CNO FINANCIAL GROUP, INC., 8-K filed on 5/11/2015
Current report filing
DOCUMENT AND ENTITY INFORMATION
12 Months Ended
Dec. 31, 2014
Document and Entity Information [Abstract]
 
Entity Registrant Name
CNO Financial Group, Inc. 
Entity Central Index Key
0001224608 
Document Type
8-K 
Document Period End Date
Dec. 31, 2014 
Current Fiscal Year End Date
--12-31 
Document Fiscal Year Focus
2014 
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 
CONSOLIDATED BALANCE SHEET (USD $)
In Millions, unless otherwise specified
Dec. 31, 2014
Dec. 31, 2013
Investments:
 
 
Fixed maturities, available for sale, at fair value (amortized cost: 2014 - $18,408.1; 2013 - $21,891.8)
$ 20,634.9 
$ 23,204.6 
Equity securities at fair value (cost: 2014 - $400.5; 2013 - $206.7)
419.0 
223.0 
Mortgage loans
1,691.9 
1,729.5 
Policy loans
106.9 
277.0 
Trading securities
244.9 
247.6 
Investments held by variable interest entities
1,367.1 
1,046.7 
Other invested assets
443.6 
423.3 
Total investments
24,908.3 
27,151.7 
Cash and cash equivalents - unrestricted
611.6 
699.0 
Cash and cash equivalents held by variable interest entities
68.3 
104.3 
Accrued investment income
242.9 
286.9 
Present value of future profits
489.4 
679.3 
Deferred acquisition costs
770.6 
968.1 
Reinsurance receivables
2,991.1 
3,392.1 
Income tax assets, net
758.7 
1,147.2 
Assets held in separate accounts
5.6 
10.3 
Other assets
337.7 
341.7 
Total assets
31,184.2 
34,780.6 
Liabilities for insurance products:
 
 
Policyholder account balances
10,707.2 
12,776.4 
Future policy benefits
10,835.4 
11,222.5 
Liability for policy and contract claims
468.7 
566.0 
Unearned and advanced premiums
291.8 
300.6 
Liabilities related to separate accounts
5.6 
10.3 
Other liabilities
587.6 
590.6 
Payable to reinsurer
590.3 
Investment borrowings
1,519.2 
1,900.0 
Borrowings related to variable interest entities
1,286.1 
1,012.3 
Notes payable – direct corporate obligations
794.4 
856.4 
Total liabilities
26,496.0 
29,825.4 
Commitments and Contingencies
   
   
Shareholders' equity:
 
 
Common stock ($0.01 par value, 8,000,000,000 shares authorized, shares issued and outstanding: 2014 – 203,324,458; 2013 – 220,323,823)
2.0 
2.2 
Additional paid-in capital
3,732.4 
4,092.8 
Accumulated other comprehensive income
825.3 
731.8 
Retained earnings
128.5 
128.4 
Total shareholders' equity
4,688.2 
4,955.2 
Total liabilities and shareholders' equity
$ 31,184.2 
$ 34,780.6 
CONSOLIDATED BALANCE SHEET (Parentheticals) (USD $)
In Millions, except Share data, unless otherwise specified
Dec. 31, 2014
Dec. 31, 2013
Investments:
 
 
Fixed maturities, available for sale, amortized cost
$ 18,408.1 
$ 21,891.8 
Equity securities cost
$ 400.5 
$ 206.7 
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)
203,324,458 
220,323,823 
Common stock, shares outstanding (in shares)
203,324,458 
220,323,823 
CONSOLIDATED STATEMENT OF OPERATIONS (USD $)
In Millions, except Share data in Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2014
Dec. 31, 2013
Dec. 31, 2012
Revenues:
 
 
 
Insurance policy income
$ 2,629.7 
$ 2,744.7 
$ 2,755.4 
Net investment income (loss):
 
 
 
General account assets
1,301.0 
1,405.8 
1,398.5 
Policyholder and reinsurer accounts and other special-purpose portfolios
126.4 
258.2 
87.9 
Realized investment gains (losses):
 
 
 
Net realized investment gains, excluding impairment losses
64.0 
45.0 
118.9 
Other-than-temporary impairment losses:
 
 
 
Total other-than-temporary impairment losses
(27.3)
(11.6)
(37.8)
Portion of other-than-temporary impairment losses recognized in accumulated other comprehensive income
Net impairment losses recognized
(27.3)
(11.6)
(37.8)
Total realized gains
36.7 
33.4 
81.1 
Fee revenue and other income
50.9 
34.0 
19.8 
Total revenues
4,144.7 
4,476.1 
4,342.7 
Benefits and expenses:
 
 
 
Insurance policy benefits
2,586.2 
2,839.7 
2,763.9 
Net loss on sale of subsidiary and (gain) loss on reinsurance transactions
239.8 
98.4 
Interest expense
92.8 
105.3 
114.6 
Amortization
247.4 
296.3 
289.0 
Loss on extinguishment or modification of debt
0.6 
65.4 
200.2 
Other operating costs and expenses
802.8 
766.2 
819.3 
Total benefits and expenses
3,969.6 
4,171.3 
4,187.0 
Income before income taxes
175.1 
304.8 
155.7 
Income tax expense (benefit):
 
 
 
Tax expense on period income
159.2 
128.3 
106.2 
Valuation allowance for deferred tax assets and other tax items
(35.5)
(301.5)
(171.5)
Net income
$ 51.4 
$ 478.0 
$ 221.0 
Basic:
 
 
 
Weighted average shares outstanding (in shares)
212,917 
221,628 
233,685 
Net income (in dollars per share)
$ 0.24 
$ 2.16 
$ 0.95 
Diluted:
 
 
 
Weighted average shares outstanding (in shares)
217,655 
232,702 
281,427 
Net income (in dollars per share)
$ 0.24 
$ 2.06 
$ 0.83 
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (USD $)
In Millions, unless otherwise specified
12 Months Ended
Dec. 31, 2014
Dec. 31, 2013
Dec. 31, 2012
Statement of Comprehensive Income [Abstract]
 
 
 
Net income (loss)
$ 51.4 
$ 478.0 
$ 221.0 
Other comprehensive income, before tax:
 
 
 
Unrealized gains (losses) for the period
942.9 
(1,627.4)
1,336.2 
Amortization of present value of future profits and deferred acquisition costs
(113.5)
175.2 
(107.1)
Amount related to premium deficiencies assuming the net unrealized gains had been realized
(624.6)
774.2 
(531.0)
Reclassification adjustments:
 
 
 
For net realized investment gains included in net income (loss)
(59.0)
(39.8)
(68.7)
For amortization of the present value of future profits and deferred acquisition costs related to net realized investment gains included in net income (loss)
1.0 
1.6 
6.5 
Unrealized gains (losses) on investments
146.8 
(716.2)
635.9 
Change related to deferred compensation plan
(1.4)
0.8 
0.4 
Other comprehensive income (loss) before tax
145.4 
(715.4)
636.3 
Income tax (expense) benefit related to items of accumulated other comprehensive income
(51.9)
249.8 
(220.5)
Other comprehensive income (loss), net of tax
93.5 
(465.6)
415.8 
Comprehensive income (loss)
$ 144.9 
$ 12.4 
$ 636.8 
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (USD $)
In Millions, unless otherwise specified
Total
Common Stock Including Additional Paid in Capital [Member]
Accumulated other comprehensive income [Member]
Retained earnings (accumulated deficit) [Member]
Balance, beginning of period at Dec. 31, 2011
$ 4,613.8 
$ 4,364.3 
$ 781.6 
$ (532.1)
Increase (Decrease) in Stockholders' Equity [Roll Forward]
 
 
 
 
Net income
221.0 
 
 
221.0 
Change in unrealized appreciation (depreciation) of investments (net of applicable income tax expense (benefit))
407.8 
 
407.8 
 
Change in noncredit component of impairment losses on fixed maturities, available for sale (net of applicable income tax expense (benefit))
8.0 
 
8.0 
 
Extinguishment of beneficial conversion feature related to the repurchase of convertible debentures
(24.0)
(24.0)
 
 
Cost of common stock and warrants repurchased
(180.2)
(180.2)
 
 
Dividends on common stock
(13.9)
 
 
(13.9)
Stock options, restricted stock and performance units
16.8 
16.8 
 
 
Balance, end of period at Dec. 31, 2012
5,049.3 
4,176.9 
1,197.4 
(325.0)
Increase (Decrease) in Stockholders' Equity [Roll Forward]
 
 
 
 
Net income
478.0 
 
 
478.0 
Change in unrealized appreciation (depreciation) of investments (net of applicable income tax expense (benefit))
(463.7)
 
(463.7)
 
Change in noncredit component of impairment losses on fixed maturities, available for sale (net of applicable income tax expense (benefit))
(1.9)
 
(1.9)
 
Extinguishment of beneficial conversion feature related to the repurchase of convertible debentures
(12.6)
(12.6)
 
 
Cost of common stock and warrants repurchased
(118.4)
(118.4)
 
 
Dividends on common stock
(24.6)
 
 
(24.6)
Conversion of convertible debentures
24.9 
24.9 
 
 
Stock options, restricted stock and performance units
24.2 
24.2 
 
 
Balance, end 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 
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (Parentheticals) (USD $)
In Millions, unless otherwise specified
12 Months Ended
Dec. 31, 2014
Dec. 31, 2013
Dec. 31, 2012
Statement of Stockholders' Equity [Abstract]
 
 
 
Change in unrealized appreciation (depreciation) of investments, applicable income tax expense (benefit)
$ 52.3 
$ (248.7)
$ 216.1 
Change in noncredit component of impairment losses on fixed maturities, available for sale, applicable income tax expense (benefit)
$ (0.4)
$ (1.1)
$ 4.4 
CONSOLIDATED STATEMENT OF CASH FLOWS (USD $)
In Millions, unless otherwise specified
12 Months Ended
Dec. 31, 2014
Dec. 31, 2013
Dec. 31, 2012
Cash flows from operating activities:
 
 
 
Insurance policy income
$ 2,407.9 
$ 2,464.9 
$ 2,419.7 
Net investment income
1,279.0 
1,387.7 
1,385.8 
Fee revenue and other income
50.9 
34.0 
19.8 
Insurance policy benefits
(1,968.4)
(2,093.8)
(2,096.5)
Payment to reinsurer pursuant to long-term care business reinsured
(590.3)
Interest expense
(81.7)
(95.9)
(109.0)
Deferrable policy acquisition costs
(242.8)
(222.8)
(191.7)
Other operating costs
(728.8)
(745.7)
(786.7)
Taxes
(4.0)
(8.0)
(6.5)
Net cash from operating activities
121.8 1
720.4 
634.9 
Cash flows from investing activities:
 
 
 
Sales of investments
2,090.0 
2,315.8 
2,057.6 
Maturities and redemptions of investments
1,618.2 
2,491.9 
1,967.4 
Purchases of investments
(3,731.6)
(5,367.1)
(4,271.1)
Net sales of trading securities
4.9 
30.0 
60.4 
Change in cash and cash equivalents held by variable interest entities
36.0 
(50.1)
20.2 
Cash and cash equivalents held by subsidiary prior to being sold
(164.7)
Proceeds from sale of subsidiary
231.0 
Other
(27.5)
(23.0)
(31.6)
Net cash provided (used) by investing activities
56.3 
(602.5)
(197.1)
Cash flows from financing activities:
 
 
 
Issuance of notes payable, net
944.5 
Payments on notes payable
(62.9)
(126.9)
(810.6)
Expenses related to extinguishment or modification of debt
(0.6)
(61.6)
(183.0)
Amount paid to extinguish the beneficial conversion feature associated with repurchase of convertible debentures
(12.6)
(24.0)
Issuance of common stock
5.0 
15.1 
3.1 
Payments to repurchase common stock and warrants
(376.5)
(118.4)
(180.2)
Common stock dividends paid
(51.0)
(24.4)
(13.9)
Amounts received for deposit products
1,295.4 
1,298.1 
1,296.7 
Withdrawals from deposit products
(1,347.3)
(1,464.4)
(1,544.9)
Issuance of investment borrowings:
 
 
 
Federal Home Loan Bank
350.0 
500.0 
375.0 
Related to variable interest entities
358.5 
376.3 
246.7 
Payments on investment borrowings:
 
 
 
Federal Home Loan Bank
(367.7)
(250.5)
(375.0)
Related to variable interest entities and other
(88.8)
(132.1)
(0.9)
Investment borrowings - repurchase agreements, net
20.4 
(24.8)
Net cash used by financing activities
(265.5)
(1.4)
(291.3)
Net increase (decrease) in cash and cash equivalents
(87.4)
116.5 
146.5 
Cash and cash equivalents, beginning of year
699.0 
582.5 
436.0 
Cash and cash equivalents, end of year
$ 611.6 
$ 699.0 
$ 582.5 
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.

Prior to 2014, the Company managed its business through the following operating segments: Bankers Life, Washington National and Colonial Penn, which are defined on the basis of product distribution; Other CNO Business, comprised primarily of products we no longer sell actively; and corporate operations, comprised of holding company activities and certain noninsurance company businesses.  As a result of the sale of Conseco Life Insurance Company ("CLIC") which was completed on July 1, 2014 (as further described in the note to the consolidated financial statements entitled "Sale of Subsidiary") and the coinsurance agreements to cede certain long-term care business effective December 31, 2013, management has changed the manner in which it disaggregates the Company's operations for making operating decisions and assessing performance. In periods prior to 2014: (i) the results in the Washington National segment have been adjusted to include the results from the business in the Other CNO Business segment that are being retained; (ii) the Other CNO Business segment included only the long-term care business that was ceded effective December 31, 2013 and the overhead expense of CLIC that is expected to continue after the completion of the sale; and (iii) the CLIC business being sold is excluded from our analysis of business segment results. Beginning on January 1, 2014: (i) the overhead expense of CLIC that is expected to continue after the completion of the sale has been reallocated primarily to the Bankers Life and Washington National segments; (ii) there is no longer an Other CNO Business segment; and (iii) the CLIC business being sold continues to be excluded from our analysis of business segment results. After the completion of the sale of CLIC: (i) the Bankers Life segment includes the results of certain life insurance business that was recaptured from Wilton Reassurance Company ("Wilton Re"); and (ii) the revenues and expenses associated with a transition services agreement and a special support services agreement with Wilton Re are included in our non-operating earnings. Under such agreements, we will receive $30 million in the year ending June 30, 2015 and $20 million in the year ending June 30, 2016. In addition, certain services will continue to be provided in the three years ending June 30, 2019 for an annual fee of $.2 million. The income we receive from these services agreements will offset certain of our overhead costs. If we are not successful in reducing our overhead costs to the same extent as the reduction in fees to be received from Wilton Re over the period of the agreements, our results of operations will be adversely affected. Our prior period segment disclosures have been revised to reflect management's current view of the Company's operating segments. 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 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 markets and distributes Medicare Advantage plans primarily through distribution arrangements with Humana, Inc. and United HealthCare and Medicare Part D prescription drug plans ("PDP") primarily through a distribution arrangement with Coventry Health Care ("Coventry").

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 of Texas, Inc. (a wholly owned subsidiary) 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").

Effective January 1, 2015, we changed our definition of pre-tax operating income to exclude the impact of fair market value changes related to the agent deferred compensation plan, since such impacts are not indicative of our ongoing business and trends in our business. Prior periods have been revised to conform to our current presentation. Pre-tax income is not impacted by this change. Such revisions impacted the following footnotes in the conolidated financial statement: Footnote 1 - Business and Basis of Presentation; and Footnote 16 - Business Segments.

We prepare our financial statements in accordance with accounting principles generally accepted in the United States of America ("GAAP").

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 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 and Reinsurance 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.

Prior to its termination in August 2013, we had a quota-share reinsurance agreement with Coventry that provided Bankers Life with 50 percent of the net premiums and related policy benefits of certain PDP business sold through Bankers Life's career agency force. We accounted for the quota-share agreement as follows:

We recognized premium revenue evenly over the period of the underlying Medicare Part D contracts.

We recognized policyholder benefits and assumed commission expense as incurred.

We recognized risk-share premium adjustments consistent with Coventry's risk-share agreement with the Centers for Medicare and Medicaid Services.
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 $176.7 million, $212.1 million and $220.0 million in 2014, 2013 and 2012, respectively.  We deduct this cost from insurance policy income.  Reinsurance recoveries netted against insurance policy benefits totaled $195.3 million, $196.2 million and $210.2 million in 2014, 2013 and 2012, 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 $35.0 million, $37.4 million and $69.4 million in 2014, 2013 and 2012, respectively.  Reinsurance premiums included amounts assumed pursuant to marketing and quota-share agreements with Coventry of $6.8 million, $19.7 million and $49.9 million, in 2014, 2013 and 2012 respectively. As further described above, we received a notice of Coventry's intent to terminate the PDP quota-share reinsurance agreement in August 2013. The premiums collected from Coventry in 2014 represented adjustments to premiums on such business related to periods prior to the termination of the agreement.

In December 2013, two of our insurance subsidiaries with long-term care business in the former Other CNO Business segment entered into 100% coinsurance agreements ceding $495 million of long-term care reserves to Beechwood Re Ltd. ("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 are 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 are the responsibility of BRe. We recognized a pre-tax loss of $98.4 million in 2013 to reflect: (i) the known loss (or premium deficiency) on the business, as we will not be recognizing additional income in future periods to recover the unamortized additional premium which will be paid to BRe; and (ii) other transaction costs.

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, 2014, our valuation allowance for our net deferred tax assets was $246.0 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 such VIEs are collateralized loan trusts that were established to issue securities to finance the purchase of corporate loans and other permitted investments (including two new VIEs which were consolidated in 2014, one new VIE which was consolidated in 2013 and one new VIE which was consolidated in 2012).  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.
Investment borrowings

Two of the Company's insurance subsidiaries (Washington National and Bankers Life) are members of the Federal Home Loan Bank ("FHLB").  As members of the FHLB, Washington National and Bankers Life have the ability to borrow on a collateralized basis from the FHLB.  Washington National and Bankers Life 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, 2014, the carrying value of the FHLB common stock was $73.5 million.  As of December 31, 2014, collateralized borrowings from the FHLB totaled $1.5 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 $1.8 billion at December 31, 2014, 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 Washington National and Bankers Life (dollars in millions):

Amount
 
Maturity
 
Interest rate at
borrowed
 
date
 
December 31, 2014
$
50.0

 
October 2015
 
Variable rate – 0.511%
100.0

 
June 2016
 
Variable rate – 0.610%
75.0

 
June 2016
 
Variable rate – 0.417%
100.0

 
October 2016
 
Variable rate – 0.413%
50.0

 
November 2016
 
Variable rate – 0.505%
50.0

 
November 2016
 
Variable rate – 0.640%
57.7

 
June 2017
 
Variable rate – 0.587%
50.0

 
August 2017
 
Variable rate – 0.432%
75.0

 
August 2017
 
Variable rate – 0.383%
100.0

 
October 2017
 
Variable rate – 0.661%
50.0

 
November 2017
 
Variable rate – 0.744%
50.0

 
January 2018
 
Variable rate – 0.579%
50.0

 
January 2018
 
Variable rate – 0.571%
50.0

 
February 2018
 
Variable rate – 0.542%
50.0

 
February 2018
 
Variable rate – 0.322%
22.0

 
February 2018
 
Variable rate – 0.566%
100.0

 
May 2018
 
Variable rate – 0.620%
50.0

 
July 2018
 
Variable rate – 0.703%
50.0

 
August 2018
 
Variable rate – 0.352%
50.0

 
January 2019
 
Variable rate – 0.649%
50.0

 
February 2019
 
Variable rate – 0.322%
100.0

 
March 2019
 
Variable rate – 0.642%
21.8

 
July 2019
 
Variable rate – 0.655%
21.8

 
June 2020
 
Fixed rate – 1.960%
28.2

 
August 2021
 
Fixed rate – 2.550%
26.8

 
March 2023
 
Fixed rate – 2.160%
20.5

 
June 2025
 
Fixed rate – 2.940%
$
1,498.8

 
 
 
 


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, 2014, the aggregate yield maintenance fee to prepay all fixed rate borrowings was $1.2 million.

Interest expense of $18.7 million, $27.9 million and $28.0 million in 2014, 2013 and 2012, 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. Pursuant to such agreements, the Company sells securities subject to an obligation to repurchase the same securities. Under these arrangements, the Company may transfer legal control over the assets but still retain effective control through an agreement that both entitles and obligates the Company to repurchase the assets. As a result, these repurchase agreements are accounted for as collateralized financing arrangements (i.e., secured borrowings) and not as a sale and subsequent repurchase of securities. Such borrowings totaled $20.4 million at December 31, 2014 and mature prior to June 30, 2015. We had no such borrowings outstanding at December 31, 2013.

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 annuity 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. 

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 bifurcated from the instrument and 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 for operational ease.
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 $43.4 million and $45.8 million related to multibucket annuity products as of December 31, 2014 and 2013, 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 $5.1 million, $5.0 million and $4.4 million during 2014, 2013 and 2012, respectively.  Amounts amortized totaled $12.4 million, $22.9 million and $27.1 million during 2014, 2013 and 2012, respectively.  The unamortized balance of deferred sales inducements was $67.4 million and $108.6 million at December 31, 2014 and 2013, respectively.  The balance of insurance liabilities for persistency bonus benefits was $1.5 million and $28.9 million at December 31, 2014 and 2013, 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). In 2013 we recorded the net effect of out-of-period adjustment which increased our insurance policy benefits by $4.7 million, increased amortization expense by $2.1 million, increased other operating costs and expenses by $1.5 million, decreased tax expense by $.7 million and decreased our net income by $7.6 million (or 3 cents 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 April 2014, the Financial Accounting Standards Board (the "FASB") issued authoritative guidance changing the criteria for reporting discontinued operations. Under the revised guidance, only disposals of a component or a group of components, including those classified as held for sale, which represent a strategic shift that has or will have a major effect on a company's operations and financial results will be reported as discontinued operations. The guidance is effective prospectively for new disposals occurring after January 1, 2015.

In May 2014, the FASB issued authoritative guidance for recognizing revenue from contracts with customers. Certain contracts with customers are specifically excluded from this guidance, including insurance contracts. The core principle of the new guidance is that an entity should recognize revenue when it transfers promised goods or services in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance also requires additional disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The guidance will be effective for the Company on January 1, 2017 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 June 2014, the FASB issued authoritative guidance on the accounting and disclosure of repurchase-to-maturity transactions and repurchase financings. Under this new accounting guidance, repurchase-to-maturity transactions will be accounted for as secured borrowings rather than sales of an asset, and transfers of financial assets with a contemporaneous repurchase financing arrangement will no longer be evaluated to determine whether they should be accounted for on a combined basis as forward contracts. The new guidance also prescribes additional disclosures particularly on the nature of collateral pledged in the repurchase agreement accounted for as a secured borrowing. The new guidance is effective beginning on January 1, 2015. We do not expect the adoption of this guidance to have a material impact on 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 variable interest entity 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 is effective for interim and annual periods beginning after December 15, 2015. 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. Early adoption is permitted. The Company is currently assessing the impact the guidance will have upon adoption.

Adopted Accounting Standards

In July 2013, the FASB issued authoritative guidance regarding the financial statement presentation of an unrecognized tax benefit when a NOL carryforward, a similar tax loss or a tax credit carryforward exists. Such guidance requires an unrecognized tax benefit, or a portion of an unrecognized tax benefit, to be presented in the financial statements as a reduction to a deferred tax asset for a NOL carryforward, a similar tax loss, or a tax credit carryforward, except under certain circumstances as further described in the guidance. Such guidance does not require new recurring disclosures. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The adoption of this guidance did not have a material impact on our consolidated financial statements.
INVESTMENTS
INVESTMENTS
INVESTMENTS

At December 31, 2014, 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
$
11,177.1

 
$
1,710.5

 
$
(42.1
)
 
$
12,845.5

 
$

United States Treasury securities and obligations of United States government corporations and agencies
138.8

 
30.2

 
(.1
)
 
168.9

 

States and political subdivisions
1,960.6

 
299.3

 
(.7
)
 
2,259.2

 

Debt securities issued by foreign governments
1.8

 
.1

 

 
1.9

 

Asset-backed securities
720.7

 
52.0

 
(1.6
)
 
771.1

 

Collateralized debt obligations
314.9

 
2.4

 
(3.4
)
 
313.9

 

Commercial mortgage-backed securities
1,179.7

 
80.9

 
(.5
)
 
1,260.1

 

Mortgage pass-through securities
4.2

 
.4

 

 
4.6

 

Collateralized mortgage obligations
571.1

 
23.1

 
(.6
)
 
593.6

 

Total investment grade fixed maturities, available for sale
16,068.9

 
2,198.9

 
(49.0
)
 
18,218.8

 

Below-investment grade (a):
 

 
 

 
 

 
 

 
 
Corporate securities
1,139.3

 
29.2

 
(43.0
)
 
1,125.5

 

States and political subdivisions
20.6

 
.2

 
(2.3
)
 
18.5

 

Asset-backed securities
465.9

 
33.8

 
(1.8
)
 
497.9

 

Collateralized debt obligations
10.4

 
.2

 

 
10.6

 

Commercial mortgage-backed securities
15.3

 
.9

 

 
16.2

 

Collateralized mortgage obligations
687.7

 
60.4

 
(.7
)
 
747.4

 
(3.2
)
Total below-investment grade fixed maturities, available for sale
2,339.2

 
124.7

 
(47.8
)
 
2,416.1

 
(3.2
)
Total fixed maturities, available for sale
$
18,408.1

 
$
2,323.6

 
$
(96.8
)
 
$
20,634.9

 
$
(3.2
)
Equity securities
$
400.5

 
$
19.1

 
$
(.6
)
 
$
419.0

 
 
_______________
(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"), Standard & Poor's Corporation ("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.

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-insurance entities, based on NRSRO ratings) as of December 31, 2014 is as follows (dollars in millions):

NAIC designation
 
Amortized cost
 
Estimated fair value
 
Percentage of total estimated fair value
1
 
$
8,930.8

 
$
10,158.6

 
49.2
%
2
 
8,294.0

 
9,310.1

 
45.1

3
 
800.6

 
800.6

 
3.9

4
 
350.2

 
334.5

 
1.6

5
 
32.5

 
31.1

 
.2

6
 

 

 

 
 
$
18,408.1

 
$
20,634.9

 
100.0
%


At December 31, 2013, 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
$
13,404.1

 
$
1,086.2

 
$
(125.8
)
 
$
14,364.5

 
$

United States Treasury securities and obligations of United States government corporations and agencies
71.1

 
2.6

 
(.6
)
 
73.1

 

States and political subdivisions
2,130.2

 
106.8

 
(38.5
)
 
2,198.5

 

Asset-backed securities
869.9

 
41.6

 
(3.9
)
 
907.6

 

Collateralized debt obligations
259.4

 
7.4

 
(.1
)
 
266.7

 

Commercial mortgage-backed securities
1,517.1

 
97.7

 
(5.8
)
 
1,609.0

 

Mortgage pass-through securities
12.7

 
.7

 

 
13.4

 

Collateralized mortgage obligations
936.2

 
34.3

 
(1.3
)
 
969.2

 

Total investment grade fixed maturities, available for sale
19,200.7

 
1,377.3

 
(176.0
)
 
20,402.0

 

Below-investment grade (a):
 

 
 

 
 

 
 

 
 
Corporate securities
1,314.5

 
53.4

 
(32.7
)
 
1,335.2

 

States and political subdivisions
6.4

 

 
(.5
)
 
5.9

 

Asset-backed securities
523.5

 
34.3

 
(3.3
)
 
554.5

 

Collateralized debt obligations
27.6

 
.1

 
(.4
)
 
27.3

 

Collateralized mortgage obligations
819.1

 
60.9

 
(.3
)
 
879.7

 
(4.3
)
Total below-investment grade fixed maturities, available for sale
2,691.1

 
148.7

 
(37.2
)
 
2,802.6

 
(4.3
)
Total fixed maturities, available for sale
$
21,891.8

 
$
1,526.0

 
$
(213.2
)
 
$
23,204.6

 
$
(4.3
)
Equity securities
$
206.7

 
$
16.3

 
$

 
$
223.0

 
 

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, 2014 and 2013, were as follows (dollars in millions):

 
2014
 
2013
Net unrealized appreciation (depreciation) on fixed maturity securities, available for sale, on which an other-than-temporary impairment loss has been recognized
$
5.3

 
$
6.5

Net unrealized gains on all other investments
2,207.7

 
1,322.6

Adjustment to present value of future profits (a)
(149.9
)
 
(47.7
)
Adjustment to deferred acquisition costs
(390.5
)
 
(137.0
)
Adjustment to insurance liabilities
(381.4
)
 

Unrecognized net loss related to deferred compensation plan
(8.5
)
 
(7.1
)
Deferred income tax liabilities
(457.4
)
 
(405.5
)
Accumulated other comprehensive income
$
825.3

 
$
731.8

________
(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, 2014, adjustments to the present value of future profits, deferred acquisition costs, insurance liabilities and deferred tax assets included $(128.8) million, $(142.2) million, $(381.4) million and $232.1 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, 2013, adjustments to the present value of future profits and deferred tax assets included $(27.8) million and $9.9 million, respectively, for premium deficiencies that would exist on certain long-term health 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, 2014, the amortized cost of the Company's below-investment grade fixed maturity securities was $2,339.2 million, or 13 percent of the Company's fixed maturity portfolio. The estimated fair value of the below-investment grade portfolio was $2,416.1 million, or 103 percent of the amortized cost.

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

Contractual Maturity

The following table sets forth the amortized cost and estimated fair value of fixed maturities, available for sale, at December 31, 2014, by contractual maturity.  Actual maturities will differ from contractual maturities because certain borrowers may have the right to call or prepay obligations with or without penalties.  In addition, 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
$
216.5

 
$
220.0

Due after one year through five years
1,966.5

 
2,152.3

Due after five years through ten years
2,689.5

 
2,879.6

Due after ten years
9,565.7

 
11,167.6

Subtotal
14,438.2

 
16,419.5

Structured securities
3,969.9

 
4,215.4

Total fixed maturities, available for sale
$
18,408.1

 
$
20,634.9



Net Investment Income

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

 
2014
 
2013
 
2012
 
 
 
 
 
 
General account assets:
 
 
 
 
 
Fixed maturities
$
1,175.8

 
$
1,290.3

 
$
1,281.1

Equity securities
13.9

 
7.0

 
4.2

Mortgage loans
104.2

 
96.3

 
99.8

Policy loans
11.0

 
17.3

 
17.1

Other invested assets
17.1

 
14.4

 
14.4

Cash and cash equivalents
.6

 
.5

 
.6

Policyholder and reinsurer accounts and other special-purpose portfolios:
 
 
 
 
 
Trading securities (a)
14.8

 
12.8

 
26.3

Options related to fixed index products:
 
 
 
 
 
Option income
118.9

 
77.4

 
.4

Change in value of options
(49.4
)
 
100.1

 
25.1

Other special-purpose portfolios
42.1

 
67.9

 
36.1

Gross investment income
1,449.0

 
1,684.0

 
1,505.1

Less investment expenses
21.6

 
20.0

 
18.7

Net investment income
$
1,427.4

 
$
1,664.0

 
$
1,486.4

_________________
(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 $3.4 million, $.4 million and $4.9 million for the years ended December 31, 2014, 2013 and 2012, respectively.

The estimated fair value of fixed maturity investments and mortgage loans not accruing investment income totaled nil and $.5 million at December 31, 2014 and 2013, respectively.

Net Realized Investment Gains (Losses)

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

 
2014
 
2013
 
2012
Fixed maturity securities, available for sale:
 
 
 
 
 
Gross realized gains on sale
$
64.4

 
$
57.7

 
$
115.4

Gross realized losses on sale
(13.0
)
 
(11.4
)
 
(15.4
)
Impairments:
 
 
 
 
 
Total other-than-temporary impairment losses

 
(7.1
)
 
(1.0
)
Other-than-temporary impairment losses recognized in accumulated other comprehensive income

 

 

Net impairment losses recognized

 
(7.1
)
 
(1.0
)
Net realized investment gains from fixed maturities
51.4

 
39.2

 
99.0

Equity securities
10.1

 
4.8

 
.1

Commercial mortgage loans
(.1
)
 
(1.1
)
 
(3.7
)
Impairments of mortgage loans and other investments
(27.3
)
 
(4.5
)
 
(36.8
)
Other (a)
2.6

 
(5.0
)
 
22.5

Net realized investment gains (losses)
$
36.7

 
$
33.4

 
$
81.1


_________________
(a)
Changes in the estimated fair value for trading securities for we have elected the fair value option still held as of the end of the respective years and included in net realized investment gains (losses) were $7.8 million, $(3.0) million and $20.1 million for the years ended December 31, 2014, 2013 and 2012, respectively.

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) with proceeds of $2.1 billion; (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.

During 2013, we recognized net realized investment gains of $33.4 million, which were comprised of: (i) $51.8 million of net gains from the sales of investments (primarily fixed maturities) with proceeds of $2.3 billion; (ii) the decrease in fair value of certain fixed maturity investments with embedded derivatives of $6.8 million; and (iii) $11.6 million of writedowns of investments for other than temporary declines in fair value recognized through net income.

During 2012, we recognized net realized investment gains of $81.1 million, which were comprised of: (i) $98.8 million of net gains from the sales of investments (primarily fixed maturities) with proceeds of $2.1 billion; (ii) the increase in fair value of certain fixed maturity investments with embedded derivatives of $20.1 million; and (iii) $37.8 million of writedowns of investments for other than temporary declines in fair value recognized through net income.

At December 31, 2014, there were no fixed maturity securities in default or considered nonperforming.

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.  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 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 have 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.

During 2013, the $11.4 million of realized losses on sales of $477.5 million of fixed maturity securities, available for sale, included:  (i) $2.5 million of losses related to the sales of mortgage-backed securities and asset-backed securities; and (ii) $8.9 million of additional losses primarily related to various corporate securities.  

During 2013, the $11.6 million of other-than-temporary impairments we recorded in earnings included:  (i) $5.0 million of losses on a corporate security; (ii) $2.5 million of losses on an equity security; and (iii) $4.1 million of losses primarily related to fixed maturity securities following unforeseen issue-specific events or conditions.

During 2012, the $15.4 million of realized losses on sales of $402.5 million of fixed maturity securities, available for sale, included: (i) $5.2 million of losses related to the sales of mortgage-backed securities and asset-backed securities; and (ii) $10.2 million of additional losses primarily related to various corporate securities.

During 2012, the $37.8 million of other-than-temporary impairments we recorded in earnings included:  (i) $5.4 million of losses related to certain commercial mortgage loans; (ii) $29.9 million of losses on equity securities primarily related to investments obtained through the commutation of an investment made by our Predecessor; and (iii) $2.5 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 2014 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
1
 
$
.5

 
$
.4

Greater than or equal to 6 months and less than 12 months prior to sale
1
 
.2

 
.2

Greater than 12 months prior to sale
2
 
5.2

 
3.9

 
4
 
$
5.9

 
$
4.5



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, 2014, other-than-temporary impairments included in accumulated other comprehensive income of $3.2 million (before taxes and related amortization) related to structured securities.

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, 2014, 2013 and 2012 (dollars in millions):

 
Year ended
 
December 31,
 
2014
 
2013
 
2012
Credit losses on fixed maturity securities, available for sale, beginning of period
$
(1.3
)
 
$
(1.6
)
 
$
(2.0
)
Add:  credit losses on other-than-temporary impairments not previously recognized

 

 

Less:  credit losses on securities sold
.3

 
.3

 
.4

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
$
(1.0
)
 
$
(1.3
)
 
$
(1.6
)
__________
(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, 2014, 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
$
7.8

 
$
7.8

Due after one year through five years
170.7

 
165.3

Due after five years through ten years
508.4

 
474.4

Due after ten years
758.2

 
709.4

Subtotal
1,445.1

 
1,356.9

Structured securities
502.8

 
494.2

Total
$
1,947.9

 
$
1,851.1



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, 2014 (dollars in millions):

 
Number
of issuers
 
Cost
basis
 
Unrealized
loss
 
Estimated
fair value
Less than 6 months
6
 
$
40.9

 
$
(10.3
)
 
$
30.6

Greater than 12 months (a)
1
 
14.1

 
(4.5
)
 
9.6

 
7
 
$
55.0

 
$
(14.8
)
 
$
40.2


________________
(a)
With respect to the security which has been in an unrealized position for greater than 12 months, we have analyzed the issuer's financial performance and determined we expect to recover the entire amortized cost.

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, 2014 (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
 
$
12.1

 
$
(.1
)
 
$
4.6

 
$

 
$
16.7

 
$
(.1
)
States and political subdivisions
 
13.2

 
(.3
)
 
44.5

 
(2.7
)
 
57.7

 
(3.0
)
Corporate securities
 
985.0

 
(65.9
)
 
297.5

 
(19.2
)
 
1,282.5

 
(85.1
)
Asset-backed securities
 
91.2

 
(1.3
)
 
60.5

 
(2.1
)
 
151.7

 
(3.4
)
Collateralized debt obligations
 
184.2

 
(3.4
)
 

 

 
184.2

 
(3.4
)
Commercial mortgage-backed securities
 
46.7

 
(.5
)
 

 

 
46.7

 
(.5
)
Mortgage pass-through securities
 
.5

 

 
.1

 

 
.6

 

Collateralized mortgage obligations
 
79.0

 
(.8
)
 
32.0

 
(.5
)
 
111.0

 
(1.3
)
Total fixed maturities, available for sale
 
$
1,411.9

 
$
(72.3
)
 
$
439.2

 
$
(24.5
)
 
$
1,851.1

 
$
(96.8
)
Equity securities
 
$
13.2

 
$
(.6
)
 
$
.5

 
$

 
$
13.7

 
$
(.6
)

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, 2013 (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
 
$
23.8

 
$
(.6
)
 
$

 
$

 
$
23.8

 
$
(.6
)
States and political subdivisions
 
473.6

 
(30.3
)
 
79.2

 
(8.7
)
 
552.8

 
(39.0
)
Corporate securities
 
2,432.4

 
(137.7
)
 
170.3

 
(20.8
)
 
2,602.7

 
(158.5
)
Asset-backed securities
 
308.4

 
(6.5
)
 
32.5

 
(.7
)
 
340.9

 
(7.2
)
Collateralized debt obligations
 
46.7

 
(.5
)
 

 

 
46.7

 
(.5
)
Commercial mortgage-backed securities
 
161.8

 
(5.8
)
 

 

 
161.8

 
(5.8
)
Mortgage pass-through securities
 
1.6

 

 
1.6

 

 
3.2

 

Collateralized mortgage obligations
 
121.8

 
(1.6
)
 
2.2

 

 
124.0

 
(1.6
)
Total fixed maturities, available for sale
 
$
3,570.1

 
$
(183.0
)
 
$
285.8

 
$
(30.2
)
 
$
3,855.9

 
$
(213.2
)
Equity securities
 
$
.5

 
$

 
$

 
$

 
$
.5

 
$



Based on management's current assessment of investments with unrealized losses at December 31, 2014, 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, 2014 fixed maturity investments included structured securities with an estimated fair value of $4.2 billion (or 20 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 and cost 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 2014.

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 to be 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, 2014 (dollars in millions):

 
Par
value
 
Amortized
cost
 
Estimated
fair value
Below 4 percent
$
1,160.7

 
$
887.8

 
$
908.0

4 percent – 5 percent
759.5

 
717.6

 
757.7

5 percent – 6 percent
1,880.0

 
1,760.1

 
1,882.2

6 percent – 7 percent
533.6

 
496.5

 
544.7

7 percent – 8 percent
85.3

 
87.0

 
101.3

8 percent and above
20.0

 
20.9

 
21.5

Total structured securities
$
4,439.1

 
$
3,969.9

 
$
4,215.4


The amortized cost and estimated fair value of structured securities at December 31, 2014, 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
$
969.4

 
$
1,033.4

 
5.0
%
Planned amortization classes, target amortization classes and accretion-directed bonds
243.3

 
262.0

 
1.3

Commercial mortgage-backed securities
1,195.0

 
1,276.3

 
6.2

Asset-backed securities
1,186.6

 
1,269.0

 
6.1

Collateralized debt obligations
325.3

 
324.5

 
1.6

Other
50.3

 
50.2

 
.2

Total structured securities
$
3,969.9

 
$
4,215.4

 
20.4
%


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, 2014, the mortgage loan balance was primarily comprised of commercial mortgage loans. Approximately 13 percent, 10 percent and 7 percent of the mortgage loan balance were on properties located in California, Texas and Maryland, 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, 2014. 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, 2014 (dollars in millions):

 
 
 
Estimated fair
value
Loan-to-value ratio (a)
Carrying value
 
Mortgage loans
 
Collateral
Less than 60%
$
745.8

 
$
787.4

 
$
1,694.1

60% to 70%
376.9

 
387.1

 
587.0

Greater than 70% to 80%
425.3

 
441.6

 
574.8

Greater than 80% to 90%
139.6

 
147.8

 
165.2

Greater than 90%
4.3

 
5.0

 
4.7

Total
$
1,691.9

 
$
1,768.9

 
$
3,025.8

________________
(a)
Loan-to-value ratios are calculated as the ratio of:  (i) the carrying value of the commercial mortgage loans; to (ii) the estimated fair value of the underlying collateral.

Other Investment Disclosures

Life insurance companies are required to maintain certain investments on deposit with state regulatory authorities. Such assets had aggregate carrying values of $42.3 million and $65.6 million at December 31, 2014 and 2013, respectively.

CNO had no fixed maturity investments that were in excess of 10 percent of shareholders' equity at December 31, 2014 and 2013.
FAIR VALUE MEASUREMENTS
FAIR VALUE MEASUREMENTS
FAIR VALUE MEASUREMENTS

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date and, therefore, represents an exit price, not an entry price.  We carry certain assets and liabilities at fair value on a recurring basis, including fixed maturities, equity securities, trading securities, investments held by VIEs, derivatives, cash and cash equivalents, separate account assets and embedded derivatives.  We carry our COLI policy, which is invested in a series of mutual funds, at its cash surrender value and our hedge fund investments at their net asset values; in both cases, we believe these values approximate their fair values. In addition, we disclose fair value for certain financial instruments, including mortgage loans and policy loans, policyholder account balances, investment borrowings, notes payable and borrowings related to VIEs.

The degree of judgment utilized in measuring the fair value of financial instruments is largely dependent on the level to which pricing is based on observable inputs.  Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our view of market assumptions in the absence of observable market data.  Financial instruments with readily available active quoted prices would be considered to have fair values based on the highest level of observable inputs, and little judgment would be utilized in measuring fair value.  Financial instruments that rarely trade would often have fair value based on a lower level of observable inputs, and more judgment would be utilized in measuring fair value.

Valuation Hierarchy

There is a three-level hierarchy for valuing assets or liabilities at fair value based on whether inputs are observable or unobservable.

Level 1 – includes assets and liabilities valued using inputs that are unadjusted quoted prices in active markets for identical assets or liabilities.  Our Level 1 assets primarily include cash and exchange traded securities.

Level 2 – includes assets and liabilities valued using inputs that are quoted prices for similar assets in an active market, quoted prices for identical or similar assets in a market that is not active, observable inputs, or observable inputs that can be corroborated by market data.  Level 2 assets and liabilities include those financial instruments that are valued by independent pricing services using models or other valuation methodologies.  These models consider various inputs such as credit rating, maturity, corporate credit spreads, reported trades and other inputs that are observable or derived from observable information in the marketplace or are supported by transactions executed in the marketplace.  Financial assets in this category primarily include:  certain publicly registered and privately placed corporate fixed maturity securities; certain government or agency securities; certain mortgage and asset-backed securities; certain equity securities; most investments held by our consolidated VIEs; certain mutual fund and hedge fund investments; most short-term investments; and non-exchange-traded derivatives such as call options. Financial liabilities in this category include investment borrowings, notes payable and borrowings related to VIEs.

Level 3 – includes assets and liabilities valued using unobservable inputs that are used in model-based valuations that contain management assumptions.  Level 3 assets and liabilities include those financial instruments whose fair value is estimated based on broker/dealer quotes, pricing services or internally developed models or methodologies utilizing significant inputs not based on, or corroborated by, readily available market information.  Financial assets in this category include certain corporate securities (primarily certain below-investment grade privately placed securities), certain structured securities, mortgage loans, and other less liquid securities.  Financial liabilities in this category include our insurance liabilities for interest-sensitive products, which includes embedded derivatives (including embedded derivatives related to our fixed index annuity products and to a modified coinsurance arrangement) since their values include significant unobservable inputs including actuarial assumptions.

At each reporting date, we classify assets and liabilities into the three input levels based on the lowest level of input that is significant to the measurement of fair value for each asset and liability reported at fair value.  This classification is impacted by a number of factors, including the type of financial instrument, whether the financial instrument is new to the market and not yet established, the characteristics specific to the transaction and overall market conditions.  Our assessment of the significance of a particular input to the fair value measurement and the ultimate classification of each asset and liability requires judgment and is subject to change from period to period based on the observability of the valuation inputs. Any transfers between levels are reported as having occurred at the beginning of the period. There were no transfers between Level 1 and Level 2 in 2014 and 2013.

The vast majority of our fixed maturity and equity securities, including those held in trading portfolios and those held by consolidated VIEs, short-term and separate account assets use Level 2 inputs for the determination of fair value.  These fair values are obtained primarily from independent pricing services, which use Level 2 inputs for the determination of fair value.  Substantially all of our Level 2 fixed maturity securities and separate account assets were valued from independent pricing services.  Third party pricing services normally derive security prices through recently reported trades for identical or similar securities making adjustments through the reporting date based upon available market observable information.  If there are no recently reported trades, the third party pricing services may use matrix or model processes to develop a security price where future cash flow expectations are discounted at an estimated risk-adjusted market rate.  The number of prices obtained for a given security is dependent on the Company's analysis of such prices as further described below.

For securities that are not priced by pricing services and may not be reliably priced using pricing models, we obtain broker quotes.  These broker quotes are non-binding and represent an exit price, but assumptions used to establish the fair value may not be observable and therefore represent Level 3 inputs.  Approximately 26 percent of our Level 3 fixed maturity securities were valued using unadjusted broker quotes or broker-provided valuation inputs.  The remaining Level 3 fixed maturity investments do not have readily determinable market prices and/or observable inputs.  For these securities, we use internally developed valuations.  Key assumptions used to determine fair value for these securities may include risk premiums, projected performance of underlying collateral and other factors involving significant assumptions which may not be reflective of an active market.  For certain investments, we use a matrix or model process to develop a security price where future cash flow expectations are discounted at an estimated market rate.  The pricing matrix incorporates term interest rates as well as a spread level based on the issuer's credit rating, other factors relating to the issuer, and the security's maturity.  In some instances issuer-specific spread adjustments, which can be positive or negative, are made based upon internal analysis of security specifics such as liquidity, deal size, and time to maturity.

As the Company is responsible for the determination of fair value, we have control processes designed to ensure that the fair values received from third-party pricing sources are reasonable and the valuation techniques and assumptions used appear reasonable and consistent with prevailing market conditions. Additionally, when inputs are provided by third-party pricing sources, we have controls in place to review those inputs for reasonableness. As part of these controls, we perform monthly quantitative and qualitative analysis on the prices received from third parties to determine whether the prices are reasonable estimates of fair value.  The Company's analysis includes:  (i) a review of the methodology used by third party pricing services; (ii) where available, a comparison of multiple pricing services' valuations for the same security; (iii) a review of month to month price fluctuations; (iv) a review to ensure valuations are not unreasonably dated; and (v) back testing to compare actual purchase and sale transactions with valuations received from third parties.  As a result of such procedures, the Company may conclude the prices received from third parties are not reflective of current market conditions.  In those instances, we may request additional pricing quotes or apply internally developed valuations.  However, the number of instances is insignificant and the aggregate change in value of such investments is not materially different from the original prices received.

The categorization of the fair value measurements of our investments priced by independent pricing services was based upon the Company's judgment of the inputs or methodologies used by the independent pricing services to value different asset classes.  Such inputs typically include:  benchmark yields, reported trades, broker dealer quotes, issuer spreads, benchmark securities, bids, offers and reference data.  The Company categorizes such fair value measurements based upon asset classes and the underlying observable or unobservable inputs used to value such investments.

The fair value measurements for derivative instruments, including embedded derivatives requiring bifurcation, are determined based on the consideration of several inputs including closing exchange or over-the-counter market price quotations; time value and volatility factors underlying options; market interest rates; and non-performance risk.  For certain embedded derivatives, we use actuarial assumptions in the determination of fair value.
The categorization of fair value measurements, by input level, for our financial instruments carried at fair value on a recurring basis at December 31, 2014 is as follows (dollars in millions):

 
Quoted prices in active markets
for identical assets or liabilities
(Level 1)
 
Significant other observable inputs
(Level 2)
 
Significant unobservable inputs
 (Level 3)
 
Total
Assets:
 
 
 
 
 
 
 
Fixed maturities, available for sale:
 
 
 
 
 
 
 
Corporate securities
$

 
$
13,605.1

 
$
365.9

 
$
13,971.0

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

 
168.9

 

 
168.9

States and political subdivisions

 
2,242.2

 
35.5

 
2,277.7

Debt securities issued by foreign governments

 
1.9

 

 
1.9

Asset-backed securities

 
1,209.8

 
59.2

 
1,269.0

Collateralized debt obligations

 
324.5

 

 
324.5

Commercial m