CNO Financial 10Q 2010 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2010

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 001-31792

CNO Financial Group, Inc.

Delaware		75-3108137
State of Incorporation		IRS Employer Identification No.

11825 N. Pennsylvania Street
Carmel, Indiana 46032		(317) 817-6100
Address of principal executive offices		Telephone

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes [ X ] No [ ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [ ] No [ ]

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. Large accelerated filer [ ] Accelerated filer [ X ] Non-accelerated filer [ ] Smaller reporting company [ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes [ ] No [ X ]

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court: Yes [ ] No [ ]

Shares of common stock outstanding as of October 27, 2010: 251,046,412

TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION		Page

Item 1.	Financial Statements

	Consolidated Balance Sheet as of September 30, 2010 and December 31, 2009	3
	Consolidated Statement of Operations for the three and nine months ended September 30, 2010 and 2009	5
	Consolidated Statement of Shareholders’ Equity for the nine months ended September 30, 2010 and 2009	6
	Consolidated Statement of Cash Flows for the nine months ended September 30, 2010 and 2009	7
	Notes to Consolidated Financial Statements	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	49

	Cautionary Statement Regarding Forward-Looking Statements	49
	Overview	51
	Critical Accounting Policies	53
	Results of Operations	53
	Premium Collections	72
	Liquidity and Capital Resources	78
	Investments	84
	Investment in Variable Interest Entities	92
	New Accounting Standards	94

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	94

Item 4.	Controls and Procedures	94

PART II - OTHER INFORMATION

Item 1.	Legal Proceedings	95

Item 1A.	Risk Factors	95

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	95

Item 5.	Other Information	96

Item 6.	Exhibits	96

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET

(Dollars in millions)

ASSETS

	September 30,		December 31,
	2010		2009
	(unaudited)
Investments:
Fixed maturities, available for sale, at fair value (amortized cost: September 30, 2010 - $19,664.5; December 31, 2009 - $18,998.0)	$	21,007.5	$	18,528.4
Equity securities at fair value (cost: September 30, 2010 - $40.7; December 31, 2009 - $30.7)		41.1		31.0
Mortgage loans		1,825.6		1,965.5
Policy loans		290.9		295.2
Trading securities		389.7		293.3
Investments held by variable interest entities		454.8		-
Securities lending collateral		-		180.0
Other invested assets		189.5		236.8

Total investments		24,199.1		21,530.2

Cash and cash equivalents - unrestricted		548.8		523.4
Cash and cash equivalents held by variable interest entities		18.3		3.4
Accrued investment income		345.3		309.0
Present value of future profits		1,028.3		1,175.9
Deferred acquisition costs		1,612.7		1,790.9
Reinsurance receivables		3,315.7		3,559.0
Income tax assets, net		536.7		1,124.0
Assets held in separate accounts		16.7		17.3
Other assets		352.0		310.7
��
Total assets	$	31,973.6	$	30,343.8

(continued on next page)

The accompanying notes are an integral part

of the consolidated financial statements.

CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET, continued

(Dollars in millions)

LIABILITIES AND SHAREHOLDERS' EQUITY

	September 30,			December 31,
	2010			2009
	(unaudited)
Liabilities:
Liabilities for insurance products:
Interest-sensitive products	$	13,217.6		$	13,219.2
Traditional products		10,253.0			10,063.5
Claims payable and other policyholder funds		939.4			994.0
Liabilities related to separate accounts		16.7			17.3
Other liabilities		833.9			610.4
Investment borrowings		653.9			683.9
Borrowings related to variable interest entities		425.0			-
Securities lending payable		-			185.7
Notes payable – direct corporate obligations		1,029.8			1,037.4

Total liabilities		27,369.3			26,811.4

Commitments and Contingencies

Shareholders' equity:
Common stock ($0.01 par value, 8,000,000,000 shares authorized, shares issued and outstanding: September 30, 2010 – 251,046,412; December 31, 2009 – 250,786,216)		2.5			2.5
Additional paid-in capital		4,421.6			4,408.8
Accumulated other comprehensive income (loss)		688.1			(264.3	)
Accumulated deficit		(507.9	)		(614.6	)

Total shareholders' equity		4,604.3			3,532.4
Total liabilities and shareholders' equity	$	31,973.6		$	30,343.8

The accompanying notes are an integral part

of the consolidated financial statements.

CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF OPERATIONS

(Dollars in millions, except per share data)

(unaudited)

	Three months ended						Nine months ended
	September 30,						September 30,
	2010			2009			2010			2009

Revenues:
Insurance policy income	$	674.5		$	772.0		$	2,007.0		$	2,346.1
Net investment income (loss):
General account assets		326.5			306.3			962.8			923.6
Policyholder and reinsurer accounts and other special-purpose portfolios		43.3			56.5			44.6			47.3
Realized investment gains (losses):
Net realized investment gains, excluding impairment losses		28.1			15.4			54.7			120.8
Other-than-temporary impairment losses:
Total other-than-temporary impairment losses		(22.8	)		(162.4	)		(69.8	)		(324.2	)
Change in other-than-temporary impairment losses recognized in accumulated other comprehensive income (loss)		(1.7	)		126.7			(2.9	)		159.9
Net impairment losses recognized		(24.5	)		(35.7	)		(72.7	)		(164.3	)
Total realized gains (losses)		3.6			(20.3	)		(18.0	)		(43.5	)
Fee revenue and other income		4.6			4.1			11.7			10.2

Total revenues		1,052.5			1,118.6			3,008.1			3,283.7

Benefits and expenses:
Insurance policy benefits		700.0			782.7			2,050.0			2,317.3
Interest expense		28.4			31.9			84.6			87.8
Amortization		118.6			113.3			317.8			335.9
Loss on extinguishment or modification of debt		-			-			2.7			9.5
Other operating costs and expenses		128.2			126.6			370.8			377.3

Total benefits and expenses		975.2			1,054.5			2,825.9			3,127.8

Income before income taxes		77.3			64.1			182.2			155.9

Income tax expense:
Tax expense on period income		27.9			22.0			65.8			54.7
Valuation allowance for deferred tax assets		-			26.7			-			33.7

Net income	$	49.4		$	15.4		$	116.4		$	67.5

Earnings per common share:
Basic:
Weighted average shares outstanding		251,045,000			184,886,000			250,942,000			184,820,000

Net income	$	.20		$	.08		$	.46		$	.37

Diluted:
Weighted average shares outstanding		306,040,000			185,846,000			300,256,000			185,277,000

Net income	$	.17		$	.08		$	.42		$	.36

The accompanying notes are an integral part

of the consolidated financial statements.

CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY

(Dollars in millions)

(unaudited)

	Common stock and additional paid-in capital		Accumulated other comprehensive income (loss)			Retained earnings (accumulated deficit)			Total

Balance, December 31, 2008	$	4,105.9	$	(1,770.7	)	$	(705.2	)	$	1,630.0

Comprehensive income, net of tax:
Net income		-		-			67.5			67.5
Change in unrealized appreciation (depreciation) of investments (net of applicable income tax expense of $949.8)		-		1,711.3			-			1,711.3
Noncredit component of impairment losses on fixed maturities, available for sale (net of applicable income tax benefit of $41.4)		-		(81.7	)		-			(81.7	)

Total comprehensive income										1,697.1

Stock option and restricted stock plans		6.6		-			-			6.6
Effect of reclassifying noncredit component of previously recognized impairment losses on fixed maturities, available for sale (net of applicable income tax benefit of $2.6)		-		(4.9	)		4.9			-

Balance, September 30, 2009	$	4,112.5	$	(146.0	)	$	(632.8	)	$	3,333.7

Balance, December 31, 2009	$	4,411.3	$	(264.3	)	$	(614.6	)	$	3,532.4

Comprehensive income, net of tax:
Net income		-		-			116.4			116.4
Change in unrealized appreciation (depreciation) of investments (net of applicable income tax expense of $497.2)		-		902.1			-			902.1
Noncredit component of impairment losses on fixed maturities, available for sale (net of applicable income tax expense of $31.6)		-		56.5			-			56.5

Total comprehensive income										1,075.0

Cumulative effect of accounting change		-		(6.2	)		(9.7	)		(15.9	)
Beneficial conversion feature related to the issuance of convertible debentures		4.0		-			-			4.0
Stock option and restricted stock plans		8.8		-			-			8.8

Balance, September 30, 2010	$	4,424.1	$	688.1		$	(507.9	)	$	4,604.3

The accompanying notes are an integral part

of the consolidated financial statements.

CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS

(Dollars in millions)

(unaudited)

	Nine months ended
	September 30,
	2010			2009

Cash flows from operating activities:
Insurance policy income	$	1,772.9		$	2,074.9
Net investment income		980.5			860.7
Fee revenue and other income		11.7			10.2
Insurance policy benefits		(1,510.1	)		(1,781.8	)
Interest expense		(76.0	)		(76.5	)
Policy acquisition costs		(315.8	)		(309.5	)
Other operating costs		(334.4	)		(352.5	)
Taxes		(4.2	)		(6.3	)

Net cash provided by operating activities		524.6			419.2

Cash flows from investing activities:
Sales of investments		6,630.9			8,140.1
Maturities and redemptions of investments		640.1			779.5
Purchases of investments		(7,847.1	)		(9,613.8	)
Net sales (purchases) of trading securities		(52.2	)		55.3
Change in cash and cash equivalents held by variable interest entities		(11.1	)		(7.2	)
Other		(14.6	)		(16.8	)

Net cash provided (used) by investing activities		(654.0	)		(662.9	)

Cash flows from financing activities:
Issuance of notes payable, net		110.8			-
Payments on notes payable		(116.5	)		(61.6	)
Expenses related to debt modification and extinguishment of debt		-			(9.5	)
Amounts received for deposit products		1,334.7			1,338.7
Withdrawals from deposit products		(1,287.0	)		(1,333.5	)
Investment borrowings and borrowings related to variable interest entities		112.8			(52.6	)

Net cash provided (used) by financing activities		154.8			(118.5	)

Net decrease in cash and cash equivalents		25.4			(362.2	)

Cash and cash equivalents, beginning of period		523.4			894.5

Cash and cash equivalents, end of period	$	548.8		$	532.3

The accompanying notes are an integral part

of the consolidated financial statements.

CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(unaudited)

___________________

BUSINESS AND BASIS OF PRESENTATION

The following notes should be read together with the notes to the consolidated financial statements included in our 2009 Annual Report on Form 10-K.

CNO Financial Group, Inc., a Delaware corporation (“CNO”), (formerly known as Conseco, Inc. prior to its name change in May 2010) 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 “Effective Date”). The terms “CNO Financial Group, Inc.”, the “Company”, “we”, “us”, and “our” as used in this report refer to CNO and its subsidiaries or, when the context requires otherwise, our Pred ecessor 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, professional 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 2010 presentation. These reclassifications have no effect on net income or shareholders’ equity. 60;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, 2009, 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 in the United States 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 material transactions between us and our consolidated affiliates, or among our consolidated affiliates.

OUT-OF-PERIOD ADJUSTMENTS

We recorded the net effects of certain out-of-period adjustments which: (i) increased our net income by $.3 million (or nil cents per diluted share) in the third quarter of 2010; and (ii) decreased our net income by $2.9 million (or one cent per diluted share) in the first nine months of 2010. We evaluated these errors taking into account both qualitative and quantitative factors and considered the impact of these errors in relation to the 2010 periods, as well as the materiality to the periods in which they originated. The impact of correcting these errors in prior years was not significant to any individual period. Management believes these errors are immaterial to the consolidated financial statements.

CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(unaudited)

___________________

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 the 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), i s substantially offset by the change in insurance policy benefits for these products. Our trading securities totaled $389.7 million and $293.3 million at September 30, 2010 and December 31, 2009, respectively.

Accumulated other comprehensive income (loss) is primarily comprised of the net effect of unrealized appreciation (depreciation) on our investments. These amounts, included in shareholders’ equity as of September 30, 2010 and December 31, 2009, were as follows (dollars in millions):

	September 30,			December 31,
	2010			2009

Net unrealized appreciation (depreciation) on fixed maturity securities, available for sale, on which an other-than-temporary impairment loss has been recognized	$	(24.5	)	$	(133.5	)
Net unrealized gains (losses) on all other investments		1,351.7			(339.9	)
Adjustment to present value of future profits (a)		(31.5	)		10.7
Adjustment to deferred acquisition costs		(217.7	)		59.8
Unrecognized net loss related to deferred compensation plan		(7.9	)		(8.2	)
Deferred income tax asset (liability)		(382.0	)		146.8

Accumulated other comprehensive income (loss)	$	688.1		$	(264.3	)

_________

(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).

CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(unaudited)

___________________

At September 30, 2010, the amortized cost, gross unrealized gains and losses, other-than-temporary impairments in accumulated other comprehensive income (loss) 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 (loss)

Corporate securities	$	14,437.7	$	1,329.5	$	(116.1	)	$	15,651.1	$	-
United States Treasury securities and obligations of United States government corporations and agencies		100.8		8.0		-			108.8		-
States and political subdivisions		1,444.3		62.5		(32.5	)		1,474.3		-
Debt securities issued by foreign governments		.8		.1		-			.9		-
Asset-backed securities		606.7		12.2		(6.7	)		612.2		-
Collateralized debt obligations		222.8		1.8		(2.2	)		222.4		-
Commercial mortgage-backed securities		1,306.2		84.9		(20.8	)		1,370.3		-
Mortgage pass-through securities		32.1		1.6		(.1	)		33.6		-
Collateralized mortgage obligations		1,513.1		63.2		(42.4	)		1,533.9		(44.7	)

Total fixed maturities, available for sale	$	19,664.5	$	1,563.8	$	(220.8	)	$	21,007.5	$	(44.7	)

The following table sets forth the amortized cost and estimated fair value of those fixed maturities, available for sale, at September 30, 2010, 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 permit periodic unscheduled payments throughout their lives.

			Estimated
	Amortized		fair
	cost		value
	(Dollars in millions)

Due in one year or less	$	146.3	$	147.5
Due after one year through five years		1,105.3		1,175.0
Due after five years through ten years		4,441.6		4,855.0
Due after ten years		10,290.4		11,057.6

Subtotal		15,983.6		17,235.1

Structured securities		3,680.9		3,772.4

Total	$	19,664.5	$	21,007.5

CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(unaudited)

___________________

Net Realized Investment Gains (Losses)

During the first nine months of 2010, we recognized net realized investment losses of $18.0 million, which were comprised of $54.7 million of net gains from the sales of investments (primarily fixed maturities) with proceeds of $6.6 billion, and $72.7 million of writedowns of investments for other than temporary declines in fair value recognized through net income ($69.8 million, prior to the $(2.9) million of impairment losses recognized through accumulated other comprehensive income (loss)).

During the first nine months of 2009, we recognized net realized investment losses of $43.5 million, which were comprised of $120.8 million of net gains from the sales of investments (primarily fixed maturities) with proceeds of $8.1 billion, and $164.3 million of writedowns of investments for other than temporary declines in fair value recognized through net income ($324.2 million, prior to the $159.9 million of impairment losses recognized through accumulated other comprehensive income (loss)).

At September 30, 2010, fixed maturity securities in default or considered nonperforming had an aggregate amortized cost of $.6 million and a carrying value of $.7 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 purchase and sell such securities to generate short-term realized gains. In certain circumstances, including those in which securities are selling at prices which exceed our view of their underlying economic value, and it is possible to reinvest the proceeds to better meet our long-term asset-liability objectives, we may sell certain securities. During the nine months ended September 30, 2010, we sold $1.2 billion of fixed maturity investments which resulted in gross investment losses (before income taxes) of $135.6 million. We sell securities at a loss for a number of reasons including, but not limited to: (i) changes in the investment envi ronment; (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.

The following summarizes the investments (excluding investments held by the variable interest entities (“VIEs”)) sold at a loss during the first nine months of 2010 which had been continuously in an unrealized loss position exceeding 20 percent of the amortized cost basis prior to the sale for the period indicated (dollars in millions):

	At date of sale
	Number		Amortized		Fair
	of issuers		cost		value

Less than 6 months prior to sale		6	$	51.5	$	38.9
Greater than 12 months prior to sale		22		162.5		85.6

		28	$	214.0	$	124.5

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; and (x) other objective and subjective factors.

CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(unaudited)

___________________

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 September 30, 2010, other-than-temporary impairments included in accumulated other comprehensive income (loss) of $44.7 million (before taxes and related amortization) relate to structured securities.

CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(unaudited)

___________________

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 (loss) for the three and nine months ended September 30, 2010 and 2009 (dollars in millions):

	Three months ended						Nine months ended
	September 30,						September 30,
	2010			2009			2010			2009

Credit losses on fixed maturity securities, available for sale, beginning of period	$	(24.0	)	$	(10.0	)	$	(27.2	)	$	(.6	)
Add: credit losses on other-than-temporary impairments not previously recognized		-			(9.8	)		(1.3	)		(18.2	)
Less: credit losses on securities sold		14.5			1.8			28.0			1.8
Less: credit losses on securities impaired due to intent to sell (a)		-			-			1.1			-
Add: credit losses on previously impaired securities		(1.7	)		(1.2	)		(11.8	)		(2.2	)
Less: increases in cash flows expected on previously impaired securities		-			-			-			-

Credit losses on fixed maturity securities, available for sale, end of period	$	(11.2	)	$	(19.2	)	$	(11.2	)	$	(19.2	)

__________

(a)	Represents securities for which the amount previously recognized in accumulated other comprehensive income (loss) 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

CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(unaudited)

___________________

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 had been in a continuous unrealized loss position, at September 30, 2010 (dollars in millions):

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

Corporate securities	$	492.7	$	(10.0	)	$	1,252.2	$	(106.1	)	$	1,744.9	$	(116.1	)
United States Treasury securities and obligations of United States government corporations and agencies		10.0		-			.3		-			10.3		-
States and political subdivisions		82.2		(.2	)		258.0		(32.3	)		340.2		(32.5	)
Asset-backed securities		170.2		(1.5	)		61.0		(5.2	)		231.2		(6.7	)
Collateralized debt obligations		117.7		(2.2	)		-		-			117.7		(2.2	)
Commercial mortgage-backed securities		37.6		(.2	)		126.3		(20.6	)		163.9		(20.8	)
Mortgage pass-through securities		.3		-			3.6		(.1	)		3.9		(.1	)
Collateralized mortgage obligations		106.3		(1.0	)		321.5		(41.4	)		427.8		(42.4	)

Total fixed maturities, available for sale	$	1,017.0	$	(15.1	)	$	2,022.9	$	(205.7	)	$	3,039.9	$	(220.8	)

Based on management’s current assessment of investments with unrealized losses at September 30, 2010, 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 bef ore its anticipated recovery.

CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(unaudited)

___________________

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				Nine months ended
	September 30,				September 30,
	2010		2009		2010		2009

Net income for basic earnings per share	$	49.4	$	15.4	$	116.4	$	67.5

Add: interest expense on 7.0% Convertible Senior Debentures due 2016 (the “7.0% Debentures”), net of income taxes		3.7		-		9.7		-

Net income for diluted earnings per share	$	53.1	$	15.4	$	126.1	$	67.5

Shares:
Weighted average shares outstanding for basic earnings per share		251,045		184,886		250,942		184,820

Effect of dilutive securities on weighted average shares:
7% Debentures		53,364		-		47,563		-
Stock option and restricted stock plans		1,631		960		1,751		457

Dilutive potential common shares		54,995		960		49,314		457

Weighted average shares outstanding for diluted earnings per share		306,040		185,846		300,256		185,277

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 o ptions (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, Colonial Penn and Washington National, which are defined on the basis of product distribution; Other CNO Business, comprised primarily of closed blocks; 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.

CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(unaudited)

___________________

Operating information by segment was as follows (dollars in millions):

	Three months ended				Nine months ended
	September 30,				September 30,
	2010		2009		2010		2009
Revenues:
Bankers Life:
Insurance policy income:
Annuities	$	11.7	$	13.1	$	30.7	$	33.9
Health		343.9		423.6		1,032.2		1,298.8
Life		49.5		56.4		139.1		149.5
Net investment income (a)		208.5		199.6		554.9		505.4
Fee revenue and other income (a)		3.6		2.4		8.6		5.4

Total Bankers Life revenues		617.2		695.1		1,765.5		1,993.0

Washington National:
Insurance policy income:
Health		139.6		140.1		418.6		421.8
Life		4.0		8.2		12.7		25.1
Other		1.3		1.4		3.7		4.1
Net investment income (a)		46.4		48.0		137.7		144.4
Fee revenue and other income (a)		.3		.5		.8		1.6

Total Washington National revenues		191.6		198.2		573.5		597.0

Colonial Penn:
Insurance policy income:
Health		1.8		2.1		5.2		6.2
Life		47.0		46.3		141.1		142.0
Net investment income (a)		9.9		9.5		29.3		29.1
Fee revenue and other income (a)		.2		.2		.5		.6

Total Colonial Penn revenues		58.9		58.1		176.1		177.9

Other CNO Business:
Insurance policy income:
Annuities		3.8		3.1		8.7		26.1
Health		7.5		7.9		22.7		24.3
Life		63.9		69.1		190.4		212.1
Other		.5		.7		1.9		2.2
Net investment income (a)		96.5		102.2		269.5		281.2

Total Other CNO Business revenues		172.2		183.0		493.2		545.9

Corporate operations:
Net investment income		8.5		3.5		16.0		10.8
Fee and other income		.5		1.0		1.8		2.6

Total corporate revenues		9.0		4.5		17.8		13.4

Total revenues		1,048.9		1,138.9		3,026.1		3,327.2

(continued on next page)

CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(unaudited)

___________________

(continued from previous page)

	Three months ended						Nine months ended
	September 30,						September 30,
	2010			2009			2010			2009
Expenses:
Bankers Life:
Insurance policy benefits	$	402.1		$	488.0		$	1,201.3		$	1,442.3
Amortization		76.4			74.5			214.0			213.2
Other operating costs and expenses		43.2			47.2			137.5			144.1

Total Bankers Life expenses		521.7			609.7			1,552.8			1,799.6

Washington National:
Insurance policy benefits		112.4			115.6			341.6			350.9
Amortization		14.4			12.9			42.3			42.1
Other operating costs and expenses		37.6			40.6			113.7			116.1

Total Washington National expenses		164.4			169.1			497.6			509.1

Colonial Penn:
Insurance policy benefits		36.4			35.0			108.5			107.6
Amortization		7.0			8.4			24.5			24.8
Other operating costs and expenses		7.7			7.3			22.4			22.0

Total Colonial Penn expenses		51.1			50.7			155.4			154.4

Other CNO Business:
Insurance policy benefits		149.1			144.1			398.6			416.5
Amortization		20.7			18.9			36.5			60.3
Interest expense on investment borrowings		5.1			5.1			15.1			15.5
Other operating costs and expenses		21.7			22.4			60.5			67.5

Total Other CNO Business expenses		196.6			190.5			510.7			559.8

Corporate operations:
Interest expense on corporate debt		20.0			24.0			59.3			61.6
Interest expense on borrowings of variable interest entities		3.3			2.8			10.2			10.7
Loss on extinguishment or modification of debt		-			-			2.7			9.5
Other operating costs and expenses		18.0			9.1			36.7			27.6

Total corporate expenses		41.3			35.9			108.9			109.4

Total expenses		975.1			1,055.9			2,825.4			3,132.3

Income (loss) before net realized investment losses (net of related amortization) and income taxes:
Bankers Life		95.5			85.4			212.7			193.4
Washington National		27.2			29.1			75.9			87.9
Colonial Penn		7.8			7.4			20.7			23.5
Other CNO Business		(24.4	)		(7.5	)		(17.5	)		(13.9	)
Corporate operations		(32.3	)		(31.4	)		(91.1	)		(96.0	)

Income before net realized investment losses (net of related amortization) and income taxes	$	73.8		$	83.0		$	200.7		$	194.9

___________________

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

CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(unaudited)

___________________

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

	Three months ended					Nine months ended
	September 30,					September 30,
	2010		2009			2010			2009

Total segment revenues	$	1,048.9	$	1,138.9		$	3,026.1		$	3,327.2
Net realized investment gains (losses)		3.6		(20.3	)		(18.0	)		(43.5	)

Consolidated revenues	$	1,052.5	$	1,118.6		$	3,008.1		$	3,283.7

Total segment expenses	$	975.1	$	1,055.9		$	2,825.4		$	3,132.3
Amortization related to net realized investment gains (losses)		.1		(1.4	)		.5			(4.5	)

Consolidated expenses	$	975.2	$	1,054.5		$	2,825.9		$	3,127.8

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 in 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 (losses) related to fixed index products were $(9.7) million and $32.7 million in the nine months ended September 30, 2010 and 2009, respectively. These amounts were substantially offset by a corresponding change to insurance policy benefits. The estimated fair value of these options was $51.8 million and $114.9 million at September 30, 2010 and December 31, 2009, 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 $519.6 million at September 30, 2010 and $494.4 million at December 31, 2009. 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 September 30, 2010, substantially all of our counterparties were rated “BBB+” or higher by Standard & Poor’s Corporation (“S&P”).

CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(unaudited)

___________________

Certain of our reinsurance payable balances contain embedded derivatives. Such derivatives had an estimated fair value of $1.6 million at both September 30, 2010 and December 31, 2009. 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 $62.9 million and $45.0 million in the third quarters of 2010 and 2009, respectively, and $194.6 million and $131.7 million in the first nine months of 2010 and 2009, respectively. We deduct this cost from insurance policy income. Reinsurance recoveries netted against insurance policy benefits totaled $118.7 million and $102.0 million in the third quarters of 2010 and 2009, respectively, and $352.2 million and $366.8 million in the first nine months of 2010 and 2009, 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 $25.0 million and $115.4 million in the third quarters of 2010 and 2009, respectively, and $75.8 million and $373.2 million in the first nine months of 2010 and 2009, respectively. Reinsurance premiums included amounts assumed pursuant to marketing and quota-share agreements with Coventry Health Care (“Coventry”) of $18.8 million and $108.1 million in the third quarters of 2010 and 2009, respectively, and $56.1 million and $349.6 million in the first nine months of 2010 and 2009, respectively. Coventry decided to cease selling Private-Fee-For-Servic e (“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.

In September 2009, we completed a transaction under which Washington National Insurance Company (“Washington National”) and Conseco Insurance Company coinsured, with an effective date of January 1, 2009, about 104,000 non-core life insurance policies in the Other CNO Business segment with Wilton Reassurance Company (“Wilton Re”). In the transaction, Wilton Re paid a ceding commission of $55.8 million and coinsures and administers 100 percent of these policies. The CNO insurance companies transferred to Wilton Re $401.6 million in cash and policy loans and $457.4 million of policy and other reserves. Most of the policies involved in the transaction were issued by companies prior to their acquisition by CNO. We recorded a deferred gain of approximately $26 million in 2009 which is being recognized over the remaining life of the block of insurance policies coinsured with Wilton Re. We also increased our deferred tax valuation allowance by $20 million in the third quarter of 2009 as a result of reassessing the recovery of our deferred tax assets upon completion of the transaction.

In November 2009, we entered into a transaction under which Bankers Life coinsured, with an effective date of October 1, 2009, about 234,000 life insurance policies with Wilton Re. In the transaction, Wilton Re paid a ceding commission of $44 million and is 50% coinsuring these policies, which continue to be administered by Bankers Life. In the transaction, Bankers Life transferred to Wilton Re $73 million in investment securities and policy loans and $117 million of policy and other reserves. We also recorded a pre-tax deferred cost of reinsurance of $32 million in 2009, which, in accordance with GAAP, is being amortized over the life of the block.

CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(unaudited)

___________________

INCOME TAXES

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

	Three months ended				Nine months ended
	September 30,				September 30,
	2010		2009		2010		2009

Current tax expense	$	3.0	$	-	$	5.5	$	3.5
Deferred tax provision		24.9		22.0		60.3		51.2

Income tax expense on period income		27.9		22.0		65.8		54.7

Valuation allowance		-		26.7		-		33.7

Total income tax expense	$	27.9	$	48.7	$	65.8	$	88.4

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

	Nine months ended
	September 30,
	2010			2009

U.S. statutory corporate rate		35.0	%		35.0	%
Valuation allowance		-			21.6
Other nondeductible expenses (benefit)		(.2	)		(1.7	)
State taxes		.9			.9
Provision for tax issues, tax credits and other		.4			.9

Effective tax rate		36.1	%		56.7	%

CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(unaudited)

___________________

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

	September 30,			December 31,
	2010			2009
Deferred tax assets:
Net federal operating loss carryforwards attributable to:
Life insurance subsidiaries	$	701.4		$	745.3
Non-life companies		872.4			883.9
Net state operating loss carryforwards		18.1			19.1
Tax credits		22.2			18.5
Capital loss carryforwards		379.9			393.8
Deductible temporary differences:
Insurance liabilities		750.1			782.1
Unrealized depreciation of investments		-			146.8
Other		60.2			44.0

Gross deferred tax assets		2,804.3			3,033.5

Deferred tax liabilities:
Investments		(20.7	)		(38.1	)
Present value of future profits and deferred acquisition costs		(686.1	)		(694.0	)
Unrealized appreciation on investments		(382.0	)		-

Gross deferred tax liabilities		(1,088.8	)		(732.1	)

Net deferred tax assets before valuation allowance		1,715.5			2,301.4

Valuation allowance		(1,176.4	)		(1,176.4	)

Net deferred tax assets		539.1			1,125.0

Current income taxes accrued		(2.4	)		(1.0	)

Income tax assets, net	$	536.7		$	1,124.0

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. 60; 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.

CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(unaudited)

___________________

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 further increases to the deferred tax valuation allowance recognizes that as of September 30, 2010, we have incurred a cumulative loss over the evaluation period, resulting from the substantial loss during the year ended December 31, 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 earnings. However, because a substantial portion of the cumulative losses for the three-year period ended September 30, 2010, 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 transferred in 2008. In addition, we have adjusted the three-year cumulative results for a significant litigation settlement and the worthlessness of certain loans made by our Predecessor. We consider these to be non-recurring matters and have reflected our best estimates of when temporary differences will reverse over the carryforward periods.

At September 30, 2010, our valuation allowance for our net deferred tax assets was $1.2 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 September 30, 2010, we believe that we will, more likely than not, recover $.5 billion of our deferred tax assets through reductions of our tax liabilitie s in future periods. There were no changes to our valuation allowance for deferred tax assets during the nine months ended September 30, 2010.

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.

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 re quired 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 (3.99 percent at September 30, 2010), 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 September 30, 2010, we were below the 50 percent ownership change level that would trigger further impairment of our ability to utilize our NOLs.

CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(unaudited)

___________________

As of September 30, 2010, we had $4.5 billion of federal NOLs and $1.1 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

2010	$	-		$	.1		$	-	$	.1
2011		-			.1			-		.1
2012		-			-			22.7		22.7
2013		-			-			1,034.2		1,034.2
2014		-			-			28.6		28.6
2018		1,770.4	(a)		-			-		1,770.4
2021		29.6			-			-		29.6
2022		204.1			-			-		204.1
2023		-			2,003.5	(a)		-		2,003.5
2024		-			3.2			-		3.2
2025		-			118.8			-		118.8
2026		-			.8			-		.8
2027		-			216.3			-		216.3
2028		-			1.2			-		1.2
2029		-			148.7			-		148.7

Total	$	2,004.1		$	2,492.7		$	1,085.5	$	5,582.3

____________________

(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 $18.1 million and $19.1 million at September 30, 2010 and December 31, 2009, respectively. The related state NOLs are available to offset future state taxable income in certain states through 2015.

Tax years 2007 through 2009 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 2009 based on the individual state statutes of limitation.

CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(unaudited)

___________________

NOTES PAYABLE - DIRECT CORPORATE OBLIGATIONS

The following notes payable were direct corporate obligations of the Company as of September 30, 2010 and December 31, 2009 (dollars in millions):

	September 30,			December 31,
	2010			2009

3.5% Convertible Debentures due September 30, 2035 (the “3.5% Debentures”)	$	-		$	116.5
7.0% Debentures		293.0			176.5
Secured credit agreement		652.1			652.1
Senior Note due November 12, 2013 (the “Senior Note”)		100.0			100.0
Unamortized discount on 3.5% Debentures		-			(3.3	)
Unamortized discount on 7.0% Debentures		(15.3	)		(4.4	)

Direct corporate obligations	$	1,029.8		$	1,037.4

In February 2010, we repurchased $64.0 million aggregate principal amount of our 3.5% Debentures in a privately-negotiated transaction. In connection with the repurchase of the 3.5% Debentures, we completed a second closing of $64 million aggregate principal amount of our 7.0% Debentures as part of our previously-announced private offering of 7.0% Debentures. The first closing of $176.5 million of the 7.0% Debentures was completed on November 13, 2009, upon settlement of a tender offer for the 3.5% Debentures.

The purchase price for the $64.0 million of 3.5% Debentures was equal to 100 percent of the aggregate principal amount plus accrued and unpaid interest. As a result of the repurchase, we realized a loss on the extinguishment of debt of $1.8 million, representing the write-off of unamortized discount and issuance costs associated with 3.5% Debentures that were repurchased.

The issuance of the $64.0 million of 7.0% Debentures was made pursuant to the purchase agreement that we entered into in October 2009 relating to the private offering of up to $293 million of 7.0% Debentures. We received aggregate net proceeds of $61.4 million in the second closing of the 7.0% Debentures (after taking into account the discounted offering price less the initial purchaser’s discounts and commissions, but before expenses).

In May 2010, we repurchased $52.5 million aggregate principal amount of our 3.5% Debentures in a privately-negotiated transaction. In connection with the repurchase of the 3.5% Debentures, we completed a third closing of $52.5 million aggregate principal amount of our 7.0% Debentures as part of our previously-announced private offering of 7.0% Debentures.

The purchase price for the $52.5 million of 3.5% Debentures was equal to 100 percent of the aggregate principal amount plus accrued and unpaid interest. As a result of the repurchase, we realized a loss on the extinguishment of debt of $.9 million, representing the write-off of unamortized discount and issuance costs associated with 3.5% Debentures that were repurchased.

The issuance of the $52.5 million of 7.0% Debentures was made pursuant to the purchase agreement that we entered into in October 2009 relating to the private offering of up to $293 million of 7.0% Debentures. We received aggregate net proceeds of $49.4 million in the third closing of the 7.0% Debentures (after taking into account the discounted offering price less the initial purchaser’s discounts and commissions, but before expenses).

CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(unaudited)

___________________

In accordance with GAAP, we are required to consider on each issuance date whether the 7.0% Debentures issued on such date are issued with a beneficial conversion feature. A beneficial conversion feature will exist if the 7.0% Debentures may be convertible into common stock at an effective conversion price (calculated by dividing the proceeds from the issuance of 7.0% Debentures issued on that date (per $1,000 principal amount of debentures) by the then effective conversion rate) that is lower than the market price of a share of common stock on the date of issuance. When a beneficial conversion feature exists, we are required to separately recognize the beneficial conversion feature at issuance by allocating a portion of the proceeds to the intrinsic value of that feature. The value of the beneficial conv ersion feature is recorded, net of taxes, as an increase to additional paid-in capital. If a beneficial conversion feature exists on the actual date(s) of issuance, a discount equal to the intrinsic value of the beneficial conversion feature will be recorded against the carrying value of the 7.0% Debentures. Such discount will be amortized from the actual date(s) of issuance to the stated maturity date of the 7.0% Debentures using the effective interest method. Accordingly, the interest expense we recognize related to the 7.0% Debentures will be dependent upon whether a beneficial conversion feature exists on the actual date(s) of issuance and the amount by which the market price(s) of our common stock exceeds the effective conversion price on such actual date(s) of issuance.

The closing market price of our common stock on May 4, 2010 (the last closing price prior to the issuance of $52.5 million of the 7.0% Debentures) was $5.81. Because this amount was higher than the effective conversion price of $5.17 on that date, a beneficial conversion feature existed with respect to the 7.0% Debentures we issued. The beneficial conversion feature related to the 7% Debentures issued on May 5, 2010 of $4.0 million, net of tax, was recorded as an increase to additional paid-in capital.

Our secured credit agreement (“Senior Credit Agreement”) contains various restrictive covenants and certain financial ratios and balances that we must maintain. As of September 30, 2010, we were in compliance with all covenants under our Senior Credit Agreement.

The scheduled repayment of our direct corporate obligations was as follows at September 30, 2010 (dollars in millions):

Remainder of 2010	$	25.0
2011		60.0
2012		65.0
2013		602.1
2016		293.0

	$	1,045.1

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 FHLB. Conseco Life and Bankers Life are required to hold certain minimum amounts of FHLB common stock as a requirement of membership in the FHLB, and additional amounts based on the amount of the borrowings. At September 30, 2010, the carrying value of the FHLB common stock was $32.5 million. As of September 30, 2010, collateralized borrowings from the FHLB totaled $650.0 million (of which, $200.0 million was borrowed in the third quarter of 2010), and the proceeds were used to purchase fixed mat urity 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 $914.9 million at September 30, 2010, which are maintained in a custodial account for the benefit of the FHLB. In early October 2010, Bankers Life borrowed an additional $250.0 million from the FHLB. A portion of the collateral for the additional borrowings had been deposited in the custodial account for the benefit of the FHLB at September 30, 2010. Such investments are classified as fixed maturities, available for sale, in our consolidated balance sheet. Interest expense of $14.9 million and $15.3 million in the first nine months of 2010 and 2009, respectively, was recognized related to the borrowings.

CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(unaudited)

___________________

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

Amount		Maturity	Interest rate
borrowed		date	at September 30, 2010

$	54.0	May 2012	Variable rate – 0.339%
	37.0	July 2012	Fixed rate – 5.540%
	13.0	July 2012	Variable rate – 0.588%
	100.0	September 2015	Variable rate – 0.606%
	100.0	September 2015	Variable rate – 0.557%
	146.0	November 2015	Fixed rate – 5.300%
	100.0	November 2015	Fixed rate – 4.890%
	100.0	December 2015	Fixed rate – 4.710%

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 September 30, 2010, the aggregate fee to prepay all fixed rate borrowings was $71 million.

At September 30, 2010, investment borrowings consisted of: (i) collateralized borrowings from the FHLB of $650.0 million; and (ii) other borrowings of $3.9 million.

At December 31, 2009, investment borrowings consisted of: (i) collateralized borrowings of $450.0 million; (ii) $229.1 million of securities issued to other entities by a VIE which is consolidated in our financial statements; and (iii) other borrowings of $4.8 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, 2009	250,786

Shares issued under employee benefit compensation plans	260	(a)

Balance at September 30, 2010	251,046

________

(a)	Such amount was reduced by 72 thousand shares which were tendered for the payment of federal and state taxes owed on the issuance 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 $13.8 million and $20.3 million during the nine months ended September 30, 2010 and 2009, respectively. Amounts amortized totaled $20.6 million and $26.0 million during the nine months ended September 30, 2010 and 200 9, respectively. The unamortized balance of deferred sales inducements at September 30, 2010 and December 31, 2009 was $170.8 million and $177.6 million, respectively. The balance of insurance liabilities for persistency bonus benefits was $96.0 million and $136.2 million at September 30, 2010 and December 31, 2009, respectively.

CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(unaudited)

___________________

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 adopti on. Retrospective application to all prior periods presented upon the date of adoption also is permitted, but not required. The Company is in the process of evaluating the impact the guidance will have on its consolidated financial statements.

In April 2010, the FASB issued authoritative guidance on how investments held through separate accounts affect an insurer’s consolidation analysis of those investments. This guidance is effective for fiscal years and interim periods beginning after December 15, 2010, with early adoption permitted. The adoption of this guidance is not expected to have a material impact on our consolidated financial statements.

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. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.

Adopted Accounting Standards

In March 2010, the FASB issued authoritative guidance clarifying the scope exception for embedded credit derivatives and when those features would be bifurcated from the host contract. Under the new guidance, only embedded credit derivative features that are in the form of subordination of one financial instrument to another would not be subject to the bifurcation requirements. Accordingly, entities will be required to bifurcate any embedded credit derivative features that no longer qualify under the amended scope exception, or, for certain investments, an entity can elect the fair value option and record the entire investment at fair value. This guidance is effective for fiscal quarters beginning after June 15, 2010. The adoption of this guidance did not have a material impact on our consolid ated financial statements.

In January 2010, the FASB issued authoritative guidance which requires new disclosures and clarifies existing disclosure requirements related to fair value. An entity is also required to disclose significant transfers in and out of Levels 1 and 2 of the fair value hierarchy. In addition, the guidance amends the fair value disclosure requirement for pension and postretirement benefit plan assets to require this disclosure at the investment class level. The guidance is effective for interim and annual reporting periods beginning after December 15, 2009. Such disclosures are included in the note to the consolidated financial statements entitled “Fair Value Measurements”. The adoption of this guidance did not have a material impact on our consolidated financial statements.

In June 2009, the FASB issued authoritative guidance that is intended to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement, if any, in transferred financial assets. The guidance must be applied as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. The guidance must be applied to transfers occurring on or after the effective date. The adoption of thi s guidance did not have a material impact on our consolidated financial statements.

CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(unaudited)

___________________

In June 2009, the FASB issued authoritative guidance that requires an entity to perform a qualitative analysis to determine whether a primary beneficiary interest is held in a VIE. Under the new qualitative model, the primary beneficiary must have both the power to direct the activities of the VIE and the obligation to absorb either losses or gains that could be significant to the VIE. The guidance also requires ongoing reassessments to determine whether a primary beneficiary interest is held and additional disclosures, including the financial statement effects of the entity’s involvement with VIEs. The guidance is effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting pe riod, and for interim and annual reporting periods thereafter. The impact of adoption of this guidance is as follows (dollars in millions):

	January 1, 2010
	Amounts prior to effect of adoption of authoritative			Effect of adoption of authoritative			As
	guidance			guidance			adjusted

Total investments	$	21,530.2		$	247.6		$	21,777.8

Cash and cash equivalents held by variable interest entities		3.4			3.8			7.2
Accrued investment income		309.0			.9			309.9
Income tax assets, net		1,124.0			8.6			1,132.6
Other assets		310.7			14.2			324.9
Total assets		30,343.8			275.1			30,618.9

Other liabilities		610.4			8.8			619.2
Borrowings related to variable interest entities		229.1			282.2			511.3
Total liabilities		26,811.4			291.0			27,102.4

Accumulated other comprehensive income (loss)		(264.3	)		(6.2	)		(270.5	)
Accumulated deficit		(614.6	)		(9.7	)		(624.3	)
Total shareholders’ equity		3,532.4			(15.9	)		3,516.5

Total liabilities and shareholders’ equity		30,343.8			275.1			30,618.9

On April 9, 2009, the FASB issued authoritative guidance regarding the recognition and presentation of an other-than-temporary impairment and requires additional disclosures. The recognition provision within this guidance applies only to fixed maturity investments that are subject to the other-than-temporary impairments. If an entity intends to sell or if it is more likely than not that it will be required to sell an impaired security prior to recovery of its cost basis, the security is other-than-temporarily impaired and the full amount of the impairment is recognized as a loss through earnings. Otherwise, losses on securities which are other-than-temporarily impaired are separated into: (i) the portion of loss which represents the credit loss; and (ii) the portion which is due to other factor s. The credit loss portion is recognized as a loss through earnings while the loss due to other factors is recognized in accumulated other comprehensive income (loss), net of taxes and related amortization. The guidance requires a cumulative effect adjustment to accumulated deficit and a corresponding adjustment to accumulated other comprehensive income (loss) to reclassify the non-credit portion of previously other-than-temporarily impaired securities which were held at the beginning of the period of adoption and for which we do not intend to sell and it is more likely than not that we will not be required to sell such securities before recovery of the amortized cost basis. We adopted the guidance effective January 1, 2009. The cumulative effect of adopting this guidance was a $4.9 million net decrease to accumulated deficit and a corresponding increase to accumulated other comprehensive income (loss).

CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(unaudited)

___________________

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. 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. The amounts sought in certain of these actions are often large o r 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.

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

After our Predecessor announced its intention to restructure on August 9, 2002, eight purported securities fraud class action lawsuits were filed in the United States District Court for the Southern District of Indiana. The complaints named us as a defendant, along with certain of our former officers. These lawsuits were filed on behalf of persons or entities who purchased our Predecessor’s common stock on various dates between October 24, 2001 and August 9, 2002. The plaintiffs allege claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and allege material omissions and dissemination of materially misleading statements regarding, among other things, the liquidity of our Predecessor and alleged problems in Conseco Finance Corp.’s manufactured housing divisi on, allegedly resulting in the artificial inflation of our Predecessor’s stock price. These cases were consolidated into one case in the United States District Court for the Southern District of Indiana, captioned Franz Schleicher, et al. v. Conseco, Inc., Gary Wendt, William Shea, Charles Chokel and James Adams, et al., Case No. 02-CV-1332 DFH-TAB. The complaint seeks an unspecified amount of damages. The plaintiffs filed an amended consolidated class action complaint with respect to the individual defendants on December 8, 2003. Our liability with respect to this lawsuit was discharged in our Predecessor’s plan of reorganization and our obligation to indemnify individual defendants who were not serving as an officer or director on the Effective Date is limited to $3 million in the aggregate under such plan. Our liability to inde mnify individual defendants who were serving as an officer or director on the Effective Date, of which there is one such defendant, is not limited by such plan. The parties to this case have reached a settlement in principle, which is subject to court approval.

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 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

CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(unaudited)

___________________

$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. 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 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. The allegations in the complaint are similar to those described in the preceding paragraph. 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 un just 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.

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 restituti onary 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

CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(unaudited)

___________________

by increases in the cost of insurance 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. 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. Conseco Life and the plaintiff have each filed motions for summary judgment, and the court has scheduled a hearing on such motions for November 29, 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 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. In the complaint, 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. In their complaint, 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. On April 23, 2009, the plaintiffs filed an amended complaint adding the additional counts of breac h 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. 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. In his complaint, plaintiff alleges that Conseco Life committed breach of contract and has been unjustly enriched in the administration 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. 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.

CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(unaudited)

___________________

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. T he 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 dismi ssed 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.

On January 18, 2008, a complaint was filed in the Hennepin County District Court, Minnesota, by the State of Minnesota (the “State”), styled, as amended, State of Minnesota, by its Pollution Control Agency and its Attorney General Lori Swanson vs. Associated Medical Assurance Limited, Associated Health Assurance Limited, Associated Hospital Assurance Limited, Federated Rural Electric Insurance Exchange, Mt. McKinley Insurance Company, Munich Reinsurance America Incorporated, North Star Reinsurance Corporation, Northwestern National Insurance Company of Milwaukee, Wisconsin, Stonebridge Life Insurance Company, and United Insurance Company, cause no. 27-cv-08-1912, seeking to recover environmental response costs and other damages in connection with the remediation o f three closed landfills. As a result of the 1967 sale of Beneficial Fire & Casualty Company (“BF&C”) by a predecessor of Conseco Insurance Company (“CIC”), CIC is obligated to defend and indemnify one of the parties, Stonebridge Life Insurance Company (“Stonebridge”), for this action under a pre-sale BF&C insurance policy. On July 26, 2010, the court denied Stonebridge’s motion for summary judgment and granted the State’s motion for partial summary judgment on the issue of liability at one of the three landfills. The court also granted the State’s motion for partial summary judgment as to the non-applicability of aggregate limits to its claims for coverage under the policy in issue. No decision on damages at any of the landfills has been ruled on. A settlement has been reached. The case is to be dismissed.

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.

Director and Officer Loan Program Litigation

The Company and CNO Services, LLC have settled all litigation related to the 1996-1999 director and officer loan programs. As part of our Predecessor’s plan of reorganization, we are required to pay 45 percent of any net proceeds recovered in connection with these lawsuits, in an aggregate amount not to exceed $30 million, to former holders of our Predecessor’s trust preferred securities that did not opt out of a settlement reached with the committee representing holders of these securities. At September 30, 2010, we estimated that approximately $2.5 million, net of collection costs, of the remaining amounts due under the loan program will be collected (amounts that remain to be collected from borrowers with whom we have settled). As of September 30, 2 010, we had paid $20.5 million to the former holders of trust preferred securities and we have established a liability of $1.0 million, representing our estimate of the additional amount which will be paid to the former holders of our Predecessor’s trust preferred securities pursuant to the settlement.

CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(unaudited)

___________________

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 canno t 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. This examination commenced in July 2007 and on May 7, 2008, Conseco, Inc. 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 in the event the process improvements and benchmarks, on the part of either Senior Health and/or Bankers Life, are not met over an 18 month period for Bankers Life or a two-and-a-half year period for Senior Health, which time started with the settlement. 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 late 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 ins urance products and the payment of a $1 million assessment to participating jurisdictions. Over 45 jurisdictions, representing almost 98 percent of the Lifetrend policyholders, have signed the settlement agreement. Conseco Life has started 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.

CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(unaudited)

___________________

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):

	Nine months ended
	September 30,
	2010			2009
Cash flows from operating activities:
Net income	$	116.4		$	67.5
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization and depreciation		339.1			364.1
Income taxes		61.6			82.1
Insurance liabilities		305.8			264.3
Accrual and amortization of investment income		(26.9	)		(110.2	)
Deferral of policy acquisition costs		(315.8	)		(309.5	)
Net realized investment losses		18.0			43.5
Loss on extinguishment or modification of debt		2.7			9.5
Other		23.7			7.9

Net cash provided by operating activities	$	524.6		$	419.2

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

	Nine months ended
	September 30,
	2010			2009

Stock option and restricted stock plans	$	8.8		$	6.6
Change in securities lending collateral		103.7			196.1
Change in securities lending payable		(103.7	)		(196.1	)

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 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:

CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(unaudited)

___________________

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 and, as a result, could absorb part of the losses 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.

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):

	September 30, 2010

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

Assets:
Investments held by variable interest entities	$	454.8	$	-		$	454.8
Notes receivable of VIEs held by insurance subsidiaries		-		(96.8	)		(96.8	)
Cash and cash equivalents held by variable interest entities		18.3		-			18.3
Accrued investment income		1.5		(4.3	)		(2.8	)
Income tax assets, net		24.6		(6.5	)		18.1
Other assets		13.8		-			13.8

Total assets	$	513.0	$	(107.6	)	$	405.4

Liabilities:
Other liabilities	$	18.2	$	(4.2	)	$	14.0
Borrowings related to variable interest entities		425.0		-			425.0
Notes payable of VIEs held by insurance subsidiaries		115.6		(115.6	)		-

Total liabilities	$	558.8	$	(119.8	)	$	439.0

CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(unaudited)

___________________

	December 31, 2009

						Net effect on
						consolidated
	Fall Creek		Eliminations			balance sheet

Assets:
Fixed maturities, available for sale	$	268.0	$	-		$	268.0
Notes receivable of VIE held by insurance subsidiaries		-		(81.9	)		(81.9	)
Cash and cash equivalents – restricted		3.4		-			3.4
Accrued investment income		1.2		(3.0	)		(1.8	)
Income tax assets, net		19.3		(5.3	)		14.0
Other assets		8.0		-			8.0

Total assets	$	299.9	$	(90.2	)	$	209.7

Liabilities:
Other liabilities	$	7.7	$	(3.2	)	$	4.5
Investment borrowings		229.1		-			229.1
Notes payable of VIE held by insurance subsidiaries		99.2		(99.2	)		-

Total liabilities	$	336.0	$	(102.4	)	$	233.6

The investment portfolio held by the VIEs is primarily comprised of corporate fixed maturity securities which are almost entirely rated as below-investment grade securities. At September 30, 2010, such securities had an amortized cost of $471.7 million; gross unrealized gains of $2.5 million; gross unrealized losses of $19.4 million; and an estimated fair value of $454.8 million.

The following table sets forth the amortized cost and estimated fair value of the investments held by the VIEs at September 30, 2010, by contractual maturity. Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

			Estimated
	Amortized		fair
	cost		value
	(Dollars in millions)

Due in one year or less	$	19.8	$	19.4
Due after one year through five years		371.2		355.5
Due after five years through ten years		80.7		79.9

Total	$	471.7	$	454.8

During the first nine months of 2010, we recognized net realized investment losses on the VIE investments of $4.1 million, which were comprised of $.9 million of net losses 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 nine months of 2009, we recognized net realized investment losses on the VIE investments of $14.8 million, which were comprised of $1.3 million of net losses from the sales of fixed maturities, and $13.5 million of writedowns of investments for other than temporary declines in fair value recognized through net income.

At September 30, 2010, investments held by the VIEs that were in default had an aggregate amortized cost and carrying value of $5.9 million and $6.1 million, respectively.

CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(unaudited)

___________________

During the nine months ended September 30, 2010, $33.4 million of investments held by the VIEs were sold which resulted in gross investment losses (before income taxes) of $6.1 million. The following summarizes the investments sold at a loss during the first nine months of 2010 which had been continuously in an unrealized loss position exceeding 20 percent of the amortized cost basis prior to the sale for the period indicated (dollars in millions):

	At date of sale
	Number		Amortized		Fair
	of issuers		cost		value

Less than six months prior to sale		1	$	-	$	-
Greater than or equal to 6 and less than 12 months prior to sale		2		.3		.1
Greater than 12 months prior to sale		5		3.0		1.5

		8	$	3.3	$	1.6

At September 30, 2010, the VIEs held: (i) investments with a fair value of $63.8 million and gross unrealized losses of $1.4 million that had been in an unrealized loss position for less than twelve months; and (ii) investments with a fair value of $283.9 million and gross unrealized losses of $18.0 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 September 30, 2010, we hold investments in various limited partnerships, in which we are not the primary beneficiary, totaling $29.9 million (classified as other invested assets). At September 30, 2010, 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, 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 be considered to have fair value based on a lower level of observable inputs, and more judgment would be utilized in measuring fair value.

CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(unaudited)

___________________

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 instrum ents 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 classifie d 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 expect ations 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.

CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(unaudited)

___________________

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 8 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 74 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 $.2 million during the first nine months of 2010.

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 o f 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.

CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(unaudited)

___________________

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 September 30, 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	$	-	$	13,167.8		$	2,483.3		$	15,651.1
United States Treasury securities and obligations of United States government corporations and agencies		-		106.6			2.2			108.8
States and political subdivisions		-		1,464.6			9.7			1,474.3
Debt securities issued by foreign governments		-		.9			-			.9
Asset-backed securities		-		606.4			5.8			612.2
Collateralized debt obligations		-		12.4			210.0			222.4
Commercial mortgage-backed securities		-		1,363.7			6.6			1,370.3
Mortgage pass-through securities		29.9		-			3.7			33.6
Collateralized mortgage obligations		-		1,454.4			79.5			1,533.9
Total fixed maturities, available for sale		29.9		18,176.8			2,800.8			21,007.5

Equity securities		-		10.0			31.1			41.1

Trading securities:
Corporate securities		5.7		53.1			4.1			62.9
United States Treasury securities and obligations of United States government corporations and agencies		-		305.6			-			305.6
States and political subdivisions		-		12.9			-			12.9
Asset-backed securities		-		.6			-			.6
Commercial mortgage-backed securities		-		5.4			-			5.4
Mortgage pass-through securities		.4		-			-			.4
Collateralized mortgage obligations		-		1.9			-			1.9
Total trading securities		6.1		379.5			4.1			389.7

Investments held by variable interest entities		-		448.6			6.2			454.8

Other invested assets		-		133.9	(a)		-			133.9
Assets held in separate accounts		-		16.7			-			16.7

Liabilities:
Liabilities for insurance products:
Interest-sensitive products		-		-			521.2	(b)		521.2

_____________

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

(b)	Includes $519.6 million of embedded derivatives associated with our fixed index annuity products and $1.6 million of embedded derivatives associated with a modified coinsurance agreement.

CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(unaudited)

___________________

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, 2009 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	$	-	$	12,044.3		$	2,247.1		$	14,291.4
United States Treasury securities and obligations of United States government corporations and agencies		19.4		248.0			2.2			269.6
States and political subdivisions		-		842.9			10.7			853.6
Debt securities issued by foreign governments		-		5.1			-			5.1
Asset-backed securities		-		176.3			15.8			192.1
Collateralized debt obligations		-		-			92.8			92.8
Commercial mortgage-backed securities		-		752.3			13.7			766.0
Mortgage pass-through securities		37.1		1.3			4.2			42.6
Collateralized mortgage obligations		-		2,003.8			11.4			2,015.2
Total fixed maturities, available for sale		56.5		16,074.0			2,397.9			18,528.4

Equity securities		.1		-			30.9			31.0

Trading securities:
Corporate securities		3.8		49.4			3.7			56.9
United States Treasury securities and obligations of United States government corporations and agencies		-		220.3			-			220.3
States and political subdivisions		-		4.4			-			4.4
Asset-backed securities		-		.6			-			.6
Commercial mortgage-backed securities		-		4.9			-			4.9
Mortgage pass-through securities		.5		-			-			.5
Collateralized mortgage obligations		-		5.7			-			5.7
Total trading securities		4.3		285.3			3.7			293.3

Securities lending collateral:
Corporate securities		-		81.0			13.7			94.7
Asset-backed securities		-		16.2			22.9			39.1
Total securities lending collateral		-		97.2			36.6			133.8

Other invested assets		-		192.6	(a)		2.4	(b)		195.0
Assets held in separate accounts		-		17.3			-			17.3

Liabilities:
Liabilities for insurance products:
Interest-sensitive products		-		-			496.0	(c)		496.0

CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(unaudited)

___________________

____________

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

(b)	Includes equity-like holdings in special-purpose entities.

(c)	Includes $494.4 million of embedded derivatives associated with our fixed index annuity products and $1.6 million of embedded derivatives associated with a modified coinsurance agreement.

CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(unaudited)

___________________

The following tables 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 and nine months ended September 30, 2010 (dollars in millions):


	September 30, 2010
	Beginning balance as of June 30, 2010			Purchases, sales, issuances and settlements, net			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		Transfers out of Level 3 (b)			Ending balance as of September 30, 2010			Amount of total gains (losses) for the three months ended September 30, 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	$	2,453.6		$	16.5		$	(1.7	)	$	51.0		$	-	$	(36.1	)	$	2,483.3		$	-
United States Treasury securities and obligations of United States government corporations and agencies		2.1			-			-			.1			-		-			2.2			-
States and political subdivisions		10.0			-			-			(.3	)		-		-			9.7			-
Asset-backed securities		6.1			(.4	)		-			.1			-		-			5.8			-
Collateralized debt obligations		136.8			69.7			.1			3.4			-		-			210.0			-
Commercial mortgage-backed securities		10.5			(2.2	)		-			(.3	)		-		(1.4	)		6.6			-
Mortgage pass-through securities		3.9			(.2	)		-			-			-		-			3.7			-
Collateralized mortgage obligations		24.1			53.3			-			2.1			-		-			79.5			-
Total fixed maturities, available for sale		2,647.1			136.7			(1.6	)		56.1			-		(37.5	)		2,800.8			-
Equity securities		31.0			-			-			.1			-		-			31.1			-
Trading securities:
Corporate securities		4.1			(.5	)		.5			-			-		-			4.1			.5
Investments held by variable interest entities:
Corporate securities		7.2			(1.0	)		-			-			-		-			6.2			-
Securities lending collateral:
Asset-backed securities		4.9			(4.9	)		-			-			-		-			-			-

Liabilities:
Liabilities for insurance products:
Interest-sensitive products		(500.5	)		(1.9	)		(18.8	)		-			-		-			(521.2	)		(18.8	)

CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(unaudited)

___________________


	September 30, 2010																						Amount of total gains (losses) for the nine months ended September 30, 2010 included in our net income relating to assets and liabilities still held as of the reporting date
	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 accumulated other comprehensive income (loss)		Transfers Into Level 3		Transfers out of Level 3 (b)			Ending balance as of September 30, 2010
Assets:
Fixed maturities, available for sale:
Corporate securities	$	2,247.1		$	(5.9	)	$	84.2		$	(2.2	)	$	172.5	$	19.6	$	(32.0	)	$	2,483.3			$	-
United States Treasury securities and obligations of United States government corporations and agencies		2.2			-			(.1	)		-			.1		-		-			2.2				-
States and political subdivisions		10.7			-			-			-			.7		-		(1.7	)		9.7				-
Asset-backed securities		15.8			-			(11.9	)		(11.3	)		13.2		-		-			5.8				-
Collateralized debt obligations		92.8			(5.7	)		119.8			(.1	)		3.2		-		-			210.0				-
Commercial mortgage-backed securities		13.7			-			(2.8	)		-			1.6		-		(5.9	)		6.6				-
Mortgage pass-through securities		4.2			-			(.5	)		-			-		-		-			3.7				-
Collateralized mortgage obligations		11.4			-			77.1			-			2.1		-		(11.1	)		79.5				-
Total fixed maturities, available for sale		2,397.9			(11.6	)		265.8			(13.6	)		193.4		19.6		(50.7	)		2,800.8				-
Equity securities		30.9			-			.1			-			.1		-		-			31.1				-
Trading securities:
Corporate securities		3.7			-			-			.4			-		-		-			4.1				.4
Investments held by variable interest entities:
Corporate securities		-			6.9			(1.0	)		-			.3		-		-			6.2				-
Securities lending collateral:
Corporate securities		13.7			-			(13.7	)		-			-		-		-			-				-
Asset-backed securities		22.9			-			(20.9	)		-			-		-		(2.0	)		-				-
Total securities lending collateral		36.6			-			(34.6	)		-			-		-		(2.0	)		-				-
Other invested assets		2.4			(2.4	)		-			-			-		-		-			-				-
Liabilities:
Liabilities for insurance products:
Interest-sensitive products		(496.0	)		-			33.1			(58.3	)		-		-		-			(521.2	)			(58.3	)

CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(unaudited)

___________________

________

(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 out of Level 3 are reported as having occurred at the beginning of the period.

	September 30, 2009
	Beginning balance as of June 30, 2009			Purchases, sales, issuances and settlements, net			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		Transfers out of Level 3		Ending balance as of September 30, 2009			Amount of total gains (losses) for the three months ended September 30, 2009 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	$	1,852.5		$	117.8		$	(1.5	)	$	244.0		$	22.3	$	-	$	2,235.1		$	-
United States Treasury securities and obligations of United States government corporations and agencies		2.3			-			-			-			-		-		2.3			-
States and political subdivisions		8.9			(.1	)		-			.1			-		-		8.9			-
Asset-backed securities		23.2			(.6	)		-			1.9			-		-		24.5			-
Collateralized debt obligations		104.9			(.7	)		-			13.6			-		-		117.8			-
Commercial mortgage-backed securities		-			(.8	)		-			.2			8.8		-		8.2			-
Mortgage pass-through securities		4.4			(.1	)		-			-			-		-		4.3			-
Collateralized mortgage obligations		.3			-			-			-			-		-		.3			-
Total fixed maturities, available for sale		1,996.5			115.5			(1.5	)		259.8			31.1		-		2,401.4			-
Equity securities		30.4			-			-			.3			-		-		30.7			-
Trading securities:
Corporate securities		2.7			-			-			.9			.5		-		4.1			.9
Securities lending collateral:
Corporate securities		23.5			(10.0	)		-			.1			-		-		13.6			-
Asset-backed securities		18.5			-			(.7	)		(1.4	)		8.5		-		24.9			(.7	)
Total securities lending collateral		42.0			(10.0	)		(.7	)		(1.3	)		8.5		-		38.5			(.7	)
Other invested assets		.9			-			-			.2			-		-		1.1			-
Liabilities:
Liabilities for insurance products:
Interest-sensitive products		(406.6	)		(30.2	)		(13.8	)		-			-		-		(450.6	)		(13.8	)

CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(unaudited)

___________________


	September 30, 2009
	Beginning balance as of December 31, 2008			Purchases, sales, issuances and settlements, net			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		Transfers out of Level 3			Ending balance as of September 30, 2009			Amount of total gains (losses) for the nine months ended September 30, 2009 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	$	1,715.6		$	204.1		$	(5.5	)	$	299.4		$	27.5	$	(6.0	)	$	2,235.1		$	-
United States Treasury securities and obligations of United States government corporations and agencies		2.6			(.1	)		-			(.2	)		-		-			2.3			-
States and political subdivisions		10.5			(.4	)		-			(1.2	)		-		-			8.9			-
Asset-backed securities		27.5			(2.2	)		-			1.9			-		(2.7	)		24.5			-
Collateralized debt obligations		96.7			(2.9	)		(2.7	)		26.7			-		-			117.8			(2.7	)
Commercial mortgage-backed securities		9.6			(6.5	)		(.6	)		5.7			-		-			8.2			-
Mortgage pass-through securities		4.9			(.6	)		-			-			-		-			4.3			-
Collateralized mortgage obligations		8.7			(.1	)		-			-			-		(8.3	)		.3			-
Total fixed maturities, available for sale		1,876.1			191.3			(8.8	)		332.3			27.5		(17.0	)		2,401.4			(2.7	)
Equity securities		32.4			(.3	)		-			(1.4	)		-		-			30.7			-
Trading securities:
Corporate securities		2.7			-			-			.9			.5		-			4.1			.9
Securities lending collateral:
Corporate securities		34.9			(17.0	)		-			.1			-		(4.4	)		13.6			-
Equity securities		.1			(.1	)		(.3	)		.3			-		-			-			(.3	)
Asset-backed securities		13.1			-			(.6	)		(8.0	)		20.4		-			24.9			(.6	)
Total securities lending collateral		48.1			(17.1	)		(.9	)		(7.6	)		20.4		(4.4	)		38.5			(.9	)
Other invested assets		2.3			-			(3.4	)		2.2			-		-			1.1			(3.4	)
Liabilities:
Liabilities for insurance products:
Interest-sensitive products		(437.2	)		(11.1	)		(2.3	)		-			-		-			(450.6	)		(2.3	)

At September 30, 2010, 92 percent of our Level 3 fixed maturities, available for sale, were investment grade and 75 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 (loss) within shareholders’ equity based on the appropriate accounting treatment for the instrument.

CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(unaudited)

___________________

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.

We review the fair value hierarchy classifications each reporting period. Transfers in and/or (out) of Level 3 in the first nine months of 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 nine months of 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.

CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(unaudited)

___________________

The estimated fair values of our financial instruments at September 30, 2010 and December 31, 2009, were as follows (dollars in millions):

	September 30, 2010				December 31, 2009
	Carrying		Estimated fair		Carrying		Estimated fair
	amount		value		amount		value

Financial assets:
Fixed maturities, available for sale	$	21,007.5	$	21,007.5	$	18,528.4	$	18,528.4
Equity securities		41.1		41.1		31.0		31.0
Mortgage loans		1,825.6		1,848.5		1,965.5		1,756.8
Policy loans		290.9		290.9		295.2		295.2
Trading securities		389.7		389.7		293.3		293.3
Investments held by securitization entities		454.8		454.8		-		-
Securities lending collateral		-		-		180.0		180.0
Other invested assets		189.5		189.5		236.8		236.8
Cash and cash equivalents		567.1		567.1		526.8		526.8

Financial liabilities:
Insurance liabilities for interest-sensitive products (a)	$	13,217.6	$	13,217.6	$	13,219.2	$	13,219.2
Investment borrowings		653.9		724.9		683.9		677.6
Borrowings related to securitization entities		425.0		378.3		-		-
Notes payable – direct corporate obligations		1,029.8		1,106.0		1,037.4		1,041.7

____________________

(a)

The estimated fair value of insurance liabilities for interest-sensitive products was approximately equal to its carrying value at September 30, 2010 and December 31, 2009. 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.

CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES

___________________

ITEM 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

In this section, we review the consolidated financial condition of CNO at September 30, 2010, and the consolidated results of operations for the three and nine months ended September 30, 2010 and 2009, and, where appropriate, factors that may affect future financial performance. Please read this discussion in conjunction with the accompanying consolidated financial statements and notes.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

Our statements, trend analyses and other information contained in this report and elsewhere (such as in filings by CNO with the SEC, press releases, presentations by CNO or its management or oral statements) relative to markets for CNO’s products and trends in CNO’s operations or financial results, as well as other statements, contain forward-looking statements within the meaning of the federal securities laws and the Private Securities Litigation Reform Act of 1995. Forward-looking statements typically are identified by the use of terms such as “anticipate,” “believe,” “plan,” “estimate,” “expect,” “project,” “intend,” “may,” “will,” “would,” “contemplate,” “possible,” 220;attempt,” “seek,” “should,” “could,” “goal,” “target,” “on track,” “comfortable with,” “optimistic” and similar words, although some forward-looking statements are expressed differently. You should consider statements that contain these words carefully because they describe our expectations, plans, strategies and goals and our beliefs concerning future business conditions, our results of operations, financial position, and our business outlook or they state other “forward-looking” information based on currently available information. The “Risk Factors” section of our 2009 Annual Report on Form 10-K provides examples of risks, uncertainties and events that could cause our actual results to differ materially from the expectations expressed in our forward-looking statements. Assumptions and other important factors that could cause our actual results t o differ materially from those anticipated in our forward-looking statements include, among other things:

·	changes in or sustained low interest rates causing a reduction in investment income, the margins of our subsidiaries fixed annuity and life insurance businesses and demand for their products;

·	general economic, market and political conditions, including the performance and fluctuations of the financial markets which may affect our ability to raise capital or refinance existing indebtedness and the cost of doing so;

·	our ability to generate sufficient liquidity to meet our debt service obligations and other cash needs;

·	our ability to obtain adequate and timely rate increases on our health products, including our long-term care business;

·	the receipt of any required regulatory approvals for dividend and surplus debenture interest payments from our insurance subsidiaries;

·	mortality, morbidity, the increased cost and usage of health care services, persistency, the adequacy of our previous reserve estimates and other factors which may affect the profitability of our insurance products;

·	changes in our assumptions related to deferred acquisition costs or the present value of future profits;

·	the recoverability of our deferred tax assets and the effect of potential ownership changes and tax rate changes on their value;

·	our assumption that the positions we take on our tax return filings, including our position that our 7.0% Debentures will not be treated as stock for purposes of Section 382 of the Code and will not trigger an ownership change, will not be successfully challenged by the IRS;

·	changes in accounting principles and the interpretation thereof;

·	our ability to continue to satisfy the financial ratio and balance requirements and other covenants of our debt agreements;

CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES

___________________

·	our ability to achieve anticipated expense reductions and levels of operational efficiencies including improvements in claims adjudication and continued automation and rationalization of operating systems;

·	performance and valuation of our investments, including the impact of realized losses (including other-than-temporary impairment charges);

·	our ability to identify products and markets in which we can compete effectively against competitors with greater market share, higher ratings, greater financial resources and stronger brand recognition;

·	the ultimate outcome of lawsuits filed against us and other legal and regulatory proceedings to which we are subject;

·	our ability to complete the remediation of the material weakness in internal controls over our actuarial reporting process and to maintain effective controls over financial reporting;

·	our ability to continue to recruit and retain productive agents and distribution partners and customer response to new products, distribution channels and marketing initiatives;

·	our ability to achieve eventual upgrades of the financial strength ratings of CNO and our insurance company subsidiaries as well as the impact of our ratings on our business, our ability to access capital and the cost of capital;

·	the risk factors or uncertainties listed from time to time in our filings with the SEC;

regulatory changes or actions, including those relating to regulation of the financial affairs of our insurance companies, such as the payment of dividends and surplus debenture interest to us, regulation of financial services affecting (among other things) bank sales and underwriting of insurance products, regulation of the sale, underwriting and pricing of products, and health care regulation affecting health insurance products; and

·	changes in the Federal income tax laws and regulations which may affect or eliminate the relative tax advantages of some of our products.

Other factors and assumptions not identified above are also relevant to the forward-looking statements, and if they prove incorrect, could also cause actual results to differ materially from those projected.

All written or oral forward-looking statements attributable to us are expressly qualified in their entirety by the foregoing cautionary statement. Our forward-looking statements speak only as of the date made. We assume no obligation to update or to publicly announce the results of any revisions to any of the forward-looking statements to reflect actual results, future events or developments, changes in assumptions or changes in other factors affecting the forward-looking statements.

CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES

___________________

OVERVIEW

We are 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. 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, professional independent producers (some of whom sell one or more of our product lines exclusively) and direct marketing.

Beginning July 1, 2010, management has 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, Colonial Penn and Washington National, which are defined on the basis of product distribution; Other CNO Business, comprised primarily of closed blocks; 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. The Company’s segments are described below:

·		Bankers Life, which markets and distributes Medicare supplement insurance, interest-sensitive life insurance, traditional life insurance, fixed annuities and long-term care insurance products to the middle-income senior market through a dedicated field force of career agents and sales managers supported by a network of community-based branch offices. The Bankers Life segment includes primarily the business of Bankers Life and Casualty Company. Bankers Life also markets and distributes Medicare Advantage plans primarily through a distribution arrangement with Humana and Medicare Part D prescription drug plans through a distribution and reinsurance arrangement with Coventry.

·		Washington National, which markets and distributes supplemental health (including specified disease, accident and hospital indemnity insurance products) and traditional life insurance to middle-income consumers at home and at the worksite. These products are marketed through Performance Matters Associates, Inc., a wholly owned subsidiary, and through independent marketing organizations and insurance agencies. Products being marketed by Washington National are underwritten by Washington National Insurance Company.

·		Colonial Penn, which markets primarily graded benefit and simplified issue life insurance directly to customers through television advertising, direct mail, the internet and telemarketing. The Colonial Penn segment includes primarily the business of Colonial Penn Life Insurance Company.

·		Other CNO Business, which consists of blocks of interest-sensitive life insurance, traditional life insurance, annuities, long-term care insurance and other supplemental health products. These blocks of business are not being actively marketed and were primarily issued or acquired by Conseco Life Insurance Company and Washington National Insurance Company.

CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES

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The following summarizes our earnings for the three and nine months ending September 30, 2010 and 2009 (dollars in millions, except per share data):

	Three months ended						Nine months ended
	September 30,						September 30,
	2010			2009			2010			2009
Earnings before net realized investment gains (losses), corporate interest expense, loss on extinguishment or modification of debt and income taxes (“EBIT” a non-GAAP financial measure) (a):
Bankers Life	$	95.5		$	85.4		$	212.7		$	193.4
Washington National		27.2			29.1			75.9			87.9
Colonial Penn		7.8			7.4			20.7			23.5
Other CNO Business		(24.4	)		(7.5	)		(17.5	)		(13.9	)
Corporate Operations, excluding corporate interest expense		(12.3	)		(7.4	)		(29.1	)		(24.9	)
EBIT		93.8			107.0			262.7			266.0
Corporate interest expense		(20.0	)		(24.0	)		(59.3	)		(61.6	)
Income before loss on extinguishment or modification of debt, net realized investment losses and taxes		73.8			83.0			203.4			204.4
Tax expense on operating income		26.7			28.7			73.2			71.8

Net operating income		47.1			54.3			130.2			132.6

Loss on extinguishment or modification of debt, net of income taxes		-			-			(1.8	)		(6.1	)
Net realized investment gains (losses) (net of related amortization and taxes and the establishment of a valuation allowance for deferred tax assets related to such losses)		2.3			(18.9	)		(12.0	)		(39.0	)

Net income before valuation allowance for deferred tax assets		49.4			35.4			116.4			87.5

Valuation allowance for deferred tax assets (excluding the establishment of a valuation allowance for realized investment losses)		-			(20.0	)		-			(20.0	)

Net income applicable to common stock	$	49.4		$	15.4		$	116.4		$	67.5
Per diluted share:
Net operating income	$	.16		$	.29		$	.46		$	.71
Loss on extinguishment or modification of debt, net of income taxes		-			-			-			(.03	)
Net realized investment gains (losses), net of related amortization and taxes		.01			(.10	)		(.04	)		(.21	)
Increase in valuation allowance for deferred tax assets		-			(.11	)		-			(.11	)

Net income	$	.17		$	.08		$	.42		$	.36

____________

(a)

Management believes that an analysis of EBIT provides a clearer comparison of the operating results of the Company from period to period because it excludes: (i) corporate interest expense; (ii) loss on extinguishment or modification of debt; and (iii) net realized investment gains (losses) that are unrelated to the Company’s underlying fundamentals. The table above reconciles the non-GAAP measure to the corresponding GAAP measure.

CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES

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CRITICAL ACCOUNTING POLICIES

Refer to “Critical Accounting Policies” in our 2009 Annual Report on Form 10-K for information on our accounting policies that we consider critical in preparing our consolidated financial statements.

RESULTS OF OPERATIONS

The following tables and narratives summarize the operating results of our segments for the periods presented (dollars in millions):

	Three months ended						Nine months ended
	September 30,						September 30,
	2010			2009			2010			2009

Income (loss) before net realized investment gains (losses), net of related amortization, and income taxes (a non-GAAP measure) (a):
Bankers Life	$	95.5		$	85.4		$	212.7		$	193.4
Washington National		27.2			29.1			75.9			87.9
Colonial Penn		7.8			7.4			20.7			23.5
Other CNO Business		(24.4	)		(7.5	)		(17.5	)		(13.9	)
Corporate operations		(32.3	)		(31.4	)		(91.1	)		(96.0	)

		73.8			83.0			200.7			194.9
							��
Net realized investment gains (losses), net of related amortization:
Bankers Life		16.9			(16.6	)		3.6			(32.3	)
Washington National		(2.3	)		1.6			(3.5	)		1.5
Colonial Penn		2.0			1.5			2.5			2.7
Other CNO Business		(11.7	)		(1.0	)		(17.0	)		(.9	)
Corporate operations		(1.4	)		(4.4	)		(4.1	)		(10.0	)

		3.5			(18.9	)		(18.5	)		(39.0	)

Income (loss) before income taxes:
Bankers Life		112.4			68.8			216.3			161.1
Washington National		24.9			30.7			72.4			89.4
Colonial Penn		9.8			8.9			23.2			26.2
Other CNO Business		(36.1	)		(8.5	)		(34.5	)		(14.8	)
Corporate operations		(33.7	)		(35.8	)		(95.2	)		(106.0	)

Income before income taxes	$	77.3		$	64.1		$	182.2		$	155.9

____________________

(a)

These non-GAAP measures as presented in the above table and in the following segment financial data and discussions of segment results exclude net realized investment gains (losses), net of related amortization and before income taxes. These are considered non-GAAP financial measures. A non-GAAP measure is a numerical measure of a company’s performance, financial position, or cash flows that excludes or includes amounts that are normally excluded or included in the most directly comparable measure calculated and presented in accordance with GAAP.

CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES

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These non-GAAP financial measures of “income (loss) before net realized investment gains (losses), net of related amortization, and before income taxes” differ from “income (loss) before income taxes” as presented in our consolidated statement of operations prepared in accordance with GAAP due to the exclusion of before tax realized investment gains (losses), net of related amortization. We measure segment performance excluding realized investment gains (losses) because we believe that this performance measure is a better indicator of the ongoing businesses 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 ma intain profitability over the life of the business. Realized investment gains (losses) depend on market conditions and do not necessarily relate to decisions regarding the underlying business of our segments. However, “income (loss) before net realized investment gains (losses), net of related amortization, and before income taxes” does not replace “income (loss) before income taxes” as a measure of overall profitability. We may experience realized investment gains (losses), which will affect future earnings levels since our underlying business is long-term in nature and we need to earn the assumed interest rates on the investments backing our liabilities for insurance products to maintain the profitability of our business. In addition, management uses this non-GAAP financial measure in its budgeting process, financial analysis of segment performance and in assessing the allocation of resources. We believe these non-GAAP financial measures enhance an investor’s understanding of our financial performance and allows them to make more informed judgments about the Company as a whole. These measures also highlight operating trends that might not otherwise be transparent. The table above reconciles the non-GAAP measure to the corresponding GAAP measure.

CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES

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Bankers Life (dollars in millions):

	Three months ended						Nine months ended
	September 30,						September 30,
	2010			2009			2010			2009
Premium collections:
Annuities	$	265.8		$	284.7		$	771.1		$	862.2
Medicare supplement and other supplemental health		333.4			440.7			1,012.9			1,286.5
Life		54.8			63.2			153.4			167.4

Total collections	$	654.0		$	788.6		$	1,937.4		$	2,316.1

Average liabilities for insurance products:
Annuities:
Mortality based	$	249.4		$	249.3		$	250.6		$	251.0
Fixed index		1,871.3			1,529.5			1,775.4			1,473.4
Deposit based		4,905.2			4,834.1			4,905.4			4,755.6
Medicare supplement and other supplemental health		4,376.8			4,143.3			4,330.0			4,094.6
Life:
Interest sensitive		414.0			403.6			411.3			400.2
Non-interest sensitive		363.4			432.6			347.2			414.7

Total average liabilities for insurance products, net of reinsurance ceded	$	12,180.1		$	11,592.4		$	12,019.9		$	11,389.5

Revenues:
Insurance policy income	$	405.1		$	493.1		$	1,202.0		$	1,482.2
Net investment income:
General account invested assets		182.4			162.2			531.6			477.8
Fixed index products		21.9			33.6			18.7			17.6
Other special-purpose portfolios		4.2			3.8			4.6			10.0
Fee revenue and other income		3.6			2.4			8.6			5.4

Total revenues		617.2			695.1			1,765.5			1,993.0

Expenses:
Insurance policy benefits		341.8			412.1			1,036.6			1,264.6
Amounts added to policyholder account balances:
Annuity products and interest-sensitive life products other than fixed index products		43.3			46.8			131.2			140.9
Fixed index products		17.0			29.1			33.5			36.8
Amortization related to operations		76.4			74.5			214.0			213.2
Other operating costs and expenses		43.2			47.2			137.5			144.1

Total benefits and expenses		521.7			609.7			1,552.8			1,799.6

Income before net realized investment gains (losses), net of related amortization, and income taxes		95.5			85.4			212.7			193.4

Net realized investment gains (losses)		18.3			(17.9	)		5.0			(34.7	)
Amortization related to net realized investment gains (losses)		(1.4	)		1.3			(1.4	)		2.4

Net realized investment gains (losses), net of related amortization		16.9			(16.6	)		3.6			(32.3	)

Income before income taxes	$	112.4		$	68.8		$	216.3		$	161.1

(continued)

CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES

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(continued from previous page)

	Three months ended						Nine months ended
	September 30,						September 30,
	2010			2009			2010			2009

Health benefit ratios:
All health lines:
Insurance policy benefits	$	296.8		$	362.3		$	911.5		$	1,135.0
Benefit ratio (a)		86.4	%		85.5	%		88.3	%		87.4	%

Medicare supplement:
Insurance policy benefits	$	123.8		$	119.9		$	380.2		$	349.5
Benefit ratio (a)		69.5	%		72.4	%		71.0	%		70.4	%

PDP:
Insurance policy benefits	$	12.4		$	11.0		$	46.1		$	55.5
Benefit ratio (a)		64.4	%		68.0	%		80.9	%		88.9	%

PFFS:
Insurance policy benefits	$	(6.9	)	$	69.2		$	(16.3	)	$	252.6
Benefit ratio (a)		N/A			75.3	%		N/A			88.0	%

Long-term care:
Insurance policy benefits	$	167.5		$	162.2		$	501.5		$	477.4
Benefit ratio (a)		114.2	%		108.3	%		113.9	%		105.5	%
Interest-adjusted benefit ratio (b)		73.2	%		70.4	%		73.5	%		68.5	%

____________________

(a)	We calculate benefit ratios by dividing the related product’s insurance policy benefits by insurance policy income.

(b)

We calculate the interest-adjusted benefit ratio (a non-GAAP measure) for Bankers Life’s long-term care products by dividing such product’s insurance policy benefits less interest income on the accumulated assets backing the insurance liabilities by policy income. These are considered non-GAAP financial measures. A non-GAAP measure is a numerical measure of a company’s performance, financial position, or cash flows that excludes or includes amounts that are normally excluded or included in the most directly comparable measure calculated and presented in accordance with GAAP.

These non-GAAP financial measures of “interest-adjusted benefit ratios” differ from “benefit ratios” due to the deduction of interest income on the accumulated assets backing the insurance liabilities from the product’s insurance policy benefits used to determine the ratio. Interest income is an important factor in measuring the performance of health products that are expected to be inforce for a longer duration of time, are not subject to unilateral changes in provisions (such as non-cancelable or guaranteed renewable contracts) and require the performance of various functions and services (including insurance protection) for an extended period of time. The net cash flows from long-term care products generally cause an accumulation of amounts in the early years of a policy (accounted f or as reserve increases) that will be paid out as benefits in later policy years (accounted for as reserve decreases). Accordingly, as the policies age, the benefit ratio will typically increase, but the increase in benefits will be partially offset by interest income earned on the accumulated assets. The interest-adjusted benefit ratio reflects the effects of the interest income offset. Since interest income is an important factor in measuring the performance of this product, management believes a benefit ratio that includes the effect of interest income is useful in analyzing product performance. We utilize the interest-adjusted benefit ratio in measuring segment performance because we believe that this performance measure is a better indicator of the ongoing businesses and trends in the business. However, the “interest-adjusted benefit ratio” does not replace the “benefit ratio” as a measure of current period benefits to curren t period insurance policy income. Accordingly, management reviews both “benefit ratios” and “interest-adjusted benefit ratios” when analyzing the financial results attributable to these products. The investment income earned on the accumulated assets backing Bankers Life’s long-term care reserves was $60.1 million and $56.8 million in the three months ended September 30, 2010 and 2009, respectively, and $177.9 million and $167.6 million in the nine months ended September 30, 2010 and 2009, respectively.

CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES

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Total premium collections were $654.0 million in the third quarter of 2010, down 17 percent from 2009, and were $1,937.4 million in the first nine months of 2010, down 16 percent from 2009. Premium collections include $(.3) million and $95.7 million in the third quarters of 2010 and 2009, respectively, and $1.0 million and $290.5 million in the first nine months of 2010 and 2009, respectively, of premiums collected pursuant to the PFFS quota-share agreements with Coventry which were terminated or expired prior to 2010. See “Premium Collections” for further analysis of Bankers Life’s premium collections.

Average liabilities for insurance products, net of reinsurance ceded were $12.2 billion in the third quarter of 2010, up 5.1 percent from 2009, and were $12.0 billion in the first nine months of 2010, up 5.5 percent from 2009. The increase in such liabilities was primarily due to increases in annuity and health reserves resulting from new sales of these products.

Insurance policy income is comprised of premiums earned on policies which provide mortality or morbidity coverage and fees and other charges assessed on other policies. Insurance policy income includes $91.8 million and $287.1 million in the three and nine months ended September 30, 2009, respectively, of premium income from the PFFS quota-share agreements with Coventry which were terminated or expired prior to 2010.

Net investment income on general account invested assets (which excludes income on policyholder accounts) was $182.4 million in the third quarter of 2010, up 12 percent from 2009, and was $531.6 million in the first nine months of 2010, up 11 percent from 2009. The average balance of general account invested assets was $12.3 billion and $11.5 billion in the third quarters of 2010 and 2009, respectively. The average yield on these assets was 5.95 percent and 5.66 percent in the third quarters of 2010 and 2009, respectively. The average balance of general account invested assets was $12.1 billion and $11.3 billion in the first nine months of 2010 and 2009, respectively. The average yield on these assets was 5.88 percent a nd 5.64 percent in the first nine months of 2010 and 2009, respectively. The increase in general account invested assets is primarily due to sales of our annuity and health products in recent periods. The increase in average yield reflects our investment in higher yielding securities as a higher amount of short-term investments were held in the first nine months of 2009.

Net investment income related to fixed index products represents the change in the estimated fair value of options which are purchased in an effort to hedge certain potential benefits accruing to the policyholders of our fixed index products. Our fixed index products are designed so that the investment income spread earned on the related insurance liabilities is expected to be more than adequate to cover the cost of the options and other costs related to these policies. Net investment income (loss) related to fixed index products were $11.9 million and $29.1 million in the third quarters of 2010 and 2009, respectively, and were $(8.0) million and $25.2 million in the first nine months of 2010 and 2009, respectively. Net investment income related to fixed index products also includes income (loss) on trading securities which are held to act as hedges for embedded derivatives related to fixed index products. Such trading account income (loss) was $10.0 million and $4.5 million in the third quarters of 2010 and 2009, respectively, and was $26.7 million and $(7.6) million in the first nine months of 2010 and 2009, respectively. Such amounts are generally offset by the corresponding charge (credit) to amounts added to policyholder account balances for fixed index products based on the change in value of the indices. Such income and related charges fluctuate based on the value of options embedded in the segment’s fixed index annuity policyholder account balances subject to this benefit and to the performance of the index to which the returns on such products are linked.

Net investment income on other special-purpose portfolios includes the income related to Company-owned life insurance (“COLI”) which was purchased as an investment vehicle to fund the deferred compensation plan for certain agents. The COLI assets are not assets of the deferred compensation plan, and as a result, are accounted for outside the plan and are recorded in the consolidated balance sheet as other invested assets. Changes in the cash surrender value (which approximates net realizable value) of the COLI assets are recorded as net investment income and totaled $3.9 million and $3.8 million in the third quarters of 2010 and 2009, respectively, and $4.3 million and $7.1 million in the first nine months of 2010 and 2009, respe ctively. We also recognized a death benefit of $2.9 million in the second quarter of 2009.

Insurance policy benefits fluctuated as a result of the factors summarized below for benefit ratios. Benefit ratios are calculated by dividing the related insurance product’s insurance policy benefits by insurance policy income.

CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES

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The Medicare supplement business consists of both individual and group policies. Government regulations generally require us to attain and maintain a ratio of total benefits incurred to total premiums earned (excluding changes in policy benefit reserves), after three years from the original issuance of the policy and over the lifetime of the policy, of not less than 65 percent on individual products and not less than 75 percent on group products, as determined in accordance with statutory accounting principles. Since the insurance product liabilities we establish for Medicare supplement business are subject to significant estimates, the ultimate claim liability we incur for a particular period is likely to be different than our initial estimate. Our insurance policy benefits reflected reserve redundancies from prior years of $7.8 million and $5.1 million in the first nine months of 2010 and 2009, respectively. Excluding the effects of prior period claim reserve redundancies, our benefit ratios would have been 72.5 percent and 71.4 percent in the first nine months of 2010 and 2009, respectively. The increase in the benefit ratios reflects unfavorable claims experience.

The insurance policy benefits on our prescription drug plan (“PDP”) and PFFS business result from our quota-share reinsurance agreements with Coventry. Coventry decided to cease selling PFFS plans effective January 1, 2010. Effective January 1, 2010, the Company no longer assumes the underwriting risk related to PFFS business. In the third quarter of 2009, Bankers Life began offering Humana’s Medicare Advantage plans to its policyholders and consumers nationwide through its career agency force and receives marketing fees based on sales. Insurance margins (insurance policy income less insurance policy benefits) on the PDP business were $6.9 million and $5.2 million in the third quarters of 2010 and 2009, respectively, and were $10.9 million and $6.9 million in the first nine mo nths of 2010 and 2009, respectively. Insurance margins on the PFFS business were $6.5 million and $22.7 million in the third quarters of 2010 and 2009, respectively, and were $15.5 million and $34.6 million in the first nine months of 2010 and 2009, respectively. The margin in the third quarter of 2009 reflects increases in our share of risk adjustment premium payments made by the Centers for Medicare and Medicaid Services.

The net cash flows from our long-term care products generally cause an accumulation of amounts in the early years of a policy (accounted for as reserve increases) which will be paid out as benefits in later policy years (accounted for as reserve decreases). Accordingly, as the policies age, the benefit ratio typically increases, but the increase in reserves is partially offset by investment income earned on the accumulated assets. The benefit ratio on our long-term care business in the Bankers Life segment was 114.2 percent and 108.3 percent in the third quarters of 2010 and 2009, respectively, and 113.9 percent and 105.5 percent in the first nine months of 2010 and 2009, respectively. The interest-adjusted benefit ratio on this business was 73.2 percent and 70.4 percent in the third quarters of 2010 and 2009, respectively, and 73.5 percent and 68.5 percent in the first nine months for 2010 and 2009, respectively. Since the insurance product liabilities we establish for long-term care business are subject to significant estimates, the ultimate claim liability we incur for a particular period is likely to be different than our initial estimate. Our insurance policy benefits reflected reserve redundancies (deficiencies) from prior years of $20.6 million and $(.6) million in the first nine months of 2010 and 2009, respectively. Excluding the effects of prior year claim reserve redundancies (deficiencies), our benefit ratios would have been 118.5 percent and 105.4 percent in the first nine months of 2010 and 2009, respectively. The benefit ratio for the first nine months of 2009 reflected a reduction in liabilities for insurance products of approximately $33.1 million ($11.1 million in the third quarter of 2009) due to our estimates of: (i) the reduction in liabilities for policyholders choosing to lapse their policies rather than paying higher rates; (ii) the reduction in liabilities for policyholders choosing to reduce their coverages to achieve a lower cost; offset by (iii) the increase in the reserves related to waiver of premium benefits to reflect the higher premiums after the rate increase. The aforementioned reduction in liabilities was partially offset by increased amortization of insurance acquisition costs of $3.9 million ($1.0 million in the third quarter of 2009) resulting from the increase in lapses. When policies lapse, active life reserves for such lapsed policies are released, resulting in decreased insurance policy benefits (although such decrease is somewhat offset by additional amortization expense).

Over the past several years, we have implemented rate increases in the long-term care block in the Bankers Life segment. In the fourth quarter of 2009, additional filings were initiated in states that had not granted approval of the full amount of the previous rate increase requests. Approximately $9 million of additional rate increases have been approved as of September 30, 2010. In October 2010, we commenced additional rate increase filings on certain long-term care blocks. The projected financial impact is estimated to be between $22 million and $27 million after approval from all states and the rate increases are implemented.

CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES

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Amounts added to policyholder account balances for annuity products and interest-sensitive life products were $43.3 million in the third quarter of 2010, down 7.5 percent from 2009, and were $131.2 million in the first nine months of 2010, down 6.9 percent from 2009. The weighted average crediting rate for these products was 3.3 percent and 3.6 percent in the third quarters of 2010 and 2009, respectively, and 3.3 percent and 3.6 percent in the first nine months of 2010 and 2009, respectively.

Amounts added to fixed index products based on change in value of the indices will generally fluctuate with the corresponding related investment income accounts described above.

Amortization related to operations includes amortization of deferred acquisition costs and the present value of future profits. Deferred acquisition costs and the present value of future profits are collectively referred to as “insurance acquisition costs.” Insurance acquisition costs are generally amortized either: (i) in relation to the estimated gross profits for universal life and investment-type products; or (ii) in relation to actual and expected premium revenue for other products. In addition, for universal life and investment-type products, we are required to adjust the total amortization recorded to date through the statement of operations if actual experience or other evidence suggests that earlier estimates of future gross profits should be revised. Accordingly, amortization for universal life and investment-type products is dependent on the profits realized during the period and on our expectation of future profits. For other products, we amortize insurance acquisition costs in relation to actual and expected premium revenue, and amortization is only adjusted if expected premium revenue changes or if we determine the balance of these costs is not recoverable from future profits. Bankers Life’s amortization expense was $76.4 million and $74.5 million in the third quarters of 2010 and 2009, respectively, and was $214.0 million and $213.2 million in the first nine months of 2010 and 2009, respectively. We limit the total amortization adjustments resulting from losses on a block of business issued in a particular year to an amount which would not result in the balance of insurance acquisition costs exceeding the total of costs capitalized plus interest.& #160; During the first nine months of 2009, amortization expense related to annuities decreased by $5.9 million due to this limitation.

Other operating costs and expenses in our Bankers Life segment were $43.2 million in the third quarter of 2010, down 8.5 percent from 2009, and were $137.5 million in the first nine months of 2010, down 4.6 percent from 2009. Other operating costs and expenses include the following (dollars in millions):

	Three months ended				Nine months ended
	September 30,				September 30,
	2010		2009		2010		2009
Expenses related to the marketing and quota-share agreements with Coventry	$	2.7	$	6.2	$	10.8	$	20.9
Commission expense		3.7		4.6		12.0		13.2
Other operating expenses		36.8		36.4		114.7		110.0

Total	$	43.2	$	47.2	$	137.5	$	144.1

Net realized investment losses fluctuate each period. During the first nine months of 2010, net realized investment gains in this segment included $40.2 million of net gains from the sales of investments (primarily fixed maturities) and $35.2 million of writedowns of investments for other than temporary declines in fair value recognized through net income ($31.6 million, prior to the $(3.6) million of impairment losses recognized through accumulated other comprehensive income (loss)). During the first nine months of 2009, net realized investment losses in this segment included $44.9 million of net gains from the sales of investments (primarily fixed maturities) and $79.6 million of writedowns of investments for other than temporary declines in fair value recognized through net income ($149.5 million, prior to the $69.9 million of impairment losses recognized through accumulated other comprehensive income (loss)).

Amortization related to net realized investment losses is the increase or decrease in the amortization of insurance acquisition costs which results from realized investment gains or losses. When we sell securities which back our universal life and investment-type products at a gain (loss) and reinvest the proceeds at a different yield, we increase (reduce) the amortization of insurance acquisition costs in order to reflect the change in estimated gross profits due to the gains (losses) realized and the resulting effect on estimated future yields. Sales of fixed maturity investments resulted in an increase (decrease) in the amortization of insurance acquisition costs of $1.4 million and $(1.3) million in the third quarters of 2010 and 2009, r espectively, and $1.4 and $(2.4) million in the first nine months of 2010 and 2009, respectively.

CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES

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Washington National (dollars in millions):

	Three months ended						Nine months ended
	September 30,						September 30,
	2010			2009			2010			2009

Premium collections:
Medicare supplement and other supplemental health	$	140.7		$	144.5		$	422.0		$	422.3
Life		3.8			8.4			12.0			25.8

Total collections	$	144.5		$	152.9		$	434.0		$	448.1

Average liabilities for insurance products:
Medicare supplement and other supplemental health	$	2,432.4		$	2,525.9		$	2,482.7		$	2,515.5
Non-interest sensitive life		207.8			340.3			207.0			432.7

Total average liabilities for insurance products, net of reinsurance ceded	$	2,640.2		$	2,866.2		$	2,689.7		$	2,948.2
Revenues:
Insurance policy income	$	144.9		$	149.7		$	435.0		$	451.0
Net investment income:
General account invested assets		46.2			47.8			137.5			145.6
Trading account income related to reinsurer accounts		1.6			3.7			3.5			4.8
Change in value of embedded derivatives related to modified coinsurance agreements		(1.4	)		(3.5	)		(3.3	)		(6.0	)
Fee revenue and other income		.3			.5			.8			1.6

Total revenues		191.6			198.2			573.5			597.0

Expenses:
Insurance policy benefits		112.4			115.6			341.6			350.9
Amortization related to operations		14.4			12.9			42.3			42.1
Other operating costs and expenses		37.6			40.6			113.7			116.1

Total benefits and expenses		164.4			169.1			497.6			509.1

Income before net realized investment gains (losses) and income taxes		27.2			29.1			75.9			87.9

Net realized investment gains (losses)		(2.3	)		1.6			(3.5	)		1.5

Income before income taxes	$	24.9		$	30.7		$	72.4		$	89.4

(continued)

CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES

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(continued from previous page)

	Three months ended						Nine months ended
	September 30,						September 30,
	2010			2009			2010			2009

Health benefit ratios:
All health lines:
Insurance policy benefits	$	108.8		$	104.8		$	327.9		$	322.5
Benefit ratio (a)		77.2	%		74.1	%		77.7	%		75.7	%

Medicare supplement:
Insurance policy benefits	$	26.2		$	30.5		$	80.0		$	95.1
Benefit ratio (a)		67.0	%		68.2	%		66.2	%		68.9	%

Supplemental health:
Insurance policy benefits	$	81.8		$	72.9		$	244.9		$	223.1
Benefit ratio (a)		81.3	%		76.6	%		82.3	%		78.6	%
Interest-adjusted benefit ratio (b)		50.5	%		42.9	%		50.6	%		45.0	%

Other health:
Insurance policy benefits	$	.8		$	1.4		$	3.0		$	4.3
Benefit ratio (a)		70.6	%		99.2	%		82.4	%		105.0	%

____________________

(a)	We calculate benefit ratios by dividing the related product’s insurance policy benefits by insurance policy income.

(b)

We calculate the interest-adjusted benefit ratio (a non-GAAP measure) for Washington National’s supplemental health products by dividing such product’s insurance policy benefits less interest income on the accumulated assets backing the insurance liabilities by policy income. These are considered non-GAAP financial measures. A non-GAAP measure is a numerical measure of a company’s performance, financial position, or cash flows that excludes or includes amounts that are normally excluded or included in the most directly comparable measure calculated and presented in accordance with GAAP.

These non-GAAP financial measures of “interest-adjusted benefit ratios” differ from “benefit ratios” due to the deduction of interest income on the accumulated assets backing the insurance liabilities from the product’s insurance policy benefits used to determine the ratio. Interest income is an important factor in measuring the performance of health products that are expected to be inforce for a longer duration of time, are not subject to unilateral changes in provisions (such as non-cancelable or guaranteed renewable contracts) and require the performance of various functions and services (including insurance protection) for an extended period of time. The net cash flows from supplemental health products generally caus e an accumulation of amounts in the early years of a policy (accounted for as reserve increases) that will be paid out as benefits in later policy years (accounted for as reserve decreases). Accordingly, as the policies age, the benefit ratio will typically increase, but the increase in benefits will be partially offset by interest income earned on the accumulated assets. The interest-adjusted benefit ratio reflects the effects of the interest income offset. Since interest income is an important factor in measuring the performance of these products, management believes a benefit ratio that includes the effect of interest income is useful in analyzing product performance. We utilize the interest-adjusted benefit ratio in measuring segment performance because we believe that this performance measure is a better indicator of the ongoing businesses and trends in the business. However, the “interest-adjusted benefit ratio” does not replace the 220;benefit ratio” as a measure of current period benefits to current period insurance policy income. Accordingly, management reviews both “benefit ratios” and “interest-adjusted benefit ratios” when analyzing the financial results attributable to these products.The investment income earned on the accumulated assets backing the supplemental health reserves was $30.9 million and $32.0 million in the three months ended September 30, 2010 and 2009, respectively, and $94.1 million and $95.6 million in the nine months ended September 30, 2010 and 2009, respectively.

CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES

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Total premium collections were $144.5 million in the third quarter of 2010, down 5.5 percent from 2009, and were $434.0 million in the first nine months of 2010, down 3.1 percent from 2009. See “Premium Collections” for further analysis.

Average liabilities for insurance products, net of reinsurance ceded were $2.6 billion in the third quarter of 2010, down 7.9 percent from 2009, and were $2.7 billion in the first nine months of 2010, down 8.8 percent from 2009. The decrease in such liabilities was primarily due to the coinsurance transaction with Wilton Re completed in September 2009 and policyholder redemptions and lapses exceeding new sales.

Insurance policy income is comprised of premiums earned on traditional insurance policies which provide mortality or morbidity coverage and fees and other charges assessed on other policies. The decrease in insurance policy income is primarily due to lower premiums from our life insurance block, including the impact of the completion of the coinsurance transaction with Wilton Re in the third quarter of 2009. See “Premium Collections” for further analysis.

Net investment income on general account invested assets (which excludes income on policyholder and reinsurer accounts) was $46.2 million in the third quarter of 2010, down 3.3 percent from 2009, and was $137.5 million in the first nine months of 2010, down 5.6 percent from 2009. The average balance of general account invested assets was $3.0 billion and $3.4 billion in the third quarters of 2010 and 2009, respectively. The average yield on these assets was 6.09 percent and 5.63 percent in the third quarters of 2010 and 2009, respectively. The average balance of general account invested assets was $3.1 billion and $3.4 billion in the first nine months of 2010 and 2009, respectively. The average yield on these assets was 5.92 percent and 5.72 percent in the first nine months of 2010 and 2009, respectively. The increase in yield in the 2010 periods primarily resulted from shifts among asset classes to increase income and from bond prepayment income. Prepayment income was $.4 million and $(.9) million in the third quarters of 2010 and 2009, respectively, and $1.9 million and $(.2) million in the first nine months of 2010 and 2009, respectively.

Trading account income related to reinsurer accounts represents the income on trading securities which are held to act as hedges for embedded derivatives related to certain modified coinsurance agreements. The income on our trading account securities is designed to substantially offset the change in value of embedded derivatives related to modified coinsurance agreements described below.

Change in value of embedded derivatives related to modified coinsurance agreements is described in the note to our consolidated financial statements entitled “Accounting for Derivatives.” We have transferred the specific block of investments related to these agreements to our trading securities account, which we carry at estimated fair value with changes in such value recognized as trading account income. The change in the value of the embedded derivatives has largely been offset by the change in value of the trading securities.

The benefit ratios on Washington National’s Medicare supplement products have been impacted by increases in policyholder lapses following our premium rate increase actions and competition from companies offering Medicare Advantage products. We establish active life reserves for these policies, which are in addition to amounts required for incurred claims. When policies lapse, active life reserves for such lapsed policies are released, resulting in decreased insurance policy benefits (although such decrease is substantially offset by additional amortization expense). In addition, the insurance product liabilities we establish for our Medicare supplement business are subject to significant estimates and the ultimate claim liability we incur for a particular period is likely to be different than our in itial estimate. Our insurance policy benefits reflected claim reserve redundancies from prior years of $4.0 million and $4.6 million in the first nine months of 2010 and 2009, respectively. Excluding the effects of prior year claim reserve redundancies, our benefit ratios for the Medicare supplement block would have been 69.5 percent and 72.2 percent in the first nine months of 2010 and 2009, respectively. The decrease in the benefit ratios in the 2010 periods is primarily due to favorable claim development. Government regulations generally require us to attain and maintain a ratio of total benefits incurred to total premiums earned (excluding changes in policy benefit reserves), after three years from the original issuance of the policy and over the lifetime of the policy, of not less than 65 percent on these products, as determined in accordance with statutory accounting principles. Insurance margins (insurance policy income less insurance policy benef its) on these products were $12.9 million and $14.2 million in the third quarters of 2010 and 2009, respectively, and were $40.9 million and $42.9 million in the first nine months of 2010 and 2009, respectively.

CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES

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Washington National’s supplemental health products (including specified disease, accident and hospital indemnity products) generally provide fixed or limited benefits. For example, payments under cancer insurance policies are generally made directly to, or at the direction of, the policyholder following diagnosis of, or treatment for, a covered type of cancer. Approximately three-fourths of our supplemental health policies inforce (based on policy count) are sold with return of premium or cash value riders. The return of premium rider generally provides that after a policy has been inforce for a specified number of years or upon the policyholder reaching a specified age, we will pay to the policyholder, or a beneficiary under the policy, the aggregate amount of all premiums paid under the policy, wi thout interest, less the aggregate amount of all claims incurred under the policy. The cash value rider is similar to the return of premium rider, but also provides for payment of a graded portion of the return of premium benefit if the policy terminates before the return of premium benefit is earned. Accordingly, the net cash flows from these products generally result in the accumulation of amounts in the early years of a policy (reflected in our earnings as reserve increases) which will be paid out as benefits in later policy years (reflected in our earnings as reserve decreases which offset the recording of benefit payments). As the policies age, the benefit ratio will typically increase, but the increase in benefits will be partially offset by investment income earned on the accumulated assets. The benefit ratio will fluctuate depending on the claim experience during the year. Insurance margins (insurance policy income less insurance policy benefits) on these products were $18.8 million and $22.3 million in the third quarters of 2010 and 2009, respectively, and were $52.8 million and $60.6 million in the first nine months of 2010 and 2009, respectively. The fluctuation in margin is primarily related to changes in incurred claims, partially offset by higher insurance policy income in the 2010 periods.

The benefit ratios on Washington National’s other health products are subject to fluctuations due to the smaller size of these blocks of business.

Amortization related to operations includes amortization of insurance acquisition costs. Insurance acquisition costs are generally amortized in relation to actual and expected premium revenue, and amortization is only adjusted if expected premium revenue changes or if we determine the balance of these costs is not recoverable from future profits. Such amounts were generally consistent with the related premium revenue and gross profits for such periods and the assumptions we made when we established the present value of future profits. A revision to our current assumptions could result in increases or decreases to amortization expense in future periods.

Other operating costs and expenses were $37.6 million in the third quarter of 2010, down 7.4 percent from 2009, and were $113.7 million in the first nine months of 2010, down 2.1 percent from 2009. Other operating costs and expenses include commission expense of $15.5 million and $15.3 million in the third quarters of 2010 and 2009, respectively, and $48.6 million and $48.5 million in the first nine months of 2010 and 2009, respectively.

Net realized investment gains (losses) fluctuate each period. During the first nine months of 2010, net realized investment losses in this segment included $7.8 million of net gains from the sales of investments (primarily fixed maturities) and $11.3 million of writedowns of investments for other than temporary declines in fair value recognized through net income ($11.4 million, prior to the $.1 million of impairment losses recognized through accumulated other comprehensive income (loss)). During the first nine months of 2009, net realized investment losses included $25.0 million of net gains from the sales of investments (primarily fixed maturities) and $23.5 million of writedowns of investments for other than temporary declines in fair val ue recognized through net income ($54.8 million, prior to the $31.3 million of impairment losses recognized through accumulated other comprehensive income (loss)).

CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES

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Colonial Penn (dollars in millions)

	Three months ended				Nine months ended
	September 30,				September 30,
	2010		2009		2010		2009

Premium collections:
Life	$	46.9	$	45.6	$	140.9	$	138.4
Supplemental health		1.5		1.8		4.8		5.8

Total collections	$	48.4	$	47.4	$	145.7	$	144.2

Average liabilities for insurance products:
Annuities-mortality based	$	79.2	$	81.0	$	79.5	$	82.1
Supplemental health		17.5		18.8		17.7		19.2
Life:
Interest sensitive		21.1		23.0		21.5		23.5
Non-interest sensitive		580.3		568.4		578.4		568.7

Total average liabilities for insurance products, net of reinsurance ceded	$	698.1	$	691.2	$	697.1	$	693.5

Revenues:
Insurance policy income	$	48.8	$	48.4	$	146.3	$	148.2
Net investment income:
General account invested assets		9.9		9.5		29.3		29.1
Fee revenue and other income		.2		.2		.5		.6

Total revenues		58.9		58.1		176.1		177.9

Expenses:
Insurance policy benefits		36.1		34.7		107.7		106.8
Amounts added to annuity and interest-sensitive life product account balances		.3		.3		.8		.8
Amortization related to operations		7.0		8.4		24.5		24.8
Other operating costs and expenses		7.7		7.3		22.4		22.0

Total benefits and expenses		51.1		50.7		155.4		154.4

Income before net realized investment gains and income taxes		7.8		7.4		20.7		23.5

Net realized investment gains		2.0		1.5		2.5		2.7

Income before income taxes	$	9.8	$	8.9	$	23.2	$	26.2

Total premium collections in the 2010 periods were comparable to the same periods in 2009. See “Premium Collections” for further analysis of Colonial Penn’s premium collections.

Insurance policy income is comprised of premiums earned on policies which provide mortality or morbidity coverage and fees and other charges assessed on other policies. In the first nine months of 2009, insurance policy income includes the recognition of a $3.4 million (of which $.4 million was recognized in the third quarter of 2009) final distribution and commutation amount following the termination of a group insurance pool that Colonial Penn previously participated in.

CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES

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Net investment income on general account invested assets (which excludes income on policyholder and reinsurer accounts) in the 2010 periods was comparable to the same periods in 2009. The average balance of general account invested assets was $661.9 million and $661.4 million in the third quarters of 2010 and 2009, respectively. The average yield on these assets was 5.99 percent and 5.76 percent in the third quarters of 2010 and 2009, respectively. The average balance of general account invested assets was $659.2 million and $660.8 million in the first nine months of 2010 and 2009, respectively. The average yield on these assets was 5.92 percent and 5.87 percent in the first nine months of 2010 and 2009, respectively.

Insurance policy benefits in the 2010 periods were comparable to the same periods in 2009.

Amortization related to operations includes amortization of insurance acquisition costs. Insurance acquisition costs in the Colonial Penn segment are amortized in relation to actual and expected premium revenue, and amortization is only adjusted if expected premium revenue changes or if we determine the balance of these costs is not recoverable from future profits. Such amounts were generally consistent with the related premium revenue and gross profits for such periods and the assumptions we made when we established the present value of future profits. A revision to our current assumptions could result in increases or decreases to amortization expense in future periods.

Other operating costs and expenses in the 2010 periods were comparable to the same periods in 2009.

Net realized investment gains fluctuate each period. During the first nine months of 2010, net realized investment gains in this segment included $3.7 million of net gains from the sales of investments (primarily fixed maturities) and $1.2 million of writedowns of investments for other than temporary declines in fair value recognized through net income ($1.5 million, prior to $.3 million of impairment losses recognized through accumulated other comprehensive income (loss)). During the first nine months of 2009, net realized investment gains in this segment included $6.7 million of net gains from the sales of investments (primarily fixed maturities) and $4.0 million of writedowns of investments for other than temporary declines in fair value recognized through net income ($4.5 million, prior to the $.5 million of impairment losses recognized through accumulated other comprehensive income (loss)).

CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES

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Other CNO Business (dollars in millions):

	Three months ended						Nine months ended
	September 30,						September 30,
	2010			2009			2010			2009

Premium collections:
Annuities	$	3.6		$	25.2		$	12.9		$	67.0
Other health		7.6			8.4			24.2			26.1
Life		47.8			51.9			144.9			161.3

Total collections	$	59.0		$	85.5		$	182.0		$	254.4

Average liabilities for insurance products:
Annuities:
Mortality based	$	209.8		$	214.5		$	210.9		$	215.8
Fixed index		705.5			751.9			725.7			787.3
Deposit based		705.0			652.1			661.6			670.2
Separate accounts		16.2			19.0			16.5			18.1
Other health		479.4			485.7			480.2			486.9
Life:
Interest sensitive		2,581.0			2,727.6			2,594.0			2,831.5
Non-interest sensitive		831.2			856.6			838.6			868.0

Total average liabilities for insurance products, net of reinsurance ceded	$	5,528.1		$	5,707.4		$	5,527.5		$	5,877.8

Revenues:
Insurance policy income	$	75.7		$	80.8		$	223.7		$	264.7
Net investment income:
General account invested assets		88.0			86.7			264.3			270.8
Fixed index products		6.2			11.0			3.6			3.6
Trading account income related to policyholder accounts		2.3			4.5			1.6			6.8

Total revenues		172.2			183.0			493.2			545.9

Expenses:
Insurance policy benefits		110.4			91.0			285.0			285.7
Amounts added to policyholder account balances:
Annuity products and interest-sensitive life products other than fixed index products		32.4			35.0			96.2			106.0
Fixed index products		6.3			18.1			17.4			24.8
Amortization related to operations		20.7			18.9			36.5			60.3
Interest expense on investment borrowings		5.1			5.1			15.1			15.5
Other operating costs and expenses		21.7			22.4			60.5			67.5

Total benefits and expenses		196.6			190.5			510.7			559.8

Loss before net realized investment losses, net of related amortization, and income taxes		(24.4	)		(7.5	)		(17.5	)		(13.9	)

Net realized investment losses		(13.0	)		(1.1	)		(17.9	)		(3.0	)
Amortization related to net realized investment gains (losses)		1.3			.1			.9			2.1
Net realized investment losses, net of related amortization		(11.7	)		(1.0	)		(17.0	)		(.9	)

Loss before income taxes	$	(36.1	)	$	(8.5	)	$	(34.5	)	$	(14.8	)

(continued)

CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES

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(continued from previous page)

	Three months ended						Nine months ended
	September 30,						September 30,
	2010			2009			2010			2009

Health benefit ratios:
All health lines:
Insurance policy benefits	$	15.5		$	13.1		$	47.0		$	46.9
Benefit ratio (a)		192.0	%		150.6	%		190.8	%		176.6	%

Long-term care:
Insurance policy benefits	$	15.1		$	12.2		$	45.5		$	44.4
Benefit ratio (a)		201.7	%		154.2	%		200.5	%		182.6	%
Interest-adjusted benefit ratio (b)		116.9	%		73.8	%		113.8	%		103.4	%

Other health:
Insurance policy benefits	$	.4		$	.9		$	1.5		$	2.5
Benefit ratio (a)		69.4	%		112.3	%		78.4	%		112.3	%

____________________

(a)	We calculate benefit ratios by dividing the related product’s insurance policy benefits by insurance policy income.

(b)

We calculate the interest-adjusted benefit ratio (a non-GAAP measure) for Other CNO Business long-term care products by dividing such product’s insurance policy benefits less interest income on the accumulated assets backing the insurance liabilities by policy income. These are considered non-GAAP financial measures. A non-GAAP measure is a numerical measure of a company’s performance, financial position, or cash flows that excludes or includes amounts that are normally excluded or included in the most directly comparable measure calculated and presented in accordance with GAAP.

These non-GAAP financial measures of “interest-adjusted benefit ratios” differ from “benefit ratios” due to the deduction of interest income on the accumulated assets backing the insurance liabilities from the product’s insurance policy benefits used to determine the ratio. Interest income is an important factor in measuring the performance of health products that are expected to be inforce for a longer duration of time, are not subject to unilateral changes in provisions (such as non-cancelable or guaranteed renewable contracts) and require the performance of various functions and services (including insurance protection) for an extended period of time. The net cash flows from long-term care products generally cause an accumulation of amounts in the early years of a policy (accounted for as reserve increases) that will be paid out as benefits in later policy years (accounted for as reserve decreases). Accordingly, as the policies age, the benefit ratio will typically increase, but the increase in benefits will be partially offset by interest income earned on the accumulated assets. The interest-adjusted benefit ratio reflects the effects of the interest income offset. Since interest income is an important factor in measuring the performance of these products, management believes a benefit ratio that includes the effect of interest income is useful in analyzing product performance. We utilize the interest-adjusted benefit ratio in measuring segment performance because we believe that this performance measure is a better indicator of the ongoing businesses and trends in the business. However, the “interest-adjusted benefit ratio” does not replace the “b enefit ratio” as a measure of current period benefits to current period insurance policy income. Accordingly, management reviews both “benefit ratios” and “interest-adjusted benefit ratios” when analyzing the financial results attributable to these products. The investment income earned on the accumulated assets backing the long-term care reserves was $6.4 million and $6.3 million in the three months ended September 30, 2010 and 2009, respectively, and $19.7 million and $19.2 million in the nine months ended September, 2010 and 2009, respectively.

Total premium collections were $59.0 million in the third quarter of 2010, down 31 percent from 2009, and were $182.0 million in the first nine months of 2010, down 28 percent from 2009. The decrease in collected premiums was primarily due to lower sales of fixed index annuities and lower life insurance premiums subsequent to the completion of the coinsurance transaction with Wilton Re in the third quarter of 2009. See “Premium Collections” for further analysis.

Average liabilities for insurance products, net of reinsurance ceded were $5.5 billion in the third quarter of 2010, down 3.1 percent from 2009, and were $5.5 billion in the first nine months of 2010, down 6.0 percent from 2009. The

CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES

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decrease in such liabilities was primarily due to the coinsurance transaction with Wilton Re completed in September 2009 and policyholder redemptions and lapses exceeding new sales.

Insurance policy income is comprised of premiums earned on traditional insurance policies which provide mortality or morbidity coverage and fees and other charges assessed on other policies. The decrease in insurance policy income is primarily due to lower premiums and policyholder charges from our life insurance block, including the impact of the completion of the coinsurance transaction with Wilton Re in the third quarter of 2009. See “Premium Collections” for further analysis.

Net investment income on general account invested assets (which excludes income on policyholder and reinsurer accounts) was $88.0 million in the third quarter of 2010, up 1.5 percent from 2009, and was $264.3 million in the first nine months of 2010, down 2.4 percent from 2009. The average balance of general account invested assets was $6.1 billion and $6.2 billion in the third quarters of 2010 and 2009, respectively. The average yield on these assets was 5.76 percent and 5.63 percent in the third quarters of 2010 and 2009, respectively. The average balance of general account invested assets was $6.1 billion and $6.3 billion in the first nine months of 2010 and 2009, respectively. The average yield on these assets was 5 .81 percent and 5.72 percent in the first nine months of 2010 and 2009, respectively. The reduction in average invested assets was primarily due to the coinsurance transaction with Wilton Re completed in September 2009. The increase in yield in the 2010 periods primarily resulted from shifts among asset classes to increase income, and from bond prepayment income. Prepayment income was $.7 million and $(.9) million in the third quarters of 2010 and 2009, respectively, and $4.0 million and $(1.4) million in the first nine months of 2010 and 2009, respectively.

Net investment income related to fixed index products represents the change in the estimated fair value of options which are purchased in an effort to hedge certain potential benefits accruing to the policyholders of our fixed index products. Our fixed index products are designed so that the investment income spread earned on the related insurance liabilities is expected to be more than adequate to cover the cost of the options and other costs related to these policies. Net investment income (loss) related to fixed index products were $4.4 million and $10.0 million in the third quarters of 2010 and 2009, respectively, and were $(1.7) million and $7.5 million in the first nine months of 2010 and 2009, respectively. Net investment i ncome related to fixed index products also includes income (loss) on trading securities which are held to act as hedges for embedded derivatives related to fixed index products. Such trading account income (loss) was $1.8 million and $1.0 million in the third quarters of 2010 and 2009, respectively, and was $5.3 million and $(3.9) million in the first nine months of 2010 and 2009, respectively. Such amounts were mostly offset by the corresponding charge (credit) to amounts added to policyholder account balances for fixed index products. Such income and related charges fluctuate based on the value of options embedded in the segment’s fixed index annuity policyholder account balances subject to this benefit and to the performance of the indices to which the returns on such products are linked.

Trading account income related to policyholder accounts represents the income on investments backing the market strategies of certain annuity products which provide for different rates of cash value growth based on the experience of a particular market strategy. The income on our trading account securities is designed to substantially offset certain amounts included in insurance policy benefits related to the aforementioned annuity products.

Insurance policy benefits were affected by a number of items as summarized below.

The long-term care policies in this segment generally provide for indemnity and non-indemnity benefits on a guaranteed renewable or non-cancellable basis. The benefit ratio on our long-term care policies was 201.7 percent and 154.2 percent in the third quarters of 2010 and 2009, respectively, and was 200.5 percent and 182.6 percent in the first nine months of 2010 and 2009, respectively. Benefit ratios are calculated by dividing the product’s insurance policy benefits by insurance policy income. Since the insurance product liabilities we establish for long-term care business are subject to significant estimates, the ultimate claim liability we incur for a particular period is likely to be different than our initial estimate. Our insurance policy benefits reflected reserve deficiencies fro m prior years of $1.0 million and $1.7 million in the first nine months of 2010 and 2009, respectively. Excluding the effects of prior year claim reserve deficiencies, our benefit ratios would have been 196.1 percent and 175.6 percent in the first nine months of 2010 and 2009, respectively. These ratios reflect the level of incurred claims experienced in recent periods, adverse development on claims incurred in prior periods and

CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES

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changes in policy income. The prior period deficiencies have primarily resulted from the impact of paid claim experience being different than prior estimates.

The net cash flows from long-term care products generally cause an accumulation of amounts in the early years of a policy (reflected in our earnings as reserve increases) which will be paid out as benefits in later policy years (reflected in our earnings as reserve decreases which offset the recording of benefit payments). Accordingly, as the policies age, the benefit ratio will typically increase, but the increase in benefits will be partially offset by investment income earned on the assets which have accumulated. The interest-adjusted benefit ratio for long-term care products is calculated by dividing the insurance product’s insurance policy benefits less interest income on the accumulated assets backing the insurance liabilities by insurance policy income. The interest-adjusted benefit ratio on this business was 113.8 percent and 103.4 percent in the first nine months of 2010 and 2009, respectively. Excluding the effects of prior year claim reserve deficiencies, our interest-adjusted benefit ratios would have been 109.4 percent and 96.4 percent in the first nine months of 2010 and 2009, respectively.

In each quarterly period, we calculate our best estimate of claim reserves based on all of the information available to us at that time, which necessarily takes into account new experience emerging during the period. Our actuaries estimate these claim reserves using various generally recognized actuarial methodologies which are based on informed estimates and judgments that are believed to be appropriate. As additional experience emerges and other data become available, these estimates and judgments are reviewed and may be revised. Significant assumptions made in estimating claim reserves for long-term care policies include expectations about the: (i) future duration of existing claims; (ii) cost of care and benefit utilization; (iii) interest rate utilized to discount claim reserves; (iv) clai ms that have been incurred but not yet reported; (v) claim status on the reporting date; (vi) claims that have been closed but are expected to reopen; and (vii) correspondence that has been received that will ultimately become claims that have payments associated with them.

The benefit ratios on Other CNO Business segment’s other products are subject to fluctuations due to the smaller size of these blocks of business.

Amounts added to policyholder account balances for annuity products and interest-sensitive life products were $32.4 million in the third quarter of 2010, down 7.4 percent from 2009, and were $96.2 million in the first nine months of 2010, down 9.2 percent from 2009. The decrease was primarily due to a smaller block of annuity and interest-sensitive life business inforce due to lapses exceeding new sales in recent periods and the completion of the coinsurance transaction with Wilton Re in the third quarter of 2009. The weighted average crediting rates for these products was 4.0 percent and 4.1 percent in the first nine months of 2010 and 2009, respectively.

Amounts added to fixed index products generally fluctuate with the corresponding related investment income accounts described above.

Amortization related to operations includes amortization of insurance acquisition costs. Insurance acquisition costs are generally amortized either: (i) in relation to the estimated gross profits for universal life and investment-type products; or (ii) in relation to actual and expected premium revenue for other products. In addition, for universal life and investment-type products, we are required to adjust the total amortization recorded to date through the statement of operations if actual experience or other evidence suggests that earlier es timates of future gross profits should be revised. Accordingly, amortization for universal life and investment-type products is dependent on the profits realized during the period and on our expectation of future profits. For other products, we amortize insurance acquisition costs in relation to actual and expected premium revenue, and amortization is only adjusted if expected premium revenue changes or if we determine the balance of these costs is not recoverable from future profits. The assumptions we use to estimate our future gross profits and premiums involve significant judgment. A revision to our current assumptions could result in increases or decreases to amortization expense in future periods. Earnings on our universal life products, which comprise a significant part of this block, are subject to volatility since our insurance acquisition costs are equal to the value of future estimated gross profits. Accordingly, the entire impact o f adverse changes in our earlier estimates of future gross profits is generally reflected in earnings in the period such differences occur.

During the third quarter of 2010, we were required to recognize $13 million of additional amortization expense resulting from decreased projected future investment yields related to interest-sensitive insurance products. Also in the third quarter of 2010, amortization increased by $6 million representing the write-off of the balance of the present value of future profits related to this segment’s long-term care insurance block. Such write-off was based on actuarial studies indicating such balance was no longer expected to be recoverable from future profits.

CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES

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During the three months ended September 30, 2009, we were required to accelerate the amortization of insurance acquisition costs by approximately $9 million for the changes in two assumptions related to future profits from our universal life products. The first change resulted in additional amortization expense of $2 million and relates to the assumption of when we will ultimately increase certain non-guaranteed premium rates related to the Lifetrend and CIUL3+ life insurance products. Refer to the note to the consolidated financial statements entitled “Litigation and Other Legal Proceedings – Regulatory Examinations and Fines,” for additional information concerning these policies. The second change resulted in additional amortization expense of $7 million and relates to the investment e arnings assumption for the entire interest-sensitive block of life insurance business. The future investment earnings assumptions were reduced by 7 basis points reflecting lower portfolio earnings.

During the first half of 2009, we were required to accelerate the amortization of insurance acquisition costs due to the experience of a block of fixed index annuities. This block of business experienced higher than anticipated surrenders during the first half of 2009 and we increased our expected surrender assumptions in future periods. These annuities also have a market value adjustment (“MVA”) feature, which effectively reduced (or in some cases, eliminated) the charges paid upon the surrender of these policies in the recent periods as the 10-year treasury rate dropped. The impact of both the historical experience and the projected increased surrender activity and higher MVA benefits reduced our expectations on the profitability of this block to approximately break-even. We recog nized additional amortization of approximately $10.2 million in the first nine months of 2009 (none of which was recognized in the third quarter of 2009), related to the actual and expected future changes in the experience of this block. We continue to hold insurance acquisition costs of approximately $55 million related to these products at September 30, 2010. Results for this block are expected to exhibit increased volatility in the future, because the difference between our assumptions and actual experience will be reflected in earnings in the period such differences occur.

Interest expense on investment borrowings includes $5.1 million and $5.1 million of interest expense on collateralized borrowings in the third quarters of 2010 and 2009, respectively, and $14.8 million and $15.3 million in the first nine months of 2010 and 2009, respectively, as further described in the note to the consolidated financial statements entitled “Investment Borrowings”.

Other operating costs and expenses were $21.7 million in the third quarter of 2010, down 3.1 percent from 2009, and were $60.5 million in the first nine months of 2010, down 10 percent from 2009. Other operating costs and expenses include commission expense of $1.3 million and $2.1 million in the third quarters of 2010 and 2009, respectively, and $4.0 million and $6.7 million in the first nine months of 2010 and 2009, respectively.

Net realized investment gains (losses) fluctuate each period. During the first nine months of 2010, net realized investment losses in this segment included $3.9 million of net gains from the sales of investments (primarily fixed maturities) and $21.8 million of writedowns of investments for other than temporary declines in fair value recognized through net income ($22.1 million, prior to the $.3 million of impairment losses recognized through accumulated other comprehensive income (loss)). During the first nine months of 2009, net realized investment gains included $40.7 million of net gains from the sales of investments (primarily fixed maturities) and $43.7 million of writedowns of investments for other than temporary declines in fair valu e recognized through net income ($101.9 million, prior to the $58.2 million of impairment losses recognized through accumulated other comprehensive income (loss)).

Amortization related to net realized investment losses is the increase or decrease in the amortization of insurance acquisition costs which results from realized investment gains or losses. When we sell securities which back our universal life and investment-type products at a gain (loss) and reinvest the proceeds at a different yield (or when we have the intent to sell the impaired investments before an anticipated recovery in value occurs), we increase (reduce) the amortization of insurance acquisition costs in order to reflect the change in estimated gross profits due to the gains (losses) realized and the resulting effect on estimated future yields. Sales of fixed maturity investments resulted in a decrease in the amortization of insuran ce acquisition costs of $1.3 million and $.1 million in the third quarters of 2010 and 2009, respectively, and $.9 million and $2.1 million in the first nine months of 2010 and 2009, respectively.

CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES

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Corporate Operations (dollars in millions):

	Three months ended						Nine months ended
	September 30,						September 30,
	2010			2009			2010			2009

Corporate operations:
Interest expense on corporate debt	$	(20.0	)	$	(24.0	)	$	(59.3	)	$	(61.6	)
Net investment income (loss):
General account invested assets		-			.1			.1			.3
Other special-purpose portfolios		3.4			.5			.4			(.2	)
Fee revenue and other income		.4			.9			1.3			2.3
Net operating results of variable interest entities		1.9			.1			5.4			-
Loss on extinguishment or modification of debt		-			-			(2.7	)		(9.5	)
Other operating costs and expenses		(18.0	)		(9.0	)		(36.3	)		(27.3	)

Loss before net realized investment losses and income taxes		(32.3	)		(31.4	)		(91.1	)		(96.0	)

Net realized investment losses		(1.4	)		(4.4	)		(4.1	)		(10.0	)

Loss before income taxes	$	(33.7	)	$	(35.8	)	$	(95.2	)	$	(106.0	)

Interest expense on corporate debt has been impacted by: (i) an amendment to our Senior Credit Agreement in 2009; (ii) repayments in 2009 pursuant to our Senior Credit Agreement; (iii) completion of a cash tender offer in 2009 for $176.5 million aggregate principal amount of the 3.5% Debentures; (iv) the repurchase of 3.5% debentures; and (v) the issuance of 7.0% Debentures. Our average corporate debt outstanding was $1,045.1 million and $1,293.5 million during the first nine months of 2010 and 2009, respectively. The average interest rate on our debt was 7.2 percent and 5.4 percent during the first nine months of 2010 and 2009, respectively.

Net investment income on other special-purpose portfolios includes the income (loss) on investments (including the change in the estimated fair value of the underlying investments) related to an employee deferred compensation plan held in a rabbi trust. An offsetting amount is included in other operating costs and expenses as the investment results are allocated to the participants’ account balances.

Fee revenue and other income includes: (i) revenues we receive for managing investments for other companies; and (ii) fees received for marketing insurance products of other companies. Fee revenue and other income has decreased primarily as a result of a decrease in investments managed for others.

Net operating results of variable interest entities represents the operating results of VIEs. The VIEs are consolidated in accordance with GAAP. These entities were established to issue securities and use the proceeds to invest in loans and other permitted assets. Refer to the note to the consolidated financial statements entitled “Investments in Variable Interest Entities” for more information on the VIEs.

Loss on extinguishment or modification of debt in the 2010 periods represents the write-off of unamortized discount and issuance costs associated with the repurchases of 3.5% Debentures as further discussed in the note to the consolidated financial statements entitled “Notes Payable – Direct Corporate Obligations.” The loss on extinguishment or modification of debt in the first nine months of 2009, reflects fees incurred in conjunction with the modification to our Senior Credit Agreement.

Other operating costs and expenses include general corporate expenses, net of amounts charged to subsidiaries for services provided by the corporate operations. These amounts fluctuate as a result of expenses such as consulting, legal and severance costs which often vary from period to period.

CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES

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Net realized investment gains (losses) often fluctuate each period. During the first nine months of 2010, net realized investment losses recognized by VIEs included $.9 million of net losses from the sales of investments (primarily 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 nine months of 2009, net realized investment losses included $3.5 million of net gains from the sale of investments (of which $1.3 million were losses recognized by a VIE) and $13.5 million of writedowns (all of which were recognized by a VIE) due to other-than- temporary declines in value on certain securities.

PREMIUM COLLECTIONS

In accordance with GAAP, insurance policy income in our consolidated statement of operations consists of premiums earned for traditional insurance policies that have life contingencies or morbidity features. For annuity and universal life contracts, premiums collected are not reported as revenues, but as deposits to insurance liabilities. We recognize revenues for these products over time in the form of investment income and surrender or other charges.

Our insurance segments sell products through three primary distribution channels — career agents (our Bankers Life segment), direct marketing (our Colonial Penn segment) and independent producers (our Washington National segment). Our career agency force in the Bankers Life segment sells primarily Medicare supplement and long-term care insurance policies, Medicare Part D contracts, life insurance and annuities. These agents visit the customer’s home, which permits one-on-one contact with potential policyholders and promotes strong personal relationships with existing policyholders. Our direct marketing distribution channel in the Colonial Penn segment is engaged primarily in the sale of “graded benefit life” and simplified issue life insurance policies which are sold directly to th e policyholder. Our independent producer distribution channel in the Washington National segment consists of a general agency and insurance brokerage distribution system comprised of independent licensed agents doing business in all fifty states, the District of Columbia, and certain protectorates of the United States. Independent producers are a diverse network of independent agents, insurance brokers and marketing organizations. Our independent producer distribution channel sells primarily supplemental health and Medicare supplement insurance policies, universal life insurance and annuities. Washington National also markets its products through Performance Matters Associates, Inc., a wholly owned subsidiary that specializes in marketing and distributing health products.

Agents, insurance brokers and marketing companies who market our products and prospective purchasers of our products use the financial strength ratings of our insurance subsidiaries as an important factor in determining whether to market or purchase. Ratings have the most impact on our annuity, interest-sensitive life insurance and long-term care products. The current financial strength ratings of our primary insurance subsidiaries from A.M. Best Company (“A. M. Best”), S&P and Moody’s Investor Services, Inc. (“Moody’s”) are “B (Fair)” (except Conseco Life), “BB-” and “Ba1”, respectively. The current financial strength rating of Conseco Life from A.M. Best is “B-”. For a description of these ratings and addi tional information on our ratings, see “Liquidity for Insurance Operations.”

We set premium rates on our health insurance policies based on facts and circumstances known at the time we issue the policies using assumptions about numerous variables, including the actuarial probability of a policyholder incurring a claim, the probable size of the claim, and the interest rate earned on our investment of premiums. We also consider historical claims information, industry statistics, the rates of our competitors and other factors. If our actual claims experience is less favorable than we anticipated and we are unable to raise our premium rates, our financial results may be adversely affected. We generally cannot raise our health insurance premiums in any state until we obtain the approval of the state insurance regulator. We review the adequacy of our premium rates regularly a nd file for rate increases on our products when we believe such rates are too low. It is likely that we will not be able to obtain approval for all requested premium rate increases. If such requests are denied in one or more states, our net income may decrease. If such requests are approved, increased premium rates may reduce the volume of our new sales and may cause existing policyholders to lapse their policies. If the healthier policyholders allow their policies to lapse, this would reduce our premium income and profitability in the future.

CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES

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Total premium collections by segment were as follows:

Bankers Life (dollars in millions):

	Three months ended				Nine months ended
	September 30,				September 30,
	2010		2009		2010		2009
Premiums collected by product:

Annuities:
Fixed index (first-year)	$	146.3	$	88.4	$	397.2	$	252.3

Other fixed rate (first-year)		118.4		195.6		370.6		607.5
Other fixed rate (renewal)		1.1		.7		3.3		2.4
Subtotal - other fixed rate annuities		119.5		196.3		373.9		609.9

Total annuities		265.8		284.7		771.1		862.2

Health:
Medicare supplement (first-year)		29.3		22.7		85.9		63.5
Medicare supplement (renewal)		140.8		146.2		429.6		416.4
Subtotal - Medicare supplement		170.1		168.9		515.5		479.9
Long-term care (first-year)		5.7		2.9		16.0		11.8
Long-term care (renewal)		139.3		151.4		425.1		440.3
Subtotal - long-term care		145.0		154.3		441.1		452.1
PDP and PFFS (first year) ��		.6		31.2		2.7		69.6
PDP and PFFS (renewal)		15.0		83.2		45.1		275.9
Subtotal – PDP and PFFS		15.6		114.4		47.8		345.5
Other health (first-year)		.5		.7		1.6		2.0
Other health (renewal)		2.2		2.4		6.9		7.0
Subtotal - other health		2.7		3.1		8.5		9.0

Total health		333.4		440.7		1,012.9		1,286.5

Life insurance:
First-year		25.8		23.4		70.8		59.6
Renewal		29.0		39.8		82.6		107.8

Total life insurance		54.8		63.2		153.4		167.4

Collections on insurance products:
Total first-year premium collections on insurance products		326.6		364.9		944.8		1,066.3
Total renewal premium collections on insurance products		327.4		423.7		992.6		1,249.8

Total collections on insurance products	$	654.0	$	788.6	$	1,937.4	$	2,316.1

Annuities in this segment include fixed index and other fixed rate annuities sold to the senior market. Annuity collections in this segment decreased 6.6 percent, to $265.8 million, in the third quarter of 2010, and 11 percent, to $771.1 million, in the first nine months of 2010, as compared to the same periods in 2009. The change in mix of premium collections between our fixed index products and our fixed annuity products has fluctuated due to volatility in the financial markets in recent periods. In addition, premium collections from Bankers Life’s fixed annuity products decreased in the 2010 periods as low new money interest rates resulted in a reduction to the bonus on our bonus interest annuity. A new product, which provides more flexibility in setting the bonus interest rate was launched in early 2010.

CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES

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Health products include Medicare supplement, Medicare Part D contracts, PFFS contracts, long-term care and other insurance products. Our profits on health policies depend on the overall level of sales, the length of time the business remains inforce, investment yields, claims experience and expense management.

Collected premiums on Medicare supplement policies in the Bankers Life segment increased .7 percent, to $170.1 million, in the third quarter of 2010, and 7.4 percent, to $515.5 million, in the first nine months of 2010, as compared to the same periods in 2009.

Premiums collected on Bankers Life’s long-term care policies decreased 6.0 percent, to $145.0 million, in the third quarter of 2010, and 2.4 percent, to $441.1 million, in the first nine months of 2010, as compared to the same periods in 2009. The decreases in 2010 were primarily attributable to higher lapses following premium rate increases in recent periods.

Premiums collected on PDP and PFFS business relate to various quota-share reinsurance agreements with Coventry. Coventry decided to cease selling PFFS plans effective January 1, 2010. Effective January 1, 2010, the Company no longer assumes the underwriting risk related to PFFS business. In the third quarter of 2009, Bankers Life began offering Humana’s Medicare Advantage plans to its policyholders and consumers nationwide through its career agency force and receives marketing fees based on sales. Premiums collected on PFFS business were $(.3) million and $95.7 million in the third quarters of 2010 and 2009, respectively, and were $1.0 million and $290.5 million in the first nine months of 2010 and 2009, respectively. The PFFS premiums recognized in 2010 relate to adjustments t o prior year contracts.

Life products in this segment are sold primarily to the senior market through our career agents. Life premiums collected in this segment decreased 13 percent, to $54.8 million, in the third quarter of 2010, and 8.4 percent, to $153.4 million, in the first nine months of 2010, as compared to the same periods in 2009. Collected premiums have been impacted by the reinsurance agreement with Wilton Re completed in the fourth quarter of 2009.

CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES

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Washington National (dollars in millions):

	Three months ended				Nine months ended
	September 30,				September 30,
	2010		2009		2010		2009
Premiums collected by product:

Health:
Medicare supplement (first-year)	$	.7	$	2.2	$	3.0	$	5.6
Medicare supplement (renewal)		37.2		44.7		114.3		128.5
Subtotal - Medicare supplement		37.9		46.9		117.3		134.1
Supplemental health (first-year)		13.0		11.8		38.6		33.1
Supplemental health (renewal)		88.5		84.4		262.7		251.2
Subtotal – supplemental health		101.5		96.2		301.3		284.3
Other health (all renewal)		1.3		1.4		3.4		3.9

Total health		140.7		144.5		422.0		422.3

Life insurance:
First-year		.1		.2		.4		.6
Renewal		3.7		8.2		11.6		25.2

Total life insurance		3.8		8.4		12.0		25.8

Collections on insurance products:

Total first-year premium collections on insurance products		13.8		14.2		42.0		39.3
Total renewal premium collections on insurance products		130.7		138.7		392.0		408.8

Total collections on insurance products	$	144.5	$	152.9	$	434.0	$	448.1

Health products in the Washington National segment include Medicare supplement, supplemental health and other insurance products. Our profits on health policies depend on the overall level of sales, the length of time the business remains inforce, investment yields, claim experience and expense management.

Collected premiums on Medicare supplement policies in the Washington National segment decreased 19 percent, to $37.9 million, in the third quarter of 2010, and 13 percent, to $117.3 million, in the first nine months of 2010, as compared to the same periods in 2009. We have experienced lower sales and higher lapses of these products due to premium rate increases implemented in recent periods and competition from companies offering Medicare Advantage products.

Premiums collected on supplemental health products (including specified disease, accident and hospital indemnity insurance products) increased 5.5 percent, to $101.5 million, in the third quarter of 2010, and 6.0 percent, to $301.3 million, in the first nine months of 2010, as compared to the same periods in 2009. Such increases are due to higher new sales and an improvement in persistency.

Life products in the Washington National segment are primarily traditional life products. Life premiums collected decreased 55 percent, to $3.8 million, in the third quarter of 2010, and 53 percent, to $12.0 million, in the first nine months of 2010, compared to the same periods in 2009, reflecting the completion of the coinsurance transaction with Wilton Re in the third quarter of 2009.

CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES

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Colonial Penn (dollars in millions)

	Three months ended				Nine months ended
	September 30,				September 30,
	2010		2009		2010		2009
Premiums collected by product:

Life insurance:
First-year	$	8.1	$	7.9	$	24.1	$	25.5
Renewal		38.8		37.7		116.8		112.9

Total life insurance		46.9		45.6		140.9		138.4

Health (all renewal):
Medicare supplement		1.4		1.8		4.5		5.4
Other health		.1		-		.3		.4

Total health		1.5		1.8		4.8		5.8

Collections on insurance products:

Total first-year premium collections on insurance products		8.1		7.9		24.1		25.5
Total renewal premium collections on insurance products		40.3		39.5		121.6		118.7

Total collections on insurance products	$	48.4	$	47.4	$	145.7	$	144.2

Life products in this segment are sold primarily to the senior market. Life premiums collected in the 2010 periods were slightly higher than the same periods in 2009. Graded benefit life products sold through our direct response marketing channel accounted for $45.9 million and $44.1 million of our total collected premiums in the third quarters of 2010 and 2009, respectively, and $138.0 million and $133.1 million in the first nine months of 2010 and 2009, respectively.

Health products include Medicare supplement and other insurance products. Our profits on health policies depend on the overall level of sales, the length of time the business remains inforce, investment yields, claims experience and expense management. Premiums collected on these products have decreased as we do not currently market these products through this segment.

CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES

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Other CNO Business (dollars in millions):

	Three months ended				Nine months ended
	September 30,				September 30,
	2010		2009		2010		2009
Premiums collected by product:

Annuities:
Fixed index (first-year)	$	2.4	$	22.9	$	7.9	$	61.1
Fixed index (renewal)		.9		1.5		3.6		4.3
Subtotal - fixed index annuities		3.3		24.4		11.5		65.4
Other fixed rate (first-year)		.2		.5		.9		.7
Other fixed rate (renewal)		.1		.3		.5		.9
Subtotal - other fixed rate annuities		.3		.8		1.4		1.6

Total annuities		3.6		25.2		12.9		67.0

Health:
Long-term care (all renewal)		7.1		7.6		22.3		24.0
Other health (all renewal)		.5		.8		1.9		2.1

Total health		7.6		8.4		24.2		26.1

Life insurance:
First-year		.6		.6		1.9		1.2
Renewal		47.2		51.3		143.0		160.1

Total life insurance		47.8		51.9		144.9		161.3

Collections on insurance products:

Total first-year premium collections on insurance products		3.2		24.0		10.7		63.0
Total renewal premium collections on insurance products		55.8		61.5		171.3		191.4

Total collections on insurance products	$	59.0	$	85.5	$	182.0	$	254.4

Annuities in this segment include fixed index and other fixed rate annuities. We are no longer actively pursuing sales of annuity products in this segment. Total annuity premiums collected in this segment totaled $3.6 million in the third quarter of 2010, compared to $25.2 million in the same period of 2009, and $12.9 million in the first nine months of 2010, compared to $67.0 million in the same period of 2009.

Health products in the Other CNO Business segment include long-term care and other insurance products. Our profits on health policies depend on the overall level of sales, the length of time the business remains inforce, investment yields, claim experience and expense management.

The long-term care premiums in this segment relate to blocks of business that we no longer market or underwrite. As a result, we expect this segment’s long-term care premiums to continue to decline, reflecting additional policy lapses in the future, partially offset by premium rate increases.

Life products in the Other CNO Business segment include primarily universal life products. Life premiums collected decreased 7.9 percent, to $47.8 million, in the third quarter of 2010, and 10 percent, to $144.9 million, in the first nine months of 2010, compared to the same periods in 2009, reflecting the completion of the coinsurance transaction with Wilton Re in the third quarter of 2009.

CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES

___________________

LIQUIDITY AND CAPITAL RESOURCES

Our capital structure as of September 30, 2010, and December 31, 2009, was as follows (dollars in millions):

	September 30,			December 31,
	2010			2009
Total capital:
Corporate notes payable	$	1,029.8		$	1,037.4

Shareholders’ equity:
Common stock		2.5			2.5
Additional paid-in capital		4,421.6			4,408.8
Accumulated other comprehensive income (loss)		688.1			(264.3	)
Accumulated deficit		(507.9	)		(614.6	)

Total shareholders’ equity		4,604.3			3,532.4

Total capital	$	5,634.1		$	4,569.8

The following table summarizes certain financial ratios as of and for the nine months ended September 30, 2010, and as of and for the year ended December 31, 2009:

	September 30,			December 31,
	2010			2009

Book value per common share	$	18.34		$	14.09
Book value per common share, excluding accumulated other comprehensive income (loss) (a)		15.60			15.14

Ratio of earnings to fixed charges		1.57	X		1.38	X

Debt to total capital ratios:
Corporate debt to total capital (b)		18	%		23	%
Corporate debt to total capital, excluding accumulated other comprehensive income (loss) (a)		21	%		21	%

____________________

(a)

This non-GAAP measure differs from the corresponding GAAP measure presented immediately above, because accumulated other comprehensive income (loss) has been excluded from the value of capital used to determine this measure. Management believes this non-GAAP measure is useful because it removes the volatility that arises from changes in accumulated other comprehensive income (loss). Such volatility is often caused by changes in the estimated fair value of our investment portfolio resulting from changes in general market interest rates rather than the business decisions made by management. However, this measure does not replace the corresponding GAAP measure.

(b)	Such ratio differs from the debt to total capitalization ratio required by our Senior Credit Agreement, primarily because the credit agreement ratio excludes accumulated other comprehensive income (loss) from total capital.

Liquidity for insurance operations

Our insurance companies generally receive adequate cash flows from premium collections and investment income to meet their obligations. Life insurance and annuity liabilities are generally long-term in nature. Policyholders may, however, withdraw funds or surrender their policies, subject to any applicable penalty provisions. We seek to balance the duration of our invested assets with the estimated duration of benefit payments arising from contract liabilities.

CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES

___________________

Conseco Life and Bankers Life are members of the FHLB. As members of the FHLB, Conseco Life and Bankers Life have the ability to borrow on a collateralized basis from FHLB. Conseco Life and Bankers Life are required to hold certain minimum amounts of FHLB common stock as a requirement of membership in the FHLB, and additional amounts based on the amount of collateralized borrowings. At September 30, 2010, the carrying value of the FHLB common stock was $32.5 million. As of September 30, 2010, collateralized borrowings totaled $650.0 million (of which $200.0 million was borrowed in the third quarter of 2010), and the proceeds were used to purchase fixed maturity securities. The borrowings are classified as investment borrowings in the accompanying consolidated balance sheet. 0;The borrowings are collateralized by investments with an estimated fair value of $914.9 million at September 30, 2010, which are maintained in a custodial account for the benefit of the FHLB. In early October 2010, Bankers Life borrowed an additional $250.0 million from the FHLB. A portion of the collateral for the additional borrowings had been deposited in the custodial account for the benefit of the FHLB at September 30, 2010. The following summarizes the terms of the borrowings (dollars in millions):

Amount		Maturity	Interest rate
borrowed		date	at September 30, 2010

$	54.0	May 2012	Variable rate – 0.339%
	37.0	July 2012	Fixed rate – 5.540%
	13.0	July 2012	Variable rate – 0.588%
	100.0	September 2015	Variable rate – 0.606%
	100.0	September 2015	Variable rate – 0.557%
	146.0	November 2015	Fixed rate – 5.300%
	100.0	November 2015	Fixed rate – 4.890%
	100.0	December 2015	Fixed rate – 4.710%

State laws generally give state insurance regulatory agencies broad authority to protect policyholders in their jurisdictions. Regulators have used this authority in the past to restrict the ability of our insurance subsidiaries to pay any dividends or other amounts without prior approval. We cannot be assured that the regulators will not seek to assert greater supervision and control over our insurance subsidiaries’ businesses and financial affairs.

Financial Strength Ratings of our Insurance Subsidiaries

Financial strength ratings provided by A.M. Best, S&P and Moody’s are the rating agency’s opinions of the ability of our insurance subsidiaries to repay policyholder claims and obligations when due.

On March 23, 2010, A.M. Best affirmed the financial strength rating of “B” of our primary insurance subsidiaries, except Conseco Life, whose “B” rating was downgraded to “B-”. A.M. Best also revised the outlook for the ratings of our primary insurance subsidiaries to stable from negative, except for Conseco Life, whose outlook of negative was affirmed. A “stable” designation means that there is a low likelihood of a rating change due to stable financial market trends. The “B” rating is assigned to companies that have a fair ability, in A.M. Best’s opinion, to meet their current obligations to policyholders, but are financially vulnerable to adverse changes in underwriting and economic conditions. A.M. Best ratings for the industr y currently range from “A++ (Superior)” to “F (In Liquidation)” and some companies are not rated. An “A++” rating indicates a superior ability to meet ongoing obligations to policyholders. A.M. Best has sixteen possible ratings. There are six ratings above the “B” rating of our primary insurance subsidiaries, other than Conseco Life, and nine ratings that are below that rating. There are seven ratings above the “B-” rating of Conseco Life and eight ratings that are below that rating.

On August 23, 2010, S&P affirmed the financial strength rating of “BB-” of our primary insurance subsidiaries and the outlook remained stable. A “stable” designation means that a rating is not likely to change. S&P financial strength ratings range from “AAA” to “R” and some companies are not rated. Rating categories from “BB” to “CCC” are classified as “vulnerable”, and pluses and minuses show the relative standing within a category. In S&P’s view, an insurer rated “BB” has marginal financial security characteristics and although positive attributes exist, adverse business conditions could lead to an insufficient ability to meet financial commitments. S&P has twenty-o ne possible ratings. There are twelve ratings above our “BB-” rating and eight ratings that are below our rating.

CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES

___________________

On May 26, 2010, Moody’s upgraded the financial strength ratings of our primary insurance subsidiaries to “Ba1” from “Ba2”. Moody’s also revised the outlook for the ratings of our primary insurance subsidiaries to stable from positive. A “stable” designation means that a rating is not likely to change. Moody’s financial strength ratings range from “Aaa” to “C”. Rating categories from “Aaa” to “Baa” are classified as “secure” by Moody’s and rating categories from “Ba” to “C” are considered “vulnerable” and these ratings may be supplemented with numbers “1”, “2”, or “3” to show relative standing within a cat egory. In Moody’s view, an insurer rated “Ba1” offers questionable financial security and, often, the ability of these companies to meet policyholders’ obligations may be very moderate and thereby not well safeguarded in the future. Moody’s has twenty-one possible ratings. There are ten ratings above our “Ba1” rating and ten ratings that are below our rating.

In light of the difficulties experienced recently by many financial institutions, including insurance companies, rating agencies have increased the frequency and scope of their credit reviews and requested additional information from the companies that they rate, including us. They may also adjust upward the capital and other requirements employed in the rating agency models for maintenance of certain ratings levels. We cannot predict what actions rating agencies may take, or what actions we may take in response. Accordingly, further downgrades and outlook revisions related to us or the life insurance industry may occur in the future at any time and without notice by any rating agency. These could increase policy surrenders and withdrawals, adversely affect relationships with our distribution c hannels, reduce new sales, reduce our ability to borrow and increase our future borrowing costs.

Liquidity of the Holding Companies

Availability and Sources and Uses of Holding Company Liquidity; Limitations on Ability of Insurance Subsidiaries to Make Dividend and Surplus Debenture Interest Payments to the Holding Companies

At September 30, 2010, CNO, CDOC, Inc. (“CDOC”) (our wholly owned subsidiary and a guarantor under the Senior Credit Agreement) and our other non-insurance subsidiaries held unrestricted cash of $190 million (an increase of $60 million from June 30, 2010). CNO and CDOC are holding companies with no business operations of their own; they depend on their operating subsidiaries for cash to make principal and interest payments on debt, and to pay administrative expenses and income taxes. CNO and CDOC receive cash from insurance subsidiaries, consisting of dividends and distributions, interest payments on surplus debentures and tax-sharing payments, as well as cash from non-insurance subsidiaries consisting of dividends, distributions, loans and advances. The principal non-insurance subsidiaries th at provide cash to CNO and CDOC are 40|86 Advisors, Inc. (“40|86 Advisors”), which receives fees from the insurance subsidiaries for investment services, and CNO Services, LLC which receives fees from the insurance subsidiaries for providing administrative services. The agreements between our insurance subsidiaries and CNO Services, LLC and 40|86 Advisors, respectively, were previously approved by the domestic insurance regulator for each insurance company, and any payments thereunder do not require further regulatory approval.

CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES

___________________

The following summarizes the current legal ownership structure of CNO’s primary subsidiaries reflecting: (i) the merger of Conseco Insurance Company and Conseco Health Insurance Company into Washington National as a result of regulatory approval received in October 2010; and (ii) an extraordinary dividend by Washington National to CDOC in the form of all outstanding shares of common stock of Conseco Life.

The ability of our insurance subsidiaries to pay dividends is subject to state insurance department regulations and is based on the financial statements of our insurance subsidiaries prepared in accordance with statutory accounting practices prescribed or permitted by regulatory authorities, which differ from GAAP. These regulations generally permit dividends to be paid from statutory earned surplus of the insurance company for any 12-month period in amounts equal to the greater of (or in a few states, the lesser of): (i) statutory net gain from operations or net income for the prior year; or (ii) 10 percent of statutory capital and surplus as of the end of the preceding year (excluded from this calculation would be the $61.2 million of additional surplus recognized due to temporary modifications in statutory prescr ibed practices related to certain deferred tax assets). These types of dividends are referred to as “ordinary dividends”. Any dividends in excess of these levels require the approval of the director or commissioner of the applicable state insurance department. These types of dividends are referred to as “extraordinary dividends”. Each of the direct insurance subsidiaries of CDOC has significant negative earned surplus and any dividend payments from the subsidiaries of CDOC would be considered extraordinary dividends and therefore require the approval of the director or commissioner of the applicable state insurance department. We generally maintain capital and surplus levels in our insurance subsidiaries in an amount that is sufficient to maintain a minimum consolidated RBC ratio of approximately 300% and will typically cause our insurance subsidiaries to pay ordinary dividends or request regulatory approval for extraordinary dividends when the consolidated RBC ratio exceeds such level and we have concluded the capital level in each of our insurance subsidiaries is adequate to support their business and projected growth. The consolidated RBC ratio of our insurance subsidiaries was 320% at September 30, 2010. We expect to receive regulatory approval for future dividends from our subsidiaries, but there can be no assurance that such payments will be approved or that the financial condition of our insurance subsidiaries will not change, making future approvals less likely.

Interest on surplus debentures from Conseco Life Insurance Company of Texas (“Conseco Life of Texas”) do not require additional approval provided the RBC ratio of Conseco Life of Texas exceeds 100 percent (but do require prior written notice to the Texas state insurance department). The RBC ratio of Conseco Life of Texas was 255% at September 30, 2010. Dividends and other payments from our non-insurance subsidiaries, including 40|86 Advisors and CNO Services, LLC, to CNO or CDOC do not require approval by any regulatory authority or other third party. However, insurance regulators may prohibit payments by our insurance subsidiaries to parent companies if they determine that such payments could be adverse to our policyholders or contractholders.

CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES

___________________

The insurance subsidiaries of CDOC receive funds to pay dividends primarily from: (i) the earnings of their direct businesses; (ii) tax sharing payments received from subsidiaries (if applicable); and (iii) with respect to Conseco Life of Texas, dividends received from subsidiaries. At September 30, 2010, the subsidiaries of Conseco Life of Texas had earned surplus (deficit) as summarized below (dollars in millions):

	Earned surplus
Subsidiary of CDOC	(deficit)			Additional information

Subsidiaries of Conseco Life of Texas:
Bankers Life	$	126.6		(a)
Colonial Penn		(245.1	)	(b)

___________

(a)	Bankers Life paid ordinary dividends of $86.0 million to Conseco Life of Texas in the third quarter of 2010 and does not expect to pay any dividends for the remainder of 2010.

(b)	The deficit is primarily due to transactions which occurred several years ago, including a tax planning transaction and the fee paid to recapture a block of business previously ceded to an unaffiliated insurer.

A significant deterioration in the financial condition, earnings or cash flow of the material subsidiaries of CNO or CDOC for any reason could hinder such subsidiaries’ ability to pay cash dividends or other disbursements to CNO and/or CDOC, which, in turn, could limit CNO’s ability to meet debt service requirements and satisfy other financial obligations. In addition, we may choose to retain capital in our insurance subsidiaries or to contribute additional capital to our insurance subsidiaries to strengthen their surplus, and these decisions could limit the amount available at our top tier insurance subsidiaries to pay dividends to the holding companies. In the past, we have made capital contributions to our insurance subsidiaries to meet debt covenants and minimum capital levels required by certain reg ulators and it is possible we will be required to do so in the future. In the first nine months of 2010, the cash dividends we received from our insurance subsidiaries exceeded capital contributions to such subsidiaries by $51.6 million.

The principal payments on our direct corporate obligations (including payments required under the Senior Credit Agreement, the Senior Note and the 7.0% Debentures) were as follows at September 30, 2010 (dollars in millions):

Remainder of 2010	$	25.0
2011		60.0
2012		65.0
2013		602.1
2016		293.0

	$	1,045.1

Pursuant to the Senior Credit Agreement, as long as the debt to total capitalization ratio (as defined in the Senior Credit Agreement) is greater than 20 percent and certain insurance subsidiaries (as defined in the Senior Credit Agreement) have financial strength ratings of less than A- from A.M. Best, the Company is required to make mandatory prepayments with all or a portion of the proceeds from the following transactions or events including: (i) the issuance of certain indebtedness; (ii) certain equity issuances; and (iii) certain asset sales or casualty events. The Company’s debt to total capital ratio as defined in the Senior Credit Agreement was 21 percent at September 30, 2010 and the insurance subsidiaries subject to the aforementioned provision had financial strength ratings from A.M. Best below R 20;A-”. The Company may make optional prepayments at any time in minimum amounts of $3.0 million or any multiple of $1.0 million in excess thereof.

We believe that the existing cash available to the holding company, the cash flows to be generated from operations and the other transactions will be sufficient to allow us to meet our debt service obligations, pay corporate expenses and satisfy other financial obligations. However, our cash flow is be affected by a variety of factors, many of which are outside of our control, including insurance regulatory issues, competition, financial markets and other general business conditions. We cannot provide assurance that we will possess sufficient income and liquidity to meet all of our debt service requirements and other holding company obligations.

CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES

___________________

Under our Senior Credit Agreement, we have agreed to a number of covenants and other provisions that restrict our ability to engage in various financing transactions and pursue certain operating activities without the prior consent of the lenders.

The following chart summarizes: (i) the most significant financial ratios and balances we must maintain pursuant to our Senior Credit Agreement; (ii) the current ratios and balances as of September 30, 2010; and (iii) the margins for adverse developments before such ratio or balance requirement is not met (dollars in millions):

		Balance or
		ratio as of		Margin for adverse
	Covenant under the	September 30,		development from
	Senior Credit Agreement	2010		September 30, 2010 levels

Aggregate risk-based capital ratio	Greater than or equal to 200% through December 31, 2010; greater than or equal to 225% from March 31, 2011 through December 31, 2011; and thereafter, greater than 250%.		320%	Reduction to total adjusted capital (defined as combined statutory capital and surplus plus the asset valuation reserve and 50 percent of the balance of the provision of policyholder dividends) of approximately $571 million, or an increase to required risk-based capital of approximately $285 million.

Combined statutory capital and surplus	Greater than $1,100 million through December 31, 2010; greater than $1,200 million from March 31, 2011 through December 31, 2011; and thereafter, $1,300 million.	$1,521 million		Reduction to combined statutory capital and surplus of approximately $421 million.

Debt to total capitalization ratio	Not more than 30%.		21%	Reduction to shareholders’ equity of approximately $1.4 billion or additional debt of $626 million.

Interest coverage ratio	Greater than or equal to 1.50 to 1 for rolling four quarters through December 31, 2010; greater than or equal to 1.75 to 1 for rolling four quarters from March 31, 2011 through December 31, 2011; and thereafter, 2.00 to 1.	2.85 to 1		Reduction in cash flows to the holding company of approximately $101 million.

CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES

___________________

INVESTMENTS

At September 30, 2010, the amortized cost, gross unrealized gains and losses and estimated fair value of fixed maturities, available for sale, and equity securities were as follows (dollars in millions):

			Gross		Gross			Estimated
	Amortized		unrealized		unrealized			fair
	cost		gains		losses			value
Investment grade (a):
Corporate securities	$	13,208.6	$	1,302.7	$	(54.3	)	$	14,457.0
United States Treasury securities and obligations of United States government corporations and agencies		100.8		8.0		-			108.8
States and political subdivisions		1,439.5		62.5		(31.2	)		1,470.8
Debt securities issued by foreign governments		.8		.1		-			.9
Asset-backed securities		559.1		10.1		(6.3	)		562.9
Collateralized debt obligations		208.7		1.6		(2.2	)		208.1
Commercial mortgage-backed securities		1,303.3		84.9		(19.0	)		1,369.2
Mortgage pass-through securities		32.1		1.6		(.1	)		33.6
Collateralized mortgage obligations		1,048.7		54.2		(16.4	)		1,086.5

Total investment grade fixed maturities, available for sale		17,901.6		1,525.7		(129.5	)		19,297.8

Below-investment grade (a):
Corporate securities		1,229.1		26.8		(61.8	)		1,194.1
States and political subdivisions		4.8		-		(1.3	)		3.5
Asset-backed securities		47.6		2.1		(.4	)		49.3
Collateralized debt obligations		14.1		.2		-			14.3
Commercial mortgage-backed securities		2.9		-		(1.8	)		1.1
Collateralized mortgage obligations		464.4		9.0		(26.0	)		447.4

Total below-investment grade fixed maturities, available for sale		1,762.9		38.1		(91.3	)		1,709.7

Total fixed maturities, available for sale	$	19,664.5	$	1,563.8	$	(220.8	)	$	21,007.5

Equity securities	$	40.7	$	.9	$	(.5	)	$	41.1

_______________

(a)

Investment ratings – Investment ratings are assigned the second lowest rating by a nationally recognized statistical rating organization (Moody’s, S&P or Fitch Ratings (“Fitch”)), or if not rated by such firms, the rating assigned by the NAIC. NAIC designations of “1” or “2” include fixed maturities generally rated investment grade (rated “Baa3” or higher by Moody’s or rated “BBB-” or higher by S&P and Fitch. NAIC designations of “3” through “6” are referred to as below-investment grade (which generally are rated “Ba1” or lower by Moody’s or rated “BB+” or lower by S&P and Fitch). References to investment grade or below-investment grade throughout our consolidated financial statements are determined as described above.

CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES

___________________

Concentration of Fixed Maturity Securities, Available for Sale

The following table summarizes the carrying values and gross unrealized losses of our fixed maturity securities, available for sale, by category as of September 30, 2010 (dollars in millions):

								Percent of
						Gross		gross
			Percent of			unrealized		unrealized
	Carrying value		fixed maturities			losses		losses

Energy/pipelines	$	2,106.1		10.0	%	$	7.3		3.3	%
Utilities		2,024.1		9.6			1.3		.6
Collateralized mortgage obligations		1,533.9		7.3			42.4		19.2
States and political subdivisions		1,474.3		7.0			32.5		14.7
Commercial mortgage-backed securities		1,370.3		6.5			20.8		9.4
Insurance		1,301.0		6.2			11.8		5.4
Food/beverage		1,231.5		5.9			.6		.3
Healthcare/pharmaceuticals		1,213.0		5.8			.5		.2
Banks		945.7		4.5			30.0		13.6
Cable/media		873.7		4.2			7.8		3.6
Real estate/REITs		821.8		3.9			6.3		2.8
Capital goods		618.7		2.9			2.2		1.0
Asset-backed securities		612.2		2.9			6.7		3.0
Transportation		527.5		2.5			-		-
Aerospace/defense		468.1		2.2			-		-
Telecom		460.8		2.2			.8		.4
Building materials		444.2		2.1			4.0		1.8
Metals and mining		340.5		1.6			.2		.1
Brokerage		264.2		1.3			1.4		.6
Consumer products		250.3		1.2			1.4		.6
Entertainment/hotels		235.3		1.1			-		-
Chemicals		222.7		1.1			-		-
Collateralized debt obligations		222.4		1.1			2.2		1.0
Other		1,445.2		6.9			40.6		18.4

Total fixed maturities, available for sale	$	21,007.5		100.0	%	$	220.8		100.0	%

Below-Investment Grade Securities

At September 30, 2010, the amortized cost of the Company’s below-investment grade fixed maturity securities was $1,762.9 million, or 9.0 percent of the Company’s fixed maturity portfolio. The estimated fair value of the below-investment grade portfolio was $1,709.7 million, or 97 percent of the amortized cost.

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

CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES

___________________

Net Realized Investment Gains (Losses)

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

	Three months ended						Nine months ended
	September 30,						September 30,
	2010			2009			2010			2009

Fixed maturity securities, available for sale:
Realized gains on sale	$	100.8		$	97.5		$	212.4		$	259.5
Realized losses on sale		(59.3	)		(78.2	)		(141.7	)		(145.4	)
Net impairment losses recognized in earnings		(4.8	)		(23.4	)		(27.6	)		(127.8	)

Net realized investment gains (losses) from fixed maturities		36.7			(4.1	)		43.1			(13.7	)

Commercial mortgage loans		(14.1	)		(5.7	)		(14.0	)		(5.7	)
Other-than-temporary declines in fair value of mortgage loans and other invested assets		(19.7	)		(12.3	)		(45.1	)		(36.5	)
Other		.7			1.8			(2.0	)		12.4

Net realized investment gains (losses)	$	3.6		$	(20.3	)	$	(18.0	)	$	(43.5	)

During the first nine months of 2010, we recognized net realized investment losses of $18.0 million, which were comprised of $54.7 million of net gains from the sales of investments (primarily fixed maturities) with proceeds of $6.6 billion and $72.7 million of writedowns of investments for other than temporary declines in fair value recognized through net income ($69.8 million, prior to the $(2.9) million of impairment losses recognized through accumulated other comprehensive income (loss)).

During the first nine months of 2009, we recognized net realized investment losses of $43.5 million, which were comprised of $120.8 million of net gains from the sales of investments (primarily fixed maturities) and $164.3 million of writedowns of investments for other than temporary declines in fair value recognized through net income ($324.2 million, prior to the $159.9 million of impairment losses recognized through accumulated other comprehensive income (loss)).

At September 30, 2010, fixed maturity securities in default or considered nonperforming had an aggregate amortized cost of $.6 million and a carrying value of $.7 million.

During the first nine months of 2010, the $72.7 million of other-than-temporary impairments we recorded in earnings included: (i) $20.3 million of losses related to mortgage-backed and asset-backed securities, primarily reflecting changes related to the estimated future cash flows of the underlying assets and, for certain securities, changes in our intent to hold the securities; (ii) $37.8 million of losses related to commercial mortgage loans reflecting our concerns regarding the issuers’ ability to continue to make contractual payments related to these loans and our estimate of the value of the underlying properties; (iii) $1.4 million related to a home office building which is available for sale; and (iv) $13.2 million of additional losses primarily related to various corporate securities and other invested assets fol lowing unforeseen issue-specific events or conditions.

During the first nine months of 2010, the $141.7 million of realized losses on sales of $1.2 billion of fixed maturity securities, available for sale, included: (i) $117.4 million of losses related to the sales of mortgage-backed securities and asset-backed securities; and (ii) $24.3 million of additional losses primarily related to various corporate securities. Securities are generally sold at a loss following unforeseen issue-specific events or conditions or shifts in perceived risks. These reasons include but are not limited to: (i) changes in the investment environment; (ii) expectation that the fair 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 .

CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES

___________________

During the first nine months of 2009, the $164.3 million of other-than-temporary impairments we recorded included: (i) $74.8 million of losses related to residential mortgage-backed and asset-backed securities, primarily reflecting changes related to the performance of the underlying assets and, for certain securities, changes in our intent regarding continuing to hold the securities; (ii) $32.2 million of losses related to commercial mortgage loans reflecting our concerns regarding the issuers’ ability to continue to make contractual payments related to these loans and our estimate of the value of the underlying properties; (iii) $13.8 million of losses related to securities issued by a large commercial lender that recently filed bankruptcy; and (iv) $43.5 million of additional losses primarily related to various corpor ate securities following unforeseen issue-specific events or conditions and shifts in risks or uncertainty of the issuer.

During the first nine months of 2009, the $145.4 million of realized losses on sales of $.8 billion of fixed maturity securities, available for sale, included: (i) $96.2 million of losses related to the sales of residential mortgage-backed securities and asset-backed securities; (ii) $11.4 million of losses related to the sale of securities issued by providers of financial guarantees and mortgage insurance; and (iii) $37.8 million of additional losses primarily related to various corporate securities. Securities are generally sold at a loss following unforeseen issue-specific events or conditions and shifts in risks or uncertainty of certain securities. These reasons include but are not limited to: (i) changes in the investment environment; (ii) expectation that the market value could deteriora te 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.

The following summarizes the investments (including investments held by the VIEs) sold at a loss during the first nine months of 2010 which had been continuously in an unrealized loss position exceeding 20 percent of the amortized cost basis prior to the sale for the period indicated (dollars in millions):

	At date of sale
	Number		Amortized		Fair
	of issuers		cost		value

Less than 6 months prior to sale		7	$	51.5	$	38.9
Greater than or equal to 6 and less than 12 months prior to sale		2		.3		.1
Greater than 12 months prior to sale		27		165.5		87.1

		36	$	217.3	$	126.1

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 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; and (x) other objective and subjective factors.

CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES

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The following table sets forth the amortized cost and estimated fair value of those fixed maturities, available for sale, with unrealized losses at September 30, 2010, 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. Structured securities frequently permit periodic unscheduled payments throughout their lives.

			Estimated
	Amortized		fair
	cost		value
	(Dollars in millions)

Due in one year or less	$	22.1	$	22.1
Due after one year through five years		187.5		182.3
Due after five years through ten years		313.0		294.1
Due after ten years		1,721.4		1,596.9

Subtotal		2,244.0		2,095.4

Structured securities		1,016.7		944.5

Total	$	3,260.7	$	3,039.9

The following summarizes the investments in our portfolio rated below-investment grade which have been continuously in an unrealized loss position exceeding 20 percent of the cost basis for the period indicated as of September 30, 2010 (dollars in millions):

	Number		Cost		Unrealized			Estimated
	of issuers		basis		loss			fair value

Less than 6 months		3	$	5.4	$	(1.2	)	$	4.2
Greater than 12 months		6		53.7		(13.7	)		40.0

		9	$	59.1	$	(14.9	)	$	44.2

CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES

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The following table summarizes the gross unrealized losses of our fixed maturity securities, available for sale, by category and ratings category as of September 30, 2010 (dollars in millions):

	Investment grade				Below investment grade				Total gross
							B+ and		unrealized
	AAA/AA/A		BBB		BB		below		losses

Collateralized mortgage obligations	$	16.3	$	.1	$	4.8	$	21.2	$	42.4
States and political subdivisions		12.2		19.0		1.3		-		32.5
Banks		10.2		17.5		2.3		-		30.0
Commercial mortgage-backed securities		11.6		7.4		1.8		-		20.8
Insurance		2.9		6.6		.8		1.6		11.9
Cable/media		-		3.1		2.3		2.5		7.9
Energy/pipelines		-		7.1		.2		-		7.3
Asset-backed securities		4.7		1.6		.1		.3		6.7
Real estate/REITs		-		1.4		4.3		.6		6.3
Building materials		-		1.3		2.3		.3		3.9
Paper		-		-		3.4		.1		3.5
Capital goods		.4		.4		1.5		-		2.3
Collateralized debt obligations		1.9		.3		-		-		2.2
Brokerage		.9		.5		-		-		1.4
Consumer products		-		-		1.0		.3		1.3
Utilities		-		.1		-		1.2		1.3
Gaming		-		-		-		1.1		1.1
Telecom		-		-		.7		-		.7
Food/beverage		-		.2		.4		-		.6
Healthcare/pharmaceuticals		.1		.2		.2		-		.5
Retail		-		-		.2		.2		.4
Metals and mining		-		.2		-		-		.2
Technology		-		-		.2		-		.2
Autos		-		-		-		.1		.1
Mortgage pass-through securities		.1		-		-		-		.1
Textiles		-		-		-		.1		.1
Other		-		1.2		33.6		.3		35.1

Total fixed maturities, available for sale	$	61.3	$	68.2	$	61.4	$	29.9	$	220.8

CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES

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Our investment strategy is to maximize, over a sustained period and within acceptable parameters of quality and risk, investment income and total investment return through active investment management. Accordingly, we may sell securities at a gain or a loss to enhance the projected total return of the portfolio as market opportunities change, to reflect changing perceptions of risk, or to better match certain characteristics of our investment portfolio with the corresponding characteristics of our insurance liabilities. 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, we may sell securities at a loss in the future because of actual or expected changes in our view of the particular investment, its industry, its type or the general investment environment. 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 securities before their anticipated recovery.

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

Corporate securities	$	492.7	$	(10.0	)	$	1,252.2	$	(106.1	)	$	1,744.9	$	(116.1	)
United States Treasury securities and obligations of United States government corporations and agencies		10.0		-			.3		-			10.3		-
States and political subdivisions		82.2		(.2	)		258.0		(32.3	)		340.2		(32.5	)
Asset-backed securities		170.2		(1.5	)		61.0		(5.2	)		231.2		(6.7	)
Collateralized debt obligations		117.7		(2.2	)		-		-			117.7		(2.2	)
Commercial mortgage-backed securities		37.6		(.2	)		126.3		(20.6	)		163.9		(20.8	)
Mortgage pass-through securities		.3		-			3.6		(.1	)		3.9		(.1	)
Collateralized mortgage obligations		106.3		(1.0	)		321.5		(41.4	)		427.8		(42.4	)

Total fixed maturities, available for sale	$	1,017.0	$	(15.1	)	$	2,022.9	$	(205.7	)	$	3,039.9	$	(220.8	)

Structured Securities

At September 30, 2010, fixed maturity investments included structured securities with an estimated fair value of $3.8 billion (or 18 percent of all fixed maturity securities). The yield characteristics of structured securities differ in some respects from those of traditional fixed-income securities. For example, interest and principal payments on structured securities may occur more frequently, often monthly. In many instances, we are subject to the risk that the amount and timing of principal and interest payments may vary from expectations. For example, in many cases, partial prepayments may occur at the option of the issuer and prepayment rates are influenced by a number of factors that cannot be predicted with certainty, including: the relative sensitivity of the underlying asse ts backing the security to changes in interest rates; a variety of economic, geographic and other factors; the timing and pace of liquidations of defaulted collateral; the amount of loan maturities; and various security-specific structural considerations (for example, the repayment priority of a given security in a securitization structure). In addition, the total amount of payments for non-government structured securities may be affected by changes to cumulative default rates or loss severities of the related collateral.

CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES

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The following table sets forth the par value, amortized cost and estimated fair value of structured securities, summarized by interest rates on the underlying collateral, at September 30, 2010 (dollars in millions):

	Par		Amortized		Estimated
	value		cost		fair value

Below 4 percent	$	289.0	$	247.3	$	246.7
4 percent – 5 percent		210.8		208.6		221.2
5 percent – 6 percent		2,362.0		2,288.2		2,346.8
6 percent – 7 percent		827.2		783.0		805.1
7 percent – 8 percent		78.3		79.2		78.1
8 percent and above		75.5		74.6		74.5

Total structured securities	$	3,842.8	$	3,680.9	$	3,772.4

The amortized cost and estimated fair value of structured securities at September 30, 2010, summarized by type of security, were as follows (dollars in millions):

			Estimated fair value
					Percent
	Amortized				of fixed
Type	cost		Amount		maturities

Pass-throughs, sequential and equivalent securities	$	1,044.9	$	1,076.2		5.1	%
Planned amortization classes, target amortization classes and accretion-directed bonds		486.1		476.6		2.3
Commercial mortgage-backed securities		1,306.2		1,370.3		6.5
Asset-backed securities		606.7		612.2		2.9
Collateralized debt obligations		222.8		222.4		1.1
Other		14.2		14.7		.1

Total structured securities	$	3,680.9	$	3,772.4		18.0	%

Pass-throughs, sequentials and equivalent securities have unique prepayment variability characteristics. Pass-through securities typically return principal to the holders based on cash payments from the underlying collateral obligations. Sequential securities return principal to tranche holders in a detailed hierarchy. Planned amortization classes, targeted amortization classes and accretion-directed bonds adhere to fixed schedules of principal payments as long as the underlying mortgage loans experience prepayments within certain estimated ranges. In most circumstances, changes in prepayment rates are first absorbed by support or companion classes insulating the timing of receipt of cash flows from the consequences of both faster prepayments (average life shortening) and slower prepayments (av erage life extension).

Commercial mortgage-backed securities are secured by commercial real estate mortgages, generally income producing properties that are managed for profit. Property types include multi-family dwellings including apartments, retail centers, hotels, restaurants, hospitals, nursing homes, warehouses, and office buildings. Most commercial mortgage-backed securities have call protection features whereby underlying borrowers may not prepay their mortgages for stated periods of time without incurring prepayment penalties.

Securities Lending

The Company participated in a securities lending program whereby certain fixed maturity securities from our investment portfolio were loaned to third parties via a lending agent for a short period of time. We maintained ownership of the loaned securities. We required collateral equal to 102 percent of the fair value of the loaned securities. The collateral was invested by the lending agent in accordance with our guidelines. The fair value of the loaned securities was monitored on a daily basis with additional collateral obtained as necessary. In the third quarter of 2010, the Company discontinued its

CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES

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securities lending program. Income generated from the program, net of expenses was recorded as net investment income and totaled $.2 million and $1.0 million in the first nine months of 2010 and 2009, respectively.

Commercial Mortgage Loans

The following table provides the weighted average loan-to-value ratio for our outstanding mortgage loans as of September 30, 2010 (dollars in millions):


			Estimated fair
Loan-to-value ratio (a)	Carrying value		value

Less than 60%	$	695.3	$	758.2
60% to 70%		669.4		646.8
70% to 80%		370.1		359.8
80% to 90%		46.5		45.1
Greater than 90%		44.3		38.6

Total	$	1,825.6	$	1,848.5

__________

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

INVESTMENT IN VARIABLE INTEREST ENTITIES

The following table provides supplemental information about the revenues and expenses of Fall Creek and Eagle Creek which have been consolidated in accordance with authoritative guidance, after giving effect to the elimination of our investment in Fall Creek and Eagle Creek and investment management fees earned by a subsidiary of the Company (dollars in millions):

	Three months ended						Nine months ended
	September 30,						September 30,
	2010			2009			2010			2009

Revenues:
Net investment income – policyholder and reinsurer accounts and other special-purpose portfolios	$	5.1		$	2.9		$	15.5		$	10.7
Fee revenue and other income		.1			.1			.5			.3

Total revenues		5.2			3.0			16.0			11.0

Expenses:
Interest expense		3.3			2.8			10.2			10.7
Other operating expenses		-			.1			.4			.3

Total expenses		3.3			2.9			10.6			11.0

Income (loss) before net realized investment losses and income taxes		1.9			.1			5.4			-

Net realized investment losses		(1.4	)		(4.0	)		(4.1	)		(14.8	)

Income (loss) before income taxes	$	.5		$	(3.9	)	$	1.3		$	(14.8	)

CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES

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During the first nine months of 2010, net realized investment losses included: (i) $.9 million of net losses from the sales of investments; and (ii) $3.2 million of writedowns of investments resulting from declines in fair values that we concluded were other than temporary. During the first nine months of 2009, net realized investment losses included: (i) $1.3 million of net losses from the sales of investments; and (ii) $13.5 million of writedowns of investments resulting from declines in fair values that we concluded were other than temporary.

Supplemental Information on Investments Held by VIEs

The following table summarizes the carrying values of the investments held by the VIEs by category as of September 30, 2010 (dollars in millions):

								Percent of
			Percent			Gross		gross
			of fixed			unrealized		unrealized
	Carrying value		maturities			losses		losses

Cable/media	$	75.4		16.6	%	$	3.4		17.8	%
Healthcare/pharmaceuticals		60.7		13.3			1.8		9.4
Chemicals		28.4		6.3			1.1		5.5
Retail		27.9		6.1			.9		4.5
Utilities		25.0		5.5			1.8		9.0
Autos		18.7		4.1			.5		2.6
Gaming		18.5		4.1			1.9		9.6
Energy/pipelines		17.4		3.8			2.1		10.9
Consumer products		17.4		3.8			.7		3.7
Entertainment/hotels		17.4		3.8			.6		3.3
Capital goods		17.1		3.8			.7		3.8
Aerospace/defense		16.8		3.7			.3		1.5
Food/beverage		16.4		3.6			.4		2.1
Paper		13.9		3.1			.2		.8
Technology		9.3		2.0			.4		2.1
Other		74.5		16.4			2.6		13.4

Total	$	454.8		100.0	%	$	19.4		100.0	%

The following table sets forth the amortized cost and estimated fair value of those investments held by the VIEs with unrealized losses at September 30, 2010, by contractual maturity. Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

			Estimated
	Amortized		fair
	cost		value
	(Dollars in millions)

Due in one year or less	$	13.5	$	13.1
Due after one year through five years		303.2		285.6
Due after five years through ten years		52.7		51.4

Total	$	369.4	$	350.1

CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES

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The following summarizes the investments in our portfolio held by the VIEs rated below-investment grade which have been continuously in an unrealized loss position exceeding 20 percent of the cost basis for the period indicated as of September 30, 2010 (dollars in millions):

	Number		Cost		Unrealized			Estimated
	of issuers		basis		loss			fair value

Less than 6 months		1	$	.9	$	(.4	)	$	.5
Greater than or equal to 6 and less than 12 months		2		10.6		(2.8	)		7.8
Greater than 12 months		2		2.6		(1.2	)		1.4

		5	$	14.1	$	(4.4	)	$	9.7

NEW ACCOUNTING STANDARDS

See “Recently Issued Accounting Standards” in the notes to consolidated financial statements for a discussion of recently issued accounting standards.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Our market risks, and the ways we manage them, are summarized in “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, included in our Annual Report on Form 10-K for the year ended December 31, 2009. There have been no material changes in the first nine months of 2010 to such risks or our management of such risks.

ITEM 4. CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures. CNO’s management, under the supervision and with the participation of the Chief Executive Officer and the Chief Financial Officer, evaluated the effectiveness of CNO’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended). Based on its evaluation, and in light of the material weakness in internal control over financial reporting identified as existing as of December 31, 2007, which is described in our Annual Report on Form 10-K, Item 9A, the Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2010, CNO’s disclosure controls and procedures were not effective.

As disclosed in our 2009 Annual Report on Form 10-K, we did not maintain effective controls over the actuarial reporting process and the design of controls to ensure the completeness and accuracy of certain inforce policies in what is now our Washington National segment. These control deficiencies could result in a material misstatement of the aforementioned accounts and disclosures in our annual or interim consolidated financial statements that would not be prevented or detected on a timely basis. Accordingly, CNO’s management has determined that these control deficiencies constitute a material weakness. Because of this material weakness, management concluded that CNO did not maintain effective internal controls over financial reporting as of December 31, 2009 based on criteria in the Internal Cont rol – Integrated Framework – issued by COSO.

A material weakness is a deficiency, or a combination of deficiencies in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements would not be prevented or detected on a timely basis.

Remediation efforts. CNO has devoted significant efforts and resources towards remediation of the material weakness relating to the actuarial reporting process. Significant improvements have been made to the actuarial reporting internal control environment. CNO recognizes that further improvement in its internal control over the actuarial reporting process in our Washington National segment is essential. The remaining weakness to be addressed by the Company’s remediation efforts relates to the flow of information from the administrative systems to the actuarial valuation processes for certain supplemental health policies in our Washington National segment. Management has developed a control to remediate this material cont rol weakness. The new control has operated effectively for the last three quarters and is expected to result in

CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES

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remediating the material weakness by the end of 2010. However, due to the nature of the remediation process and the need to allow adequate time after implementation to evaluate and test the effectiveness of the revised controls, no assurance can be given as to the timing of achievement of remediation. CNO recognizes that further investment is needed to improve the actuarial reporting processes in our Washington National segment and is committed to making the investments for these improvements.

Changes to Internal Control Over Financial Reporting. There were no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) during the nine months ended September 30, 2010, that have materially affected, or are reasonably likely to materially affect, CNO’s internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

Information required for Part II, Item 1 is incorporated by reference to the discussion under the heading “Litigation and Other Legal Proceedings” in the footnotes to our consolidated financial statements included in Part I, Item 1 of this Form 10-Q.

ITEM 1A. RISK FACTORS.

CNO and its businesses are subject to a number of risks including general business and financial risk factors. Any or all of such factors could have a material adverse effect on the business, financial condition or results of operations of CNO. Refer to “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2009, for further discussion of such risk factors. There have been no material changes from such previously disclosed risk factors except as set forth below.

Continuation of the current low interest rate environment for an extended period of time may impact our profitability.

New money interest rates continue to be at historically low levels. If interest rates were to remain low over an extended period of time, we may have to invest new cash flows or reinvest proceeds from investments that have matured, prepaid or been sold at lower yields, reducing our net spread between interest earned on investments and interest credited to some of our products (including annuity and other interest-sensitive products). Our ability to lower credited rates is limited by the guaranteed minimum rates that we must credit to policyholders on certain products, as well as the terms of most of our other products that limit reductions in the crediting rates. In addition, investment income is an important component of the profitability of our health products, especially long-term care and supplemental health products.

Our expectation of future investment income is an important consideration in determining the amortization of insurance acquisition costs, analyzing the recovery of these assets and determining the adequacy of our liabilities for insurance products. Expectations of lower future investment earnings may cause us to accelerate amortization or writedown the balance of insurance acquisition costs or establish additional liabilities for insurance products, thereby reducing net income in the affected reporting period. The blocks of business in our Other CNO Business segment are particularly sensitive to changes in our expectations of future interest rates, since many of these blocks are not expected to generate future profits and the entire impact of adverse changes to our earlier estimates of future gross profits is reflec ted in earnings in the period such changes occur. During the third quarter of 2010, we were required to recognize a pre-tax reduction in earnings of approximately $13 million in our Other CNO Business segment primarily due to additional amortization expense resulting from decreased projected future investment yields related to interest-sensitive insurance products.

Continued low or declining interest rates may adversely affect our results of operations, financial position and cash flows.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

On September 30, 2010, CNO completed a fourth closing of $18,000 of its 7.0% Debentures as part of its previously announced private offering of 7.0% Debentures. The issuance of the additional 7.0% Debentures was done in connection with the repurchase of $18,230 of CNO’s 3.5% Debentures from those holders of the 3.5% Debentures who exercised their right to require CNO to repurchase the 3.5% Debentures on that date. The issuance of the 7.0% Debentures was made pursuant to the purchase agreement that was entered into in October 2009 relating to the private offering of up to $293 million of the 7.0% Debentures. CNO received net proceeds of $16,435 in the fourth closing of the 7.0% Debentures (after taking into account the discounted offering price less the initial purchaser’s discounts and commiss ions, but before expenses). Further information regarding the 7.0% Debentures is set forth in Item 1.01 of CNO’s Current Report on Form 8-K that was filed with the SEC on October 13, 2009.

CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES

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ITEM 5. OTHER INFORMATION.

None.

ITEM 6. EXHIBITS.

12.1	Computation of Ratio of Earnings to Fixed Charges.

31.1	Certification Pursuant to the Securities Exchange Act Rule 13a-14(a)/15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2	Certification Pursuant to the Securities Exchange Act Rule 13a-14(a)/15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101	The following materials from CNO Financial Group, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2010, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheet; (ii) Consolidated Statement of Operations; (iii) Consolidated Statement of Shareholders’ Equity; (iv) Consolidated Statement of Cash Flows; and (v) Notes to Consolidated Financial Statements, tagged as blocks of text.

CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

CNO FINANCIAL GROUP, INC.

Dated: November 8, 2010

	By:	/s/ Edward J. Bonach
		Edward J. Bonach
		Executive Vice President and Chief Financial Officer
		(authorized officer and principal financial officer)

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CNO Financial (CNO) 10-Q2010 Q3 Quarterly report

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