CNO FINANCIAL GROUP, INC., 10-Q filed on 8/3/2015
Quarterly Report
DOCUMENT AND ENTITY INFORMATION
6 Months Ended
Jun. 30, 2015
Jul. 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
Jun. 30, 2015
Current Fiscal Year End Date
--12-31
Document Fiscal Year Focus
2015
Document Fiscal Period Focus
Q2
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
192,220,590
CONSOLIDATED BALANCE SHEET (unaudited)(USD $)
In Millions, unless otherwise specified
Jun. 30, 2015
Dec. 31, 2014
Investments:
Fixed maturities, available for sale, at fair value (amortized cost: June 30, 2015 - $18,758.2; December 31, 2014 - $18,408.1)
$20,224.8
$20,634.9
Equity securities at fair value (cost: June 30, 2015 - $418.6; December 31, 2014 - $400.5)
433.3
419.0
Mortgage loans
1,665.5
1,691.9
Policy loans
108.1
106.9
Trading securities
257.5
244.9
Investments held by variable interest entities
1,565.6
1,367.1
Other invested assets
435.4
443.6
Total investments
24,690.2
24,908.3
Cash and cash equivalents - unrestricted
453.9
611.6
Cash and cash equivalents held by variable interest entities
150.6
68.3
Accrued investment income
240.4
242.9
Present value of future profits
465.1
489.4
Deferred acquisition costs
877.4
770.6
Reinsurance receivables
2,925.0
2,991.1
Income tax assets, net
827.8
758.7
Assets held in separate accounts
5.4
5.6
Other assets
413.2
337.7
Total assets
31,049.0
31,184.2
Liabilities for insurance products:
Policyholder account balances
10,689.3
10,707.2
Future policy benefits
10,588.9
10,835.4
Liability for policy and contract claims
484.5
468.7
Unearned and advanced premiums
268.6
291.8
Liabilities related to separate accounts
5.4
5.6
Other liabilities
742.5
587.6
Investment borrowings
1,518.9
1,519.2
Borrowings related to variable interest entities
1,461.7
1,286.1
Notes payable direct corporate obligations
925.0
794.4
Total liabilities
26,684.8
26,496.0
Commitments and Contingencies
  
  
Shareholders' equity:
Common stock ($0.01 par value, 8,000,000,000 shares authorized, shares issued and outstanding: June 30, 2015 193,467,712; December 31, 2014 203,324,458)
1.9
2.0
Additional paid-in capital
3,554.9
3,732.4
Accumulated other comprehensive income
605.0
825.3
Retained earnings
202.4
128.5
Total shareholders' equity
4,364.2
4,688.2
Total liabilities and shareholders' equity
$31,049.0
$31,184.2
CONSOLIDATED BALANCE SHEET (unaudited) (Parenthetical)(USD $)
In Millions, except Share data, unless otherwise specified
Jun. 30, 2015
Dec. 31, 2014
Investments:
Fixed maturities, available for sale, amortized cost
$18,758.2
$18,408.1
Equity securities cost
$418.6
$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)
193,467,712
203,324,458
Common stock, shares outstanding (in shares)
193,467,712
203,324,458
CONSOLIDATED STATEMENT OF OPERATIONS (unaudited)(USD $)
In Millions, except Share data in Thousands, unless otherwise specified
3 Months Ended 6 Months Ended
Jun. 30, 2015
Jun. 30, 2014
Jun. 30, 2015
Jun. 30, 2014
Revenues:
Insurance policy income
$640.1
$679.0
$1,276.6
$1,364.9
Net investment income (loss):
General account assets
302.1
347.4
602.2
695.5
Policyholder and reinsurer accounts and other special-purpose portfolios
11.8
47.2
28.4
68.1
Realized investment gains (losses):
Net realized investment gains (losses), excluding impairment losses
(2.2)
12.4
(3.3)
47.7
Net impairment losses recognized
(7.9)1
01
(9.2)1
(11.9)1
Gain on dissolution of a variable interest entity
0
0
11.3
0
Total realized gains (losses)
(10.1)
12.4
(1.2)
35.8
Fee revenue and other income
15.6
7.0
31.8
13.4
Total revenues
959.5
1,093.0
1,937.8
2,177.7
Benefits and expenses:
Insurance policy benefits
568.3
691.1
1,174.3
1,381.4
Loss on sale of subsidiary, gain on reinsurance transaction and transition expenses
4.5
(3.8)
9.0
274.8
Interest expense
25.3
24.3
46.8
48.9
Amortization
73.7
64.9
139.8
131.6
Loss on extinguishment or modification of debt
32.8
0.6
32.8
0.6
Other operating costs and expenses
182.2
201.5
380.1
395.6
Total benefits and expenses
886.8
978.6
1,782.8
2,232.9
Income (loss) before income taxes
72.7
114.4
155.0
(55.2)
Income tax expense:
Tax expense on period income
25.9
40.3
55.4
79.3
Valuation allowance for deferred tax assets and other tax items
0
(4.0)
0
15.4
Net income (loss)
$46.8
$78.1
$99.6
$(149.9)
Basic:
Weighted average shares outstanding (in shares)
195,857
216,538
198,174
218,422
Net income (loss) (in dollars per share)
$0.24
$0.36
$0.50
$(0.69)
Diluted:
Weighted average shares outstanding (in shares)
198,073
222,108
200,174
218,422
Net income (loss) (in dollars per share)
$0.24
$0.35
$0.50
$(0.69)
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (unaudited)(USD $)
In Millions, unless otherwise specified
3 Months Ended 6 Months Ended
Jun. 30, 2015
Jun. 30, 2014
Jun. 30, 2015
Jun. 30, 2014
Statement of Comprehensive Income [Abstract]
Net income (loss)
$46.8
$78.1
$99.6
$(149.9)
Unrealized gains (losses) for the period
(1,016.1)
479.1
(747.1)
872.9
Amortization of present value of future profits and deferred acquisition costs
99.4
(42.0)
90.2
(119.4)
Amount related to premium deficiencies assuming the net unrealized gains (losses) had been realized
402.4
(180.1)
310.3
(417.6)
Reclassification adjustments:
For net realized investment (gains) losses included in net income (loss)
1.4
(9.7)
1.8
(35.7)
For amortization of the present value of future profits and deferred acquisition costs related to net realized investment gains (losses) included in net income (loss)
0.3
0.1
0.1
0.5
Unrealized gains (losses) on investments
(512.6)
247.4
(344.7)
300.7
Change related to deferred compensation plan
1.2
0.4
2.5
0.7
Other comprehensive income (loss) before tax
(511.4)
247.8
(342.2)
301.4
Income tax (expense) benefit related to items of accumulated other comprehensive income (loss)
182.2
(87.9)
121.9
(107.1)
Other comprehensive income (loss), net of tax
(329.2)
159.9
(220.3)
194.3
Comprehensive income (loss)
$(282.4)
$238.0
$(120.7)
$44.4
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)
(149.9)
(149.9)
Change in unrealized appreciation (depreciation) of investments (net of applicable income tax expense (benefit))
193.7
193.7
Change in noncredit component of impairment losses on fixed maturities, available for sale (net of applicable income tax expense (benefit))
0.6
0.6
Cost of common stock repurchased
(136.6)
(136.6)
Dividends on common stock
(26.3)
(26.3)
Stock options, restricted stock and performance units
7.6
7.6
Balance, end of period at Jun. 30, 2014
4,844.3
3,966.0
926.1
(47.8)
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)
99.6
99.6
Change in unrealized appreciation (depreciation) of investments (net of applicable income tax expense (benefit))
(220.9)
(220.9)
Change in noncredit component of impairment losses on fixed maturities, available for sale (net of applicable income tax expense (benefit))
0.6
0.6
Cost of common stock repurchased
(186.9)
(186.9)
Dividends on common stock
(25.7)
(25.7)
Stock options, restricted stock and performance units
9.3
9.3
Balance, end of period at Jun. 30, 2015
$4,364.2
$3,556.8
$605.0
$202.4
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (unaudited) (Parenthetical)(USD $)
In Millions, unless otherwise specified
6 Months Ended
Jun. 30, 2015
Jun. 30, 2014
Statement of Stockholders' Equity [Abstract]
Change in unrealized appreciation (depreciation) of investments, applicable income tax expense (benefit)
$(122.3)
$106.8
Change in noncredit component of impairment losses on fixed maturities, available for sale, applicable income tax expense (benefit)
$0.4
$0.3
CONSOLIDATED STATEMENT OF CASH FLOWS (unaudited)(USD $)
In Millions, unless otherwise specified
6 Months Ended
Jun. 30, 2015
Jun. 30, 2014
Cash flows from operating activities:
Insurance policy income
$1,190.8
$1,185.3
Net investment income
599.7
686.1
Fee revenue and other income
31.8
13.4
Insurance policy benefits
(947.0)
(1,049.1)
Payment to reinsurer pursuant to long-term care business reinsured
0
(590.3)
Interest expense
(42.6)
(45.2)
Deferrable policy acquisition costs
(120.5)
(116.9)
Other operating costs
(379.2)
(396.2)
Taxes
(2.6)
(2.0)
Net cash from operating activities
330.41
(314.9)1
Cash flows from investing activities:
Sales of investments
796.0
1,377.2
Maturities and redemptions of investments
982.8
1,007.1
Purchases of investments
(2,182.8)
(2,072.4)
Net sales (purchases) of trading securities
(11.0)
12.1
Change in cash and cash equivalents held by variable interest entities
(82.3)
2.5
Cash and cash equivalents held by subsidiary prior to being sold
0
(164.7)
Other
(11.2)
(15.0)
Net cash provided (used) by investing activities
(508.5)
146.8
Cash flows from financing activities:
Issuance of notes payable, net
909.0
0
Payments on notes payable
(797.1)
(29.5)
Expenses related to extinguishment or modification of debt
(17.8)
(0.5)
Issuance of common stock
3.9
3.6
Payments to repurchase common stock
(178.9)
(133.6)
Common stock dividends paid
(25.8)
(26.3)
Amounts received for deposit products
584.2
677.7
Withdrawals from deposit products
(645.3)
(732.5)
Issuance of investment borrowings:
Federal Home Loan Bank
50.0
300.0
Related to variable interest entities
274.8
141.6
Payments on investment borrowings:
Federal Home Loan Bank
(50.3)
(317.4)
Related to variable interest entities and other
(86.3)
(43.6)
Investment borrowings - repurchase agreements, net
0
8.4
Net cash provided (used) by financing activities
20.4
(152.1)
Net decrease in cash and cash equivalents
(157.7)
(320.2)
Cash and cash equivalents, beginning of period
611.6
699.0
Cash and cash equivalents, end of period
$453.9
$378.8
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 as retrospectively updated by the Current Report on Form 8-K filed on May 11, 2015 reflecting updated disclosures of operating earnings performance measures.

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 June 30, 2015 and December 31, 2014, were as follows (dollars in millions):

 
June 30,
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
1,461.3

 
2,207.7

Adjustment to present value of future profits (a)
(137.3
)
 
(149.9
)
Adjustment to deferred acquisition costs
(301.3
)
 
(390.5
)
Adjustment to insurance liabilities
(82.6
)
 
(381.4
)
Unrecognized net loss related to deferred compensation plan
(6.0
)
 
(8.5
)
Deferred income tax liabilities
(335.5
)
 
(457.4
)
Accumulated other comprehensive income
$
605.0

 
$
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 June 30, 2015, adjustments to the present value of future profits, deferred acquisition costs, insurance liabilities and deferred tax assets included $(119.0) million, $(140.5) million, $(82.6) million and $121.8 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 June 30, 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
$
12,470.4

 
$
1,189.7

 
$
(143.2
)
 
$
13,516.9

 
$

United States Treasury securities and obligations of United States government corporations and agencies
149.9

 
16.3

 

 
166.2

 

States and political subdivisions
2,000.6

 
215.8

 
(15.0
)
 
2,201.4

 

Debt securities issued by foreign governments
1.8

 
.1

 

 
1.9

 

Asset-backed securities
1,338.8

 
70.4

 
(3.2
)
 
1,406.0

 

Collateralized debt obligations
343.8

 
1.7

 
(1.2
)
 
344.3

 

Commercial mortgage-backed securities
1,323.7

 
64.0

 
(5.1
)
 
1,382.6

 

Mortgage pass-through securities
3.5

 
.3

 

 
3.8

 

Collateralized mortgage obligations
1,125.7

 
76.9

 
(.9
)
 
1,201.7

 
(3.0
)
Total fixed maturities, available for sale
$
18,758.2

 
$
1,635.2

 
$
(168.6
)
 
$
20,224.8

 
$
(3.0
)
Equity securities
$
418.6

 
$
16.3

 
$
(1.6
)
 
$
433.3

 
 


The following table sets forth the amortized cost and estimated fair value of fixed maturities, available for sale, at June 30, 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
$
231.4

 
$
235.6

Due after one year through five years
2,175.0

 
2,371.7

Due after five years through ten years
2,213.0

 
2,365.3

Due after ten years
10,003.3

 
10,913.8

Subtotal
14,622.7

 
15,886.4

Structured securities
4,135.5

 
4,338.4

Total fixed maturities, available for sale
$
18,758.2

 
$
20,224.8



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
 
Six months ended
 
June 30,
 
June 30,
 
2015
 
2014
 
2015
 
2014
Fixed maturity securities, available for sale:
 
 
 
 
 
 
 
Gross realized gains on sale
$
11.5

 
$
4.9

 
$
26.2

 
$
46.4

Gross realized losses on sale
(5.5
)
 
(3.0
)
 
(20.9
)
 
(8.5
)
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
6.0

 
1.9

 
4.0

 
37.9

Equity securities
.5

 
7.9

 
3.0

 
7.9

Commercial mortgage loans

 
1.1

 
(2.3
)
 
1.1

Impairments of mortgage loans and other investments
(7.9
)
 

 
(7.9
)
 
(11.9
)
Gain on dissolution of a variable interest entity

 

 
11.3

 

Other (a)
(8.7
)
 
1.5

 
(9.3
)
 
.8

Net realized investment gains (losses)
$
(10.1
)
 
$
12.4

 
$
(1.2
)
 
$
35.8


_________________
(a)
Changes in the estimated fair value of trading securities that we have elected the fair value option (and are still held as of the end of the respective periods) were $(3.9) million and $6.1 million for the six months ended June 30, 2015 and 2014, respectively.

During the first six months of 2015, we recognized net realized investment losses of $1.2 million, which were comprised of: (i) $1.0 million of net gains from the sales of investments; (ii) an $11.3 million gain on the dissolution of a variable interest entity ("VIE"); (iii) the decrease in fair value of embedded derivatives related to a modified coinsurance agreement of $4.3 million; and (iv) $9.2 million of writedowns of investments for other than temporary declines in fair value recognized through net income.

During the first six 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 six months of 2014, we recognized net realized investment gains of $35.8 million, which were comprised of: (i) $41.8 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 $5.9 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 six months of 2015, the $20.9 million of realized losses on sales of $181.7 million of fixed maturity securities, available for sale included: (i) $.6 million of losses related to the sales of asset-backed securities; and (ii) $20.3 million 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 six months of 2015, we recognized $9.2 million of impairment losses recorded in earnings which included: (i) a $1.3 million writedown on a fixed maturity due to issuer specific events; and (ii) a $7.9 million writedown of a legacy investment in a private company that is being liquidated. We no longer have any exposure to legacy private companies related to investments acquired by our Predecessor.

During the first six 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 June 30, 2015, other-than-temporary impairments included in accumulated other comprehensive income of $3.0 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 and six months ended June 30, 2015, and 2014 (dollars in millions):

 
Three months ended
 
Six months ended
 
June 30,
 
June 30,
 
2015
 
2014
 
2015
 
2014
Credit losses on fixed maturity securities, available for sale, beginning of period
$
(1.0
)
 
$
(1.3
)
 
$
(1.0
)
 
$
(1.3
)
Add:  credit losses on other-than-temporary impairments not previously recognized

 

 

 

Less:  credit losses on securities sold

 
.1

 

 
.1

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
)
 
$
(1.2
)
 
$
(1.0
)
 
$
(1.2
)
__________
(a)
Represents securities for which the amount previously recognized in accumulated other comprehensive income was recognized in earnings because we intend to sell the security or we more likely than not will be required to sell the security before recovery of its amortized cost basis.

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 June 30, 2015 (dollars in millions):

 
 
Less than 12 months
 
12 months or greater
 
Total
Description of securities
 
Fair
value
 
Unrealized
losses
 
Fair
value
 
Unrealized
losses
 
Fair
value
 
Unrealized
losses
United States Treasury securities and obligations of United States government corporations and agencies
 
$
7.6

 
$

 
$

 
$

 
$
7.6

 
$

States and political subdivisions
 
213.4

 
(9.4
)
 
24.9

 
(5.6
)
 
238.3

 
(15.0
)
Corporate securities
 
1,942.5

 
(125.2
)
 
184.1

 
(18.0
)
 
2,126.6

 
(143.2
)
Asset-backed securities
 
241.5

 
(2.5
)
 
54.3

 
(.7
)
 
295.8

 
(3.2
)
Collateralized debt obligations
 
108.2

 
(.6
)
 
46.1

 
(.6
)
 
154.3

 
(1.2
)
Commercial mortgage-backed securities
 
175.6

 
(5.1
)
 
4.7

 

 
180.3

 
(5.1
)
Mortgage pass-through securities
 

 

 
.3

 

 
.3

 

Collateralized mortgage obligations
 
68.4

 
(.5
)
 
24.2

 
(.4
)
 
92.6

 
(.9
)
Total fixed maturities, available for sale
 
$
2,757.2

 
$
(143.3
)
 
$
338.6

 
$
(25.3
)
 
$
3,095.8

 
$
(168.6
)
Equity securities
 
$
118.3

 
$
(1.4
)
 
$
1.6

 
$
(.2
)
 
$
119.9

 
$
(1.6
)

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, 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 June 30, 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
 
Six months ended
 
June 30,
 
June 30,
 
2015
 
2014
 
2015
 
2014
Net income (loss) for basic and diluted earnings per share
$
46.8

 
$
78.1

 
$
99.6

 
$
(149.9
)
Shares:
 

 
 

 
 
 
 
Weighted average shares outstanding for basic earnings per share
195,857

 
216,538

 
198,174

 
218,422

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

 
 

 
 
 
 
Stock options, restricted stock and performance units
2,216

 
2,390

 
2,000

 

Warrants

 
3,180

 

 

Weighted average shares outstanding for diluted earnings per share
198,073

 
222,108

 
200,174

 
218,422


________
(a)
In the six months ended June 30, 2014, 5,687,000 equivalent common shares (comprised of 2,464,000 shares related to stock options, restricted stock and performance units and 3,223,000 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. 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
 
Six months ended
 
June 30,
 
June 30,
 
2015
 
2014
 
2015
 
2014
Revenues:
 
 
 
 
 
 
 
Bankers Life:
 
 
 
 
 
 
 
Insurance policy income:
 
 
 
 
 
 
 
Annuities
$
6.1

 
$
7.7

 
$
11.8

 
$
15.2

Health
313.1

 
320.5

 
628.9

 
651.0

Life
94.7

 
79.9

 
185.9

 
158.2

Net investment income (a)
225.2

 
247.6

 
451.7

 
472.0

Fee revenue and other income (a)
6.5

 
5.8

 
12.8

 
11.1

Total Bankers Life revenues
645.6

 
661.5

 
1,291.1

 
1,307.5

Washington National:
 

 
 

 
 
 
 
Insurance policy income:
 

 
 

 
 
 
 
Annuities
.7

 
1.4

 
1.6

 
2.4

Health
152.7

 
148.8

 
304.9

 
297.7

Life
6.2

 
6.5

 
12.6

 
12.2

Net investment income (a)
63.1

 
71.8

 
128.7

 
140.8

Fee revenue and other income (a)
.3

 
.2

 
.7

 
.4

Total Washington National revenues
223.0

 
228.7

 
448.5

 
453.5

Colonial Penn:
 

 
 

 
 
 
 
Insurance policy income:
 

 
 

 
 
 
 
Health
.8

 
.9

 
1.6

 
1.9

Life
65.8

 
60.8

 
129.3

 
120.3

Net investment income (a)
10.8

 
10.5

 
21.5

 
21.2

Fee revenue and other income (a)
.2

 
.3

 
.5

 
.5

Total Colonial Penn revenues
77.6

 
72.5

 
152.9

 
143.9

Corporate operations:
 

 
 

 
 
 
 
Net investment income
2.8

 
5.7

 
9.5

 
12.7

Fee and other income
2.2

 
1.3

 
4.1

 
2.7

Total corporate revenues
5.0

 
7.0

 
13.6

 
15.4

Total revenues
951.2

 
969.7

 
1,906.1

 
1,920.3


(continued on next page)

(continued from previous page)
 
Three months ended
 
Six months ended
 
June 30,
 
June 30,
 
2015
 
2014
 
2015
 
2014
Expenses:
 
 
 
 
 
 
 
Bankers Life:
 
 
 
 
 
 
 
Insurance policy benefits
$
410.7

 
$
427.9

 
$
816.0

 
$
842.9

Amortization
47.7

 
45.4

 
99.3

 
93.6

Interest expense on investment borrowings
2.1

 
1.9

 
4.2

 
3.8

Other operating costs and expenses
98.7

 
98.9

 
203.0

 
195.6

Total Bankers Life expenses
559.2

 
574.1

 
1,122.5

 
1,135.9

Washington National:
 

 
 

 
 
 
 
Insurance policy benefits
143.8

 
132.8

 
279.0

 
264.6

Amortization
13.7

 
16.0

 
29.0

 
32.3

Interest expense on investment borrowings
.5

 
.5

 
.9

 
.9

Other operating costs and expenses
44.9

 
47.1

 
91.0

 
92.3

Total Washington National expenses
202.9

 
196.4

 
399.9

 
390.1

Colonial Penn:
 

 
 

 
 
 
 
Insurance policy benefits
47.8

 
43.2

 
96.4

 
87.9

Amortization
3.7

 
3.8

 
7.3

 
7.8

Other operating costs and expenses
21.9

 
21.7

 
50.9

 
50.6

Total Colonial Penn expenses
73.4

 
68.7

 
154.6

 
146.3

Corporate operations:
 

 
 

 
 
 
 
Interest expense on corporate debt
11.9

 
11.1

 
22.4

 
22.2

Interest expense on investment borrowings
.1

 

 
.1

 

Other operating costs and expenses
9.9

 
10.7

 
19.8

 
25.1

Total corporate expenses
21.9

 
21.8

 
42.3

 
47.3

Total expenses
857.4

 
861.0

 
1,719.3

 
1,719.6

Pre-tax operating earnings by segment:
 

 
 

 
 
 
 
Bankers Life
86.4

 
87.4

 
168.6

 
171.6

Washington National
20.1

 
32.3

 
48.6

 
63.4

Colonial Penn
4.2

 
3.8

 
(1.7
)
 
(2.4
)
Corporate operations
(16.9
)
 
(14.8
)
 
(28.7
)
 
(31.9
)
Pre-tax operating earnings
$
93.8

 
$
108.7

 
$
186.8

 
$
200.7

___________________
(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
 
Six months ended
 
June 30,
 
June 30,
 
2015
 
2014
 
2015
 
2014
Total segment revenues                                                                                            
$
951.2

 
$
969.7

 
$
1,906.1

 
$
1,920.3

Net realized investment gains (losses)                                           
(10.1
)
 
11.7

 
(12.5
)
 
33.0

Revenues related to certain non-strategic investments and earnings attributable to VIEs
10.9

 
7.3

 
29.2

 
13.6

Fee revenue related to transition and support services agreements
7.5

 

 
15.0

 

Revenues of CLIC prior to being sold

 
104.3

 

 
210.8

Consolidated revenues                                                                                       
959.5

 
1,093.0

 
1,937.8

 
2,177.7

 
 
 
 
 
 
 
 
Total segment expenses                                                                                            
857.4

 
861.0

 
1,719.3

 
1,719.6

Insurance policy benefits - fair value changes in embedded derivative liabilities
(34.0
)
 
10.1

 
(17.1
)
 
25.3

Amortization related to fair value changes in embedded derivative liabilities
8.3

 
(2.7
)
 
4.1

 
(6.9
)
Amortization related to net realized investment gains
.3

 
.1

 
.1

 
.5

Expenses related to certain non-strategic investments and expenses attributable to VIEs
12.0

 
10.2

 
22.5

 
19.8

Fair value changes related to agent deferred compensation plan


11.8

 

 
11.8

Loss on extinguishment or modification of debt
32.8

 
.6

 
32.8

 
.6

Loss on sale of subsidiary, gain on reinsurance transaction and transition expenses
4.5

 
(3.8
)
 
9.0

 
274.8

Expenses related to transition and support services agreements
5.5

 

 
12.1

 

Expenses of CLIC prior to being sold

 
91.3

 

 
187.4

Consolidated expenses                                                                                       
886.8

 
978.6

 
1,782.8

 
2,232.9

Income (loss) before tax
72.7

 
114.4

 
155.0

 
(55.2
)
Income tax expense:
 
 
 
 
 
 
 
Tax expense on period income
25.9

 
40.3

 
55.4

 
79.3

Valuation allowance for deferred tax assets and other tax items

 
(4.0
)
 

 
15.4

Net income (loss)
$
46.8

 
$
78.1

 
$
99.6

 
$
(149.9
)
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
 
 
June 30,
2015
 
December 31, 2014
Assets:
 
 
 
 
Other invested assets:
 
 
 
 
Fixed index call options
 
$
63.8

 
$
107.2

Interest rate futures
 
(.1
)
 
(.2
)
Reinsurance receivables
 
(2.3
)
 
2.0

Total assets
 
$
61.4

 
$
109.0

Liabilities:
 
 
 
 
Future policy benefits:
 
 
 
 
Fixed index products
 
$
1,074.0

 
$
1,081.5

Total liabilities
 
$
1,074.0

 
$
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 June 30, 2015. Such amount did not fluctuate significantly during the first six 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 $152 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
 
Six months ended
 
 
June 30,
 
June 30,
 
 
2015
 
2014
 
2015
 
2014
Net investment income from policyholder and reinsurer accounts and other special-purpose portfolios:
 
 
 
 
 
 
 
 
Fixed index call options
 
$
(5.9
)
 
$
31.3

 
$
(8.0
)
 
$
36.7

Embedded derivative related to reinsurance contract
 

 
.2

 

 
(1.4
)
Total
 
(5.9
)
 
31.5

 
(8.0
)
 
35.3

Net realized gains (losses):
 
 
 
 
 
 
 
 
Interest rate futures
 
.1

 
(1.9
)
 
(1.6
)
 
(4.6
)
Embedded derivative related to modified coinsurance agreement
 
(5.7
)
 

 
(4.3
)
 

Total
 
(5.6
)
 
(1.9
)
 
(5.9
)
 
(4.6
)
Insurance policy benefits:
 
 
 
 
 
 
 
 
Embedded derivative related to fixed index annuities
 
35.3

 
(10.8
)
 
17.5

 
(26.8
)
Total
 
$
23.8

 
$
18.8

 
$
3.6

 
$
3.9



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 June 30, 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 June 30, 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
June 30, 2015:
 
 
 
Fixed index call options
 
$
63.8

 
$

 
$
63.8

 
$

 
$

 
$
63.8

 
Interest rate futures
 
(.1
)
 
.8

 
.7

 

 

 
.7

 
Repurchase agreements (a)
 
20.4

 

 
20.4

 
20.4

 

 

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 June 30, 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 $33.3 million and $55.4 million in the second quarters of 2015 and 2014, respectively, and $67.2 million and $107.5 million in the first six months of 2015 and 2014, respectively.  We deduct this cost from insurance policy income.  Reinsurance recoveries netted against insurance policy benefits totaled $53.8 million and $61.2 million in the second quarters of 2015 and 2014, respectively, and $93.2 million and $120.8 million in the first six months 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 $3.8 million in the second quarters of 2015 and 2014, respectively, and $19.8 million and $14.7 million in the first six months 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.

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.
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 six months ended June 30, 2014. The components of income tax expense are as follows (dollars in millions):

 
Three months ended
 
Six months ended
 
June 30,
 
June 30,
 
2015
 
2014
 
2015
 
2014
Current tax expense
$
3.3

 
$
3.9

 
$
6.2

 
$
6.1

Deferred tax expense
22.6

 
36.4

 
49.0

 
73.2

Income tax expense calculated based on estimated annual effective tax rate
25.9

 
40.3

 
55.2

 
79.3

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

 

 

 
19.4

Other items

 
(4.0
)
 
.2

 
(4.0
)
Total income tax expense
$
25.9

 
$
36.3

 
$
55.4

 
$
94.7



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:
 
 
Six months ended
 
June 30,
 
2015
 
2014
U.S. statutory corporate rate
35.0
 %
 
35.0
 %
Non-taxable income and nondeductible benefits, net
(1.0
)
 
(1.0
)
State taxes
1.6

 
1.5

Estimated annual effective tax rate
35.6
 %
 
35.5
 %


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

 
June 30,
2015
 
December 31,
2014
Deferred tax assets:
 
 
 
Net federal operating loss carryforwards
$
1,001.2

 
$
1,048.4

Net state operating loss carryforwards
14.3

 
15.2

Tax credits
50.3

 
47.2

Capital loss carryforwards
.1

 

Investments
47.0

 
59.7

Insurance liabilities
589.3

 
585.9

Other
61.1

 
67.3

Gross deferred tax assets
1,763.3

 
1,823.7

Deferred tax liabilities:
 

 
 

Present value of future profits and deferred acquisition costs
(309.1
)
 
(320.5
)
Accumulated other comprehensive income
(335.5
)
 
(457.4
)
Gross deferred tax liabilities
(644.6
)
 
(777.9
)
Net deferred tax assets before valuation allowance
1,118.7

 
1,045.8

Valuation allowance
(246.0
)
 
(246.0
)
Net deferred tax assets
872.7

 
799.8

Current income taxes accrued
(44.9
)
 
(41.1
)
Income tax assets, net
$
827.8

 
$
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 $872.7 million of our net deferred tax assets of $1,118.7 million will be realized through future taxable earnings. Accordingly, we have established a deferred tax valuation allowance of $246.0 million at June 30, 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 (2.50 percent at June 30, 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 June 30, 2015, we were below the 50 percent ownership change level that would trigger further impairment of our ability to utilize our NOLs.

As of June 30, 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") and other uncertain tax positions(dollars in millions):

Year of expiration
 
Net operating loss carryforwards
 
Total loss
 
 
Life
 
Non-life
 
carryforwards
2023
 
$
715.0

 
$
1,983.0

 
$
2,698.0

2025
 

 
91.5

 
91.5

2026
 

 
207.4