SHAREHOLDERS' EQUITY

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



	2016		2015		2014
Balance, beginning of year	184,029		203,324		220,324
Treasury stock purchased and retired	(11,688	)	(20,582	)	(18,489	)
Stock options exercised	978		769		916
Restricted and performance stock vested (a)	435		518		573
Balance, end of year	173,754		184,029		203,324

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(a)	In 2016, 2015 and 2014, such amount was reduced by 191 thousand, 237 thousand and 257 thousand shares, respectively, which were tendered to the Company for the payment of required federal and state tax withholdings owed on the vesting of restricted and performance stock.

In May 2011, the Company announced a securities repurchase program of up to $100.0 million. In February 2012, June 2012, December 2012, December 2013, November 2014 and November 2015, the Company's Board of Directors approved, in aggregate, an additional $1,600.0 million to repurchase the Company's outstanding securities. In 2016, 2015 and 2014, we repurchased 11.7 million, 20.6 million and 18.5 million shares, respectively, for $203.0 million, $365.2 million and $319.1 million, respectively, under the securities repurchase program. In addition, in September 2014, we repurchased all outstanding common stock warrants for $57.4 million under the securities repurchase program. The Company had remaining repurchase authority of $252.7 million as of December 31, 2016.

In 2016, 2015 and 2014, dividends declared and paid on common stock totaled $54.8 million ($0.31 per common share), $52.0 million ($0.27 per common share) and $51.0 million ($0.24 per common share), respectively. In May 2016, the Company increased its quarterly common stock dividend to $0.08 per share from $0.07 per share. In May 2015, the Company increased its quarterly common stock dividend to $0.07 per share from $0.06 per share.

The Company has a long-term incentive plan which permits the grant of CNO incentive or non-qualified stock options, restricted stock awards, stock appreciation rights, performance shares or units and certain other equity-based awards to certain directors, officers and employees of the Company and certain other individuals who perform services for the Company. As of December 31, 2016, 4.6 million shares remained available for issuance under the plan. Our stock option awards are generally granted with an exercise price equal to the market price of the Company's stock on the date of grant and a maximum term of ten years. Our stock option awards granted in 2007 through 2009 generally vested on a graded basis over a three year service term and expired five years from the date of grant. Our stock options granted in 2010 through 2014 generally vest on a graded basis over a three year service term and expire seven years from the date of grant. Our stock options granted in 2015 and 2016 generally vest on a graded basis over a three year service term and expire ten years from the date of grant. The vesting periods for our restricted stock awards range from immediate vesting to a period of three years.

A summary of the Company's stock option activity and related information for 2016 is presented below (shares in thousands; dollars in millions, except per share amounts):



	Shares		Weighted average exercise price			Weighted average remaining life (in years)	Aggregate intrinsic value
Outstanding at the beginning of the year	5,199		$	13.32
Options granted	1,706		17.45
Exercised	(978	)	(8.70		)		$	6.1
Forfeited or terminated	(573	)	(20.41		)
Outstanding at the end of the year	5,354		14.73			5.9	$	37.1
Options exercisable at the end of the year	2,187					2.7	$	15.1
Available for future grant	4,620

A summary of the Company's stock option activity and related information for 2015 is presented below (shares in thousands; dollars in millions, except per share amounts):



	Shares		Weighted average exercise price			Weighted average remaining life (in years)	Aggregate intrinsic value
Outstanding at the beginning of the year	5,011		$	12.04
Options granted	1,361		16.45
Exercised	(769	)	(8.20		)		$	4.8
Forfeited or terminated	(404	)	(17.70		)
Outstanding at the end of the year	5,199		13.32			4.8	$	38.4
Options exercisable at the end of the year	2,399					2.5	$	15.3
Available for future grant	6,882

A summary of the Company's stock option activity and related information for 2014 is presented below (shares in thousands; dollars in millions, except per share amounts):



	Shares		Weighted average exercise price			Weighted average remaining life (in years)	Aggregate intrinsic value
Outstanding at the beginning of the year	5,579		$	10.64
Options granted	1,014		19.10
Exercised	(917	)	(5.47		)		$	3.8
Forfeited or terminated	(665	)	(20.07		)
Outstanding at the end of the year	5,011		12.04			4.3	$	32.1
Options exercisable at the end of the year	2,030					2.7	$	12.1
Available for future grant	8,571

We recognized compensation expense related to stock options totaling $12.2 million ($7.9 million after income taxes) in 2016, $9.6 million ($6.2 million after income taxes) in 2015 and $7.9 million ($5.1 million after income taxes) in 2014. Compensation expense related to stock options reduced both basic and diluted earnings per share by four cents in 2016, three cents in 2015 and two cents in 2014. At December 31, 2016, the unrecognized compensation expense for non-vested stock options totaled $6.9 million which is expected to be recognized over a weighted average period of 1.4 years. Cash received by the Company from the exercise of stock options was $8.4 million, $6.3 million and $5.0 million during 2016, 2015 and 2014, respectively.

The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option valuation model with the following weighted average assumptions:



	2016			2015			2014
	Grants			Grants			Grants
Weighted average risk-free interest rates	1.4		%	1.7		%	1.6		%
Weighted average dividend yields	1.6		%	1.5		%	1.3		%
Volatility factors	36		%	85		%	51		%
Weighted average expected life (in years)	6.3			6.3			4.8
Weighted average fair value per share	$	5.48		$	10.83		$	7.65

The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant. The dividend yield is based on the Company's history and expectation of dividend payouts. Volatility factors are based on the weekly historical volatility of the Company's common stock equal to the expected life of the option. The expected life is based on the average of the graded vesting period and the contractual terms of the option.

The exercise price was equal to the market price of our stock on the date of grant for all options granted in 2016, 2015 and 2014.

The following table summarizes information about stock options outstanding at December 31, 2016 (shares in thousands):



		Options outstanding			Options exercisable
Range of exercise prices	Number outstanding	Remaining life (in years)	Average exercise price		Number exercisable	Average exercise price
$6.45 - $7.51	922	1.6	$	7.29	922	$	7.29
$10.88 - $16.22	860	3.2	11.09		846	11.02
$16.42 - $19.15	3,572	7.7	17.52		419	19.08
	5,354				2,187

During 2016, 2015 and 2014, the Company granted .4 million, .1 million and .1 million restricted shares, respectively, of CNO common stock to certain directors, officers and employees of the Company at a weighted average fair value of $18.17 per share, $17.59 per share and $17.15 per share, respectively. The fair value of such grants totaled $7.3 million, $1.7 million and $1.9 million in 2016, 2015 and 2014, respectively. Such amounts are recognized as compensation expense over the vesting period of the restricted stock. A summary of the Company's non-vested restricted stock activity for 2016 is presented below (shares in thousands):



	Shares		Weighted average grant date fair value
Non-vested shares, beginning of year	95		$	15.66
Granted	401		18.17
Vested	(126	)	16.53
Forfeited	(1	)	16.80
Non-vested shares, end of year	369		18.10

At December 31, 2016, the unrecognized compensation expense for non-vested restricted stock totaled $5.0 million which is expected to be recognized over a weighted average period of 2.3 years. At December 31, 2015, the unrecognized compensation expense for non-vested restricted stock totaled $0.9 million. We recognized compensation expense related to restricted stock awards totaling $3.1 million, $2.2 million and $3.0 million in 2016, 2015 and 2014, respectively. The fair value of restricted stock that vested during 2016, 2015 and 2014 was $2.1 million, $2.7 million and $3.7 million, respectively.

Authoritative guidance also requires us to estimate the amount of unvested stock-based awards that will be forfeited in future periods and reduce the amount of compensation expense recognized over the applicable service period to reflect this estimate. We periodically evaluate our forfeiture assumptions to more accurately reflect our actual forfeiture experience.

In 2016, 2015 and 2014 the Company granted performance units totaling 507,976, 516,660 and 283,630, respectively, pursuant to its long-term incentive plan to certain officers of the Company. The criteria for payment for such awards are based on certain company-wide performance levels that must be achieved within a specified performance time (generally three years), each as defined in the award. The performance units granted in 2016 and 2015 provide for a payout of up to 200 percent of the award if certain performance thresholds are achieved, and the performance units granted prior to 2015 provide for a payout of up to 150 percent of the award if certain performance thresholds are achieved. Unless antidilutive, the diluted weighted average shares outstanding would reflect the number of performance units expected to be issued, using the treasury stock method.

A summary of the Company's performance units is presented below (shares in thousands):



	Total shareholder return awards		Operating return on equity awards		Pre-tax operating income awards
Awards outstanding at December 31, 2013	382		204		470
Granted in 2014	142		142		—
Additional shares issued pursuant to achieving certain performance criteria (a)	—		—		142
Shares vested in 2014	—		—		(434	)
Forfeited	(5	)	(3	)	(2	)
Awards outstanding at December 31, 2014	519		343		176
Granted in 2015	258		258		—
Additional shares issued pursuant to achieving certain performance criteria (a)	85		—		85
Shares vested in 2015	(260	)	—		(260	)
Forfeited	(53	)	(52	)	(1	)
Awards outstanding at December 31, 2015	549		549		—
Granted in 2016	254		254		—
Additional shares issued pursuant to achieving certain performance criteria (a)	87		65		—
Shares vested in 2016	(261	)	(239	)	—
Forfeited	(59	)	(59	)	—
Awards outstanding at December 31, 2016	570		570		—

_________________________

(a) The performance units that vested in these years provided for a payout of up to 150 percent of the award if certain performance levels were achieved.

The grant date fair value of the performance units awarded was $10.3 million and $9.4 million in 2016 and 2015, respectively. We recognized compensation expense of $7.7 million, $5.3 million and $4.7 million in 2016, 2015 and 2014, respectively, related to the performance units.

As further discussed in the footnote to the consolidated financial statements entitled "Income Taxes", the Company's Board of Directors adopted the Section 382 Rights Agreement on January 20, 2009 and amended and extended the Section 382 Rights Agreement on December 6, 2011 and November 13, 2014. The Section 382 Rights Agreement, as amended, is designed to protect shareholder value by preserving the value of our tax assets primarily associated with NOLs. At the time the Section 382 Rights Agreement was adopted, the Company declared a dividend of one preferred share purchase right (a "Right") for each outstanding share of common stock. The dividend was payable on January 30, 2009, to the shareholders of record as of the close of business on that date and a Right is also attached to each share of CNO common stock issued after that date. Pursuant to the Section 382 Rights Agreement, as amended, each Right entitles the shareholder to purchase from the Company one one-thousandth of a share of Series C Junior Participating Preferred Stock, par value $.01 per share (the "Junior Preferred Stock") of the Company at a price of $70.00 per one one-thousandth of a share of Junior Preferred Stock. The description and terms of the Rights are set forth in the Section 382 Rights Agreement, as amended. The Rights would become exercisable in the event any person or group (subject to certain exemptions) becomes an owner of more than 4.99 percent of the outstanding stock of CNO (a "Threshold Holder") without the approval of the Board of Directors or an existing shareholder who is currently a Threshold Holder acquires additional shares exceeding one percent of our outstanding shares without prior approval from the Board of Directors.

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):



	2016		2015		2014
Net income for diluted earnings per share	$	358.2	$	270.7	$	51.4
Shares:
Weighted average shares outstanding for basic earnings per share	176,638		193,054		212,917
Effect of dilutive securities on weighted average shares:
Stock options, restricted stock and performance units	1,685		2,112		2,505
Warrants (a)	—		—		2,233
Dilutive potential common shares	1,685		2,112		4,738
Weighted average shares outstanding for diluted earnings per share	178,323		195,166		217,655

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(a)	All outstanding warrants were repurchased in September 2014 as further discussed above. Accordingly, the warrants have no dilutive effect in periods beginning after September 30, 2014.

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