CNO FINANCIAL GROUP, INC., 10-Q filed on 5/5/2015
Quarterly Report
DOCUMENT AND ENTITY INFORMATION
3 Months Ended
Mar. 31, 2015
Apr. 22, 2015
Document and Entity Information [Abstract]
Entity Registrant Name
CNO Financial Group, Inc.
Entity Central Index Key
0001224608
Document Type
10-Q
Document Period End Date
Mar. 31, 2015
Current Fiscal Year End Date
--12-31
Document Fiscal Year Focus
2015
Document Fiscal Period Focus
Q1
Entity Filer Category
Large Accelerated Filer
Entity Voluntary Filers
No
Entity Well-known Seasoned Issuer
Yes
Entity Current Reporting Status
Yes
Amendment Flag
false
Entity Common Stock, Shares Outstanding
196,938,910
CONSOLIDATED BALANCE SHEET (unaudited)(USD $)
In Millions, unless otherwise specified
Mar. 31, 2015
Dec. 31, 2014
Investments:
Fixed maturities, available for sale, at fair value (amortized cost: March 31, 2015 - $18,583.5; December 31, 2014 - $18,408.1)
$21,058.4
$20,634.9
Equity securities at fair value (cost: March 31, 2015 - $407.6; December 31, 2014 - $400.5)
427.8
419.0
Mortgage loans
1,699.7
1,691.9
Policy loans
107.1
106.9
Trading securities
252.3
244.9
Investments held by variable interest entities
1,499.8
1,367.1
Other invested assets
453.4
443.6
Total investments
25,498.5
24,908.3
Cash and cash equivalents - unrestricted
426.9
611.6
Cash and cash equivalents held by variable interest entities
158.5
68.3
Accrued investment income
257.2
242.9
Present value of future profits
472.4
489.4
Deferred acquisition costs
767.2
770.6
Reinsurance receivables
2,958.0
2,991.1
Income tax assets, net
669.5
758.7
Assets held in separate accounts
5.5
5.6
Other assets
381.1
337.7
Total assets
31,594.8
31,184.2
Liabilities for insurance products:
Policyholder account balances
10,697.8
10,707.2
Future policy benefits
10,962.8
10,835.4
Liability for policy and contract claims
474.1
468.7
Unearned and advanced premiums
278.9
291.8
Liabilities related to separate accounts
5.5
5.6
Other liabilities
667.1
587.6
Investment borrowings
1,518.9
1,519.2
Borrowings related to variable interest entities
1,461.3
1,286.1
Notes payable direct corporate obligations
774.8
794.4
Total liabilities
26,841.2
26,496.0
Commitments and Contingencies
  
  
Shareholders' equity:
Common stock ($0.01 par value, 8,000,000,000 shares authorized, shares issued and outstanding: March 31, 2015 198,631,949; December 31, 2014 203,324,458)
2.0
2.0
Additional paid-in capital
3,648.1
3,732.4
Accumulated other comprehensive income
934.2
825.3
Retained earnings
169.3
128.5
Total shareholders' equity
4,753.6
4,688.2
Total liabilities and shareholders' equity
$31,594.8
$31,184.2
CONSOLIDATED BALANCE SHEET (unaudited) (Parenthetical)(USD $)
In Millions, except Share data, unless otherwise specified
Mar. 31, 2015
Dec. 31, 2014
Investments:
Fixed maturities, available for sale, amortized cost
$18,583.5
$18,408.1
Equity securities cost
$407.6
$400.5
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)
198,631,949
203,324,458
Common stock, shares outstanding (in shares)
198,631,949
203,324,458
CONSOLIDATED STATEMENT OF OPERATIONS (unaudited)(USD $)
In Millions, except Share data in Thousands, unless otherwise specified
3 Months Ended
Mar. 31, 2015
Mar. 31, 2014
Revenues:
Insurance policy income
$636.5
$685.9
Net investment income (loss):
General account assets
300.1
348.1
Policyholder and reinsurer accounts and other special-purpose portfolios
16.6
20.9
Realized investment gains (losses):
Net realized investment gains (losses), excluding impairment losses
(1.1)
35.3
Net impairment losses recognized (a)
(1.3)1
(11.9)1
Total realized gains
8.9
23.4
Fee revenue and other income
16.2
6.4
Total revenues
978.3
1,084.7
Benefits and expenses:
Insurance policy benefits
606.0
690.3
Loss on sale of subsidiary and transition expenses
4.5
278.6
Interest expense
21.5
24.6
Amortization
66.1
66.7
Other operating costs and expenses
197.9
194.1
Total benefits and expenses
896.0
1,254.3
Income (loss) before income taxes
82.3
(169.6)
Income tax expense:
Tax expense on period income
29.5
39.0
Valuation allowance for deferred tax assets and other tax items
0
19.4
Net income (loss)
52.8
(228.0)
Basic:
Weighted average shares outstanding (in shares)
200,491
220,307
Net income (loss) (in dollars per share)
$0.26
$(1.03)
Diluted:
Weighted average shares outstanding (in shares)
202,275
220,307
Net income (loss) (in dollars per share)
$0.26
$(1.03)
Variable Interest Entity, Gain on Dissolution
$11.3
$0
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (unaudited)(USD $)
In Millions, unless otherwise specified
3 Months Ended
Mar. 31, 2015
Mar. 31, 2014
Consolidated Statement of Comprehensive Income [Abstract]
Net income (loss)
$52.8
$(228.0)
Unrealized gains for the period
269.0
393.8
Amortization of present value of future profits and deferred acquisition costs
(9.2)
(77.4)
Amount related to premium deficiencies assuming the net unrealized gains had been realized
(92.1)
(237.5)
Reclassification adjustments:
For net realized investment gains included in net income (loss)
0.4
(26.0)
For amortization of the present value of future profits and deferred acquisition costs related to net realized investment gains included in net income (loss)
(0.2)
0.4
Unrealized gains on investments
167.9
53.3
Change related to deferred compensation plan
1.3
0.3
Other comprehensive income before tax
169.2
53.6
Income tax expense related to items of accumulated other comprehensive income
(60.3)
(19.2)
Other comprehensive income, net of tax
108.9
34.4
Comprehensive income (loss)
$161.7
$(193.6)
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (unaudited)(USD $)
In Millions, unless otherwise specified
Total
Common stock and additional paid-in capital [Member]
Accumulated other comprehensive income [Member]
Retained earnings (accumulated deficit) [Member]
Balance, beginning of period at Dec. 31, 2013
$4,955.2
$4,095.0
$731.8
$128.4
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Net income (loss)
(228.0)
(228.0)
Change in unrealized appreciation (depreciation) of investments (net of applicable income tax expense (benefit))
34.2
34.2
Change in noncredit component of impairment losses on fixed maturities, available for sale (net of applicable income tax expense (benefit))
0.2
0.2
Cost of common stock repurchased
(41.0)
(41.0)
Dividends on common stock
(13.3)
(13.3)
Stock options, restricted stock and performance units
2.9
2.9
Balance, end of period at Mar. 31, 2014
4,710.2
4,056.9
766.2
(112.9)
Balance, beginning of period at Dec. 31, 2014
4,688.2
3,734.4
825.3
128.5
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Net income (loss)
52.8
52.8
Change in unrealized appreciation (depreciation) of investments (net of applicable income tax expense (benefit))
108.2
108.2
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 repurchased
(86.0)
(86.0)
Dividends on common stock
(12.0)
(12.0)
Stock options, restricted stock and performance units
1.7
1.7
Balance, end of period at Mar. 31, 2015
$4,753.6
$3,650.1
$934.2
$169.3
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (unaudited) (Parenthetical)(USD $)
In Millions, unless otherwise specified
3 Months Ended
Mar. 31, 2015
Mar. 31, 2014
Statement of Stockholders' Equity [Abstract]
Change in unrealized appreciation (depreciation) of investments, applicable income tax expense (benefit)
$59.9
$19.1
Change in noncredit component of impairment losses on fixed maturities, available for sale, applicable income tax expense (benefit)
$0.4
$0.1
CONSOLIDATED STATEMENT OF CASH FLOWS (unaudited)(USD $)
In Millions, unless otherwise specified
3 Months Ended
Mar. 31, 2015
Mar. 31, 2014
Cash flows from operating activities:
Insurance policy income
$592.9
$593.2
Net investment income
281.0
321.1
Fee revenue and other income
16.2
6.4
Insurance policy benefits
(474.9)
(523.7)
Payment to reinsurer pursuant to long-term care business reinsured
0
(590.3)
Interest expense
(17.2)
(18.3)
Deferrable policy acquisition costs
(58.2)
(56.7)
Other operating costs
(216.6)
(211.3)
Taxes
(0.7)
(0.7)
Net cash from operating activities
122.5
(480.3)1
Cash flows from investing activities:
Sales of investments
452.5
807.2
Maturities and redemptions of investments
320.1
469.6
Purchases of investments
(1,019.9)
(1,010.2)
Net sales (purchases) of trading securities
(3.7)
(3.1)
Change in cash and cash equivalents held by variable interest entities
(90.2)
(36.0)
Cash and cash equivalents held by subsidiary prior to being sold
0
(50.0)
Other
(5.2)
(5.9)
Net cash provided (used) by investing activities
(346.4)
171.6
Cash flows from financing activities:
Payments on notes payable
(19.8)
(12.5)
Issuance of common stock
1.0
3.4
Payments to repurchase common stock
(81.5)
(33.0)
Common stock dividends paid
(12.1)
(13.3)
Amounts received for deposit products
286.1
329.6
Withdrawals from deposit products
(322.6)
(368.7)
Issuance of investment borrowings:
Federal Home Loan Bank
0
200.0
Related to variable interest entities
239.3
24.1
Payments on investment borrowings:
Federal Home Loan Bank
(0.2)
(217.2)
Related to variable interest entities and other
(50.9)
(17.3)
Investment borrowings - repurchase agreements, net
(0.1)
0
Net cash provided (used) by financing activities
39.2
(104.9)
Net decrease in cash and cash equivalents
(184.7)
(413.6)
Cash and cash equivalents, beginning of period
611.6
699.0
Cash and cash equivalents, end of period
$426.9
$285.4
BUSINESS AND BASIS OF PRESENTATION
BUSINESS AND BASIS OF PRESENTATION
BUSINESS AND BASIS OF PRESENTATION

The following notes should be read together with the notes to the consolidated financial statements included in our 2014 Annual Report on Form 10-K.

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

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

Our unaudited consolidated financial statements reflect normal recurring adjustments that, in the opinion of management, are necessary for a fair statement of our financial position, results of operations and cash flows for the periods presented.  As permitted by rules and regulations of the Securities and Exchange Commission (the "SEC") applicable to quarterly reports on Form 10-Q, we have condensed or omitted certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP").  We have reclassified certain amounts from the prior periods to conform to the 2015 presentation.  These reclassifications have no effect on net income or shareholders' equity.  Results for interim periods are not necessarily indicative of the results that may be expected for a full year.

The balance sheet at December 31, 2014, presented herein, has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by GAAP for complete financial statements.

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

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

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

Our trading securities include: (i) investments purchased with the intent of selling in the near term to generate income; (ii) investments supporting certain insurance liabilities (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.

Accumulated other comprehensive income is primarily comprised of the net effect of unrealized appreciation (depreciation) on our investments.  These amounts, included in shareholders' equity as of March 31, 2015 and December 31, 2014, were as follows (dollars in millions):

 
March 31,
2015
 
December 31,
2014
Net unrealized appreciation (depreciation) on fixed maturity securities, available for sale, on which an other-than-temporary impairment loss has been recognized
$
6.4

 
$
5.3

Net unrealized gains on all other investments
2,476.0

 
2,207.7

Adjustment to present value of future profits (a)
(148.0
)
 
(149.9
)
Adjustment to deferred acquisition costs
(404.9
)
 
(390.5
)
Adjustment to insurance liabilities
(470.4
)
 
(381.4
)
Unrecognized net loss related to deferred compensation plan
(7.2
)
 
(8.5
)
Deferred income tax liabilities
(517.7
)
 
(457.4
)
Accumulated other comprehensive income
$
934.2

 
$
825.3

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

At March 31, 2015, adjustments to the present value of future profits, deferred acquisition costs, insurance liabilities and deferred tax assets included $(127.3) million, $(146.8) million, $(470.4) million and $264.4 million, respectively, for premium deficiencies that would exist on certain products (primarily long-term care) if unrealized gains on the assets backing such products had been realized and the proceeds from the sales of such assets were invested at then current yields.

At March 31, 2015, the amortized cost, gross unrealized gains and losses, estimated fair value, other-than-temporary impairments in accumulated other comprehensive income of fixed maturities, available for sale, and equity securities were as follows (dollars in millions):
 
Amortized cost
 
Gross unrealized gains
 
Gross unrealized losses
 
Estimated fair value
 
Other-than-temporary impairments included in accumulated other comprehensive income
Corporate securities
$
12,367.5

 
$
1,932.1

 
$
(64.9
)
 
$
14,234.7

 
$

United States Treasury securities and obligations of United States government corporations and agencies
137.3

 
39.0

 

 
176.3

 

States and political subdivisions
1,992.3

 
316.9

 
(4.1
)
 
2,305.1

 

Debt securities issued by foreign governments
1.8

 
.1

 

 
1.9

 

Asset-backed securities
1,251.9

 
85.9

 
(2.0
)
 
1,335.8

 

Collateralized debt obligations
330.4

 
2.5

 
(1.0
)
 
331.9

 

Commercial mortgage-backed securities
1,268.9

 
89.4

 
(.5
)
 
1,357.8

 

Mortgage pass-through securities
3.7

 
.3

 

 
4.0

 

Collateralized mortgage obligations
1,229.7

 
82.0

 
(.8
)
 
1,310.9

 
(3.1
)
Total fixed maturities, available for sale
$
18,583.5

 
$
2,548.2

 
$
(73.3
)
 
$
21,058.4

 
$
(3.1
)
Equity securities
$
407.6

 
$
20.5

 
$
(.3
)
 
$
427.8

 
 


The following table sets forth the amortized cost and estimated fair value of fixed maturities, available for sale, at March 31, 2015, 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
$
235.8

 
$
239.5

Due after one year through five years
2,138.3

 
2,350.2

Due after five years through ten years
2,479.7

 
2,706.6

Due after ten years
9,645.1

 
11,421.7

Subtotal
14,498.9

 
16,718.0

Structured securities
4,084.6

 
4,340.4

Total fixed maturities, available for sale
$
18,583.5

 
$
21,058.4



Net Realized Investment Gains (Losses)

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

 
Three months ended
 
March 31,
 
2015
 
2014
Fixed maturity securities, available for sale:
 
 
 
Gross realized gains on sale
$
14.7

 
$
41.5

Gross realized losses on sale
(15.4
)
 
(5.5
)
Impairments:
 
 
 
Total other-than-temporary impairment losses
(1.3
)
 

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

 

Net impairment losses recognized
(1.3
)
 

Net realized investment gains from fixed maturities
(2.0
)
 
36.0

Equity securities
2.5

 

Commercial mortgage loans
(2.3
)
 

Impairments of mortgage loans and other investments

 
(11.9
)
Gain on dissolution of a variable interest entity
11.3

 

Other (a)
(.6
)
 
(.7
)
Net realized investment gains
$
8.9

 
$
23.4


_________________
(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 periods and included in net realized investment gains were $3.1 million for the three months ended March 31, 2014. Such amount was insignificant in the 2015 period.

During the first three months of 2015, we recognized net realized investment gains of $8.9 million, which were comprised of: (i) $2.5 million of net losses from the sales of investments; (ii) an $11.3 million gain on the dissolution of a variable interest entity ("VIE"); (iii) the increase in fair value of embedded derivatives related to a modified coinsurance agreement of $1.4 million; and (iv) $1.3 million of writedowns of investments for other than temporary declines in fair value recognized through net income.

During the first three months of 2015, a VIE that was required to be consolidated was dissolved. A gain of $11.3 million was recognized representing the difference between the borrowings of such VIE and the contractual distributions required following the liquidation of the underlying assets.

During the first three months of 2014, we recognized net realized investment gains of $23.4 million, which were comprised of: (i) $32.8 million of net gains from the sales of investments (primarily fixed maturities); (ii) the increase in fair value of certain fixed maturity investments with embedded derivatives of $2.5 million; and (iii) $11.9 million of writedowns of investments for other than temporary declines in fair value recognized through net income.

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

During the first three months of 2015, the $15.4 million of realized losses on sales of $132.4 million of fixed maturity securities, available for sale, 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 the first three months of 2015, we recognized $1.3 million of impairment losses recorded in earnings on a fixed maturity due to issuer specific events.

During the first three months of 2014, we recognized $11.9 million of impairment losses recorded in earnings which included: (i) a $3.9 million writedown of a commercial mortgage loan related to a property with expected occupancy challenges; and (ii) $8.0 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.

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 March 31, 2015, other-than-temporary impairments included in accumulated other comprehensive income of $3.1 million (before taxes and related amortization) related to certain structured securities.

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

 
Three months ended
 
March 31,
 
2015
 
2014
Credit losses on fixed maturity securities, available for sale, beginning of period
$
(1.0
)
 
$
(1.3
)
Add:  credit losses on other-than-temporary impairments not previously recognized

 

Less:  credit losses on securities sold

 

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

Gross Unrealized Investment Losses

Our investment strategy is to maximize, over a sustained period and within acceptable parameters of quality and risk, investment income and total investment return through active investment management. Accordingly, we may sell securities at a gain or a loss to enhance the projected total return of the portfolio as market opportunities change, to reflect changing perceptions of risk, or to better match certain characteristics of our investment portfolio with the corresponding characteristics of our insurance liabilities.

The following table summarizes the gross unrealized losses and fair values of our investments with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that such securities have been in a continuous unrealized loss position, at March 31, 2015 (dollars in millions):

 
 
Less than 12 months
 
12 months or greater
 
Total
Description of securities
 
Fair
value
 
Unrealized
losses
 
Fair
value
 
Unrealized
losses
 
Fair
value
 
Unrealized
losses
States and political subdivisions
 
$
19.8

 
$
(.5
)
 
$
31.1

 
$
(3.6
)
 
$
50.9

 
$
(4.1
)
Corporate securities
 
779.2

 
(55.7
)
 
163.9

 
(9.2
)
 
943.1

 
(64.9
)
Asset-backed securities
 
131.9

 
(1.3
)
 
56.4

 
(.7
)
 
188.3

 
(2.0
)
Collateralized debt obligations
 
139.8

 
(1.0
)
 

 

 
139.8

 
(1.0
)
Commercial mortgage-backed securities
 
49.1

 
(.5
)
 

 

 
49.1

 
(.5
)
Mortgage pass-through securities
 
.2

 

 
.2

 

 
.4

 

Collateralized mortgage obligations
 
91.2

 
(.5
)
 
23.1

 
(.3
)
 
114.3

 
(.8
)
Total fixed maturities, available for sale
 
$
1,211.2

 
$
(59.5
)
 
$
274.7

 
$
(13.8
)
 
$
1,485.9

 
$
(73.3
)
Equity securities
 
$
6.7

 
$
(.3
)
 
$
.5

 
$

 
$
7.2

 
$
(.3
)

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
)


Based on management's current assessment of investments with unrealized losses at March 31, 2015, 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.

Repurchase agreements

We may enter into agreements under which we sell securities subject to an obligation to repurchase the same securities. These repurchase agreements are accounted for as collateralized financing arrangements and not as a sale and subsequent repurchase of securities. The obligation to repurchase the securities is reflected as investment borrowings in the Company's consolidated balance sheet, while the securities underlying the repurchase agreements remain in the respective investment asset accounts. There is no offsetting or netting of the investment securities assets with the repurchase agreement liabilities. In addition, as the Company does not currently have any outstanding reverse repurchase agreements, there is no such offsetting to be done with the repurchase agreements.

The right of offset for a repurchase agreement resembles a secured borrowing, whereby the collateral would be used to settle the fair value of the repurchase agreement should the Company be in default under the agreement (e.g., fails to make an interest payment to the counterparty). If the counterparty were to default (e.g., declare bankruptcy), the Company could cancel the repurchase agreement (i.e., cease payment of principal and interest), and attempt collection on the amount of collateral value in excess of the repurchase agreement fair value. The collateral is held by a third party financial institution in the counterparty's custodial account. The counterparty has the right to sell or repledge the investment securities. Offsetting disclosures are included in the note to the consolidated financial statements entitled "Accounting for Derivatives".
EARNINGS PER SHARE
EARNINGS PER SHARE
EARNINGS PER SHARE

A reconciliation of net income and shares used to calculate basic and diluted earnings per share is as follows (dollars in millions and shares in thousands):

 
Three months ended
 
March 31,
 
2015
 
2014
Net income (loss) for basic and diluted earnings per share
$
52.8

 
$
(228.0
)
Shares:
 

 
 

Weighted average shares outstanding for basic earnings per share
200,491

 
220,307

Effect of dilutive securities on weighted average shares (a):
 

 
 

Stock options, restricted stock and performance units
1,784

 

Weighted average shares outstanding for diluted earnings per share
202,275

 
220,307


________
(a)
In the first quarter of 2014, 5,803,000 equivalent common shares (comprised of 2,537,000 shares related to stock options, restricted stock and performance units and 3,266,000 shares related to warrants) were not included in the diluted weighted average shares outstanding, because their inclusion would have been antidilutive in such period due to the net loss recognized by the Company resulting from the sale of Conseco Life Insurance Company ("CLIC").

Basic earnings per common share is computed by dividing net income by the weighted average number of common shares outstanding for the period.  Restricted shares (including our performance units) are not included in basic earnings per share until vested.  Diluted earnings per share reflect the potential dilution that could occur if outstanding stock options and warrants were exercised and restricted stock was vested.  The dilution from options, restricted shares and warrants (until they were repurchased in September 2014) is calculated using the treasury stock method.  Under this method, we assume the proceeds from the exercise of the options and warrants (or the unrecognized compensation expense with respect to restricted stock and performance units) will be used to purchase shares of our common stock at the average market price during the period, reducing the dilutive effect of the exercise of the options and warrants (or the vesting of the restricted stock and performance units).
BUSINESS SEGMENTS
BUSINESS SEGMENTS
BUSINESS SEGMENTS

The Company manages its business through the following operating segments: Bankers Life, Washington National and Colonial Penn, which are defined on the basis of product distribution; and corporate operations, comprised of holding company activities and certain noninsurance company businesses.

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. There was no impact on pre-tax operating income in the first three months of 2014 or 2015 as a result of this change. Prior periods have been revised, as applicable, to conform to our current presentation. Pre-tax income is not impacted by this change. We measure segment performance by excluding the net loss on the sale of CLIC and gain on reinsurance transactions, the earnings of CLIC prior to being sold on July 1, 2014, net realized investment gains (losses), fair value changes in embedded derivative liabilities (net of related amortization), fair value changes in the agent deferred compensation plan, loss on extinguishment or modification of debt, income taxes and other non-operating items consisting primarily of equity in earnings of certain non-strategic investments and earnings attributable to VIEs ("pre-tax operating earnings") because we believe that this performance measure is a better indicator of the ongoing business and trends in our business.  Our primary investment focus is on investment income to support our liabilities for insurance products as opposed to the generation of net realized investment gains (losses), and a long-term focus is necessary to maintain profitability over the life of the business.

The net loss on the sale of CLIC and gain on related reinsurance transaction, the earnings of CLIC prior to being sold, net realized investment gains (losses), fair value changes in embedded derivative liabilities (net of related amortization), fair value changes in the agent deferred compensation plan, loss on extinguishment or modification of debt and other non-operating items consisting primarily of equity in earnings of certain non-strategic investments and earnings attributable to VIEs depend on market conditions or represent unusual items that do not necessarily relate to the underlying business of our segments.  Net realized investment gains (losses) and fair value changes in embedded derivative liabilities (net of related amortization) may affect future earnings levels since our underlying business is long-term in nature and changes in our investment portfolio may impact our ability to earn the assumed interest rates needed to maintain the profitability of our business.
Operating information by segment was as follows (dollars in millions):

 
Three months ended
 
March 31,
 
2015
 
2014
Revenues:
 
 
 
Bankers Life:
 
 
 
Insurance policy income:
 
 
 
Annuities
$
5.7

 
$
7.5

Health
315.8

 
330.5

Life
91.2

 
78.3

Net investment income (a)
226.5

 
224.4

Fee revenue and other income (a)
6.3

 
5.3

Total Bankers Life revenues
645.5

 
646.0

Washington National:
 

 
 

Insurance policy income:
 

 
 

Annuities
.9

 
1.0

Health
152.2

 
148.9

Life
6.4

 
5.7

Net investment income (a)
65.6

 
69.0

Fee revenue and other income (a)
.4

 
.2

Total Washington National revenues
225.5

 
224.8

Colonial Penn:
 

 
 

Insurance policy income:
 

 
 

Health
.8

 
1.0

Life
63.5

 
59.5

Net investment income (a)
10.7

 
10.7

Fee revenue and other income (a)
.3

 
.2

Total Colonial Penn revenues
75.3

 
71.4

Corporate operations:
 

 
 

Net investment income
6.7

 
7.0

Fee and other income
1.9

 
1.4

Total corporate revenues
8.6

 
8.4

Total revenues
954.9

 
950.6


(continued on next page)

(continued from previous page)
 
Three months ended
 
March 31,
 
2015
 
2014
Expenses:
 
 
 
Bankers Life:
 
 
 
Insurance policy benefits
$
405.3

 
$
415.0

Amortization
51.6

 
48.2

Interest expense on investment borrowings
2.1

 
1.9

Other operating costs and expenses
104.3

 
96.7

Total Bankers Life expenses
563.3

 
561.8

Washington National:
 

 
 

Insurance policy benefits
135.2

 
131.8

Amortization
15.3

 
16.3

Interest expense on investment borrowings
.4

 
.4

Other operating costs and expenses
46.1

 
45.2

Total Washington National expenses
197.0

 
193.7

Colonial Penn:
 

 
 

Insurance policy benefits
48.6

 
44.7

Amortization
3.6

 
4.0

Other operating costs and expenses
29.0

 
28.9

Total Colonial Penn expenses
81.2

 
77.6

Corporate operations:
 

 
 

Interest expense on corporate debt
10.5

 
11.1

Other operating costs and expenses
9.9

 
14.4

Total corporate expenses
20.4

 
25.5

Total expenses
861.9

 
858.6

Pre-tax operating earnings by segment:
 

 
 

Bankers Life
82.2

 
84.2

Washington National
28.5

 
31.1

Colonial Penn
(5.9
)
 
(6.2
)
Corporate operations
(11.8
)
 
(17.1
)
Pre-tax operating earnings
$
93.0

 
$
92.0

___________________
(a)
It is not practicable to provide additional components of revenue by product or services.

A reconciliation of segment revenues and expenses to consolidated revenues and expenses and net income (loss) is as follows (dollars in millions):

 
Three months ended
 
March 31,
 
2015
 
2014
Total segment revenues                                                                                            
$
954.9

 
$
950.6

Net realized investment gains (losses)                                           
(2.4
)
 
21.3

Revenues related to certain non-strategic investments and earnings attributable to VIEs
18.3

 
6.3

Fee revenue related to transition and support services agreements
7.5

 

Revenues of CLIC prior to being sold

 
106.5

Consolidated revenues                                                                                       
978.3

 
1,084.7

 
 
 
 
Total segment expenses                                                                                            
861.9

 
858.6

Insurance policy benefits - fair value changes in embedded derivative liabilities
16.9

 
15.2

Amortization related to fair value changes in embedded derivative liabilities
(4.2
)
 
(4.2
)
Amortization related to net realized investment gains
(.2
)
 
.4

Expenses related to certain non-strategic investments and earnings attributable to VIEs
10.5

 
9.6

Net loss on sale of subsidiary and transition expenses
4.5

 
278.6

Expenses related to transition and support services agreements
6.6

 

Expenses of CLIC prior to being sold

 
96.1

Consolidated expenses                                                                                       
896.0

 
1,254.3

Income (loss) before tax
82.3

 
(169.6
)
Income tax expense:
 
 
 
Tax expense on period income
29.5

 
39.0

Valuation allowance for deferred tax assets and other tax items

 
19.4

Net income (loss)
$
52.8

 
$
(228.0
)
ACCOUNTING FOR DERIVATIVES
ACCOUNTING FOR DERIVATIVES
ACCOUNTING FOR DERIVATIVES

Our freestanding and embedded derivatives, none of which are designated as hedging instruments, are held at fair value and are summarized as follows (dollars in millions):

 
 
Fair value
 
 
March 31, 2015
 
December 31, 2014
Assets:
 
 
 
 
Other invested assets:
 
 
 
 
Fixed index call options
 
$
87.7

 
$
107.2

Interest rate futures
 
(.1
)
 
(.2
)
Total assets
 
$
87.6

 
$
107.0

Liabilities:
 
 
 
 
Future policy benefits:
 
 
 
 
Fixed index products
 
$
1,102.1

 
$
1,081.5

Reinsurance related
 
3.4

 

Total liabilities
 
$
1,105.5

 
$
1,081.5



Our fixed index products provide a guaranteed minimum rate of return and a higher potential return that is based on a percentage (the "participation rate") of the amount of increase in the value of a particular index, such as the Standard & Poor's 500 Index, over a specified period.  Typically, on each policy anniversary date, a new index period begins.  We are generally able to change the participation rate at the beginning of each index period during a policy year, subject to contractual minimums.  The Company accounts for the options attributed to the policyholder for the estimated life of the contract as embedded derivatives. These accounting requirements often create volatility in the earnings from these products. We typically buy call options (including call spreads) referenced to the applicable indices in an effort to offset or hedge potential increases to policyholder benefits resulting from increases in the particular index to which the policy's return is linked.  The notional amount of these options was $2.4 billion at March 31, 2015. Such amount did not fluctuate significantly during the first three months of 2015 and 2014.

We utilize United States Treasury interest rate futures primarily to hedge interest rate risk related to anticipated mortgage loan transactions.

We are required to establish an embedded derivative related to a modified coinsurance agreement pursuant to which we assume the risks of a block of health insurance business. The embedded derivative represents the mark-to-market adjustment for approximately $155 million in underlying investments held by the ceding reinsurer.

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

The following table provides the pre-tax gains (losses) recognized in net income for derivative instruments, which are not designated as hedges for the periods indicated (dollars in millions):

 
 
Three months ended
 
 
March 31,
 
 
2015
 
2014
Net investment income from policyholder and reinsurer accounts and other special-purpose portfolios:
 
 
 
 
Fixed index call options
 
$
(2.1
)
 
$
5.4

Embedded derivative related to reinsurance contract
 

 
(1.6
)
Total
 
(2.1
)
 
3.8

Net realized gains (losses):
 
 
 
 
Interest rate futures
 
(1.7
)
 
(2.7
)
Insurance policy benefits:
 
 
 
 
Embedded derivative related to fixed index annuities
 
(17.8
)
 
(16.0
)
Total
 
$
(21.6
)
 
$
(14.9
)


Derivative Counterparty Risk

If the counterparties to the call options fail to meet their obligations, we may recognize a loss.  We limit our exposure to such a loss by diversifying among several counterparties believed to be strong and creditworthy.  At March 31, 2015, all of our counterparties were rated "A-" or higher by Standard & Poor's Corporation ("S&P").

The interest rate future contracts are effected through regulated exchanges. Such positions are marked to market and margined on a daily basis. The Company has minimal exposure to credit-related losses in the event of nonperformance.

The Company and its subsidiaries are parties to master netting arrangements with its counterparties related to entering into various derivative contracts. Exchange-traded derivatives require margin accounts which we offset.

The following table summarizes information related to derivatives and repurchase agreements with master netting arrangements or collateral as of March 31, 2015 and December 31, 2014 (dollars in millions):

 
 
 
 
 
 
 
 
 
Gross amounts not offset in the balance sheet
 
 
 
 
 
Gross amounts recognized
 
Gross amounts offset in the balance sheet
 
Net amounts of assets presented in the balance sheet
 
Financial instruments
 
Cash collateral received
 
Net amount
March 31, 2015:
 
 
 
Fixed index call options
 
$
87.7

 
$

 
$
87.7

 
$

 
$

 
$
87.7

 
Interest rate futures
 
(.1
)
 
.4

 
.3

 

 

 
.3

 
Repurchase agreements (a)
 
20.3

 

 
20.3

 
20.3

 

 

December 31, 2014:
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed index call options
 
107.2

 

 
107.2

 

 

 
107.2

 
Interest rate futures
 
(.2
)
 
1.5

 
1.3

 

 

 
1.3

 
Repurchase agreements (a)
 
20.4

 

 
20.4

 
20.4

 

 

_________________
(a)
As of March 31, 2015 and December 31, 2014, these agreements were collateralized by investment securities with a fair value of $25.4 million and $25.3 million, respectively.
REINSURANCE
REINSURANCE
REINSURANCE

The cost of reinsurance ceded totaled $33.9 million and $52.1 million in the first quarters of 2015 and 2014, respectively.  We deduct this cost from insurance policy income.  Reinsurance recoveries netted against insurance policy benefits totaled $39.4 million and $59.6 million in the first quarters of 2015 and 2014, respectively.

From time-to-time, we assume insurance from other companies.  Any costs associated with the assumption of insurance are amortized consistent with the method used to amortize deferred acquisition costs.  Reinsurance premiums assumed totaled $9.9 million and $10.9 million in the first quarters of 2015 and 2014, respectively.  In the first quarter of 2014, premiums assumed included $6.8 million of premium adjustments on prescription drug plan ("PDP") business related to periods prior to the termination of a quota-share reinsurance agreement with Coventry Health Care ("Coventry") in August 2013. We continue to receive distribution income from Coventry for PDP business sold through our Bankers Life segment.
INCOME TAXES
INCOME TAXES
INCOME TAXES

The Company's interim tax expense is based upon the estimated annual effective tax rate for the respective period. Under authoritative guidance, certain items are required to be excluded from the estimated annual effective tax rate calculation. Such items include changes in judgment about the realizability of deferred tax assets resulting from changes in projections of income expected to be available in future years, and items deemed to be unusual, infrequent, or that can not be reliably estimated. In these cases, the actual tax expense or benefit applicable to that item is treated discretely and is reported in the same period as the related item. Discrete items primarily include the loss on the sale of CLIC of $278.6 million in the three months ended March 31, 2014. The components of income tax expense are as follows (dollars in millions):

 
Three months ended
 
March 31,
 
2015
 
2014
Current tax expense
$
2.9

 
$
2.2

Deferred tax expense
26.4

 
36.8

Income tax expense calculated based on estimated annual effective tax rate
29.3

 
39.0

Income tax expense on discrete items:
 
 
 
Tax expense related to the sale of CLIC

 
19.4

Other items
.2

 

Total income tax expense
$
29.5

 
$
58.4



A reconciliation of the U.S. statutory corporate tax rate to the estimated annual effective rate, before discrete items, reflected in the consolidated statement of operations is as follows:
 
 
Three months ended
 
March 31,
 
2015
 
2014
U.S. statutory corporate rate
35.0
 %
 
35.0
 %
Non-taxable income and nondeductible benefits, net
(.8
)
 
(.7
)
State taxes
1.4

 
1.5

Estimated annual effective tax rate
35.6
 %
 
35.8
 %


The components of the Company's income tax assets and liabilities are summarized below (dollars in millions):

 
March 31,
2015
 
December 31,
2014
Deferred tax assets:
 
 
 
Net federal operating loss carryforwards
$
1,024.4

 
$
1,048.4

Net state operating loss carryforwards
14.9

 
15.2

Tax credits
48.7

 
47.2

Capital loss carryforwards
5.0

 

Investments
46.9

 
59.7

Insurance liabilities
593.1

 
585.9

Other
58.8

 
67.3

Gross deferred tax assets
1,791.8

 
1,823.7

Deferred tax liabilities:
 

 
 

Present value of future profits and deferred acquisition costs
(315.1
)
 
(320.5
)
Accumulated other comprehensive income
(517.7
)
 
(457.4
)
Gross deferred tax liabilities
(832.8
)
 
(777.9
)
Net deferred tax assets before valuation allowance
959.0

 
1,045.8

Valuation allowance
(246.0
)
 
(246.0
)
Net deferred tax assets
713.0

 
799.8

Current income taxes accrued
(43.5
)
 
(41.1
)
Income tax assets, net
$
669.5

 
$
758.7



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.

Based on our assessment, it appears more likely than not that $713.0 million of our net deferred tax assets of $959.0 million will be realized through future taxable earnings. Accordingly, we have established a deferred tax valuation allowance of $246.0 million at March 31, 2015. We will continue to assess the need for a valuation allowance in the future. If future results are less than projected, an increase to the valuation allowance may be required to reduce the deferred tax asset, which could have a material impact on our results of operations in the period in which it is recorded.
 
We use a deferred tax valuation model to assess the need for a valuation allowance. Our model is adjusted to reflect changes in our projections of future taxable income including changes resulting from investment trading strategies, reinsurance transactions and the impact of the sale of CLIC. Our estimates of future taxable income are based on evidence we consider to be objective and verifiable.

Our projection of future taxable income for purposes of determining the valuation allowance is based on our adjusted average annual taxable income for the last three years plus: (i) a 3 percent core growth factor; and (ii) an additional 1 percent increase which primarily reflects the impact of the investment trading strategies completed in 2013 (which grade off over time). The aggregate 4 percent factor is used to increase taxable income over the next five years, and level taxable income is assumed thereafter. In the projections used for our analysis, our three year average taxable income was approximately $320 million. Approximately $50 million of the current three year average relates to non-life taxable income and $270 million relates to life income.

Recovery of our deferred tax asset is dependent on achieving the level of future taxable income projected in our deferred tax valuation model and failure to do so could result in an increase in the valuation allowance in a future period.  Any future increase in the valuation allowance may result in additional income tax expense and reduce shareholders' equity, and such an increase could have a significant impact upon our earnings in the future.

The Internal Revenue Code (the "Code") limits the extent to which losses realized by a non-life entity (or entities) may offset income from a life insurance company (or companies) to the lesser of:  (i) 35 percent of the income of the life insurance company; or (ii) 35 percent of the total loss of the non-life entities (including NOLs of the non-life entities).  There is no similar limitation on the extent to which losses realized by a life insurance entity (or entities) may offset income from a non-life entity (or entities). This limitation is the primary reason a valuation allowance for NOL carryforwards is required.

Section 382 of the Code imposes limitations on a corporation's ability to use its NOLs when the company undergoes an ownership change.  Future transactions and the timing of such transactions could cause an ownership change for Section 382 income tax purposes.  Such transactions may include, but are not limited to, additional repurchases under our securities repurchase program, issuances of common stock and acquisitions or sales of shares of CNO stock by certain holders of our shares, including persons who have held, currently hold or may accumulate in the future five percent or more of our outstanding common stock for their own account.  Many of these transactions are beyond our control.  If an additional ownership change were to occur for purposes of Section 382, we would be required to calculate an annual restriction on the use of our NOLs to offset future taxable income.  The annual restriction would be calculated based upon the value of CNO's equity at the time of such ownership change, multiplied by a federal long-term tax exempt rate (2.67 percent at March 31, 2015), and the annual restriction could limit our ability to use a substantial portion of our NOLs to offset future taxable income.  We regularly monitor ownership change (as calculated for purposes of Section 382) and, as of March 31, 2015, we were below the 50 percent ownership change level that would trigger further impairment of our ability to utilize our NOLs.

As of March 31, 2015, we had $2.9 billion of federal NOLs. The following table summarizes the expiration dates of our loss carryforwards assuming the Internal Revenue Service ("IRS") ultimately agrees with the position we have taken with respect to the loss on our investment in Conseco Senior Health Insurance Company ("CSHI") (dollars in millions):

Year of expiration
 
Net operating loss carryforwards
 
Total loss
 
 
Life
 
Non-life
 
carryforwards
2022
 
$
48.1

 
$

 
$
48.1

2023
 
742.6

 
1,978.3

 
2,720.9

2025
 

 
91.5

 
91.5

2026
 

 
207.4

 
207.4

2027
 

 
4.9

 
4.9

2028
 

 
203.7

 
203.7

2029
 

 
146.6

 
146.6

2032
 

 
44.0

 
44.0

Subtotal
 
790.7

 
2,676.4

 
3,467.1

Less:
 
 
 
 
 
 
Unrecognized tax benefits
 
(342.9
)
 
(197.4
)
 
(540.3
)
Total
 
$
447.8

 
$
2,479.0

 
$
2,926.8



In addition, we had $14.4 million of capital loss carryforwards that expire in 2020.

We had deferred tax assets related to NOLs for state income taxes of $14.9 million and $15.2 million at March 31, 2015 and December 31, 2014, respectively.  The related state NOLs are available to offset future state taxable income in certain states through 2025.

We recognized an $878 million ordinary loss on our investment in CSHI which was worthless when it was transferred to an independent trust in 2008. Of this loss, $742 million has been reported as a life loss and $136 million as a non-life loss. The IRS has disagreed with our ordinary loss treatment and believes that it should be treated as a capital loss, subject to a five year carryover. If the IRS position is ultimately determined to be correct, $473 million would have expired unused in 2013. Due to this uncertainty, we have not recognized a tax benefit of $166.0 million. However, if this unrecognized tax benefit would have been recognized, we would also have established a valuation allowance of $34 million at March 31, 2015.

We currently expect to utilize all of our remaining life NOLs in 2016, absent a favorable IRS position on the classification of the loss on our investment in CSHI. After all of the life NOLs are utilized, we will begin making cash tax payments equal to the effective federal tax rate applied to 65 percent of our life insurance company taxable income due to the limitations on the extent to which we can use non-life NOLs to offset life insurance company taxable income. We will continue to pay tax on only 65 percent of our life insurance company taxable income until all non-life NOLs are utilized or expire.

Tax years 2004 and 2008 through 2014 are open to examination by the IRS.  The Company's various state income tax returns are generally open for tax years 2011 through 2014 based on the individual state statutes of limitation. Generally, for tax years which generate NOLs, capital losses or tax credit carryforwards, the statute of limitations does not close until the expiration of the statute of limitations for the tax year in which such carryforwards are utilized.
NOTES PAYABLE - DIRECT CORPORATE OBLIGATIONS
NOTES PAYABLE - DIRECT CORPORATE OBLIGATIONS
NOTES PAYABLE - DIRECT CORPORATE OBLIGATIONS

The following notes payable were direct corporate obligations of the Company as of March 31, 2015 and December 31, 2014 (dollars in millions):

 
March 31,
2015
 
December 31,
2014
Senior Secured Credit Agreement (as defined below)
$
502.3

 
$
522.1

6.375% Senior Secured Notes due October 2020 (the "6.375% Notes")
275.0

 
275.0

Unamortized discount on Senior Secured Credit Agreement
(2.5
)
 
(2.7
)
Direct corporate obligations
$
774.8

 
$
794.4



Senior Secured Credit Agreement

On September 28, 2012, the Company entered into a new senior secured credit agreement, providing for: (i) a $425.0 million six-year term loan facility ($389.8 million remained outstanding at March 31, 2015); (ii) a $250.0 million four-year term loan facility ($112.5 million remained outstanding at March 31, 2015); and (iii) a $50.0 million three-year revolving credit facility, with JPMorgan Chase Bank, N.A., as administrative agent, and the lenders from time to time party thereto (the "Senior Secured Credit Agreement"). As of March 31, 2015, no amounts have been borrowed under the revolving credit facility. The Senior Secured Credit Agreement is guaranteed by the Subsidiary Guarantors (as defined below) and secured by a first-priority lien (which ranks pari passu with the liens securing the 6.375% Notes) on substantially all of the Company's and the Subsidiary Guarantors' assets.

The revolving credit facility includes an uncommitted subfacility for swingline loans of up to $5.0 million, and up to $5.0 million of the revolving credit facility is available for the issuance of letters of credit. The six-year term loan facility amortizes in quarterly installments in amounts resulting in an annual amortization of 1% and the four-year term loan facility amortizes in quarterly installments resulting in an annual amortization of 20% during the first and second years and 30% during the third and fourth years. Subject to certain conditions, the Company may incur additional incremental loans under the Senior Secured Credit Agreement in an amount of up to $250.0 million.

The interest rates with respect to loans under: (i) the six-year term loan facility are, at the Company's option, equal to a eurodollar rate, plus 2.75% per annum, or a base rate, plus 1.75% per annum, subject to a eurodollar rate "floor" of 1.00% and a base rate "floor" of 2.25% (such rate was 3.75% at March 31, 2015); (ii) the four-year term loan facility are, at the Company's option, equal to a eurodollar rate, plus 2.25% per annum, or a base rate, plus 1.25% per annum, subject to a eurodollar rate "floor" of .75% and a base rate "floor" of 2.00% (such rate was 3.00% at March 31, 2015); and (iii) the revolving credit facility will be, at the Company's option, equal to a eurodollar rate, plus 3.00% per annum, or a base rate, plus 2.00% per annum, in each case, with respect to revolving credit facility borrowings only, subject to certain step-downs based on the debt to total capitalization ratio of the Company.

In the first three months of 2015, we made $19.8 million of scheduled quarterly principal payments due under the Senior Secured Credit Agreement.

Mandatory prepayments of the Senior Secured Credit Agreement will be required, subject to certain exceptions, in an amount equal to: (i) 100% of the net cash proceeds from certain asset sales or casualty events; (ii) 100% of the net cash proceeds received by the Company or any of its restricted subsidiaries from certain debt issuances; and (iii) 100% of the amount of certain restricted payments made (including any common stock dividends and share repurchases) as defined in the Senior Secured Credit Agreement provided that if, as of the end of the fiscal quarter immediately preceding such restricted payment, the debt to total capitalization ratio is: (x) equal to or less than 25.0%, but greater than 20.0%, the prepayment requirement shall be reduced to 33.33%; or (y) equal to or less than 20.0%, the prepayment requirement shall not apply.

Notwithstanding the foregoing, no mandatory prepayments pursuant to item (i) in the preceding paragraph shall be required if: (x) the debt to total capitalization ratio is equal or less than 20% and (y) either (A) the financial strength rating of certain of the Company's insurance subsidiaries is equal or better than A- (stable) from A.M. Best Company ("A.M. Best") or (B) the Senior Secured Credit Agreement is rated equal or better than BBB- (stable) from S&P and Baa3 (stable) by Moody's Investor Services, Inc. ("Moody's").

The Senior Secured Credit Agreement requires the Company to maintain (each as calculated in accordance with the Senior Secured Credit Agreement): (i) a debt to total capitalization ratio of not more than 27.5 percent (such ratio was 17.1 percent at March 31, 2015); (ii) an interest coverage ratio of not less than 2.50 to 1.00 for each rolling four quarters (such ratio was 16.53 to 1.00 for the four quarters ended March 31, 2015); (iii) an aggregate ratio of total adjusted capital to company action level risk-based capital for the Company's insurance subsidiaries of not less than 250 percent (such ratio was estimated to be 428 percent at March 31, 2015); and (iv) a combined statutory capital and surplus for the Company's insurance subsidiaries of at least $1,300.0 million (combined statutory capital and surplus at March 31, 2015, was estimated to be $1,871 million).

6.375% Notes

On September 28, 2012, we issued $275.0 million in aggregate principal amount of 6.375% Notes pursuant to the 6.375% Indenture dated as of September 28, 2012 (the "6.375% Indenture"), among the Company, the subsidiary guarantors party thereto (the "Subsidiary Guarantors") and Wilmington Trust, National Association, as trustee and as collateral agent. The net proceeds from the issuance of the 6.375% Notes, together with the net proceeds from the Senior Secured Credit Agreement, were used to repay other outstanding indebtedness and for general corporate purposes. The 6.375% Notes mature on October 1, 2020. Interest on the 6.375% Notes accrues at a rate of 6.375% per annum and is payable semiannually in arrears on April 1 and October 1 of each year, commencing on April 1, 2013. The 6.375% Notes and the guarantees thereof (the "Guarantees") are senior secured obligations of the Company and the Subsidiary Guarantors and rank equally in right of payment with all of the Company's and the Subsidiary Guarantors' existing and future senior obligations, and senior to all of the Company's and the Subsidiary Guarantors' future subordinated indebtedness. The 6.375% Notes are secured by a first-priority lien on substantially all of the assets of the Company and the Subsidiary Guarantors, subject to certain exceptions. The 6.375% Notes and the Guarantees are pari passu with respect to security and in right of payment with all of the Company's and the Subsidiary Guarantors' existing and future secured indebtedness under the Senior Secured Credit Agreement. The 6.375% Notes are structurally subordinated to all of the liabilities and preferred stock of each of the Company's insurance subsidiaries, which are not guarantors of the 6.375% Notes.

Under the 6.375% Indenture, the Company can make Restricted Payments (as such term is defined in the 6.375% Indenture) up to a calculated limit, provided that the Company's pro forma risk-based capital ratio exceeds 225% after giving effect to the Restricted Payment and certain other conditions are met. Restricted Payments include, among other items, repurchases of common stock and cash dividends on common stock (to the extent such dividends exceed $30.0 million in the aggregate in any calendar year).

The limit of Restricted Payments permitted under the 6.375% Indenture is the sum of (x) 50% of the Company's "Net Excess Cash Flow" (as defined in the 6.375% Indenture) for the period (taken as one accounting period) from July 1, 2012 to the end of the Company's most recently ended fiscal quarter for which financial statements are available at the time of such Restricted Payment, (y) $175.0 million and (z) certain other amounts specified in the 6.375% Indenture. Based on the provisions set forth in the 6.375% Indenture and the Company's Net Excess Cash Flow for the period from July 1, 2012 through March 31, 2015, the Company could have made additional Restricted Payments under this 6.375% Indenture covenant of approximately $17 million as of March 31, 2015. This limitation on Restricted Payments does not apply if the Debt to Total Capitalization Ratio (as defined in the 6.375% Indenture) as of the last day of the Company's most recently ended fiscal quarter for which financial statements are available that immediately precedes the date of any Restricted Payment, calculated immediately after giving effect to such Restricted Payment and any related transactions on a pro forma basis, is equal to or less than 17.5% (such ratio was less than 17.5% as of March 31, 2015).

The Company may redeem all or part of the 6.375% Notes beginning on October 1, 2015, at the redemption prices set forth in the 6.375% Indenture. The Company may also redeem all or part of the 6.375% Notes at any time and from time to time prior to October 1, 2015, at a price equal to 100% of the aggregate principal amount of the 6.375% Notes to be redeemed, plus a "make-whole" premium and accrued and unpaid interest to, but not including, the redemption date.


Scheduled Repayment of our Direct Corporate Obligations

The scheduled repayment of our direct corporate obligations was as follows at March 31, 2015 (dollars in millions):

Year ending March 31,
 
2016
$
79.2

2017
41.7

2018
4.3

2019
377.1

2020

Thereafter
275.0

 
$
777.3

INVESTMENT BORROWINGS
INVESTMENT BORROWINGS
INVESTMENT BORROWINGS

Two of the Company's insurance subsidiaries (Washington National Insurance Company ("Washington National") and Bankers Life and Casualty Company ("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 March 31, 2015, the carrying value of the FHLB common stock was $73.5 million.  As of March 31, 2015, 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 March 31, 2015, 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
 
March 31, 2015
$
50.0

 
October 2015
 
Variable rate – 0.525%
100.0

 
June 2016
 
Variable rate – 0.614%
75.0

 
June 2016
 
Variable rate – 0.433%
100.0

 
October 2016
 
Variable rate – 0.436%
50.0

 
November 2016
 
Variable rate – 0.535%
50.0

 
November 2016
 
Variable rate – 0.643%
57.7

 
June 2017
 
Variable rate – 0.603%
50.0

 
August 2017
 
Variable rate – 0.458%
75.0

 
August 2017
 
Variable rate – 0.412%
100.0

 
October 2017
 
Variable rate – 0.683%
50.0

 
November 2017
 
Variable rate – 0.771%
50.0

 
January 2018
 
Variable rate – 0.602%
50.0

 
January 2018
 
Variable rate – 0.597%
50.0

 
February 2018
 
Variable rate – 0.566%
50.0

 
February 2018
 
Variable rate – 0.348%
22.0

 
February 2018
 
Variable rate – 0.592%
100.0

 
May 2018
 
Variable rate – 0.628%
50.0

 
July 2018
 
Variable rate – 0.726%
50.0

 
August 2018
 
Variable rate – 0.378%
50.0

 
January 2019
 
Variable rate – 0.674%
50.0

 
February 2019
 
Variable rate – 0.348%
100.0

 
March 2019
 
Variable rate – 0.657%
21.8

 
July 2019
 
Variable rate – 0.663%
21.8

 
June 2020
 
Fixed rate – 1.960%
28.2

 
August 2021
 
Fixed rate – 2.550%
26.6

 
March 2023
 
Fixed rate – 2.160%
20.5

 
June 2025
 
Fixed rate – 2.940%
$
1,498.6

 
 
 
 


The variable rate borrowings are pre-payable on each interest reset date without penalty.  The fixed rate borrowings are pre-payable subject to payment of a yield maintenance fee based on prevailing market interest rates.  At March 31, 2015, the aggregate yield maintenance fee to prepay all fixed rate borrowings was $2.9 million.

Interest expense of $2.5 million and $7.0 million in the first three months of 2015 and 2014, respectively, was recognized related to total borrowings from the FHLB.

In addition to our borrowings from the FHLB, we may enter into repurchase agreements to increase our investment return as part of our investment strategy. 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 $20.3 million at March 31, 2015 and mature prior to June 30, 2015.

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

Changes in the number of shares of common stock outstanding were as follows (shares in thousands):

Balance, December 31, 2014
203,324

 
Treasury stock purchased and retired
(5,270
)
 
Stock options exercised
144

 
Restricted and performance stock vested
434

(a)
Balance, March 31, 2015
198,632

 
____________________
(a)
Such amount was reduced by 230 thousand shares which were tendered to the Company for the payment of required federal and state tax withholdings owed on the vesting of restricted and performance stock.

In the first three months of 2015, we repurchased 5.3 million shares of common stock for $86.0 million (including $4.5 million of repurchases settled in the second quarter of 2015) under our securities repurchase program. The Company had remaining repurchase authority of $334.9 million as of March 31, 2015.

In the first three months of 2015, dividends declared and paid on common stock totaled $12.1 million ($0.06 per common share).
SALES INDUCEMENTS
SALES INDUCEMENTS
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 $.8 million and $1.2 million during the three months ended March 31, 2015 and 2014, respectively.  Amounts amortized totaled $2.8 million and $4.5 million during the three months ended March 31, 2015 and 2014, respectively.  The unamortized balance of deferred sales inducements was $65.4 million and $67.4 million at March 31, 2015 and December 31, 2014, respectively.  The balance of insurance liabilities for persistency bonus benefits was $1.3 million and $1.5 million at March 31, 2015 and December 31, 2014, respectively.
RECENTLY ISSUED ACCOUNTING STANDARDS
RECENTLY ISSUED ACCOUNTING STANDARDS
RECENTLY ISSUED ACCOUNTING STANDARDS

Pending Accounting Standards

In May 2014, the Financial Accounting Standards Board (the "FASB") issued authoritative guidance for recognizing revenue from contracts with customers. Certain contracts with customers are specifically excluded from this guidance, including insurance contracts. The core principle of the new guidance is that an entity should recognize revenue when it transfers promised goods or services in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance also requires additional disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. 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 August 2014, the FASB issued authoritative guidance related to measuring the financial assets and the financial liabilities of a consolidated collateralized financing entity which provides a measurement alternative for an entity that consolidates collateralized financing entities. A collateralized financing entity is a VIE with no more than nominal equity that holds financial assets and issues beneficial interests in those financial assets; the beneficial interests have contractual recourse only to the related assets of the collateralized financing entity and are classified as financial liabilities. If elected, the alternative method results in the reporting entity measuring both the financial assets and the financial liabilities of the collateralized financing entity using the more observable of the two fair value measurements, which effectively removes measurement differences between the financial assets and the financial liabilities of the collateralized financing entity previously recorded as net income (loss) attributable to non-controlling and other beneficial interests and as an adjustment to appropriated retained earnings. The reporting entity continues to measure its own beneficial interests in the collateralized financing entity (other than those that represent compensation for services) at fair value. The guidance 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.

In February 2015, the FASB issued authoritative guidance which updates the analysis that a reporting entity must perform to determine whether it should consolidate certain legal entities. Such guidance: (i) modifies the evaluation of whether limited partnerships and similar legal entities are VIEs or voting interest entities; (ii) eliminates the presumption that a general partner should consolidate a limited partnership; (iii) affects the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships; and (iv) provides a scope exception from consolidation guidance for certain investment funds. The new guidance is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted. The new guidance may be adopted: (i) using a modified retrospective approach by recording a cumulative effect adjustment to equity as of the beginning of the fiscal year of adoption; or (ii) retrospectively. The Company is currently assessing the impact the guidance will have upon adoption.

In April 2015, the FASB issued authoritative guidance which requires debt issuance costs in financial statements to be presented as a direct deduction from the carrying value of the associated debt liability rather than as an asset on the balance sheet. This guidance is effective beginning January 1, 2016. Early adoption is permitted, and the new guidance will be applied on a retrospective basis. The adoption of this guidance will not have a material impact on our consolidated financial statements.

Adopted Accounting Standards

In April 2014, 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 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. The adoption of this guidance did not have a material impact on our consolidated financial statements.
CONSOLIDATED STATEMENT OF CASH FLOWS
CONSOLIDATED STATEMENT OF CASH FLOWS
CONSOLIDATED STATEMENT OF CASH FLOWS

The following disclosures supplement our consolidated statement of cash flows.

The following reconciles net income (loss) to net cash from operating activities (dollars in millions):

 
Three months ended
 
 
March 31,
 
 
2015
 
2014
 
Cash flows from operating activities:
 
 
 
 
Net income (loss)
$
52.8

 
$
(228.0
)
 
Adjustments to reconcile net income to net cash from operating activities:
 
 
 

 
Amortization and depreciation
71.0

 
73.8

 
Income taxes
28.9

 
57.7

 
Insurance liabilities
88.2

 
74.0

 
Accrual and amortization of investment income
(35.7
)
 
(47.9
)
 
Deferral of policy acquisition costs
(58.2
)
 
(56.7
)
 
Net realized investment gains
(8.9
)
 
(23.4
)
 
Payment to reinsurer pursuant to long-term care business reinsured

 
(590.3
)
 
Net loss on sale of subsidiary and transition expenses
4.5

 
278.6

 
Other
(20.1
)
 
(18.1
)
 
Net cash from operating activities
$
122.5

 
$
(480.3
)
(a)

______________________
(a)
Cash flows from operating activities reflect outflows in the 2014 period due to the payment to reinsurer to transfer certain long-term care business.

Other non-cash items not reflected in the investing and financing activities sections of the consolidated statement of cash flows (dollars in millions):

 
Three months ended
 
March 31,
 
2015
 
2014
Stock options, restricted stock and performance units
$
4.3

 
$
3.6

OUT OF PERIOD ADJUSTMENTS
OUT-OF-PERIOD ADJUSTMENTS
OUT-OF-PERIOD ADJUSTMENTS

In the three months ended March 31, 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 increased our net loss by $1.6 million (or 1 cent per diluted share). We evaluated these adjustments taking into account both qualitative and quantitative factors and considered the impact of these adjustments in relation to each period, as well as the periods in which they originated. The impact of recognizing these adjustments in prior years was not significant to any individual period. Management believes these adjustments are immaterial to the consolidated financial statements and all previously issued financial statements.
INVESTMENTS IN VARIABLE INTEREST ENTITIES
INVESTMENTS IN VARIABLE INTEREST ENTITIES
INVESTMENTS IN VARIABLE INTEREST ENTITIES

We have concluded that we are the primary beneficiary with respect to certain VIEs, which are consolidated in our financial statements.  In consolidating the VIEs, we consistently use the financial information most recently distributed to investors in the VIE, which in one case, is less than two months prior to the end of our reporting period.

All of the VIEs are collateralized loan trusts that were established to issue securities to finance the purchase of corporate loans and other permitted investments.  The assets held by the trusts are legally isolated and not available to the Company.  The liabilities of the VIEs are expected to be satisfied from the cash flows generated by the underlying loans held by the trusts, not from the assets of the Company.  The Company has no financial obligation to the VIEs beyond its investment in each VIE.

Certain of our insurance subsidiaries are noteholders of the VIEs.  Another subsidiary of the Company is the investment manager for the VIEs.  As such, it has the power to direct the most significant activities of the VIEs which materially impacts the economic performance of the VIEs.

The following table provides supplemental information about the assets and liabilities of the VIEs which have been consolidated in accordance with authoritative guidance (dollars in millions):
 
March 31, 2015
 
VIEs
 
Eliminations
 
Net effect on
consolidated
balance sheet
Assets:
 
 
 
 
 
Investments held by variable interest entities
$
1,499.8

 
$

 
$
1,499.8

Notes receivable of VIEs held by insurance subsidiaries

 
(163.5
)
 
(163.5
)
Cash and cash equivalents held by variable interest entities
158.5

 

 
158.5

Accrued investment income
2.8

 

 
2.8

Income tax assets, net
6.9

 
(1.7
)
 
5.2

Other assets
18.4

 
(1.3
)
 
17.1

Total assets
$
1,686.4

 
$
(166.5
)
 
$
1,519.9

Liabilities:
 

 
 

 
 

Other liabilities
$
73.8

 
$
(5.5
)
 
$
68.3

Borrowings related to variable interest entities
1,461.3

 

 
1,461.3

Notes payable of VIEs held by insurance subsidiaries
164.1

 
(164.1
)
 

Total liabilities
$
1,699.2

 
$
(169.6
)
 
$
1,529.6


 
December 31, 2014
 
VIEs
 
Eliminations
 
Net effect on
consolidated
balance sheet
Assets:
 
 
 
 
 
Investments held by variable interest entities
$
1,367.1

 
$

 
$
1,367.1

Notes receivable of VIEs held by insurance subsidiaries

 
(153.3
)
 
(153.3
)
Cash and cash equivalents held by variable interest entities
68.3