CONSOLIDATED BALANCE SHEET (USD $)

In Millions

3 Months Ended
Mar. 31, 2011

Year Ended
Dec. 31, 2010

Investments:

Fixed maturities, available for sale, at fair value (amortized cost: March 31, 2011 - $20,343.9; December 31, 2010 - $20,155.8)

$ 20,852

$ 20,634

Equity securities at fair value (cost: March 31, 2011 - $104.9; December 31, 2010 - $68.2)

105

68

Mortgage loans

1,751

1,761

Policy loans

282

284

Trading securities

403

373

Investments held by variable interest entities

402

421

Other invested assets

272

241

Total investments

24,067

23,782

Cash and cash equivalents - unrestricted

425

572

Cash and cash equivalents held by variable interest entities

27

Accrued investment income

337

328

Present value of future profits

970

1,009

Deferred acquisition costs

1,766

1,764

Reinsurance receivables

3,219

3,256

Income tax assets, net

799

839

Assets held in separate accounts

18

Other assets

440

305

Total assets

32,068

31,900

Liabilities for insurance products:

Interest-sensitive products

13,161

13,195

Traditional products

10,358

10,308

Claims payable and other policyholder funds

979

969

Liabilities related to separate accounts

18

Other liabilities

643

496

Investment borrowings

1,204

Borrowings related to variable interest entities

354

387

Notes payable - direct corporate obligations

950

999

Total liabilities

27,667

27,574

Commitments and contingencies

Shareholders' equity:

Common stock ($0.01 par value, 8,000,000,000 shares authorized, shares issued and outstanding: March 31, 2011 - 251,404,857; December 31, 2010 - 251,084,174)

3

Additional paid-in capital

4,426

4,424

Accumulated other comprehensive income

258

238

Accumulated deficit

(286)

(340)

Total shareholders' equity

4,400

4,325

Total liabilities and shareholders' equity

$ 32,068

$ 31,900

PARENTHETICAL DATA TO THE CONSOLIDATED BALANCE SHEET (USD $)

In Millions, except Share data

Mar. 31, 2011

Dec. 31, 2010

Investments:

Fixed maturities, available for sale, amortized cost

$ 20,344

$ 20,156

Available for sale equity secuities cost

105

68

Shareholders' equity:

Common stock, par value

$ 0.01

Common stock, shares authorized

8,000,000,000

Common stock, shares issued

251,404,857

251,084,174

Common stock, shares outstanding

251,404,857

251,084,174

CONSOLIDATED STATEMENT OF OPERATIONS (USD $)

In Millions, except Share data

3 Months Ended
Mar. 31,

2011

2010

Revenues:

Insurance policy income

$ 667

$ 665

Net investment income (loss):

General account assets

336

315

Policyholder and reinsurer accounts and other special- purpose portfolios

37

24

Realized investment gains (losses):

Net realized investment gains, excluding impairment losses

18

15

Other-than-temporary impairment losses:

Total other-than-temporary impairment losses

(13)

(18)

Portion of other-than-temporary impairment losses recognized in accumulated other comprehensive income

0

(3)

Net impairment losses recognized

(13)

(20)

Total realized gains (losses)

5

(5)

Fee revenue and other income

3

4

Total revenues

1,049

1,002

Benefits and expenses:

Insurance policy benefits

683

699

Interest expense

29

28

Amortization

137

103

Loss on extinguishment of debt

1

2

Other operating costs and expenses

115

118

Total benefits and expenses

966

949

Income before income taxes

84

53

Income tax expense:

Tax expense on period income

30

19

Net income

54

34

Basic:

Weighted average shares outstanding

251,121,000

250,788,000

Net income

0.21

0.14

Diluted:

Weighted average shares outstanding

307,498,000

292,081,000

Net income

$ 0.19

$ 0.13

CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (USD $)

In Millions

Common stock and additional paid-in capital

Accumulated other comprehensive income (loss)

Retained earnings (accumulated deficit)

Total

Balance at Dec. 31, 2009

$ 4,411

$ (264)

$ (615)

$ 3,532

Comprehensive income (loss), net of tax:

Net income

34

Change in unrealized appreciation (depreciation) of investments (net of applicable income tax benefit (expense))

146

Change in noncredit component of impairment losses on fixed maturities, available for sale (net of applicable income tax benefit (expense))

21

Total comprehensive income (loss)

201

Cumulative effect of accounting change

(6)

(10)

(16)

Stock option and restricted stock plans

2

Balance at Mar. 31, 2010

4,414

(103)

(590)

3,720

Balance at Dec. 31, 2010

4,427

238

(340)

4,325

Comprehensive income (loss), net of tax:

Net income

54

Change in unrealized appreciation (depreciation) of investments (net of applicable income tax benefit (expense))

17

Change in noncredit component of impairment losses on fixed maturities, available for sale (net of applicable income tax benefit (expense))

3

Total comprehensive income (loss)

73

Stock option and restricted stock plans

2

Balance at Mar. 31, 2011

$ 4,429

$ 258

$ (286)

$ 4,400

PARENTHETICAL DATA TO THE CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (USD $)

In Millions

3 Months Ended
Mar. 31,

2011

2010

Comprehensive income (loss), net of tax:

Change in unrealized appreciation (depreciation) of investments, applicable income tax expense

$ 10

$ 78

Change in noncredit component of impairment losses on fixed maturities, available for sale, applicable income tax expense

$ 2

$ 12

CONSOLIDATED STATEMENT OF CASH FLOWS (USD $)

In Millions

3 Months Ended
Mar. 31,

2011

2010

Cash flows from operating activities:

Insurance policy income

$ 592

$ 586

Net investment income

325

315

Fee revenue and other income

3

4

Insurance policy benefits

(514)

(466)

Interest expense

(16)

(24)

Policy acquisition costs

(109)

Other operating costs

(125)

(123)

Taxes

(1)

(2)

Net cash provided by operating activities

155

181

Cash flows from investing activities:

Sales of investments

1,248

2,195

Maturities and redemptions of investments

253

158

Purchases of investments

(1,661)

(2,660)

Net purchases of trading securities

(24)

(34)

Change in cash and cash equivalents held by variable interest entities

(0)

(17)

Other

(5)

(3)

Net cash used by investing activities

(189)

(361)

Cash flows from financing activities:

Issuance of notes payable, net

0

61

Payments on notes payable

(50)

(64)

Amounts received for deposit products

395

409

Withdrawals from deposit products

(426)

(412)

Investment borrowings and borrowings related to variable interest entities

(33)

(16)

Net cash used by financing activities

(113)

(22)

Net decrease in cash and cash equivalents

(147)

(202)

Cash and cash equivalents, beginning of period

572

523

Cash and cash equivalents, end of period

$ 425

$ 321

BUSINESS AND BASIS OF PRESENTATION

The following notes should be read together with the notes to the consolidated financial statements included in our 2010 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. CNO became the successor to Conseco, Inc., an Indiana corporation (our “Predecessor”), in connection with our bankruptcy reorganization which became effective on September 10, 2003. The terms “CNO Financial Group, Inc.”, the “Company”, “we”, “us”, and “our” as used in these financial statements refer to CNO and its subsidiaries or, when the context requires otherwise, our Predecessor and its subsidiaries. We focus on serving the senior and middle-income markets, 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 2011 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, 2010, 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, certain investments (including derivatives), 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.

Our consolidated financial statements exclude the results of transactions between us and our consolidated affiliates, or among our consolidated affiliates.

INVESTMENTS

We classify our fixed maturity securities into one of three 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); (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)); or (iii) “held to maturity” (which we carry at amortized cost). We had no fixed maturity securities classified as held to maturity during the periods presented in these financial statements.

Certain of our trading securities are held in an effort to offset the portion of the income statement volatility caused by the effect of interest rate fluctuations on the value of certain embedded derivatives related to our fixed index annuity products and certain modified coinsurance agreements. See the note entitled “Accounting for Derivatives” for further discussion regarding embedded derivatives and the trading accounts. In addition, the trading account includes investments backing the market strategies of our multibucket annuity products. The change in fair value of these securities, which is recognized currently in income from policyholder and reinsurer accounts and other special-purpose portfolios (a component of investment income), is substantially offset by the change in insurance policy benefits for these products. Our trading securities totaled $403.1 million and $372.6 million at March 31, 2011 and December 31, 2010, respectively.

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, 2011 and December 31, 2010, were as follows (dollars in millions):

	March 31,			December 31,
	2011			2010

Net unrealized appreciation (depreciation) on fixed maturity securities, available for sale, on which an other-than-temporary impairment loss has been recognized	$	.3		$	(4.4	)
Net unrealized gains (losses) on all other investments		511.5			476.5
Adjustment to present value of future profits (a)		(18.0	)		(17.6	)
Adjustment to deferred acquisition costs		(85.0	)		(76.2	)
Unrecognized net loss related to deferred compensation plan		(7.4	)		(7.7	)
Deferred income tax liability		(143.8	)		(132.3	)

Accumulated other comprehensive income	$	257.6		$	238.3

_________

(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 our Predecessor emerged from bankruptcy).

At March 31, 2011, the amortized cost, gross unrealized gains and losses, other-than-temporary impairments in accumulated other comprehensive income and estimated fair value of fixed maturities, available for sale, were as follows (dollars in millions):

										Other-than-
										temporary
										impairments
										included in
			Gross		Gross					accumulated other
	Amortized		unrealized		unrealized			Estimated		comprehensive
	cost		gains		losses			fair value		income

Corporate securities	$	13,950.1	$	628.2	$	(142.9	)	$	14,435.4	$	-
United States Treasury securities and obligations of United States government corporations and agencies		281.7		4.1		(13.1	)		272.7		-
States and political subdivisions		1,819.6		12.7		(80.6	)		1,751.7		-
Debt securities issued by foreign governments		.8		.1		-			.9		-
Asset-backed securities		706.9		20.3		(5.1	)		722.1		-
Collateralized debt obligations		180.2		6.0		-			186.2		-
Commercial mortgage-backed securities		1,331.3		80.2		(6.5	)		1,405.0		-
Mortgage pass-through securities		27.5		1.9		(.1	)		29.3		-
Collateralized mortgage obligations		2,045.8		36.9		(33.8	)		2,048.9		(13.7	)

Total fixed maturities, available for sale	$	20,343.9	$	790.4	$	(282.1	)	$	20,852.2	$	(13.7	)

The following table sets forth the amortized cost and estimated fair value of fixed maturities, available for sale, at March 31, 2011, 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.

			Estimated
	Amortized		fair
	cost		value
	(Dollars in millions)

Due in one year or less	$	109.6	$	110.8
Due after one year through five years		1,052.7		1,108.5
Due after five years through ten years		4,146.7		4,400.0
Due after ten years		10,743.3		10,841.5

Subtotal		16,052.3		16,460.8

Structured securities		4,291.6		4,391.4

Total fixed maturities, available for sale	$	20,343.9	$	20,852.2

Net Realized Investment Gains (Losses)

During the first three months of 2011, we recognized net realized investment gains of $5.1 million, which were comprised of $18.4 million of net gains from the sales of investments (primarily fixed maturities) with proceeds of $1.2 billion and $13.3 million of writedowns of investments for other than temporary declines in fair value recognized through net income.

During the first three months of 2010, we recognized net realized investment losses of $4.9 million, which were comprised of $15.4 million of net gains from the sales of investments (primarily fixed maturities) with proceeds of $2.2 billion and $20.3 million of writedowns of investments for other than temporary declines in fair value recognized through net income ($17.7 million, prior to the $(2.6) million of impairment losses recognized through accumulated other comprehensive income (loss)).

At March 31, 2011, fixed maturity securities in default or considered nonperforming had an aggregate amortized cost of $.4 million and a carrying value of $.5 million.

Our fixed maturity investments are generally purchased in the context of a long-term strategy to fund 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 three months ended March 31, 2011, we sold $.4 billion of fixed maturity investments which resulted in gross investment losses (before income taxes) of $24.6 million. We sell securities at a loss for a number of reasons including, but 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) changes in credit quality; or (v) changes in expected liability cash flows.

There were no investments sold at a loss during the first three months of 2011 which had been continuously in an unrealized loss position exceeding 20 percent of the amortized cost basis prior to the sale of the investment.

We regularly evaluate our investments 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) 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 of securities in our portfolio. Significant losses in the estimated fair values of our investments could have a material adverse effect on our earnings 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 (loss).

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 including timing, secured interest and loss severity. 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.

The remaining non-credit impairment, which is recorded in accumulated other comprehensive income (loss), 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 non-credit impairment typically represents changes in the market interest rates, current market liquidity and risk premiums. As of March 31, 2011, other-than-temporary impairments included in accumulated other comprehensive income of $13.7 million (before taxes and related amortization) relate to 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, 2011 and 2010 (dollars in millions):

	Three months ended
	March 31,
	2011			2010

Credit losses on fixed maturity securities, available for sale, beginning of period	$	(6.1	)	$	(27.2	)
Add: credit losses on other-than-temporary impairments not previously recognized		-			-
Less: credit losses on securities sold		4.3			3.4
Less: credit losses on securities impaired due to intent to sell (a)		-			-
Add: credit losses on previously impaired securities		-			(5.6	)
Less: increases in cash flows expected on previously impaired securities		-			-

Credit losses on fixed maturity securities, available for sale, end of period	$	(1.8	)	$	(29.4	)

__________

(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 income or 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, 2011 (dollars in millions):

	Less than 12 months					12 months or greater					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
Description of securities	value		losses			value		losses			value		losses

United States Treasury securities and obligations of United States government corporations and agencies	$	206.3	$	(13.1	)	$	.3	$	-		$	206.6	$	(13.1	)
States and political subdivisions		1,016.2		(41.5	)		212.7		(39.1	)		1,228.9		(80.6	)
Corporate securities		2,955.2		(83.0	)		748.3		(59.9	)		3,703.5		(142.9	)
Asset-backed securities		211.2		(4.1	)		10.5		(1.0	)		221.7		(5.1	)
Collateralized debt obligations		1.7		-			-		-			1.7		-
Commercial mortgage-backed securities		60.0		(.7	)		69.0		(5.8	)		129.0		(6.5	)
Mortgage pass-through securities		.2		-			3.3		(.1	)		3.5		(.1	)
Collateralized mortgage obligations		626.5		(32.6	)		36.4		(1.2	)		662.9		(33.8	)

Total fixed maturities, available for sale	$	5,077.3	$	(175.0	)	$	1,080.5	$	(107.1	)	$	6,157.8	$	(282.1	)

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, 2010 (dollars in millions):

	Less than 12 months					12 months or greater					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
Description of securities	value		losses			value		losses			value		losses

United States Treasury securities and obligations of United States government corporations and agencies	$	196.9	$	(11.8	)	$	.2	$	-		$	197.1	$	(11.8	)
States and political subdivisions		1,201.9		(54.8	)		229.6		(45.9	)		1,431.5		(100.7	)
Corporate securities		2,633.0		(80.6	)		864.6		(88.4	)		3,497.6		(169.0	)
Asset-backed securities		272.2		(2.4	)		54.0		(3.9	)		326.2		(6.3	)
Collateralized debt obligations		117.0		(.9	)		5.8		(.2	)		122.8		(1.1	)
Commercial mortgage-backed securities		15.5		-			111.8		(12.5	)		127.3		(12.5	)
Mortgage pass-through securities		.3		-			3.4		-			3.7		-
Collateralized mortgage obligations		661.0		(29.1	)		112.9		(6.4	)		773.9		(35.5	)

Total fixed maturities, available for sale	$	5,097.8	$	(179.6	)	$	1,382.3	$	(157.3	)	$	6,480.1	$	(336.9	)

Based on management’s current assessment of investments with unrealized losses at March 31, 2011, 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.

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,
	2011		2010

Net income for basic earnings per share	$	53.9	$	33.9

Add: interest expense on 7.0% Convertible Senior Debentures due 2016 (the “7.0% Debentures”), net of income taxes		3.7		2.6

Net income for diluted earnings per share	$	57.6	$	36.5

Shares:
Weighted average shares outstanding for basic earnings per share		251,121		250,788

Effect of dilutive securities on weighted average shares:
7% Debentures		53,367		39,533
Stock option and restricted stock plans		2,748		1,760
Warrants		262		-

Dilutive potential common shares		56,377		41,293

Weighted average shares outstanding for diluted earnings per share		307,498		292,081

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 shares) are not included in basic earnings per share until vested. Diluted earnings per share reflect the potential dilution that could occur if outstanding stock options were exercised and restricted stock was vested. The dilution from options and restricted shares is calculated using the treasury stock method. Under this method, we assume the proceeds from the exercise of the options (or the unrecognized compensation expense with respect to restricted stock) will be used to purchase shares of our common stock at the average market price during the period, reducing the dilutive effect of the exercise of the options (or the vesting of the restricted stock).

BUSINESS SEGMENTS

Beginning July 1, 2010, management changed the manner in which it disaggregates the Company’s operations for making operating decisions and assessing performance. As a result, 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; Other CNO Business, comprised primarily of products we no longer sell actively; and corporate operations, comprised of holding company activities and certain noninsurance company businesses. All prior period segment disclosures have been revised to conform to management’s current view of the Company’s operating segments.

We measure segment performance by excluding realized investment gains (losses) 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 realized investment gains (losses), and a long-term focus is necessary to maintain profitability over the life of the business.

Realized investment gains (losses) depend on market conditions and do not necessarily relate to the underlying business of our segments. Realized investment gains (losses) 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,
	2011		2010
Revenues:
Bankers Life:
Insurance policy income:
Annuities	$	8.4	$	8.3
Health		339.8		345.9
Life		51.8		42.0
Net investment income (a)		209.6		185.9
Fee revenue and other income (a)		2.3		2.3

Total Bankers Life revenues		611.9		584.4

Washington National:
Insurance policy income:
Health		140.2		139.6
Life		4.1		4.6
Other		1.1		1.2
Net investment income (a)		46.3		45.4
Fee revenue and other income (a)		.3		.3

Total Washington National revenues		192.0		191.1

Colonial Penn:
Insurance policy income:
Health		1.6		1.8
Life		48.7		46.4
Net investment income (a)		10.3		9.7
Fee revenue and other income (a)		.2		.2

Total Colonial Penn revenues		60.8		58.1

Other CNO Business:
Insurance policy income:
Annuities		2.3		2.5
Health		7.3		7.7
Life		61.3		63.9
Other		.6		.7
Net investment income (a)		94.7		92.6

Total Other CNO Business revenues		166.2		167.4

Corporate operations:
Net investment income		12.6		5.6
Fee and other income		.6		.7

Total corporate revenues		13.2		6.3

Total revenues		1,044.1		1,007.3

(continued on next page)

(continued from previous page)

	Three months ended
	March 31,
	2011			2010
Expenses:
Bankers Life:
Insurance policy benefits	$	404.8		$	416.5
Amortization		101.9			67.0
Interest expense on investment borrowings		1.2			-
Other operating costs and expenses		40.1			47.7

Total Bankers Life expenses		548.0			531.2

Washington National:
Insurance policy benefits		112.2			112.5
Amortization		16.1			14.8
Other operating costs and expenses		38.5			36.2

Total Washington National expenses		166.8			163.5

Colonial Penn:
Insurance policy benefits		38.7			36.7
Amortization		9.0			8.7
Other operating costs and expenses		7.7			7.4

Total Colonial Penn expenses		55.4			52.8

Other CNO Business:
Insurance policy benefits		127.5			133.3
Amortization		9.1			12.2
Interest expense on investment borrowings		4.9			5.0
Other operating costs and expenses		17.6			18.8

Total Other CNO Business expenses		159.1			169.3

Corporate operations:
Interest expense on corporate debt		20.6			19.5
Interest expense on borrowings of variable interest entities		2.5			3.0
Loss on extinguishment of debt		1.4			1.8
Other operating costs and expenses		11.2			8.3

Total corporate expenses		35.7			32.6

Total expenses		965.0			949.4

Income (loss) before net realized investment losses (net of related amortization) and income taxes:
Bankers Life		63.9			53.2
Washington National		25.2			27.6
Colonial Penn		5.4			5.3
Other CNO Business		7.1			(1.9	)
Corporate operations		(22.5	)		(26.3	)

Income before net realized investment losses (net of related amortization) and income taxes	$	79.1		$	57.9

___________________

(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 is as follows (dollars in millions):

	Three months ended
	March 31,
	2011		2010

Total segment revenues	$	1,044.1	$	1,007.3
Net realized investment gains (losses)		5.1		(4.9	)

Consolidated revenues	$	1,049.2	$	1,002.4

Total segment expenses	$	965.0	$	949.4
Amortization related to net realized investment gains (losses)		.6		(.1	)

Consolidated expenses	$	965.6	$	949.3

ACCOUNTING FOR DERIVATIVES

Our fixed index annuity products provide a guaranteed minimum rate of return and a higher potential return that is based on a percentage (the “participation rate”) of the amount of increase in the value of a particular index, such as the Standard & Poor’s 500 Index, over a specified period. Typically, on each policy anniversary date, a new index period begins. We are generally able to change the participation rate at the beginning of each index period during a policy year, subject to contractual minimums. We typically buy call options (including call spreads) referenced to the applicable indices in an effort to hedge potential increases to policyholder benefits resulting from increases in the particular index to which the policy’s return is linked. We reflect changes in the estimated fair value of these options in net investment income (classified as investment income from policyholder and reinsurer accounts and other special-purpose portfolios). Net investment gains related to fixed index products were $26.7 million and $15.0 million in the three months ended March 31, 2011 and 2010, respectively. These amounts were substantially offset by a corresponding change to insurance policy benefits. The estimated fair value of these options was $115.0 million and $89.4 million at March 31, 2011 and December 31, 2010, respectively. We classify these instruments as other invested assets.

The Company accounts for the options attributed to the policyholder for the estimated life of the annuity contract as embedded derivatives. The expected future cost of options on fixed index annuity products is used to determine the value of embedded derivatives. The Company purchases options to hedge liabilities for the next policy year on each policy anniversary date and must estimate the fair value of the forward embedded options related to the policies. These accounting requirements often create volatility in the earnings from these products. We record the changes in the fair values of the embedded derivatives in current earnings as a component of policyholder benefits. The fair value of these derivatives, which are classified as “liabilities for interest-sensitive products”, was $587.6 million at March 31, 2011 and $553.6 million at December 31, 2010. We maintain a specific block of investments in our trading securities account, which we carry at estimated fair value with changes in such value recognized as investment income (classified as investment income from policyholder and reinsurer accounts and other special-purpose portfolios). The change in value of these trading securities attributable to interest fluctuations is intended to offset a portion of the change in the value of the embedded derivative.

If the counterparties for the call options we hold fail to meet their obligations, we may have to 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, 2011, substantially all of our counterparties were rated “BBB+” or higher by Standard & Poor’s Corporation (“S&P”).

Certain of our reinsurance payable balances contain embedded derivatives. Such derivatives had an estimated fair value of $(.1) million and $(.4) million at March 31, 2011 and December 31, 2010, respectively. We record the change in the fair value of these derivatives as a component of investment income (classified as investment income from policyholder and reinsurer accounts and other special-purpose portfolios). We maintain a specific block of investments related to these agreements in our trading securities account, which we carry at estimated fair value with changes in such value recognized as investment income (also classified as investment income from policyholder and reinsurer accounts and other special-purpose portfolios). The change in value of these trading securities attributable to interest fluctuations is intended to offset the change in value of the embedded derivatives. However, differences will occur as corporate spreads change.

REINSURANCE

The cost of reinsurance ceded totaled $60.4 million and $64.6 million in the first quarters of 2011 and 2010, respectively. We deduct this cost from insurance policy income. Reinsurance recoveries netted against insurance policy benefits totaled $71.5 million and $119.9 million in the first quarters of 2011 and 2010, 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 $20.4 million and $24.2 million in the first quarters of 2011 and 2010, respectively. Reinsurance premiums included amounts assumed pursuant to marketing and quota-share agreements with Coventry Health Care (“Coventry”) of $14.4 million and $17.9 million in the first quarters of 2011 and 2010, respectively. Coventry decided to cease selling Private-Fee-For-Service (“PFFS”) plans effective January 1, 2010. In July 2009, Bankers Life and Casualty Company (“Bankers Life”) entered into an agreement with Humana, Inc. (“Humana”) under which it offers Humana’s Medicare Advantage/PFFS plans to its policyholders and consumers nationwide through its career agency force and receives marketing fees based on sales. Effective January 1, 2010, the Company no longer assumes the underwriting risk related to PFFS business.

See the note entitled “Accounting for Derivatives” for a discussion of the derivative embedded in the payable related to certain modified coinsurance agreements.

INCOME TAXES

The components of income tax expense were as follows (dollars in millions):

	Three months ended
	March 31,
	2011		2010

Current tax expense	$	3.1	$	1.0
Deferred tax provision		26.6		18.2

Total income tax expense	$	29.7	$	19.2

A reconciliation of the U.S. statutory corporate tax rate to the effective rate reflected in the consolidated statement of operations is as follows:

	Three months ended
	March 31,
	2011			2010

U.S. statutory corporate rate		35.0	%		35.0	%
Other nondeductible benefits		(1.0	)		(.7	)
State taxes		.7			.9
Provision for tax issues, tax credits and other		.8			1.0

Effective tax rate		35.5	%		36.2	%

The components of the Company’s income tax assets and liabilities were as follows (dollars in millions):

	March 31,			December 31,
	2011			2010
Deferred tax assets:
Net federal operating loss carryforwards attributable to:
Life insurance subsidiaries	$	651.3		$	681.7
Non-life companies		877.0			870.6
Net state operating loss carryforwards		17.8			17.8
Tax credits		25.2			23.4
Capital loss carryforwards		343.4			339.7
Deductible temporary differences:
Investments		-			5.3
Insurance liabilities		739.5			738.9
Other		53.2			62.8

Gross deferred tax assets		2,707.4			2,740.2

Deferred tax liabilities:
Investments		(2.4	)		-
Present value of future profits and deferred acquisition costs		(667.6	)		(676.3	)
Unrealized appreciation on investments		(143.8	)		(132.3	)

Gross deferred tax liabilities		(813.8	)		(808.6	)

Net deferred tax assets before valuation allowance		1,893.6			1,931.6

Valuation allowance		(1,081.4	)		(1,081.4	)

Net deferred tax assets		812.2			850.2

Current income taxes accrued		(13.3	)		(10.8	)

Income tax assets, net	$	798.9		$	839.4

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. We evaluate the need to establish a valuation allowance for our deferred income tax assets on an ongoing basis. In evaluating our deferred income tax assets, we consider whether the deferred income tax assets will be realized, based on the more-likely-than-not realization threshold criterion. The ultimate realization of our deferred income tax assets depends upon generating sufficient future taxable income during the periods in which our temporary differences become deductible and before our capital loss carryforwards and NOLs expire. This assessment requires significant judgment. In assessing the need for a valuation allowance, appropriate consideration is given to all positive and negative evidence related to the realization of the deferred tax assets. This assessment considers, among other matters, the nature, frequency and severity of current and cumulative losses, forecasts of future profitability, excess appreciated asset value over the tax basis of net assets, the duration of carryforward periods, our experience with operating loss and tax credit carryforwards expiring unused, and tax planning alternatives.

Concluding that a valuation allowance is not required is difficult when there has been significant negative evidence, such as cumulative losses in recent years. We utilize a three year rolling calculation of actual income before income taxes as our primary measure of cumulative losses in recent years. Our analysis of whether there needs to be any changes to the deferred tax valuation allowance recognizes that as of March 31, 2011, we have incurred a cumulative loss over the evaluation period, resulting from the substantial loss during 2008 primarily related to the transfer of Senior Health Insurance Company of Pennsylvania (“Senior Health”) to an independent trust. As a result of the cumulative losses recognized in recent years, our evaluation of the need to increase the valuation allowance for deferred tax assets was primarily based on our historical taxable earnings. However, because a substantial portion of the cumulative losses for the three-year period ended March 31, 2011, relates to transactions to dispose of blocks of businesses, we have adjusted the three-year cumulative results for the income and losses from the blocks of business disposed of in the past and the business of Senior Health transferred in 2008. We consider this to be non-recurring and have reflected our best estimates of when temporary differences will reverse over the carryforward periods.

At March 31, 2011, our valuation allowance for our net deferred tax assets was $1.1 billion, as we have determined that it is more likely than not that a portion of our deferred tax assets will not be realized. This determination was made by evaluating each component of the deferred tax asset and assessing the effects of limitations and/or interpretations on the value of such component to be fully recognized in the future. We have also evaluated the likelihood that we will have sufficient taxable income to offset the available deferred tax assets based on evidence which we consider to be objective and verifiable. Based upon our analysis completed at March 31, 2011, we believe that we will, more likely than not, recover $.8 billion of our deferred tax assets through reductions of our tax liabilities in future periods. There were no changes to our valuation allowance for deferred tax assets during the three months ended March 31, 2011.

Recovery of our deferred tax assets is dependent on achieving the projections of future taxable income embedded in our analysis and failure to do so would 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. In addition, the use of the Company’s NOLs is dependent, in part, on whether the Internal Revenue Service (the “IRS”) does not take an adverse position in the future regarding the tax position we have taken in our tax returns with respect to the allocation of cancellation of indebtedness income resulting from the bankruptcy of our Predecessor.

The Internal Revenue Code (the “Code”) limits the extent to which losses realized by a non-life entity (or entities) may offset income from a life insurance company (or companies) to the lesser of: (i) 35 percent of the income of the life insurance company; or (ii) 35 percent of the total loss of the non-life entities (including NOLs of the non-life entities). There is no similar limitation on the extent to which losses realized by a life insurance entity (or entities) may offset income from a non-life entity (or entities).

Section 382 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 or issuances of common stock (including upon conversion of our outstanding 7.0% Debentures), or 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 (4.55 percent at March 31, 2011), and the annual restriction could effectively eliminate 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, 2011, 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, 2011, we had $4.3 billion of federal NOLs and $1.0 billion of capital loss carryforwards, which expire as follows (dollars in millions):

Year of expiration	Net operating loss carryforwards (a)						Capital loss		Total loss
	Life			Non-life			carryforwards		carryforwards

2011	$	-		$	.1		$	-	$	.1
2013		-			-			942.0		942.0
2014		-			-			28.6		28.6
2016		-			-			10.4		10.4
2018		1,627.1	(a)		-			-		1,627.1
2021		29.6			-			-		29.6
2022		204.1			-			-		204.1
2023		-			1,999.3	(a)		-		1,999.3
2024		-			3.2			-		3.2
2025		-			118.8			-		118.8
2027		-			216.8			-		216.8
2028		-			.3			-		.3
2029		-			149.0			-		149.0
2031		-			18.3			-		18.3

Total	$	1,860.8		$	2,505.8		$	981.0	$	5,347.6

_________________________

(a)

The allocation of the NOLs summarized above assumes the IRS does not take an adverse position in the future regarding the tax position we plan to take in our tax returns with respect to the allocation of cancellation of indebtedness income. If the IRS disagrees with the tax position we plan to take with respect to the allocation of cancellation of indebtedness income, and their position prevails, approximately $631 million of the NOLs expiring in 2018 would be characterized as non-life NOLs.

We had deferred tax assets related to NOLs for state income taxes of $17.8 million at both March 31, 2011 and December 31, 2010. The related state NOLs are available to offset future state taxable income in certain states through 2018.

Tax years 2007 through 2010 are open to examination by the IRS, and tax year 2002 remains open only for potential adjustments related to certain partnership investments. The Company does not anticipate any material adjustments related to these partnership investments. The Company’s various state income tax returns are generally open for tax years 2007 through 2010 based on the individual state statutes of limitation.

NOTES PAYABLE - DIRECT CORPORATE OBLIGATIONS

The following notes payable were direct corporate obligations of the Company as of March 31, 2011 and December 31, 2010 (dollars in millions):

	March 31,			December 31,
	2011			2010

7.0% Debentures	$	293.0		$	293.0
Senior Secured Credit Agreement due September 30, 2016 (the “Senior Secured Credit Agreement”)		325.0			375.0
9.0% Senior Secured Notes due January 2018 (the “9.0% Senior Secured Notes”)		275.0			275.0
Senior Health Note due November 12, 2013 (the “Senior Health Note”)		75.0			75.0
Unamortized discount on 7.0% Debentures		(14.4	)		(14.8	)
Unamortized discount on Senior Secured Credit Agreement		(3.8	)		(4.7	)

Direct corporate obligations	$	949.8		$	998.5

In March 2011, we prepaid $50.0 million of our outstanding principal balance under the Senior Secured Credit Agreement using available cash. As a result of the repayment, we recognized a loss on the extinguishment of debt totaling $1.4 million representing the write-off of unamortized discount and issuance costs associated with the Senior Secured Credit Agreement.

The scheduled repayment of our direct corporate obligations was as follows at March 31, 2011 (dollars in millions):

Remainder of 2011	$	25.0
2012		45.0
2013		80.0
2014		75.0
2015		85.0
2016		383.0
2018		275.0

	$	968.0

As further described in the note to the consolidated financial statements entitled “Subsequent Event”, we announced that we are seeking to amend our Senior Secured Credit Agreement.

INVESTMENT BORROWINGS

Two of the Company’s insurance subsidiaries (Conseco Life Insurance Company (“Conseco Life”) and Bankers Life) are members of the Federal Home Loan Bank (“FHLB”). As members of the FHLB, Conseco Life and Bankers Life have the ability to borrow on a collateralized basis from the FHLB. Conseco Life 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, 2011, the carrying value of the FHLB common stock was $60.0 million. As of March 31, 2011, collateralized borrowings from the FHLB totaled $1.2 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 $1.5 billion at March 31, 2011, which are maintained in a custodial account for the benefit of the FHLB. Such investments are classified as fixed maturities, available for sale, in our consolidated balance sheet. Interest expense of $6.0 million and $4.9 million in the first three months of 2011 and 2010, respectively, was recognized related to the borrowings.

The following summarizes the terms of the borrowings (dollars in millions):

Amount		Maturity	Interest rate
borrowed		date	at March 31, 2011

$	100.0	October 2013	Variable rate – 0.580%
	67.0	February 2014	Fixed rate – 1.830%
	100.0	September 2015	Variable rate – 0.600%
	100.0	September 2015	Variable rate – 0.604%
	100.0	October 2015	Variable rate – 0.610%
	150.0	October 2015	Variable rate – 0.605%
	146.0	November 2015	Fixed rate – 5.300%
	100.0	November 2015	Fixed rate – 4.890%
	100.0	December 2015	Fixed rate – 4.710%
	50.0	November 2016	Variable rate – 0.580%
	50.0	November 2016	Variable rate – 0.718%
	100.0	October 2017	Variable rate – 0.733%
	37.0	November 2017	Fixed rate – 3.750%

$	1,200.0

The variable rate borrowings are pre-payable on each interest reset date without penalty. The fixed rate borrowings are pre-payable subject to payment of a yield maintenance fee based on current market interest rates. At March 31, 2011, the aggregate fee to prepay all fixed rate borrowings was $56.9 million.

At March 31, 2011, investment borrowings consisted of: (i) collateralized borrowings from the FHLB of $1.2 billion; and (ii) other borrowings of $3.8 million.

At December 31, 2010, investment borrowings consisted of: (i) collateralized borrowings from the FHLB of $1.2 billion; and (ii) other borrowings of $4.1 million.

CHANGES IN COMMON STOCK

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

Balance at December 31, 2010	251,084

Shares issued under employee benefit compensation plans	321	(a)

Balance at March 31, 2011	251,405

________

(a)	Such amount was reduced by 149 thousand shares which were tendered to the Company for the payment of federal and state taxes owed on the vesting of restricted stock.

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 $4.1 million and $11.6 million during the three months ended March 31, 2011 and 2010, respectively. Amounts amortized totaled $8.1 million and $8.6 million during the three months ended March 31, 2011 and 2010, respectively. The unamortized balance of deferred sales inducements at March 31, 2011 and December 31, 2010 was $162.4 million and $166.4 million, respectively. The balance of insurance liabilities for persistency bonus benefits was $75.7 million and $85.3 million at March 31, 2011 and December 31, 2010, respectively.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

RECENTLY ISSUED ACCOUNTING STANDARDS

Pending Accounting Standards

In October 2010, the Financial Accounting Standards Board (“FASB”) issued authoritative guidance that modifies the definition of the types of costs incurred by insurance entities that can be capitalized in the acquisition of new and renewal contracts. The guidance specifies that an insurance entity shall only capitalize incremental direct costs related to the successful acquisition of new or renewal insurance contracts. The guidance also states that advertising costs should be included in deferred acquisition costs only if the capitalization criteria in the direct-response advertising guidance are met. The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2011. The guidance should be applied prospectively upon adoption. Retrospective application to all prior periods presented upon the date of adoption also is permitted, but not required. We are in the process of evaluating the impact the guidance will have on our consolidated financial statements and we believe that the guidance will reduce the amount of costs that we can capitalize.

Adopted Accounting Standards

In January 2010, the FASB issued authoritative guidance which requires additional disclosures related to purchases, sales, issuances and settlements in the rollforward of Level 3 fair value measurements. This guidance is effective for reporting periods beginning after December 15, 2010. The adoption of this guidance did not have a material impact on our consolidated financial statements.

COMMITMENTS AND CONTINGENCIES

LITIGATION AND OTHER LEGAL PROCEEDINGS

Legal Proceedings

The Company and its subsidiaries are involved in various legal actions in the normal course of business, in which claims for compensatory and punitive damages are asserted, some for substantial amounts. Some of the pending matters have been filed as purported class actions and some actions have been filed in certain jurisdictions that permit punitive damage awards that are disproportionate to the actual damages incurred. The amounts sought in certain of these actions are often large or indeterminate and the ultimate outcome of certain actions is difficult to predict. In the event of an adverse outcome in one or more of these matters, the ultimate liability may be in excess of the liabilities we have established and could have a material adverse effect on our business, financial condition, results of operations and cash flows. In addition, the resolution of pending or future litigation may involve modifications to the terms of outstanding insurance policies or could impact the timing and amount of rate increases, which could adversely affect the future profitability of the related insurance policies. Although there can be no assurances, at the present time the Company does not anticipate that the ultimate liability from either pending or threatened legal actions, after consideration of existing loss provisions, will have a material adverse effect on the financial condition, operating results or cash flows of the Company.

In the cases described below, we have disclosed any specific dollar amounts sought in the complaints. In our experience, monetary demands in complaints bear little relation to the ultimate loss, if any, to the Company. However, for the reasons stated above, it is not possible to make meaningful estimates of the amount or range of loss that could result from some of these matters at this time. The Company reviews these matters on an ongoing basis. When assessing reasonably possible and probable outcomes, the Company bases its assessment on the expected ultimate outcome following all appeals.

Securities Litigation

On August 6, 2009, a purported class action complaint was filed in the United States District Court for the Southern District of New York, Plumbers and Pipefitters Local Union No. 719 Pension Trust Fund, on behalf of itself and all others similarly situated v. Conseco, Inc., et al., Case No. 09-CIV-6966, on behalf of purchasers of our common stock during the period from August 4, 2005 to March 17, 2008 (the “Class Period”). The complaint charges CNO and certain of its officers and directors with violations of the Securities Exchange Act of 1934. On June 2, 2010, the lead plaintiff filed a second amended complaint. The amended complaint alleges that, during the Class Period, the defendants issued numerous statements regarding the Company’s financial performance. As alleged in the complaint, these statements were materially false and misleading because the defendants misrepresented and/or failed to disclose the following adverse facts, among others: (i) that the Company was reporting materially inaccurate revenue figures; (ii) that the Company’s reported financial results were materially misstated and did not present the true operating performance of the Company; (iii) that the Company’s shareholders’ equity was materially overstated during the Class Period, including the overstatement of shareholders’ equity by $20.6 million at December 31, 2006; and (iv) as a result of the foregoing, the defendants lacked a reasonable basis for their positive statements about the Company, its corporate governance practices, its prospects and earnings growth. On August 2, 2010, we filed a motion to dismiss the amended complaint. On March 29, 2011, the court granted our motion to dismiss, and on April 29, 2011, the lead plaintiff filed a notice of appeal. We believe the complaint is without merit and intend to defend it vigorously. The ultimate outcome of the action cannot be predicted with certainty.

On June 2, 2010, a purported shareholder derivative complaint was filed in the Marion County Circuit/Superior Court, Indiana, William T. Carter, derivatively on behalf of CNO Financial Group, Inc. v. R. Glenn Hilliard, Donna A. James, R. Keith Long, Debra J. Perry, C. James Prieur, Neal C. Schneider, Michael T. Tokarz, John G. Turner, William Kirsch, Eugene Bullis, Michael Dubes, James Hohmann, Edward Bonach, Ali Inanilan, and John Wells, and CNO Financial Group, Inc., Cause No. 49D10 10 06 PL 024523, on behalf of nominal defendant CNO Financial Group, Inc. against certain current and/or former members of its Board of Directors and executive officers seeking to remedy defendant’s alleged breaches of fiduciary duties and unjust enrichment from August 2005 to the present. On November 1, 2010, the plaintiffs filed an amended complaint. The allegations in the complaint are similar to those described in the preceding paragraph. On December 17, 2010, we filed a motion to dismiss the amended complaint. A hearing on our motion to dismiss was held on April 21, 2011. The court took the matter under advisement. We believe the action is without merit, and intend to defend it vigorously. The ultimate outcome of the action cannot be predicted with certainty.

Cost of Insurance Litigation

Two lawsuits are pending in Hawaii captioned AE Ventures for Archie Murakami, et al. v. Conseco, Inc., Conseco Life Insurance Company; and Doe Defendants 1-100, Case No. CV05-00594 and Clifford S. Arakaki et al. v. Conseco Life Insurance Company, Doe Defendants 1-100, Case No. CV05-00026 (United States District Court, District of Hawaii). These suits involve an aggregate of approximately 700 plaintiffs all of whom purport to have opted out of the previously settled In Re Conseco Life Insurance Co. Cost of Insurance Litigation multi-district action. The complaints allege nondisclosure, breach of fiduciary duty, violations of HRS 480 (unfair and/or deceptive business practices), declaratory and injunctive relief, insurance bad faith, punitive damages, and seeks to impose alter ego liability. A settlement in principle has been reached. The ultimate outcome of these lawsuits cannot be predicted with certainty and an adverse outcome could exceed the amount we have accrued and could have a material adverse impact on the Company’s consolidated financial condition, cash flows or results of operations.

Other Litigation

On November 17, 2005, a complaint was filed in the United States District Court for the Northern District of California, Robert H. Hansen, an individual, and on behalf of all others similarly situated v. Conseco Insurance Company, an Illinois corporation f/k/a Conseco Annuity Assurance Company, Cause No. C0504726. Plaintiff in this putative class action purchased an annuity in 2000 and is claiming relief on behalf of the proposed national class for alleged violations of the Racketeer Influenced and Corrupt Organizations Act; elder abuse; unlawful, deceptive and unfair business practices; unlawful, deceptive and misleading advertising; breach of fiduciary duty; aiding and abetting of breach of fiduciary duty; and unjust enrichment and imposition of constructive trust. On January 27, 2006, a similar complaint was filed in the same court entitled Friou P. Jones, on Behalf of Himself and All Others Similarly Situated v. Conseco Insurance Company, an Illinois company f/k/a Conseco Annuity Assurance Company, Cause No. C06-00537. Mr. Jones had purchased an annuity in 2003. Each case alleged that the annuity sold was inappropriate and that the annuity products in question are inherently unsuitable for seniors age 65 and older. On March 3, 2006 a first amended complaint was filed in the Hansen case adding causes of action for fraudulent concealment and breach of the duty of good faith and fair dealing. In an order dated April 14, 2006, the court consolidated the two cases under the original Hansen cause number and retitled the consolidated action: In re Conseco Insurance Co. Annuity Marketing & Sales Practices Litig. A settlement in principle has been reached in this case, and on April 22, 2011, the court granted preliminary approval of the settlement.

On March 4, 2008, a complaint was filed in the United States District Court for the Central District of California, Celedonia X. Yue, M. D. on behalf of the class of all others similarly situated, and on behalf of the General Public v. Conseco Life Insurance Company, successor to Philadelphia Life Insurance Company and formerly known as Massachusetts General Life Insurance Company, Cause No. CV08-01506 CAS. Plaintiff in this putative class action owns a Valulife universal life policy insuring the life of Ruth S. Yue originally issued by Massachusetts General Life Insurance Company in 1995. Plaintiff is claiming breach of contract on behalf of the proposed national class and seeks injunctive and restitutionary relief pursuant to California Business & Professions Code Section 17200 and declaratory relief. The putative class consists of all owners of Valulife and Valuterm universal life insurance policies issued by either Massachusetts General or Philadelphia Life and that were later acquired and serviced by Conseco Life. Plaintiff alleges that members of the class will be damaged by increases in the cost of insurance (a non-guaranteed element) that are set to take place in the twenty first policy year of Valulife and Valuterm policies. No such increases have yet been applied to the subject policies. During 2010, Conseco Life voluntarily agreed not to implement the cost of insurance rate increase at issue in this litigation and is following a process with respect to any future cost of insurance rate increases as set forth in the regulatory settlement agreement described below. Plaintiff filed a motion for certification of a nationwide class and a California state class. On December 7, 2009, the court granted that motion. On October 8, 2010, the court dismissed the causes of actions alleged in the California state class. On January 19, 2011, the court granted the plaintiff’s motion for summary judgment as to the declaratory relief claim and on February 2, 2011, the court issued an advisory opinion, in the form of a declaratory judgment, as to what, in its view, Conseco Life could consider in implementing future cost of insurance rate increases related to its Valulife and Valuterm block of policies. On February 17, 2011, Conseco Life filed notice that it is appealing the court’s January 19, 2011 decision. On March 3, 2011, the plaintiff filed notice that she is appealing the court’s decision to dismiss the California causes of action. We believe the action is without merit, and intend to defend it vigorously. The ultimate outcome of the action cannot be predicted with certainty.

On December 8, 2008, a purported Florida state class action was filed in the U.S. District Court for the Southern District of Florida, Sydelle Ruderman individually and on behalf of all other similarly situated v. Washington National Insurance Company, Case No. 08-23401-CIV-Cohn/Selzer. The plaintiff alleges that the inflation escalation rider on her policy of long-term care insurance operates to increase the policy’s lifetime maximum benefit, and that Washington National breached the contract by stopping her benefits when they reached the lifetime maximum. The Company takes the position that the inflation escalator only affects the per day maximum benefit. Plaintiffs filed their motion for class certification, and the motion has been fully briefed by both sides. The court has not yet ruled on the motion or set it for hearing. Additional parties have asked the court to allow them to intervene in the action, and on January 5, 2010, the court granted the motion to intervene and granted the plaintiff’s motion for class certification. The court certified a (B) (3) Florida state class alleging damages and a (B) (2) Florida state class alleging injunctive relief. The parties have reached a settlement in principle of the (B) (3) class. The plaintiffs filed a motion for summary judgment as to the (B) (2) class which was granted by the court on September 8, 2010. The Company filed a notice of appeal on October 6, 2010. We believe the action is without merit, and intend to defend it vigorously. The ultimate outcome of the action cannot be predicted with certainty.

On December 24, 2008, a purported class action was filed in the U.S. District Court for the Northern District of California, Cedric Brady, et. al. individually and on behalf of all other similarly situated v. Conseco, Inc. and Conseco Life Insurance Company Case No. 3:08-cv-05746. The plaintiffs allege that Conseco Life and Conseco, Inc. committed breach of contract and insurance bad faith and violated various consumer protection statutes in the administration of various interest sensitive whole life products sold primarily under the name “Lifetrend” by requiring the payment of additional cash amounts to maintain the policies in force and by making changes to certain non-guaranteed elements in their policies. On April 23, 2009, the plaintiffs filed an amended complaint adding the additional counts of breach of fiduciary duty, fraud, negligent misrepresentation, conversion and declaratory relief. On May 29, 2009, Conseco, Inc. and Conseco Life filed a motion to dismiss the amended complaint. On July 29, 2009, the court granted in part and denied in part the motion to dismiss. The court dismissed the allegations that Conseco Life violated various consumer protection statutes, the breach of fiduciary duty count, and dismissed Conseco, Inc. for lack of personal jurisdiction. On October 15, 2009, Conseco Life filed a motion with the Judicial Panel on Multidistrict Litigation (“MDL”), seeking the establishment of an MDL proceeding consolidating this case and the McFarland case described below into a single action. On February 3, 2010, the Judicial Panel on MDL ordered this case be consolidated for pretrial proceedings. On July 7, 2010, plaintiffs filed an amended motion for class certification of a nationwide class and a California state class. The Company filed its motion in opposition on July 21, 2010. On October 6, 2010, the court granted the motion for certification of a nationwide class and denied the motion for certification of a California state class. Trial is set for May 7, 2012. The Company believes the action is without merit and intends to defend it vigorously. The ultimate outcome of the action cannot be predicted with certainty.

On July 2, 2009, a purported class action was filed in the U.S. District Court for the Middle District of Florida, Bill W. McFarland, and all those similarly situated v. Conseco Life Insurance Company, Case No. 3:09-cv-598-J-32MCR. The plaintiff alleges that Conseco Life committed breach of contract and has been unjustly enriched in the administration, including changes to certain non-guaranteed elements, of various interest sensitive whole life products sold primarily under the name “Lifetrend.” The plaintiff seeks declaratory and injunctive relief, compensatory damages, punitive damages and attorney fees. As described in the preceding paragraph, on February 3, 2010, the Judicial Panel on MDL ordered this case be consolidated with the Brady case for pretrial proceedings in the Northern District of California Federal Court. On July 7, 2010, plaintiffs filed an amended motion for class certification of a nationwide class and a California state class. The Company filed its motion in opposition on July 21, 2010. On October 6, 2010, the court granted the motion for certification of a nationwide class and denied the motion for certification of a California state class. Trial is set for May 7, 2012. The Company believes the action is without merit and intends to defend it vigorously. The ultimate outcome of the action cannot be predicted with certainty.

On January 26, 2009, a purported class action complaint was filed in the United States District Court for the Northern District of Illinois, Samuel Rowe and Estella Rowe, individually and on behalf of themselves and all others similarly situated v. Bankers Life & Casualty Company and Bankers Life Insurance Company of Illinois, Case No. 09CV491. The plaintiffs are alleging violation of California Business and Professions Code Sections 17200 et seq. and 17500 et seq., breach of common law fiduciary duty, breach of implied covenant of good faith and fair dealing and violation of California Welfare and Institutions Code Section 15600 on behalf of the proposed national class and seek injunctive relief, compensatory damages, punitive damages and attorney fees. The plaintiff alleges that the defendants used an improper and misleading sales and marketing approach to seniors that fails to disclose all facts, misuses consumers’ confidential financial information, uses misleading sales and marketing materials, promotes deferred annuities that are fundamentally inferior and less valuable than readily available alternative investment products and fails to adequately disclose other principal risks including maturity dates, surrender penalties and other restrictions which limit access to annuity proceeds to a date beyond the applicants actuarial life expectancy. Plaintiffs have amended their complaint attempting to convert this from a California only class action to a national class action. In addition, the amended complaint adds causes of action under the Racketeer Influenced and Corrupt Organization Act (“RICO”); aiding and abetting breach of fiduciary duty and for unjust enrichment. On September 13, 2010, the court dismissed the plaintiff’s RICO claims. On October 25, 2010, the plaintiffs filed a second amended complaint re-alleging their RICO claims. A hearing date on the motion for class certification has not been set. We believe the action is without merit, and intend to defend it vigorously. The ultimate outcome of the action cannot be predicted with certainty.

In addition, the Company and its subsidiaries are involved on an ongoing basis in other lawsuits, including purported class actions, related to their operations. The ultimate outcome of all of these other legal matters pending against the Company or its subsidiaries cannot be predicted, and, although such lawsuits are not expected individually to have a material adverse effect on the Company, such lawsuits could have, in the aggregate, a material adverse effect on the Company’s consolidated financial condition, cash flows or results of operations.

Regulatory Examinations and Fines

Insurance companies face significant risks related to regulatory investigations and actions. Regulatory investigations generally result from matters related to sales or underwriting practices, payment of contingent or other sales commissions, claim payments and procedures, product design, product disclosure, additional premium charges for premiums paid on a periodic basis, denial or delay of benefits, charging excessive or impermissible fees on products, changing the way cost of insurance charges are calculated for certain life insurance products or recommending unsuitable products to customers. We are, in the ordinary course of our business, subject to various examinations, inquiries and information requests from state, federal and other authorities. The ultimate outcome of these regulatory actions cannot be predicted with certainty. In the event of an unfavorable outcome in one or more of these matters, the ultimate liability may be in excess of liabilities we have established and we could suffer significant reputational harm as a result of these matters, which could also have a material adverse effect on our business, financial condition, results of operations or cash flows.

The states of Pennsylvania, Illinois, Texas, Florida and Indiana led a multistate examination of the long-term care claims administration and complaint handling practices of Senior Health and Bankers Life, as well as the sales and marketing practices of Bankers Life. On May 7, 2008, we announced a settlement among the state insurance regulators and Senior Health and Bankers Life. This examination covered the years 2005, 2006 and 2007. More than 40 states are parties to the settlement, which included a Senior Health fine of up to $2.3 million, with up to an additional $10 million payable, on the part of either Senior Health and/or Bankers Life, in the event the process improvements and benchmarks are not met. The process improvement plan is being monitored by the lead states and pursuant to the settlement agreement, the lead states are conducting a re-examination of Bankers Life to confirm compliance with the process improvements and benchmarks.

In October 2008, Conseco Life mailed notice to approximately 12,000 holders of its “Lifetrend” life insurance products to inform them of: (i) changes to certain “non-guaranteed elements” (“NGEs”) of their policies; and (ii) the fact that certain policyholders who were not paying premiums may have failed to receive a notice that their policy was underfunded and that additional premiums were required in order for the policyholders to maintain their guaranteed cash values. In December 2008, Conseco Life mailed notice to approximately 16,000 holders of its CIUL3+ universal life policies to inform them of an increase in certain NGEs with respect to their policies. Prior to or around the time that the notices were sent, Conseco Life had informed the insurance regulators in a number of states, including among others Indiana, Iowa and Florida, of these matters and the planned communication with the impacted policyholders. Several states initiated regulatory actions and inquiries after the notices were sent by Conseco Life, and Conseco Life agreed to take no further actions with respect to those policies during the pendency of a market conduct examination.

After working with various state insurance regulators to review the terms of the Lifetrend and CIUL3+ policies, Conseco Life reached a settlement in principle with the regulators regarding issues involving these policies. During this regulatory review process, Conseco Life had been allowed to move forward with implementing the NGE changes in its CIUL3+ policies while the regulators continued their review. Conseco Life had also resumed the administration of its Lifetrend policies with administrative changes in place but did not implement the NGE changes pending execution of the final settlement agreement with the regulators. On June 30, 2010, we announced that Conseco Life had finalized a regulatory settlement agreement that requires the establishment of a $10 million fund for certain owners of its Lifetrend life insurance products and the payment of a $1 million assessment to participating jurisdictions. Forty-seven jurisdictions, representing almost 98 percent of the Lifetrend policyholders, have signed the settlement agreement. Conseco Life is in the process of notifying consumers of the settlement and the increase in their non-guaranteed elements. As previously disclosed, we accrued for the financial impact of the settlement in our consolidated financial statements for year-end 2009.

CONSOLIDATED STATEMENT OF CASH FLOWS

The following disclosures supplement our consolidated statement of cash flows.

The following reconciles net income to net cash provided by operating activities (dollars in millions):

	Three months ended
	March 31,
	2011			2010
Cash flows from operating activities:
Net income	$	53.9		$	33.9
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization and depreciation		143.3			110.4
Income taxes		29.0			17.3
Insurance liabilities		109.1			138.4
Accrual and amortization of investment income		(48.3	)		(24.6	)
Deferral of policy acquisition costs		(109.4	)		(109.0	)
Net realized investment (gains) losses		(5.1	)		4.9
Loss on extinguishment of debt		1.4			1.8
Other		(18.6	)		8.0

Net cash provided by operating activities	$	155.3		$	181.1

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,
	2011		2010

Stock option and restricted stock plans	$	1.9	$	2.2
Change in securities lending collateral		-		33.3
Change in securities lending payable		-		(33.3	)

INVESTMENTS IN VARIABLE INTEREST ENTITIES

Effective January 1, 2010, the Company adopted authoritative guidance that requires an entity to perform a qualitative analysis to determine whether a primary beneficiary interest is held in a variable interest entity (a “VIE”). The guidance also requires ongoing reassessments to determine whether a primary beneficiary interest is held. Based on our assessment, we concluded that we were the primary beneficiary with respect to two VIEs which are consolidated in our financial statements. One of the VIEs was consolidated prior to 2010. The following is a description of our significant investments in VIEs:

Fall Creek CLO Ltd. (“Fall Creek”) and Eagle Creek CLO Ltd. (“Eagle Creek”) are collateralized loan trusts that were established to issue securities and use the proceeds to principally invest in corporate loans and other permitted investments. The assets held by the trusts are legally isolated and not available to the Company. The liabilities of Fall Creek and Eagle Creek are expected to be satisfied from the cash flows generated by the underlying loans, not from the assets of the Company. Repayment of the remaining principal balance of the borrowings of Fall Creek and Eagle Creek are based on available cash flows from the assets and such borrowings mature in 2017 and 2018, respectively. The Company has no further commitments to Fall Creek or Eagle Creek.

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

Fall Creek expects to repay its unaffiliated obligations using the proceeds from the sales of the investments held by Fall Creek. As a result, we recognized other-than-temporary impairments of $2.8 million related to investments held by Fall Creek as a result of the intent not to hold such investments for a period of time that would be sufficient to allow for any anticipated recovery in value. The repayment of the unaffiliated obligations of Fall Creek will terminate the collateralized loan trust. The termination of the collateralized loan trust is not expected to have a material impact on our consolidated financial statements.

The following table provides supplemental information about the assets and liabilities of Fall Creek and Eagle Creek which have been consolidated in accordance with authoritative guidance (dollars in millions):

	March 31, 2011

	Fall Creek					Net effect on
	and					consolidated
	Eagle Creek		Eliminations			balance sheet

Assets:
Investments held by variable interest entities	$	401.6	$	-		$	401.6
Notes receivable of VIEs held by insurance subsidiaries		-		(96.8	)		(96.8	)
Cash and cash equivalents held by variable interest entities		27.1		-			27.1
Accrued investment income		1.3		(5.3	)		(4.0	)
Income tax assets, net		18.0		(6.5	)		11.5
Other assets		7.8		-			7.8

Total assets	$	455.8	$	(108.6	)	$	347.2

Liabilities:
Other liabilities	$	19.2	$	(5.1	)	$	14.1
Borrowings related to variable interest entities		354.4		-			354.4
Notes payable of VIEs held by insurance subsidiaries		115.6		(115.6	)		-

Total liabilities	$	489.2	$	(120.7	)	$	368.5

	December 31, 2010

	Fall Creek					Net effect on
	and					consolidated
	Eagle Creek		Eliminations			balance sheet

Assets:
Investments held by variable interest entities	$	420.9	$	-		$	420.9
Notes receivable of VIEs held by insurance subsidiaries		-		(96.8	)		(96.8	)
Cash and cash equivalents held by variable interest entities		26.8		-			26.8
Accrued investment income		1.4		(4.8	)		(3.4	)
Income tax assets, net		20.9		(6.5	)		14.4
Other assets		15.9		-			15.9

Total assets	$	485.9	$	(108.1	)	$	377.8

Liabilities:
Other liabilities	$	22.0	$	(4.6	)	$	17.4
Borrowings related to variable interest entities		386.9		-			386.9
Notes payable of VIEs held by insurance subsidiaries		115.6		(115.6	)		-

Total liabilities	$	524.5	$	(120.2	)	$	404.3

The investment portfolios held by the VIEs are primarily comprised of corporate fixed maturity securities which are almost entirely rated as below-investment grade securities. At March 31, 2011, such securities had an amortized cost of $399.9 million; gross unrealized gains of $4.3 million; gross unrealized losses of $2.6 million; and an estimated fair value of $401.6 million.

The following table sets forth the amortized cost and estimated fair value of the investments held by the VIEs at March 31, 2011, by contractual maturity. Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without penalties.

			Estimated
	Amortized		fair
	cost		value
	(Dollars in millions)

Due in one year or less	$	3.1	$	3.1
Due after one year through five years		287.6		287.5
Due after five years through ten years		109.2		111.0

Total	$	399.9	$	401.6

During the first three months of 2011, we recognized net realized investment losses on the VIE investments of $1.4 million, which were comprised of $1.8 million of net gains from the sales of fixed maturities, and $3.2 million of writedowns of investments for other than temporary declines in fair value recognized through net income. During the first three months of 2010, we recognized net realized investment losses on the VIE investments of $1.3 million, which were comprised of $.1 million of net losses from the sales of fixed maturities, and $1.2 million of writedowns of investments for other than temporary declines in fair value recognized through net income.

At March 31, 2011, there were no investments held by the VIEs that were in default.

During the three months ended March 31, 2011, there were no investments held by the VIEs that were sold which resulted in a loss.

At March 31, 2011, the VIEs held: (i) investments with a fair value of $12.1 million and gross unrealized losses of $.1 million that had been in an unrealized loss position for less than twelve months; and (ii) investments with a fair value of $153.8 million and gross unrealized losses of $2.5 million that had been in an unrealized loss position for greater than twelve months.

The investments held by the VIEs are evaluated for other-than-temporary declines in fair value in a manner that is consistent with the Company’s fixed maturities, available for sale.

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

At March 31, 2011, we hold investments in various limited partnerships, in which we are not the primary beneficiary, totaling $20.7 million (classified as other invested assets). At March 31, 2011, we had unfunded commitments to these partnerships of $14.8 million. Our maximum exposure to loss on these investments is limited to the amount of our investment.

FAIR VALUE MEASUREMENTS

Definition of Fair Value

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date and, therefore, represents an exit price, not an entry price. We hold fixed maturities, equity securities, trading securities, investments held by variable interest entities, derivatives, separate account assets and embedded derivatives, which are carried at fair value.

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

Valuation Hierarchy

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

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

·

Level 2 – includes assets and liabilities valued using inputs that are quoted prices for similar assets in an active market, quoted prices for identical or similar assets in a market that is not active, observable inputs, or observable inputs that can be corroborated by market data. Level 2 assets and liabilities include those financial instruments that are valued by independent pricing services using models or other valuation methodologies. These models are primarily industry-standard models that consider various inputs such as interest rate, credit spread, reported trades, broker/dealer quotes, issuer spreads and other inputs that are observable or derived from observable information in the marketplace or are supported by observable levels at which transactions are executed in the marketplace. Financial instruments in this category primarily include: certain public and private corporate fixed maturity securities; certain government or agency securities; certain mortgage and asset-backed securities; and non-exchange-traded derivatives such as call options to hedge liabilities related to our fixed index annuity products.

·

Level 3 – includes assets and liabilities valued using unobservable inputs that are used in model-based valuations that contain management assumptions. Level 3 assets and liabilities include those financial instruments whose fair value is estimated based on non-binding broker prices or internally developed models or methodologies utilizing significant inputs not based on, or corroborated by, readily available market information. Financial instruments in this category include certain corporate securities (primarily private placements), certain mortgage and asset-backed securities, and other less liquid securities. Additionally, the Company’s liabilities for embedded derivatives (including embedded derivatives related to our fixed index annuity products and to a modified coinsurance arrangement) are classified in Level 3 since their values include significant unobservable inputs including actuarial assumptions.

At each reporting date, we classify assets and liabilities into the three input levels based on the lowest level of input that is significant to the measurement of fair value for each asset and liability reported at fair value. This classification is impacted by a number of factors, including the type of financial instrument, whether the financial instrument is new to the market and not yet established, the characteristics specific to the transaction and overall market conditions. Our assessment of the significance of a particular input to the fair value measurement and the ultimate classification of each asset and liability requires judgment.

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

For securities that are not priced by pricing services and may not be reliably priced using pricing models, we obtain broker quotes. These broker quotes are non-binding and represent an exit price, but assumptions used to establish the fair value may not be observable and therefore represent Level 3 inputs. Approximately 19 percent and 1 percent of our Level 3 fixed maturity securities were valued using broker quotes or independent pricing services, respectively. The remaining Level 3 fixed maturity investments do not have readily determinable market prices and/or observable inputs. For these securities, we use internally developed valuations. Key assumptions used to determine fair value for these securities may include risk-free rates, risk premiums, performance of underlying collateral and other factors involving significant assumptions which may not be reflective of an active market. For certain investments, we use a matrix or model process to develop a security price where future cash flow expectations are developed and discounted at an estimated market rate. The pricing matrix utilizes a spread level to determine the market price for a security. The credit spread generally incorporates the issuer’s credit rating and other factors relating to the issuer’s industry and the security’s maturity. In some instances issuer-specific spread adjustments, which can be positive or negative, are made based upon internal analysis of security specifics such as liquidity, deal size, and time to maturity.

Privately placed securities comprise approximately 69 percent of our fixed maturities, available for sale, classified as Level 3. Privately placed securities are classified as Level 3 when their valuation is based on internal valuation models which rely on significant inputs that are not observable in the market. Our model applies spreads above the risk-free rate which are determined based on comparison to securities with similar ratings, maturities and industries that are rated by independent third party rating agencies. Our process also considers the ratings assigned by the National Association of Insurance Commissioners (the “NAIC”) to the Level 3 securities on an annual basis. Each quarter, a review is performed to determine the reasonableness of the initial valuations from the model. If an initial valuation appears unreasonable based on our knowledge of a security and current market conditions, we make appropriate adjustments to our valuation inputs. The remaining securities classified as Level 3 are primarily valued based on internally developed models using estimated future cash flows. We recognized other-than-temporary impairments on securities classified as Level 3 investments of $8.4 million during the first three months of 2011.

As the Company is responsible for the determination of fair value, we perform monthly quantitative and qualitative analysis on the prices received from third parties to determine whether the prices are reasonable estimates of fair value. The Company’s analysis includes: (i) a review of the methodology used by third party pricing services; (ii) a comparison of pricing services’ valuation to other pricing services’ valuations for the same security; (iii) a review of month to month price fluctuations; (iv) a review to ensure valuations are not unreasonably stale; and (v) back testing to compare actual purchase and sale transactions with valuations received from third parties. As a result of such procedures, the Company may conclude the prices received from third parties are not reflective of current market conditions. In those instances, we may request additional pricing quotes or apply internally developed valuations. However, the number of instances is insignificant and the aggregate change in value of such investments is not materially different from the original prices received.

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

The classification of fair value measurements for derivative instruments, including embedded derivatives requiring bifurcation, is determined based on the consideration of several inputs including closing exchange or over-the-counter market price quotations; time value and volatility factors underlying options; market interest rates; and non-performance risk. For certain embedded derivatives, we may use actuarial assumptions in the determination of fair value.

The categorization of fair value measurements, by input level, for our fixed maturity securities, equity securities, trading securities, certain other invested assets, assets held in separate accounts and embedded derivative instruments included in liabilities for insurance products at March 31, 2011 is as follows (dollars in millions):

	Quoted prices in active markets for identical assets or liabilities (Level 1)		Significant other observable inputs (Level 2)			Significant unobservable inputs (Level 3)			Total
Assets:
Fixed maturities, available for sale:
Corporate securities	$	-	$	12,509.4		$	1,926.0		$	14,435.4
United States Treasury securities and obligations of United States government corporations and agencies		-		271.0			1.7			272.7
States and political subdivisions		-		1,742.8			8.9			1,751.7
Debt securities issued by foreign governments		-		.9			-			.9
Asset-backed securities		-		578.8			143.3			722.1
Collateralized debt obligations		-		-			186.2			186.2
Commercial mortgage-backed securities		-		1,405.0			-			1,405.0
Mortgage pass-through securities		26.0		-			3.3			29.3
Collateralized mortgage obligations		-		1,801.4			247.5			2,048.9
Total fixed maturities, available for sale		26.0		18,309.3			2,516.9			20,852.2

Equity securities		-		60.0			45.4			105.4

Trading securities:
Corporate securities		3.5		54.8			4.6			62.9
United States Treasury securities and obligations of United States government corporations and agencies		-		317.5			-			317.5
States and political subdivisions		-		15.9			-			15.9
Asset-backed securities		-		.2			-			.2
Commercial mortgage-backed securities		-		4.9			-			4.9
Mortgage pass-through securities		.3		-			-			.3
Collateralized mortgage obligations		-		.9			.5			1.4
Total trading securities		3.8		394.2			5.1			403.1
Investments held by variable interest entities		-		401.6			-			401.6
Other invested assets		-		220.7	(a)		-			220.7
Assets held in separate accounts		-		18.1			-			18.1

Liabilities:
Liabilities for insurance products:
Interest-sensitive products		-		-			587.5	(b)		587.5

_____________

(a)	Includes company-owned life insurance and derivatives.

(b)	Includes $587.6 million of embedded derivatives associated with our fixed index annuity products and $(.1) million of embedded derivatives associated with a modified coinsurance agreement.

The categorization of fair value measurements, by input level, for our fixed maturity securities, equity securities, trading securities, certain other invested assets, assets held in separate accounts and embedded derivative instruments included in liabilities for insurance products at December 31, 2010 is as follows (dollars in millions):

	Quoted prices in active markets for identical assets or liabilities (Level 1)		Significant other observable inputs (Level 2)			Significant unobservable inputs (Level 3)			Total
Assets:
Fixed maturities, available for sale:
Corporate securities	$	-	$	12,240.1		$	1,977.5		$	14,217.6
United States Treasury securities and obligations of United States government corporations and agencies		10.0		282.2			2.0			294.2
States and political subdivisions		-		1,772.1			11.4			1,783.5
Debt securities issued by foreign governments		-		.9			-			.9
Asset-backed securities		-		652.7			121.0			773.7
Collateralized debt obligations		-		-			256.5			256.5
Commercial mortgage-backed securities		-		1,363.7			-			1,363.7
Mortgage pass-through securities		27.8		-			3.5			31.3
Collateralized mortgage obligations		-		1,715.4			197.1			1,912.5
Total fixed maturities, available for sale		37.8		18,027.1			2,569.0			20,633.9

Equity securities		-		37.5			30.6			68.1

Trading securities:
Corporate securities		3.2		47.5			4.3			55.0
United States Treasury securities and obligations of United States government corporations and agencies		-		293.8			-			293.8
States and political subdivisions		-		16.1			-			16.1
Asset-backed securities		-		.6			-			.6
Commercial mortgage-backed securities		-		5.2			-			5.2
Mortgage pass-through securities		.3		-			-			.3
Collateralized mortgage obligations		-		1.2			.4			1.6
Total trading securities		3.5		364.4			4.7			372.6
Investments held by variable interest entities		-		414.2			6.7			420.9
Other invested assets		-		192.0	(a)		-			192.0
Assets held in separate accounts		-		17.5			-			17.5

Liabilities:
Liabilities for insurance products:
Interest-sensitive products		-		-			553.2	(b)		553.2

___	____________

(a)	Includes company-owned life insurance and derivatives.

(b)	Includes $553.6 million of embedded derivatives associated with our fixed index annuity products and $(.4) million of embedded derivatives associated with a modified coinsurance agreement.

The following table presents additional information about assets and liabilities measured at fair value on a recurring basis and for which we have utilized significant unobservable (Level 3) inputs to determine fair value for the three months ended March 31, 2011 (dollars in millions):

	March 31, 2011
	Beginning balance as of December 31, 2010			Purchases, sales, issuances and settlements, net (b)			Total realized and unrealized gains (losses) included in net income			Total realized and unrealized gains (losses) included in accumulated other comprehensive income (loss)			Transfers into Level 3 (a)		Transfers out of Level 3 (a)			Ending balance as of March 31, 2011			Amount of total gains (losses) for the three months ended March 31, 2011 included in our net income relating to assets and liabilities still held as of the reporting date
Assets:
Fixed maturities, available for sale:
Corporate securities	$	1,977.5		$	(63.7	)	$	(11.8	)	$	9.2		$	14.8	$	-		$	1,926.0		$	-
United States Treasury securities and obligations of United States government corporations and agencies		2.0			-			-			(.3	)		-		-			1.7			-
States and political subdivisions		11.4			(.1	)		-			.1			-		(2.5	)		8.9			-
Asset-backed securities		121.0			(1.2	)		-			(.3	)		23.8		-			143.3			-
Collateralized debt obligations		256.5			(76.7	)		2.1			4.3			-		-			186.2			-
Mortgage pass-through securities		3.5			(.2	)		-			-			-		-			3.3			-
Collateralized mortgage obligations		197.1			11.5			-			1.7			90.9		(53.7	)		247.5			-
Total fixed maturities, available for sale		2,569.0			(130.4	)		(9.7	)		14.7			129.5		(56.2	)		2,516.9			-
Equity securities		30.6			36.6			-			.7			-		(22.5	)		45.4			-
Trading securities:
Corporate securities		4.3			-			.3			-			-		-			4.6			.3
Collateralized mortgage obligations		.4			-			.1			-			-		-			.5			.1
Total trading securities		4.7			-			.4			-			-		-			5.1			.4
Investments held by variable interest entities:
Corporate securities		6.7			(7.9	)		1.5			(.3	)		-		-			-			-

Liabilities:
Liabilities for insurance products:
Interest-sensitive products		(553.2	)		(36.1	)		1.8			-			-		-			(587.5	)		1.8

____________

(a)	Transfers in/out of Level 3 are reported as having occurred at the beginning of the period.

(b)

Purchases, sales, issuances and settlements, net, represent the activity that occurred during the period that results in a change of the asset or liability but does not represent changes in fair value for the instruments held at the beginning of the period. Such activity primarily consists of purchases and sales of fixed maturity, equity and trading securities, purchases and settlements of derivative instruments, and changes to embedded derivative instruments related to insurance products resulting from the issuance of new contracts, or changes to existing contracts. The following summarizes such activity for the three months ended March 31, 2011 (dollars in millions):

									Purchases, sales, issuances and settlements, net
	Purchases		Sales		Issuances		Settlements		Purchases, sales, issuances and settlements, net
Assets:
Fixed maturities, available for sale:
Corporate securities	$ 45.0		$(108.7	)	$ -		$ -	$	(63.7	)
States and political subdivisions	-		(.1	)	-		-		(.1	)
Asset-backed securities	-		(1.2	)	-		-		(1.2	)
Collateralized debt obligations	1.7		(78.4	)	-		-		(76.7	)
Mortgage pass-through securities	-		(.2	)	-		-		(.2	)
Collateralized mortgage obligations	18.4		(6.9	)	-		-		11.5
Total fixed maturities, available for sale	65.1		(195.5	)	-		-		(130.4	)
Equity securities	36.6		-		-		-		36.6
Investments held by variable interest entities:
Corporate securities	-		(7.9	)	-		-		(7.9	)

Liabilities:
Liabilities for insurance products:
Interest-sensitive products	(25.0	)	2.6		(19.0	)	5.3		(36.1	)

The following table presents additional information about assets and liabilities measured at fair value on a recurring basis and for which we have utilized significant unobservable (Level 3) inputs to determine fair value for the three months ended March 31, 2010 (dollars in millions):

	March 31, 2010
	Beginning balance as of December 31, 2009			Cumulative effect of accounting change (a)			Purchases, sales, issuances and settlements, net			Total realized and unrealized gains (losses) included in net income			Total realized and unrealized gains (losses) included in other comprehensive loss			Transfers into Level 3 (b)		Transfers out of Level 3 (b)			Ending balance as of March 31, 2010			Amount of total gains (losses) for the three months ended March 31, 2010 included in our net income relating to assets and liabilities still held as of the reporting date
Assets:
Fixed maturities, available for sale:
Corporate securities	$	2,247.1		$	(5.9	)	$	(5.1	)	$	-		$	16.2		$	25.3	$	(27.6	)	$	2,250.0		$	-
United States Treasury securities and obligations of United States government corporations and agencies		2.2			-			-			-			-			-		-			2.2			-
States and political subdivisions		10.7			-			-			-			-			-		(1.8	)		8.9			-
Asset-backed securities		15.8			-			(13.0	)		(11.3	)		13.4			-		-			4.9			-
Collateralized debt obligations		92.8			(5.7	)		38.9			.6			2.3			-		-			128.9			-
Commercial mortgage-backed securities		13.7			-			-			-			.3			-		(14.0	)		-			-
Mortgage pass-through securities		4.2			-			(.2	)		-			(.1	)		-		-			3.9			-
Collateralized mortgage obligations		11.4			-			(1.6	)		-			.1			-		-			9.9			-
Total fixed maturities, available for sale		2,397.9			(11.6	)		19.0			(10.7	)		32.2			25.3		(43.4	)		2,408.7			-
Equity securities		30.9			-			-			-			.1			-		-			31.0			-
Trading securities:
Corporate securities		3.7			-			-			.3			-			-		-			4.0			.3
Investments held by variable interest entities:
Corporate securities		-			6.9			-			-			.2			-		-			7.1			-
Securities lending collateral:
Corporate securities		13.7			-			(13.7	)		-			-			-		-			-			-
Asset-backed securities		22.9			-			(.8	)		-			.1			-		(.8	)		21.4			-
Total securities lending collateral		36.6			-			(14.5	)		-			.1			-		(.8	)		21.4			-
Other invested assets		2.4			(2.4	)		-			-			-			-		-			-			-
Liabilities:
Liabilities for insurance products:
Interest- sensitive products		(496.0	)		-			5.6			(6.8	)		-			-		-			(497.2	)		(6.8	)

__________

(a)	Amounts represent adjustments to investments related to a variable interest entity that was required to be consolidated effective January 1, 2010, as well as the reclassification of investments of a variable interest entity which was consolidated at December 31, 2009.

(b)	Transfers in/out of Level 3 are reported as having occurred at the beginning of the period.

At March 31, 2011, 88 percent of our Level 3 fixed maturities, available for sale, were investment grade and 77 percent of our Level 3 fixed maturities, available for sale, consisted of corporate securities.

Realized and unrealized investment gains and losses presented in the preceding tables represent gains and losses during the time the applicable financial instruments were classified as Level 3.

Realized and unrealized gains (losses) on Level 3 assets are primarily reported in either net investment income for policyholder and reinsurer accounts and other special-purpose portfolios, net realized investment gains (losses) or insurance policy benefits within the consolidated statement of operations or accumulated other comprehensive income within shareholders’ equity based on the appropriate accounting treatment for the instrument.

We review the fair value hierarchy classifications each reporting period. Transfers in and/or (out) of Level 3 in the first three months of 2011 and 2010 were primarily due to changes in the observability of the valuation attributes resulting in a reclassification of certain financial assets or liabilities. Such reclassifications are reported as transfers in and out of Level 3 at the beginning fair value for the reporting period in which the changes occur. There were no transfers between Level 1 and Level 2 in the first three months of 2011 or 2010.

The amount presented for gains (losses) included in our net loss for assets and liabilities still held as of the reporting date primarily represents impairments for fixed maturities, available for sale, changes in fair value of trading securities and certain derivatives and changes in fair value of embedded derivative instruments included in liabilities for insurance products that exist as of the reporting date.

We use the following methods and assumptions to determine the estimated fair values of other financial instruments:

Cash and cash equivalents. The carrying amount for these instruments approximates their estimated fair value.

Mortgage loans and policy loans. We discount future expected cash flows for loans included in our investment portfolio based on interest rates currently being offered for similar loans to borrowers with similar credit ratings. We aggregate loans with similar characteristics in our calculations. The fair value of policy loans approximates their carrying value.

Other invested assets. We use quoted market prices, where available. When quotes are not available, we estimate the fair value based on discounted future expected cash flows or independent transactions which establish a value for our investment. Investments in limited partnerships are accounted for under the equity method which approximates estimated fair value.

Insurance liabilities for interest-sensitive products. We discount future expected cash flows based on interest rates currently being offered for similar contracts with similar maturities.

Investment borrowings, notes payable and borrowings related to variable interest entities. For publicly traded debt, we use current fair values. For other notes, we use discounted cash flow analyses based on our current incremental borrowing rates for similar types of borrowing arrangements.

The estimated fair values of our financial instruments at March 31, 2011 and December 31, 2010, were as follows (dollars in millions):

	March 31, 2011				December 31, 2010
	Carrying		Estimated fair		Carrying		Estimated fair
	amount		value		amount		value

Financial assets:
Fixed maturities, available for sale	$	20,852.2	$	20,852.2	$	20,633.9	$	20,633.9
Equity securities		105.4		105.4		68.1		68.1
Mortgage loans		1,751.3		1,762.1		1,761.2		1,762.6
Policy loans		281.6		281.6		284.4		284.4
Trading securities		403.1		403.1		372.6		372.6
Investments held by securitization entities		401.6		401.6		420.9		420.9
Other invested assets		272.1		272.1		240.9		240.9
Cash and cash equivalents		451.7		451.7		598.7		598.7

Financial liabilities:
Insurance liabilities for interest-sensitive products (a)	$	13,161.3	$	13,161.3	$	13,194.7	$	13,194.7
Investment borrowings		1,203.8		1,260.7		1,204.1		1,265.3
Borrowings related to variable interest entities		354.4		316.6		386.9		345.1
Notes payable – direct corporate obligations		949.8		1,154.1		998.5		1,166.4

____________________

(a)

The estimated fair value of insurance liabilities for interest-sensitive products was approximately equal to its carrying value at March 31, 2011 and December 31, 2010. This was because interest rates credited on the vast majority of account balances approximate current rates paid on similar products and because these rates are not generally guaranteed beyond one year.

SUBSEQUENT EVENTS

SUBSEQUENT EVENT

In April 2011, we announced that we are seeking to amend our Senior Secured Credit Agreement to reduce the interest rate and make other changes to provide additional operating flexibility. The Senior Secured Credit Agreement currently has an interest rate of LIBOR plus 600 basis points, with a LIBOR floor of 150 basis points (which equals a current interest rate of 7.50%) and has an outstanding principal balance of $325 million.

Document Information

3 Months Ended
Mar. 31, 2011

Document Type

10-Q

Amendment Flag

FALSE

Document Period End Date

2011-03-31

Entity Information

3 Months Ended
Mar. 31, 2011

Apr. 20, 2011

Jun. 30, 2010

Entity Registrant Name

CNO Financial Group, Inc.

Entity Central Index Key

0001224608

Current Fiscal Year End Date

12/31

Entity Well-known Seasoned Issuer

Yes

Entity Voluntary Filers

No

Entity Current Reporting Status

Yes

Entity Filer Category

Large Accelerated Filer

Entity Public Float

1,225,000,000

Entity Common Stock, Shares Outstanding

251,425,857

Document Fiscal Year Focus

2011

Document Fiscal Period Focus

Q1