Revolving Credit Agreement"). The Amendment Agreement, among other things, increased the total commitments available under the revolving credit facility from $150.0 million to $250.0 million, increased the aggregate amount of additional incremental loans the Company may incur from $50.0 million to $100.0 million and extended the maturity date of the revolving credit facility from May 19, 2019 to October 13, 2022. There were no amounts outstanding under the Revolving Credit Agreement during the three months ended March 31, 2021.

The interest rates with respect to loans under the Revolving Credit Agreement are based on, at the Company's option, a floating base rate (defined as a per annum rate equal to the highest of: (i) the federal funds rate plus 0.50%; (ii) the "prime rate" of the Agent; and (iii) the eurodollar rate for a one-month interest period plus an applicable margin based on the Company's unsecured debt rating), or a eurodollar rate plus an applicable margin based on the Company's unsecured debt rating. The margins under the Revolving Credit Agreement range from 1.375 percent to 2.125 percent, in the case of loans at the eurodollar rate, and 0.375 percent to 1.125 percent, in the case of loans at the base rate. In addition, the daily average undrawn portion of the Revolving Credit Agreement accrues a commitment fee payable quarterly in arrears. The applicable margin for, and the commitment fee applicable to, the Revolving Credit Agreement, will be adjusted from time to time pursuant to a ratings-based pricing grid.

The Revolving Credit Agreement requires the Company to maintain (each as calculated in accordance with the Revolving Credit Agreement): (i) a debt to total capitalization ratio of not more than 35.0 percent (such ratio was 25.9 percent at March 31, 2021); (ii) an aggregate ratio of total adjusted capital to company action level risk-based capital for the Company's insurance subsidiaries of not less than 250 percent (such ratio was estimated to be 407 percent at March 31, 2021); and (iii) a minimum consolidated net worth of not less than the sum of (x) $2,674 million plus (y) 50.0 percent of the net equity proceeds received by the Company from the issuance and sale of equity interests in the Company (the Company's consolidated net worth was $3,342.6 million at March 31, 2021 compared to the minimum requirement of $2,705.8 million).
v3.21.1
INVESTMENT BORROWINGS
3 Months Ended
Mar. 31, 2021
Investment Borrowings [Abstract]  
INVESTMENT BORROWINGS
INVESTMENT BORROWINGS

Three of the Company's insurance subsidiaries (Bankers Life and Casualty Company ("Bankers Life"), Washington National Insurance Company ("Washington National") and Colonial Penn Life Insurance Company ("Colonial Penn")) are members of the FHLB.  As members of the FHLB, our insurance subsidiaries have the ability to borrow on a collateralized basis from the FHLB. We are required to hold certain minimum amounts of FHLB common stock as a condition of membership in the FHLB, and additional amounts based on the amount of the borrowings.  At March 31, 2021, the carrying value of the FHLB common stock was $71.0 million.  As of March 31, 2021, 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 March 31, 2021, which are maintained in a custodial account for the benefit of the FHLB.  Substantially all of such investments are classified as fixed maturities, available for sale, in our consolidated balance sheet.  

The following summarizes the terms of the borrowings from the FHLB by our insurance subsidiaries (dollars in millions):
AmountMaturityInterest rate at
borroweddateMarch 31, 2021
$27.2 August 2021
Fixed rate – 2.550%
22.0 May 2022
Variable rate – .541%
100.0 May 2022
Variable rate – .537%
10.0 June 2022
Variable rate – .799%
50.0 July 2022
Variable rate – .595%
50.0 August 2022
Variable rate – .583%
50.0 December 2022
Variable rate – .491%
50.0 December 2022
Variable rate – .491%
22.2 March 2023
Fixed rate – 2.160%
50.0 July 2023
Variable rate – .496%
100.0 July 2023
Variable rate – .498%
50.0 February 2024
Variable rate – .491%
50.0 May 2024
Variable rate – .581%
21.8 May 2024
Variable rate – .591%
50.0 May 2024
Variable rate – .639%
75.0 June 2024
Variable rate – .503%
100.0 July 2024
Variable rate – .548%
15.5 July 2024
Fixed rate – 1.990%
34.5 July 2024
Variable rate – .713%
15.0 July 2024
Variable rate – .662%
25.0 September 2024
Variable rate – .750%
21.7 May 2025
Variable rate – .446%
19.4 June 2025
Fixed rate – 2.940%
125.0 September 2025
Variable rate – .360%
100.0 October 2025
Variable rate – .572%
100.0 October 2025
Variable rate – .597%
57.7 October 2025
Variable rate – .534%
50.0 November 2025
Variable rate – .538%
50.0 January 2026
Variable rate – .573%
50.0 January 2026
Variable rate – .557%
100.0 January 2026
Variable rate – .500%
$1,642.0   

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 March 31, 2021, the aggregate yield maintenance fee to prepay all fixed rate borrowings was $4.3 million.
Interest expense of $2.7 million and $9.1 million in the first three months of 2021 and 2020, respectively, was recognized related to total borrowings from the FHLB.
v3.21.1
CHANGES IN COMMON STOCK
3 Months Ended
Mar. 31, 2021
Equity [Abstract]  
CHANGES IN COMMON STOCK
CHANGES IN COMMON STOCK

In the first three months of 2021, we repurchased 4.1 million shares of common stock for $100.0 million (including $2.2 million of repurchases settled in the second quarter of 2021) under our securities repurchase program. The Company had remaining repurchase authority of $169.3 million as of March 31, 2021. In May 2021, the Company's Board of Directors approved an additional $500.0 million to repurchase the Company's outstanding shares of common stock.
In the first three months of 2021, dividends declared on common stock totaled $16.2 million ($0.12 per common share). In May 2021, the Company increased its quarterly common stock dividend to $0.13 per share from $0.12 per share.
v3.21.1
SALES INDUCEMENTS
3 Months Ended
Mar. 31, 2021
Insurance [Abstract]  
SALES INDUCEMENTS
SALES INDUCEMENTS