UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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[X] | QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SeptemberJune 30, 20182019
OR
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[ ] | TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
☐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 1-10890
HORACE MANN EDUCATORS CORPORATION
(Exact name of registrant as specified in its charter)
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Delaware | 37-0911756 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
1 Horace Mann Plaza, Springfield, Illinois 62715-0001
(Address of principal executive offices, including Zip Code)
Registrant’s Telephone Number, Including Area Code: 217-789-2500
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 website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes X ☑No ☐
Indicate by check mark whether the registrant’sregistrant is a large accelerated filer, status, as such terms are definedan accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
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Large accelerated filer | X☑ | | Accelerated filer | | ☐ |
Non-accelerated filer | ☐ | | Smaller reporting company | | ☐ |
Emerging growth company | | | | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company as(as defined in Rule 12b-2 of the Exchange Act.
) Yes ☐No X ☑
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| | | | |
Securities registered pursuant to Section 12(b) of the Act: |
Title of each class | | Trading Symbol | | Name of each exchange on which registered |
Common Stock, $0.001 par value | | HMN | | New York Stock Exchange |
As of OctoberJuly 31, 2018,2019, the registrant had 40,940,84941,198,167 shares of Common Stock, par value $0.001 per share, outstanding.
HORACE MANN EDUCATORS CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBERJUNE 30, 20182019
INDEX
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Item 2. | | |
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Item 3. | | |
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Item 4. | | |
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Item 1A. | | |
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Item 2. | | |
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Item 5. | | |
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Item 6. | | |
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PART I: FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TheTo the Shareholders and Board of Directors and Shareholders
Horace Mann Educators Corporation:
Results of Review of Interim Financial Information
We have reviewed the consolidated balance sheet of Horace Mann Educators Corporation and subsidiaries (the Company) as of SeptemberJune 30, 2018,2019, the related consolidated statements of operations, and comprehensive income (loss) and changes in shareholders' equity for the three-month and nine-monthsix-month periods ended SeptemberJune 30, 20182019 and 2017, the related consolidated statements of changes in shareholders’ equity2018, and cash flows for the nine-monthsix-month periods ended SeptemberJune 30, 20182019 and 2017,2018, and the related notes (collectively, the consolidated interim financial information). Based on our reviews, we are not aware of any material modifications that should be made to the consolidated interim financial information for it to be in conformity with U.S. generally accepted accounting principles.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheet of the Company as of December 31, 2017,2018, and the related consolidated statements of operations, and comprehensive income (loss), changes in shareholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated February 28, 2018,March 1, 2019, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2017,2018, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
Basis for Review Results
This consolidated interim financial information is the responsibility of the Company’s management. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our reviews in accordance with the standards of the PCAOB. A review of consolidated interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
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/s/ KPMG LLP |
KPMG LLP |
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Chicago, Illinois | |
NovemberAugust 8, 20182019 | |
HORACE MANN EDUCATORS CORPORATION
CONSOLIDATED BALANCE SHEETS
($ in thousands, except per share data)
|
| | | | | | | | |
| | September 30, 2018 | | December 31, 2017 |
| | (Unaudited) | | |
ASSETS |
Investments | | | | |
Fixed maturity securities, available for sale, at fair value (amortized cost 2018, $7,419,491; 2017, $7,302,950) | | $ | 7,529,139 |
| | $ | 7,724,075 |
|
Equity securities, at fair value (cost 2017, $116,320) | | 133,184 |
| | 135,466 |
|
Limited partnership interests | | 326,893 |
| | 247,266 |
|
Short-term and other investments | | 252,755 |
| | 245,541 |
|
Total investments | | 8,241,971 |
| | 8,352,348 |
|
Cash | | 6,431 |
| | 7,627 |
|
Deferred policy acquisition costs | | 305,350 |
| | 257,826 |
|
Goodwill | | 47,396 |
| | 47,396 |
|
Other assets | | 387,081 |
| | 381,182 |
|
Separate Account (variable annuity) assets | | 2,292,536 |
| | 2,151,961 |
|
Total assets | | $ | 11,280,765 |
| | $ | 11,198,340 |
|
| | | | |
LIABILITIES AND SHAREHOLDERS’ EQUITY |
Policy liabilities | | | | |
Investment contract and life policy reserves | | $ | 5,690,689 |
| | $ | 5,573,735 |
|
Unpaid claims and claim expenses | | 384,636 |
| | 347,749 |
|
Unearned premiums | | 274,084 |
| | 260,539 |
|
Total policy liabilities | | 6,349,409 |
| | 6,182,023 |
|
Other policyholder funds | | 722,452 |
| | 724,261 |
|
Other liabilities | | 314,441 |
| | 341,053 |
|
Long-term debt | | 297,671 |
| | 297,469 |
|
Separate Account (variable annuity) liabilities | | 2,292,536 |
| | 2,151,961 |
|
Total liabilities | | 9,976,509 |
| | 9,696,767 |
|
Preferred stock, $0.001 par value, authorized 1,000,000 shares; none issued | | — |
| | — |
|
Common stock, $0.001 par value, authorized 75,000,000 shares; issued, 2018, 65,764,279; 2017, 65,439,245 | | 66 |
| | 65 |
|
Additional paid-in capital | | 473,596 |
| | 464,246 |
|
Retained earnings | | 1,248,814 |
| | 1,231,177 |
|
Accumulated other comprehensive income (loss), net of tax: | | | | |
|
Net unrealized investment gains on securities | | 75,958 |
| | 300,177 |
|
Net funded status of benefit plans | | (13,217 | ) | | (13,217 | ) |
Treasury stock, at cost, 2018, 24,723,533 shares; 2017, 24,721,372 shares | | (480,961 | ) | | (480,875 | ) |
Total shareholders’ equity | | 1,304,256 |
| | 1,501,573 |
|
Total liabilities and shareholders’ equity | | $ | 11,280,765 |
| | $ | 11,198,340 |
|
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| | | | | | | | |
| | June 30, 2019 | | December 31, 2018 |
| | (Unaudited) | | |
ASSETS |
Investments | | | | |
Fixed maturity securities, available for sale, at fair value (amortized cost 2019, $5,241,755; 2018, $7,373,911) | | $ | 5,534,270 |
| | $ | 7,515,318 |
|
Equity securities, at fair value | | 100,143 |
| | 111,750 |
|
Limited partnership interests | | 351,515 |
| | 328,516 |
|
Short-term and other investments | | 433,688 |
| | 295,093 |
|
Total investments | | 6,419,616 |
| | 8,250,677 |
|
Cash | | 7,616 |
| | 11,906 |
|
Deferred policy acquisition costs | | 279,041 |
| | 298,742 |
|
Deposit asset on reinsurance | | 2,315,330 |
| | — |
|
Goodwill | | 29,458 |
| | 47,396 |
|
Other assets | | 417,460 |
| | 422,047 |
|
Separate Account (variable annuity) assets | | 2,310,886 |
| | 2,001,128 |
|
Total assets | | $ | 11,779,407 |
| | $ | 11,031,896 |
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| | | | |
LIABILITIES AND SHAREHOLDERS’ EQUITY |
Policy liabilities | | | | |
Investment contract and life policy reserves | | $ | 5,776,769 |
| | $ | 5,711,193 |
|
Unpaid claims and claim expenses | | 398,339 |
| | 396,714 |
|
Unearned premiums | | 270,163 |
| | 276,225 |
|
Total policy liabilities | | 6,445,271 |
| | 6,384,132 |
|
Other policyholder funds | | 821,880 |
| | 767,988 |
|
Other liabilities | | 403,812 |
| | 290,358 |
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Long-term debt | | 297,881 |
| | 297,740 |
|
Separate Account (variable annuity) liabilities | | 2,310,886 |
| | 2,001,128 |
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Total liabilities | | 10,279,730 |
| | 9,741,346 |
|
Preferred stock, $0.001 par value, authorized 1,000,000 shares; none issued | | — |
| | — |
|
Common stock, $0.001 par value, authorized 75,000,000 shares; issued, 2019, 66,036,205; 2018, 65,820,369 | | 66 |
| | 66 |
|
Additional paid-in capital | | 476,353 |
| | 475,109 |
|
Retained earnings | | 1,318,329 |
| | 1,216,582 |
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Accumulated other comprehensive income (loss), net of tax: | | | | |
|
Net unrealized investment gains on fixed maturity securities | | 203,077 |
| | 96,941 |
|
Net funded status of benefit plans | | (12,185 | ) | | (12,185 | ) |
Treasury stock, at cost, 2019, 24,850,484 shares; 2018, 24,850,484 shares | | (485,963 | ) | | (485,963 | ) |
Total shareholders’ equity | | 1,499,677 |
| | 1,290,550 |
|
Total liabilities and shareholders’ equity | | $ | 11,779,407 |
| | $ | 11,031,896 |
|
See Notes to Consolidated Financial Statements.
HORACE MANN EDUCATORS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
($ in thousands, except per share data)
| | | | Three Months Ended September 30, | | Nine Months Ended September 30, | | | | | | | | | |
| | 2018 | | 2017 | | 2018 | | 2017 | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | | | | | | | | | 2019 | | 2018 | | 2019 | | 2018 |
Revenues | | |
| | |
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Insurance premiums and contract charges earned | | $ | 206,820 |
| | $ | 198,935 |
| | $ | 615,428 |
| | $ | 590,375 |
| | $ | 208,096 |
| | $ | 205,610 |
| | $ | 417,881 |
| | $ | 408,608 |
|
Net investment income | | 99,083 |
| | 92,320 |
| | 288,048 |
| | 275,025 |
| | 93,458 |
| | 97,101 |
| | 186,258 |
| | 188,965 |
|
Net investment gains (losses) | | 2,803 |
| | (3,486 | ) | | 1,884 |
| | (1,656 | ) | | 146,333 |
| | 735 |
| | 153,750 |
| | (919 | ) |
Other income | | 2,612 |
| | 2,048 |
| | 7,704 |
| | 4,813 |
| | 3,591 |
| | 2,811 |
| | 6,802 |
| | 5,092 |
|
| | | | | | | | | | | | | | | | |
Total revenues | | 311,318 |
| | 289,817 |
| | 913,064 |
| | 868,557 |
| | 451,478 |
| | 306,257 |
| | 764,691 |
| | 601,746 |
|
| | | | | | | | | | | | | | | | |
Benefits, losses and expenses | | | | | |
|
| |
|
| | | | | | | | |
Benefits, claims and settlement expenses | | 161,846 |
| | 134,895 |
| | 473,686 |
| | 444,870 |
| | 152,692 |
| | 168,278 |
| | 292,076 |
| | 311,840 |
|
Interest credited | | 52,124 |
| | 50,078 |
| | 153,229 |
| | 148,200 |
| | 53,594 |
| | 51,071 |
| | 106,516 |
| | 101,105 |
|
DAC amortization expense | | 26,066 |
| | 24,210 |
| | 79,357 |
| | 73,904 |
| | 31,648 |
| | 26,586 |
| | 56,621 |
| | 53,291 |
|
Operating expenses | | 50,989 |
| | 44,172 |
| | 149,376 |
| | 139,156 |
| | 55,252 |
| | 50,218 |
| | 109,305 |
| | 98,387 |
|
Interest expense | | 3,253 |
| | 2,978 |
| | 9,717 |
| | 8,879 |
| | 3,312 |
| | 3,291 |
| | 6,615 |
| | 6,464 |
|
Other expense | | | 28,025 |
| | — |
| | 28,025 |
| | — |
|
| | | | | | | | | | | | | | | | |
Total benefits, losses and expenses | | 294,278 |
| | 256,333 |
| | 865,365 |
| | 815,009 |
| | 324,523 |
| | 299,444 |
| | 599,158 |
| | 571,087 |
|
| | | | | | | | | | | | | | | | |
Income before income taxes | | 17,040 |
| | 33,484 |
| | 47,699 |
| | 53,548 |
| | 126,955 |
| | 6,813 |
| | 165,533 |
| | 30,659 |
|
Income tax expense | | 4,512 |
| | 6,933 |
| | 9,099 |
| | 9,418 |
| | 33,133 |
| | 896 |
| | 39,545 |
| | 4,587 |
|
| | | | | | | | | | | | | | | | |
Net income | | $ | 12,528 |
| | $ | 26,551 |
| | $ | 38,600 |
| | $ | 44,130 |
| | $ | 93,822 |
| | $ | 5,917 |
| | $ | 125,988 |
| | $ | 26,072 |
|
| | | | | | | | | | | | | | | | |
Net income per share | | | | | |
|
| |
|
| | | | | | | | |
Basic | | $ | 0.30 |
| | $ | 0.64 |
| | $ | 0.93 |
| | $ | 1.07 |
| | $ | 2.25 |
| | $ | 0.14 |
| | $ | 3.02 |
| | $ | 0.63 |
|
Diluted | | $ | 0.30 |
| | $ | 0.64 |
| | $ | 0.93 |
| | $ | 1.06 |
| | $ | 2.24 |
| | $ | 0.14 |
| | $ | 3.01 |
| | $ | 0.63 |
|
| | | | | | | | | | | | | | | | |
Weighted average number of shares and equivalent shares | | | | | | | | | | | | | | | | |
Basic | | 41,683 |
| | 41,433 |
| | 41,586 |
| | 41,337 |
| | 41,762 |
| | 41,600 |
| | 41,685 |
| | 41,531 |
|
Diluted | | 41,850 |
| | 41,575 |
| | 41,727 |
| | 41,467 |
| | 41,921 |
| | 41,735 |
| | 41,851 |
| | 41,659 |
|
| | | | | | | | | | | | | | | | |
Net investment gains (losses) | | | | | | | | | | | | | | | | |
Total other-than-temporary impairment losses on securities | | $ | (70 | ) | | $ | (6,092 | ) | | $ | (1,357 | ) | | $ | (12,452 | ) | | $ | (34 | ) | | $ | (1,177 | ) | | $ | (271 | ) | | $ | (1,287 | ) |
Portion of losses recognized in other comprehensive income (loss) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Net other-than-temporary impairment losses on securities recognized in earnings | | (70 | ) | | (6,092 | ) | | (1,357 | ) | | (12,452 | ) | | (34 | ) | | (1,177 | ) | | (271 | ) | | (1,287 | ) |
Sales and other, net | | (1,331 | ) | | 2,365 |
| | 2,661 |
| | 10,050 |
| | 142,067 |
| | 1,789 |
| | 146,905 |
| | 3,992 |
|
Change in fair value - equity securities | | 2,000 |
| | — |
| | (4,342 | ) | | — |
| | 3,441 |
| | (1,156 | ) | | 6,948 |
| | (6,342 | ) |
Change in fair value and gains realized on settlements - derivative instruments | | 2,204 |
| | 241 |
| | 4,922 |
| | 746 |
| | 859 |
| | 1,279 |
| | 168 |
| | 2,718 |
|
Total | | $ | 2,803 |
| | $ | (3,486 | ) | | $ | 1,884 |
| | $ | (1,656 | ) | | $ | 146,333 |
| | $ | 735 |
| | $ | 153,750 |
| | $ | (919 | ) |
See Notes to Consolidated Financial Statements.
HORACE MANN EDUCATORS CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
($ in thousands)
| | | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2018 | | 2017 | | 2018 | | 2017 | | 2019 | | 2018 | | 2019 | | 2018 |
Comprehensive income (loss) | | |
| | |
| | | | | | |
| | |
| | | | |
Net income | | $ | 12,528 |
| | $ | 26,551 |
| | $ | 38,600 |
| | $ | 44,130 |
| | $ | 93,822 |
| | $ | 5,917 |
| | $ | 125,988 |
| | $ | 26,072 |
|
Other comprehensive income (loss), net of tax: | | |
| | |
| | | | | | |
| | |
| | | | |
Change in net unrealized investment gains (losses) on securities | | (49,638 | ) | | 12,208 |
| | (209,178 | ) | | 79,980 |
| |
Change in net unrealized investment gains (losses) on fixed maturity securities | | | (7,762 | ) | | (52,444 | ) | | 106,136 |
| | (159,540 | ) |
Change in net funded status of benefit plans | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Cumulative effect of change in accounting principle | | — |
| | — |
| | (15,041 | ) | | — |
| | — |
| | — |
| | — |
| | (15,041 | ) |
Other comprehensive income (loss) | | (49,638 | ) | | 12,208 |
| | (224,219 | ) | | 79,980 |
| | (7,762 | ) | | (52,444 | ) | | 106,136 |
| | (174,581 | ) |
Total | | $ | (37,110 | ) | | $ | 38,759 |
| | $ | (185,619 | ) | | $ | 124,110 |
| | $ | 86,060 |
| | $ | (46,527 | ) | | $ | 232,124 |
| | $ | (148,509 | ) |
See Notes to Consolidated Financial Statements.
HORACE MANN EDUCATORS CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)
($ in thousands, except per share data)
| | | | Nine Months Ended September 30, | | | | | | | | | |
| | 2018 | | 2017 | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | | | | | 2019 | | 2018 | | 2019 | | 2018 |
Common stock, $0.001 par value | | | | | | | | | | | | |
Beginning balance | | $ | 65 |
| | $ | 65 |
| | $ | 66 |
| | $ | 66 |
| | $ | 66 |
| | $ | 65 |
|
Options exercised, 2018, 131,324 shares; 2017, 156,211 shares | | — |
| | — |
| |
Conversion of common stock units, 2018, 30,368 shares; 2017, 15,981 shares | | — |
| | — |
| |
Conversion of restricted stock units, 2018, 170,406 shares; 2017, 293,002 shares | | 1 |
| | — |
| |
Options exercised | | | — |
| | — |
| | — |
| | — |
|
Conversion of common stock units | | | — |
| | — |
| | — |
| | — |
|
Conversion of restricted stock units | | | — |
| | — |
| | — |
| | 1 |
|
Ending balance | | 66 |
| | 65 |
| | 66 |
| | 66 |
| | 66 |
| | 66 |
|
| | | | | | | | | | | | |
Additional paid-in capital | | | | | | | | | | | | |
Beginning balance | | 464,246 |
| | 453,479 |
| | 474,336 |
| | 466,277 |
| | 475,109 |
| | 464,246 |
|
Options exercised and conversion of common stock units and restricted stock units | | 3,262 |
| | 2,773 |
| | 344 |
| | 2,384 |
| | (1,761 | ) | | 2,259 |
|
Share-based compensation expense | | 6,088 |
| | 5,816 |
| | 1,673 |
| | 1,991 |
| | 3,005 |
| | 4,147 |
|
Ending balance | | 473,596 |
| | 462,068 |
| | 476,353 |
| | 470,652 |
| | 476,353 |
| | 470,652 |
|
| | | | | | | | | | | | |
Retained earnings | | | | | | | | | | | | |
Beginning balance | | 1,231,177 |
| | 1,155,732 |
| | 1,236,621 |
| | 1,254,394 |
| | 1,216,582 |
| | 1,231,177 |
|
Net income | | 38,600 |
| | 44,130 |
| | 93,822 |
| | 5,917 |
| | 125,988 |
| | 26,072 |
|
Dividends, 2018, $0.855 per share; 2017, $0.825 per share | | (36,004 | ) | | (34,580 | ) | |
Dividends, 2019, $0.2875, $0.5750 per share; 2018, $0.2850, $0.5700 per share | | | (12,114 | ) | | (12,006 | ) | | (24,241 | ) | | (23,985 | ) |
Cumulative effect of change in accounting principle | | 15,041 |
| | — |
| | — |
| | — |
| | — |
| | 15,041 |
|
Ending balance | | 1,248,814 |
| | 1,165,282 |
| | 1,318,329 |
| | 1,248,305 |
| | 1,318,329 |
| | 1,248,305 |
|
| | | | | | | | | | | | |
Accumulated other comprehensive income (loss), net of tax: | | | | | | | | | | | | |
Beginning balance | | 286,960 |
| | 163,921 |
| | 198,654 |
| | 164,823 |
| | 84,756 |
| | 286,960 |
|
Change in net unrealized investment gains on securities | | (209,178 | ) | | 79,980 |
| |
Change in net unrealized investment gains on fixed maturity securities | | | (7,762 | ) | | (52,444 | ) | | 106,136 |
| | (159,540 | ) |
Change in net funded status of benefit plans | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Cumulative effect of change in accounting principle | | (15,041 | ) | | — |
| | — |
| | — |
| | — |
| | (15,041 | ) |
Ending balance | | 62,741 |
| | 243,901 |
| | 190,892 |
| | 112,379 |
| | 190,892 |
| | 112,379 |
|
| | | | | | | | | | | | |
Treasury stock, at cost | | | | | | | | | | | | |
Beginning balance, 2018, 24,721,372 shares; 2017, 24,672,932 shares | | (480,875 | ) | | (479,215 | ) | |
Acquisition of shares, 2018, 2,161 shares; 2017, 48,440 shares | | (86 | ) | | (1,660 | ) | |
Ending balance, 2018, 24,723,533 shares; 2017, 24,721,372 shares | | (480,961 | ) | | (480,875 | ) | |
Beginning balance | | | (485,963 | ) | | (480,881 | ) | | (485,963 | ) | | (480,875 | ) |
Acquisition of shares | | | — |
| | (80 | ) | | — |
| | (86 | ) |
Ending balance | | | (485,963 | ) | | (480,961 | ) | | (485,963 | ) | | (480,961 | ) |
| | | | | | | | | | | | |
Shareholders’ equity at end of period | | $ | 1,304,256 |
| | $ | 1,390,441 |
| | $ | 1,499,677 |
| | $ | 1,350,441 |
| | $ | 1,499,677 |
| | $ | 1,350,441 |
|
See Notes to Consolidated Financial Statements.
HORACE MANN EDUCATORS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
($ in thousands)
| | | | Nine Months Ended September 30, | | Six Months Ended June 30, |
| | 2018 | | 2017 | | 2019 | | 2018 |
Cash flows - operating activities | | | | | | | | |
Premiums collected | | $ | 598,443 |
| | $ | 598,882 |
| | $ | 396,887 |
| | $ | 392,103 |
|
Policyholder benefits paid | | (419,736 | ) | | (410,241 | ) | | (275,437 | ) | | (272,769 | ) |
Policy acquisition and other operating expenses paid | | (218,464 | ) | | (208,248 | ) | | (161,863 | ) | | (141,620 | ) |
Income taxes paid | | (8,719 | ) | | (10,061 | ) | | (78 | ) | | (7,393 | ) |
Investment income collected | | 277,178 |
| | 271,717 |
| | 139,210 |
| | 184,749 |
|
Interest expense paid | | (6,537 | ) | | (5,821 | ) | | (6,440 | ) | | (6,190 | ) |
Other | | (4,691 | ) | | 975 |
| | 5,557 |
| | 2,429 |
|
| | | | | |
Net cash provided by operating activities | | 217,474 |
| | 237,203 |
| | 97,836 |
| | 151,309 |
|
| | | | | | | | |
Cash flows - investing activities | | |
| | |
| | |
| | |
|
Fixed maturity securities | | |
| | |
| | |
| | |
|
Purchases | | (1,044,002 | ) | | (1,041,744 | ) | | (644,104 | ) | | (551,984 | ) |
Sales | | 360,246 |
| | 315,531 |
| | 501,739 |
| | 190,023 |
|
Maturities, paydowns, calls and redemptions | | 577,425 |
| | 691,169 |
| | 342,998 |
| | 383,090 |
|
Equity securities | | | | | | | | |
Purchases | | (8,578 | ) | | (27,219 | ) | | (5,282 | ) | | (6,028 | ) |
Sales and repayments | | 8,493 |
| | 21,710 |
| | 17,122 |
| | 5,783 |
|
Limited partnership interests | | | | | | | | |
Purchases | | (84,444 | ) | | (87,613 | ) | | (29,357 | ) | | (33,031 | ) |
Sales | | 11,754 |
| | 15,097 |
| | 15,029 |
| | 9,457 |
|
Change in short-term and other investments, net | | (4,700 | ) | | (74,365 | ) | | (156,748 | ) | | (109,711 | ) |
| | | | | |
Net cash used in investing activities | | (183,806 | ) | | (187,434 | ) | |
Acquisition of business, net of cash acquired | | | (18,198 | ) | | — |
|
Net cash provided by (used in) investing activities | | | 23,199 |
| | (112,401 | ) |
| | | | | | | | |
Cash flows - financing activities | | |
| | |
| | |
| | |
|
Dividends paid to shareholders | | (35,016 | ) | | (34,580 | ) | | (23,630 | ) | | (23,320 | ) |
Acquisition of treasury stock | | (86 | ) | | (1,660 | ) | | — |
| | (86 | ) |
Proceeds from exercise of stock options | | 3,191 |
| | 3,815 |
| | 722 |
| | 2,460 |
|
Withholding tax payments on RSUs tendered | | (2,190 | ) | | (2,745 | ) | | (3,366 | ) | | (2,155 | ) |
Annuity contracts: variable, fixed and FHLB funding agreements | | |
| | |
| | |
| | |
|
Deposits | | 326,003 |
| | 348,900 |
| | 266,310 |
| | 199,074 |
|
Benefits, withdrawals and net transfers to Separate Account (variable annuity) assets | | (333,473 | ) | | (295,064 | ) | | (214,243 | ) | | (218,694 | ) |
Transfer of Company 401(k) assets to a third-party provider | | — |
| | (77,898 | ) | |
Life policy accounts | | | | |
| | | | |
|
Deposits | | 5,618 |
| | 3,357 |
| | 4,638 |
| | 3,163 |
|
Withdrawals and surrenders | | (3,766 | ) | | (3,340 | ) | | (1,733 | ) | | (2,525 | ) |
Change in bank overdrafts | | 4,855 |
| | (532 | ) | |
| | | | | |
Change in deposit asset on reinsurance, net | | | (134,682 | ) | | — |
|
Change in book overdrafts | | | (19,341 | ) | | 3,795 |
|
Net cash used in financing activities | | (34,864 | ) | | (59,747 | ) | | (125,325 | ) | | (38,288 | ) |
| | | | | | | | |
Net decrease in cash | | (1,196 | ) | | (9,978 | ) | |
Net increase (decrease) in cash | | | (4,290 | ) | | 620 |
|
| | | | | | | | |
Cash at beginning of period | | 7,627 |
| | 16,670 |
| | 11,906 |
| | 7,627 |
|
| | | | | | | | |
Cash at end of period | | $ | 6,431 |
| | $ | 6,692 |
| | $ | 7,616 |
| | $ | 8,247 |
|
See Notes to Consolidated Financial Statements.
HORACE MANN EDUCATORS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SeptemberJUNE 30, 20182019 and 20172018
($ in thousands, except per share data and unless noted otherwise)
Note 1 - Basis of Presentation
The accompanying unaudited consolidated financial statements of Horace Mann Educators Corporation (HMEC; and together with its subsidiaries, the Company or Horace Mann) have been prepared in conformity with accounting principles generally accepted in the United States of AmericaU.S. (GAAP) and with the rules and regulations of the Securities and Exchange Commission (SEC), specifically Regulation S-X and the instructions to Form 10-Q.. Certain information and disclosures normally included in annual financial statements prepared in conformity with GAAP, but are not required for interim reporting purposes, have been omitted. The Company believes that these consolidated financial statements contain all adjustments (consisting of normal recurring accruals) which are, in the opinion of management, necessary to present fairly the Company’s consolidated financial position as of SeptemberJune 30, 2018,2019, the consolidated results of operations, and comprehensive income (loss) for the three and nine month periods ended September 30, 2018 and 2017 and the consolidated, changes in shareholders’ equity and cash flows for the ninesix month periods ended SeptemberJune 30, 20182019 and 2017.2018. The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
The subsidiaries of HMEC market and underwrite personal lines of property and casualty insurance products (primarily personal lines of automobile and property insurance), retirement products (primarily tax-qualified annuities) and life insurance, primarily to K-12 teachers, administrators and other employees of public schools and their families. HMEC’s principal operating subsidiaries are Horace Mann Life Insurance Company, Horace Mann Insurance Company, Teachers Insurance Company, Horace Mann Property & Casualty Insurance Company and Horace Mann Lloyds.
These consolidated financial statements should be read in conjunction with the consolidated financial statements and the related notes to consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.2018.
The results of operations for the three and ninesix month periodperiods ended SeptemberJune 30, 20182019 are not necessarily indicative of the results to be expected for the full year.
The Company has reclassified the presentation of certain prior period information to conform to the current presentation.
Investment Contract and Life Policy Reserves
ThisThe following table summarizes the Company’s investment contract and life policy reserves.
| | ($ in thousands) | | September 30, 2018 | | December 31, 2017 | | June 30, 2019 | | December 31, 2018 |
| | | | | |
Investment contract reserves | | $ | 4,545,232 |
| | $ | 4,452,972 |
| | $ | 4,605,272 |
| | $ | 4,555,856 |
|
Life policy reserves | | 1,145,457 |
| | 1,120,763 |
| | 1,171,497 |
| | 1,155,337 |
|
Total | | $ | 5,690,689 |
| | $ | 5,573,735 |
| | $ | 5,776,769 |
| | $ | 5,711,193 |
|
Note 1 - Basis of Presentation (Continued)
Accumulated Other Comprehensive Income (Loss)
Accumulated other comprehensive income (loss) (AOCI) represents the accumulated change in shareholders’ equity from transactions and other events and circumstances from non-shareholder sources. For the Company, AOCI includes the after tax change in net unrealized investment gains (losses) on fixed maturity securities and the after tax change in net funded status of benefit plans for the periods as shown in the Consolidated Statements of Changes in Shareholders’ Equity. The following tables reconcile these components.
|
| | | | | | | | | | | | |
($ in thousands) | | Net Unrealized Investment Gains (Losses) on Securities (1)(2) | | Net Funded Status of Benefit Plans (1) | | Total (1) |
| | | | | | |
Beginning balance, July 1, 2018 | | $ | 125,596 |
| | $ | (13,217 | ) | | $ | 112,379 |
|
Other comprehensive income (loss) before reclassifications | | (49,165 | ) | | — |
| | (49,165 | ) |
Amounts reclassified from accumulated other comprehensive income (loss) | | (473 | ) | | — |
| | (473 | ) |
Cumulative effect of change in accounting principle | | — |
| | — |
| | — |
|
Net current period other comprehensive income (loss) | | (49,638 | ) | | — |
| | (49,638 | ) |
Ending balance, September 30, 2018 | | $ | 75,958 |
| | $ | (13,217 | ) | | $ | 62,741 |
|
| | | | | | |
Beginning balance, January 1, 2018 | | $ | 300,177 |
| | $ | (13,217 | ) | | $ | 286,960 |
|
Other comprehensive income (loss) before reclassifications | | (211,577 | ) | | — |
| | (211,577 | ) |
Amounts reclassified from accumulated other comprehensive income (loss) | | 2,399 |
| | — |
| | 2,399 |
|
Cumulative effect of change in accounting principle (3) | | (15,041 | ) | | — |
| | (15,041 | ) |
Net current period other comprehensive income (loss) | | (224,219 | ) | | — |
| | (224,219 | ) |
Ending balance, September 30, 2018 | | $ | 75,958 |
| | $ | (13,217 | ) | | $ | 62,741 |
|
|
| | | | | | | | | | | | |
($ in thousands) | | Net Unrealized Investment Gains (Losses) on Fixed Maturity Securities (1)(2) | | Net Funded Status of Benefit Plans (1) | | Total (1) |
Beginning balance, April 1, 2019 | | $ | 210,839 |
| | $ | (12,185 | ) | | $ | 198,654 |
|
Other comprehensive income (loss) before reclassifications | | 107,163 |
| | — |
| | 107,163 |
|
Amounts reclassified from AOCI | | (114,925 | ) | | — |
| | (114,925 | ) |
Net current period other comprehensive income (loss) | | (7,762 | ) | | — |
| | (7,762 | ) |
Ending balance, June 30, 2019 | | $ | 203,077 |
| | $ | (12,185 | ) | | $ | 190,892 |
|
| | | | | | |
Beginning balance, January 1, 2019 | | $ | 96,941 |
| | $ | (12,185 | ) | | $ | 84,756 |
|
Other comprehensive income (loss) before reclassifications | | 227,466 |
| | — |
| | 227,466 |
|
Amounts reclassified from AOCI | | (121,330 | ) | | — |
| | (121,330 | ) |
Net current period other comprehensive income (loss) | | 106,136 |
| | — |
| | 106,136 |
|
Ending balance, June 30, 2019 | | $ | 203,077 |
| | $ | (12,185 | ) | | $ | 190,892 |
|
________________
| |
(1) | All amounts are net of tax. |
| |
(2) | The pretax amounts reclassified from AOCI, $599$145,474 thousand and $(3,037)$153,582 thousand, are included in net investment gains (losses) and the related income tax expenses, $30,549 thousand and $32,252 thousand, are included in income tax expense in the Consolidated Statements of Operations for the three and six month periods ended June 30, 2019, respectively. |
Note 1 - Basis of Presentation (Continued)
|
| | | | | | | | | | | | |
($ in thousands) | | Net Unrealized Investment Gains (Losses) on Fixed Maturity Securities (1)(2) | | Net Funded Status of Benefit Plans (1) | | Total (1)(3) |
Beginning balance, April 1, 2018, | | $ | 178,040 |
| | $ | (13,217 | ) | | $ | 164,823 |
|
Other comprehensive income (loss) before reclassifications | | (52,873 | ) | | — |
| | (52,873 | ) |
Amounts reclassified from AOCI | | 429 |
| | — |
| | 429 |
|
Net current period other comprehensive income (loss) | | (52,444 | ) | | — |
| | (52,444 | ) |
Ending balance, June 30, 2018 | | $ | 125,596 |
| | $ | (13,217 | ) | | $ | 112,379 |
|
| | | | | | |
Beginning balance, January 1, 2018 | | $ | 300,177 |
| | $ | (13,217 | ) | | $ | 286,960 |
|
Other comprehensive income (loss) before reclassifications | | (162,412 | ) | | — |
| | (162,412 | ) |
Amounts reclassified from AOCI | | 2,872 |
| | — |
| | 2,872 |
|
Cumulative effect of change in accounting principle (3) | | (15,041 | ) | | — |
| | (15,041 | ) |
Net current period other comprehensive income (loss) | | (174,581 | ) | | — |
| | (174,581 | ) |
Ending balance, June 30, 2018 | | $ | 125,596 |
| | $ | (13,217 | ) | | $ | 112,379 |
|
________________
| |
(1) | All amounts are net of tax. |
| |
(2) | The pretax amounts reclassified from AOCI, $(544) thousand and $(3,636) thousand, are included in Net investment gains (losses) and the related income tax expenses, $126$(115) thousand and $(638)$(764) thousand, are included in Income tax expense in the Consolidated Statements of Operations for the three and ninesix month periods ended SeptemberJune 30, 2018, respectively. |
| |
(3) | The Company adopted guidance on January 1, 2018 that resulted in reclassifying $15,041 thousand of after tax net unrealized gains on equity securities from AOCI to Retained earnings. |
|
| | | | | | | | | | | | |
($ in thousands) | | Net Unrealized Investment Gains (Losses) on Securities (1)(2) | | Net Funded Status of Benefit Plans (1) | | Total (1) |
| | | | | | |
Beginning balance, July 1, 2017 | | $ | 243,510 |
| | $ | (11,817 | ) | | $ | 231,693 |
|
Other comprehensive income (loss) before reclassifications | | 9,786 |
| | — |
| | 9,786 |
|
Amounts reclassified from accumulated other comprehensive income (loss) | | 2,422 |
| | — |
| | 2,422 |
|
Net current period other comprehensive income (loss) | | 12,208 |
| | — |
| | 12,208 |
|
Ending balance, September 30, 2017 | | $ | 255,718 |
| | $ | (11,817 | ) | | $ | 243,901 |
|
| | | | | | |
Beginning balance, January 1, 2017 | | $ | 175,738 |
| | $ | (11,817 | ) | | $ | 163,921 |
|
Other comprehensive income (loss) before reclassifications | | 78,419 |
| | — |
| | 78,419 |
|
Amounts reclassified from accumulated other comprehensive income (loss) | | 1,561 |
| | — |
| | 1,561 |
|
Net current period other comprehensive income (loss) | | 79,980 |
| | — |
| | 79,980 |
|
Ending balance, September 30, 2017 | | $ | 255,718 |
| | $ | (11,817 | ) | | $ | 243,901 |
|
________________
| |
(1)
| All amounts are net of tax. |
| |
(2)
| The pretax amounts reclassified from AOCI, $(3,726) thousand and $(2,401) thousand, are included in Net investment gains (losses) and the related income tax expenses, $(1,304) thousand and $(840) thousand, are included in Income tax expense in the Consolidated Statements of Operations for the three and nine month periods ended September 30, 2017, respectively.
|
Note 1 - Basis of Presentation (Continued)
Comparative information for elements that are not required to be reclassified in their entirety to Netnet income in the same reporting period is locateddisclosed in Note 2 -- Investments -- Net Unrealized Investment Gains (Losses) on Securities.3.
Adopted Accounting Standards
Revenue RecognitionAccounting for Leases
In May 2014,Effective for the Financial Accounting Standards Board (FASB) issuedquarter ended March 31, 2019, the Company adopted guidance for leases and elected to utilize a cumulative-effect adjustment to the opening balance of retained earnings. Accordingly, the Company’s reporting for the comparative periods prior to adoption continue to be presented in the financial statements in accordance with previous lease accounting guidance, with an effective date that was deferred to January 1, 2018, to provide a single comprehensive model in accounting for revenue arising from contracts with customers. The guidance applies to all contracts with customers; however, certain insurance contracts are specifically excluded from this updated guidance. The Company adoptedelected to apply all practical expedients in the guidance on January 1, 2018,for transition for leases in effect at adoption, including using hindsight to determine the modified retrospective transition method.lease term of existing leases, the option to not reassess whether an existing contract is a lease or contains a lease and whether the lease is an operating or finance lease. The adoption of the guidance did not haveresulted in the Company recognizing an impactinitial $14,499 thousand lease liability equal to the present value of lease payments and an initial $13,908 thousand right-of-use (ROU) asset, which is the corresponding lease liability adjusted for qualifying accrued lease payments. The lease liability and ROU asset are reported in Other liabilities and Other assets on the Company’s consolidated financial position, resultsConsolidated Balance Sheets. The impact of operations, cash flows, or disclosures.
Recognition and Measurement of Financial Assets and Liabilities
In January 2016, the FASB issued accounting guidance to improve certain aspects of the recognition, measurement, presentation and disclosure of financial instruments. Among other things, the guidance revises the accounting related to the classification and measurement of investments in equity securities and the presentation of certain fair valuethese changes for financial liabilities measured at fair value. The Company adopted the guidance on January 1, 2018 using the modified retrospective approach that resulted in reclassifying $15,041 thousand of after tax net unrealized gains on equity securities from AOCI to Retained earnings. The Company's Consolidated Statements of Operations were impacted as changes in fair value of equity securities are now being reported in Net investment gains (losses) instead of reported in other comprehensive income (loss) (OCI).
Statement of Cash Flows -- Classification
In August 2016, the FASB issued guidance to reduce diversity in practice in the statement of cash flows between operating, investing and financing activities related to the classification of cash receipts and cash payments for eight specific issues. The FASB acknowledged that current GAAP either is unclear or does not include specific guidance on these eight cash flow classification issues: (1) debt prepayment or extinguishment costs; (2) settlement of zero-coupon bonds (pertains to issuers); (3) contingent consideration payments made after a business combination; (4) proceeds from the settlement of insurance claims (pertains to claimants); (5) proceeds from the settlement of corporate-owned life insurance policies; (6) distributions received from equity method investees; (7) beneficial interests in securitization transactions (pertains to transferors) and (8) separately identifiable cash flows and application of the predominance principle. The Company adopted the guidance on January 1, 2018 using a retrospective approach whichadoption had no impact to the prior year amounts reported in the Consolidated Statement of Cash Flows.on net income or shareholders' equity.
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (Loss)Simplifying the Test for Goodwill Impairment
On February 14, 2018,
Effective for the FASB issued accounting guidance that permits recognition of a reclassification adjustment between AOCI and Retained earnings for stranded tax amounts related to the reduced corporate tax rate enacted under the Tax Act. As permitted under its provisions,quarter ended June 30, 2019, the Company early adopted guidance to simplify the accounting for goodwill impairment. Adoption of this guidance effective forremoved Step 2 of the quarterly period that ended December 31, 2017 and electedgoodwill impairment test, which required a hypothetical purchase price allocation. Goodwill impairment is now the amount by which a reporting unit's carrying value exceeds its fair value, not to reclassifyexceed the stranded tax amounts. The impact from early adoption resulted in an increase to AOCI and a reduction to Retained earningscarrying amount of approximately $47,900 thousand; representing the stranded deferred tax liabilities of $50,034 thousand and $(2,134) thousand for Net unrealized investment gains (losses) on securities and Net funded status of benefit plans, respectively.goodwill.
Note 1 - Basis of Presentation (Continued)
Pending Accounting Standards
Accounting for Leases
In February 2016, the FASB issued accounting and disclosure guidance to improve financial reporting and comparability among organizations about leasing transactions. Under the new guidance, for leases with lease terms of more than 12 months, a lessee will be required to recognize assets and liabilities on the balance sheet for the rights and obligations created by those leases. Consistent with current accounting guidance, the recognition, measurement and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or an operating lease. However, while current guidance requires only capital leases to be recognized on the balance sheet, the new guidance will require both operating and capital leases to be recognized on the balance sheet. This new guidance is effective for annual reporting periods beginning December 15, 2018, and interim reporting periods within those annual periods, with early adoption permitted. The Company will adopt this new guidance on January 1, 2019, and the Company expects to use the optional transition method, which allows the Company to recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption (i.e., comparative periods presented in the consolidated financial statements will continue to be in conformity with current GAAP). While the Company is in the process of evaluating the impact of the guidance, it does not expect the guidance to have a material impact on its consolidated financial statements. Had the Company adopted the guidance on September 30, 2018, it would have recognized additional operating liabilities of $13,267 thousand, with corresponding right of use assets of the same amount based on the present value of the expected remaining lease payments under the new guidance.
Measurement of Credit Losses on Financial Instruments
In June 2016, the FASB issued guidance to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments, including reinsurance receivables, held by companies. The new guidance replaces the incurred loss impairment methodology for financial instruments other than available for sale debt securities and requires an organization to measure and recognize all current expected credit losses (CECL) for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Companies will need to utilize forward-looking information to better informestimate their credit loss estimates.losses. Companies will continue to use judgment to determine which loss estimation method is appropriate for their circumstances. Any credit losses related to available for sale debt securities will be recorded through an allowance for credit losses with this allowance having a limit equal to the amount by which fair value is below amortized cost. The guidance also requires enhanced qualitative and quantitative disclosures to provide additional information about the amounts recorded in the financial statements. For public business entities, the
This guidance is effective for annual and interim reporting periods beginning after December 15, 2019, including interim periods within those years, using a modified-retrospective approach.2019. Early applicationadoption is permitted for annual reporting periods, and interim periods within those years, beginning after December 15, 2018. ManagementUpon adoption, the guidance will be applied using the modified-retrospective approach, by which a cumulative-effect adjustment will be made to retained earnings as of the beginning of the first reporting period in which the guidance is evaluating the impact thiseffective. The guidance will have the most impact on the results of operations and financial position ofCompany’s available for sale fixed maturity securities portfolio. However, as the Company.
Simplifying the Test for Goodwill Impairment
In January 2017, the FASB issued guidance to simplify the accounting for goodwill impairment. The guidance removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit's carrying value exceeds itsCompany’s fixed maturity securities portfolio is weighted towards higher rated bonds (97.1% investment grade, based on fair value, with an average quality rating of A+ at June 30, 2019), the Company does not to exceedexpect that the carrying amounteffect of goodwill. All other goodwill impairment guidance will remain largely unchanged. Entities will continue to have the option to perform a qualitative assessment to determine if a quantitative impairment test is necessary. The same one-step impairment testadoption will be applied to goodwill at all reporting units, even those with zero or negative carrying amounts. Entities will be required to disclose the amount of goodwill for reporting units with zero or negative carrying amounts. Public business entities should adopt the guidance prospectively for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early application is permitted. Management believes the adoption of this accounting guidance will not have a material effect on the results of operations and financial position of the Company.
Note 1 - Basis of Presentation (Continued)
material.
Accounting for Long-Duration Insurance Contracts
In August 2018, the FASB issued accounting and disclosure guidance that contains targeted changesimprovements to the accounting for long-duration insurance contracts. Under the new guidance, the cash flow assumptions used to measure the liability for future policy benefits for traditional insurance contracts will be required to be updated at least annually with changes recognized as a benefit expense (i.e., assumptions will no longer be locked-in). Insurance entities will be required to use a standard discount rate to measure the liabilities that will be equivalent to the yield from a high-quality bond. The new guidance also changes the amortization of deferred acquisition costs (DAC) to be on a constant-level basis over the expected term of the related contracts with no interest accruing on the DAC balance. The new guidance also introduces a new category of contract features associated with deposit type contracts referred to as market risk benefits (MRBs). Contract features meeting the definition of a MRB will be measured at fair value. New disclosures will be required for long-duration insurance contracts in order to provide better transparency into the exposure of insurance entities and the drivers of their results. For public business entities, the guidance is effective for annual reporting periods beginning after December 15, 2020, including interim periods within those years. With regards to the liability for future policy benefits and DAC, the guidance applies to contracts in force as of the beginning of the earliest period presented and may be applied retrospectively. With regards to MRBs, the guidance is to be applied retrospectively at the beginning of the earliest period presented. Early adoption is permitted. Management is evaluating the impact this guidance will have on the results of operations and financial position of the Company.
Note 2 - InvestmentsAcquisitions
The Company and Benefit Consultants Group, Inc. (BCG) entered into a Stock Purchase Agreement under which the Company acquired all of the outstanding capital stock of BCG with a transaction valued at $25 million. The acquisition was approved by the Company’s investment portfolio includes free-standing derivative financial instruments (currently overBoard and closed on January 2, 2019. The acquisition of BCG gave rise to recognition of intangible assets of $16.2 million and goodwill of $10.1 million as a result of the counter index call option contracts) to economically hedge risk associated with its fixed indexed annuity (FIA) and indexed universal life (IUL) products’ contingent liabilities.purchase accounting. The Company’s FIA and IUL products include embedded derivative featuresintangible assets are reported as Other assets in the Consolidated Balance Sheets. Intangible assets that are discussedamortizable have lives of 10 to 16 years.
On July 1, 2019, the Company completed its acquisition of all the equity interests in Note 1 -- SummaryNational Teachers Associates Life Insurance Company (NTA) pursuant to a Purchase Agreement (Agreement) dated as of Significant Accounting Policies -- Investment ContractDecember 10, 2018, by and Life Policy Reserves -- Reserves for Fixed Indexed Annuitiesamong the Company and Indexed Universal Life PoliciesEllard Family Holdings, Inc., Brian M. Ellard and The JCE Exempt Trust. The purchase price of the Company’s Annual Report on Form 10-K fortransaction was $425 million which includes $20 million representing NTA’s share of "adjusted earnings" (as determined in accordance with the year ended December 31, 2017. The Company’s investment portfolio included no other free-standing derivative financial instruments (futures, forwards, swaps, option contracts or other financial instruments with similar characteristics),terms of the Agreement) from July 1, 2018 to July 1, 2019. As a result of the acquisition, NTA became a wholly owned subsidiary of the Company. NTA provides supplemental insurance products, including heart and there were no other embedded derivative features relatedcancer, to the Company’s investment or insurance products during the nine month periods ended September 30, 2018 and 2017.education market. NTA's results will be reported in a newly created operating segment titled "Supplemental".
Fixed Maturity Securities
The Company’s investment portfolio is comprised primarily of fixed maturity securities. The amortizedAmortized cost, net unrealized investment gains (losses) and fair values of all fixed maturity securities in the portfolio were as follows:
| | ($ in thousands) | | Amortized Cost/Cost | | Unrealized Investment Gains | | Unrealized Investment Losses | | Fair Value | | Amortized Cost | | Unrealized Gains | | Unrealized Losses | | Fair Value |
September 30, 2018 (1) | | | | | | | | | |
June 30, 2019 | | | | | | | | | |
Fixed maturity securities | | | | | | | | | | | | | | | | |
U.S. Government and federally sponsored agency obligations: (2)(1) | | | | | | | | | | | | | | | | |
Mortgage-backed securities | | $ | 758,301 |
| | $ | 15,744 |
| | $ | 23,209 |
| | $ | 750,836 |
| | $ | 550,059 |
| | $ | 37,900 |
| | $ | 1,201 |
| | $ | 586,758 |
|
Other, including U.S. Treasury securities | | 802,508 |
| | 12,528 |
| | 32,436 |
| | 782,600 |
| | 546,396 |
| | 20,574 |
| | 533 |
| | 566,437 |
|
Municipal bonds | | 1,783,711 |
| | 119,671 |
| | 19,708 |
| | 1,883,674 |
| | 1,472,794 |
| | 127,700 |
| | 801 |
| | 1,599,693 |
|
Foreign government bonds | | 92,860 |
| | 2,787 |
| | 644 |
| | 95,003 |
| | 45,303 |
| | 2,064 |
| | — |
| | 47,367 |
|
Corporate bonds | | 2,290,452 |
| | 74,409 |
| | 29,365 |
| | 2,335,496 |
| | 1,226,962 |
| | 96,535 |
| | 2,211 |
| | 1,321,286 |
|
Other mortgage-backed securities | | 1,691,659 |
| | 8,073 |
| | 18,202 |
| | 1,681,530 |
| | 1,400,241 |
| | 20,786 |
| | 8,298 |
| | 1,412,729 |
|
Totals | | $ | 7,419,491 |
| | $ | 233,212 |
| | $ | 123,564 |
| | $ | 7,529,139 |
| | $ | 5,241,755 |
| | $ | 305,559 |
| | $ | 13,044 |
| | $ | 5,534,270 |
|
| | | | | | | | | | | | | | | | |
December 31, 2017 | | | | | | | | | |
December 31, 2018 | | | | | | | | | |
Fixed maturity securities | | | | | | | | | | | | | | | | |
U.S. Government and federally sponsored agency obligations: (2)(1) | | | | | | | | | | | | | | | | |
Mortgage-backed securities | | $ | 669,297 |
| | $ | 30,460 |
| | $ | 3,032 |
| | $ | 696,725 |
| | $ | 778,038 |
| | $ | 22,724 |
| | $ | 13,321 |
| | $ | 787,441 |
|
Other, including U.S. Treasury securities | | 714,613 |
| | 26,311 |
| | 5,516 |
| | 735,408 |
| | 835,096 |
| | 16,127 |
| | 17,681 |
| | 833,542 |
|
Municipal bonds | | 1,711,581 |
| | 184,107 |
| | 2,435 |
| | 1,893,253 |
| | 1,884,313 |
| | 133,150 |
| | 13,494 |
| | 2,003,969 |
|
Foreign government bonds | | 96,780 |
| | 5,958 |
| | — |
| | 102,738 |
| | 83,343 |
| | 2,321 |
| | 760 |
| | 84,904 |
|
Corporate bonds | | 2,409,426 |
| | 173,862 |
| | 4,334 |
| | 2,578,954 |
| | 2,054,105 |
| | 64,296 |
| | 38,891 |
| | 2,079,510 |
|
Other mortgage-backed securities | | 1,701,253 |
| | 22,935 |
| | 7,191 |
| | 1,716,997 |
| | 1,739,016 |
| | 10,467 |
| | 23,531 |
| | 1,725,952 |
|
Totals | | $ | 7,302,950 |
| | $ | 443,633 |
| | $ | 22,508 |
| | $ | 7,724,075 |
| | $ | 7,373,911 |
| | $ | 249,085 |
| | $ | 107,678 |
| | $ | 7,515,318 |
|
| | | | | | | | | |
Equity securities (3) | | $ | 116,320 |
| | $ | 19,425 |
| | $ | 279 |
| | $ | 135,466 |
| |
________________
| |
(1) | Effective January 1, 2018, with the adoption of new accounting guidance for recognition and measurement of financial instruments, available for sale equity securities were reclassified to equity securities at fair value and are excluded from the table above as of September 30, 2018. |
| |
(2)
| Fair value includes securities issued by Federal National Mortgage Association (FNMA) of $408,130$370,182 thousand and $361,955$441,308 thousand; Federal Home Loan Mortgage Corporation (FHLMC) of $408,858$256,531 thousand and $400,001$417,308 thousand; and Government National Mortgage Association (GNMA) of $96,018$79,141 thousand and $104,168$96,466 thousand as of SeptemberJune 30, 20182019 and December 31, 2017,2018, respectively. |
| |
(3)
| Includes nonredeemable (perpetual) preferred stocks, common stocks and closed-end funds. |
Note 23 - Investments (Continued)
The following table presents the fair value and gross unrealized losses of securities in an unrealized loss position at SeptemberJune 30, 20182019 and December 31, 2017,2018, respectively. The Company views the decrease in fair value of all of the securities with unrealized losses at SeptemberJune 30, 20182019 -- which was driven largely by increasing interest rates, spread widening, financial market illiquidity and/or market volatility from the date of acquisition -- as temporary. For fixed maturity securities, management does not have the intent to sell the securities and it is not more likely than not the Company will be required to sell the securities before the anticipated recovery of their amortized cost bases, and management expects to recover the entire amortized cost bases of the fixed maturity securities. Therefore, it was determined that the unrealized losses on the securities presented in the table below were not other than temporarilyother-than-temporarily impaired as of SeptemberJune 30, 2018.2019.
|
| | | | | | | | | | | | | | | | | | | | | | | | |
($ in thousands) | | 12 Months or Less | | More than 12 Months | | Total |
| | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses |
September 30, 2018 (1) | | | | | | | | | | | | |
Fixed maturity securities | | | | | | | | | | | | |
U.S. Government and federally sponsored agency obligations: | | | | | | | | | | | | |
Mortgage-backed securities | | $ | 330,285 |
| | $ | 13,484 |
| | $ | 99,483 |
| | $ | 9,725 |
| | $ | 429,768 |
| | $ | 23,209 |
|
Other | | 450,713 |
| | 18,510 |
| | 163,569 |
| | 13,926 |
| | 614,282 |
| | 32,436 |
|
Municipal bonds | | 491,680 |
| | 13,484 |
| | 75,678 |
| | 6,224 |
| | 567,358 |
| | 19,708 |
|
Foreign government bonds | | 19,856 |
| | 644 |
| | — |
| | — |
| | 19,856 |
| | 644 |
|
Corporate bonds | | 821,190 |
| | 20,801 |
| | 90,998 |
| | 8,564 |
| | 912,188 |
| | 29,365 |
|
Other mortgage-backed securities | | 902,673 |
| | 10,207 |
| | 252,739 |
| | 7,995 |
| | 1,155,412 |
| | 18,202 |
|
Total | | $ | 3,016,397 |
| | $ | 77,130 |
| | $ | 682,467 |
| | $ | 46,434 |
| | $ | 3,698,864 |
| | $ | 123,564 |
|
| | | | | | | | | | | | |
Number of positions with a gross unrealized loss | | 1,237 |
| | | | 246 |
| | | | 1,483 |
| | |
Fair value as a percentage of total fixed maturity securities fair value | | 39.4 | % | | | | 8.9 | % | | | | 48.3 | % | | |
| | | | | | | | | | | | |
December 31, 2017 | | | | | | | | | | | | |
Fixed maturity securities | | | | | | | | | | | | |
U.S. Government and federally sponsored agency obligations: | | | | | | | | | | | | |
Mortgage-backed securities | | $ | 134,032 |
| | $ | 1,053 |
| | $ | 40,606 |
| | $ | 1,979 |
| | $ | 174,638 |
| | $ | 3,032 |
|
Other | | 168,634 |
| | 1,849 |
| | 122,753 |
| | 3,667 |
| | 291,387 |
| | 5,516 |
|
Municipal bonds | | 29,437 |
| | 100 |
| | 79,140 |
| | 2,335 |
| | 108,577 |
| | 2,435 |
|
Foreign government bonds | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Corporate bonds | | 115,113 |
| | 2,701 |
| | 36,081 |
| | 1,633 |
| | 151,194 |
| | 4,334 |
|
Other mortgage-backed securities | | 457,166 |
| | 2,791 |
| | 168,972 |
| | 4,400 |
| | 626,138 |
| | 7,191 |
|
Total fixed maturity securities | | 904,382 |
| | 8,494 |
| | 447,552 |
| | 14,014 |
| | 1,351,934 |
| | 22,508 |
|
Equity securities (2) | | 6,027 |
| | 249 |
| | 1,277 |
| | 30 |
| | 7,304 |
| | 279 |
|
Combined totals | | $ | 910,409 |
| | $ | 8,743 |
| | $ | 448,829 |
| | $ | 14,044 |
| | $ | 1,359,238 |
| | $ | 22,787 |
|
| | | | | | | | | | | | |
Number of positions with a gross unrealized loss | | 354 |
| | | | 158 |
| | | | 512 |
| | |
Fair value as a percentage of total fixed maturity and equity securities fair value | | 11.6 | % | | | | 5.7 | % | | | | 17.3 | % | | |
________________
| |
(1)
| Effective January 1, 2018, with the adoption of new accounting guidance for recognition and measurement of financial instruments, available for sale equity securities were reclassified to equity securities at fair value and are excluded from the table above as of September 30, 2018. |
| |
(2)
| Includes nonredeemable (perpetual) preferred stocks, common stocks and closed-end funds. |
Note 2 - Investments (Continued)
|
| | | | | | | | | | | | | | | | | | | | | | | | |
($ in thousands) | | 12 Months or Less | | More than 12 Months | | Total |
| | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses |
June 30, 2019 | | | | | | | | | | | | |
Fixed maturity securities | | | | | | | | | | | | |
U.S. Government and federally sponsored agency obligations: | | | | | | | | | | | | |
Mortgage-backed securities | | $ | 10,504 |
| | $ | 27 |
| | $ | 44,564 |
| | $ | 1,174 |
| | $ | 55,068 |
| | $ | 1,201 |
|
Other | | 11,463 |
| | 32 |
| | 37,575 |
| | 501 |
| | 49,038 |
| | 533 |
|
Municipal bonds | | 16,900 |
| | 93 |
| | 34,031 |
| | 708 |
| | 50,931 |
| | 801 |
|
Foreign government bonds | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Corporate bonds | | 27,858 |
| | 518 |
| | 32,997 |
| | 1,693 |
| | 60,855 |
| | 2,211 |
|
Other mortgage-backed securities | | 391,170 |
| | 3,895 |
| | 277,694 |
| | 4,403 |
| | 668,864 |
| | 8,298 |
|
Total | | $ | 457,895 |
| | $ | 4,565 |
| | $ | 426,861 |
| | $ | 8,479 |
| | $ | 884,756 |
| | $ | 13,044 |
|
| | | | | | | | | | | | |
Number of positions with a gross unrealized loss | | 143 |
| | | | 156 |
| | | | 299 |
| | |
Fair value as a percentage of total fixed maturity securities fair value | | 8.3 | % | | | | 7.7 | % | | | | 16.0 | % | | |
| | | | | | | | | | | | |
December 31, 2018 | | | | | | | | | | | | |
Fixed maturity securities | | | | | | | | | | | | |
U.S. Government and federally sponsored agency obligations: | | | | | | | | | | | | |
Mortgage-backed securities | | $ | 193,447 |
| | $ | 5,026 |
| | $ | 157,295 |
| | $ | 8,295 |
| | $ | 350,742 |
| | $ | 13,321 |
|
Other | | 263,497 |
| | 6,746 |
| | 246,213 |
| | 10,935 |
| | 509,710 |
| | 17,681 |
|
Municipal bonds | | 291,869 |
| | 7,603 |
| | 95,297 |
| | 5,891 |
| | 387,166 |
| | 13,494 |
|
Foreign government bonds | | 16,250 |
| | 760 |
| | — |
| | — |
| | 16,250 |
| | 760 |
|
Corporate bonds | | 818,519 |
| | 27,429 |
| | 99,171 |
| | 11,462 |
| | 917,690 |
| | 38,891 |
|
Other mortgage-backed securities | | 913,858 |
| | 16,076 |
| | 291,442 |
| | 7,455 |
| | 1,205,300 |
| | 23,531 |
|
Total | | $ | 2,497,440 |
| | $ | 63,640 |
| | $ | 889,418 |
| | $ | 44,038 |
| | $ | 3,386,858 |
| | $ | 107,678 |
|
| | | | | | | | | | | | |
Number of positions with a gross unrealized loss | | 1,052 |
| | | | 359 |
| | | | 1,411 |
| | |
Fair value as a percentage of total fixed maturity securities fair value | | 33.2 | % | | | | 11.8 | % | | | | 45.0 | % | | |
Fixed maturity securities with an investment grade rating represented 97.5%84.0% of the gross unrealized losses as of SeptemberJune 30, 2018.2019. With respect to fixed maturity securities involving securitized financial assets, the underlying collateral cash flows were stress tested to determine there was no adverse change in the present value of cash flows below their amortized cost bases.
Note 3 - Investments (Continued)
Limited Partnership Interests
As of June 30, 2019 and December 31, 2018, the carrying value of equity method limited partnerships totaled $351,515 thousand and $328,516 thousand, respectively. Principal factors influencing carrying value appreciation or decline include operating performance, comparable public company earnings multiples, capitalization rates and the economic environment. The Company recognizes an impairment loss for equity method limited partnerships when evidence demonstrates that the loss is other than temporary. Evidence of a loss in value that is other than temporary may include the absence of an ability to recover the carrying amount of the investment or the inability of the investee to sustain a level of earnings that would justify the carrying amount of the investment.
Credit Losses
The following table summarizes the cumulative amounts related to the Company’s credit loss component of other-than-temporary impairment (OTTI) losses on fixed maturity securities held as of SeptemberJune 30, 20182019 and 20172018 that the Company did not intend to sell as of those dates, and it was not more likely than not that the Company would be required to sell the securities before the anticipated recovery of theirthe amortized cost bases, for which the non-credit portions of OTTI losses were recognized in OCI:
| | ($ in thousands) | | Nine Months Ended September 30, | | Six Months Ended June 30, |
| | 2018 | | 2017 | | 2019 | | 2018 |
Cumulative credit loss (1) | | | | | | | | |
Beginning of period | | $ | 3,825 |
| | $ | 13,703 |
| | $ | 1,529 |
| | $ | 3,825 |
|
New credit losses | | — |
| | — |
| | — |
| | — |
|
Increases to previously recognized credit losses | | 246 |
| | 1,994 |
| | — |
| | 246 |
|
Losses related to securities sold or paid down during the period | | (2,542 | ) | | (2 | ) | | — |
| | — |
|
End of period | | $ | 1,529 |
| | $ | 15,695 |
| | $ | 1,529 |
| | $ | 4,071 |
|
________________
| |
(1) | The cumulative credit loss amounts exclude OTTI losses on securities held as of the periods indicated that the Company intended to sell or it was more likely than not that the Company would be required to sell the securitiessecurity before the recovery of theirthe amortized cost bases.basis. |
Maturities/SalesMaturities of Fixed Maturity Securities
The following table presents the distribution of the Company’s fixed maturity securities portfolio by estimated expected maturity. Estimated expected maturities differ from contractual maturities, reflecting assumptions regarding borrowers’ utilization of the right to call or prepay obligations with or without call or prepayment penalties. For structured securities, including mortgage-backed securities and other asset-backed securities, estimated expected maturities consider broker-dealer survey prepayment assumptions and are verified for consistency with the interest rate and economic environments.
| | ($ in thousands) | | Percent of Total Fair Value | | September 30, 2018 | | Percent of Total Fair Value | | June 30, 2019 |
| | September 30, 2018 | | December 31, 2017 | | Fair Value | | Amortized Cost | | June 30, 2019 | | December 31, 2018 | | Fair Value | | Amortized Cost |
Estimated expected maturity: | | | | | | | | | | | | | | | | |
Due in 1 year or less | | 4.5 | % | | 3.2 | % | | $ | 342,221 |
| | $ | 339,321 |
| | 4.7 | % | | 4.8 | % | | $ | 258,331 |
| | $ | 252,586 |
|
Due after 1 year through 5 years | | 23.7 |
| | 26.7 |
| | 1,783,259 |
| | 1,758,061 |
| | 26.7 | % | | 22.8 | % | | 1,478,291 |
| | 1,439,296 |
|
Due after 5 years through 10 years | | 32.8 |
| | 32.6 |
| | 2,469,126 |
| | 2,464,959 |
| | 29.6 | % | | 32.8 | % | | 1,638,887 |
| | 1,555,825 |
|
Due after 10 years through 20 years | | 26.1 |
| | 24.2 |
| | 1,962,671 |
| | 1,929,967 |
| | 25.6 | % | | 26.5 | % | | 1,414,857 |
| | 1,316,715 |
|
Due after 20 years | | 12.9 |
| | 13.3 |
| | 971,862 |
| | 927,183 |
| | 13.4 | % | | 13.1 | % | | 743,904 |
| | 677,333 |
|
Total | | 100.0 | % | | 100.0 | % | | $ | 7,529,139 |
| | $ | 7,419,491 |
| | 100.0 | % | | 100.0 | % | | $ | 5,534,270 |
| | $ | 5,241,755 |
|
| | | | | | | | | | | | | | | | |
Average option-adjusted duration, in years | | 6.0 |
| | 5.9 |
| | | | | | 5.6 |
| | 5.9 |
| | | | |
Note 23 - Investments (Continued)
Sales of Fixed Maturity and Equity Securities
Proceeds received from sales of fixed maturity and equity securities, each determined using the specific identification method, and gross gains and gross losses realized as a result of those sales for each period were:
| | ($ in thousands) | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2018 | | 2017 | | 2018 | | 2017 | | 2019 (1) | | 2018 | | 2019 (1) | | 2018 |
Fixed maturity securities | | | | | | | | | | | | | | | | |
Proceeds received | | $ | 170,223 |
| | $ | 85,841 |
| | $ | 360,246 |
| | $ | 315,531 |
| | $ | 442,015 |
| | $ | 100,129 |
| | $ | 501,739 |
| | $ | 190,023 |
|
Gross gains realized | | 3,980 |
| | 2,293 |
| | 8,002 |
| | 8,862 |
| | 147,774 |
| | 2,352 |
| | 148,316 |
| | 4,022 |
|
Gross losses realized | | (5,893 | ) | | (181 | ) | | (7,530 | ) | | (1,558 | ) | | (5,976 | ) | | (1,584 | ) | | (6,081 | ) | | (1,637 | ) |
| | | | | | | | | | | | | | | | |
Equity securities | | | | | | | | | | | | | | | | |
Proceeds received | | $ | 2,710 |
| | $ | 3,514 |
| | $ | 8,493 |
| | $ | 20,510 |
| | $ | 1,633 |
| | $ | 3,735 |
| | $ | 17,122 |
| | $ | 5,783 |
|
Gross gains realized | | 885 |
| | 477 |
| | 2,478 |
| | 3,227 |
| | 389 |
| | 977 |
| | 5,134 |
| | 1,593 |
|
Gross losses realized | | (321 | ) | | (293 | ) | | (502 | ) | | (721 | ) | | (166 | ) | | (147 | ) | | (510 | ) | | (181 | ) |
________________
| |
(1) | Gross gains realized presented above include a $135.3 million realized investment gain associated with a transfer of investments to a reinsurer as consideration paid during the second quarter of 2019 in connection with the reinsurance of a $2.9 billion block of in force fixed and variable annuity business. See Notes 6 and 13 for further information. |
Net Investment Gains (Losses)
The following table reconciles the net investment gains (losses) pretax by transaction type:
|
| | | | | | | | | | | | | | | | |
($ in thousands) | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
Impairment write-downs | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Change in intent write-downs | | (34 | ) | | (1,177 | ) | | (271 | ) | | (1,287 | ) |
Net OTTI losses recognized in earnings | | (34 | ) | | (1,177 | ) | | (271 | ) | | (1,287 | ) |
Sales and other, net | | 142,067 |
| | 1,789 |
| | 146,905 |
| | 3,992 |
|
Change in fair value - equity securities | | 3,441 |
| | (1,156 | ) | | 6,948 |
| | (6,342 | ) |
Change in fair value and gains (losses) realized on settlements - derivative instruments | | 859 |
| | 1,279 |
| | 168 |
| | 2,718 |
|
Net investment gains (losses) | | $ | 146,333 |
| | $ | 735 |
| | $ | 153,750 |
| | $ | (919 | ) |
|
| | | | | | | | | | | | | | | | | |
($ in thousands) | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2018 | | 2017 | | 2018 | | 2017 |
| | | | | | | | |
Impairment write-downs | | $ | — |
| | $ | — |
| | $ | — |
| | $ | (1,777 | ) |
Change in intent write-downs | | (70 | ) | | (6,092 | ) | | (1,357 | ) | | (10,675 | ) |
Net OTTI losses recognized in earnings | | (70 | ) | | (6,092 | ) | | (1,357 | ) | — |
| (12,452 | ) |
Sales and other, net | | (1,331 | ) | | 2,365 |
| | 2,661 |
| | 10,050 |
|
Change in fair value - equity securities (1) | | 2,000 |
| | — |
| | (4,342 | ) | | — |
|
Change in fair value and gains (losses) realized on settlements - derivative instruments | | 2,204 |
| | 241 |
| | 4,922 |
| | 746 |
|
Net investment gains (losses) | | $ | 2,803 |
| | $ | (3,486 | ) | | $ | 1,884 |
| — |
| $ | (1,656 | ) |
________________
| |
(1)
| Effective January 1, 2018, with the adoption of new accounting guidance for recognition and measurement of financial instruments, equity securities are reported at fair value with changes in fair value recognized in Net investment gains (losses) and are no longer included in impairment write-downs or change in intent write-downs. |
Note 23 - Investments (Continued)
Net Unrealized Investment Gains (Losses) on Fixed Maturity Securities
The following table reconciles the net unrealized investment gains (losses), on fixed maturity securities, net of tax, included in AOCI, before the impact of DAC:
|
| | | | | | | | | | | | | | | | |
($ in thousands) | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2018 | | 2017 | | 2018 | | 2017 |
Net unrealized investment gains (losses) on securities, net of tax | | | | | | | | |
Beginning of period | | $ | 144,998 |
| | $ | 281,465 |
| | $ | 286,176 |
| | $ | 202,941 |
|
Change in net unrealized investment gains | | (57,903 | ) | | 12,066 |
| | (186,912 | ) | | 91,452 |
|
Reclassification of net investment (gains) losses to net income | | (473 | ) | | 2,422 |
| | 2,399 |
| | 1,560 |
|
Reclassification of net unrealized gains on equity securities, net of tax, to Retained earnings (1) | | — |
| | — |
| | (15,041 | ) | | — |
|
End of period | | $ | 86,622 |
| | $ | 295,953 |
| | $ | 86,622 |
| | $ | 295,953 |
|
|
| | | | | | | | | | | | | | | | |
($ in thousands) | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
Net unrealized investment gains (losses) on fixed maturity securities, net of tax | | | | | | | | |
Beginning of period | | $ | 245,319 |
| | $ | 206,293 |
| | $ | 111,712 |
| | $ | 286,176 |
|
Change in net unrealized investment gains (losses) on fixed maturity securities | | 100,693 |
| | (61,724 | ) | | 240,705 |
| | (129,009 | ) |
Reclassification of net investment (gains) losses on securities to net income | | (114,925 | ) | | 429 |
| | (121,330 | ) | | 2,872 |
|
Cumulative effect of change in accounting principle (1) | | — |
| | — |
| | — |
| | (15,041 | ) |
End of period | | $ | 231,087 |
| | $ | 144,998 |
| | $ | 231,087 |
| | $ | 144,998 |
|
________________
| |
(1) | Effective January 1, 2018, with the adoption of new accounting guidance for recognition and measurement of financial instruments, available for sale equity securities were reclassified to equity securities at fair value and the related net unrealized gains were reclassified from AOCI to Retained earnings. |
Offsetting of Assets and Liabilities
The Company’s derivative instruments (call options) are subject to enforceable master netting arrangements. Collateral support agreements associated with each master netting arrangement provide that the Company will receive or pledge financial collateral in the event minimum thresholds have been reached.
The following table presents the instruments that were subject to a master netting arrangement for the Company.
| | ($ in thousands) | | | | Gross Amounts Offset in the | | Net Amounts of Assets/ Liabilities Presented in the | | Gross Amounts Not Offset in the Consolidated Balance Sheets | | | | | | Gross Amounts Offset in the | | Net Amounts of Assets/ Liabilities Presented in the | | Gross Amounts Not Offset in the Consolidated Balance Sheets | | |
| | Gross Amounts | | Consolidated Balance Sheets | | Consolidated Balance Sheets | | Financial Instruments | | Cash Collateral Received | | Net Amount | | Gross Amounts | | Consolidated Balance Sheets | | Consolidated Balance Sheets | | Financial Instruments | | Cash Collateral Received | | Net Amount |
September 30, 2018 | | | | | | | | | | | | | |
June 30, 2019 | | | | | | | | | | | | | |
Asset derivatives: | | | | | | | | | | | | | | | | | | | | | | | | |
Free-standing derivatives | | $ | 10,198 |
| | $ | — |
| | $ | 10,198 |
| | $ | — |
| | $ | 11,638 |
| | $ | (1,440 | ) | | $ | 8,753 |
| | $ | — |
| | $ | 8,753 |
| | $ | — |
| | $ | 8,663 |
| | $ | 90 |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2017 | | | | | | | | | | | | | |
December 31, 2018 | | | | | | | | | | | | | |
Asset derivatives: | | | | | | | | | | | | | | | | | | | | | | | | |
Free-standing derivatives | | $ | 15,550 |
| | $ | — |
| | $ | 15,550 |
| | $ | — |
| | $ | 15,584 |
| | $ | (34 | ) | | $ | 2,647 |
| | $ | — |
| | $ | 2,647 |
| | $ | — |
| | $ | 1,868 |
| | $ | 779 |
|
Note 3 - Investments (Continued)
Deposits
At SeptemberJune 30, 20182019 and December 31, 2017,2018, fixed maturity securities with a fair value of $17,676$18,073 thousand and $17,985$17,695 thousand, respectively, were on deposit with governmental agencies as required by law in various states in which the insurance subsidiaries of HMEC conduct business. In addition, at SeptemberJune 30, 20182019 and December 31, 2017,2018, fixed maturity securities with a fair value of $685,886$787,421 thousand and $686,790$740,016 thousand, respectively, were on deposit with the Federal Home Loan Bank of Chicago (FHLB) as collateral for amounts subject to funding agreements, advances and borrowings which were equal to $625,000$725,000 thousand at both of the respective dates.June 30, 2019 and $675,000 thousand at December 31, 2018. The deposited securities are included in Fixed maturity securities on the Company’s Consolidated Balance Sheets.
Note 34 - Fair Value of Financial Instruments
The Company is required under GAAP to disclose estimated fair values for certain financial and nonfinancial assets and liabilities. Fair values of the Company’s insurance contracts other than annuity contracts (which are investment contracts) are not required to be disclosed. However, the estimated fair values of liabilities under all insurance contracts are taken into consideration in the Company’s overall management of interest rate risk through the matching of investment maturities with amounts due under insurance contracts.
Information regarding the three-level hierarchy presented below and the valuation methodologies utilized by the Company to estimate fair values at each reporting date is included in Note 3 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, specifically in Note 3 -- Fair Value of Financial Instruments.2018.
Note 34 - Fair Value of Financial Instruments (Continued)
Financial Instruments Measured and Carried at Fair Value
The following table presents the Company’s fair value hierarchy for those assets and liabilities measured and carried at fair value on a recurring basis. At SeptemberJune 30, 2018,2019, Level 3 invested assets comprised 3.2%4.0% of the Company’s total investment portfolio at fair value.
| | ($ in thousands) | | | | Fair Value Measurements at | | | | Fair Value Measurements at |
| | Carrying | | Fair | | Reporting Date Using | | Carrying | | Fair | | Reporting Date Using |
| | Amount | | Value | | Level 1 | | Level 2 | | Level 3 | | Amount | | Value | | Level 1 | | Level 2 | | Level 3 |
September 30, 2018 | | | | | | | | | | | |
June 30, 2019 | | | | | | | | | | | |
Financial Assets | | | | | | | | | | | | | | | | | | | | |
Investments | | | | | | | | | | | | | | | | | | | | |
Fixed maturity securities | | | | | | | | | | | | | | | | | | | | |
U.S. Government and federally sponsored agency obligations: | | | | | | | | | | | | | | | | | | | | |
Mortgage-backed securities | | $ | 750,836 |
| | $ | 750,836 |
| | $ | — |
| | $ | 747,469 |
| | $ | 3,367 |
| | $ | 586,758 |
| | $ | 586,758 |
| | $ | — |
| | $ | 584,070 |
| | $ | 2,688 |
|
Other, including U.S. Treasury securities | | 782,600 |
| | 782,600 |
| | 13,101 |
| | 769,499 |
| | — |
| | 566,437 |
| | 566,437 |
| | 16,288 |
| | 550,149 |
| | — |
|
Municipal bonds | | 1,883,674 |
| | 1,883,674 |
| | — |
| | 1,834,345 |
| | 49,329 |
| | 1,599,693 |
| | 1,599,693 |
| | — |
| | 1,552,709 |
| | 46,984 |
|
Foreign government bonds | | 95,003 |
| | 95,003 |
| | — |
| | 95,003 |
| | — |
| | 47,367 |
| | 47,367 |
| | — |
| | 47,367 |
| | — |
|
Corporate bonds | | 2,335,496 |
| | 2,335,496 |
| | 13,188 |
| | 2,233,443 |
| | 88,865 |
| | 1,321,286 |
| | 1,321,286 |
| | 13,997 |
| | 1,228,067 |
| | 79,222 |
|
Other mortgage-backed securities | | 1,681,530 |
| | 1,681,530 |
| | — |
| | 1,561,613 |
| | 119,917 |
| | 1,412,729 |
| | 1,412,729 |
| | — |
| | 1,286,979 |
| | 125,750 |
|
Total fixed maturity securities | | 7,529,139 |
| | 7,529,139 |
| | 26,289 |
| | 7,241,372 |
| | 261,478 |
| | 5,534,270 |
| | 5,534,270 |
| | 30,285 |
| | 5,249,341 |
| | 254,644 |
|
Equity securities | | 133,184 |
| | 133,184 |
| | 82,389 |
| — |
| 50,789 |
| — |
| 6 |
| | 100,143 |
| | 100,143 |
| | 57,530 |
| | 42,544 |
| | 69 |
|
Short-term investments | | 74,647 |
| | 74,647 |
| | 70,705 |
| | 3,942 |
| | — |
| | 247,872 |
| | 247,872 |
| | 246,872 |
| | 1,000 |
| | — |
|
Other investments | | 22,698 |
| | 22,698 |
| | — |
| | 22,698 |
| | — |
| | 24,503 |
| | 24,503 |
| | — |
| | 24,503 |
| | — |
|
Totals | | $ | 7,759,668 |
| | $ | 7,759,668 |
| | $ | 179,383 |
| | $ | 7,318,801 |
| | $ | 261,484 |
| | $ | 5,906,788 |
| | $ | 5,906,788 |
| | $ | 334,687 |
| | $ | 5,317,388 |
| | $ | 254,713 |
|
Separate Account (variable annuity) assets (1) | | | $ | 2,310,886 |
| | $ | 2,310,886 |
| | $ | 2,310,886 |
| | $ | — |
| | $ | — |
|
Financial Liabilities | | | | | | | | | | | | | | | | | | | | |
Investment contract and life policy reserves, embedded derivatives | | $ | 722 |
| | $ | 722 |
| | $ | — |
| | $ | 722 |
| | $ | — |
| | $ | 940 |
| | $ | 940 |
| | $ | — |
| | $ | 940 |
| | $ | — |
|
Other policyholder funds, embedded derivatives | | 82,265 |
| | 82,265 |
| | — |
| | — |
| | 82,265 |
| | $ | 85,961 |
| | $ | 85,961 |
| | $ | — |
| | $ | — |
| | $ | 85,961 |
|
| | | | | | | | | | | | | | | | | | | | |
December 31, 2017 | | | | | | | | | | | |
December 31, 2018 | | | | | | | | | | | |
Financial Assets | | | | | | | | | | | | | | | | | | | | |
Investments | | | | | | | | | | | | | | | | | | | | |
Fixed maturity securities | | | | | | | | | | | | | | | | | | | | |
U.S. Government and federally sponsored agency obligations: | | | | | | | | | | | | | | | | | | | | |
Mortgage-backed securities | | $ | 696,725 |
| | $ | 696,725 |
| | $ | — |
| | $ | 693,375 |
| | $ | 3,350 |
| | $ | 787,441 |
| | $ | 787,441 |
| | $ | — |
| | $ | 784,224 |
| | $ | 3,217 |
|
Other, including U.S. Treasury securities | | 735,408 |
| | 735,408 |
| | 13,393 |
| | 722,015 |
| | — |
| | 833,542 |
| | 833,542 |
| | 13,291 |
| | 820,251 |
| | — |
|
Municipal bonds | | 1,893,253 |
| | 1,893,253 |
| | — |
| | 1,843,925 |
| | 49,328 |
| | 2,003,969 |
| | 2,003,969 |
| | — |
| | 1,956,438 |
| | 47,531 |
|
Foreign government bonds | | 102,738 |
| | 102,738 |
| | — |
| | 102,738 |
| | — |
| | 84,904 |
| | 84,904 |
| | — |
| | 84,904 |
| | — |
|
Corporate bonds | | 2,578,954 |
| | 2,578,954 |
| | 14,345 |
| | 2,491,630 |
| | 72,979 |
| | 2,079,510 |
| | 2,079,510 |
| | 12,281 |
| | 1,986,487 |
| | 80,742 |
|
Other mortgage-backed securities | | 1,716,997 |
| | 1,716,997 |
| | — |
| | 1,612,403 |
| | 104,594 |
| | 1,725,952 |
| | 1,725,952 |
| | — |
| | 1,608,958 |
| | 116,994 |
|
Total fixed maturity securities | | 7,724,075 |
| | 7,724,075 |
| | 27,738 |
| | 7,466,086 |
| | 230,251 |
| | 7,515,318 |
| | 7,515,318 |
| | 25,572 |
| | 7,241,262 |
| | 248,484 |
|
Equity securities | | 135,466 |
| | 135,466 |
| | 82,208 |
| | 53,252 |
| | 6 |
| | 111,750 |
| | 111,750 |
| | 64,330 |
| | 47,415 |
| | 5 |
|
Short-term investments | | 62,593 |
| | 62,593 |
| | 62,593 |
| | — |
| | — |
| | 122,222 |
| | 122,222 |
| | 117,296 |
| | 4,926 |
| | — |
|
Other investments | | 28,050 |
| | 28,050 |
| | — |
| | 28,050 |
| | — |
| | 16,147 |
| | 16,147 |
| | — |
| | 16,147 |
| | — |
|
Totals | | $ | 7,950,184 |
| | $ | 7,950,184 |
| | $ | 172,539 |
| | $ | 7,547,388 |
| | $ | 230,257 |
| | $ | 7,765,437 |
| | $ | 7,765,437 |
| | $ | 207,198 |
| | $ | 7,309,750 |
| | $ | 248,489 |
|
Separate Account (variable annuity) assets (1) | | | $ | 2,001,128 |
| | $ | 2,001,128 |
| | $ | 2,001,128 |
| | $ | — |
| | $ | — |
|
Financial Liabilities | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Investment contract and life policy reserves, embedded derivatives | | $ | 594 |
| | $ | 594 |
| | $ | — |
| | $ | 594 |
| | $ | — |
| | $ | 248 |
| | $ | 248 |
| | $ | — |
| | $ | 248 |
| | $ | — |
|
Other policyholder funds, embedded derivatives | | 80,733 |
| | 80,733 |
| | — |
| | — |
| | 80,733 |
| | $ | 78,700 |
| | $ | 78,700 |
| | $ | — |
| | $ | — |
| | $ | 78,700 |
|
________________
(1) Separate Account (variable annuity) liabilities are equal to the estimated fair value of the Separate Account (variable annuity) assets.
Note 34 - Fair Value of Financial Instruments (Continued)
During the ninesix month periodperiods ended SeptemberJune 30, 2019 and 2018, there were no transfers between Level 1 and Level 2. During the nine month period ended September 30, 2017, an equity security was transferred into Level 1 from Level 2 as a result of increased liquidity in the market and a sustained increase in the market activity for this asset. The following table presents reconciliations for the periods indicated for all Level 3 assets and liabilities measured at fair value on a recurring basis.
| | ($ in thousands) | | Financial Assets | | Financial Liabilities(1) | | Financial Assets | | Financial Liabilities(1) |
| | Municipal Bonds | | Corporate Bonds | | Other Mortgage- Backed Securities (2) | | Total Fixed Maturity Securities | | Equity Securities | | Short-term Investments | | Total | | | | Municipal Bonds | | Corporate Bonds | | Other Mortgage- Backed Securities (2) | | Total Fixed Maturity Securities | | Equity Securities | | Total | | |
| | | | | | | | | | | | | | | | | |
Beginning balance, July 1, 2018 | | $ | 49,921 |
| | $ | 92,663 |
| | $ | 129,061 |
| | $ | 271,645 |
| | $ | 6 |
| | $ | — |
| | $ | 271,651 |
| | $ | 77,788 |
| |
Beginning balance, April 1, 2019 | | | $ | 47,756 |
| | $ | 82,482 |
| | $ | 135,790 |
| | $ | 266,028 |
| | $ | 5 |
| | $ | 266,033 |
| | $ | 84,629 |
|
Transfers into Level 3 (3) | | — |
| | — |
| | 17,030 |
| | 17,030 |
| | — |
| | — |
| | 17,030 |
| | — |
| | — |
| | 2,808 |
| | — |
| | 2,808 |
| | 64 |
| | 2,872 |
| | — |
|
Transfers out of Level 3 (3) | | — |
| | — |
| | (970 | ) | | (970 | ) | | — |
| | — |
| | (970 | ) | | — |
| | — |
| | (4,876 | ) | | — |
| | (4,876 | ) | | — |
| | (4,876 | ) | | — |
|
Total gains or losses | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net investment gains (losses) included in net income related to financial assets | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Net (gains) losses included in net income related to financial liabilities | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 2,205 |
| |
Net unrealized investment gains (losses) on securities included in OCI | | (471 | ) | | 128 |
| | (6,184 | ) | | (6,527 | ) | | — |
| | — |
| | (6,527 | ) | | — |
| |
Net realized (gains) losses included in net income related to financial liabilities | | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 371 |
|
Net unrealized investment gains (losses) included in OCI | | | (537 | ) | | 1,961 |
| | 2,807 |
| | 4,231 |
| | — |
| | 4,231 |
| | — |
|
Purchases | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1,566 |
| | — |
| | 1,566 |
| | — |
| | 1,566 |
| | — |
|
Issuances | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 3,940 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 2,431 |
|
Sales | | — |
| | — |
| | (187 | ) | | (187 | ) | | — |
| | — |
| | (187 | ) | | — |
| | — |
| | — |
| | (607 | ) | | (607 | ) | | — |
| | (607 | ) | | — |
|
Settlements | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Paydowns, maturities and distributions | | (121 | ) | | (3,926 | ) | | (15,466 | ) | | (19,513 | ) | | — |
| | — |
| | (19,513 | ) | | (1,668 | ) | | (235 | ) | | (4,719 | ) | | (9,552 | ) | | (14,506 | ) | | — |
| | (14,506 | ) | | (1,470 | ) |
Ending balance, September 30, 2018 | | $ | 49,329 |
| | $ | 88,865 |
| | $ | 123,284 |
| | $ | 261,478 |
| | $ | 6 |
| | $ | — |
| | $ | 261,484 |
| | $ | 82,265 |
| |
Ending balance, June 30, 2019 | | | $ | 46,984 |
| | $ | 79,222 |
| | $ | 128,438 |
| | $ | 254,644 |
| | $ | 69 |
| | $ | 254,713 |
| | $ | 85,961 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Beginning balance, January 1, 2018 | | $ | 49,328 |
| | $ | 72,979 |
| | $ | 107,944 |
| | $ | 230,251 |
| | $ | 6 |
| | $ | — |
| | $ | 230,257 |
| | $ | 80,733 |
| |
Beginning balance, January 1, 2019 | | | $ | 47,531 |
| | $ | 80,742 |
| | $ | 120,211 |
| | $ | 248,484 |
| | $ | 5 |
| | $ | 248,489 |
| | $ | 78,700 |
|
Transfers into Level 3 (3) | | — |
| | 40,487 |
| | 50,174 |
| | 90,661 |
| | — |
| | — |
| | 90,661 |
| | — |
| | — |
| | 5,882 |
| | 21,934 |
| | 27,816 |
| | 64 |
| | 27,880 |
| | — |
|
Transfers out of Level 3 (3) | | — |
| | (11,279 | ) | | (5,200 | ) | | (16,479 | ) | | — |
| | — |
| | (16,479 | ) | | — |
| | — |
| | (4,876 | ) | | — |
| | (4,876 | ) | | — |
| | (4,876 | ) | | — |
|
Total gains or losses | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net investment gains (losses) included in net income related to financial assets | | — |
| | (246 | ) | | — |
| | (246 | ) | | 3 |
| | — |
| | (243 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Net (gains) losses included in net income related to financial liabilities | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (1,308 | ) | |
Net unrealized investment gains (losses) on securities included in OCI | | 369 |
| | (1,459 | ) | | (5,547 | ) | | (6,637 | ) | | — |
| | — |
| | (6,637 | ) | | — |
| |
Net realized (gains) losses included in net income related to financial liabilities | | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 4,705 |
|
Net unrealized investment gains (losses) included in OCI | | | (193 | ) | | 4,510 |
| | 2,655 |
| | 6,972 |
| | — |
| | 6,972 |
| | — |
|
Purchases | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1,566 |
| | — |
| | 1,566 |
| | — |
| | 1,566 |
| | — |
|
Issuances | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 7,379 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 5,449 |
|
Sales | | — |
| | — |
| | (187 | ) | | (187 | ) | | (3 | ) | | — |
| | (190 | ) | | — |
| | — |
| | — |
| | (607 | ) | | (607 | ) | | — |
| | (607 | ) | | — |
|
Settlements | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Paydowns, maturities and distributions | | (368 | ) | | (11,617 | ) | | (23,900 | ) | | (35,885 | ) | | — |
| | — |
| | (35,885 | ) | | (4,539 | ) | | (354 | ) | | (8,602 | ) | | (15,755 | ) | | (24,711 | ) | | — |
| | (24,711 | ) | | (2,893 | ) |
Ending balance, September 30, 2018 | | $ | 49,329 |
| | $ | 88,865 |
| | $ | 123,284 |
| | $ | 261,478 |
| | $ | 6 |
| | $ | — |
| | $ | 261,484 |
| | $ | 82,265 |
| |
Ending balance, June 30, 2019 | | | $ | 46,984 |
| | $ | 79,222 |
| | $ | 128,438 |
| | $ | 254,644 |
| | $ | 69 |
| | $ | 254,713 |
| | $ | 85,961 |
|
________________
| |
(1) | Represents embedded derivatives, all related to FIAthe Company's fixed indexed annuity products, reported in Other policyholder funds in the Company’s Consolidated Balance Sheets. |
| |
(2) | Includes U.S. Government and federally sponsored agency obligations for mortgage-backed securities and other mortgage-backed securities. |
| |
(3) | Transfers into and out of Level 3 during the three and ninesix month periods ended SeptemberJune 30, 20182019 were attributable to changes in the availability of observable market information for individual fixed maturity securities. The Company’s policy is to recognize transfers into and transfers out of the levels as having occurred at the end of the reporting period in which the transfers were determined. |
Note 34 - Fair Value of Financial Instruments (Continued)
| | ($ in thousands) | | Financial Assets | | Financial Liabilities(1) | | Financial Assets | | Financial Liabilities(1) |
| | Municipal Bonds | | Corporate Bonds | | Mortgage- Backed Securities (2) | | Total Fixed Maturity Securities | | Equity Securities | | Short-term Investments | | Total | | | | Municipal Bonds | | Corporate Bonds | | Other Mortgage- Backed Securities (2) | | Total Fixed Maturity Securities | | Equity Securities | | Total | | |
Beginning balance, April 1, 2018 | | | $ | 49,748 |
| | $ | 78,780 |
| | $ | 115,334 |
| | $ | 243,862 |
| | $ | 6 |
| | $ | 243,868 |
| | $ | 78,486 |
|
Transfers into Level 3 (3) | | | — |
| | 29,709 |
| | 18,322 |
| | 48,031 |
| | — |
| | 48,031 |
| | — |
|
Transfers out of Level 3 (3) | | | — |
| | (11,279 | ) | | (4,230 | ) | | (15,509 | ) | | — |
| | (15,509 | ) | | — |
|
Total gains or losses | | | | | | | | | | | | | | | |
Net investment gains (losses) included in net income related to financial assets | | | — |
| | (246 | ) | | — |
| | (246 | ) | | — |
| | (246 | ) | | — |
|
Net realized (gains) losses included in net income related to financial liabilities | | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (1,291 | ) |
Net unrealized investment gains (losses) included in OCI | | | 397 |
| | (700 | ) | | 1,659 |
| | 1,356 |
| | — |
| | 1,356 |
| | — |
|
Purchases | | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Issuances | | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 2,107 |
|
Sales | | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Settlements | | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Paydowns, maturities and distributions | | | (224 | ) | | (3,601 | ) | | (2,024 | ) | | (5,849 | ) | | — |
| | (5,849 | ) | | (1,514 | ) |
Ending balance, June 30, 2018 | | | $ | 49,921 |
| | $ | 92,663 |
| | $ | 129,061 |
| | $ | 271,645 |
| | $ | 6 |
| | $ | 271,651 |
| | $ | 77,788 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Beginning balance, July 1, 2017 | | $ | 49,123 |
| | $ | 77,052 |
| | $ | 120,324 |
| | $ | 246,499 |
| | $ | 6 |
| | $ | — |
| | $ | 246,505 |
| | $ | 67,995 |
| |
Beginning balance, January 1, 2018 | | | $ | 49,328 |
| | $ | 72,979 |
| | $ | 107,944 |
| | $ | 230,251 |
| | $ | 6 |
| | $ | 230,257 |
| | $ | 80,733 |
|
Transfers into Level 3 (3) | | — |
| | 23,501 |
| | 11,961 |
| | 35,462 |
| | — |
| | — |
| | 35,462 |
| | — |
| | — |
| | 40,487 |
| | 33,144 |
| | 73,631 |
| | — |
| | 73,631 |
| | — |
|
Transfers out of Level 3 (3) | | — |
| | 1 |
| | (881 | ) | | (880 | ) | | — |
| | — |
| | (880 | ) | | — |
| | — |
| | (11,279 | ) | | (4,230 | ) | | (15,509 | ) | | — |
| | (15,509 | ) | | — |
|
Total gains or losses | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net investment gains (losses) included in net income related to financial assets | | — |
| | (1 | ) | | (160 | ) | | (161 | ) | | — |
| | — |
| | (161 | ) | | — |
| | — |
| | (246 | ) | | — |
| | (246 | ) | | 3 |
| | (243 | ) | | — |
|
Net (gains) losses included in net income related to financial liabilities | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 2,587 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (3,513 | ) |
Net unrealized investment gains (losses) on securities included in OCI | | 382 |
| | (192 | ) | | (377 | ) | | (187 | ) | | — |
| | — |
| | (187 | ) | | — |
| |
Net unrealized investment gains (losses) included in OCI | | | 840 |
| | (1,587 | ) | | 637 |
| | (110 | ) | | — |
| | (110 | ) | | — |
|
Purchases | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Issuances | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 3,752 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 3,439 |
|
Sales | | — |
| | (1,999 | ) | | — |
| | (1,999 | ) | | — |
| | — |
| | (1,999 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | (3 | ) | | (3 | ) | | — |
|
Settlements | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Paydowns, maturities and distributions | | (293 | ) | | (4,117 | ) | | (9,249 | ) | | (13,659 | ) | | — |
| | — |
| | (13,659 | ) | | (1,348 | ) | | (247 | ) | | (7,691 | ) | | (8,434 | ) | | (16,372 | ) | | — |
| | (16,372 | ) | | (2,871 | ) |
Ending balance, September 30, 2017 | | $ | 49,212 |
| | $ | 94,245 |
| | $ | 121,618 |
| | $ | 265,075 |
| | $ | 6 |
| | $ | — |
| | $ | 265,081 |
| | $ | 72,986 |
| |
| | | | | | | | | | | | | | | | | |
Beginning balance, January 1, 2017 | | $ | 46,497 |
| | $ | 60,191 |
| | $ | 104,659 |
| | $ | 211,347 |
| | $ | 6 |
| | $ | 751 |
| | $ | 212,104 |
| | $ | 59,393 |
| |
Transfers into Level 3 (3) | | 5,214 |
| | 55,420 |
| | 36,482 |
| | 97,116 |
| | — |
| | — |
| | 97,116 |
| | — |
| |
Transfers out of Level 3 (3) | | (5,557 | ) | | (11,962 | ) | | (881 | ) | | (18,400 | ) | | — |
| | (751 | ) | | (19,151 | ) | | — |
| |
Total gains or losses | | | | | | | | | | | | | | | | | |
Net investment gains (losses) included in net income related to financial assets | | — |
| | (1 | ) | | (1,874 | ) | | (1,875 | ) | | — |
| | — |
| | (1,875 | ) | | — |
| |
Net (gains) losses included in net income related to financial liabilities | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 6,133 |
| |
Net unrealized investment gains (losses) on securities included in OCI | | 3,540 |
| | 263 |
| | 1,945 |
| | 5,748 |
| | — |
| | — |
| | 5,748 |
| | — |
| |
Purchases | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| |
Issuances | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 10,538 |
| |
Sales | | — |
| | (1,999 | ) | | — |
| | (1,999 | ) | | — |
| | — |
| | (1,999 | ) | | — |
| |
Settlements | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| |
Paydowns, maturities and distributions | | (482 | ) | | (7,667 | ) | | (18,713 | ) | | (26,862 | ) | | — |
| | — |
| | (26,862 | ) | | (3,078 | ) | |
Ending balance, September 30, 2017 | | $ | 49,212 |
| | $ | 94,245 |
| | $ | 121,618 |
| | $ | 265,075 |
| | $ | 6 |
| | $ | — |
| | $ | 265,081 |
| | $ | 72,986 |
| |
Ending balance, June 30, 2018 | | | $ | 49,921 |
| | $ | 92,663 |
| | $ | 129,061 |
| | $ | 271,645 |
| | $ | 6 |
| | $ | 271,651 |
| | $ | 77,788 |
|
________________
| |
(1) | Represents embedded derivatives, all related to FIAthe Company’s fixed indexed annuity products, reported in Other policyholder funds in the Company’s Consolidated Balance Sheets. |
| |
(2) | Includes U.S. Government and federally sponsored agency obligations for mortgage-backed securities and other mortgage-backed securities. |
| |
(3) | Transfers into and out of Level 3 during the three and ninesix month periods ended SeptemberJune 30, 20172018 were attributable to changes in the availability of observable market information for individual fixed maturity securities and short-term investments.. The Company’s policy is to recognize transfers into and transfers out of the levels as having occurred at the end of the reporting period in which the transfers were determined. |
For the ninesix month period ended SeptemberJune 30, 2018,2019, the Company realized ahad no net loss of $243 thousandlosses on three Level 3 securities. For the ninesix month period ended SeptemberJune 30, 2017,2018, the Company impairedhad a realized net loss on two Level 3 securities for a $1,875 thousand realized loss.of $243 thousand. For the three and ninesix month periods ended SeptemberJune 30, 2018,2019, net investment losses of $2,205$371 thousand and gains of $1,308$4,705 thousand respectively, were included in earnings that were attributable to the changes in the fair value of Level 3 liabilities (embedded derivatives) still held; for the three and ninesix month periods ended SeptemberJune 30, 2017,2018, the respective lossgain amounts were $2,587$1,291 thousand and $6,133$3,513 thousand.
Note 34 - Fair Value of Financial Instruments (Continued)
The valuation techniques and significant unobservable inputs used in the fair value measurement for financial assets and liabilities classified as Level 3 are subject to the control processes as described in Note 3 -- Fair Value of Financial Instruments -- Investments in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.2018. Generally, valuation techniques for fixed maturity securities include spread pricing, matrix pricing and discounted cash flow methodologies; include inputs such as quoted prices for identical or similar securities that are less liquid; and are based on lower levels of trading activity than securities classified as Level 2. The valuation techniques and significant unobservable inputs used in the fair value measurement for equity securities classified as Level 3 use similar valuation techniques and significant unobservable inputs as those used for fixed maturity securities.
The sensitivity of the estimated fair values to changes in the significant unobservable inputs for fixed maturity and equity securities included in Level 3 generally relate to interest rate spreads, illiquidity premiums and default rates. Significant spread widening in isolation will adversely impact the overall valuation, while significant spread tightening will lead to substantial valuation increases. Significant increases (decreases) in illiquidity premiums in isolation will result in substantially lower (higher) valuations. Significant increases (decreases) in expected default rates in isolation will result in substantially lower (higher) valuations.
Financial Instruments Not Carried at Fair Value; Disclosure Required
The Company has various other financial assets and financial liabilities used in the normal course of business that are not carried at fair value, but for which fair value disclosure is required. The following table presents the carrying value, fair value and fair value hierarchy of these financial assets and financial liabilities.
| | ($ in thousands) | | | | Fair Value Measurements at | | | | Fair Value Measurements at |
| | Carrying | | Fair | | Reporting Date Using | | Carrying | | Fair | | Reporting Date Using |
| | Amount | | Value | | Level 1 | | Level 2 | | Level 3 | | Amount | | Value | | Level 1 | | Level 2 | | Level 3 |
September 30, 2018 | | | | | | | | | | | |
June 30, 2019 | | | | | | | | | | | |
Financial Assets | | | | | | | | | | | | | | | | | | | | |
Investments | | | | | | | | | | | | | | | | | | | | |
Other investments | | $ | 155,410 |
| | $ | 160,121 |
| | $ | — |
| | $ | — |
| | $ | 160,121 |
| | $ | 161,313 |
| | $ | 166,023 |
| | $ | — |
| | $ | — |
| | $ | 166,023 |
|
Financial Liabilities | | | | | | | | | | | | | | | | | | | | |
Investment contract and life policy reserves, fixed annuity contracts | | 4,545,232 |
| | 4,445,442 |
| | — |
| | — |
| | 4,445,442 |
| | 4,605,272 |
| | 4,529,317 |
| | — |
| | — |
| | 4,529,317 |
|
Investment contract and life policy reserves, account values on life contracts | | 85,698 |
| | 91,254 |
| | — |
| | — |
| | 91,254 |
| | 90,239 |
| | 93,366 |
| | — |
| | — |
| | 93,366 |
|
Other policyholder funds | | 640,187 |
| | 640,187 |
| | — |
| | 576,021 |
| | 64,166 |
| | 735,919 |
| | 735,919 |
| | — |
| | 676,460 |
| | 59,459 |
|
Long-term debt | | 297,671 |
| | 304,614 |
| | — |
| | 304,614 |
| | — |
| | 297,881 |
| | 315,938 |
| | — |
| | 315,938 |
| | — |
|
| | | | | | | | | | | | | | | | | | | | |
December 31, 2017 | | | | | | | | | | | |
December 31, 2018 | | | | | | | | | | | |
Financial Assets | | | | | | | | | | | | | | | | | | | | |
Investments | | | | | | | | | | | | | | | | | | | | |
Other investments | | $ | 154,898 |
| | $ | 159,575 |
| | $ | — |
| | $ | — |
| | $ | 159,575 |
| | $ | 156,725 |
| | $ | 161,449 |
| | $ | — |
| | $ | — |
| | $ | 161,449 |
|
Financial Liabilities | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Investment contract and life policy reserves, fixed annuity contracts | | 4,452,972 |
| | 4,366,334 |
| | — |
| | — |
| | 4,366,334 |
| | 4,555,849 |
| | 4,478,338 |
| | — |
| | — |
| | 4,478,338 |
|
Investment contract and life policy reserves, account values on life contracts | | 82,911 |
| | 88,620 |
| | — |
| | — |
| | 88,620 |
| | 87,229 |
| | 90,402 |
| | — |
| | — |
| | 90,402 |
|
Other policyholder funds | | 643,528 |
| | 643,528 |
| | — |
| | 575,622 |
| | 67,906 |
| | 689,287 |
| | 689,287 |
| | — |
| | 626,325 |
| | 62,962 |
|
Long-term debt | | 297,469 |
| | 311,315 |
| | — |
| | 311,315 |
| | — |
| | 297,740 |
| | 291,938 |
| | — |
| | 291,938 |
| | — |
|
Note 45 - Derivative Instruments
The Company offers FIAfixed indexed annuity (FIA) products, which are deferred fixed annuities that guarantee the return of principal to the contractholder and credit interest based on a percentage of the gain in a specified market index. The Company also offers IULindexed universal life (IUL) products which credit interest based on a percentage of the gain in a specified market index. When deposits are received for FIA and IUL contracts, a portion is used to purchase derivatives consisting of call options on the applicable market indices to fund the index credits due to FIA and IUL policyholders. For the Company, substantially all of such call options are one-year options purchased to match the funding requirements of the underlying contracts. The call options are carried at fair value with changes in fair value included in Net investment gains (losses), a component of Revenues,revenues, in the Consolidated Statements of Operations.
The change in fair value of derivatives includes the gains or losses recognized at the expiration of the option term or early termination and the changes in fair value for open positions. Call options are not purchased to fund the index liabilities which may arise after the next deposit anniversary date. On the respective anniversary dates of the indexed deposits, the index used to compute the annual index credit is reset and new one-year call options are purchased to fund the next annual index credit. The cost of these purchases is managed through the terms of the FIA and IUL contracts, which permit changes to index return caps, participation rates and/or asset fees, subject to guaranteed minimums on each contract’s anniversary date. By adjusting the index return caps, participation rates or asset fees, crediting rates generally can be managed except in cases where the contractual features would prevent further modifications.
The future annual index credits on FIA contracts are treatedaccounted for as a "series of embedded derivatives" over the expected life of the applicable contract with a corresponding reserve recorded. For IUL, the embedded derivative represents a single year liability for the index return.
The Company carries all derivative instruments at fair value in the Consolidated Balance Sheets. The Company elected to not use hedge accounting for derivative transactions related to the FIA and IUL products. As a result, the Company recognizes the purchased call options and the embedded derivatives related to the provision of a contingent return at fair value, with changes in the fair value of the derivatives recognized immediately as Net investment gains (losses) in the Consolidated Statements of Operations. The fair values of derivative instruments, including derivative instruments embedded in FIA and IUL contracts, are presented in the Consolidated Balance Sheets as follows:
| | ($ in thousands) | | September 30, 2018 | | December 31, 2017 | | June 30, 2019 | | December 31, 2018 |
Assets | | |
| | |
| | | | |
Derivative instruments, included in Short-term and other investments | | $ | 10,198 |
| | $ | 15,550 |
| | $ | 8,753 |
| | $ | 2,647 |
|
| | | | | | | | |
Liabilities | | |
| | |
| | | | |
FIA - embedded derivatives, included in Other policyholder funds | | $ | 82,265 |
| | $ | 80,733 |
| | $ | 85,961 |
| | $ | 78,700 |
|
IUL - embedded derivatives, included in Investment contract and life policy reserves | | 722 |
| | 594 |
| | 940 |
| | 248 |
|
Note 45 - Derivative Instruments (Continued)
In general, the change in the fair value of the embedded derivatives related to FIA contracts will not correspond to the change in fair value of the purchased call options because the purchased call options are one-year options while the options valued in the embedded derivatives represent the rights of the policyholder to receive index credits over the entire period the FIA contracts are expected to be in force, which typically exceeds 10 years. The changes in fair value of derivatives included in the Consolidated Statements of Operations were as follows:
| | ($ in thousands) | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2018 | | 2017 | | 2018 | | 2017 | | 2019 | | 2018 | | 2019 | | 2018 |
Change in fair value of derivatives:(1) | | | | | | | | | | | | | | | | |
Revenues | | | | | | | | | | | | | | | | |
Net investment gains (losses) | | $ | 4,683 |
| | $ | 2,943 |
| | $ | 3,832 |
| | $ | 7,109 |
| | $ | 1,375 |
| | $ | (2 | ) | | $ | 5,429 |
| | $ | (851 | ) |
| | | | | | | | | | | | | | | | |
Change in fair value of embedded derivatives: | | | | | | | | | | | | | | | | |
Revenues | | | | | | | | | | | | | | | | |
Net investment gains (losses) | | $ | (2,479 | ) | | $ | (2,702 | ) | | $ | 1,090 |
| | $ | (6,363 | ) | | $ | (516 | ) | | $ | 1,281 |
| | $ | (5,261 | ) | | $ | 3,569 |
|
________________
| |
(1) | Includes the gains or losses recognized at the expiration of the option term or early termination and the changes in fair value for open options. |
The Company’s strategy attempts to mitigate potential risk of loss under these agreements through a regular monitoring process, which evaluates the program’s effectiveness. The Company is exposed to risk of loss in the event of nonperformance by the counterparties and, accordingly, option contracts are purchased from multiple counterparties, which are evaluated for creditworthiness prior to purchase of the contracts. All of these options have been purchased from nationally recognized financial institutions with a Standard and Poor’s Financial Services LLCGlobal Inc. (S&P) and/or /Moody's Investors Service, Inc. (Moody's) long-term credit rating of "BBB+/Bbb1"A1" or higher at the time of purchase and the maximum credit exposure to any single counterparty is subject to concentration limits. The Company also obtains credit support agreements that allow it to request the counterparty to provide collateral when the fair value of the exposure to the counterparty exceeds specified amounts.
The notional amount and fair value of call options by counterparty and each counterparty’s long-term credit ratings were as follows:
| | ($ in thousands) | | September 30, 2018 | | December 31, 2017 | | June 30, 2019 | | December 31, 2018 |
| | Credit Rating | | Notional | | Fair | | Notional | | Fair | | Credit Rating | | Notional | | Fair | | Notional | | Fair |
Counterparty | | S&P | | Moody's | | Amount | | Value | | Amount | | Value | | S&P | | Moody's | | Amount | | Value | | Amount | | Value |
| | | | | | | | | |
Bank of America, N.A. | | A+ | | Aa3 | | $ | 135,600 |
| | $ | 6,144 |
| | $ | 85,100 |
| | $ | 6,320 |
| | A+ | | Aa2 | | $ | 156,800 |
| | $ | 3,560 |
| | $ | 144,500 |
| | $ | 870 |
|
Barclays Bank PLC | | A | | A2 | | 26,200 |
| | 586 |
| | 48,900 |
| | 1,828 |
| | A | | A2 | | 72,500 |
| | 1,696 |
| | 28,500 |
| | 247 |
|
Citigroup Inc. | | BBB+ | | | | — |
| | — |
| | — |
| | — |
| | BBB+ | | A3 | | — |
| | — |
| | — |
| | — |
|
Credit Suisse International | | A | | A1 | | 16,100 |
| | 307 |
| | 21,100 |
| | 1,444 |
| | A+ | | A1 | | 16,100 |
| | 295 |
| | 16,100 |
| | 55 |
|
Societe Generale | | A | | | | 92,000 |
| | 3,161 |
| | 91,700 |
| | 5,958 |
| | A | | | | 55,000 |
| | 3,202 |
| | 89,100 |
| | 1,475 |
|
| | | | | | | | | | | | | | | | |
Total | | $ | 269,900 |
| | $ | 10,198 |
| | $ | 246,800 |
| | $ | 15,550 |
| | $ | 300,400 |
| | $ | 8,753 |
| | $ | 278,200 |
| | $ | 2,647 |
|
As of SeptemberJune 30, 20182019 and December 31, 2017,2018, the Company held $11,638$8,663 thousand and $15,584$1,868 thousand, respectively, of cash received from counterparties for derivative collateral, which is included in Other liabilities on the Consolidated Balance Sheets. This derivative collateral limits the Company’s maximum amount of economic loss due to credit risk that would be incurred if parties to the call options failed completely to perform according to the terms of the contracts to $250 thousand per counterparty.
Note 6 - Deposit Asset on Reinsurance
In the second quarter of 2019, the Company reinsured a $2.9 billion block of in force fixed and variable annuity business with a minimum crediting rate of 4.5%. This represented approximately 50% of the Company’s in force fixed annuity account balances. The arrangement contains investment guidelines and a trust to help meet the Company’s risk management objectives.
The annuity reinsurance transaction was effective April 1, 2019. Under the agreement, approximately $2.2 billion of fixed annuity reserves were reinsured on a coinsurance basis for consideration of approximately $2.3 billion which resulted in recognition of an after tax realized investment gain of $106.9 million. The separate account assets and liabilities of approximately $0.7 billion were reinsured on a modified coinsurance basis and thus, remain on the Company’s consolidated financial statements, but the related results of operations are fully reinsured.
The Company determined that the reinsurance agreement does not expose the reinsurer to a reasonable possibility of a significant loss from insurance risk. Therefore, the Company recognizes the reinsurance agreement using the deposit method of accounting. The assets transferred to the reinsurer as consideration paid is reported as a Deposit asset on reinsurance. As amounts are received or paid, consistent with the underlying reinsured contracts, the Deposit asset on reinsurance is adjusted. The Deposit asset on reinsurance is accreted to the estimated ultimate cash flows using the interest method and the adjustment is reported as Net investment income.
Note 57 - Property and Casualty Unpaid Claims and Claim Expenses
The following table is a summary reconciliation of the beginning and ending Property and Casualty unpaid claims and claim expense reserves for the periods indicated. The table presents reserves on both gross and net (after reinsurance) bases. The total net Property and Casualty insurance claims and claim expense incurred amounts are reflected in the Consolidated Statements of Operations. The end of the period gross reserve (before reinsurance) balances and the reinsurance recoverable balances are reflected on a gross basis in the Consolidated Balance Sheets.
| | ($ in thousands) | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2018 | | 2017 | | 2018 | | 2017 | | 2019 | | 2018 | | 2019 | | 2018 |
Property and Casualty | | |
| | |
| | | | | | |
| | |
| | | | |
Beginning gross reserves (1) | | $ | 352,817 |
| | $ | 329,831 |
| | $ | 319,182 |
| | $ | 307,757 |
| | $ | 359,701 |
| | $ | 331,255 |
| | $ | 367,180 |
| | $ | 319,182 |
|
Less: reinsurance recoverables | | 62,883 |
| | 58,897 |
| | 57,409 |
| | 61,199 |
| | 78,328 |
| | 62,917 |
| | 89,725 |
| | 57,409 |
|
Net reserves, beginning of period (2) | | 289,934 |
| | 270,934 |
| | 261,773 |
| | 246,558 |
| | 281,373 |
| | 268,338 |
| | 277,455 |
| | 261,773 |
|
Incurred claims and claim expenses: | | |
| | |
| | | | | | |
| | |
| | | | |
Claims occurring in the current period | | 140,035 |
| | 115,393 |
| | 408,028 |
| | 386,945 |
| | 134,411 |
| | 147,005 |
| | 253,178 |
| | 267,993 |
|
Decrease in estimated reserves for claims occurring in prior periods (3) | | — |
| | (500 | ) | | (300 | ) | | (2,100 | ) | | (2,000 | ) | | — |
| | (4,000 | ) | | (300 | ) |
Total claims and claim expenses incurred (4) | | 140,035 |
| | 114,893 |
| | 407,728 |
| | 384,845 |
| | 132,411 |
| | 147,005 |
| | 249,178 |
| | 267,693 |
|
Claims and claim expense payments for claims occurring during: | | |
| | |
| | | | | | |
| | |
| | | | |
Current period | | 106,187 |
| | 97,188 |
| | 233,638 |
| | 245,213 |
| | 83,755 |
| | 80,403 |
| | 129,469 |
| | 127,451 |
|
Prior periods | | 28,997 |
| | 28,054 |
| | 141,078 |
| | 125,605 |
| | 39,512 |
| | 45,006 |
| | 106,647 |
| | 112,081 |
|
Total claims and claim expense payments | | 135,184 |
| | 125,242 |
| | 374,716 |
| | 370,818 |
| | 123,267 |
| | 125,409 |
| | 236,116 |
| | 239,532 |
|
Net reserves, end of period (2) | | 294,785 |
| | 260,585 |
| | 294,785 |
| | 260,585 |
| | 290,517 |
| | 289,934 |
| | 290,517 |
| | 289,934 |
|
Plus: reinsurance recoverables | | 63,262 |
| | 57,302 |
| | 63,262 |
| | 57,302 |
| | 77,345 |
| | 62,883 |
| | 77,345 |
| | 62,883 |
|
Ending gross reserves (1) | | $ | 358,047 |
| | $ | 317,887 |
| | $ | 358,047 |
| | $ | 317,887 |
| | $ | 367,862 |
| | $ | 352,817 |
| | $ | 367,862 |
| | $ | 352,817 |
|
________________
| |
(1) | Unpaid claims and claim expenses as reported in the Consolidated Balance Sheets also include reserves for Life and Retirement of $26,589$30,477 thousand and $23,897$27,016 thousand as of SeptemberJune 30, 20182019 and 2017,2018, respectively, in addition to Property and Casualty reserves. |
| |
(2) | Reserves net of anticipated reinsurance recoverables. |
| |
(3) | Shows the amounts by which the Company decreased its reserves in each of the periods indicated for claims occurring in previous periods to reflect subsequent information on such claims and changes in their projected final settlement costs. |
| |
(4) | Benefits, claims and settlement expenses as reported in the Consolidated Statements of Operations also include amounts for Life and Retirement of $21,811$20,281 thousand and $65,958$42,898 thousand for the three and ninesix month periods ended SeptemberJune 30, 2018,2019, respectively, in addition to Property and Casualty amounts. Benefits, claims and settlement expenses for Life and Retirement were $20,002$21,273 thousand and $60,025$44,147 thousand for the three and ninesix month periods ended SeptemberJune 30, 2017,2018, respectively. |
Net favorable development of total reserves for Property and Casualty claims occurring in prior years was $300 thousand$4.0 million and $2,100 thousand$0.3 million for the ninesix month periods ended SeptemberJune 30, 20182019 and 2017,2018, respectively. The favorable development for both of the ninesix month periodsperiod ended SeptemberJune 30, 2018 and 20172019 was predominantly the result of favorable severityloss trends in auto and homeowners loss emergence for accident years 20162018 and prior. The favorable development for the six month period ended June 30, 2018 was predominately the result of favorable loss trends in homeowners emergence for accident years 2017 and prior.
Indebtedness outstanding was as follows:
| | ($ in thousands) | | September 30, 2018 | | December 31, 2017 | | June 30, 2019 | | December 31, 2018 |
Short-term debt: | | |
| | |
| | |
| | |
|
Bank Credit Facility, expires June 27, 2023 | | $ | — |
| | $ | — |
| |
Bank Credit Facility, expires June 21, 2024 | | | $ | — |
| | $ | — |
|
| | | | | | | | |
Long-term debt: | | |
| | |
| | |
| | |
|
4.50% Senior Notes, due December 1, 2025. Aggregate principal amount of $250,000 thousand less unaccrued discount of $503 and $547 thousand (4.5% imputed rate) and unamortized debt issuance costs of $1,826 thousand and $1,984 thousand | | 247,671 |
| | 247,469 |
| |
Federal Home Loan Bank borrowing | | 50,000 |
| | 50,000 |
| |
4.50% Senior Notes, due December 1, 2025. Aggregate principal amount of $250,000 thousand less unaccrued discount of $458 and $488 thousand (4.5% imputed rate) and unamortized debt issuance costs of $1,661 thousand and $1,772 thousand | | | 247,881 |
| | 247,740 |
|
FHLB borrowing | | | 50,000 |
| | 50,000 |
|
Total | | $ | 297,671 |
| | $ | 297,469 |
| | $ | 297,881 |
| | $ | 297,740 |
|
Note 6 - Debt (Continued)
The Credit Agreement with certain financial institutions (Bank Credit Facility), 4.50% Senior Notes due 2025 (Senior Notes due 2025) and the FHLB borrowing are described in Notes to Consolidated Financial Statements -- Note 7 -- Debt of the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.2018.
Credit Agreement with Financial Institutions (Bank Credit Facility)
EffectiveOn June 27, 2018,21, 2019, the Company, as borrower, replaced its current line of credit with a new five-year Credit Agreement (Bank Credit Facility). The new Bank Credit Facility was amended and restatedincreased the amount available on this senior revolving credit facility to extend the commitment termination date to June 27, 2023$225 million from the previous termination date of July 30, 2019. The interest rate spread relative to Eurodollar base rates and the financial covenants within the agreement were not changed. The Bank Credit Facility is by and between HMEC, certain financial institutions named therein$150 million. PNC Capital Markets, LLC and JPMorgan Chase Bank, N.A., served as administrative agent, and provides for unsecured borrowings of up to $150 million. Interest accrues at varying spreads relative to prime or Eurodollar base rates and is payable monthly or quarterly dependingjoint leads on the applicable basenew agreement, with The Northern Trust Company, U.S. Bank National Association, KeyBank National Association, Comerica Bank and Illinois National Bank participating in the syndicate. Terms and conditions of the new Bank Credit Facility are substantially consistent with the prior agreement, with an interest rate (Eurodollar base ratebased on LIBOR plus 1.15%).115 basis points.
On July 1, 2019, the Company utilized the senior revolving credit facility to partially fund the acquisition of NTA. As of August 1, 2019, the amount outstanding on the senior revolving credit facility was $135 million. The unused portion of the Bank Credit Facility is subject to a variable commitment fee, which was 0.15% on an annual basis at SeptemberJune 30, 2018. HMEC had no balance outstanding under its Bank Credit Facility at September 30, 2018.2019.
The Company recognizes the cost of reinsurance premiums over the contract periods for such premiums in proportion to the insurance protection provided. Amounts recoverable from reinsurers for unpaid claims and claim settlement expenses, including estimated amounts for unsettled claims, claims incurred but not yet reported and policy benefits, are estimated in a manner consistent with the insurance liability associated with the policy. The effects of reinsurance on premiums written and contract deposits; premiums and contract charges earned; and benefits, claims and settlement expenses were as follows:
| | ($ in thousands) | | Gross Amount | | Ceded to Other Companies | | Assumed from Other Companies | | Net Amount | | Gross Amount | | Ceded to Other Companies (1) | | Assumed from Other Companies | | Net Amount |
Three months ended September 30, 2018 | | |
| | |
| | |
| | |
| |
Three months ended June 30, 2019 | | | |
| | |
| | |
| | |
|
Premiums written and contract deposits (1)(2) | | $ | 342,268 |
| | $ | 5,370 |
| | $ | 1,199 |
| | $ | 338,097 |
| | $ | 314,897 |
| | $ | 6,028 |
| | $ | 2,822 |
| | $ | 311,691 |
|
Premiums and contract charges earned | | 210,953 |
| | 5,385 |
| | 1,252 |
| | 206,820 |
| | 213,415 |
| | 8,155 |
| | 2,836 |
| | 208,096 |
|
Benefits, claims and settlement expenses | | 163,912 |
| | 3,207 |
| | 1,141 |
| | 161,846 |
| | 153,436 |
| | 2,797 |
| | 2,053 |
| | 152,692 |
|
| | | | | | | | | | | | | | | | |
Three months ended September 30, 2017 | | |
| | |
| | |
| | |
| |
Premiums written and contract deposits (1) | | $ | 322,428 |
| | $ | 5,189 |
| | $ | 1,116 |
| | $ | 318,355 |
| |
Three months ended June 30, 2018 | | | |
| | |
| | |
| | |
|
Premiums written and contract deposits (2) | | | $ | 305,864 |
| | $ | 5,483 |
| | $ | 1,341 |
| | $ | 301,722 |
|
Premiums and contract charges earned | | 202,988 |
| | 5,216 |
| | 1,163 |
| | 198,935 |
| | 209,892 |
| | 5,505 |
| | 1,223 |
| | 205,610 |
|
Benefits, claims and settlement expenses | | 135,508 |
| | 1,831 |
| | 1,218 |
| | 134,895 |
| | 170,459 |
| | 3,330 |
| | 1,149 |
| | 168,278 |
|
| | | | | | | | | | | | | | | | |
Nine months ended September 30, 2018 | | | | | | | | | |
Six months ended June 30, 2019 | | | | | | | | | |
Premiums written and contract deposits (1)(2) | | $ | 936,948 |
| | $ | 16,367 |
| | $ | 3,246 |
| | $ | 923,827 |
| | $ | 613,990 |
| | $ | 11,876 |
| | $ | 4,971 |
| | $ | 607,085 |
|
Premiums and contract charges earned | | 628,582 |
| | 16,418 |
| | 3,264 |
| | 615,428 |
| | 426,671 |
| | 13,977 |
| | 5,187 |
| | 417,881 |
|
Benefits, claims and settlement expenses | | 486,339 |
| | 15,551 |
| | 2,898 |
| | 473,686 |
| | 295,488 |
| | 7,089 |
| | 3,677 |
| | 292,076 |
|
| | | | | | | | | | | | | | | | |
Nine months ended September 30, 2017 | | | | | | | | | |
Premiums written and contract deposits (1) | | $ | 940,063 |
| | $ | 16,342 |
| | $ | 2,980 |
| | $ | 926,701 |
| |
Six months ended June 30, 2018 | | | | | | | | | |
Premiums written and contract deposits (2) | | | $ | 594,680 |
| | $ | 10,997 |
| | $ | 2,047 |
| | $ | 585,730 |
|
Premiums and contract charges earned | | 603,794 |
| | 16,415 |
| | 2,996 |
| | 590,375 |
| | 417,629 |
| | 11,033 |
| | 2,012 |
| | 408,608 |
|
Benefits, claims and settlement expenses | | 450,997 |
| | 8,899 |
| | 2,772 |
| | 444,870 |
| | 322,427 |
| | 12,344 |
| | 1,757 |
| | 311,840 |
|
________________
| |
(1) | Excludes the annuity reinsurance agreement accounted for under the deposit method that is discussed in Note 6. |
| |
(2) | This measure is not based on accounting principles generally accepted in the United States of AmericaU.S. (non-GAAP). An explanation of this non-GAAP measure is contained in the Glossary of Selected Terms included as an exhibit in the Company's reports filed with the SEC. |
Investment Commitments
From time to time, the Company has outstanding commitments to purchase investments and/or commitments to lend funds under bridge loans. Unfunded commitments to purchase investments were $124,577 thousand$157.4 million and $106,381 thousand$145.4 million at SeptemberJune 30, 20182019 and December 31, 2017,2018, respectively.
Note 911 - Segment Information
The Company conducts and manages its business through four segments. The three operating segments, representing the major lines of insurance business, are: Property and Casualty, primarily personal lines automobile and property insurance products; Retirement, primarily tax-qualified fixed and variable annuities; and Life, life insurance. The Company does not allocate the impact of corporate-level transactions to these operating segments, consistent with the basis for management’s evaluation of the results of those segments, but classifies those items in the fourth segment, Corporate and Other. In addition to ongoing transactions such as corporate debt service, net investment gains (losses) and certain public company expenses, such items also have included corporate debt retirement costs, when applicable. Summarized financial information for these segments is as follows:
| | ($ in thousands) | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2018 | | 2017 | | 2018 | | 2017 | | 2019 | | 2018 | | 2019 | | 2018 |
Insurance premiums and contract charges earned | | | | | | | | | | | | | | | | |
Property and Casualty | | $ | 168,653 |
| | $ | 163,209 |
| | $ | 501,444 |
| | $ | 481,987 |
| | $ | 171,303 |
| | $ | 167,333 |
| | $ | 342,143 |
| | $ | 332,791 |
|
Retirement | | 8,031 |
| | 7,393 |
| | 23,924 |
| | 20,753 |
| | 6,931 |
| | 7,825 |
| | 15,509 |
| | 15,893 |
|
Life | | 30,136 |
| | 28,333 |
| | 90,060 |
| | 87,635 |
| | 29,862 |
| | 30,452 |
| | 60,229 |
| | 59,924 |
|
Total | | $ | 206,820 |
| | $ | 198,935 |
| | $ | 615,428 |
| | $ | 590,375 |
| | $ | 208,096 |
| | $ | 205,610 |
| | $ | 417,881 |
| | $ | 408,608 |
|
| | | | | | | | | | | | | | | | |
Net investment income | | | | | | | | | | | | | | | | |
Property and Casualty | | $ | 12,361 |
| | $ | 9,167 |
| | $ | 32,177 |
| | $ | 26,457 |
| | $ | 12,643 |
| | $ | 10,300 |
| | $ | 22,861 |
| | $ | 19,816 |
|
Retirement | | 67,750 |
| | 64,340 |
| | 199,706 |
| | 192,921 |
| | 62,684 |
| | 67,787 |
| | 127,423 |
| | 131,956 |
|
Life | | 19,123 |
| | 18,999 |
| | 56,629 |
| | 56,215 |
| | 18,324 |
| | 19,166 |
| | 36,376 |
| | 37,506 |
|
Corporate and Other | | 41 |
| | 17 |
| | 119 |
| | 47 |
| | (14 | ) | | 42 |
| | (37 | ) | | 78 |
|
Intersegment eliminations | | (192 | ) | | (203 | ) | | (583 | ) | | (615 | ) | | (179 | ) | | (194 | ) | | (365 | ) | | (391 | ) |
Total | | $ | 99,083 |
| | $ | 92,320 |
| | $ | 288,048 |
| | $ | 275,025 |
| | $ | 93,458 |
| | $ | 97,101 |
| | $ | 186,258 |
| | $ | 188,965 |
|
| | | | | | | | | | | | | | | | |
Net income (loss) | | | | | | | | | | | | | | | | |
Property and Casualty | | $ | (3,190 | ) | | $ | 13,407 |
| | $ | (4,364 | ) | | $ | 2,186 |
| | $ | 5,101 |
| | $ | (10,896 | ) | | $ | 20,153 |
| | $ | (1,174 | ) |
Retirement | | 12,120 |
| | 13,603 |
| | 37,682 |
| | 36,933 |
| | (25,045 | ) | | 14,141 |
| | (12,894 | ) | | 25,562 |
|
Life | | 5,331 |
| | 4,788 |
| | 14,997 |
| | 14,283 |
| | 5,239 |
| | 5,879 |
| | 8,516 |
| | 9,666 |
|
Corporate and Other | | (1,733 | ) | | (5,247 | ) | | (9,715 | ) | | (9,272 | ) | | 108,527 |
| | (3,207 | ) | | 110,213 |
| | (7,982 | ) |
Total | | $ | 12,528 |
| | $ | 26,551 |
| | $ | 38,600 |
| | $ | 44,130 |
| | $ | 93,822 |
| | $ | 5,917 |
| | $ | 125,988 |
| | $ | 26,072 |
|
| | ($ in thousands) | | September 30, 2018 | | December 31, 2017 | | June 30, 2019 | | December 31, 2018 |
Assets | | | | | | | | |
Property and Casualty | | $ | 1,241,538 |
| | $ | 1,217,394 |
| | $ | 1,281,344 |
| | $ | 1,236,362 |
|
Retirement | | 8,143,384 |
| | 8,063,912 |
| | 8,493,089 |
| | 7,866,969 |
|
Life | | 1,787,361 |
| | 1,815,732 |
| | 1,911,569 |
| | 1,821,351 |
|
Corporate and Other | | 146,593 |
| | 143,784 |
| | 145,022 |
| | 149,014 |
|
Intersegment eliminations | | (38,111 | ) | | (42,482 | ) | | (51,617 | ) | | (41,800 | ) |
Total | | $ | 11,280,765 |
| | $ | 11,198,340 |
| | $ | 11,779,407 |
| | $ | 11,031,896 |
|
Note 1012 - Income TaxesOperating Leases
On December 22, 2017, comprehensive tax legislation commonly referredThe Company has various operating lease agreements, primarily for real estate (claims and marketing offices in a few states) as well as for computer equipment and copier machines. Such leases have remaining lease terms of 1 years to 6 years, some of which may include options to extend the leases for up to 10 years.
The components of lease expense were as follows:
|
| | | | | | | | |
($ in thousands) | | Three Months Ended June 30, 2019 | | Six Months Ended June 30, 2019 |
Operating lease cost | | $ | 791 |
| | $ | 1,600 |
|
Short-term lease cost | | 27 |
| | 51 |
|
Total lease cost | | $ | 818 |
| | $ | 1,651 |
|
Supplemental cash flow information related to operating leases was as follows:
|
| | | | | | | | |
($ in thousands) | | Three Months Ended June 30, 2019 | | Six Months Ended June 30, 2019 |
Cash paid for amounts included in the measurement of lease liabilities | | $ | 575 |
| | $ | 1,341 |
|
Supplemental balance sheet information related to operating leases was as follows:
|
| | | | |
($ in thousands, except lease term and discount rate) | | June 30, 2019 |
Assets | | |
Right of use assets, included in Other assets | | $ | 12,692 |
|
| | |
Liabilities | | |
Operating lease liabilities, included in Other liabilities | | $ | 13,429 |
|
| | |
Weighted Average Remaining Lease Term | | 5.00 |
|
| | |
Weighted Average Discount Rate | | 4.10 | % |
Future minimum lease payments under non-cancellable operating leases as of June 30, 2019 were as follows:
|
| | | | |
($ in thousands) | | |
Year Ending December 31, | | |
2019 (excluding the six months ended June 30, 2019) | | $ | 1,448 |
|
2020 | | 3,108 |
|
2021 | | 3,028 |
|
2022 | | 2,943 |
|
2023 | | 2,246 |
|
Thereafter | | 2,111 |
|
Total future minimum lease payments | | 14,884 |
|
Less imputed interest | | (1,455 | ) |
Total | | $ | 13,429 |
|
As of June 30, 2019, the Tax CutsCompany has no additional operating leases that have not yet commenced.
Note 13 - Supplemental Cash Flow Information
Non-cash investing activities include $2.1 billion of investments and Jobs Act (the Tax Act) was enacted bypolicy loans transferred to a reinsurer as consideration paid during the U.S. government. The Tax Act is generally effective January 1, 2018, and among other changes, reduced the federal corporate income tax rate from 35% to 21%, eliminated the corporate Alternative Minimum Tax, modified numerous insurance-specific provisions, and further limited deductions for executive compensation. The Tax Act reducedsecond quarter of 2019 in connection with the Company’s effective tax rate by 8.8%reinsurance of a $2.9 billion block of in force fixed and variable annuity business. See Note 6 for further information.
Non-cash investing activities in respect to modifications or exchanges of fixed maturity securities was insignificant for the nine month periodsix months ended SeptemberJune 30, 2018. There have been no changes to the provisional items that were reflected in the Company’s December 31, 2017 Consolidated Financial Statements associated with the tax effects of the Tax Act related to partnership investments2019 and discounted loss reserves. No material adjustments related to the provisional items for partnership investments are required and the Company is waiting on guidance from the U.S. Treasury regarding the tax impact on discounted loss reserves. Accounting for the tax effects associated with the Tax Act will be completed in the fourth quarter 2018.2018, respectively.
Note 1114 - Proposed Acquisition of Benefit Consultants Group, Inc. (BCG)Goodwill
On October 30,The Company conducts impairment testing for goodwill at least annually, or more often if events, changes or circumstances indicate that the carrying amount may not be recoverable. See Note 1 in the Company's Annual Report on Form 10-K for the year ended 2018 for further description of impairment testing.
The annuity reinsurance transaction described in Note 6 triggered the Company and BCG entered into a Stock Purchase Agreement under whichrequirement to evaluate the Company will acquire allgoodwill associated with the annuity business of the outstanding capital stockRetirement segment. For the evaluation, the fair value of BCG for $25.0 million.the Retirement segment was measured using a discounted cash flow method. The acquisition has been approved bycarrying value exceeded the Company's Boardfair value, resulting in a $28,025 thousand non-cash impairment charge during the quarter ended June 30, 2019 which represented the entire balance of Directors and is expected to closethe goodwill associated with the annuity business of the Retirement segment. The impairment charge was reported as Other expense in the first halfConsolidated Statement of 2019, subject to regulatory approval.Operations.
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (MD&A)
(Dollars in millions, except per share data)
Measures within this MD&A that are not based on accounting principles generally accepted in the United States of AmericaU.S. (non-GAAP) are marked bywith an asterisk (*) when such measuresthe first time they are first introduced.presented within this Item 2. An explanation of these measures is contained in the Glossary of Selected Terms included as an exhibitExhibit 99.1 to this Quarterly Report on Form 10-Q.10-Q and are reconciled to the most directly comparable measures prepared in accordance with accounting principles generally accepted in the U.S. (GAAP) in the Appendix to the Company's Second Quarter 2019 Investor Supplement.
Forward-looking Information
Statements made in the following discussion that are not historical in nature are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995 and are subject to known and unknown risks, uncertainties and other factors. Horace Mann Educators Corporation (HMEC; and together with its subsidiaries, the Company or Horace Mann) is an insurance holding company. Horace Mann is not under any obligation to (and expressly disclaims any such obligation to) update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. It is important to note that the Company’s actual results could differ materially from those projected in forward-looking statements due to a number of risks and uncertainties inherent in the Company’s business. For additional information regarding risks and uncertainties, seeSee Item 1A. Risk Factors1A in this Quarterly Report on Form 10-Q and in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.2018 for additional information regarding risks and uncertainties.
Executive SummaryIntroduction
The purpose of this MD&A is to provide an understanding of the Company’s consolidated results of operations and financial condition. This MD&A should be read in conjunction with Item 1 of this report.
HMEC is an insurance holding company. Through its subsidiaries, HMEC markets and underwrites personal lines of property and casualty insurance, retirement products, (primarily tax-qualified annuities)including annuities, and life insurance in the United States of America.U.S. The Company markets its products primarily to K-12 teachers, administrators and other employees of public schools and their families.
This MD&A begins with the Company’s consolidated financial highlights followed by consolidated results of operations, an outlook for future performance, details about critical accounting estimates and the results of operations by segment.
Consolidated Financial Highlights
|
| | | | | | | | | | | | | | | | | | | | | | |
($ in millions) | | Three Months Ended June 30, | | 2019-2018 | | Six Months Ended June 30, | | 2019-2018 |
| | 2019 | | 2018 | | Change % | | 2019 | | 2018 | | Change % |
Total revenues | | $ | 451.5 |
| | $ | 306.2 |
| | 47.5 | % | | $ | 764.7 |
| | $ | 601.7 |
| | 27.1 | % |
Net income | | 93.8 |
| | 5.9 |
| | N.M. | | 126.0 |
| | 26.1 |
| | N.M. |
Per diluted share: | | | | | | | | | | | | |
Net income | | $ | 2.24 |
| | $ | 0.14 |
| | N.M. | | $ | 3.01 |
| | $ | 0.63 |
| | N.M. |
Net investment gains (losses), after tax | | 2.74 |
| | 0.01 |
| | N.M. | | 2.88 |
| | (0.01 | ) | | N.M. |
Book value per share | | | | | | | | $ | 36.41 |
| | $ | 32.93 |
| | 10.6 | % |
Net income return on equity - last twelve months | | | | | | | | 8.6 | % | | 12.7 | % | |
|
|
Net income return on equity - annualized | | | | | | | | 18.1 | % | | 3.7 | % | |
|
|
___________________
N.M. - The Company defines increases or decreases greater than or equal to 150% as "N.M." or not meaningful.
Net Income
For the three and six month periods ended June 30, 2019, the Company's net income increased $87.9 million and $99.9 million, respectively, compared to the prior year periods primarily due to recognition of a $106.9 million after tax realized investment gain in the three month period ended SeptemberJune 30, 2018,2019. The gain was associated with the Company’stransfer of investments as consideration in connection with the reinsurance of approximately 50% of the Company's fixed annuity account balances effective April 1, 2019. The impact from the realized investment gain was partially offset by a $28.0 million goodwill impairment charge. See Item 1, Note 6 and Note 14 of the Consolidated Financial Statements for more information regarding the annuity reinsurance transaction and the goodwill impairment charge.
Net income (loss) by segment is as follows:
|
| | | | | | | | | | | | | | | | | | | | | | |
($ in millions) | | Three Months Ended June 30, | | 2019-2018 | | Six Months Ended June 30, | | 2019-2018 |
| | 2019 | | 2018 | | Change % | | 2019 | | 2018 | | Change % |
Analysis of net income (loss) by segment: | | | | | | | | |
| | |
| | |
Property and Casualty | | $ | 5.1 |
| | $ | (10.9 | ) | | 146.8 | % | | $ | 20.1 |
| | $ | (1.2 | ) | | N.M. |
Retirement | | (25.0 | ) | | 14.1 |
| | N.M. | | (12.8 | ) | | 25.5 |
| | N.M. |
Life | | 5.2 |
| | 5.9 |
| | -11.9 | % | | 8.5 |
| | 9.7 |
| | -12.4 | % |
Corporate and Other | | 108.5 |
| | (3.2 | ) | | N.M. | | 110.2 |
| | (7.9 | ) | | N.M. |
Net income | | $ | 93.8 |
| | $ | 5.9 |
| | N.M. | | $ | 126.0 |
| | $ | 26.1 |
| | N.M. |
___________________
N.M. - Not meaningful.
The net incomeloss for the Retirement segment in the three month period ended June 30, 2019 is primarily due to the $28.0 million goodwill impairment which was triggered by the annuity reinsurance transaction.
The aforementioned $106.9 million after tax realized investment gain recognized in the three month period ended June 30, 2019 associated with the annuity reinsurance transaction is reported in the results for the Corporate and Other segment.
Consolidated Results of $12.5Operations
|
| | | | | | | | | | | | | | | | | | | | | | |
($ in millions) | | Three Months Ended June 30, | | 2019-2018 | | Six Months Ended June 30, | | 2019-2018 |
| | 2019 | | 2018 | | Change % | | 2019 | | 2018 | | Change % |
Insurance premiums and contract charges earned | | $ | 208.1 |
| | $ | 205.6 |
| | 1.2 | % | | $ | 417.9 |
| | $ | 408.6 |
| | 2.3 | % |
Net investment income | | 93.5 |
| | 97.1 |
| | -3.7 | % | | 186.3 |
| | 189.0 |
| | -1.4 | % |
Net investment gains (losses) | | 146.3 |
| | 0.7 |
| | N.M. | | 153.7 |
| | (1.0 | ) | | N.M. |
Other income | | 3.6 |
| | 2.8 |
| | 28.6 | % | | 6.8 |
| | 5.1 |
| | 33.3 | % |
Total revenues | | 451.5 |
| | 306.2 |
| | 47.5 | % | | 764.7 |
| | 601.7 |
| | 27.1 | % |
| | | | | | | | | | | | |
Benefits, claims and settlement expenses | | 152.7 |
| | 168.3 |
| | -9.3 | % | | 292.1 |
| | 311.9 |
| | -6.3 | % |
Interest credited | | 53.6 |
| | 51.1 |
| | 4.9 | % | | 106.5 |
| | 101.1 |
| | 5.3 | % |
DAC amortization expense | | 31.6 |
| | 26.5 |
| | 19.2 | % | | 56.6 |
| | 53.2 |
| | 6.4 | % |
Operating expenses | | 55.3 |
| | 50.2 |
| | 10.2 | % | | 109.3 |
| | 98.4 |
| | 11.1 | % |
Interest expense | | 3.3 |
| | 3.3 |
| | — | % | | 6.6 |
| | 6.5 |
| | 1.5 | % |
Other expense | | 28.0 |
| | — |
| | N.M. | | 28.0 |
| | — |
| | N.M. |
Total benefits, losses and expenses | | 324.5 |
| | 299.4 |
| | 8.4 | % | | 599.1 |
| | 571.1 |
| | 4.9 | % |
| | | | | | | | | | | | |
Income before income taxes | | 127.0 |
| | 6.8 |
| | N.M. | | 165.6 |
| | 30.6 |
| | N.M. |
Income tax expense | | 33.2 |
| | 0.9 |
| | N.M. | | 39.6 |
| | 4.5 |
| | N.M. |
Net income | | $ | 93.8 |
| | $ | 5.9 |
| | N.M. | | $ | 126.0 |
| | $ | 26.1 |
| | N.M. |
___________________
N.M. - Not meaningful.
Insurance Premiums and Contract Charges Earned
For the three and six month periods ended June 30, 2019, insurance premiums and contract charges earned increased $2.5 million decreased $14.0and $9.3 million, respectively, compared to the prior year periods, primarily due to increases in average premium per policy for both automobile and property.
Net Investment Income
Excluding accreted net investment income on the deposit asset on reinsurance, net investment income for the three and six month periods ended June 30, 2019 declined primarily because invested assets decreased 22.2% from December 31, 2018 due to assets transferred under the annuity reinsurance transaction as well as lower than expected new money rates and prepayments that were partially offset by stronger returns on alternative investments. Investment yields continue to be impacted by the low interest rate environment of recent years. Annualized investment portfolio yield is presented in the following table:
|
| | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
Pretax yield | | 5.1% | | 5.3% | | 5.1% | | 5.1% |
After tax yield | | 4.1% | | 4.2% | | 4.1% | | 4.1% |
During the six month period primarilyended June 30, 2019, management continued to identify and purchase investments, including a modest level of alternative investments, with attractive risk-adjusted yields relative to market conditions without venturing into asset classes or individual securities that would be inconsistent with the Company's overall conservative investment guidelines.
Net Investment Gains (Losses) - Pretax
For the three and six month periods ended June 30, 2019, net investment gains increased $145.6 million and $154.7 million, respectively, compared to the prior year periods as a result of a higher levelrealized investment gain of catastrophe losses. After tax$135.3 million recognized during the three month period ended June 30, 2019 in connection with the transfer of investments related to the aforementioned annuity reinsurance transaction. The breakdown of net investment gains (losses) by transaction type is shown in the following table:
|
| | | | | | | | | | | | | | | | |
($ in millions) | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
OTTI losses recognized in earnings | | $ | — |
| | $ | (1.2 | ) | | $ | (0.3 | ) | | $ | (1.3 | ) |
Sales and other, net | | 142.1 |
| | 1.8 |
| | 146.9 |
| | 4.0 |
|
Change in fair value - equity securities | | 3.4 |
| | (1.2 | ) | | 6.9 |
| | (6.4 | ) |
Change in fair value and gains (losses) realized on settlements - derivative instruments | | 0.8 |
| | 1.3 |
| | 0.2 |
| | 2.7 |
|
Net investment gains (losses) | | $ | 146.3 |
| | $ | 0.7 |
| | $ | 153.7 |
| | $ | (1.0 | ) |
The Company, from time to time, sells securities subsequent to the reporting date that were $2.2 millionconsidered temporarily impaired at the reporting date. Such sales are due to issuer specific events occurring subsequent to the reporting date that result in a change in the Company's intent to sell an invested asset.
Other Income
For the three and six month periods ended June 30, 2019, other income increased compared to after tax net investment losses of $2.2 million in the prior year period.periods primarily due to inclusion of BCG brokerage fees.
Benefits, Claims and Settlement Expenses
For the three and six month periods ended June 30, 2019, benefits, claims and settlement expenses decreased $15.6 million and $19.8 million, respectively, compared to the prior year periods, driven by improved automobile and property loss ratios.
Interest Credited
For the three and six month periods ended June 30, 2019, the increase in Retirement interest credited reflected higher interest costs on Federal Home Loan Bank (FHLB) funding agreements as well as a 2.3% increase in average accumulated fixed deposits. Under the deposit method of accounting, the interest credited on the annuity reinsured block continues to be reported. The average deferred annuity credited rate was 2.5% at June 30, 2019, excluding the reinsured block, and 3.6% at June 30, 2018.
DAC Amortization Expense
For the three month period ended SeptemberJune 30, 2018, Property and Casualty recorded a net loss of $3.22019, DAC amortization expense increased $5.1 million reflecting a significant level of catastrophe and non-catastrophe weather-related losses. The Property and Casualty net loss was $16.6 million lower than the $13.4 million of net income recorded in the prior year period. The Property and Casualty combined ratio of 110.1% increased 14.3 points compared to the prior year period. This increase was due to an increase in catastrophe losses of $23.6 million pretax over the prior year period, partially offset by 3.1 points of improvement in the underlying auto loss ratio.
On a reported basis, the current quarter auto combined ratio of 99.5% improved 3.9 points due to the improvement in the underlying loss ratio due to rate actions combined with continued stabilization in auto loss trends, partially offset by a 1.8 point increase in the expense ratio. The property combined ratio of 133.3% increased 53.4 points compared to the prior year period and was attributabledue to an elevated level$5.1 million of catastrophe and non-catastrophe weather-related losses. The underlying property loss ratio* was 48.0% inaccelerated amortization of the current quarter, which reflected an increase of 1.7 pointsDAC asset associated with the reinsured annuity block. For the six month period ended June 30, 2019, DAC amortization increased $3.4 million compared to the prior year period in part due to the aforementioned DAC accelerated amortization partially offset by $3.2 million of favorable DAC unlocking in Retirement due to market performance. For Life, DAC unlocking resulted in an elevated level of non-catastrophe weather-related losses.immaterial change to amortization for the three and six month periods ended June 30, 2019.
Operating Expenses
For the three and six month periods ended June 30, 2019, increases in operating expenses were consistent with management's expectations as the current periods include $2.8 million and $5.6 million, respectively, of expenses pertaining to BCG and the prior year periods benefited from a $2.2 million legal expense recovery.
The Property and Casualty expense ratio of 26.9% for the six month period ended SeptemberJune 30, 2018, total Property and Casualty written premiums* of $182.7 million increased 3.1% compared to the prior year period. The growth2019 was driven primarily by rate actions which resulted in an increase in the average premium per policy for both auto and property.
For the three month period ended September 30, 2018, Retirement net income of $12.1 million decreased 11.0% compared to the prior year period primarily due to an increase in operating and amortization expenses partially offset by higher net investment income and an increase in fee-based product income.
For the three month period ended September 30, 2018, the total level of Retirement sales deposits* increased 18.2% compared to the prior year period reflecting an increase in fee-based deposits, partially offset by a decline in spread-based products. For the third quarter of 2018, traditional annuity deposits of $127.0 million increased 10.6% compared to the prior year period. The increase in traditional annuity deposits was related to higher sales of single premium annuity products in the current quarter. Sales deposit activity related to the Retirement Advantage® mutual fund products, as well as other mutual fund offerings, were strong with $24.9 million in the current quarter compared to $13.7 million in the prior year period.
For the three month period ended September 30, 2018, Life net income of $5.3 million increased 10.4% compared to0.5 points above the prior year period primarily due to the lower federal income tax rate. Life sales of $5.3 million for the current quarter increased 65.6% compared to the prior year period due to an increase in recurring and single premium sales.legal expense recovery noted above.
Interest Expense
For the ninethree and six month periodperiods ended SeptemberJune 30, 2018,2019, interest expense was comparable to June 30, 2018.
Other Expense
For the Company’s net income of $38.6 million decreased $5.5 million compared tothree and six month periods ended June 30, 2019, other expense represents the prior year period primarily due to an elevated level of catastrophe and non-catastrophe weather-related losses offset by the impact of the lower federalaforementioned goodwill impairment in Retirement.
Income Tax Expense
The effective income tax rate on Retirement and Life earnings. After taxthe Company's pretax income, including net investment gains were $1.5 million compared to after(losses), was 23.9% and 15.0% for the six month periods ended June 30, 2019 and 2018, respectively. Income from investments in tax-advantaged securities reduced the effective income tax net investment losses of $0.8 millionrates by 1.4 and 4.8 percentage points for the six month periods ended June 30, 2019 and 2018, respectively. The goodwill impairment charge in the prior year period.Retirement segment increased the effective income tax rate by 3.5 percentage points at June 30, 2019.
ForThe Company records liabilities for uncertain tax filing positions where it is more likely than not that the nine month period ended Septemberposition will not be sustainable upon audit by taxing authorities. These liabilities are reevaluated routinely and are adjusted appropriately based on changes in facts or law. The Company has no unrecorded liabilities from uncertain tax filing positions.
At June 30, 2018,2019, the Company's federal income tax returns for years prior to 2014 are no longer subject to examination by the IRS. Management does not anticipate any assessments for tax years that remain subject to examination to have a material effect on the Company's financial position or results of operations.
Outlook for 2019
At the time of this Quarterly Report on Form 10-Q, management estimates that 2019 full year core earnings* will be within a range of $2.05 to $2.25 per diluted share, generating a core return on equity* of between 7.0% and 7.5%. This projection also reflects an overall effective tax rate of between 16% and 18%.
Within Property and Casualty, recorded a net loss of $4.4 million comparedplanned premium rate increases, as well as continued underwriting initiatives, are expected to $2.2 million of net income recorded in the prior year period. The Property and Casualty combined ratio of 108.0% increased 1.5 points compared to the prior year period. This increase was due to a 1.9 point improvement inimprove the underlying autoautomobile loss ratio offsetratio* by a 1.8 point increase inabout 3.0 to 3.5 points and the underlying property loss ratio* by around 3 points. For 2019, management increased the estimate used for catastrophe costs by 20% to be between $45 million and $55 million or 7.0 to 7.5 points. The expense ratio is expected to be consistent with 2018 and Property and Casualty catastrophe losses that were $68.8 million pretax in the current period comparedis expected to $58.2 million pretax in the prior year period.remain around 27%.
On a reported basis, the auto combined ratio of 103.4% improved 3.6 points and the property combined ratio of 117.9% increased 12.3 points as compared to the prior year period. The underlying auto loss ratio of 75.1% improved 1.9 points compared to the prior year periodNet income for Retirement will decrease as a result of an increase in earned premium due to rate actions combined with continued stabilization in auto loss trends. The auto expense ratio improved 0.2 points. The underlying property loss ratio was 51.5% in the current period, which reflected an increaserecent annuity reinsurance transaction and redeployment of 1.8 points comparedcapital to the prior year period due to an elevated level of non-catastrophe weather-related losses.
For the nine month period ended September 30, 2018, total Property and Casualty written premiums of $515.1 million increased 3.4% compared to the prior year period. The growth was driven primarily by rate actions which resulted in an increase in the average premium per policy for both auto and property. Policy retention continues to be stable with auto and property policy retention rates for the current quarter at 82.5% and 87.9%, respectively.
For the nine month period ended September 30, 2018, Retirement net income of $37.6 million was 1.9% higher than the prior year period and benefited from higher netnew Supplemental segment. Net investment income an increase in fee-based product income and the lower federal income tax rate partially offset by an increase in operating expenses to support strategic initiatives.
The annualized net interest spread on fixed annuity assets under management as of September 30, 2018 was 182 basis points, which benefited from an elevated level of prepayments. Total retirement assets under management, including fee-based mutual fund products of $7.1 billion, increased 6.6% compared to a year ago, and total cash value persistency remained strong at 94.5% for variable annuities and 94.2% for fixed annuities.
For the nine month period ended September 30, 2018, the total level of Retirement sales deposits increased 3.1% compared to the prior year period reflecting an increase in fee-based deposits, partially offset by awill decline in spread-based deposits. For the first nine months of 2018, traditional annuity deposits of $326.0 million decreased 6.6% compared to the prior year period. The decline in traditional annuity deposits was related to lower sales of single premium annuity products in the current period. Sales deposit activity related to the Retirement Advantage® mutual fund products, as well as other mutual fund offerings, were strong with $57.6 million in the current period compared to $29.0 million in the prior year period.
For the nine month period ended September 30, 2018, Life net income of $15.0 million increased $0.7 million compared to the prior year period, primarily due to the lower federalinvestment levels and the new money rates are anticipated to remain below the average portfolio earned rate. In addition, expense levels will rise over prior year, offset by increases in fee income tax rate. Life salesand other income due to the inclusion of $15.1BCG. As a result, net income for Retirement is anticipated to be in the range of $25 million to $27 million for the current period increased 30.2% compared to the priorfull year period due to an increase in recurring and single premium sales. Life persistency of 95.2% was comparable to 12 months earlier.2019.
The Company’s book value per share was $31.78 at September 30, 2018, a decrease of 13.8% and 7.1% comparedLife net income is anticipated to December 31, 2017 and adecline 15% over prior year ago, respectively, due to the decrease in net investment income noted above accompanied by a modest increase in mortality costs.
Net income for the new Supplemental segment is anticipated to be in the range of $12 million to $14 million for the second half of 2019, partially offset by additional interest expense of $2 million in Corporate and Other.
As described in Critical Accounting Estimates, certain of the Company's significant accounting measurements require the use of estimates and assumptions. As additional information becomes available, adjustments may be required. Those adjustments are charged or credited to income for the period in which the adjustments are made and may impact actual results compared to management's estimates above. Additionally, see Forward-looking Information and Item 1A in this Quarterly Report on Form 10-Q and Items 1 and 1A of higher interest ratesthe Company's Annual Report on Form 10-K for the year ended December 31, 2018 concerning other important factors that could impact actual results. Management believes that a projection of net income is not appropriate on a forward-looking basis because it is not possible to provide a valid forecast of net investment gains (losses), which can vary substantially from one period to another and wider credit spreadsmay have a significant impact on net unrealized investment gains on securities.income.
Critical Accounting PoliciesEstimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (GAAP)GAAP requires the Company's management to make estimates and assumptions based on information available at the time the consolidated financial statements are prepared. These estimates and assumptions affect the reported amounts of the Company's consolidated assets, liabilities, shareholders' equity, net income and cash flows. Certain accounting estimates are particularly sensitive because of their significance to the Company's consolidated financial statements and because of the possibility that subsequent events and available information may differ markedly from management's judgments at the time the consolidated financial statements were prepared. Management has discussed with the Audit Committee the quality, not just the acceptability, of the Company's accounting principles as applied in its financial reporting. The discussions generally included such matters as the consistency of the Company's accounting policies and their application, and the clarity and completeness of the Company's consolidated financial statements, which include related disclosures. For the Company, areas most subject to significant management judgments include: fair value measurements,
Valuation of fixed maturity securities, including evaluation of other-than-temporary impairment (OTTI)impairments
Evaluation of investments, goodwill for impairment
Valuation of life and annuity deferred policy acquisition costs (DAC) for investment contracts and life insurance products with account values,
Valuation of liabilities for Propertyproperty and Casualtycasualty unpaid claims and claim expenses
Valuation of investment contract and liabilities for futurelife policy benefits.reserves
Compared to December 31, 2017,2018, at SeptemberJune 30, 2018,2019, there were no material changes to accounting policies for areas most subject to significant management judgments identified above. In addition to disclosures in the Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017,2018, discussion of accounting policies, including certain sensitivity information, was presented in Management’s Discussion and Analysis of Financial Condition and Results of Operations -- Critical Accounting PoliciesEstimates in that Form 10-K.
Results of Operations by Segment
Consolidated financial results primarily reflect the operating results of three operating segments as well as the corporate and other line. These reporting segments are defined based on financial information management uses to evaluate performance and to determine the allocation of assets.
Property and Casualty
Retirement
Life
Corporate and Other
The calculations of segment data are described in more detail in Item 1, Note 14 of the Consolidated Financial Statements in the Company's Annual Report on Form 10-K for the year ended December 31, 2018. The following sections provide analysis and discussion of results of operations for each of the reporting segments as well as investment results.
Results of OperationsProperty and Casualty
Insurance PremiumsThe following table provides certain financial information for the Property and Contract Charges
Casualty segment for the periods indicated.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
($ in millions) | | Three Months Ended September 30, | | Change From Prior Year | | Nine Months Ended September 30, | | Change From Prior Year |
| | 2018 | | 2017 | | Percent | | Amount | | 2018 | | 2017 | | Percent | | Amount |
Insurance premiums written and contract deposits (includes annuity and life contract deposits) | | | | | | | | | | | | | | | | |
Property and Casualty | | $ | 182.7 |
| | $ | 177.2 |
| | 3.1 | % | | $ | 5.5 |
| | $ | 515.1 |
| | $ | 498.0 |
| | 3.4 | % | | $ | 17.1 |
|
Retirement | | 127.0 |
| | 114.8 |
| | 10.6 | % | | 12.2 |
| | 326.0 |
| | 348.9 |
| | -6.6 | % | | (22.9 | ) |
Life | | 28.4 |
| | 26.4 |
| | 7.6 | % | | 2.0 |
| | 82.7 |
| | 79.8 |
| | 3.6 | % | | 2.9 |
|
Total | | $ | 338.1 |
| | $ | 318.4 |
| | 6.2 | % | | $ | 19.7 |
| | $ | 923.8 |
| | $ | 926.7 |
| | -0.3 | % | | $ | (2.9 | ) |
| | | | | | | | | | | | | | | | |
Insurance premiums and contract charges earned (excludes annuity and life contract deposits) | | | | | | | | | | | | | | | | |
Property and Casualty | | $ | 168.6 |
| | $ | 163.2 |
| | 3.3 | % | | $ | 5.4 |
| | $ | 501.4 |
| | $ | 482.0 |
| | 4.0 | % | | $ | 19.4 |
|
Retirement | | 8.0 |
| | 7.5 |
| | 6.7 | % | | 0.5 |
| | 23.9 |
| | 20.8 |
| | 14.9 | % | | 3.1 |
|
Life | | 30.2 |
| | 28.3 |
| | 6.7 | % | | 1.9 |
| | 90.1 |
| | 87.6 |
| | 2.9 | % | | 2.5 |
|
Total | | $ | 206.8 |
| | $ | 199.0 |
| | 3.9 | % | | $ | 7.8 |
| | $ | 615.4 |
| | $ | 590.4 |
| | 4.2 | % | | $ | 25.0 |
|
|
| | | | | | | | | | | | | | | | | | | | | | |
($ in millions, unless otherwise indicated) | | Three Months Ended June 30, | | 2019-2018 | | Six Months Ended June 30, | | 2019-2018 |
| | 2019 | | 2018 | | Change % | | 2019 | | 2018 | | Change % |
Financial Data: | | | | | | | | |
| | |
| | |
Premiums written*: | | | | | | | | | | | | |
Automobile | | $ | 114.6 |
| | $ | 114.6 |
| | — | % | | $ | 231.4 |
| | $ | 229.5 |
| | 0.8 | % |
Property and other | | 59.7 |
| | 58.4 |
| | 2.2 | % | | 104.6 |
| | 102.9 |
| | 1.7 | % |
Total premiums written | | 174.3 |
| | 173.0 |
| | 0.8 | % | | 336.0 |
| | 332.4 |
| | 1.1 | % |
Change in unearned insurance premiums | | (3.0 | ) | | (5.7 | ) | |
|
| | 6.1 |
| | 0.4 |
| |
|
Total insurance premiums earned | | 171.3 |
| | 167.3 |
| | 2.4 | % | | 342.1 |
| | 332.8 |
| | 2.8 | % |
Incurred claims and claims expenses: | | | | | | | | | | | | |
Claims occurring in the current year | | 134.4 |
| | 147.0 |
| | -8.6 | % | | 253.2 |
| | 268.0 |
| | -5.5 | % |
Prior years' reserve development | | 2.0 |
| | — |
| | N.M. | | 4.0 |
| | 0.3 |
| | N.M. |
Total claims and claim expenses incurred | | 132.4 |
| | 147.0 |
| | -9.9 | % | | 249.2 |
| | 267.7 |
| | -6.9 | % |
Operating expenses, including DAC amortization | | 45.4 |
| | 44.8 |
| | 1.3 | % | | 91.9 |
| | 87.9 |
| | 4.6 | % |
Underwriting gain (loss) | | (6.5 | ) | | (24.5 | ) | | 73.5 | % | | 1.0 |
| | (22.8 | ) | | 104.4 | % |
Net investment income | | 12.7 |
| | 10.3 |
| | 23.3 | % | | 22.9 |
| | 19.8 |
| | 15.7 | % |
Income (loss) before income taxes | | 6.6 |
| | (13.7 | ) | | 148.2 | % | | 24.4 |
| | (2.5 | ) | | N.M. |
Net income (loss)/core earnings* | | 5.1 |
| | (10.9 | ) | | 146.8 | % | | 20.1 |
| | (1.2 | ) | | N.M. |
| | | | | | | | | | | | |
Operating Statistics: | | | | | | | | |
| | |
| | |
Automobile | | | | | | | | | | | | |
Loss and loss adjustment expense ratio | | 73.8 | % | | 82.0 | % | | -8.2 | pts | | 72.3 | % | | 79.1 | % | | -6.8 | pts |
Expense ratio | | 26.6 | % | | 26.9 | % | | -0.3 | pts | | 26.9 | % | | 26.3 | % | | 0.6 | pts |
Combined ratio: | | 100.4 | % | | 108.9 | % | | -8.5 | pts | | 99.2 | % | | 105.4 | % | | -6.2 | pts |
Prior years' reserve development | | -0.9 | % | | — | % | | -0.9 | pts | | -0.9 | % | | — | % | | -0.9 | pts |
Catastrophes | | 1.9 | % | | 3.3 | % | | -1.4 | pts | | 1.3 | % | | 2.0 | % | | -0.7 | pts |
Underlying combined ratio* | | 99.4 | % | | 105.6 | % | | -6.2 | pts | | 98.8 | % | | 103.4 | % | | -4.6 | pts |
Property | | | | | | | | | | | | |
Loss and loss adjustment expense ratio | | 84.8 | % | | 100.4 | % | | -15.6 | pts | | 73.9 | % | | 83.3 | % | | -9.4 | pts |
Expense ratio | | 26.6 | % | | 26.7 | % | | -0.1 | pts | | 27.1 | % | | 26.9 | % | | 0.2 | pts |
Combined ratio: | | 111.4 | % | | 127.1 | % | | -15.7 | pts | | 101.0 | % | | 110.2 | % | | -9.2 | pts |
Prior years' reserve development | | -1.8 | % | | — | % | | -1.8 | pts | | -1.9 | % | | -0.3 | % | | -1.6 | pts |
Catastrophes | | 36.8 | % | | 43.3 | % | | -6.5 | pts | | 27.6 | % | | 30.3 | % | | -2.7 | pts |
Underlying combined ratio* | | 76.4 | % | | 83.8 | % | | -7.4 | pts | | 75.3 | % | | 80.2 | % | | -4.9 | pts |
| | | | | | | | | | | | |
Policies in force (in thousands) | | | | | | | | |
| | |
| | |
Automobile (1) | | | | | | | | 448 |
| | 471 |
| | -4.9 | % |
Property | | | | | | | | 198 |
| | 203 |
| | -2.5 | % |
Total | | | | | | | | 646 |
| | 674 |
| | -4.2 | % |
___________________
NumberN.M. - Not meaningful.
(1) June 30, 2019 includes assumed policies in force of Policies and Contracts in Force4.
(actual counts)
|
| | | | | | |
| | September 30, 2018 | | December 31, 2017 | | September 30, 2017 |
Property and Casualty | | | | | | |
Automobile | | 466,258 | | 478,951 | | 482,035 |
Property and other liability | | 213,762 | | 216,306 | | 217,377 |
Total | | 680,020 | | 695,257 | | 699,412 |
Retirement | | 224,094 | | 223,287 | | 221,309 |
Life | | 198,330 | | 197,889 | | 196,978 |
For the three and six month periodperiods ended SeptemberJune 30, 2018, the Company’s premiums written2019, core earnings* increased $16.0 million and contract deposits* of $338.1$21.3 million, increased $19.7 million, or 6.2%,respectively, compared to the prior year periods. These reflect 7.1 points of improvement in the Property and Casualty combined ratio year to date due to improved underwriting results, lower catastrophe losses and favorable prior years' reserve development.
On a reported basis, the improvement in the automobile combined ratio for the six month period ended June 30, 2019 was mainly attributed to 5.2 points of improvement in the underlying loss ratio* due to rate actions combined with continued stabilization in auto loss trends. The reported property combined ratio improved for the six month period ended June 30, 2019, reflecting an improvement in the underlying loss ratio of 5.1 points as well as a 2.7 point improvement due to lower catastrophe losses.
Rate actions were the primary factor for the slight increase in sales of single premium annuity products intotal premiums written* for the current quarter. The Company’s premiumsthree and contract charges earned increased $7.8 million, or 3.9%,six month periods ended June 30, 2019 compared to the prior year period reflectingperiods. For 2019, the Company's full year rate plan anticipates low-single digit average rate increases in average premium per policy(including states with no rate actions) for both propertyautomobile and automobile.
Total Property and Casualty premiums written increased 3.4%, or $17.1 million, in the first nine months of 2018, compared to the prior year period reflecting increases inproperty; average written premium per policy for both property and automobile. Average approved rate changes during the first ninesix months of 20182019 were 11.1%5.3% for automobile and 4.5%4.6% for property.
Based on policies in force, the current year automobile 12 month retention rate for new and renewal policies was 82.5% compared to 83.0% at September 30, 2017, with the decrease due to recent rate and underwriting actions. The current year property 12 month retention rate for new and renewal policies was 87.9% compared to 87.6% at September 30, 2017.
Automobile premiums written* increased 3.9%, or $13.0 million, comparedwas comparable to the first nine months of 2017.three and six month periods ended June 30, 2018. In the first ninesix months of 2018,2019, the average written premium per policy and average earned premium per policy increased approximately 7.0%5.8% and 6.7%6.2%, respectively, compared to the prior year period. TheFor automobile, the number of educator policies has been stable relative to overall automobile policies as educators represented approximately85.3%, 85.4% and 85.4% of the automobile policies in force at Septemberas of June 30, 2019, December 31, 2018 and June 30, 2018, 85.2%respectively. Based on policies in force, the automobile 12 month retention rate for new and renewal policies was 81.3% compared to 82.6% at December 31, 2017June 30, 2019 and 85.1% at September 30, 2017.2018, respectively, with the decrease due to recent rate and underwriting actions.
Property and other premiums written* increased 2.6%, or $4.2 million,slightly compared to the first nine months of 2017.three and six month periods ended June 30, 2018. While the number of property policies in force has declined, the average written premium per policy and average earned premium per policy increased approximately 4.0%5.2% and 2.6%4.3%, respectively, in the first ninesix months of 20182019 compared to the prior year period. TheFor property, the number of educator policies has been stable relative to overall property policies as educators represented approximately82.5%, 82.4% and 82.4% of the property policies in force at Septemberas of June 30, 2019, December 31, 2018, and June 30, 2018, 82.3%respectively. The property 12 month new and renewal policy retention rate was 87.7% and 88.0% at December 31, 2017June 30, 2019 and 82.2% at September 30, 2017. The number of educator policies and total policies has been, and may continue to be, impacted by the Company’s risk mitigation programs, including actions in catastrophe-prone coastal areas, involving policies of both educators and non-educators.2018, respectively.
The Company continues to evaluate and implement actions to further mitigate its risk exposure in catastrophe-prone areas.areas of the country. Such actions could include, but are not limited to, non-renewal of property policies, restricted agent geographic placement, limitations on agent new business sales, further tightening of underwriting standards and increased utilization of third-party vendor products.
Retirement
The following table provides certain information for the Retirement segment for the periods indicated.
|
| | | | | | | | | | | | | | | | | | | | | | | |
($ in millions, unless otherwise indicated) | | Three Months Ended June 30, | | 2019-2018 | | Six Months Ended June 30, | | 2019-2018 |
| | 2019 | | 2018 | | Change % | | 2019 | | 2018 | | Change % |
Financial Data: | | | | | | | | |
| | |
| | |
Contract charges earned | | $ | 6.9 |
| | $ | 7.9 |
| | -12.7 | % | | $ | 15.5 |
| | $ | 15.9 |
| | -2.5 | % |
Net investment income | | 62.7 |
| | 67.8 |
| | -7.5 | % | | 127.4 |
| | 132.0 |
| | -3.5 | % |
Interest credited | | 42.3 |
| | 39.9 |
| | 6.0 | % | | 84.0 |
| | 78.6 |
| | 6.9 | % |
Net interest margin without net investment gains (losses) | | 21.5 |
| | 27.9 |
| | -22.9 | % | | 44.5 |
| | 53.4 |
| | -16.7 | % |
Net interest margin - Reinsured block | | (1.1 | ) | | — |
| | N.M. | | (1.1 | ) | | — |
| | N.M. |
Mortality loss and other reserve charges | | 1.2 |
| | 1.4 |
| | -14.3 | % | | 1.8 |
| — |
| 3.3 |
| | -45.5 | % |
DAC amortization expense, excluding unlocking | | 4.3 |
| | 4.8 |
| | -10.4 | % | | 9.2 |
| | 9.6 |
| | -4.2 | % |
DAC unlocking | | 5.6 |
| | 0.2 |
| | N.M. | | 3.6 |
| | 0.4 |
| | N.M. |
Operating expenses | | 15.4 |
| | 13.9 |
| | 10.8 | % | | 31.3 |
| | 28.3 |
| | 10.6 | % |
Other expense - goodwill impairment | | 28.0 |
| | — |
| | N.M. | | 28.0 |
| | — |
| | N.M. |
Income (loss) before income taxes | | (24.8 | ) | | 17.2 |
| | N.M. | | (10.2 | ) | | 31.2 |
| | -132.7 | % |
Net income (loss) | | (25.0 | ) | | 14.1 |
| | N.M. | | (12.8 | ) | | 25.5 |
| | N.M. |
Core earnings* | | 3.0 |
| | 14.1 |
| | -78.7 | % | | 15.2 |
| | 25.5 |
| | -40.4 | % |
Operating Statistics: | | | | | | | | | | | | |
Annuity sales deposits | | | | | | | | | | | | |
Variable | | $ | 54.1 |
| | $ | 50.7 |
| | 6.7 | % | | $ | 102.9 |
| | $ | 97.5 |
| | 5.5 | % |
Fixed | | 54.9 |
| | 49.5 |
| | 10.9 | % | | 113.4 |
| | 101.5 |
| | 11.7 | % |
Total | | 109.0 |
| | 100.2 |
| | 8.8 | % | | 216.3 |
| | 199.0 |
| | 8.7 | % |
Single | | 55.8 |
| | 46.9 |
| | 19.0 | % | | 111.7 |
| | 95.5 |
| | 17.0 | % |
Recurring | | 53.2 |
| | 53.3 |
| | -0.2 | % | | 104.6 |
| | 103.5 |
| | 1.1 | % |
Total | | 109.0 |
| | 100.2 |
| | 8.8 | % | | 216.3 |
| | 199.0 |
| | 8.7 | % |
Assets under administration (AUA) | | | | | | | | | | | | |
Annuity assets under management (1) | | | | | |
|
| | 4,170.3 |
| | 6,851.7 |
| | -39.1 | % |
Broker and advisory assets under administration (2) | | | | | |
|
| | 2,236.0 |
| | 300.5 |
| | N.M. |
Recordkeeping assets under administration (2) | | | | | |
|
| | 1,395.1 |
| | — |
| | N.M. |
Total | |
|
| |
|
| |
|
| | 7,801.4 |
| | 7,152.2 |
| | 9.1 | % |
Persistency | | | | | | | | | | | | |
Variable annuities | | | | | |
|
| | 94.3 | % | | 94.6 | % | | -0.3 | pts |
Fixed annuities | | | | | |
|
| | 93.9 | % | | 94.4 | % | | -0.5 | pts |
Total | | | | | |
|
| | 94.0 | % | | 94.5 | % | | -0.5 | pts |
Annuity contracts in force | | | | | |
|
| | 227 |
| | 224 |
| | 1.3 | % |
Fixed spread - YTD annualized (basis points) | | | | | |
|
| | 175 |
| | 181 |
| | -6bps |
|
___________________
N.M. - Not meaningful.
| |
(1) | Amount reported as of June 30, 2019 excludes $691.6 of assets under management held under modified coinsurance reinsurance. |
(2) 2019 includes the results of BCG acquired on January 2, 2019.
For the ninethree and six month periodperiods ended SeptemberJune 30, 2018, total traditional annuity deposits2019, core earnings* decreased 6.6%, or $22.9 million, compared to the prior year period. New deposits to fixed accounts of $174.7 million decreased 21.0%, or $46.5$11.1 million and new deposits to variable accounts of $151.3$10.3 million, increased 18.5%, or $23.6 million, compared to the prior year period.
Total Retirement assets under management, including fee based mutual fund products, increased 6.6% for the nine month period ended September 30, 2018respectively, as compared to the prior year period. Annuity accumulated value on depositperiods reflecting lower net investment income and accelerated amortization of $7.0 billion at Septemberthe DAC asset associated with the reinsured block partially offset by favorable benefits expense from mortality. The current periods also include higher operating expenses from the inclusion of BCG.
As a result of the annuity reinsurance transaction, the Company impaired goodwill associated with the annuity business of the Retirement segment and recorded a non-cash impairment charge of $28.0 million during the quarter ended June 30, 2018 increased 5.5% compared to a year earlier reflecting an increase from new deposits received, market appreciation as well as favorable retention. Accumulated value retention for2019.
For the variable annuity option was 94.5%three and 95.0% for the 12six month periods ended SeptemberJune 30, 20182019, contract deposits increased compared to the prior year periods, reflecting increases in single deposits. Variable annuity deposits increased by $3.4 million and 2017, respectively; fixed annuity retention was 94.2% and 94.5%$5.4 million for the 12three and six month periods ended SeptemberJune 30, 2019. Fixed annuity deposits increased by $5.4 million and $11.9 million for the current periods.
At June 30, 2019, assets under management decreased by $2.7 billion compared to June 30, 2018 driven by the annuity reinsurance transaction. Variable assets under management, excluding reinsurance, increased by $115.0 million primarily due to market performance. The year to date annualized net interest spread on fixed annuities, excluding reinsurance, decreased 6 basis points.
The Company actively manages its interest rate risk exposure, considering a variety of factors, including earned interest rates, credited interest rates and 2017, respectively.the relationship between the expected durations of assets and liabilities. Management estimates that over the next 12 months approximately $336.0 million of Retirement and Life combined investment portfolio and related investable cash flows will be reinvested at current market rates. As interest rates remain at low levels, borrowers may prepay or redeem the securities with greater frequency in order to borrow at lower market rates, which could increase investable cash flows and exacerbate the reinvestment risk.
As a general guideline, for a 100 basis point decline in the average reinvestment rate and based on the Company's existing policies and investment portfolio, the impact from investing in that lower interest rate environment could further reduce Retirement net investment income by approximately $1.3 million in year one and $3.8 million in year two, further reducing the annualized net interest spread by approximately 4 basis points and 13 basis points in the respective periods, compared to the current period annualized net interest spread. The Company could also consider potential changes in rates credited to policyholders, tempered by any restrictions on the ability to adjust policyholder rates due to minimum guaranteed crediting rates.
The expectation for future annualized net interest spreads is also an important component in the amortization of DAC. In terms of the sensitivity of this amortization to the annualized net interest spread, based on DAC as of June 30, 2019 and assuming all other assumptions are met, a 10 basis point deviation in the current year targeted annualized net interest rate spread assumption would impact amortization between $0.3 million and $0.4 million. This result may change depending on the magnitude and direction of any actual deviations but represents a range of reasonably likely experience for the noted assumption.
Variable
The annuity accumulatedreinsurance agreement entered into in the second quarter of 2019, which reinsured the $2.2 billion block of in force fixed annuities with a minimum crediting rate of 4.5%, mitigates the risk of being able to generate appropriate spreads on the annuity business. Information regarding the interest crediting rates and balances equal to the minimum guaranteed rate for deferred annuity account values excluding the reinsured block is shown below.
|
| | | | | | | | | | | | | | | | | |
($ in millions) | | June 30, 2019 |
| | | | | | Deferred Annuities at |
| | Total Deferred Annuities | | Minimum Guaranteed Rate |
| | Percent of Total | | Accumulated Value (AV) | | Percent of Total Deferred Annuities AV | | Percent of Total | | Accumulated Value |
Minimum guaranteed interest rates: | | | | | | | | | | |
Less than 2% | | 52.0 | % | | $ | 1,216.2 |
| | 46.9 | % | | 34.7 | % | | $ | 570.9 |
|
Equal to 2% but less than 3% | | 12.5 | % | | 293.0 |
| | 82.8 | % | | 14.8 | % | | 242.7 |
|
Equal to 3% but less than 4% | | 26.0 | % | | 607.5 |
| | 99.9 | % | | 36.9 | % | | 607.0 |
|
Equal to 4% but less than 5% | | 7.3 | % | | 171.1 |
| | 100.0 | % | | 10.4 | % | | 171.1 |
|
5% or higher | | 2.2 | % | | 52.0 |
| | 100.0 | % | | 3.2 | % | | 52.0 |
|
Total | | 100.0 | % | | $ | 2,339.8 |
| | 70.2 | % | | 100.0 | % | | $ | 1,643.7 |
|
The Company will continue to be disciplined in executing strategies to mitigate the negative impact on profitability of $2.3 billion at Septembera sustained low interest rate environment. However, the success of these strategies may be affected by the factors discussed in Item 1A and other factors within this report.
Life
The following table provides certain information for the Life segment for the periods indicated.
|
| | | | | | | | | | | | | | | | | | | | | | |
($ in millions, unless otherwise indicated) | | Three Months Ended June 30, | | 2019-2018 | | Six Months Ended June 30, | | 2019-2018 |
| | 2019 | | 2018 | | Change % | | 2019 | | 2018 | | Change % |
Financial Data: | | | | | | | | | | | | |
Insurance premiums and contract deposits | | $ | 28.4 |
| | $ | 28.5 |
| | -0.4 | % | | $ | 54.8 |
| | $ | 54.3 |
| | 0.9 | % |
Insurance premiums and contract charges earned | | 29.9 |
| | 30.4 |
| | -1.6 | % | | 60.3 |
| | 59.9 |
| | 0.7 | % |
Net investment income | | 18.3 |
| | 19.2 |
| | -4.7 | % | | 36.4 |
| | 37.5 |
| | -2.9 | % |
Benefits and settlement expenses | | 19.1 |
| | 19.9 |
| | -4.0 | % | | 41.1 |
| | 40.9 |
| | 0.5 | % |
Interest credited | | 11.3 |
| | 11.2 |
| | 0.9 | % | | 22.5 |
| | 22.5 |
| | — | % |
DAC amortization expense, excluding unlocking | | 2.1 |
| | 1.9 |
| | 10.5 | % | | 4.1 |
| | 3.7 |
| | 10.8 | % |
DAC unlocking | | (0.1 | ) | | — |
| | N.M. | | (0.1 | ) | | 0.1 |
| | N.M. |
Operating expenses | | 9.2 |
| | 9.3 |
| | -1.1 | % | | 18.6 |
| | 18.3 |
| | 1.6 | % |
Income before income taxes | | 6.7 |
| | 7.3 |
| | -8.2 | % | | 10.7 |
| | 12.0 |
| | -10.8 | % |
Net income /core earnings* | | 5.2 |
| | 5.9 |
| | -11.9 | % | | 8.5 |
| | 9.7 |
| | -12.4 | % |
| | | | | | | | | | | | |
Operating Statistics: | | | | | | | | | | | | |
Life insurance in force | | | | | | | | $ | 18,598 |
| | $ | 17,862 |
| | 4.1 | % |
Number of policies in force (in thousands) | | | | | | | | 199 |
| | 198 |
| | 0.5 | % |
Average face amount in force (in dollars) | | | | | | | | $ | 93,506 |
| | $ | 90,282 |
| | 3.6 | % |
Lapse ratio (ordinary life insurance in force) | | | | | | | | 4.5 | % | | 4.9 | % | | -0.4 | pts |
Mortality costs | | | | | | | | $ | 18.0 |
| | $ | 17.2 |
| | 4.7 | % |
___________________
N.M. - Not meaningful.
For the three and six month periods ended June 30, 2018 increased 11.7%2019, core earnings* decreased compared to September 30, 2017, as positive impactsthe prior year periods, largely due to lower net investment income partially offset by lower mortality costs in the second quarter of deposits and favorable financial market performance and retention offset withdrawals and net transfers to the guaranteed interest rate fixed account option. Fixed annuity accumulated balances of $4.7 billion at September 30, 2018 increased 2.7% compared to September 30, 2017 reflecting new deposits, interest credited and net transfers from the variable annuity accounts. Compared to the nine month period ended September 30, 2017, Retirement contract charges earned increased 14.9%, or $3.1 million.2019.
Life premiums and contract deposits* for the ninethree and six month periodperiods ended SeptemberJune 30, 2018 increased 3.6%, or $2.9 million, compared2019 were comparable to the prior year period.periods. The ordinary life insurance in force lapse ratio was 4.8%4.5% for the 12 months ended SeptemberJune 30, 2018, comparable2019 compared to 4.9% for the prior year period.12 month period ended June 30, 2018.
Corporate and Other
|
| | | | | | | | | | | | | | | | | | | | | | |
($ in millions) | | Three Months Ended June 30, | | 2019-2018 | | Six Months Ended June 30, | | 2019-2018 |
| | 2019 | | 2018 | | Change % | | 2019 | | 2018 | | Change % |
Interest expense | | $ | (2.9 | ) | | $ | (3.0 | ) | | 3.3 | % | | $ | (5.9 | ) | | $ | (6.0 | ) | | 1.7 | % |
Net investment gains (losses) pretax | | 146.3 |
| | 0.7 |
| | N.M. | | 153.7 |
| | (1.0 | ) | | N.M. |
Tax on net investment gains (losses) | | 31.6 |
| | 0.1 |
| | N.M. | | 33.2 |
| | (0.3 | ) | | N.M. |
Net investment gains (losses) after tax | | 114.7 |
| | 0.6 |
| | N.M. | | 120.5 |
| | (0.7 | ) | | N.M. |
Net income (loss) | | 108.5 |
| | (3.2 | ) | | N.M. | | 110.2 |
| | (7.9 | ) | | N.M. |
Core earnings (loss)* | | (6.2 | ) | | (3.8 | ) | | -63.2 | % | | (10.3 | ) | | (7.2 | ) | | -43.1 | % |
___________________
N.M. - Not meaningful.
For the first nine months of 2018, Propertythree and Casualty new annualized sales premiumssix month periods ended June 30, 2019, core earnings* decreased 4.1% compared to the first nine months of 2017, as a 5.3%, or $3.8 million decline in new automobile sales was offset by growth in property sales of 2.1%, or $0.3 million, compared to the prior year period.periods, driven by $3.1 and $4.0 million, respectively, of pretax acquisition costs associated with BCG and NTA.
For the nine month period ended September 30, 2018, the total level of Retirement sales deposits increased 3.1% compared to the prior year period reflecting an increase in fee-based deposits, partially offset by a decline in spread-based deposits. For the nine month period ended September 30, 2018, traditional annuity deposits decreased 4.9%, or $16.9 million, compared to the prior year period. New deposits to fixed accounts of $174.7 million decreased
Investment Results
20.5%, or $45.1 million, and new deposits to variable accounts of $151.3 million increased 22.9%, or $28.2 million, compared to the prior year period. Sales deposit activity related to the Retirement Advantage® mutual fund products, as well as other mutual fund offerings, were strong with $57.6 million in the current period compared to $29.0 million in the prior year period. |
| | | | | | | | | | | | | | | | | | | | | | |
($ in millions) | | Three Months Ended June 30, | | 2019-2018 | | Six Months Ended June 30, | | 2019-2018 |
| | 2019 | | 2018 | | Change % | | 2019 | | 2018 | | Change % |
Net investment income - investment portfolio | | $ | 70.3 |
| | $ | 97.1 |
| | -27.6 | % | | $ | 163.1 |
| | $ | 189.0 |
| | -13.7 | % |
Investment income - Deposit asset on reinsurance | | 23.2 |
| | — |
| | N.M. | | 23.2 |
| | — |
| | N.M. |
Pretax net investment gains (losses) | | 146.3 |
| | 0.7 |
| | N.M. | | 153.7 |
| | (1.0 | ) | | N.M. |
Pretax net unrealized investment gains on fixed maturity securities | |
| | | |
| | 292.5 |
| | 183.5 |
| | 59.4 | % |
___________________
The Company's introduction of new educator-focused portfolios of term and whole life products in recent years, including a single premium whole life product, as well as the Company's Indexed Universal Life (IUL) product, have contributed to sales of life products. For the first nine months of 2018, sales of Horace Mann's life insurance products totaled $15.1 million, representing an increase of $3.5 million, compared to the prior year period.
Distribution
At September 30, 2018, there was a combined total of 672 Exclusive Distributors, compared to 694 at both December 31, 2017 and September 30, 2017. The Company continues to expect higher quality standards for Exclusive Distributors to focus on improving both customer experiences and agent productivity in their respective territories. The dedicated sales force is supported by the Company’s customer contact center which provides a means for educators to begin their experience directly with the Company, if that is their preference. The Customer Contact Center is also able to assist educators in territories which are not currently served by an Exclusive Distributor.
Net Investment Income
For the three and nine month periods ended September 30, 2018, net investment income of $99.1 million and $288.1 million increased 7.4% and 4.8%, compared to the prior year periods. Net investment income for the three and nine month periods ended September 30, 2018 benefited from a higher level of prepayments as well as favorable returns on alternative investments as compared to the prior year periods. Overall, investment results reflected continued growth in annuity asset balances along with increased alternative investment results offset by the continued low interest rate environment and a concerted effort to increase portfolio quality, which puts pressure on portfolio yield. The Company believes it is late in the credit cycle so the increase in portfolio quality is a proactive action to opportunistically position the portfolio for a recessionary environment and is consistent with our approach in previous credit cycles.
Average invested assets increased 2.6% over the 12 months ended September 30, 2018. The average pretax yield on the total investment portfolio for the nine month period ended September 30, 2018 of 5.2% (4.1% after tax) was higher when compared to the prior year period. During the nine month period ended September 30, 2018, management continued to identify and purchase investments, including a modest level of alternative investments, with attractive risk-adjusted yields relative to market conditions without venturing into asset classes or individual securities that would be inconsistent with the Company’s overall conservative investment guidelines.
Net Investment Gains (Losses)N.M. - PretaxNot meaningful.
For the three and six month periodperiods ended SeptemberJune 30, 2019, net investment income from the investment portfolio was lower than the prior year periods primarily because invested assets decreased 22.2% from December 31, 2018 due to assets transferred under the annuity reinsurance transaction as well as lower than expected new money rates and prepayments that were somewhat offset by stronger returns on alternative investments.
For the three and six month periods ended June 30, 2019, pretax net investment gains were $2.9driven primarily by a $135.3 million comparedpretax realized investment gain related to net investment lossesthe transfer of $3.5 million inassets as a result of the prior year periodannuity reinsurance transaction and the results from the current quarter include $2.0 million of net investment gains due to the change in fair value of the equity securities portfolio.
For the nine month period ended September 30, 2018,securities. Pretax net unrealized investment gains on securities were $1.9up $109.0 million compared to net investment losses of $1.7 millionprior year, reflecting a decline in the prior year period10-year U.S. Treasury yield of 85 basis points and tightening investment-grade credit spreads, offset by the results fromimpact of the current year period include $4.3aforementioned $135.3 million of netpretax realized investment losses duegain related to the change in fair value of the equity securities portfolio.
The Company, from time to time, sells securities subsequent to the reporting date that were considered temporarily impaired at the reporting date. Such sales are due to issuer specific events occurring subsequent to the reporting date that result in a change in the Company’s intent to sell an invested asset.annuity reinsurance transaction.
Fixed Maturity and Equity Securities Portfolios
The table below presents the Company’s fixed maturity and equity securities portfolios by major asset class, including the 10 largest sectors of the Company’s corporate bond holdings (based on fair value). Compared to December 31, 2017, credit spreads were wider within investment grade and tighter in high yield, and the 10-year U.S. Treasury rate rose 65 basis points to 3.06%, which resulted in lower net unrealized investment gains on the fixed maturity securities portfolio at September 30, 2018.
| | ($ in millions) | | September 30, 2018 | | June 30, 2019 |
| | Number of Issuers | | Fair Value | | Amortized Cost | | Pretax Net Unrealized Investment Gain (Loss) | | Number of Issuers | | Fair Value | | Amortized Cost | | Pretax Net Unrealized Gain (Loss) |
Fixed maturity securities | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Corporate bonds | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Banking and Finance | | 126 |
| | $ | 658.4 |
| | $ | 653.4 |
| | $ | 5.0 |
| |
Banking & Finance | | | 96 |
| | $ | 358.3 |
| | $ | 335.6 |
| | $ | 22.7 |
|
Insurance | | 61 |
| | 261.9 |
| | 249.9 |
| | 12.0 |
| | 36 |
| | 134.7 |
| | 120.2 |
| | 14.5 |
|
Technology | | 35 |
| | 179.7 |
| | 179.9 |
| | (0.2 | ) | |
Real Estate | | 41 |
| | 177.3 |
| | 178.0 |
| | (0.7 | ) | | 35 |
| | 105.9 |
| | 101.4 |
| | 4.5 |
|
Energy (1) | | 57 |
| | 172.0 |
| | 166.8 |
| | 5.2 |
| | 52 |
| | 103.5 |
| | 94.9 |
| | 8.6 |
|
HealthCare,Pharmacy | | 50 |
| | 140.9 |
| | 139.3 |
| | 1.6 |
| |
HealthCare, Pharmacy | | | 43 |
| | 92.2 |
| | 86.1 |
| | 6.1 |
|
Technology | | | 29 |
| | 78.8 |
| | 75.3 |
| | 3.5 |
|
Transportation | | | 29 |
| | 73.2 |
| | 68.8 |
| | 4.4 |
|
Utilities | | 42 |
| | 123.2 |
| | 112.7 |
| | 10.5 |
| | 36 |
| | 59.3 |
| | 52.1 |
| | 7.2 |
|
Transportation | | 37 |
| | 112.8 |
| | 111.4 |
| | 1.4 |
| |
Food and Beverage | | | 17 |
| | 41.7 |
| | 39.6 |
| | 2.1 |
|
Telecommunications | | 19 |
| | 74.9 |
| | 70.9 |
| | 4.0 |
| | 21 |
| | 40.7 |
| | 36.4 |
| | 4.3 |
|
Broadcasting and Media | | 17 |
| | 71.1 |
| | 68.3 |
| | 2.8 |
| |
All other corporates (2) | | 191 |
| | 363.3 |
| | 359.9 |
| | 3.4 |
| | 158 |
| | 233.0 |
| | 216.5 |
| | 16.5 |
|
Total corporate bonds | | 676 |
| | 2,335.5 |
| | 2,290.5 |
| | 45.0 |
| | 552 |
| | 1,321.3 |
| | 1,226.9 |
| | 94.4 |
|
Mortgage-backed securities | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
U.S. Government and federally sponsored agencies | | 237 |
| | 435.5 |
| | 431.5 |
| | 4.0 |
| | 216 |
| | 363.6 |
| | 338.5 |
| | 25.1 |
|
Commercial (3) | | 152 |
| | 638.6 |
| | 657.5 |
| | (18.9 | ) | | 107 |
| | 340.5 |
| | 326.6 |
| | 13.9 |
|
Other | | 31 |
| | 85.7 |
| | 86.0 |
| | (0.3 | ) | | 25 |
| | 69.9 |
| | 69.4 |
| | 0.5 |
|
Municipal bonds (4) | | 451 |
| | 1,883.7 |
| | 1,783.7 |
| | 100.0 |
| | 493 |
| | 1,599.7 |
| | 1,472.9 |
| | 126.8 |
|
Government bonds | | | | | | | | | | | | | | | | |
U.S. | | 41 |
| | 782.6 |
| | 802.5 |
| | (19.9 | ) | | 37 |
| | 566.4 |
| | 546.4 |
| | 20.0 |
|
Foreign | | 15 |
| | 95.0 |
| | 92.9 |
| | 2.1 |
| | 10 |
| | 47.4 |
| | 45.3 |
| | 2.1 |
|
Collateralized loan obligations (5) | | 127 |
| | 655.0 |
| | 655.5 |
| | (0.5 | ) | | 131 |
| | 753.2 |
| | 758.2 |
| | (5.0 | ) |
Asset-backed securities | | 111 |
| | 617.5 |
| | 619.4 |
| | (1.9 | ) | | 94 |
| | 472.3 |
| | 457.6 |
| | 14.7 |
|
Total fixed maturity securities | | 1,841 |
| | $ | 7,529.1 |
| | $ | 7,419.5 |
| | $ | 109.6 |
| | 1,665 |
| | $ | 5,534.3 |
| | $ | 5,241.8 |
| | $ | 292.5 |
|
| | | | | | | | | | | | | | | | |
Equity securities | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Non-redeemable preferred stocks | | 12 |
| | $ | 58.6 |
| | | | | | 12 |
| | $ | 50.5 |
| | | | |
Common stocks | | 89 |
| | 55.4 |
| | | | | | 91 |
| | 27.9 |
| | | | |
Closed-end fund | | 1 |
| | 19.2 |
| | | | | | 1 |
| | 21.7 |
| | | | |
Total equity securities | | 102 |
| | $ | 133.2 |
| | | | | | 104 |
| | $ | 100.1 |
| | | | |
| | | | | | | | | | | | | | | | |
Total | | 1,943 |
| | $ | 7,662.3 |
| | | | | | 1,769 |
| | $ | 5,634.4 |
| | | | |
________________
| |
(1) | At SeptemberJune 30, 2018,2019, the fair value amount included $10.7$10.1 million which were non-investment grade. |
| |
(2) | The All other corporates category contains 19 additional industry sectors. Gaming, natural gas, food and beverage,broadcasting & media, leisure/entertainment, metal and mining and retail represented $229.7$133.3 million of fair value at SeptemberJune 30, 2018,2019, with the remaining 14 sectors each representing less than $28.0$15.0 million. |
| |
(3) | At SeptemberJune 30, 2018,2019, 100% were investment grade, with an overall credit rating of AA,AA+, and the positions were well diversified by property type, geography and sponsor. |
| |
(4) | Holdings are geographically diversified, 42.3%54.4% are tax-exempt and 77.0%77.2% are revenue bonds tied to essential services, such as mass transit, water and sewer. The overall credit quality of the municipal bond portfolio was AA- at SeptemberJune 30, 2018.2019. |
| |
(5) | Based on fair value, 97.2%97.7% of the collateralized loan obligation securities were rated investment grade by Standard and Poor’s CorporationGlobal Inc. (S&P), Moody’s Investors Service, Inc. (Moody’s) and/or Fitch Ratings, Inc. (Fitch) at SeptemberJune 30, 2018.2019. |
At SeptemberJune 30, 2018,2019, the Company’s diversified fixed maturity securities portfolio consisted of 2,9732,615 investment positions, issued by 1,8411,665 entities, and totaled approximately $7.5$5.5 billion in fair value. This portfolio was 96.9%97.1% investment grade, based on fair value, with an average quality rating of A+. The Company’s investment guidelines target single corporate issuer concentrations to 0.5% of invested assets for "AAA"AAA or "AA"AA rated securities, 0.4% of invested assets for "A"A or "BBB"BBB rated securities, and 0.2% of invested assets for non-investment grade securities.
The following table presents the composition and fair value of the Company’s fixed maturity and equity securities portfolios by rating category. At SeptemberJune 30, 2018, 96.0%2019, 96.3% of these combined portfolios were investment grade, based on fair value, with an overall average quality rating of A+. At September 30, 2018, theThe Company has classified the entire fixed maturity securities portfolio as available for sale, which is carried at fair value.
Rating of Fixed Maturity Securities and Equity Securities (1)
| | ($ in millions) | | Percent of Portfolio | | | | | | Percent of Portfolio | | | | |
| | Fair Value | | September 30, 2018 | | Fair Value | | June 30, 2019 |
| | December 31, 2017 | | September 30, 2018 | | Fair Value | | Amortized Cost | | December 31, 2018 | | June 30, 2019 | | Fair Value | | Amortized Cost |
Fixed maturity securities | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
AAA | | 7.4 | % | | 8.7 | % | | $ | 655.2 |
| | $ | 653.7 |
| | 9.1 | % | | 12.3 | % | | $ | 680.6 |
| | $ | 671.1 |
|
AA (2) | | 40.4 |
| | 41.8 |
| | 3,144.9 |
| | 3,124.7 |
| | 44.5 |
| | 43.9 |
| | 2,429.4 |
| | 2,296.2 |
|
A | | 23.8 |
| | 23.5 |
| | 1,775.1 |
| | 1,714.8 |
| | 22.4 |
| | 22.8 |
| | 1,260.6 |
| | 1,171.5 |
|
BBB | | 24.8 |
| | 22.7 |
| | 1,709.5 |
| | 1,684.1 |
| | 21.2 |
| | 17.9 |
| | 996.4 |
| | 940.7 |
|
BB | | 2.2 |
| | 2.2 |
| | 163.4 |
| | 163.4 |
| | 1.8 |
| | 1.8 |
| | 98.2 |
| | 95.8 |
|
B | | 0.6 |
| | 0.5 |
| | 38.0 |
| | 37.8 |
| | 0.4 |
| | 0.4 |
| | 27.5 |
| | 27.4 |
|
CCC or lower | | 0.1 |
| | 0.1 |
| | 0.7 |
| | 0.7 |
| | 0.1 |
| | 0.1 |
| | 0.5 |
| | 0.5 |
|
Not rated (3) | | 0.7 |
| | 0.5 |
| | 42.3 |
| | 40.3 |
| | 0.5 |
| | 0.8 |
| | 41.1 |
| | 38.6 |
|
Total fixed maturity securities | | 100.0 | % | | 100.0 | % | | $ | 7,529.1 |
| | $ | 7,419.5 |
| | 100.0 | % | | 100.0 | % | | $ | 5,534.3 |
| | $ | 5,241.8 |
|
Equity securities | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
AAA | | — |
| | — |
| | — |
| | | | — |
| | — |
| | — |
| | |
AA | | — |
| | — |
| | — |
| | | | — |
| | — |
| | — |
| | |
A | | — |
| | — |
| | — |
| | | | — |
| | — |
| | — |
| | |
BBB | | 45.4 | % | | 44.0 | % | | $ | 58.6 |
| | | | 49.0 | % | | 50.4 | % | | $ | 50.5 |
| | |
BB | | — |
| | — |
| | — |
| | | | — |
| | — |
| | — |
| | |
B | | — |
| | — |
| | — |
| | | | — |
| | — |
| | — |
| | |
CCC or lower | | — |
| | — |
| | — |
| | | | — |
| | — |
| | — |
| | |
Not rated | | 54.6 |
| | 56.0 |
| | 74.6 |
| | | | 51.0 |
| | 49.6 |
| | 49.6 |
| | |
Total equity securities | | 100.0 | % | | 100.0 | % | | $ | 133.2 |
| |
|
| | 100.0 | % | | 100.0 | % | | $ | 100.1 |
| | |
| | | | | | | | | | | | | | | | |
Total | | |
| | |
| | $ | 7,662.3 |
| |
|
| | |
| | |
| | $ | 5,634.4 |
| | |
________________
| |
(1) | Ratings are as assigned primarily by S&P when available, with remaining ratings as assigned on an equivalent basis by Moody’s or Fitch. Ratings for publicly traded securities are determined when the securities are acquired and are updated monthly to reflect any changes in ratings. |
| |
(2) | At SeptemberJune 30, 2018,2019, the AA rated fair value amount included $782.6$566.4 million of U.S. Government and federally sponsored agency securities and $661.5$572.2 million of mortgage-backed and asset-backed securities issued by U.S. Government and federally sponsored agencies. |
| |
(3) | This category primarily represents private placement and municipal securities not rated by either S&P, Moody’s or Fitch. |
At SeptemberJune 30, 2018,2019, the fixed maturity securities portfolio had $123.6$13.0 million of pretax of gross unrealized investment losses on $3,698.9$884.8 million of fair value related to 1,483299 positions. Of the investment positions with gross unrealized losses, there were nonethree trading below 80.0% of the carrying value at SeptemberJune 30, 2018.2019.
The Company views the unrealized investment losses of all of the fixed maturity securities at SeptemberJune 30, 20182019 as temporary. Future changes in circumstances related to these and other securities could require subsequent recognition of OTTI.
Benefits, Claims and Settlement Expenses
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
($ in millions) | | Three Months Ended September 30, | | Change From Prior Year | | Nine Months Ended September 30, | | Change From Prior Year |
| | 2018 | | 2017 | | Percent | | Amount | | 2018 | | 2017 | | Percent | | Amount |
| | | | | | | | | | | | | | | | |
Property and Casualty | | $ | 140.0 |
| | $ | 114.9 |
| | 21.8 | % | | $ | 25.1 |
| | $ | 407.7 |
| | $ | 384.9 |
| | 5.9 | % | | $ | 22.8 |
|
Retirement | | 1.5 |
| | 1.6 |
| | -6.3 | % | | (0.1 | ) | | 4.8 |
| | 4.0 |
| | 20.0 | % | | 0.8 |
|
Life | | 20.3 |
| | 18.4 |
| | 10.3 | % | | 1.9 |
| | 61.2 |
| | 56.0 |
| | 9.3 | % | | 5.2 |
|
Total | | $ | 161.8 |
| | $ | 134.9 |
| | 19.9 | % | | $ | 26.9 |
| | $ | 473.7 |
| | $ | 444.9 |
| | 6.5 | % | | $ | 28.8 |
|
| | | | | | | | | | | | | | | | |
Property and Casualty catastrophe losses, included above (1) | | $ | 32.2 |
| | $ | 8.6 |
| | 274.4 | % | | $ | 23.6 |
| | $ | 68.8 |
| | $ | 58.2 |
| | 18.2 | % | | $ | 10.6 |
|
________________
|
| | | | | | | | |
(1) Property and Casualty catastrophe losses were incurred as follows: |
| | 2018 | | 2017 |
Three months ended | | | | |
March 31 | | $ | 9.8 |
| | $ | 17.2 |
|
June 30 | | 26.8 |
| | 32.4 |
|
September 30 | | 32.2 |
| | 8.6 |
|
Total year-to-date | | $ | 68.8 |
| | $ | 58.2 |
|
Property and Casualty Claims and Claim Expenses (Losses)
|
| | | | | | | | | | | | | | | | |
($ in millions) | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2018 | | 2017 | | 2018 | | 2017 |
Incurred claims and claim expenses: | | |
| | |
| | | | |
Claims occurring in the current year | | $ | 140.0 |
| | $ | 115.4 |
| | $ | 408.0 |
| | $ | 387.0 |
|
Decrease in estimated reserves for claims occurring in prior years (1) | | — |
| | (0.5 | ) | | (0.3 | ) | | (2.1 | ) |
Total claims and claim expenses incurred | | $ | 140.0 |
| | $ | 114.9 |
| | $ | 407.7 |
| | $ | 384.9 |
|
| | | | | | | | |
Property and Casualty loss ratio: | | |
| | |
| | | | |
Total | | 83.0 | % | | 70.4 | % | | 81.3 | % | | 79.8 | % |
Effect of catastrophe losses, included above | | 19.1 | % | | 5.3 | % | | 13.7 | % | | 12.0 | % |
Effect of prior years’ reserve development, included above | | — | % | | -0.3 | % | | -0.1 | % | | -0.4 | % |
________________
|
| | | | | | | | |
(1) Shows the amounts by which the Company decreased its reserves in each of the periods indicated for claims occurring in previous years to reflect subsequent information on such claims and changes in their projected final settlement costs. |
| | 2018 | | 2017 |
Three months ended | | | | |
March 31 | | $ | (0.3 | ) | | $ | (1.0 | ) |
June 30 | | — |
| | (0.6 | ) |
September 30 | | — |
| | (0.5 | ) |
Total year-to-date | | $ | (0.3 | ) | | $ | (2.1 | ) |
For the three month period ended September 30, 2018, the Company's benefits, claims and settlement expenses increased $26.9 million or 19.9%, compared to the prior year period.
For the nine month period ended September 30, 2018, the Company's benefits, claims and settlement expenses increased $28.8 million or 6.5%, compared to the prior year period.
For the nine month period ended September 30, 2018, the automobile loss ratio of 76.7% improved by 3.4 points compared to the prior year period reflecting lower catastrophe losses that resulted in 1.5 points of the improvement and continued stabilization in auto loss trends. The property loss ratio of 91.1% for the nine month period ended September 30, 2018, increased 11.9 points compared to the prior year period reflecting higher catastrophe losses that contributed 8.9 points of the increase.
Interest Credited to Policyholders
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
($ in millions) | | Three Months Ended September 30, | | Change From Prior Year | | Nine Months Ended September 30, | | Change From Prior Year |
| | 2018 | | 2017 | | Percent | | Amount | | 2018 | | 2017 | | Percent | | Amount |
| | | | | | | | | | | | | | | | |
Retirement (annuity) | | $ | 40.8 |
| | $ | 38.8 |
| | 5.2 | % | | $ | 2.0 |
| | $ | 119.4 |
| | $ | 114.4 |
| | 4.4 | % | | $ | 5.0 |
|
Life | | 11.3 |
| | 11.3 |
| | — | % | | — |
| | 33.8 |
| | 33.8 |
| | — | % | | — |
|
Total | | $ | 52.1 |
| | $ | 50.1 |
| | 4.0 | % | | $ | 2.0 |
| | $ | 153.2 |
| | $ | 148.2 |
| | 3.4 | % | | $ | 5.0 |
|
For the nine month period ended September 30, 2018, the increase in Retirement interest credited reflected a 2.5% increase in average accumulated fixed value on deposit. Life interest credited remained flat.
The annualized net interest spread on fixed annuity assets under management measures the difference between the rate of income earned on the underlying invested assets and the rate of interest which policyholders are credited on their account values. The annualized net interest spread on fixed annuity assets under management as of September 30, 2018 was 182 basis points, which benefited from an elevated level of prepayments.
As of September 30, 2018, fixed annuity account values totaled $4.7 billion, including $4.5 billion of deferred annuities. As shown in the table below, for approximately 86.9%, or $3.9 billion of the deferred annuity account values, the credited interest rate was equal to the minimum guaranteed rate. Due to limitations on the Company’s ability to further lower interest crediting rates, coupled with the expectation for continued low reinvestment interest rates, management anticipates fixed annuity spread compression in future periods. The majority of assets backing the net interest spread on fixed annuity business are invested in fixed maturity securities.
The Company actively manages its interest rate risk exposure, considering a variety of factors, including earned interest rates, credited interest rates and the relationship between the expected durations of assets and liabilities. Management estimates that over the next 12 months approximately $476.6 million of the Retirement and Life combined investment portfolio and related investable cash flows will be reinvested at current market rates. As interest rates remain at low levels, borrowers may prepay or redeem the securities with greater frequency in order to borrow at lower market rates, which could increase investable cash flows and exacerbate the reinvestment risk.
As a general guideline, for a 100 basis point decline in the average reinvestment rate and based on the Company’s existing policies and investment portfolio, the impact from investing in that lower interest rate environment could further reduce Retirement net investment income by approximately $1.9 million in year one and $5.6 million in year two, further reducing the annualized net interest spread by approximately 4 basis points and 11 basis points in the respective periods, compared to the current period annualized net interest spread. The Company could also consider potential changes in rates credited to policyholders, tempered by any restrictions on the ability to adjust policyholder rates due to minimum guaranteed crediting rates.
The expectation for future annualized net interest spreads is also an important component in the amortization of DAC. In terms of the sensitivity of this amortization to the annualized net interest spread, based on DAC as of September 30, 2018 and assuming all other assumptions are met, a 10 basis point deviation in the current year targeted interest rate spread assumption would impact amortization between $0.3 million and $0.4 million. This result may change depending on the magnitude and direction of any actual deviations but represents a range of reasonably likely experience for the noted assumption.
Additional information regarding the interest crediting rates and balances equal to the minimum guaranteed rate for deferred annuity account values is shown below.
|
| | | | | | | | | | | | | | | | | |
($ in millions) | | September 30, 2018 |
| | | | | | Deferred Annuities at |
| | Total Deferred Annuities | | Minimum Guaranteed Rate |
| | Percent of Total | | Accumulated Value (AV) | | Percent of Total Deferred Annuities AV | | Percent of Total | | Accumulated Value |
Minimum guaranteed interest rates: | | |
| | |
| | |
| | |
| | |
|
Less than 2% | | 25.9 | % | | $ | 1,161.1 |
| | 53.8 | % | | 16.0 | % | | $ | 624.6 |
|
Equal to 2% but less than 3% | | 6.8 |
| | 304.4 |
| | 82.9 | % | | 6.5 |
| | 252.2 |
|
Equal to 3% but less than 4% | | 13.7 |
| | 614.2 |
| | 99.9 | % | | 15.7 |
| | 613.8 |
|
Equal to 4% but less than 5% | | 52.4 |
| | 2,352.8 |
| | 100.0 | % | | 60.4 |
| | 2,352.8 |
|
5% or higher | | 1.2 |
| | 53.4 |
| | 100.0 | % | | 1.4 |
| | 53.4 |
|
Total | | 100.0 | % | | $ | 4,485.9 |
| | 86.9 | % | | 100.0 | % | | $ | 3,896.8 |
|
The Company will continue to be disciplined in executing strategies to mitigate the negative impact on profitability of a sustained low interest rate environment. However, the success of these strategies may be affected by the factors discussed in Item 1A. Risk Factors in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, and other factors discussed herein.
DAC Amortization Expense
DAC amortization expense was $26.2 million for the three month period ended September 30, 2018 compared to $24.2 million for the prior year period, reflecting a $1.4 million pretax increase in Retirement. For Retirement and Life, unlocking resulted in an immaterial change to amortization at September 30, 2018.
DAC amortization expense was $79.4 million for the nine month period ended September 30, 2018 compared to $73.9 million for the prior year period, reflecting a $3.4 million pretax increase in Retirement. For Retirement and Life, unlocking resulted in an immaterial change to amortization at September 30, 2018.
Operating Expenses
For the three month period ended September 30, 2018, operating expenses of $51.0 million increased $6.8 million, or 15.4%, as the Company makes continued investments in targeted strategies to enhance product, distribution, and infrastructure.
For the nine month period ended September 30, 2018, operating expenses of $149.4 million increased $10.3 million, or 7.4%.
The Property and Casualty expense ratio of 26.7% for nine month period ended September 30, 2018 was comparable to the prior year period.
Income Tax Expense
The effective income tax rate on the Company’s pretax income, including net investment gains (losses), was 19.1% and 17.6% for the nine month periods ended September 30, 2018 and 2017, respectively. Income from investments in tax-advantaged securities reduced the effective income tax rates by 2.8% and 12.5% for the nine month periods ended September 30, 2018 and 2017, respectively. The adoption of a new accounting standard for employee share-based payments on January 1, 2017 reduced the effective income tax rate by 5.3% for the nine month period ended September 30, 2017.
On December 22, 2017, comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the Tax Act) was enacted by the U.S. government. The Tax Act is generally effective January 1, 2018, and among other changes, reduced the federal corporate income tax rate from 35% to 21%, eliminated the corporate Alternative Minimum Tax, modified numerous insurance-specific provisions, and further limited deductions for executive compensation. The Tax Act reduced the Company’s effective tax rate by 8.8% for the nine month period ended September 30, 2018. There have been no changes to the provisional items that were reflected in the Company’s December 31, 2017 Consolidated Financial Statements associated with the tax effects of the Tax Act related to partnership investments and discounted loss reserves. No material adjustments related to the provisional items for partnership investments are required and the Company is waiting on guidance from the U.S. Treasury regarding the tax impact on discounted loss reserves. Accounting for the tax effects associated with the Tax Act will be completed in the fourth quarter 2018.
The Company records liabilities for uncertain tax filing positions where it is more likely than not that the position will not be sustainable upon audit by taxing authorities. These liabilities are reevaluated routinely and are adjusted appropriately based on changes in facts or law. The Company has no unrecorded liabilities from uncertain tax filing positions.
At September 30, 2018, the Company’s federal income tax returns for years prior to 2014 are no longer subject to examination by the IRS. Management does not anticipate any assessments for tax years that remain subject to examination to have a material effect on the Company’s financial position or results of operations.
Net Income
For the three month period ended September 30, 2018, the Company's net income of $12.5 million decreased $14.0 million. For the nine month period ended September 30, 2018, the Company's net income of $38.6 million decreased $5.5 million. Additional detail is included in the Executive Summary at the beginning of this MD&A.
Net income (loss) by segment and net income per share were as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
($ in millions) | | Three Months Ended September 30, | | Change From Prior Year | | Nine Months Ended September 30, | | Change From Prior Year |
| | 2018 | | 2017 | | Percent | | Amount | | 2018 | | 2017 | | Percent | | Amount |
Analysis of net income (loss) by segment: | | |
| | |
| | |
| | |
| | | | | | | | |
Property and Casualty | | $ | (3.2 | ) | | $ | 13.4 |
| | -123.9 | % | | $ | (16.6 | ) | | $ | (4.4 | ) | | $ | 2.2 |
| | N.M. |
| | $ | (6.6 | ) |
Retirement | | 12.1 |
| | 13.6 |
| | -11.0 | % | | (1.5 | ) | | 37.6 |
| | 36.9 |
| | 1.9 | % | | 0.7 |
|
Life | | 5.3 |
| | 4.8 |
| | 10.4 | % | | 0.5 |
| | 15.0 |
| | 14.3 |
| | 4.9 | % | | 0.7 |
|
Corporate and Other (1) | | (1.7 | ) | | (5.3 | ) | | -67.9 | % | | 3.6 |
| | (9.6 | ) | | (9.3 | ) | | -3.2 | % | | (0.3 | ) |
Net income | | $ | 12.5 |
| | $ | 26.5 |
| | -52.8 | % | | $ | (14.0 | ) | | $ | 38.6 |
| | $ | 44.1 |
| | -12.5 | % | | $ | (5.5 | ) |
| | | | | | | | | | | | | | | | |
Effect of catastrophe losses, after tax, included above | | $ | (25.4 | ) | | $ | (5.6 | ) | | N.M. |
| | $ | (19.8 | ) | | $ | (54.3 | ) | | $ | (37.8 | ) | | 43.7 | % | | $ | (16.5 | ) |
Effect of net investment gains (losses), after tax, included above | | $ | 2.2 |
| | $ | (2.2 | ) | | N.M. |
| | $ | 4.4 |
| | $ | 1.5 |
| | $ | (0.8 | ) | | N.M. |
| | $ | 2.3 |
|
| | | | | | | | | | | | | | | | |
Diluted: | | |
| | |
| | |
| | |
| | | | | | | | |
Net income per share | | $ | 0.30 |
| | $ | 0.64 |
| | -53.1 | % | | $ | (0.34 | ) | | $ | 0.93 |
| | $ | 1.06 |
| | -12.3 | % | | $ | (0.13 | ) |
Weighted average number of common and common equivalent shares (in millions) | | 41.9 |
| | 41.6 |
| | 0.7 | % | | 0.3 |
| | 41.7 |
| | 41.5 |
| | 0.5 | % | | 0.2 |
|
| | | | | | | | | | | | | | | | |
Property and Casualty combined ratio: | | |
| | |
| | |
| | |
| | | | | | | | |
Total | | 110.1 | % | | 95.8 | % | | | | 14.3 pts |
| | 108.0 | % | | 106.5 | % | | | | 1.5 pts |
|
Effect of catastrophe losses, included above | | 19.1 | % | | 5.3 | % | | | | 13.8 pts |
| | 13.7 | % | | 12.0 | % | | | | 1.7 pts |
|
Effect of prior years’ reserve development,included above | | — | % | | -0.3 | % | | | | +0.3 pts |
| | -0.1 | % | | -0.4 | % | | | | +0.3 pts |
|
________________
N.M. - Not meaningful.
| |
(1)
| Corporate and Other includes interest expense on corporate debt, net investment gains (losses), corporate debt retirement costs, certain public company expenses and other corporate-level items. The Company does not allocate the impact of corporate-level transactions to the operating segments, consistent with the basis for management’s evaluation of the results of those segments. |
As described in footnote (1) to the table above, Corporate and Other reflects corporate-level transactions. Of those transactions, net investment gains (losses) may vary notably between reporting periods and are often the driver of fluctuations in the level of this segment’s net income or loss. For the nine month period ended September 30, 2018, net investment gains after tax were $1.5 million, compared to net investment losses after tax of $0.8 million for the prior year period.
Outlook for 2018
At the time of this Quarterly Report on Form 10-Q, management expects full-year 2018 core earnings* will be in the range of $1.45 to $1.60 per diluted share, which is an update from the previous guidance of $1.90 to $2.10 per diluted share. This projection was revised to account for the significant level of catastrophe and other weather-related losses the Company experienced in the second and third quarters.
Within Property and Casualty, both approved and planned premium rate increases will contribute to a 4 to 5 percent growth in net written premiums. The underlying automobile loss ratio is anticipated to improve by 1.5 to 2.0 points. The underlying property loss ratio is expected to be slightly elevated compared to 2017 due to the higher weather losses. In addition, the contribution of catastrophe losses to the Property and Casualty combined ratio now is expected to be around 11 points.
Net income for Retirement is anticipated to be between $49 to $50 million, reflecting a reduced level of prepayments in the fourth quarter along with the continued impact on the portfolio yield from the low interest rate environment of recent years.
Life net income is expected to be between $18 and $19 million.
Management’s expectations for full-year 2018 core earnings anticipate the Company’s continued initiatives to enhance the customer experience as well as improve infrastructure. This will result in a modest increase in expense levels for all segments compared to 2017 and is in line with the original guidance. In the Property and Casualty segment, the full-year expense ratio is expected to increase to 27 percent.
Management’s full-year expectations also encompass the impacts of the Tax Cuts and Jobs Act of 2017, which is expected to result in an overall effective tax rate of between 16% and 18%.
As described in Critical Accounting Policies, certain of the Company's significant accounting measurements require the use of estimates and assumptions. As additional information becomes available, adjustments may be required. Those adjustments are charged or credited to income for the period in which the adjustments are made and may impact actual results compared to management's estimates above. Additionally, see Forward-looking Information in this Quarterly Report on Form 10-Q and Item 1A. Risk Factors in the Company's Annual Report on Form 10-K for the year ended December 31, 2017 concerning other important factors that could impact actual results. Management believes that a projection of net income is not appropriate on a forward-looking basis because it is not possible to provide a valid forecast of net investment gains (losses), which can vary substantially from one period to another and may have a significant impact on net income.
Liquidity and Financial Resources
Off-Balance Sheet Arrangements
At SeptemberJune 30, 20182019 and 2017,2018, the Company did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or for other contractually narrow or limited purposes. As such, the Company is not exposed to any financing, liquidity, market or credit risk that could arise if the Company engaged in such relationships.
Investments
Information regarding the Company’s investment portfolio, which is comprised primarily of investment grade, fixed maturity securities, is locatedpresented in ResultsItem 1, Note 3 of Operations -- Net Investment Gains (Losses) - Pretax and in the Notes to Consolidated Financial Statements -- Noteand Item 2, -- Investments.
Investments Results.
Cash Flow
Operating Activities
The short-term liquidity requirements of the Company, within a 12 month operating cycle, are for the timely payment of claims and benefits to policyholders, operating expenses, interest payments and federal income taxes. Cash flow generated from operations has been, and is expected to be, adequate to meet the Company’sCompany's operating cash needs in the next 12 months. Cash flow in excess of operational needs has been used to fund business growth, pay dividends to shareholders and repurchase shares of HMEC's common stock. Long-term liquidity requirements, beyond one year, are principally for the payment of future insurance and annuity policy claims and benefits, as well as retirement of long-term debt. The following table summarizes the Company's consolidated cash flows activity for the periods indicated.
|
| | | | | | | | | | | |
($ in millions) | | Six Months Ended June 30, | | 2019-2018 |
| | 2019 | | 2018 | | Change % |
Net cash provided by operating activities | | $ | 97.8 |
| | $ | 151.3 |
| | -35.4 | % |
Net cash provided by (used in) investing activities | | 23.2 |
| | (112.4 | ) | | 120.6 | % |
Net cash used in financing activities | | (125.3 | ) | | (38.3 | ) | | N.M. |
Net increase (decrease) in cash | | (4.3 | ) | | 0.6 |
| | N.M. |
Cash at beginning of period | | 11.9 |
| | 7.6 |
| | 56.6 | % |
Cash at end of period | | $ | 7.6 |
| | $ | 8.2 |
| | -7.3 | % |
___________________
N.M. - Not meaningful.
Operating Activities
As a holding company, HMEC conducts its principal operations in the personal lines segment of the Propertyproperty and Casualtycasualty and Lifelife insurance industries through its subsidiaries. HMEC’sHMEC's insurance subsidiaries generate cash flow from premiums, contract depositspremium and investment income, generally well in excess of their immediate needs for policy obligations, operating expenses and other cash requirements. Cash provided by operating activities primarily reflects net cash generated by the insurance subsidiaries.
For the nine month periodsix months ended SeptemberJune 30, 2018,2019, net cash provided by operating activities decreased $19.7$53.5 million compared to the same period in 2018, primarily due to a decrease in Investment income collected and an increase in Policy acquisition and other operating expenses paid.
Investing Activities
HMEC's insurance subsidiaries maintain significant investments in fixed maturity securities to meet future contractual obligations to policyholders. In conjunction with its management of liquidity and other asset/liability management objectives, the Company, from time to time, will sell fixed maturity securities prior to maturity, and reinvest the proceeds into other investments with different interest rates, maturities or credit characteristics. Accordingly, the Company has classified the entire fixed maturity securities portfolio as available for sale.
During the first quarter of 2019, HMEC acquired BCG.
Financing Activities
Financing activities include primarily payment of dividends, receipt and withdrawal of funds by annuity contractholders, changes in deposit asset on reinsurance, net, issuances and repurchases of HMEC's common stock, fluctuations in book overdraft balances, and borrowings, repayments and repurchases related to debt facilities.
Horace Mann Life Insurance Company (HMLIC), one of the Company's subsidiaries, operates under funding agreements with FHLB. In January 2019, HMLIC received an additional $50.0 million from FHLB under a funding agreement and receipt of those funds has been reported in Annuity Contracts: Variable, Fixed and FHLB Funding Agreements, Deposits. Advances to HMLIC from FHLB under funding agreements totaled $675.0 million as of June 30, 2019. For the six month period ended June 30, 2019, cash inflows from annuity contract deposits, excluding the FHLB transaction, increased $17.2 million, or 8.3%8.7%, compared to the prior year period. Cash outflows from annuity contract benefits, withdrawals and net transfers to Separate Account (variable annuity) assets decreased $4.5 million, or 2.0%, compared to the prior year period.
PaymentsFinancing activities for the six month period ended June 30, 2019 also includes a one time cash payment of principal$124.1 million as part of the initial transfer under the annuity reinsurance transaction.
Capital Resources
The Company has determined the amount of capital which is needed to adequately fund and interestsupport business growth, primarily based on risk-based capital formulas including those developed by the National Association of Insurance Commissioners (NAIC). Historically, the Company’s insurance subsidiaries have generated capital in excess of such needed capital. These excess amounts have been paid to HMEC through dividends. HMEC has then utilized these dividends and its access to the capital markets to service and retire long-term debt, pay dividends to its shareholders, fund growth initiatives, repurchase shares of its common stock and parent company operating expenses is largely dependent on the ability of the insurance subsidiaries to pay cash dividends or makefor other cash payments to HMEC, including tax payments pursuant to tax sharing agreements. Payments for share repurchase programs also have this dependency.corporate purposes. If necessary, HMEC also has other potential sources of liquidity that could provide for additional funding to meet corporate obligations or pay shareholder dividends, which include a revolving line of credit, as well as issuances of various securities. The insurance subsidiaries are subject to various regulatory restrictions which limit the amount of annual dividends or other distributions, including loans or cash advances, available to HMEC without prior approval of the insurance regulatory authorities. The aggregate amount of dividends that may be paid in 20182019 from all of HMEC’sHMEC's insurance subsidiaries without prior regulatory approval is approximately $94.0$90.7 million, of which $42.0 million$54.8 was paid during the ninesix month period ended SeptemberJune 30, 2018. Although regulatory restrictions exist, dividend availability from subsidiaries has been, and is expected to be, adequate for HMEC’s capital needs. Additional information is contained in Notes to Consolidated Financial Statements -- Note 10 -- Statutory Information and Restrictions of the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.
Investing Activities
HMEC’s insurance subsidiaries maintain significant investments in fixed maturity securities to meet future contractual obligations to policyholders. In conjunction with its management of liquidity and other asset/liability management objectives, the Company, from time to time, will sell fixed maturity securities prior to maturity, and reinvest the proceeds in other investments with different interest rates, maturities or credit characteristics. Accordingly, the Company has classified the entire fixed maturity securities portfolio as available for sale.
Financing Activities
Financing activities include primarily payment of dividends, the receipt and withdrawal of funds by annuity contractholders, issuances and repurchases of HMEC’s common stock, fluctuations in bank overdraft balances, and borrowings, repayments and repurchases related to its debt facilities.
The Company’s annuity business produced net negative cash flows in the first nine months of 2018. For the nine month period ended September 30, 2018, receipts from annuity contracts decreased $22.9 million, or 6.6%, compared to the prior year period, as described in Results of Operations -- Insurance Premiums and Contract Charges. In total, annuity contract benefits, withdrawals and net transfers to variable annuity accumulated cash values increased $38.4 million, or 13.0%, compared to the prior year period.
Capital Resources
The Company has determined the amount of capital which is needed to adequately fund and support business growth, primarily based on risk-based capital formulas including those developed by the National Association of Insurance Commissioners (the NAIC). Historically, the Company’s insurance subsidiaries have generated capital in excess of such needed capital. These excess amounts have been paid to HMEC through dividends. HMEC has then utilized these dividends and its access to the capital markets to service and retire long-term debt, pay dividends to its shareholders, fund growth initiatives, repurchase shares of its common stock and for other corporate purposes.2019. Management anticipates that the Company’s sources of capital will continue to generate sufficient capital to meet the needs for business growth, debt interest payments, shareholder dividends and its share repurchase program. Additional information is contained in Notes toItem 8, Note 10 of the Consolidated Financial Statements -- Note 10 -- Statutory Information and Restrictions ofin the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.2018.
The total capital of the Company was $1,602.0$1,797.6 million at SeptemberJune 30, 2018,2019, including $297.7$297.9 million of long-term debt. Total long-term debt represented 19.5%18.7% of total capital excluding net unrealized investment gains on fixed maturity securities (18.6%(16.6% including net unrealized investment gains on fixed maturity securities) at SeptemberJune 30, 2018,2019, which was below the Company’s long-term target of 25%.
Shareholders’ equity was $1,304.3$1,499.7 million at SeptemberJune 30, 2018,2019, including net unrealized investment gains on fixed maturity securities in the Company’s investment portfolio of $76.0$203.1 million after taxes and the related impact of DAC associated with investment contracts and life insurance products with account values. The market value of the Company’s common stock and the market value per share were $1,842.7$1,659.4 million and $44.90,$40.29, respectively, at SeptemberJune 30, 2018.2019. Book value per share was $31.78$36.41 at SeptemberJune 30, 20182019 ($29.9331.48 excluding net unrealized investment gains on fixed maturity securities).
Additional information regarding net unrealized investment gains on fixed maturity securities in the Company’s investment portfolio at SeptemberJune 30, 20182019 is included in Item 1, Note 3 of the Consolidated Financial Statements and in Item 2, - Investments - Net Unrealized Investment Gains (Losses) on Securities containedResults of Operations by Segment in this Quarterly Report on Form 10-Q.report.
Total shareholder dividends paid to shareholders was $35.0were $23.6 million for the ninesix month period ended SeptemberJune 30, 2018.2019. In March and May and September 2018,2019, the Board of Directors announcedapproved regular quarterly dividends of $0.285to $0.2875 per share.
For the ninesix month period ended SeptemberJune 30, 2018,2019, the Company repurchased 2,161did not repurchase any shares of its common stock at an average price per share of $39.53 under its share repurchase program, which is further described in Notes toItem 8, Note 9 of the Consolidated Financial Statements -- Note 9 -- Shareholders’ Equity and Common Stock Equivalents ofin the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.2018. As of SeptemberJune 30, 2018, $27.82019, $22.8 million remained authorized for future share repurchases under the repurchase program.
The following table summarizes the Company's debt obligations.
|
| | | | | | | | |
($ in millions) | | June 30, 2019 | | December 31, 2018 |
Short-term debt: | | | | |
Bank Credit Facility, expires June 21, 2024 | | $ | — |
| | $ | — |
|
| | | | |
Long-term debt: | | | | |
4.50% Senior Notes, due December 1, 2025. Aggregate principal amount of $250 million less unaccrued discount of $0.4 million and $0.5 million (4.5% imputed rate) and unamortized debt issuance costs of $1.7 million and $1.8 million | | 247.9 |
| | 247.7 |
|
FHLB borrowing | | 50.0 |
| | 50.0 |
|
Total | | $ | 297.9 |
| | $ | 297.7 |
|
As of SeptemberJune 30, 2018,2019, the Company had outstanding $250.0 million aggregate principal amount of 4.50% Senior Notes (Senior Notes due 2025), which will mature on December 1, 2025, issued at a discount resulting in an effective yield of 4.53%. Interest on the Senior Notes due 2025 is payable semi-annually at a rate of 4.50%. Detailed information regarding the redemption terms of the Senior Notes due 2025 is contained in the Notes toItem 8, Note 7 of the Consolidated Financial Statements -- Note 7 -- Debt ofin the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.2018. The Senior Notes due 2025 are traded in the open market (HMN 4.50).
As of SeptemberJune 30, 2018,2019, the Company had $50.0 million outstanding with Federal Home Loan Bank (FHLB). In 2017, HMIC purchased common stock to meet the activity-based requirement for membership.FHLB. For FHLB borrowings, the Board has authorized a maximum amount equal to the greater of 10% of admitted assets or 20% of surplus of the consolidated property and casualty companies. For the total $50.0 million received, $25.0 million matures on October 5, 2022 and $25.0 million matures on December 2, 2022. Interest on the borrowings accrues at an annual weighted average rate of 2.4%2.7230% as of SeptemberJune 30, 2018.2019. HMIC's FHLB borrowings of $50.0 million are included in Long-term debt on the Consolidated Balance Sheet.
EffectiveOn June 27, 2018,21, 2019, the BankCompany, as borrower, replaced its current line of credit with a new five-year Credit Facility was amended and restated to extendAgreement (Bank Credit Facility). The credit agreement extends the commitment termination date to June 27, 202321, 2024 from the previous termination date of July 30, 2019. As of September 30, 2018, the Company had no balance outstanding under its Bank Credit Facility.June 27, 2023. The new Bank Credit Facility provides for unsecured borrowings of upincreased the amount available on this senior revolving credit facility to $225.0 million from $150.0 millionmillion. PNC Capital Markets, LLC and expires on June 27, 2023. Interest accrues at varying spreads relative to prime or Eurodollar base rates and is payable monthly or quarterly dependingJPMorgan Chase Bank, N.A. served as joint leads on the applicable base rate. new agreement, with The Northern Trust Company, U.S. Bank National Association, KeyBank National Association, Comerica Bank and Illinois National Bank participating in the syndicate. Terms and conditions of the new Bank Credit Facility are substantially consistent with the prior agreement, with an interest rate based on LIBOR plus 115 basis points. The Company utilized the senior revolving credit facility to partially fund the acquisition of NTA. Moving forward, the Company will use the senior revolving credit facility for ongoing working capital, capital expenditures and general corporate expenditures.The unused portion of the Bank Credit Facility is subject to a variable commitment fee, which was 0.15% on an annual basis at SeptemberJune 30, 2018.2019.
As described in Note 2, on July 1, 2019, the Company completed its acquisition of NTA utilizing the senior revolving credit facility to fund a portion of the purchase price. As of August 1, 2019, the Company had $135 million outstanding under the senior revolving credit facility.
To provide additional capital management flexibility, the Company filed a "universal shelf" registration statement on Form S-3 with the Securities and Exchange Commission (SEC) on March 13, 2018. The registration statement, which registered the offer and sale by the Company from time to time of an indeterminate amount of various securities, which may include debt securities, common stock, preferred
stock, depositary shares, warrants, delayed delivery contracts and/or units that include any of these securities, was automatically effective on March 13, 2018. Unless withdrawn by the Company earlier, this registration statement will remain effective through March 13, 2021. No securities associated with the registration statement have been issued as of the date of this Quarterly Report on Form 10-Q.
On March 13, 2018, the Company filed a "shelf" registration statement on Form S-4 with the SEC which became effective on May 2, 2018. Under this registration statement, the Company may from time to time offer and issue up to 5,000,000 shares of its common stock in connection with future acquisitions of other businesses, assets or securities. Unless withdrawn by the Company, this registration statement will remain effective indefinitely. No securities associated with the registration statement have been issued as of the date of this Quarterly Report on Form 10-Q.
Financial Ratings
HMEC’s principal insurance subsidiaries are rated by S&P, Moody’s, A.M. Best Company, Inc. (A.M. Best) and Fitch. These rating agencies have also assigned ratings to the Company’s long-term debt securities. The ratings that are assigned by these agencies, which are subject to change, can impact, among other things, the Company’s access to sources of capital, cost of capital, and competitive position. These ratings are not a recommendation to buy or hold any of the Company’s securities.
Assigned ratings aswere reviewed by all of October 31, 2018 were unchanged from the disclosurerating agencies in June and July 2019 in conjunction with the announcement of the Company’s Annual Report on Form 10-K forfinancing plans to purchase NTA. A.M. Best and S&P affirmed the year endedratings that were in place at December 31, 2017 with the exception of Moody's. In October 2018, Moody's upgraded Horace Mann's rating on the Senior Notes from Baa3 with a positive outlook to Baa22018. Moody’s and Fitch affirmed their ratings with a stable outlook. They also upgradedoutlook, removing negative watches from their respective debt and insurance financial strength ratings placed after the Property and Casualty and Lifeannouncement of NTA acquisition in December 2018. Assigned ratings from A3 with a positive outlook to A2 with a stable outlook. Assigned ratingsas of July 31, 2019 were as follows (the insurance financial strength ratings for the Company’s Property and Casualty insurance subsidiaries and the Company’s principal Life insurance subsidiary are the same):
|
| | | | | | | | |
| | Insurance Financial | | |
| | Strength Ratings (Outlook) | | Debt Ratings (Outlook) |
As of OctoberJuly 31, 20182019 | | | | |
S&P | | A | | (stable) | | BBB | | (stable) |
Moody’s | | A2 | | (stable) | | Baa2 | | (stable) |
A.M. Best | | A | | (stable) | | bbb | | (stable) |
Fitch | | A | | (stable) | | BBB | | (stable) |
Reinsurance Programs
Information regarding the reinsurance program for the Company’s Property and Casualty segment is located in Business -- Property and Casualty Segment -- Property and Casualty ReinsuranceItem 1, Reporting Segments of the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.2018.
Information regarding the reinsurance program for the Company’s Life segment is located in Business -- Life SegmentItem 1, Reporting Segments of the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.2018.
Effective April 1, 2019, the Company reinsured a $2.9 billion block of policy liabilities related to legacy individual annuities written in 2002 and prior to AA- S&P rated RGA Reinsurance Company, a subsidiary of Reinsurance Group of America, Incorporated (RGA). The block includes $2.2 billion of fixed annuities reinsured under coinsurance and $0.7 billion of variable annuities reinsured under modified
coinsurance. RGA’s financial obligations for the general account liabilities of the reinsured annuity contracts are secured by its assets placed in a comfort trust for HMLIC’s sole use and benefit. Upon RGA’s material breach of the reinsurance agreement, deterioration of its RBC ratio to a certain level, or certain other events, HMLIC may recapture the reinsured business.
Market Value Risk
Market value risk, the Company’s primary market risk exposure, is the risk that the Company’s invested assets will decrease in value. This decrease in value may be due to (1) a change in the yields realized on the Company’s assets and prevailing market yields for similar assets, (2) an unfavorable change in the liquidity of the investment, (3) an unfavorable change in the financial prospects of the issuer of the investment, or (4) a downgrade in the credit rating of the issuer of the investment. See also Results of Operations -- Net Investment Gains (Losses) - Pretax.
Significant changes in interest rates expose the Company to the risk of experiencing losses or earning a reduced level of income based on the difference between the interest rates earned on the Company’s investments and the credited interest rates on the Company’s insurance and investment contract liabilities. See also Results of Operations -- Interest Credited to Policyholders.
The Company seeks to manage its market value risk by coordinating the projected cash inflows of assets with the projected cash outflows of liabilities. For all its assets and liabilities, the Company seeks to maintain reasonable durations, consistent with the maximization of income without sacrificing investment quality, while providing for liquidity and diversification. The investment risk associated with variable annuity deposits and the underlying mutual funds is assumed by those contractholders, and not by the Company. Certain fees that the Company earns from variable annuity deposits are based on the market value of the funds deposited.
More detailed descriptions of the Company’s exposure to market value risks and the management of those risks is presented in Management’s Discussion and Analysis of Financial Condition and Results of Operations -- Market Value Risk of the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.
Item 3:3. Quantitative and Qualitative Disclosures Aboutabout Market Risk
The information required by Item 305Market value risk, the Company’s primary market risk exposure, is the risk that the Company’s invested assets will decrease in value. This decrease in value may be due to (1) a change in the yields realized on the Company’s assets and prevailing market yields for similar assets, (2) an unfavorable change in the liquidity of Regulation S-K is containedthe investment, (3) an unfavorable change in Management’s Discussion and Analysisthe financial prospects of Financial Condition andthe issuer of the investment, or (4) a downgrade in the credit rating of the issuer of the investment. See also Results of Operations --regarding net investment gains (losses).
Significant changes in interest rates expose the Company to the risk of experiencing losses or earning a reduced level of income based on the difference between the interest rates earned on the Company’s investments and the credited interest rates on the Company’s insurance and investment contract liabilities. See also Results of Operations regarding interest credited to policyholders.
The Company seeks to manage its market value risk by coordinating the projected cash inflows of assets with the projected cash outflows of liabilities. For all its assets and liabilities, the Company seeks to maintain reasonable durations, consistent with the maximization of income without sacrificing investment quality, while providing for liquidity and diversification. The investment risk associated with variable annuity deposits and the underlying mutual funds is assumed by those contractholders, and not by the Company. Certain fees that the Company earns from variable annuity deposits are based on the market value of the funds deposited.
More detailed descriptions of the Company’s exposure to market value risks and the management of those risks is presented in Item 7A, Quantitative and Qualitative Disclosures about Market Value Risk contained in this Quarterlyof the Company’s Annual Report on Form 10-Q.10-K for the year ended December 31, 2018.
Item 4:4. Controls and Procedures
Management’s Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
Under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, the Company conducted an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures, as such term is defined in Rule 13a-15(e) of the Securities Exchange Act of 1934 as amended (Exchange Act), as of SeptemberJune 30, 20182019 pursuant to Rule 13a-15(b) of the Exchange Act. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) that is required to be included in the Company’s periodic Securities and Exchange Commission filings. No material weaknesses in the Company’s disclosure controls and procedures were identified in the evaluation and therefore, no corrective actions were taken. There were no significant changes in the Company’s internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation.
Changes in Internal Control Over Financial Reporting
There were no changes in the Company’s internal control over financial reporting that occurred during the Company’s last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II: OTHER INFORMATION
Item 1A:1A. Risk Factors
At the time of this Quarterly Report on Form 10-Q, management believes there are no material changes from the risk factors as previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017. The2018. However, the following risk factor is updated to reflect recent developments; however, in generalhas emerged as a result of transactions that occurred during the described risks are comparable to those previously disclosed.three months ended June 30, 2019.
Future regulatory and legislative activity,The Company is subject to the credit risk of its counterparties, including standards of conduct proposed byreinsurers who reinsure business from the Securities and Exchange Commission (SEC) and related state activity, could have a material adverse effect on our business, financial condition and results of operations.Company’s insurance companies.
On April 6, 2016, the Department of Labor (DOL) released a final regulation which more broadly defined the types of activities that will result in a person being deemed a "fiduciary" for purposesThe Company’s insurance subsidiaries may cede certain risks to third-party insurance companies through reinsurance. One of the prohibited transaction rulesCompany’s insurance subsidiaries, Horace Mann Life Insurance Company (HMLIC), entered into a reinsurance agreement with RGA Reinsurance Company, a subsidiary of Reinsurance Group of America, Incorporated (RGA) to effectuate the reinsurance of a block of HMLIC’s in force fixed and variable annuities on a coinsurance and modified coinsurance basis. The variable portion of the Employee Retirement Income Security Act (ERISA)reinsured annuities is reinsured on a modified coinsurance basis and Code Section 4975. Section 4975 prohibits certain kindsassets supporting the variable account liabilities are still held by HMLIC in its separate accounts. Because the reinsurance agreement covers a large volume of compensationHMLIC’s in force business, the transaction exposes HMLIC and in turn, the Company, to a concentration of credit risk with respect to transactions involvingthis counterparty. RGA’s financial obligations for the general account liabilities of the reinsured annuity contracts are secured by its assets placed in a comfort trust for HMLIC’s sole use and benefit. Upon RGA’s material breach of the reinsurance agreement, deterioration of its RBC ratio to certain level, or certain other events, HMLIC may recapture the reinsured business. However, in the event of RGA’s insolvency, HMLIC’s right to use the assets in certain accounts, including IRAs.
Inthe trust account may be delayed. Also if at the time of its original form,insolvency the DOL regulation would have affectedtrust account is not funded at a level to fully discharge all its obligations, HMLIC’s claims to the ways in which financial services representatives could be compensated for sales to participants in ERISA employer-sponsored qualified plans and sales to IRA customers, and imposed significant additional legal obligations and disclosure requirements.
On March 15, 2018,extent not covered by the United States Court of Appeals for the Fifth Circuit released an opinion vacating the fiduciary rule in its entirety, including all related prohibited transaction exemptions; and on June 21, 2018, the Court issued its mandate officially vacating the rule. The deadline for an appeal of the Court’s decision has expired.
The DOL has stated that it intends to provide appropriate guidanceassets in the future and that until regulations, exemptions, or other administrative guidance has been issued, it will not pursue prohibited transaction claims against fiduciaries who are working diligently and in good faith to comply with the impartial conduct standards for transactions thattrust would have been exempted had the fiduciary rule and related exemptions not been vacated.
The SEC has proposed new or clarified standards of conduct for broker-dealers and investment advisers. This regulatory activity by the SEC has the potential to adversely impact our business, financial condition and results of operations.
There is also activity at the state level. The NAIC has proposed amendments to its Suitability in Annuity Transactions model regulation, including incorporationbe those of a requirement that a recommendation be in the consumer's best interest. Nevada passed a fiduciary statute, New York has amended its suitability regulation, and other states are considering passing their own "fiduciary rules". In view of the Fifth Circuit decision vacating the DOL fiduciary rule, there may be increased state activity in this arena.general creditor.
Item 2:2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
On December 7, 2011,September 30, 2015, the Company’sCompany's Board of Directors (the Board) authorized a share repurchase program allowing repurchases of up to $50.0 million of Horace Mann Educators Corporation’s Common Stock, par value $0.001 (the 2011 Plan). On September 30, 2015, the Board authorized an additionalmillion. The share repurchase program allowing repurchases of up to $50.0 million to begin following the completion of the 2011 Plan and utilization of that authorization began in January 2016. Both share repurchase programs authorizeauthorizes the repurchase of common shares in open market or privately negotiated transactions, from time to time, depending on market conditions. The current share repurchase program does not have an expiration date and may be limited or terminated at any time without notice. During the three month period ended SeptemberJune 30, 2018,2019, the Company did not repurchase shares of HMEC common stock. As of SeptemberJune 30, 2018, $27.82019, $22.8 million remained authorized for future share repurchases.
Item 5:5. Other Information
The Company is not aware of any information required to be disclosed in a report on Form 8-K during the three month period ended SeptemberJune 30, 20182019 which has not been filed with the SEC.
Item 6:6. Exhibits
The following items are filed as Exhibits. Management contracts and compensatory plans are indicated by an asterisk (*).
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Exhibit | | |
No. | | Description |
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(3) Articles of incorporation and bylaws: |
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3.1 | | |
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3.2 | | |
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(4) Instruments defining the rights of security holders, including indentures: |
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4.1 | | |
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4.1(a) | | |
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4.2 | | |
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(10) Material contracts: |
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10.1 | | Amended and Restated Credit Agreement dated as of July 30, 2014June 21, 2019 among HMEC, certain financial institutions named therein and JPMorgan ChasePNC Bank, N.A., as administrative agent, incorporated by reference to Exhibit 10.1 to HMEC’s QuarterlyCurrent Report on Form 10-Q for the quarter ended8-K dated June 30, 2014,24, 2019, filed with the SEC on August 8, 2014.June 24, 2019. |
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10.1(a) | | |
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10.1(b) | | |
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10.1(c) | | |
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10.2(a)* | | |
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10.2(b)* | | |
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10.2(c)* | | |
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10.2(d)* | | |
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10.2(e)* | | |
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10.3* | | |
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10.3(a)* | | |
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10.3(b)* | | |
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10.3(c)* | | |
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10.3(d)* | | |
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10.3(e)* | | |
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10.3(f)* | | |
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10.3(g)* | | |
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10.4* | | |
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10.5* | | |
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10.6* | | |
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10.7* | | |
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10.8* | | |
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10.9* | | |
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10.9(a)* | | |
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10.10* | | |
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10.10(a)* | | |
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10.11* | | |
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10.11(a)* | | |
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10.11(b)* | | |
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10.12 | | Stock Purchase Agreement Among Horace Mann Educators Corporation, and Robert Paglione, Paglione Family Irrevocable Trust F/B/O Adam Paglione, Paglione Family Irrevocable Trust F/B/O Lisa and Jorge Arroyo, Beau Adams and Benefit Consultants Group, Inc. dated as of October 30, 2018, incorporated by reference to Exhibit 10.12 to HMEC's Annual Report on Form 10-K for the year ended December 31, 2018, filed with the SEC on May 9, 2018.March 1, 2019. |
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10.13 | | |
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(31) Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002: |
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31.1 | | |
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31.2 | | |
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(32) Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002: |
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32.1 | | |
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32.2 | | |
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(99) Additional exhibits: |
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99.1 | | |
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(101) Interactive Data File: |
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101.INS | | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document |
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101.SCH | | XBRL Taxonomy Extension Schema |
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101.CAL | | XBRL Taxonomy Extension Calculation Linkbase |
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101.DEF | | XBRL Taxonomy Extension Definition Linkbase |
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101.LAB | | XBRL Taxonomy Extension Label Linkbase |
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101.PRE | | XBRL Taxonomy Extension Presentation Linkbase |
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SIGNATURES
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.
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| | | HORACE MANN EDUCATORS CORPORATION |
| | | (Registrant) |
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Date | NovemberAugust 8, 20182019 | | /s/ /s/ Marita Zuraitis |
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| | | Marita Zuraitis |
| | | President and Chief Executive Officer |
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Date | NovemberAugust 8, 20182019 | | /s/ /s/ Bret A. Conklin |
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| | | Bret A. Conklin |
| | | Executive Vice President and |
| | | Chief Financial Officer |
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Date | NovemberAugust 8, 20182019 | | /s/ /s/ Kimberly A. Johnson |
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| | | Kimberly A. Johnson |
| | | Vice President, Controller and |
| | | Principal Accounting Officer |