UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q 

☒     QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JuneSeptember 30, 2019
OR
☐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)
Delaware37-0911756
(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 ☑ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☑ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an 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.
Large accelerated filer☑ Accelerated filer☐
Non-accelerated filer☐ Smaller reporting 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 defined in Rule 12b-2 of the Exchange Act.) Yes ☐ No ☑
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 JulyOctober 31, 2019, the registrant had 41,198,16741,219,737 shares of Common Stock, par value $0.001 per share, outstanding.




HORACE MANN EDUCATORS CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED JUNESEPTEMBER 30, 2019
INDEX
PART I - FINANCIAL INFORMATION
Page
   
Item 1.
Consolidated Financial Statements (Unaudited)
 
   
 
Report of Independent Registered Public Accounting Firm
1
   
 
Consolidated Balance Sheets as of September 30, 2019 (Unaudited) and December, 31 2018
2
   
 
Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2019 and 2018 (Unaudited)
3
   
 
Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2019 and 2018 (Unaudited)
4
   
 
Consolidated Statements of Changes in Shareholders’ Equity for the Three and Nine Months Ended September 30, 2019 and 2018 (Unaudited)
5
   
 
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2019 and 2018 (Unaudited)
6
   
 
Notes to Consolidated Financial Statements (Unaudited)
 
 
Note 1 - Basis of Presentation
7
 
Note 2 - Acquisitions
11
 
Note 3 - Investments
1213
 
Note 4 - Fair Value of Financial Instruments
1718
 
Note 5 - Derivative Instruments
2223
 
Note 6 - Deposit Asset on Reinsurance
2425
 
Note 7 - Property and Casualty Unpaid Claims and Claim Expenses
2526
 
Note 8 - Debt
2627
 
Note 9 - Reinsurance
2728
 
Note 10 - Commitments
2728
 
Note 11 - Segment Information
2829
 
Note 12 - Operating Leases
2930
 
Note 13 - Supplemental Cash Flow Information
3031
 
Note 14 - Goodwill and Intangible Assets, net
3031
   
Item 2.
Management’s Discussion and Analysis of Financial Condition
and Results of Operations
3134
   
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
5157
   
Item 4.
Controls and Procedures
5157
   
PART II - OTHER INFORMATION
 
   
Item 1A.
Risk Factors
5258
   
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
5260
   
Item 5.
Other Information
5361
   
Item 6.
Exhibits
5361
   
SIGNATURES
5765



PART I: FINANCIAL INFORMATION

Item 1.    Consolidated Financial Statements (Unaudited)

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 
To the Shareholders and Board of Directors
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 JuneSeptember 30, 2019, the related consolidated statements of operations, comprehensive income (loss) and changes in shareholders' equity for the three-month and six-monthnine-month periods ended JuneSeptember 30, 2019 and 2018, and cash flows for the six-monthnine-month periods ended JuneSeptember 30, 2019 and 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, 2018, and the related consolidated statements of operations, comprehensive income (loss), changes in shareholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated 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, 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.
 
/s/ KPMG LLP
KPMG LLP
  
Chicago, Illinois 
AugustNovember 8, 2019 
 



HORACE MANN EDUCATORS CORPORATION
CONSOLIDATED BALANCE SHEETS
($ in thousands, except share data)

  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
     
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
Long-term debt 297,881
 297,740
Separate Account (variable annuity) liabilities 2,310,886
 2,001,128
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
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


  September 30, 2019 December 31, 2018
  (Unaudited)  
ASSETS
Investments    
Fixed maturity securities, available for sale, at fair value
(amortized cost 2019, $5,453,433; 2018, $7,373,911)
 $5,839,560
 $7,515,318
Equity securities, at fair value 105,483
 111,750
Limited partnership interests 354,611
 328,516
Short-term and other investments 433,336
 295,093
Total investments 6,732,990
 8,250,677
Cash 39,349
 11,906
Deferred policy acquisition costs 269,215
 298,742
Deposit asset on reinsurance 2,342,305
 —
Intangible assets, net 181,145
 —
Goodwill 48,744
 47,396
Other assets 410,663
 422,047
Separate Account (variable annuity) assets 2,308,134
 2,001,128
Total assets $12,332,545
 $11,031,896
     
LIABILITIES AND SHAREHOLDERS’ EQUITY
Policy liabilities    
Investment contract and policy reserves $6,207,888
 $5,711,193
Unpaid claims and claim expenses 412,272
 396,714
Unearned premiums 285,215
 276,225
Total policy liabilities 6,905,375
 6,384,132
Other policyholder funds 672,845
 767,988
Other liabilities 434,626
 290,358
Short-term debt 135,000
 —
Long-term debt 297,953
 297,740
Separate Account (variable annuity) liabilities 2,308,134
 2,001,128
Total liabilities 10,753,933
 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, 66,063,569; 2018, 65,820,369
 66
 66
Additional paid-in capital 478,650
 475,109
Retained earnings 1,331,663
 1,216,582
Accumulated other comprehensive income (loss), net of tax:    
Net unrealized investment gains on fixed maturity securities 266,381
 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 1,578,612
 1,290,550
Total liabilities and shareholders’ equity $12,332,545
 $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
June 30,		 Six Months Ended
June 30,
  2019 2018 2019 2018
Revenues  
  
    
Insurance premiums and contract charges earned $208,096
 $205,610
 $417,881
 $408,608
Net investment income 93,458
 97,101
 186,258
 188,965
Net investment gains (losses) 146,333
 735
 153,750
 (919)
Other income 3,591
 2,811
 6,802
 5,092
         
Total revenues 451,478
 306,257
 764,691
 601,746
         
Benefits, losses and expenses        
Benefits, claims and settlement expenses 152,692
 168,278
 292,076
 311,840
Interest credited 53,594
 51,071
 106,516
 101,105
DAC amortization expense 31,648
 26,586
 56,621
 53,291
Operating expenses 55,252
 50,218
 109,305
 98,387
Interest expense 3,312
 3,291
 6,615
 6,464
Other expense 28,025
 —
 28,025
 —
         
Total benefits, losses and expenses 324,523
 299,444
 599,158
 571,087
         
Income before income taxes 126,955
 6,813
 165,533
 30,659
Income tax expense 33,133
 896
 39,545
 4,587
         
Net income $93,822
 $5,917
 $125,988
 $26,072
         
Net income per share        
Basic $2.25
 $0.14
 $3.02
 $0.63
Diluted $2.24
 $0.14
 $3.01
 $0.63
         
Weighted average number of shares
and equivalent shares
        
Basic 41,762
 41,600
 41,685
 41,531
Diluted 41,921
 41,735
 41,851
 41,659
         
Net investment gains (losses)        
Total other-than-temporary impairment losses
on securities
 $(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
 (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 realized
on settlements - derivative instruments
 859
 1,279
 168
 2,718
Total $146,333
 $735
 $153,750
 $(919)

  Three Months Ended
September 30,		 Nine Months Ended
September 30,
  2019 2018 2019 2018
Revenues  
  
    
Insurance premiums and contract charges earned $239,681
 $206,820
 $657,562
 $615,428
Net investment income 93,071
 99,083
 279,329
 288,048
Net investment gains (losses) (2,156) 2,803
 151,594
 1,884
Other income 3,822
 2,612
 10,624
 7,704
         
Total revenues 334,418
 311,318
 1,099,109
 913,064
         
Benefits, losses and expenses        
Benefits, claims and settlement expenses 154,191
 161,846
 446,267
 473,686
Interest credited 53,576
 52,124
 160,092
 153,229
Operating expenses 61,414
 50,989
 169,637
 149,376
DAC unlocking and amortization expense 26,344
 26,066
 82,965
 79,357
Intangible asset amortization expense 3,781
 —
 4,863
 —
Interest expense 4,608
 3,253
 11,223
 9,717
Other expense - goodwill impairment —
 —
 28,025
 —
         
Total benefits, losses and expenses 303,914
 294,278
 903,072
 865,365
         
Income before income taxes 30,504
 17,040
 196,037
 47,699
Income tax expense 5,050
 4,512
 44,595
 9,099
         
Net income $25,454
 $12,528
 $151,442
 $38,600
         
Net income per share        
Basic $0.61
 $0.30
 $3.63
 $0.93
Diluted $0.60
 $0.30
 $3.61
 $0.93
         
Weighted average number of shares
and equivalent shares
        
Basic 41,785
 41,683
 41,715
 41,586
Diluted 42,030
 41,850
 41,911
 41,727
         
Net investment gains (losses)        
Total other-than-temporary impairment losses
on securities
 $(5) $(70) $(276) $(1,357)
Portion of losses recognized in other
comprehensive income (loss)
 —
 —
 —
 —
Net other-than-temporary impairment losses
on securities recognized in earnings
 (5) (70) (276) (1,357)
Sales and other, net 608
 (1,331) 147,513
 2,661
Change in fair value - equity securities 1,081
 2,000
 8,029
 (4,342)
Change in fair value and gains realized
on settlements - derivatives
 (3,840) 2,204
 (3,672) 4,922
Total $(2,156) $2,803
 $151,594
 $1,884
See Notes to Consolidated Financial Statements.


HORACE MANN EDUCATORS CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
($ in thousands)

 Three Months Ended
June 30,		 Six Months Ended
June 30,		 Three Months Ended
September 30,		 Nine Months Ended
September 30,
 2019 2018 2019 2018 2019 2018 2019 2018
Comprehensive income (loss)  
  
      
  
    
Net income $93,822
 $5,917
 $125,988
 $26,072
 $25,454
 $12,528
 $151,442
 $38,600
Other comprehensive income (loss), net of tax:  
  
      
  
    
Change in net unrealized investment gains
(losses) on fixed maturity securities
 (7,762) (52,444) 106,136
 (159,540) 63,304
 (49,638) 169,440
 (209,178)
Change in net funded status of benefit plans —
 —
 —
 —
 —
 —
 —
 —
Cumulative effect of change in accounting principle —
 —
 —
 (15,041) —
 —
 —
 (15,041)
Other comprehensive income (loss) (7,762) (52,444) 106,136
 (174,581) 63,304
 (49,638) 169,440
 (224,219)
Total $86,060
 $(46,527) $232,124
 $(148,509) $88,758
 $(37,110) $320,882
 $(185,619)
 






































See Notes to Consolidated Financial Statements.


HORACE MANN EDUCATORS CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)
($ in thousands, except per share data)

 Three Months Ended
June 30,		 Six Months Ended
June 30,		 Three Months Ended
September 30,		 Nine Months Ended
September 30,
 2019 2018 2019 2018 2019 2018 2019 2018
Common stock, $0.001 par value                
Beginning balance $66
 $66
 $66
 $65
 $66
 $66
 $66
 $65
Options exercised —
 —
 —
 —
 —
 —
 —
 —
Conversion of common stock units —
 —
 —
 —
 —
 —
 —
 —
Conversion of restricted stock units —
 —
 —
 1
 —
 —
 —
 1
Ending balance 66
 66
 66
 66
 66
 66
 66
 66
                
Additional paid-in capital                
Beginning balance 474,336
 466,277
 475,109
 464,246
 476,353
 470,652
 475,109
 464,246
Options exercised and conversion of common stock
units and restricted stock units
 344
 2,384
 (1,761) 2,259
 447
 1,003
 (1,314) 3,262
Share-based compensation expense 1,673
 1,991
 3,005
 4,147
 1,850
 1,941
 4,855
 6,088
Ending balance 476,353
 470,652
 476,353
 470,652
 478,650
 473,596
 478,650
 473,596
                
Retained earnings                
Beginning balance 1,236,621
 1,254,394
 1,216,582
 1,231,177
 1,318,329
 1,248,305
 1,216,582
 1,231,177
Net income 93,822
 5,917
 125,988
 26,072
 25,454
 12,528
 151,442
 38,600
Dividends, 2019, $0.2875, $0.5750 per share;
2018, $0.2850, $0.5700 per share
 (12,114) (12,006) (24,241) (23,985)
Dividends, 2019, $0.2875, $0.8625 per share;
2018, $0.2850, $0.8550 per share
 (12,120) (12,019) (36,361) (36,004)
Cumulative effect of change in accounting principle —
 —
 —
 15,041
 —
 —
 —
 15,041
Ending balance 1,318,329
 1,248,305
 1,318,329
 1,248,305
 1,331,663
 1,248,814
 1,331,663
 1,248,814
                
Accumulated other comprehensive income (loss),
net of tax:
                
Beginning balance 198,654
 164,823
 84,756
 286,960
 190,892
 112,379
 84,756
 286,960
Change in net unrealized investment gains
on fixed maturity securities
 (7,762) (52,444) 106,136
 (159,540)
Change in net unrealized investment gains (losses)
on fixed maturity securities
 63,304
 (49,638) 169,440
 (209,178)
Change in net funded status of benefit plans —
 —
 —
 —
 —
 —
 —
 —
Cumulative effect of change in accounting principle —
 —
 —
 (15,041) —
 —
 —
 (15,041)
Ending balance 190,892
 112,379
 190,892
 112,379
 254,196
 62,741
 254,196
 62,741
                
Treasury stock, at cost                
Beginning balance (485,963) (480,881) (485,963) (480,875) (485,963) (480,961) (485,963) (480,875)
Acquisition of shares —
 (80) —
 (86) —
 —
 —
 (86)
Ending balance (485,963) (480,961) (485,963) (480,961) (485,963) (480,961) (485,963) (480,961)
                
Shareholders’ equity at end of period $1,499,677
 $1,350,441
 $1,499,677
 $1,350,441
Shareholders' equity at end of period $1,578,612
 $1,304,256
 $1,578,612
 $1,304,256








See Notes to Consolidated Financial Statements.


HORACE MANN EDUCATORS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
($ in thousands)
  Six Months Ended
June 30,
  2019 2018
Cash flows - operating activities    
Premiums collected $396,887
 $392,103
Policyholder benefits paid (275,437) (272,769)
Policy acquisition and other operating expenses paid (161,863) (141,620)
Income taxes paid (78) (7,393)
Investment income collected 139,210
 184,749
Interest expense paid (6,440) (6,190)
Other 5,557
 2,429
Net cash provided by operating activities 97,836
 151,309
     
Cash flows - investing activities  
  
Fixed maturity securities  
  
Purchases (644,104) (551,984)
Sales 501,739
 190,023
Maturities, paydowns, calls and redemptions 342,998
 383,090
Equity securities    
Purchases (5,282) (6,028)
Sales and repayments 17,122
 5,783
Limited partnership interests    
Purchases (29,357) (33,031)
Sales 15,029
 9,457
Change in short-term and other investments, net (156,748) (109,711)
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 (23,630) (23,320)
Acquisition of treasury stock —
 (86)
Proceeds from exercise of stock options 722
 2,460
Withholding tax payments on RSUs tendered (3,366) (2,155)
Annuity contracts: variable, fixed and FHLB funding agreements  
  
Deposits 266,310
 199,074
Benefits, withdrawals and net transfers to
Separate Account (variable annuity) assets
 (214,243) (218,694)
Life policy accounts    
Deposits 4,638
 3,163
Withdrawals and surrenders (1,733) (2,525)
Change in deposit asset on reinsurance, net (134,682) —
Change in book overdrafts (19,341) 3,795
Net cash used in financing activities (125,325) (38,288)
     
Net increase (decrease) in cash (4,290) 620
     
Cash at beginning of period 11,906
 7,627
     
Cash at end of period $7,616
 $8,247

  Nine Months Ended
September 30,
  2019 2018
Cash flows - operating activities    
Premiums collected $674,170
 $598,443
Policyholder benefits paid (404,086) (419,736)
Policy acquisition and other operating expenses paid (253,101) (218,464)
Income taxes paid (12,696) (8,719)
Investment income collected 204,186
 277,178
Interest expense paid (6,948) (6,537)
Other 5,711
 (4,691)
Net cash provided by operating activities 207,236
 217,474
     
Cash flows - investing activities  
  
Fixed maturity securities  
  
Purchases (845,967) (1,044,002)
Sales 651,058
 360,246
Maturities, paydowns, calls and redemptions 645,946
 577,425
Equity securities    
Purchases (10,510) (8,578)
Sales and repayments 20,989
 8,493
Limited partnership interests    
Purchases (42,388) (84,444)
Sales 36,108
 11,754
Change in short-term and other investments, net (99,702) (4,700)
Acquisition of businesses, net of cash acquired (421,174) —
Net cash used in investing activities (65,640) (183,806)
     
Cash flows - financing activities  
  
Dividends paid to shareholders (35,477) (35,016)
Principal borrowings on Bank Credit Facility 135,000
 —
Acquisition of treasury stock —
 (86)
Proceeds from exercise of stock options 1,105
 3,191
Withholding tax payments on RSUs tendered (3,560) (2,190)
Annuity contracts: variable, fixed and FHLB funding agreements  
  
Deposits 519,636
 326,003
Benefits, withdrawals and net transfers to
Separate Account (variable annuity) assets
 (313,653) (333,473)
Principal repayment on FHLB funding agreements (275,000) —
Life policy accounts    
Deposits 7,143
 5,618
Withdrawals and surrenders (2,682) (3,766)
Change in deposit asset on reinsurance, net (130,740) —
Change in book overdrafts (15,925) 4,855
Net cash used in financing activities (114,153) (34,864)
     
Net increase (decrease) in cash 27,443
 (1,196)
     
Cash at beginning of period 11,906
 7,627
     
Cash at end of period $39,349
 $6,431

See Notes to Consolidated Financial Statements.


HORACE MANN EDUCATORS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNESeptember 30, 2019 and 2018
($ 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 U.S. (GAAP) and with the rules and regulations of the Securities and Exchange Commission (SEC). 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’sCompany's consolidated financial position as of JuneSeptember 30, 2019, the consolidated results of operations, comprehensive income (loss), and changes in shareholders’ equity for the three and nine month periods ended September 30, 2019 and 2018 and cash flows for the sixnine month periods ended JuneSeptember 30, 2019 and 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 thosethese 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’sHMEC'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.Lloyds and National Teachers Associates Life Insurance Company (NTA).

As described more fully in Note 2, the Company acquired NTA on July 1, 2019. As a result, the Company’s reporting segments have changed effective in the third quarter of 2019. A new reporting segment titled "Supplemental" was added to report on the personal lines of supplemental insurance products (primarily heart, cancer, accident and limited supplemental disability coverages) that are marketed and underwritten by NTA.
These consolidated financial statements should be read in conjunction with the consolidated financial statements and the related notes to consolidated financial statements included in Item 8 of the Company’sCompany's Annual Report on Form 10-K for the year ended December 31, 2018.
 
The results of operations for the three and sixnine month periods ended JuneSeptember 30, 2019 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.


Note 1 - Basis of Presentation (Continued)

Cash
Cash reported on the Consolidated Balance Sheet at September 30, 2019 includes restricted cash in the amount of $672 thousand, representing funds held in segregated accounts for insurance premiums to be remitted to insurance companies on behalf of the Company’s customers or for the purpose of reimbursement to cafeteria plan participants.

Investment Contract and Life Policy Reserves
 
The following table summarizes investment contract and life policy reserves.
($ in thousands) June 30, 2019 December 31, 2018 September 30, 2019 December 31, 2018
Investment contract reserves $4,605,272
 $4,555,856
 $4,658,148
 $4,555,856
Life policy reserves 1,171,497
 1,155,337
Policy reserves 1,549,740
 1,155,337
Total $5,776,769
 $5,711,193
 $6,207,888
 $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 Fixed Maturity Securities (1)(2)
 
Net Funded Status of
Benefit Plans (1)
 
Total (1)
 
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
Beginning balance, July 1, 2019 $203,077
 $(12,185) $190,892
Other comprehensive income (loss) before reclassifications 107,163
 —
 107,163
 64,577
 —
 64,577
Amounts reclassified from AOCI (114,925) —
 (114,925) (1,273) —
 (1,273)
Net current period other comprehensive income (loss) (7,762) —
 (7,762) 63,304
 —
 63,304
Ending balance, June 30, 2019 $203,077
 $(12,185) $190,892
Ending balance, September 30, 2019 $266,381
 $(12,185) $254,196
            
Beginning balance, January 1, 2019 $96,941
 $(12,185) $84,756
 $96,941
 $(12,185) $84,756
Other comprehensive income (loss) before reclassifications 227,466
 —
 227,466
 292,043
 —
 292,043
Amounts reclassified from AOCI (121,330) —
 (121,330) (122,603) —
 (122,603)
Net current period other comprehensive income (loss) 106,136
 —
 106,136
 169,440
 —
 169,440
Ending balance, June 30, 2019 $203,077
 $(12,185) $190,892
Ending balance, September 30, 2019 $266,381
 $(12,185) $254,196
______________________________
(1) 
All amounts are net of tax.
(2) 
The pretax amounts reclassified from AOCI, $145,474$1,612 thousand and $153,582$155,194 thousand, are included in net investment gains (losses) and the related income tax expenses, $30,549$339 thousand and $32,252$32,591 thousand, are included in income tax expense in the Consolidated Statements of Operations for the three and sixnine month periods ended JuneSeptember 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)
 
Net Unrealized Investment
Gains (Losses)
on Fixed Maturity Securities (1)(2)
 
Net Funded Status of
Benefit Plans (1)
 
Total (1)
Beginning balance, April 1, 2018, $178,040
 $(13,217) $164,823
Beginning balance, July 1, 2018, $125,596
 $(13,217) $112,379
Other comprehensive income (loss) before reclassifications (52,873) —
 (52,873) (49,165) —
 (49,165)
Amounts reclassified from AOCI 429
 —
 429
 (473) —
 (473)
Net current period other comprehensive income (loss) (52,444) —
 (52,444) (49,638) —
 (49,638)
Ending balance, June 30, 2018 $125,596
 $(13,217) $112,379
Ending balance, September 30, 2018 $75,958
 $(13,217) $62,741
            
Beginning balance, January 1, 2018 $300,177
 $(13,217) $286,960
 $300,177
 $(13,217) $286,960
Other comprehensive income (loss) before reclassifications (162,412) —
 (162,412) (211,577) —
 (211,577)
Amounts reclassified from AOCI 2,872
 —
 2,872
 2,399
 —
 2,399
Cumulative effect of change in accounting principle (3)
 (15,041) —
 (15,041) (15,041) —
 (15,041)
Net current period other comprehensive income (loss) (174,581) —
 (174,581) (224,219) —
 (224,219)
Ending balance, June 30, 2018 $125,596
 $(13,217) $112,379
Ending balance, September 30, 2018 $75,958
 $(13,217) $62,741
______________________________
(1) 
All amounts are net of tax.
(2) 
The pretax amounts reclassified from AOCI, $(544)$599 thousand and $(3,636)(3,037) thousand, are included in Net investment gains (losses) and the related income tax expenses, $(115)$126 thousand and $(764)$(638) thousand, are included in Income tax expense in the Consolidated Statements of Operations for the three and sixnine month periods ended JuneSeptember 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.

Comparative information for elements that are not required to be reclassified in their entirety to net income in the same reporting period is disclosed in Note 3.

Adopted Accounting Standards

Accounting for Leases

Effective for the quarter 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 continuecontinues to be presented in the financial statements in accordance with previous lease accounting guidance. The Company elected to apply all practical expedients in the guidance for transition for leases in effect at adoption, including using hindsight to determine the 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 resulted in the Company recognizing an initial $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 Consolidated Balance Sheets. The impact of these changes at adoption had no impact on net income or shareholders' equity.equity.

Simplifying the Test for Goodwill Impairment

Effective for the quarter ended June 30, 2019, the Company adopted guidance to simplify the accounting for goodwill impairment. Adoption of this guidance removed Step 2 of the goodwill 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 exceed the carrying amount of goodwill.

Note 1 - Basis of Presentation (Continued)

Pending Accounting Standards

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 estimate their credit 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.

This guidance is effective for annual and interim reporting periods beginning after December 15, 2019. Early adoption is permitted beginning after December 15, 2018. Upon 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 effective. The guidance will have the most impact on the Company’sCompany's available for sale fixed maturity securities portfolio. However, as the Company’sCompany's fixed maturity securities portfolio is weighted towards higher rated bonds (97.1%(96.7% investment grade, based on fair value, with an average quality rating of A+ at JuneSeptember 30, 2019), the Company does not expect that the effect of adoption will be material.

Accounting for Long-Duration Insurance Contracts

In August 2018, the FASB issued accounting and disclosure guidance that contains targeted improvements 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, 2020,2021, 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 - Acquisitions


TheOn January 2, 2019, the Company andcompleted its acquisition of all the equity interests in Benefit Consultants Group, Inc. (BCG) entered intofor a Stock Purchase Agreement under which the Company acquired alltotal purchase consideration of the outstanding capital stock of BCG with a transaction valued at $25 million. The acquisition was approved by the Company’s BoardBCG provides advisory and closed on January 2, 2019.benefit plan record keeping services. BCG's results are reported in Retirement. 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 purchase accounting. The intangible assets are reported as Other assets in the Consolidated Balance Sheets. Intangible assets that are amortizable have lives of 10 to 16 years. See Note 14 for further information. The amount of goodwill that is expected to be deductible for federal income tax purposes is $10.1 million.

On July 1, 2019, the Company completed its acquisition ofacquired all the equity interests in National Teachers Associates Life Insurance Company (NTA)NTA pursuant to a Purchase Agreement (Agreement) dated as of December 10, 2018, by and among the Company and Ellard Family Holdings, Inc., Brian M. Ellard and The JCE Exempt Trust.2018. The purchase price of the transaction was $425 million which includes $20 million representing NTA’s share of "adjusted earnings" (as determined in accordance with the terms of the Agreement) from July 1, 2018 to July 1, 2019. The purchase price adjustment is subject to finalization within 135 days of the acquisition date pursuant to the terms of the Agreement. As a result of the acquisition, NTA became a wholly owned subsidiary of the Company. NTA provides supplemental insurance products including(primarily heart, cancer, accident and cancer, tolimited supplemental disability coverages) primarily within the education market.public sector for which approximately 80% are individuals employed by educational institutions, with the remainder employed in state and local governments and emergency services facilities. NTA's results will beare being reported in a newly created operatingreporting segment titled "Supplemental".

The Company has not yet completed the process of estimating the fair value of NTA assets acquired and liabilities assumed, including, but not limited to, intangible assets, policy reserves, certain tax-related balances and certain investments. Accordingly, the Company’s preliminary estimates and the allocation of the purchase price to the assets acquired and liabilities assumed are subject to change as the Company completes the process. In accordance with Accounting Standards Codification (ASC) 805, Business Combinations, changes if any, to the preliminary estimates and allocation of the purchase price will be reported in the Company’s financial statements as an adjustment to the opening balance sheet. Based on the Company’s preliminary allocation of the purchase price, the fair values of the assets acquired and liabilities assumed were as follows:

($ in millions)  
Assets:  
Investments $542.6
Cash and short-term investments 73.8
Intangible assets (1)
 169.8
Other assets 18.3
Liabilities:  
Policy reserves 366.8
Policy claims 21.8
Unearned premiums 4.1
Other liabilities 5.5
Total identifiable net assets acquired 406.3
Goodwill (2)
 19.3
Purchase price $425.6
_____________
(1)
Intangible assets consist of the value of business acquired, value of distribution acquired, agency relationships, trade names and state licenses. The intangible assets that are amortizable have estimated lives of 14 to 35 years. See Note 14 for further information.
(2)
The amount of goodwill that is expected to be deductible for federal income tax purposes is $17.9 million.

Note 2 - Acquisitions (Continued)

The following unaudited pro forma information presents the Company's results of operations as if the acquisition of NTA occurred on January 1, 2018. The adjustments to arrive at the unaudited pro forma information below includes, among other things, adjustments for lost investment income on the cash used to fund the acquisition, amortization of an estimated fair value adjustment on NTA's policy reserves, amortization of acquired intangible assets, interest expense on debt incurred to finance the acquisition and exclusion of certain transaction costs attributable to the acquisition as such costs are considered non-recurring.
($ in thousands, except per share data) Unaudited
  Nine Months Ended
September 30,		 
Year Ended
December 31,
  2019 2018
Total revenues $1,175,977
 $1,339,896
Total expenses 967,352
 1,288,690
Income before income taxes 208,625
 51,206
Net income $161,463
 $43,373
     
Net income per share: (1)
    
Basic $3.87
 $1.04
Diluted $3.85
 $1.04
___________
(1)
The unaudited pro forma basic and diluted net income per share calculations are based on the Company's historical basic and diluted weighted average number of shares outstanding for the nine months ended September 30, 2019 and the year ended December 31, 2018.

The unaudited pro forma financial information is not necessarily indicative of the consolidated results of operations that might been achieved had the transaction in fact occurred at the beginning of the periods presented, nor does the information project results for any future period. The unaudited pro forma information does not include the impact of any future cost savings or synergies that may be achieved as a result of the acquisition.

Note 3 - Investments

Fixed Maturity Securities

The Company’sCompany's investment portfolio is comprised primarily of fixed maturity securities. Amortized cost, net unrealized investment gains (losses) and fair values of all fixed maturity securities in the portfolio were as follows:
($ in thousands) 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
June 30, 2019        
September 30, 2019        
Fixed maturity securities                
U.S. Government and federally
sponsored agency obligations: (1)
                
Mortgage-backed securities $550,059
 $37,900
 $1,201
 $586,758
 $698,794
 $55,868
 $307
 $754,355
Other, including U.S. Treasury securities 546,396
 20,574
 533
 566,437
 430,149
 28,161
 135
 458,175
Municipal bonds 1,472,794
 127,700
 801
 1,599,693
 1,511,967
 164,811
 356
 1,676,422
Foreign government bonds 45,303
 2,064
 —
 47,367
 45,301
 2,616
 2
 47,915
Corporate bonds 1,226,962
 96,535
 2,211
 1,321,286
 1,465,217
 121,861
 1,970
 1,585,108
Other mortgage-backed securities 1,400,241
 20,786
 8,298
 1,412,729
 1,302,005
 23,465
 7,885
 1,317,585
Totals $5,241,755
 $305,559
 $13,044
 $5,534,270
 $5,453,433
 $396,782
 $10,655
 $5,839,560
                
December 31, 2018                
Fixed maturity securities                
U.S. Government and federally
sponsored agency obligations: (1)
                
Mortgage-backed securities $778,038
 $22,724
 $13,321
 $787,441
 $778,038
 $22,724
 $13,321
 $787,441
Other, including U.S. Treasury securities 835,096
 16,127
 17,681
 833,542
 835,096
 16,127
 17,681
 833,542
Municipal bonds 1,884,313
 133,150
 13,494
 2,003,969
 1,884,313
 133,150
 13,494
 2,003,969
Foreign government bonds 83,343
 2,321
 760
 84,904
 83,343
 2,321
 760
 84,904
Corporate bonds 2,054,105
 64,296
 38,891
 2,079,510
 2,054,105
 64,296
 38,891
 2,079,510
Other mortgage-backed securities 1,739,016
 10,467
 23,531
 1,725,952
 1,739,016
 10,467
 23,531
 1,725,952
Totals $7,373,911
 $249,085
 $107,678
 $7,515,318
 $7,373,911
 $249,085
 $107,678
 $7,515,318
______________________________
(1) 
Fair value includes securities issued by Federal National Mortgage Association (FNMA) of $370,182$429,676 thousand and $441,308 thousand; Federal Home Loan Mortgage Corporation (FHLMC) of $256,531$290,964 thousand and $417,308 thousand; and Government National Mortgage Association (GNMA) of $79,141$154,226 thousand and $96,466 thousand as of JuneSeptember 30, 2019 and December 31, 2018, respectively.


Note 3 - Investments (Continued)

The following table presents the fair value and gross unrealized losses of securities in an unrealized loss position at JuneSeptember 30, 2019 and December 31, 2018, respectively. The Company views the decrease in fair value of all of the securities with unrealized losses at JuneSeptember 30, 2019 -- 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 doesAs of September 30, 2019, the Company has not havemade the intentdecision to sell the securities and it is not more likely than not the Company will be required to sell thefixed maturity securities with unrealized losses before the anticipated recovery of theirthe amortized cost bases, and management expects to recover the entire amortized cost bases of the fixed maturity securities.basis. Therefore, it was determined that the unrealized losses on the securities presented in the table below were not other-than-temporarily impaired as of JuneSeptember 30, 2019.
($ in thousands) 12 Months or Less More than 12 Months Total 12 Months or Less More than 12 Months Total
 Fair Value 
Gross
Unrealized
Losses
 Fair Value 
Gross
Unrealized
Losses
 Fair Value 
Gross
Unrealized
Losses
 Fair Value 
Gross
Unrealized
Losses
 Fair Value 
Gross
Unrealized
Losses
 Fair Value 
Gross
Unrealized
Losses
June 30, 2019            
September 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
 $21,323
 $204
 $2,795
 $103
 $24,118
 $307
Other 11,463
 32
 37,575
 501
 49,038
 533
 12,712
 128
 2,024
 7
 14,736
 135
Municipal bonds 16,900
 93
 34,031
 708
 50,931
 801
 11,707
 74
 13,185
 282
 24,892
 356
Foreign government bonds —
 —
 —
 —
 —
 —
 2,500
 2
 —
 —
 2,500
 2
Corporate bonds 27,858
 518
 32,997
 1,693
 60,855
 2,211
 57,329
 1,145
 16,371
 825
 73,700
 1,970
Other mortgage-backed securities 391,170
 3,895
 277,694
 4,403
 668,864
 8,298
 320,293
 3,498
 293,852
 4,387
 614,145
 7,885
Total $457,895
 $4,565
 $426,861
 $8,479
 $884,756
 $13,044
 $425,864
 $5,051
 $328,227
 $5,604
 $754,091
 $10,655
                        
Number of positions with a
gross unrealized loss
 143
   156
   299
   214
   102
   316
  
Fair value as a percentage of total fixed
maturity securities fair value
 8.3%   7.7%   16.0%   7.3%   5.6%   12.9%  
                        
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
 $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
 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
 291,869
 7,603
 95,297
 5,891
 387,166
 13,494
Foreign government bonds 16,250
 760
 —
 —
 16,250
 760
 16,250
 760
 —
 —
 16,250
 760
Corporate bonds 818,519
 27,429
 99,171
 11,462
 917,690
 38,891
 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
 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
 $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
   1,052
   359
   1,411
  
Fair value as a percentage of total fixed
maturity securities fair value
 33.2%   11.8%   45.0%   33.2%   11.8%   45.0%  

Fixed maturity securities with an investment grade rating represented 84.0%77.5% of the gross unrealized losses as of JuneSeptember 30, 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 theirthe amortized cost bases.basis.

Note 3 - Investments (Continued)

Limited Partnership Interests

As of JuneSeptember 30, 2019 and December 31, 2018, the carrying value of equity method limited partnerships totaled $351,515$354,611 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’sCompany's credit loss component of other-than-temporary impairment (OTTI) losses on fixed maturity securities held as of JuneSeptember 30, 2019 and 2018 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 the amortized cost bases,basis, for which the non-credit portions of OTTI losses were recognized in OCI:other comprehensive income (loss) (OCI):
($ in thousands) Six Months Ended
June 30,		 Nine Months Ended
September 30,
 2019 2018 2019 2018
Cumulative credit loss (1)
        
Beginning of period $1,529
 $3,825
 $1,529
 $3,825
New credit losses —
 —
 —
 —
Increases to previously recognized credit losses —
 246
 —
 246
Losses related to securities sold or paid down during the period —
 —
 —
 (2,542)
End of period $1,529
 $4,071
 $1,529
 $1,529
_____________________________
(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 security before the recovery of the amortized cost basis.


Note 3 - Investments (Continued)

Maturities 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’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 June 30, 2019 Percent of Total Fair Value September 30, 2019
 June 30, 2019 December 31, 2018 
Fair
Value
 
Amortized
Cost
 September 30, 2019 December 31, 2018 
Fair
Value
 
Amortized
Cost
Estimated expected maturity:                
Due in 1 year or less 4.7% 4.8% $258,331
 $252,586
 4.0% 4.8% $234,818
 $228,604
Due after 1 year through 5 years 26.7% 22.8% 1,478,291
 1,439,296
 26.5% 22.8% 1,546,779
 1,499,348
Due after 5 years through 10 years 29.6% 32.8% 1,638,887
 1,555,825
 29.3% 32.8% 1,709,053
 1,601,491
Due after 10 years through 20 years 25.6% 26.5% 1,414,857
 1,316,715
 24.9% 26.5% 1,454,033
 1,318,362
Due after 20 years 13.4% 13.1% 743,904
 677,333
 15.3% 13.1% 894,877
 805,628
Total 100.0% 100.0% $5,534,270
 $5,241,755
 100.0% 100.0% $5,839,560
 $5,453,433
                
Average option-adjusted duration, in years 5.6
 5.9
     6.0
 5.9
    


Note 3 - 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
June 30,		 Six Months Ended
June 30,		 Three Months Ended
September 30,		 Nine Months Ended
September 30,
 
2019 (1)
 2018 
2019 (1)
 2018 2019 2018 
2019 (1)
 2018
Fixed maturity securities                
Proceeds received $442,015
 $100,129
 $501,739
 $190,023
 $149,319
 $170,223
 $651,058
 $360,246
Gross gains realized 147,774
 2,352
 148,316
 4,022
 1,258
 3,980
 149,574
 8,002
Gross losses realized (5,976) (1,584) (6,081) (1,637) (1,047) (5,893) (7,128) (7,530)
                
Equity securities                
Proceeds received $1,633
 $3,735
 $17,122
 $5,783
 $1,367
 $2,710
 $18,489
 $8,493
Gross gains realized 389
 977
 5,134
 1,593
 428
 885
 5,562
 2,478
Gross losses realized (166) (147) (510) (181) (32) (321) (542) (502)

_____________________________
(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.


Note 3 - Investments (Continued)

Net Investment Gains (Losses)

The following table reconciles net investment gains (losses) pretax by transaction type:
($ in thousands) Three Months Ended
June 30,		 Six Months Ended
June 30,		 Three Months Ended
September 30,		 Nine Months Ended
September 30,
 2019 2018 2019 2018 2019 2018 2019 2018
Impairment write-downs $—
 $—
 $—
 $—
 $—
 $—
 $—
 $—
Change in intent write-downs (34) (1,177) (271) (1,287) (5) (70) (276) (1,357)
Net OTTI losses recognized in earnings (34) (1,177) (271) (1,287) (5) (70) (276) (1,357)
Sales and other, net 142,067
 1,789
 146,905
 3,992
 608
 (1,331) 147,513
 2,661
Change in fair value - equity securities 3,441
 (1,156) 6,948
 (6,342) 1,081
 2,000
 8,029
 (4,342)
Change in fair value and gains (losses) realized
on settlements - derivative instruments
 859
 1,279
 168
 2,718
Change in fair value and gains (losses) realized
on settlements - derivatives
 (3,840) 2,204
 (3,672) 4,922
Net investment gains (losses) $146,333
 $735
 $153,750
 $(919) $(2,156) $2,803
 $151,594
 $1,884



Note 3 - Investments (Continued)

Net Unrealized Investment Gains (Losses) on Fixed Maturity Securities

The following table reconciles 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
June 30,		 Six Months Ended
June 30,		 Three Months Ended
September 30,		 Nine Months Ended
September 30,
 2019 2018 2019 2018 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
 $231,087
 $144,998
 $111,712
 $286,176
Change in net unrealized investment gains
(losses) on fixed maturity securities
 100,693
 (61,724) 240,705
 (129,009) 75,283
 (57,903) 315,988
 (186,912)
Reclassification of net investment (gains) losses
on securities to net income
 (114,925) 429
 (121,330) 2,872
 (1,330) (473) (122,660) 2,399
Cumulative effect of change in accounting principle (1)
 —
 —
 —
 (15,041) —
 —
 —
 (15,041)
End of period $231,087
 $144,998
 $231,087
 $144,998
 $305,040
 $86,622
 $305,040
 $86,622

_____________________________
(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 instrumentsCompany's derivatives (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.
 

Note 3 - Investments (Continued)

The following table presents 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
June 30, 2019            
September 30, 2019            
Asset derivatives:                        
Free-standing derivatives $8,753
 $—
 $8,753
 $—
 $8,663
 $90
 $10,685
 $—
 $10,685
 $—
 $10,338
 $347
                        
December 31, 2018                        
Asset derivatives:                        
Free-standing derivatives $2,647
 $—
 $2,647
 $—
 $1,868
 $779
 $2,647
 $—
 $2,647
 $—
 $1,868
 $779



Note 3 - Investments (Continued)

Deposits

At JuneSeptember 30, 2019 and December 31, 2018, fixed maturity securities with a fair value of $18,073$26,119 thousand and $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 JuneSeptember 30, 2019 and December 31, 2018, fixed maturity securities with a fair value of $787,421$629,010 thousand and $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 $725,000$575,000 thousand at JuneSeptember 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 4 - 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 Item 8, Note 3 of the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.


Note 4 - Fair Value of Financial Instruments (Continued)

Financial Instruments Measured and Carried at Fair Value

The following table presents the Company’sCompany's fair value hierarchy for those assets and liabilities measured and carried at fair value on a recurring basis. At JuneSeptember 30, 2019, Level 3 invested assets comprised 4.0%4.3% 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
June 30, 2019          
September 30, 2019          
Financial Assets                    
Investments                    
Fixed maturity securities                    
U.S. Government and federally
sponsored agency obligations:
                    
Mortgage-backed securities $586,758
 $586,758
 $—
 $584,070
 $2,688
 $754,355
 $754,355
 $—
 $749,551
 $4,804
Other, including U.S. Treasury securities 566,437
 566,437
 16,288
 550,149
 —
 458,175
 458,175
 17,779
 440,396
 —
Municipal bonds 1,599,693
 1,599,693
 —
 1,552,709
 46,984
 1,676,422
 1,676,422
 —
 1,628,717
 47,705
Foreign government bonds 47,367
 47,367
 —
 47,367
 —
 47,915
 47,915
 —
 47,915
 —
Corporate bonds 1,321,286
 1,321,286
 13,997
 1,228,067
 79,222
 1,585,108
 1,585,108
 14,506
 1,473,929
 96,673
Other mortgage-backed securities 1,412,729
 1,412,729
 —
 1,286,979
 125,750
 1,317,585
 1,317,585
 —
 1,175,684
 141,901
Total fixed maturity securities 5,534,270
 5,534,270
 30,285
 5,249,341
 254,644
 5,839,560
 5,839,560
 32,285
 5,516,192
 291,083
Equity securities 100,143
 100,143
 57,530
 42,544
 69
 105,483
 105,483
 57,876
 47,491
 116
Short-term investments 247,872
 247,872
 246,872
 1,000
 —
 237,819
 237,819
 237,819
 —
 —
Other investments 24,503
 24,503
 —
 24,503
 —
 23,935
 23,935
 —
 23,935
 —
Totals $5,906,788
 $5,906,788
 $334,687
 $5,317,388
 $254,713
 $6,206,797
 $6,206,797
 $327,980
 $5,587,618
 $291,199
Separate Account (variable annuity) assets (1)
 $2,310,886
 $2,310,886
 $2,310,886
 $—
 $—
 $2,308,134
 $2,308,134
 $2,308,134
 $—
 $—
Financial Liabilities                    
Investment contract and life policy
reserves, embedded derivatives
 $940
 $940
 $—
 $940
 $—
Investment contract and policy
reserves, embedded derivatives
 $1,145
 $1,145
 $—
 $1,145
 $—
Other policyholder funds, embedded derivatives $85,961
 $85,961
 $—
 $—
 $85,961
 $89,098
 $89,098
 $—
 $—
 $89,098
                    
December 31, 2018                    
Financial Assets                    
Investments                    
Fixed maturity securities                    
U.S. Government and federally
sponsored agency obligations:
                    
Mortgage-backed securities $787,441
 $787,441
 $—
 $784,224
 $3,217
 $787,441
 $787,441
 $—
 $784,224
 $3,217
Other, including U.S. Treasury securities 833,542
 833,542
 13,291
 820,251
 —
 833,542
 833,542
 13,291
 820,251
 —
Municipal bonds 2,003,969
 2,003,969
 —
 1,956,438
 47,531
 2,003,969
 2,003,969
 —
 1,956,438
 47,531
Foreign government bonds 84,904
 84,904
 —
 84,904
 —
 84,904
 84,904
 —
 84,904
 —
Corporate bonds 2,079,510
 2,079,510
 12,281
 1,986,487
 80,742
 2,079,510
 2,079,510
 12,281
 1,986,487
 80,742
Other mortgage-backed securities 1,725,952
 1,725,952
 —
 1,608,958
 116,994
 1,725,952
 1,725,952
 —
 1,608,958
 116,994
Total fixed maturity securities 7,515,318
 7,515,318
 25,572
 7,241,262
 248,484
 7,515,318
 7,515,318
 25,572
 7,241,262
 248,484
Equity securities 111,750
 111,750
 64,330
 47,415
 5
 111,750
 111,750
 64,330
 47,415
 5
Short-term investments 122,222
 122,222
 117,296
 4,926
 —
 122,222
 122,222
 117,296
 4,926
 —
Other investments 16,147
 16,147
 —
 16,147
 —
 16,147
 16,147
 —
 16,147
 —
Totals $7,765,437
 $7,765,437
 $207,198
 $7,309,750
 $248,489
 $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
 $—
 $—
 $2,001,128
 $2,001,128
 $2,001,128
 $—
 $—
Financial Liabilities  
  
  
  
  
  
  
  
  
  
Investment contract and life policy
reserves, embedded derivatives
 $248
 $248
 $—
 $248
 $—
Investment contract and policy
reserves, embedded derivatives
 $248
 $248
 $—
 $248
 $—
Other policyholder funds, embedded derivatives $78,700
 $78,700
 $—
 $—
 $78,700
 $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 4 - Fair Value of Financial Instruments (Continued)

During the sixnine month periods ended JuneSeptember 30, 2019 and 2018, there were no transfers between Level 1 and Level 2. 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
 Total   
Municipal
Bonds
 
Corporate
Bonds
 
Other
Mortgage-
Backed
Securities (2)
 
Total
Fixed
Maturity
Securities
 
Equity
Securities
 Total  
Beginning balance, April 1, 2019 $47,756
 $82,482
 $135,790
 $266,028
 $5
 $266,033
 $84,629
Beginning balance, July 1, 2019 $46,984
 $79,222
 $128,438
 $254,644
 $69
 $254,713
 $85,961
Transfers into Level 3 (3)
 —
 2,808
 —
 2,808
 64
 2,872
 —
 —
 18,916
 21,004
 39,920
 1
 39,921
 —
Transfers out of Level 3 (3)
 —
 (4,876) —
 (4,876) —
 (4,876) —
 —
 (2,822) (449) (3,271) —
 (3,271) —
Total gains or losses                            
Net investment gains (losses) included in
net income related to financial assets
 —
 —
 —
 —
 —
 —
 —
 —
 —
 —
 —
 46
 46
 —
Net realized (gains) losses included in net
income related to financial liabilities
 —
 —
 —
 —
 —
 —
 371
 —
 —
 —
 —
 —
 —
 3,661
Net unrealized investment gains
(losses) included in OCI
 (537) 1,961
 2,807
 4,231
 —
 4,231
 —
 842
 1,744
 397
 2,983
 —
 2,983
 —
Purchases —
 1,566
 —
 1,566
 —
 1,566
 —
 —
 —
 —
 —
 —
 —
 —
Issuances —
 —
 —
 —
 —
 —
 2,431
 —
 —
 —
 —
 —
 —
 2,033
Sales —
 —
 (607) (607) —
 (607) —
 —
 —
 —
 —
 —
 —
 —
Settlements —
 —
 —
 —
 —
 —
 —
 —
 —
 —
 —
 —
 —
 —
Paydowns, maturities and distributions (235) (4,719) (9,552) (14,506) —
 (14,506) (1,470) (121) (387) (2,685) (3,193) —
 (3,193) (2,557)
Ending balance, June 30, 2019 $46,984
 $79,222
 $128,438
 $254,644
 $69
 $254,713
 $85,961
Ending balance, September 30, 2019 $47,705
 $96,673
 $146,705
 $291,083
 $116
 $291,199
 $89,098
                            
Beginning balance, January 1, 2019 $47,531
 $80,742
 $120,211
 $248,484
 $5
 $248,489
 $78,700
 $47,531
 $80,742
 $120,211
 $248,484
 $5
 $248,489
 $78,700
Transfers into Level 3 (3)
 —
 5,882
 21,934
 27,816
 64
 27,880
 —
 —
 24,798
 42,938
 67,736
 65
 67,801
 —
Transfers out of Level 3 (3)
 —
 (4,876) —
 (4,876) —
 (4,876) —
 —
 (7,698) (449) (8,147) —
 (8,147) —
Total gains or losses                            
Net investment gains (losses) included in
net income related to financial assets		 —
 —
 —
 —
 —
 —
 —
 —
 —
 —
 —
 46
 46
 —
Net realized (gains) losses included in net
income related to financial liabilities		 —
 —
 —
 —
 —
 —
 4,705
 —
 —
 —
 —
 —
 —
 8,366
Net unrealized investment gains
(losses) included in OCI
 (193) 4,510
 2,655
 6,972
 —
 6,972
 —
 649
 6,254
 3,052
 9,955
 —
 9,955
 —
Purchases —
 1,566
 —
 1,566
 —
 1,566
 —
 —
 1,566
 —
 1,566
 —
 1,566
 —
Issuances —
 —
 —
 —
 —
 —
 5,449
 —
 —
 —
 —
 —
 —
 7,482
Sales —
 —
 (607) (607) —
 (607) —
 —
 —
 (607) (607) —
 (607) —
Settlements —
 —
 —
 —
 —
 —
 —
 —
 —
 —
 —
 —
 —
 —
Paydowns, maturities and distributions (354) (8,602) (15,755) (24,711) —
 (24,711) (2,893) (475) (8,989) (18,440) (27,904) —
 (27,904) (5,450)
Ending balance, June 30, 2019 $46,984
 $79,222
 $128,438
 $254,644
 $69
 $254,713
 $85,961
Ending balance, September 30, 2019 $47,705
 $96,673
 $146,705
 $291,083
 $116
 $291,199
 $89,098
_____________________________
(1) 
Represents embedded derivatives, all related to the Company's fixed indexed annuity products, reported in Other policyholder funds in the Company’sCompany'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 sixnine month periods ended JuneSeptember 30, 2019 were attributable to changes in the availability of observable market information for individual fixed maturity securities. The Company’sCompany'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 4 - Fair Value of Financial Instruments (Continued)

($ 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		 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
Beginning balance, July 1, 2018 $49,921
 $92,663
 $129,061
 $271,645
 $6
 $271,651
 $77,788
Transfers into Level 3 (3)
 —
 29,709
 18,322
 48,031
 —
 48,031
 —
 —
 —
 17,030
 17,030
 —
 17,030
 —
Transfers out of Level 3 (3)
 —
 (11,279) (4,230) (15,509) —
 (15,509) —
 —
 —
 (970) (970) —
 (970) —
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) —
 —
 —
 —
 —
 —
 2,205
Net unrealized investment gains
(losses) included in OCI		 397
 (700) 1,659
 1,356
 —
 1,356
 —
 (471) 128
 (6,184) (6,527) —
 (6,527) —
Purchases —
 —
 —
 —
 —
 —
 —
 —
 —
 —
 —
 —
 —
 —
Issuances —
 —
 —
 —
 —
 —
 2,107
 —
 —
 —
 —
 —
 —
 3,940
Sales —
 —
 —
 —
 —
 —
 —
 —
 —
 (187) (187) —
 (187) —
Settlements —
 —
 —
 —
 —
 —
 —
 —
 —
 —
 —
 —
 —
 —
Paydowns, maturities and distributions (224) (3,601) (2,024) (5,849) —
 (5,849) (1,514) (121) (3,926) (15,466) (19,513) —
 (19,513) (1,668)
Ending balance, June 30, 2018 $49,921
 $92,663
 $129,061
 $271,645
 $6
 $271,651
 $77,788
Ending balance, September 30, 2018 $49,329
 $88,865
 $123,284
 $261,478
 $6
 $261,484
 $82,265
                            
Beginning balance, January 1, 2018 $49,328
 $72,979
 $107,944
 $230,251
 $6
 $230,257
 $80,733
 $49,328
 $72,979
 $107,944
 $230,251
 $6
 $230,257
 $80,733
Transfers into Level 3 (3)
 —
 40,487
 33,144
 73,631
 —
 73,631
 —
 —
 40,487
 50,174
 90,661
 —
 90,661
 —
Transfers out of Level 3 (3)
 —
 (11,279) (4,230) (15,509) —
 (15,509) —
 —
 (11,279) (5,200) (16,479) —
 (16,479) —
Total gains or losses                            
Net investment gains (losses) included in
net income related to financial assets		 —
 (246) —
 (246) 3
 (243) —
 —
 (246) —
 (246) 3
 (243) —
Net (gains) losses included in net
income related to financial liabilities
 —
 —
 —
 —
 —
 —
 (3,513) —
 —
 —
 —
 —
 —
 (1,308)
Net unrealized investment gains
(losses) included in OCI		 840
 (1,587) 637
 (110) —
 (110) —
 369
 (1,459) (5,547) (6,637) —
 (6,637) —
Purchases —
 —
 —
 —
 —
 —
 —
 —
 —
 —
 —
 —
 —
 —
Issuances —
 —
 —
 —
 —
 —
 3,439
 —
 —
 —
 —
 —
 —
 7,379
Sales —
 —
 —
 —
 (3) (3) —
 —
 —
 (187) (187) (3) (190) —
Settlements —
 —
 —
 —
 —
 —
 —
 —
 —
 —
 —
 —
 —
 —
Paydowns, maturities and distributions (247) (7,691) (8,434) (16,372) —
 (16,372) (2,871) (368) (11,617) (23,900) (35,885) —
 (35,885) (4,539)
Ending balance, June 30, 2018 $49,921
 $92,663
 $129,061
 $271,645
 $6
 $271,651
 $77,788
Ending balance, September 30, 2018 $49,329
 $88,865
 $123,284
 $261,478
 $6
 $261,484
 $82,265
_____________________________
(1) 
Represents embedded derivatives, all related to the Company’sCompany's fixed indexed annuity products, reported in Other policyholder funds in the Company’sCompany'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 sixnine month periods ended JuneSeptember 30, 2018 were attributable to changes in the availability of observable market information for individual fixed maturity securities . The Company’sCompany'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 sixnine month period ended JuneSeptember 30, 2019, the Company had no net losses on Level 3 securities. For the sixnine month period ended JuneSeptember 30, 2018, the Company had a realized net loss on twothree Level 3 securities of $243 thousand. For the three and sixnine month periods ended JuneSeptember 30, 2019, net investment losses of $371$3,661 thousand and $4,705$8,366 thousand 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 sixnine month periods ended JuneSeptember 30, 2018, the respective gain amountsnet investment losses were $1,291$2,205 thousand and $3,513net investment gains were $1,308 thousand.

Note 4 - 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 Item 8, Note 3 in the Company’s Annual Report on Form 10-K for the year ended December 31, 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
June 30, 2019          
September 30, 2019          
Financial Assets                    
Investments                    
Other investments $161,313
 $166,023
 $—
 $—
 $166,023
 $171,579
 $175,478
 $—
 $—
 $175,478
Deposit asset on reinsurance 2,342,305
 2,619,640
 —
 —
 2,619,640
Financial Liabilities                    
Investment contract and life policy reserves,
fixed annuity contracts
 4,605,272
 4,529,317
 —
 —
 4,529,317
Investment contract and life policy reserves,
account values on life contracts
 90,239
 93,366
 —
 —
 93,366
Investment contract and policy reserves,
fixed annuity contracts
 4,658,148
 4,581,321
 —
 —
 4,581,321
Investment contract and policy reserves,
account values on life contracts
 91,788
 94,899
 —
 —
 94,899
Other policyholder funds 735,919
 735,919
 —
 676,460
 59,459
 583,747
 583,747
 —
 526,113
 57,634
Short-term debt 135,000
 135,000
 —
 —
 135,000
Long-term debt 297,881
 315,938
 —
 315,938
 —
 297,953
 318,271
 —
 318,271
 —
                    
December 31, 2018                    
Financial Assets                    
Investments                    
Other investments $156,725
 $161,449
 $—
 $—
 $161,449
 $156,725
 $161,449
 $—
 $—
 $161,449
Financial Liabilities  
  
  
  
  
  
  
  
  
  
Investment contract and life policy reserves,
fixed annuity contracts
 4,555,849
 4,478,338
 —
 —
 4,478,338
Investment contract and life policy reserves,
account values on life contracts		 87,229
 90,402
 —
 —
 90,402
Investment contract and policy reserves,
fixed annuity contracts
 4,555,849
 4,478,338
 —
 —
 4,478,338
Investment contract and policy reserves,
account values on life contracts		 87,229
 90,402
 —
 —
 90,402
Other policyholder funds 689,287
 689,287
 —
 626,325
 62,962
 689,287
 689,287
 —
 626,325
 62,962
Short-term debt —
 —
 —
 —
 —
Long-term debt 297,740
 291,938
 —
 291,938
 —
 297,740
 291,938
 —
 291,938
 —


Note 5 - Derivative Instruments

The Company offers fixed 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 indexed 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 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, 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’scontract'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 are accounted 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 instrumentsderivatives 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 recognized immediately as Net investment gains (losses) in the Consolidated Statements of Operations. The fair values of derivative instruments,derivatives, including derivative instrumentsderivatives embedded in FIA and IUL contracts, are presented in the Consolidated Balance Sheets as follows:
($ in thousands) June 30, 2019 December 31, 2018 September 30, 2019 December 31, 2018
Assets        
Derivative instruments, included in Short-term and other investments $8,753
 $2,647
Derivatives included in Short-term and other investments $10,685
 $2,647
        
Liabilities        
FIA - embedded derivatives, included in Other policyholder funds $85,961
 $78,700
 $89,098
 $78,700
IUL - embedded derivatives, included in
Investment contract and life policy reserves
 940
 248
IUL - embedded derivatives, included in
Investment contract and policy reserves
 1,145
 248



Note 5 - Derivative Instruments (Continued)

In general, the change in the fair value of the embedded derivatives related to FIA 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
June 30,		 Six Months Ended
June 30,		 Three Months Ended
September 30,		 Nine Months Ended
September 30,
 2019 2018 2019 2018 2019 2018 2019 2018
Change in fair value of derivatives:(1)
                
Revenues                
Net investment gains (losses) $1,375
 $(2) $5,429
 $(851) $(149) $4,683
 $5,280
 $3,832
                
Change in fair value of embedded derivatives:                
Revenues                
Net investment gains (losses) $(516) $1,281
 $(5,261) $3,569
 $(3,691) $(2,479) $(8,952) $1,090
________________
(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’sCompany's strategy attempts to mitigate potential risk of loss under these agreements through a regular monitoring process, which evaluates the program’sprogram'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’sPoor's Global Inc. (S&P)/Moody's Investors Service, Inc. (Moody's) long-term credit rating of "BBB+/A1"A3" 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’scounterparty's long-term credit ratings were as follows:
($ in thousands) June 30, 2019 December 31, 2018 September 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+ Aa2 $156,800
 $3,560
 $144,500
 $870
 A+ Aa2 $145,100
 $5,026
 $144,500
 $870
Barclays Bank PLC A A2 72,500
 1,696
 28,500
 247
 A A2 101,700
 2,271
 28,500
 247
Citigroup Inc. BBB+ A3 —
 —
 —
 —
 BBB+ A3 —
 —
 —
 —
Credit Suisse International A+ A1 16,100
 295
 16,100
 55
 A+ A1 —
 —
 16,100
 55
Societe Generale A   55,000
 3,202
 89,100
 1,475
 A A1 60,700
 3,388
 89,100
 1,475
                
Total $300,400
 $8,753
 $278,200
 $2,647
 $307,500
 $10,685
 $278,200
 $2,647

 
As of JuneSeptember 30, 2019 and December 31, 2018, the Company held $8,663$10,338 thousand and $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’sCompany'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 7 - Property and Casualty Unpaid Claims and Claim Expenses

Property and Casualty

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 a gross and net (after reinsurance) bases.basis. 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
June 30,		 Six Months Ended
June 30,		 Three Months Ended
September 30,		 Nine Months Ended
September 30,
 2019 2018 2019 2018 2019 2018 2019 2018
Property and Casualty  
  
      
  
    
Beginning gross reserves (1)
 $359,701
 $331,255
 $367,180
 $319,182
 $367,862
 $352,817
 $367,180
 $319,182
Less: reinsurance recoverables 78,328
 62,917
 89,725
 57,409
 77,345
 62,883
 89,725
 57,409
Net reserves, beginning of period (2)
 281,373
 268,338
 277,455
 261,773
 290,517
 289,934
 277,455
 261,773
Incurred claims and claim expenses:  
  
      
  
    
Claims occurring in the current period 134,411
 147,005
 253,178
 267,993
 122,470
 140,035
 375,648
 408,028
Decrease in estimated reserves for claims occurring
in prior periods (3)
 (2,000) —
 (4,000) (300) (3,500) —
 (7,500) (300)
Total claims and claim expenses incurred (4)
 132,411
 147,005
 249,178
 267,693
 118,970
 140,035
 368,148
 407,728
Claims and claim expense payments
for claims occurring during:
  
  
      
  
    
Current period 83,755
 80,403
 129,469
 127,451
 101,499
 106,187
 230,968
 233,638
Prior periods 39,512
 45,006
 106,647
 112,081
 29,747
 28,997
 136,394
 141,078
Total claims and claim expense payments 123,267
 125,409
 236,116
 239,532
 131,246
 135,184
 367,362
 374,716
Net reserves, end of period (2)
 290,517
 289,934
 290,517
 289,934
 278,241
 294,785
 278,241
 294,785
Plus: reinsurance recoverables 77,345
 62,883
 77,345
 62,883
 76,526
 63,262
 76,526
 63,262
Ending gross reserves (1)
 $367,862
 $352,817
 $367,862
 $352,817
 $354,767
 $358,047
 $354,767
 $358,047
_____________________________
(1) 
Unpaid claims and claim expenses as reported in the Consolidated Balance Sheets also include reserves for Supplemental, Life and Retirement of $30,477$57,505 thousand and $27,016$26,589 thousand as of JuneSeptember 30, 2019 and 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 Supplemental, Life and Retirement of $20,281$35,221 thousand and $42,898$78,119 thousand for the three and sixnine month periods ended JuneSeptember 30, 2019, respectively, in addition to Property and Casualty amounts. Benefits, claims and settlement expenses for Life and Retirement were $21,273$21,811 thousand and $44,147$65,958 thousand for the three and sixnine month periods ended JuneSeptember 30, 2018, respectively.

Net favorable development of total reserves for Property and Casualty claims occurring in prior years was $4.0$7.5 million and $0.3 million for the sixnine month periods ended JuneSeptember 30, 2019 and 2018, respectively. The favorable development for the sixnine month period ended JuneSeptember 30, 2019 was the result of favorable loss trends in auto and homeowners loss emergence for accident years 2018 and prior. The favorable development for the sixnine month period ended JuneSeptember 30, 2018 was predominately the result of favorable loss trends in homeowners emergence for accident years 2017 and prior.


Note 8 - Debt


Indebtedness outstanding was as follows:
($ in thousands) June 30, 2019 December 31, 2018 September 30, 2019 December 31, 2018
Short-term debt:  
  
  
  
Bank Credit Facility, expires June 21, 2024 $—
 $—
 $135,000
 $—
        
Long-term debt:  
  
  
  
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
4.50% Senior Notes, due December 1, 2025. Aggregate principal amount of $250,000 thousand less unaccrued discount of $442 and $488 thousand (4.5% imputed rate) and unamortized debt issuance costs of $1,605 thousand and $1,772 thousand 247,953
 247,740
FHLB borrowing 50,000
 50,000
 50,000
 50,000
Total $297,881
 $297,740
 $432,953
 $297,740


The 4.50% Senior Notes due 2025 (Senior Notes due 2025) and the FHLB borrowing are described in Item 8, Note 7 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

Credit Agreement with Financial Institutions (Bank Credit Facility)

On June 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 increased the amount available on this senior revolving credit facility to $225 million from $150 million. PNC Capital Markets, LLC and JPMorgan Chase Bank, N.A. served as joint leads on the 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.

On July 1, 2019, the Company utilized the senior revolving credit facility to partially fund the acquisition of NTA. As of August 1,September 30, 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 JuneSeptember 30, 2019.



Note 9 - Reinsurance

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 (1)
 
Assumed
from Other
Companies
 
Net
Amount
 
Gross
Amount
 
Ceded to
Other
Companies (1)
 
Assumed
from Other
Companies
 
Net
Amount
Three months ended June 30, 2019  
  
  
  
Three months ended September 30, 2019  
  
  
  
Premiums written and contract deposits (2)
 $314,897
 $6,028
 $2,822
 $311,691
 $374,598
 $5,968
 $2,586
 $371,216
Premiums and contract charges earned 213,415
 8,155
 2,836
 208,096
 245,200
 8,181
 2,662
 239,681
Benefits, claims and settlement expenses 153,436
 2,797
 2,053
 152,692
 154,718
 2,310
 1,783
 154,191
                
Three months ended June 30, 2018  
  
  
  
Three months ended September 30, 2018  
  
  
  
Premiums written and contract deposits (2)
 $305,864
 $5,483
 $1,341
 $301,722
 $342,268
 $5,370
 $1,199
 $338,097
Premiums and contract charges earned 209,892
 5,505
 1,223
 205,610
 210,953
 5,385
 1,252
 206,820
Benefits, claims and settlement expenses 170,459
 3,330
 1,149
 168,278
 163,912
 3,207
 1,141
 161,846
                
Six months ended June 30, 2019        
Nine months ended September 30, 2019        
Premiums written and contract deposits (2)
 $613,990
 $11,876
 $4,971
 $607,085
 $988,588
 $17,844
 $7,557
 $978,301
Premiums and contract charges earned 426,671
 13,977
 5,187
 417,881
 671,871
 22,158
 7,849
 657,562
Benefits, claims and settlement expenses 295,488
 7,089
 3,677
 292,076
 450,206
 9,399
 5,460
 446,267
                
Six months ended June 30, 2018        
Nine months ended September 30, 2018        
Premiums written and contract deposits (2)
 $594,680
 $10,997
 $2,047
 $585,730
 $936,948
 $16,367
 $3,246
 $923,827
Premiums and contract charges earned 417,629
 11,033
 2,012
 408,608
 628,582
 16,418
 3,264
 615,428
Benefits, claims and settlement expenses 322,427
 12,344
 1,757
 311,840
 486,339
 15,551
 2,898
 473,686

_____________________________
(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 U.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.

Note 10 - Commitments

Investment Commitments

From time to time, the Company has outstanding commitments to purchase investments and/or commitments to lend funds under bridge loans. UnfundedSuch unfunded commitments to purchase investments were $157.4$198.3 million and $145.4 million at JuneSeptember 30, 2019 and December 31, 2018, respectively.


Note 11 - Segment Information

The Company conducts and manages its business through four5 segments. See Note 1 for a description of the Company's reporting segments that changed effective in the third quarter of 2019. The three4 operating segments, representing the major lines of insurance business, are:are Property and Casualty primarily(primarily personal lines automobile and property insurance products;products), the newly created Supplemental (primarily heart, cancer, accident and limited supplemental disability insurance coverages), Retirement primarily(primarily tax-qualified fixed and variable annuities;annuities) and Life life insurance.(life insurance). The Company does not allocate the impact of corporate-level transactions to these operating segments, consistent with the basis for management’smanagement's evaluation of the results of those segments, but classifies those items in the fourthfifth 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
June 30,		 Six Months Ended
June 30,		 Three Months Ended
September 30,		 Nine Months Ended
September 30,
 2019 2018 2019 2018 2019 2018 2019 2018
Insurance premiums and contract charges earned                
Property and Casualty $171,303
 $167,333
 $342,143
 $332,791
 $170,483
 $168,653
 $512,626
 $501,444
Supplemental 32,921
 N/A
 32,921
 N/A
Retirement 6,931
 7,825
 15,509
 15,893
 6,624
 8,031
 22,133
 23,924
Life 29,862
 30,452
 60,229
 59,924
 29,653
 30,136
 89,882
 90,060
Total $208,096
 $205,610
 $417,881
 $408,608
 $239,681
 $206,820
 $657,562
 $615,428
                
Net investment income                
Property and Casualty $12,643
 $10,300
 $22,861
 $19,816
 $10,726
 $12,361
 $33,587
 $32,177
Supplemental 3,691
 N/A
 3,691
 N/A
Retirement 62,684
 67,787
 127,423
 131,956
 60,770
 67,750
 188,193
 199,706
Life 18,324
 19,166
 36,376
 37,506
 18,453
 19,123
 54,829
 56,629
Corporate and Other (14) 42
 (37) 78
 —
 41
 (37) 119
Intersegment eliminations (179) (194) (365) (391) (569) (192) (934) (583)
Total $93,458
 $97,101
 $186,258
 $188,965
 $93,071
 $99,083
 $279,329
 $288,048
                
Net income (loss)                
Property and Casualty $5,101
 $(10,896) $20,153
 $(1,174) $14,194
 $(3,190) $34,347
 $(4,364)
Supplemental 6,943
 N/A
 6,943
 N/A
Retirement (25,045) 14,141
 (12,894) 25,562
 5,915
 12,120
 (6,979) 37,682
Life 5,239
 5,879
 8,516
 9,666
 5,101
 5,331
 13,617
 14,997
Corporate and Other 108,527
 (3,207) 110,213
 (7,982) (6,699) (1,733) 103,514
 (9,715)
Total $93,822
 $5,917
 $125,988
 $26,072
 $25,454
 $12,528
 $151,442
 $38,600

($ in thousands) June 30, 2019 December 31, 2018 September 30, 2019 December 31, 2018
Assets        
Property and Casualty $1,281,344
 $1,236,362
 $1,297,585
 $1,236,362
Supplemental 745,345
 N/A
Retirement 8,493,089
 7,866,969
 8,328,718
 7,866,969
Life 1,911,569
 1,821,351
 1,857,331
 1,821,351
Corporate and Other 145,022
 149,014
 156,310
 149,014
Intersegment eliminations (51,617) (41,800) (52,744) (41,800)
Total $11,779,407
 $11,031,896
 $12,332,545
 $11,031,896

________________
N/A - The acquisition of NTA closed on July 1, 2019.


Note 12 - Operating Leases


The 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 thecertain leases for up to 10an additional 25 years.

The components of lease expense were as follows:
($ in thousands) Three Months Ended
June 30, 2019		 Six Months Ended
June 30, 2019		 Three Months Ended
September 30, 2019		 Nine Months Ended
September 30, 2019
Operating lease cost $791
 $1,600
 $1,124
 $2,720
Short-term lease cost 27
 51
 57
 155
Total lease cost $818
 $1,651
 $1,181
 $2,875


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		 Three Months Ended
September 30, 2019		 Nine Months Ended
September 30, 2019
Cash paid for amounts included in the measurement of lease liabilities $575
 $1,341
 $1,006
 $2,340


Supplemental balance sheet information related to operating leases was as follows:
($ in thousands, except lease term and discount rate) June 30, 2019 September 30, 2019
Assets    
Right of use assets, included in Other assets $12,692
 $17,527
  
Liabilities    
Operating lease liabilities, included in Other liabilities $13,429
 $18,439
    
Weighted Average Remaining Lease Term 5.00
  
Weighted Average Discount Rate 4.10%
Weighted average remaining lease term 4.74
Weighted average discount rate 3.78%


Future minimum lease payments under non-cancellable operating leases as of JuneSeptember 30, 2019 were as follows:
($ in thousands)    
Year Ending December 31,    
2019 (excluding the six months ended June 30, 2019) $1,448
2019 (excluding the nine months ended September 30, 2019) $1,108
2020 3,108
 4,443
2021 3,028
 4,284
2022 2,943
 4,156
2023 2,246
 3,459
Thereafter 2,111
 2,717
Total future minimum lease payments 14,884
 20,167
Less imputed interest (1,455) (1,728)
Total $13,429
 $18,439


As of JuneSeptember 30, 2019, the Company 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 policy loans transferred to a reinsurer as consideration paid during the second quarter of 2019 in connection with the Company’sCompany's 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 wasas well as paid-in-kind activity for policy loans were insignificant for the sixnine months ended JuneSeptember 30, 2019 and 2018, respectively.

Note 14 - Goodwill and Intangible Assets, net

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 Item 8, Note 1 in the Company's Annual Report on Form 10-K for the year ended December 31, 2018 for further description of impairment testing.

The annuity reinsurance transaction described in Note 6 triggered the requirement to evaluate the goodwill associated with the annuity business of the Retirement segment. For the evaluation, the fair value of the Retirement segment was measured using a discounted cash flow method. The carrying value exceeded the fair value, resulting in a $28,025 thousand non-cash impairment charge during the quarter ended June 30, 2019 which represented the entire balance of the goodwill associated with the annuity business of the Retirement segment. The impairment charge was reported as Other expense in the Consolidated Statement of Operations.

The changes in the carrying amount of goodwill by reportable segment for the nine months ended September 30, 2019 were as follows:
($ in thousands) 
December 31,
2018
 Impairment Acquisitions 
September 30,
2019
Property and Casualty $9,460
 $—
 $—
 $9,460
Supplemental (1)
 —
 —
 19,286
 19,286
Retirement 28,025
 (28,025) 10,087
 10,087
Life 9,911
 —
 —
 9,911
Total $47,396
 $(28,025) $29,373
 $48,744
_____________
(1)
Based on preliminary purchase price allocation.

Note 14 - Goodwill and Intangible Assets, net (Continued)


As of September 30, 2019, the outstanding amounts of definite-lived intangible assets subject to amortization are attributable to the acquisitions of BCG and NTA during 2019. The acquisition of BCG resulted in initial recognition of definite-lived intangible assets subject to amortization in the amount of $14,083 thousand and the acquisition of NTA resulted in initial recognition of definite-lived intangible assets subject to amortization in the amount of $160,313 thousand. As of September 30, 2019 the outstanding amounts of definite-lived intangible assets subject to amortization were as follows:
($ in thousands) Useful Life (in Years)  
At inception:    
Value of business acquired 17 - 35 $94,419
Value of distribution acquired 16 - 17 53,996
Value of agency relationships 14 16,981
Value of customer relationships 10 9,080
Total   174,476
Accumulated amortization:    
Value of business acquired   (1,844)
Value of distribution acquired   (973)
Value of agency relationships   (745)
Value of customer relationships   (1,300)
Total   (4,862)
Net intangible assets subject to amortization:   $169,614

In regards to the definite-lived intangible assets in the table above, the value of business acquired intangible asset represents the present value of the expected underwriting profit within policies that were inforce on the date of acquisition. The value of distribution acquired intangible asset represents the present value of future business to be written by the existing agency force. The value of agency relationships intangible asset represents the present value of the commission overrides retained by NTA. The value of customer relationships intangible asset represents the present value of the expected profits from existing BCG customers in force at the date of acquisition. All of the aforementioned definite-lived intangible assets were valued using the income approach.
Estimated future amortization of the Company's definite-lived intangible assets were as follows:
($ in thousands)  
Year Ending December 31,  
2019 (excluding the nine months ended September 30, 2019) $3,920
2020 14,471
2021 13,396
2022 12,420
2023 11,566
2024 10,796
Thereafter 103,045
Total $169,614

The value of business acquired intangible asset is being amortized by product based on the present value of future premiums to be received. The value of distribution acquired intangible asset is being amortized on a straight-line basis. The value of agency relationships intangible asset in being amortized based on the present value of future premiums to be received. The value of customer relationships intangible asset is being amortized based on the present value of future profits to be received.

Note 14 - Goodwill and Intangible Assets, net (Continued)


Indefinite-lived intangible assets (not subject to amortization) as of September 30, 2019 were as follows:
($ in thousands)  
Trade names $8,645
State licenses 2,886
Total $11,531
The trade names intangible asset represents the present value of future savings accruing NTA by virtue of not having to pay royalties for the use of the trade names, valued using the relief from royalty method. The state licenses intangible asset represents the regulatory licenses held by NTA that were valued using the cost approach.




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 U.S. (non-GAAP) are marked with an asterisk (*) the first time they are presented within this Item 2. An explanation of these measures is contained in the Glossary of Selected Terms included as Exhibit 99.1 to this Quarterly Report on Form 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 SecondThird 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’sCompany's business. See Item 1A 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, 2018 for additional information regarding risks and uncertainties.

Introduction

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, supplemental health insurance products, retirement products, including annuities, and life insurance in the U.S. The Company markets its products primarily to K-12 teachers, administrators and other employees of public schools and their families.

On July 1, 2019, the Company acquired all of the equity interests in National Teachers Associates Life Insurance Company (NTA). NTA’s insurance subsidiaries predominantly sell a variety of guaranteed renewable supplemental health insurance products (primarily heart, cancer and limited supplemental disability coverages). The insurance subsidiaries also market accidental injury and life insurance products. NTA’s insurance subsidiaries are licensed in 50 states, the U.S. Virgin Islands and the District of Columbia and their marketplace is primarily within the public sector for which approximately 80% are individuals employed by educational institutions, with the remainder employed in state and local governments and emergency services facilities.

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

(All comparisons versus same period in 2018, unless noted otherwise)
($ in millions) Three Months Ended
June 30,		 2019-2018 Six Months Ended
June 30,		 2019-2018 Three Months Ended
September 30,		 2019-2018 Nine Months Ended
September 30,		 2019-2018
 2019 2018 Change % 2019 2018 Change % 2019 2018 Change % 2019 2018 Change %
Total revenues $451.5
 $306.2
 47.5% $764.7
 $601.7
 27.1% $334.4
 $311.4
 7.4% $1,099.1
 $913.1
 20.4%
Net income 93.8
 5.9
 N.M. 126.0
 26.1
 N.M. 25.4
 12.5
 103.2% 151.4
 38.6
 N.M.
Per diluted share:                        
Net income $2.24
 $0.14
 N.M. $3.01
 $0.63
 N.M. $0.60
 $0.30
 100.0% $3.61
 $0.93
 N.M.
Net investment gains (losses), after tax 2.74
 0.01
 N.M. 2.88
 (0.01) N.M. (0.04) 0.05
 N.M.
 2.84
 0.04
 N.M.
Book value per share       $36.41
 $32.93
 10.6%       $38.30
 $31.78
 20.5%
Net income return on equity - last twelve months       8.6% 12.7% 

       9.2% 11.8% 

Net income return on equity - annualized       18.1% 3.7% 

       14.1% 3.7% 

___________________________________
N.M. - The Company defines increases or decreases greater than or equal to 150% as "N.M." or notNot meaningful.

Net Income

For the three and sixnine month periods ended JuneSeptember 30, 2019, the Company's net income increased $87.9$12.9 million and $99.9$112.8 million, respectively, comparedrespectively. The increase in net income for the three month period was primarily due to lower catastrophe losses in Property and Casualty and the prior year periodsaddition of net income from Supplemental offset by a decrease in Retirement net income resulting from the annuity reinsurance transaction. The increase in net income for the nine month period was primarily due to recognition of a $106.9 million after tax realized investment gain in the three month period ended June 30, 2019. The gain wassecond quarter of 2019 associated with the transfer of investments as consideration in connection with theannuity reinsurance of approximately 50% of the Company's fixed annuity account balances effective April 1, 2019.transaction. The impact from the realized investment gain was partially offset by a $28.0 million annuity goodwill impairment charge. Lower catastrophe costs in Property and Casualty as well as the addition of Supplemental also contributed to the increase in net income for the nine month period. See Item 1, NoteNotes 2, 6 and Note 14 of the Consolidated Financial Statements for more information regarding Supplemental, 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 Three Months Ended
September 30,		 2019-2018 Nine Months Ended
September 30,		 2019-2018
 2019 2018 Change % 2019 2018 Change % 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. $14.2
 $(3.2) N.M.
 $34.3
 $(4.4) N.M.
Supplemental 6.9
 N/A
 N/A
 6.9
 N/A
 N/A
Retirement (25.0) 14.1
 N.M. (12.8) 25.5
 N.M. 5.9
 12.1
 -51.2 % (6.9) 37.6
 -118.4 %
Life 5.2
 5.9
 -11.9 % 8.5
 9.7
 -12.4 % 5.1
 5.3
 -3.8 % 13.6
 15.0
 -9.3 %
Corporate and Other 108.5
 (3.2) N.M. 110.2
 (7.9) N.M. (6.7) (1.7) N.M.
 103.5
 (9.6) N.M.
Net income $93.8
 $5.9
 N.M. $126.0
 $26.1
 N.M. $25.4
 $12.5
 103.2 % $151.4
 $38.6
 N.M.
___________________________________
N.M. - Not meaningful.
N/A - The acquisition of NTA closed on July 1, 2019.

The net loss for the Retirement segment in the threenine month period ended JuneSeptember 30, 2019 is primarily due to the $28.0 million goodwill impairment charge 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,second quarter of 2019 associated with the annuity reinsurance transaction is reported in the results for the Corporate and Other segment.




Consolidated Results of Operations

(All comparisons versus same period in 2018, unless noted otherwise)
($ in millions) Three Months Ended
June 30,		 2019-2018 Six Months Ended
June 30,		 2019-2018 Three Months Ended
September 30,		 2019-2018 Nine Months Ended
September 30,		 2019-2018
 2019 2018 Change % 2019 2018 Change % 2019 2018 Change % 2019 2018 Change %
Insurance premiums and
contract charges earned
 $208.1
 $205.6
 1.2 % $417.9
 $408.6
 2.3 % $239.7
 $206.8
 15.9 % $657.6
 $615.4
 6.9 %
Net investment income 93.5
 97.1
 -3.7 % 186.3
 189.0
 -1.4 % 93.0
 99.1
 -6.2 % 279.3
 288.1
 -3.1 %
Net investment gains (losses) 146.3
 0.7
 N.M. 153.7
 (1.0) N.M. (2.1) 2.9
 N.M.
 151.6
 1.9
 N.M.
Other income 3.6
 2.8
 28.6 % 6.8
 5.1
 33.3 % 3.8
 2.6
 46.2 % 10.6
 7.7
 37.7 %
Total revenues 451.5
 306.2
 47.5 % 764.7
 601.7
 27.1 % 334.4
 311.4
 7.4 % 1,099.1
 913.1
 20.4 %
                        
Benefits, claims and settlement expenses 152.7
 168.3
 -9.3 % 292.1
 311.9
 -6.3 % 154.2
 161.8
 -4.7 % 446.3
 473.7
 -5.8 %
Interest credited 53.6
 51.1
 4.9 % 106.5
 101.1
 5.3 % 53.6
 52.1
 2.9 % 160.1
 153.2
 4.5 %
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 % 61.4
 51.0
 20.4 % 169.6
 149.4
 13.5 %
DAC unlocking and amortization expense 26.3
 26.2
 0.4 % 82.9
 79.4
 4.4 %
Intangible asset amortization expense 3.8
 —
 N.M.
 4.9
 —
 N.M.
Interest expense 3.3
 3.3
 — % 6.6
 6.5
 1.5 % 4.6
 3.2
 43.8 % 11.2
 9.7
 15.5 %
Other expense 28.0
 —
 N.M. 28.0
 —
 N.M.
Other expense - goodwill impairment —
 —
 N.M.
 28.0
 —
 N.M.
Total benefits, losses and expenses 324.5
 299.4
 8.4 % 599.1
 571.1
 4.9 % 303.9
 294.3
 3.3 % 903.0
 865.4
 4.3 %
                        
Income before income taxes 127.0
 6.8
 N.M. 165.6
 30.6
 N.M. 30.5
 17.1
 78.4 % 196.1
 47.7
 N.M.
Income tax expense 33.2
 0.9
 N.M. 39.6
 4.5
 N.M. 5.1
 4.6
 10.9 % 44.7
 9.1
 N.M.
Net income $93.8
 $5.9
 N.M. $126.0
 $26.1
 N.M. $25.4
 $12.5
 103.2 % $151.4
 $38.6
 N.M.
___________________________________
N.M. - Not meaningful.

Insurance Premiums and Contract Charges Earned

For the three and sixnine month periods ended JuneSeptember 30, 2019, insurance premiums and contract charges earned increased $2.5$32.9 million and $9.3$42.2 million, respectively, comparedrespectively. The increase for the three month period is due to the prior year periods, primarilyaddition of earned premiums from Supplemental. The increase for the nine month period is due to the addition of earned premiums from Supplemental as well as 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 sixnine month periods ended JuneSeptember 30, 2019 declined primarily because invested assets decreased 22.2%18.4% 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%


  Three Months Ended
September 30,		 Nine Months Ended
September 30,
  2019 2018 2019 2018
Pretax yield 4.8% 5.3% 5.0% 5.2%
After tax yield 3.8% 4.0% 4.0% 4.1%

During the sixnine month period ended JuneSeptember 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 sixnine month periods ended JuneSeptember 30, 2019, net investment gains increased $145.6decreased $5.0 million and $154.7increased $149.7 million, respectively, comparedrespectively. The decrease for the three month period was primarily due to changes in fair value and settlements for derivatives. The increase for the prior year periods as a resultnine month period was primarily due to recognition of a realized investment gain of $135.3 million recognized duringin the three month period ended June 30,second quarter of 2019 in connection with the transfer of investments related to the aforementioned annuity reinsurance transaction. The breakdown of net investment gains (losses) by transaction type is shown in the following table:
($ in millions) Three Months Ended
June 30,		 Six Months Ended
June 30,		 Three Months Ended
September 30,		 Nine Months Ended
September 30,
 2019 2018 2019 2018 2019 2018 2019 2018
OTTI losses recognized in earnings $—
 $(1.2) $(0.3) $(1.3) $—
 $—
 $(0.3) $(1.4)
Sales and other, net 142.1
 1.8
 146.9
 4.0
 0.6
 (1.3) 147.5
 2.7
Change in fair value - equity securities 3.4
 (1.2) 6.9
 (6.4) 1.1
 2.0
 8.0
 (4.3)
Change in fair value and gains (losses) realized
on settlements - derivative instruments		 0.8
 1.3
 0.2
 2.7
Change in fair value and gains (losses) realized
on settlements - derivatives		 (3.8) 2.2
 (3.6) 4.9
Net investment gains (losses) $146.3
 $0.7
 $153.7
 $(1.0) $(2.1) $2.9
 $151.6
 $1.9

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.

Other Income

For the three and sixnine month periods ended JuneSeptember 30, 2019, other income increased compared to the prior year periods primarily due to inclusion of BCGBenefit Consultants Group, Inc. (BCG) brokerage fees.



Benefits, Claims and Settlement Expenses

For the three and sixnine month periods ended JuneSeptember 30, 2019, benefits, claims and settlement expenses decreased $15.6$7.6 million and $19.8$27.4 million, respectively, compared to the prior year periods, driven primarily by lower catastrophe losses and improved automobile and property loss ratios.experience, partially offset by losses from the new Supplemental segment.

Interest Credited

For the three and sixnine month periods ended JuneSeptember 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%2.4% 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 JuneSeptember 30, 2019, excluding the reinsured block, and 3.6% at JuneSeptember 30, 2018.


Operating Expenses

DACFor the three and nine month periods ended September 30, 2019, increases in operating expenses were consistent with management's expectations as the current periods include $13.8 million and $18.4 million, respectively, of operating expenses pertaining to NTA and BCG operations.

Deferred Acquisition Costs (DAC) Unlocking and Amortization Expense

For the three and nine month periodperiods ended JuneSeptember 30, 2019, DAC amortization expense increased $5.1$0.1 million compared toand $3.5 million, respectively. The increase for the prior yearnine month period was primarily due to $5.1 million of accelerated amortization of the DAC 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 due to the aforementioned DAC accelerated amortizationblock partially offset by $3.2 million of favorable DAC unlocking in Retirement due to market performance. For Life, DAC unlocking resulted in an immaterial change to amortization for the three and sixnine month periods ended JuneSeptember 30, 2019.

Operating ExpensesIntangible Asset Amortization Expense

For the three and sixnine month periods ended JuneSeptember 30, 2019, increases in operating expenses were consistent with management's expectations as the current periods include $2.8intangible asset amortization expense increased $3.8 million and $5.6$4.9 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 June 30, 2019 was 0.5 points above the prior year period primarily due to the legal expense recovery noted above.acquisitions of NTA and BCG in 2019.

Interest Expense

For the three and sixnine month periods ended JuneSeptember 30, 2019, interest expense was comparableincreased $1.4 million and $1.5 million, respectively as the Company utilized its senior revolving credit facility in the current quarter to June 30, 2018.partially fund the acquisition of NTA on July 1, 2019.

Other Expense - Goodwill Impairment

For the three and sixnine month periods ended JuneSeptember 30, 2019, other expense represents the aforementioned goodwill impairment in Retirement.



Income Tax Expense

The effective income tax rate on the Company's pretax income, including net investment gains (losses), was 23.9%22.7% and 15.0%19.1% for the sixnine month periods ended JuneSeptember 30, 2019 and 2018, respectively. Income from investments in tax-advantaged securities reduced the effective income tax rates by 1.41.8 and 4.82.8 percentage points for the sixnine month periods ended JuneSeptember 30, 2019 and 2018, respectively. The goodwill impairment charge in the Retirement segment increased the effective income tax rate by 3.52.8 percentage points at JuneSeptember 30, 2019.

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 JuneSeptember 30, 2019, the Company's federal income tax returns for years prior to 2014 are no longer subject to examination by the IRS.Internal Revenue Service (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$2.15 per diluted share, generating a core return on equity* of betweenaround 7.0% and 7.5%. This projection also reflects an overall effective tax rate of between 16% and 18%.

Within Property and Casualty, planned premium rate increases, as well as continued underwriting initiatives, are expected to improve the underlying automobile loss ratio* by about 3.0 to 3.5 points and the underlying property loss ratio* by around 3 points. For 2019, management increased the estimate used for catastropheis anticipated to remain flat compared to full year 2018. Catastrophe costs by 20%are projected to be between $45$50 million and $55 million or 7.0 to 7.5 points. Theand the expense ratio is expected to be consistent with 2018 and is expected to remainat around 27%.

Net income for Retirement will decreasecontinue at a lower run rate as a result of the recent annuity reinsurance transaction and redeployment of capital to the new Supplemental segment. Net investment income declines for Retirement will declineare due to the resulting lower investment levels and theof invested assets as well as new money rates are anticipated to remain below the average portfolio earned rate. In addition, expense levels will rise overare higher than prior year, offset by increases in fee income and other income due to the inclusion of BCG. As a result, net income for Retirement is anticipated to be in the range of $25 million to $27 million for the full year 2019.

Life net income is anticipated to decline 15% over10-15% from the prior year 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 the 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 may have a significant impact on net income.



Critical Accounting Estimates

The preparation of consolidated financial statements in conformity with 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:

Valuation of hard to value fixed maturity securities, including evaluation of other-than-temporary impairments
Evaluation of goodwill and intangible assets for impairment
Valuation of life and annuity deferred policy acquisition costs
Valuation of liabilities for property and casualty unpaid claims and claim expenses
Valuation of investment contract and life policy reserves
Valuation of assets acquired and liabilities assumed under purchase accounting

ComparedExcept as noted below, compared to December 31, 2018, at JuneSeptember 30, 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, 2018, discussion of accounting policies, including certain sensitivity information, was presented in Management’sManagement's Discussion and Analysis of Financial Condition and Results of Operations -- Critical Accounting Estimates in that Form 10-K.

Valuation of Assets Acquired and Liabilities Assumed under Purchase Accounting and Purchase Price Allocation

In accounting for the acquisition of NTA, assets acquired and liabilities assumed are recognized based on estimated fair values as of the date of acquisition. The excess of the purchase price when compared to the fair value of the net tangible and identifiable intangible assets acquired is recognized as goodwill. A significant amount of judgment is involved in estimating the individual fair values of tangible assets, intangible assets, and other assets and liabilities. The Company uses all available information to make these fair value determinations and engages third-party consultants for valuation assistance. The fair value of assets and liabilities as of the acquisition date are estimated using a combination of approaches, including the income approach, which requires the Company to project future cash flows and apply an appropriate discount rate; the cost approach, which requires estimates of replacement costs and depreciation and obsolescence estimates; and the market approach. The estimates used in determining fair values are based


on assumptions believed to be reasonable but which are inherently uncertain. Accordingly, actual results may differ materially from the projected results used to determine fair value.

The value of business acquired intangible asset represents the present value of the expected underwriting profit within policies that were in force on the date of acquisition. The value of distribution acquired intangible asset represents the present value of future business to be written by the existing agency force. The value of agency relationships intangible asset represents the present value of the commission overrides retained by NTA. The aforementioned intangible assets were valued using the income approach. The trade names intangible asset represents the present value of future savings accruing NTA by virtue of not having to pay royalties for the use of the trade names, valued using the relief from royalty method. The state licenses intangible asset represents the regulatory licenses held by NTA that were valued using the cost approach. The valuation of NTA's policy reserves represents the present value of future benefits and expenses associated with the policies, valued using the actuarial appraisal approach.

The valuation of the assets acquired and liabilities assumed of NTA noted above required management to make multiple judgments and assumptions to project future cash flows. Assumptions included future policy and contract charges, premiums, morbidity and mortality, and persistency by product, as well as expenses, investment returns, growth rates, agent termination rates and other factors. One of the most significant inputs in these calculations is the discount rate used to arrive at the present value of the net cash flows. Actual experience on the purchased business may vary from these projections and the recovery of the net assets recorded is dependent upon the future profitability of the related business.

Results of Operations by Segment

Consolidated financial results primarily reflect the operating results of threefour 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
Supplemental (see Note 1 for a description of changes to the Company's reporting segments)
Retirement
Life
Corporate and Other

The calculations of segment data are described in more detail in Item 1, Note 1411 of the Consolidated Financial Statements in the Company's Annualthis Quarterly Report on Form 10-K for the year ended December 31, 2018.10-Q. The following sections provide analysis and discussion of results of operations for each of the reporting segments as well as investment results.



Property and Casualty

The following table provides certain financial information for the Property and Casualty segment for the periods indicated.

(All comparisons versus same period in 2018, unless noted otherwise)
($ in millions, unless otherwise indicated) Three Months Ended
June 30,		 2019-2018 Six Months Ended
June 30,		 2019-2018 Three Months Ended
September 30,		 2019-2018 Nine Months Ended
September 30,		 2019-2018
 2019 2018 Change % 2019 2018 Change % 2019 2018 Change % 2019 2018 Change %
Financial Data:        
  
              
Premiums written*:                        
Automobile $114.6
 $114.6
 — % $231.4
 $229.5
 0.8% $118.8
 $120.5
 -1.4% $350.2
 $350.0
 0.1%
Property and other 59.7
 58.4
 2.2 % 104.6
 102.9
 1.7% 63.7
 62.2
 2.4% 168.3
 165.1
 1.9%
Total premiums written 174.3
 173.0
 0.8 % 336.0
 332.4
 1.1% 182.5
 182.7
 -0.1% 518.5
 515.1
 0.7%
Change in unearned insurance premiums (3.0) (5.7) 

 6.1
 0.4
 
 (12.0) (14.1) -14.9% (5.9) (13.7) -56.9%
Total insurance premiums earned 171.3
 167.3
 2.4 % 342.1
 332.8
 2.8% 170.5
 168.6
 1.1% 512.6
 501.4
 2.2%
Incurred claims and claims expenses:                        
Claims occurring in the current year 134.4
 147.0
 -8.6 % 253.2
 268.0
 -5.5% 122.5
 140.0
 -12.5% 375.7
 408.0
 -7.9%
Prior years' reserve development
 2.0
 —
 N.M. 4.0
 0.3
 N.M. 3.5
 —
 N.M.
 7.5
 0.3
 N.M.
Total claims and claim expenses incurred 132.4
 147.0
 -9.9 % 249.2
 267.7
 -6.9% 119.0
 140.0
 -15.0% 368.2
 407.7
 -9.7%
Operating expenses,
including DAC amortization
 45.4
 44.8
 1.3 % 91.9
 87.9
 4.6% 45.0
 45.8
 -1.7 % 136.9
 133.7
 2.4%
Underwriting gain (loss) (6.5) (24.5) 73.5 % 1.0
 (22.8) 104.4% 6.5
 (17.2) 137.8 % 7.5
 (40.0) 118.8%
Net investment income 12.7
 10.3
 23.3 % 22.9
 19.8
 15.7% 10.7
 12.4
 -13.7 % 33.6
 32.2
 4.3%
Income (loss) before income taxes 6.6
 (13.7) 148.2 % 24.4
 (2.5) N.M. 17.4
 (4.7) N.M.
 41.8
 (7.2) N.M.
Net income (loss)/core earnings* 5.1
 (10.9) 146.8 % 20.1
 (1.2) N.M. 14.2
 (3.2) N.M.
 34.3
 (4.4) 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 65.8 % 72.1% -6.3 pts 70.2 % 76.7 % -6.5 pts
Expense ratio 26.6 % 26.9% -0.3 pts 26.9 % 26.3 % 0.6 pts 26.6 % 27.4% -0.8 pts 26.8 % 26.7 % 0.1 pts
Combined ratio: 100.4 % 108.9% -8.5 pts 99.2 % 105.4 % -6.2 pts 92.4 % 99.5% -7.1 pts 97.0 % 103.4 % -6.4 pts
Prior years' reserve development -0.9 % —% -0.9 pts -0.9 % — % -0.9 pts -3.0 % —% -3.0 pts -1.6 % — % -1.6 pts
Catastrophes 1.9 % 3.3% -1.4 pts 1.3 % 2.0 % -0.7 pts 2.1 % 0.7% 1.4 pts 1.6 % 1.6 % —%
Underlying combined ratio* 99.4 % 105.6% -6.2 pts 98.8 % 103.4 % -4.6pts 93.3 % 98.8% -5.5 pts 97.0 % 101.8 % -4.8pts
Property                        
Loss and loss adjustment expense ratio 84.8 % 100.4% -15.6 pts 73.9 % 83.3 % -9.4 pts 78.2 % 106.6% -28.4 pts 75.3 % 91.1 % -15.8 pts
Expense ratio 26.6 % 26.7% -0.1 pts 27.1 % 26.9 % 0.2 pts 26.1 % 26.7% -0.6 pts 26.7 % 26.8 % -0.1 pts
Combined ratio: 111.4 % 127.1% -15.7 pts 101.0 % 110.2 % -9.2 pts 104.3 % 133.3% -29.0 pts 102.0 % 117.9 % -15.9 pts
Prior years' reserve development -1.8 % —% -1.8 pts -1.9 % -0.3 % -1.6 pts — % —% —%
 -1.2 % -0.2 % -1.0 pts
Catastrophes 36.8 % 43.3% -6.5 pts 27.6 % 30.3 % -2.7 pts 22.6 % 58.6% -36.0 pts 25.9 % 39.8 % -13.9 pts
Underlying combined ratio* 76.4 % 83.8% -7.4 pts 75.3 % 80.2 % -4.9 pts 81.7 % 74.7% 7.0 pts 77.3 % 78.3 % -1.0 pts
                        
Policies in force (in thousands)        
  
              
Automobile (1)
       448
 471
 -4.9%       441
 466
 -5.4%
Property       198
 203
 -2.5%       196
 202
 -3.0%
Total       646
 674
 -4.2%       637
 668
 -4.6%
___________________________________
N.M. - Not meaningful.
(1)    JuneSeptember 30, 2019 includes assumed policies in force of 4.


For the three and sixnine month periods ended JuneSeptember 30, 2019, core earnings* increased $16.0$17.4 million and $21.3$38.7 million, respectively, compared to the prior year periods. These reflect 7.1respectively. This reflects 9.5 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.development and improved automobile underwriting results.

On a reported basis, the improvement in the automobile combined ratio for the sixnine month period ended JuneSeptember 30, 2019 was mainly attributed to 5.24.9 points of improvement in the underlying loss ratio* due to rate actions combined with continued stabilization in autoautomobile loss trends. The reported property combined ratio improved 15.9 points for the sixnine month period ended JuneSeptember 30, 2019 reflecting an improvement in the underlying loss ratio of 5.1 points as well as a 2.7 point improvementprimarily due to lower catastrophe losses. For the three month period ended September 30, 2019, the underlying property loss ratio increased 7.6 points reflecting an increase in non-catastrophe fire loss severity with no increase in frequency. For the nine month period ended September 30, 2019, the underlying property loss ratio improved 0.9 points.

Rate actions were the primary factor for the slight increase in total premiums written* for the three and sixnine month periodsperiod ended JuneSeptember 30, 2019 compared to the prior year periods.2019. For 2019, the Company's full year rate plan anticipates low-single digit average rate increases (including states with no rate actions) for both automobile and property; average approved rate changes during the first sixnine months of 2019 were 5.3%4.8% for automobile and 4.6%3.5% for property.

Automobile premiums written* waswere comparable to the three and sixnine month periods ended JuneSeptember 30, 2018. In the first sixnine months of 2019, the average written premium per policy and average earned premium per policy increased 5.8%4.4% and 6.2%5.7%, respectively. Based on policies in force, the automobile 12 month retention rate for new and renewal policies decreased to 80.9% from 82.5% at September 30, 2019 and 2018, respectively, comparedwith the decrease due to the prior year period. For automobile, therecent rate and underwriting actions. The number of educator policies has been stable relative to overall automobile policies as educators represented 85.3%, 85.4% and 85.4% of the automobile policies in force as of JuneSeptember 30, 2019, December 31, 2018 and JuneSeptember 30, 2018, 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 June 30, 2019 and 2018, respectively, with the decrease due to recent rate and underwriting actions.

Property and other premiums written* increased slightly compared tofor the three and sixnine month periods ended JuneSeptember 30, 2018.2019. While the number of property policies in force has declined, the average written premium per policy and average earned premium per policy increased 5.2%6.4% and 4.3%5.2%, respectively, in the first sixnine months of 2019. Based on policies in force, the property 12 month retention rate for new and renewal policies decreased to 87.3% from 87.9% at September 30, 2019 compared to the prior year period. For property, theand 2018, respectively. The number of educator policies has been stable relative to overall property policies as educators represented 82.5%82.6%, 82.4% and 82.4% of the property policies in force as of JuneSeptember 30, 2019, December 31, 2018, and JuneSeptember 30, 2018, respectively. The property 12 month new and renewal policy retention rate was 87.7% and 88.0% at June 30, 2019 and 2018, respectively.

The Company continues to evaluate and implement actions to further mitigate its risk exposure in catastrophe-prone 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.



Supplemental

The following table provides certain information for Supplemental for the periods indicated.
($ in millions, unless otherwise indicated) Three Months Ended
September 30,		 2019-2018 Nine Months Ended
September 30,		 2019-2018
  2019 2018 Change % 2019 2018 Change %
Financial Data:            
Insurance premiums and contract deposits $32.7
 N/A N/A $32.7
 N/A N/A
Insurance premiums and
contract charges earned
 32.9
 N/A N/A 32.9
 N/A N/A
Net investment income 3.7
 N/A N/A 3.7
 N/A N/A
Benefits and settlement expenses 14.7
 N/A N/A 14.7
 N/A N/A
Operating expenses (includes DAC unlocking and amortization expense) 10.5
 N/A N/A 10.5
 N/A N/A
Intangible asset amortization expense 3.2
 N/A N/A 3.2
 N/A N/A
Income before income taxes 8.8
 N/A N/A 8.8
 N/A N/A
Net income /core earnings* 6.9
 N/A N/A 6.9
 N/A N/A
             
Operating Statistics:            
Supplemental insurance in force (thousands)       297
 N/A N/A
Benefits ratio (1)
 44.7% N/A N/A 44.7% N/A N/A
Expense ratio (2)
 28.2% N/A N/A 28.2% N/A N/A
Pretax profit margin (2)
 23.7% N/A N/A 23.7% N/A N/A
Persistency       88.9% N/A N/A
______________
N/A - The acquisition of NTA closed on July 1, 2019.
(1)    Benefits ratio measured to earned premium.
(2)    Expense ratio and pretax profit margin measured to total revenues.

Supplemental contributed $6.9 million to net income in its initial quarter with the Company. The pretax profit margin was 23.7% for the three month period ended September 30, 2019 reflecting this business' focus on efficient operations and product mix. The non-cash impact from amortization of intangible assets recognized in connection with the purchase accounting of NTA reduced pretax net income by $3.2 million.



Retirement

The following table provides certain information for the Retirement segment for the periods indicated.

(All comparisons versus same period in 2018, unless noted otherwise)
($ in millions, unless otherwise indicated) Three Months Ended
June 30,		 2019-2018 Six Months Ended
June 30,		 2019-2018 Three Months Ended
September 30,		 2019-2018 Nine Months Ended
September 30,		 2019-2018
 2019 2018 Change % 2019 2018 Change % 2019 2018 Change % 2019 2018 Change %
Financial Data:        
  
              
Contract charges earned $6.9
 $7.9
 -12.7 % $15.5
 $15.9
 -2.5% $6.6
 $8.0
 -17.5% $22.1
 $23.9
 -7.5%
Net investment income 62.7
 67.8
 -7.5 % 127.4
 132.0
 -3.5% 60.8
 67.7
 -10.2% 188.2
 199.7
 -5.8%
Interest credited 42.3
 39.9
 6.0 % 84.0
 78.6
 6.9% 42.4
 40.8
 3.9% 126.4
 119.4
 5.9%
Net interest margin without
net investment gains (losses)
 21.5
 27.9
 -22.9 % 44.5
 53.4
 -16.7% 19.5
 26.9
 -27.5% 64.0
 80.3
 -20.3%
Net interest margin - Reinsured block (1.1) —
 N.M. (1.1) —
 N.M. (1.1) —
 N.M.
 (2.2) —
 N.M.
Mortality loss and other reserve charges 1.2
 1.4
 -14.3 % 1.8
—
3.3
 -45.5% 0.9
 1.5
 -40.0% 2.7
 4.8
 -43.8%
DAC amortization expense,
excluding unlocking
 4.3
 4.8
 -10.4 % 9.2
 9.6
 -4.2%
Operating expenses 14.5
 14.0
 3.6% 44.7
 42.3
 5.7%
DAC and intangible asset amortization expense,
excluding DAC unlocking
 4.9
 4.7
 4.3% 15.2
 14.3
 6.3%
DAC unlocking 5.6
 0.2
 N.M. 3.6
 0.4
 N.M. —
 (0.3) N.M.
 3.6
 0.1
 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. —
 —
 N.M.
 28.0
 —
 N.M.
Income (loss) before income taxes (24.8) 17.2
 N.M. (10.2) 31.2
 -132.7% 7.0
 16.8
 -58.3% (3.2) 48.0
 -106.7%
Net income (loss) (25.0) 14.1
 N.M. (12.8) 25.5
 N.M. 5.9
 12.1
 -51.2% (6.9) 37.6
 -118.4%
Core earnings* 3.0
 14.1
 -78.7 % 15.2
 25.5
 -40.4% 5.9
 12.1
 -51.2% 21.1
 37.6
 -43.9%
Operating Statistics:                        
Annuity sales deposits            
Annuity contract deposits*            
Variable $54.1
 $50.7
 6.7 % $102.9
 $97.5
 5.5% $54.6
 $53.8
 1.5% $157.5
 $151.3
 4.1%
Fixed 54.9
 49.5
 10.9 % 113.4
 101.5
 11.7% 73.7
 73.2
 0.7% 187.1
 174.7
 7.1%
Total 109.0
 100.2
 8.8 % 216.3
 199.0
 8.7% 128.3
 127.0
 1.0% 344.6
 326.0
 5.7%
Single 55.8
 46.9
 19.0 % 111.7
 95.5
 17.0% 81.3
 80.1
 1.5% 193.0
 175.6
 9.9%
Recurring 53.2
 53.3
 -0.2 % 104.6
 103.5
 1.1% 47.0
 46.9
 0.2% 151.6
 150.4
 0.8%
Total 109.0
 100.2
 8.8 % 216.3
 199.0
 8.7% 128.3
 127.0
 1.0% 344.6
 326.0
 5.7%
Assets under administration (AUA)                        
Annuity assets under management (1)
     

 4,170.3
 6,851.7
 -39.1%     

 $4,215.9
 $6,997.7
 -39.8%
Broker and advisory assets
under administration (2)
     

 2,236.0
 300.5
 N.M.     

 2,259.4
 333.6
 N.M.
Recordkeeping assets
under administration (2)
     

 1,395.1
 —
 N.M.     

 1,422.4
 —
 N.M.
Total 

 

 

 7,801.4
 7,152.2
 9.1% 

 

 

 $7,897.7
 $7,331.3
 7.7%
Persistency                        
Variable annuities     

 94.3% 94.6% -0.3 pts     

 94.7% 94.5% 0.2 pts
Fixed annuities     

 93.9% 94.4% -0.5 pts     

 93.9% 94.2% -0.3 pts
Total     

 94.0% 94.5% -0.5pts     

 94.2% 94.3% -0.1pts
Annuity contracts in force     

 227
 224
 1.3%
Annuity contracts in force (thousands)     

 227
 224
 1.3%
Fixed spread - YTD annualized (basis points)     

 175
 181
 -6bps
     

 198
 182
 16bps
__________________________________
N.M. - Not meaningful.
(1) 
Amount reported as of JuneSeptember 30, 2019 excludes $691.6$673.1 million of assets under management held under modified coinsurance reinsurance.
(2)    2019 includes the results of BCG acquired on January 2, 2019.



For the three and sixnine month periods ended JuneSeptember 30, 2019, core earnings* decreased $11.1$6.2 million and $10.3$16.5 million, respectively, as compared to the prior year periods reflectingrespectively. The three month period reflected lower net investment income and accelerated amortization of the DAC asset associated with the reinsured block partially offset by favorable benefits expense from mortality.mortality costs. The nine month period reflected lower net investment income and accelerated amortization of DAC associated with the reinsured block partially offset by favorable mortality costs. 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 recordedrecognized a non-cash impairment charge of $28.0 million during the second quarter ended June 30,of 2019.

For the three and six month periodsperiod ended JuneSeptember 30, 2019, annuity contract deposits increased compared to the prior year periods, reflecting$1.3 million driven by slight increases in both single and recurring deposits. For the nine month period ended September 30, 2019 annuity contract deposits increased $18.6 million driven by single premium deposits. Variable annuity deposits increased by $3.4$0.8 million and $5.4$6.2 million, respectively, for the three and sixnine month periods ended JuneSeptember 30, 2019. Fixed annuity deposits increased by $5.4$0.5 million and $11.9$12.4 million, respectively, for the current periods.three and nine month periods ended September 30, 2019.

At JuneSeptember 30, 2019, assets under management decreased by $2.7were $2.8 billion compared to June 30, 2018below a year ago, driven primarily by the annuity reinsurance transaction. Variable assets under management, excluding reinsurance,amounts held under the modified coinsurance agreement, increased by $115.0$15.6 million primarily due to market performance. The year to date annualized net interest spread on fixed annuities, excluding reinsurance, decreased 6reinsured block, increased 16 basis points.

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 $336.0$523.0 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$2.7 million in year one and $3.8$8.2 million in year two, further reducing the annualized net interest spread by approximately 48 basis points and 1329 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 JuneSeptember 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.



The annuity reinsurance 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 September 30, 2019
     Deferred Annuities at     Deferred Annuities at
 Total Deferred Annuities Minimum Guaranteed Rate Total Deferred Annuities Minimum Guaranteed Rate
 
Percent
of Total
 
Accumulated
Value (AV)
 
Percent of
Total Deferred
Annuities AV
 
Percent
of Total
 
Accumulated
Value
 
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
 52.5% $1,241.9
 46.9% 35.1% $582.0
Equal to 2% but less than 3% 12.5% 293.0
 82.8% 14.8% 242.7
 12.3% 291.6
 83.1% 14.6% 242.3
Equal to 3% but less than 4% 26.0% 607.5
 99.9% 36.9% 607.0
 25.7% 608.7
 99.9% 36.7% 608.3
Equal to 4% but less than 5% 7.3% 171.1
 100.0% 10.4% 171.1
 7.3% 171.7
 100.0% 10.4% 171.7
5% or higher 2.2% 52.0
 100.0% 3.2% 52.0
 2.2% 52.2
 100.0% 3.2% 52.2
Total 100.0% $2,339.8
 70.2% 100.0% $1,643.7
 100.0% $2,366.1
 70.0% 100.0% $1,656.5

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 and other factors within this report.



Life

The following table provides certain information for the Life segment for the periods indicated.

(All comparisons versus same period in 2018, unless noted otherwise)
($ in millions, unless otherwise indicated) Three Months Ended
June 30,		 2019-2018 Six Months Ended
June 30,		 2019-2018 Three Months Ended
September 30,		 2019-2018 Nine Months Ended
September 30,		 2019-2018
 2019 2018 Change % 2019 2018 Change % 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% $27.7
 $28.4
 -2.5 % $82.5
 $82.7
 -0.2%
Insurance premiums and
contract charges earned
 29.9
 30.4
 -1.6 % 60.3
 59.9
 0.7% 29.7
 30.2
 -1.7 % 90.0
 90.1
 -0.1%
Net investment income 18.3
 19.2
 -4.7 % 36.4
 37.5
 -2.9% 18.4
 19.1
 -3.7 % 54.8
 56.6
 -3.2%
Benefits and settlement expenses 19.1
 19.9
 -4.0 % 41.1
 40.9
 0.5% 19.6
 20.3
 -3.4 % 60.7
 61.2
 -0.8%
Interest credited 11.3
 11.2
 0.9 % 22.5
 22.5
 —% 11.2
 11.3
 -0.9 % 33.7
 33.8
 -0.3%
Operating expenses 8.9
 8.9
 — % 27.5
 27.2
 1.1%
DAC amortization expense,
excluding unlocking
 2.1
 1.9
 10.5 % 4.1
 3.7
 10.8% 2.0
 1.8
 11.1 % 6.1
 5.5
 10.9%
DAC unlocking (0.1) —
 N.M. (0.1) 0.1
 N.M. —
 0.1
 N.M.
 (0.1) 0.2
 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% 6.4
 7.0
 -8.6 % 17.1
 19.0
 -10.0%
Net income /core earnings* 5.2
 5.9
 -11.9 % 8.5
 9.7
 -12.4% 5.1
 5.3
 -3.8 % 13.6
 15.0
 -9.3%
                        
Operating Statistics:                        
Life insurance in force       $18,598
 $17,862
 4.1%       $18,937
 $18,054
 4.9%
Number of policies in force (in thousands)       199
 198
 0.5%
Number of policies in force (thousands)       202
 198
 2.0%
Average face amount in force (in dollars)       $93,506
 $90,282
 3.6%       $93,944
 $91,030
 3.2%
Lapse ratio (ordinary life insurance in force)       4.5% 4.9% -0.4pts       4.5% 4.8% -0.3pts
Mortality costs       $18.0
 $17.2
 4.7%       $26.4
 $25.9
 1.9%
_________________________________
N.M. - Not meaningful.


For the three and sixnine month periods ended JuneSeptember 30, 2019, core earnings* decreased compared to the prior year periods, largelyprimarily due to lower net investment income partially offset by lower mortality costs in the second quarter of 2019.income.

Life premiums and contract deposits* for the three and sixnine month periods ended JuneSeptember 30, 2019 were comparableslightly decreased due to the prior year periods.a decline in single premiums. The ordinary life insurance in force lapse ratio was 4.5% for the 12 months ended JuneSeptember 30, 2019 compared to 4.9%4.8% for the 12 month period ended JuneSeptember 30, 2018.



Corporate and Other

The following table provides certain financial information for Corporate and Other for the periods indicated.

(All comparisons versus same period in 2018, unless noted otherwise)
($ in millions) Three Months Ended
June 30,		 2019-2018 Six Months Ended
June 30,		 2019-2018 Three Months Ended
September 30,		 2019-2018 Nine Months Ended
September 30,		 2019-2018
 2019 2018 Change % 2019 2018 Change % 2019 2018 Change % 2019 2018 Change %
Interest expense $(2.9) $(3.0) 3.3 % $(5.9) $(6.0) 1.7% $4.3
 $2.9
 48.3 % $10.2
 $8.9
 14.6%
Net investment gains (losses) pretax 146.3
 0.7
 N.M. 153.7
 (1.0) N.M. (2.1) 2.9
 N.M.
 151.6
 1.9
 N.M.
Tax on net investment gains (losses) 31.6
 0.1
 N.M. 33.2
 (0.3) N.M. (0.5) 0.7
 N.M.
 32.7
 0.4
 N.M.
Net investment gains (losses) after tax 114.7
 0.6
 N.M. 120.5
 (0.7) N.M. (1.6) 2.2
 N.M.
 118.9
 1.5
 N.M.
Net income (loss) 108.5
 (3.2) N.M. 110.2
 (7.9) N.M. (6.7) (1.7) N.M.
 103.5
 (9.6) N.M.
Core earnings (loss)* (6.2) (3.8) -63.2 % (10.3) (7.2) -43.1% (5.1) (3.9) -30.8 % (15.4) (11.1) -38.7%
___________________________________
N.M. - Not meaningful.

For the three and sixnine month periods ended JuneSeptember 30, 2019, core earnings* decreased compared to the prior year periods, driven by $3.1 and $4.0 million, respectively,increased interest expense as the Company utilized its senior revolving credit facility in the current quarter to partially fund the acquisition of pretaxNTA on July 1, 2019 as well as acquisition costs associated with BCG and NTA.

Investment Results

(All comparisons versus same period in 2018, unless noted otherwise)
($ in millions) Three Months Ended
June 30,		 2019-2018 Six Months Ended
June 30,		 2019-2018 Three Months Ended
September 30,		 2019-2018 Nine Months Ended
September 30,		 2019-2018
 2019 2018 Change % 2019 2018 Change % 2019 2018 Change % 2019 2018 Change %
Net investment income - investment portfolio $70.3
 $97.1
 -27.6 % $163.1
 $189.0
 -13.7 % $69.2
 $99.1
 -30.2 % $232.3
 $288.1
 -19.4 %
Investment income - Deposit asset on reinsurance 23.2
 —
 N.M. 23.2
 —
 N.M. 23.8
 —
 N.M.
 47.0
 —
 N.M.
Pretax net investment gains (losses) 146.3
 0.7
 N.M. 153.7
 (1.0) N.M. (2.1) 2.9
 N.M.
 151.6
 1.9
 N.M.
Pretax net unrealized investment
gains on fixed maturity securities
 
   
 292.5
 183.5
 59.4 % 
   
 386.1
 109.6
 N.M.
_________________________________
N.M. - Not meaningful.

For the three and sixnine month periods ended JuneSeptember 30, 2019, net investment income from the investment portfolio was lower than the prior year periods primarily because invested assets decreased 22.2% fromwere 18.4% below the December 31, 2018 level due to assets transferred under the annuity reinsurance transaction as well astransaction. In addition, lower than expected new money rates and prepayments that were somewhat offset by stronger returns on alternative investments.

For the three month period ended September 30, 2019, the pretax net investment loss was driven primarily by change in fair value and sixsettlements of derivatives. For the nine month periodsperiod ended JuneSeptember 30, 2019, pretax net investment gains were driven primarily by a $135.3 million pretax realized investment gain related to the transfer of assets as a result of the annuity reinsurance transaction and the change in fair value of the equity securities.securities portfolio. Pretax net unrealized investment gains on securities were up $109.0$276.5 million compared to prior year,December 31, 2018, reflecting a decline in the 10-year U.S. Treasury yield of 85102 basis points and tightening investment-gradetighter credit spreads across all asset classes as well as the addition of NTA's investment portfolio, offset by the impact of the aforementioned $135.3 million pretax realized investment gain related to the 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).
($ in millions) June 30, 2019 September 30, 2019
 
Number of
Issuers
 
Fair
Value
 
Amortized
Cost
 
Pretax Net
Unrealized
Gain (Loss)
 
Number of
Issuers
 
Fair
Value
 
Amortized
Cost
 
Pretax Net
Unrealized
Gain (Loss)
Fixed maturity securities  
  
  
  
        
Corporate bonds  
  
  
  
        
Banking & Finance 96
 $358.3
 $335.6
 $22.7
 125
 $416.7
 $388.6
 $28.1
Insurance 36
 134.7
 120.2
 14.5
 44
 167.2
 149.1
 18.1
Energy (1)
 71
 126.9
 117.6
 9.3
Real Estate 35
 105.9
 101.4
 4.5
 40
 114.1
 107.5
 6.6
Energy (1)
 52
 103.5
 94.9
 8.6
HealthCare, Pharmacy 43
 92.2
 86.1
 6.1
 56
 113.6
 104.8
 8.8
Technology 29
 78.8
 75.3
 3.5
 35
 95.5
 90.5
 5.0
Utilities 54
 78.3
 69.4
 8.9
Transportation 29
 73.2
 68.8
 4.4
 31
 78.1
 72.8
 5.3
Utilities 36
 59.3
 52.1
 7.2
Telecommunications 27
 54.3
 48.8
 5.5
Food and Beverage 17
 41.7
 39.6
 2.1
 24
 50.5
 47.2
 3.3
Telecommunications 21
 40.7
 36.4
 4.3
All other corporates (2)
 158
 233.0
 216.5
 16.5
 216
 289.8
 268.8
 21.0
Total corporate bonds 552
 1,321.3
 1,226.9
 94.4
 723
 1,585.0
 1,465.1
 119.9
Mortgage-backed securities  
  
  
  
        
U.S. Government and federally sponsored agencies 216
 363.6
 338.5
 25.1
 269
 525.3
 488.7
 36.6
Commercial (3)
 107
 340.5
 326.6
 13.9
 119
 361.8
 339.3
 22.5
Other 25
 69.9
 69.4
 0.5
 48
 88.5
 87.8
 0.7
Municipal bonds (4)
 493
 1,599.7
 1,472.9
 126.8
 538
 1,676.4
 1,511.9
 164.5
Government bonds                
U.S. 37
 566.4
 546.4
 20.0
 36
 458.2
 430.2
 28.0
Foreign 10
 47.4
 45.3
 2.1
 10
 47.9
 45.3
 2.6
Collateralized loan obligations (5)
 131
 753.2
 758.2
 (5.0) 118
 624.4
 628.9
 (4.5)
Asset-backed securities 94
 472.3
 457.6
 14.7
 105
 472.0
 456.2
 15.8
Total fixed maturity securities 1,665
 $5,534.3
 $5,241.8
 $292.5
 1,966
 $5,839.5
 $5,453.4
 $386.1
                
Equity securities  
  
  
  
        
Non-redeemable preferred stocks 12
 $50.5
     12
 $55.6
    
Common stocks 91
 27.9
     94
 28.3
    
Closed-end fund 1
 21.7
     1
 21.6
    
Total equity securities 104
 $100.1
     107
 $105.5
    
                
Total 1,769
 $5,634.4
     2,073
 $5,945.0
    
_____________________________
(1) 
At JuneSeptember 30, 2019, the fair value amount included $10.1$10.0 million which were non-investment grade.
(2) 
The All other corporates category contains 19 additional industry sectors. Gaming,Industrial, broadcasting & media, leisure/entertainment,aerospace and defense, metal and mining and retail represented $133.3$158.8 million of fair value at JuneSeptember 30, 2019, with the remaining 14 sectors each representing less than $15.0$19.0 million.
(3) 
At JuneSeptember 30, 2019, 100% were investment grade, with an overall credit rating of AA+, and the positions were well diversified by property type, geography and sponsor.
(4) 
Holdings are geographically diversified, 54.4%52.6% are tax-exempt and 77.2%77.7% 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 JuneSeptember 30, 2019.
(5) 
Based on fair value, 97.7%95.8% of the collateralized loan obligation securities were rated investment grade by Standard and Poor’sPoor's Global Inc. (S&P), Moody’sMoody's Investors Service, Inc. (Moody’s)(Moody's) and/or Fitch Ratings, Inc. (Fitch) at JuneSeptember 30, 2019.


At JuneSeptember 30, 2019, the Company’s diversified fixed maturity securities portfolio consisted of 2,6153,093 investment positions, issued by 1,6651,966 entities, and totaled approximately $5.5$5.8 billion in fair value. This portfolio was 97.1%96.7% 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 or AA rated securities, 0.4% of invested assets for A or 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 JuneSeptember 30, 2019, 96.3%95.9% of these combined portfolios were investment grade, based on fair value, with an overall average quality rating of A+. The 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 June 30, 2019 Fair Value September 30, 2019
 December 31, 2018 June 30, 2019 
Fair
Value
 
Amortized
Cost
 December 31, 2018 September 30, 2019 
Fair
Value
 
Amortized
Cost
Fixed maturity securities  
  
  
  
        
AAA 9.1% 12.3% $680.6
 $671.1
 9.1% 11.2% $650.5
 $634.1
AA (2)
 44.5
 43.9
 2,429.4
 2,296.2
 44.5
 43.4
 2,533.8
 2,348.6
A 22.4
 22.8
 1,260.6
 1,171.5
 22.4
 23.0
 1,343.9
 1,237.6
BBB 21.2
 17.9
 996.4
 940.7
 21.2
 19.1
 1,116.6
 1,044.1
BB 1.8
 1.8
 98.2
 95.8
 1.8
 1.8
 105.3
 102.3
B 0.4
 0.4
 27.5
 27.4
 0.4
 0.5
 28.9
 28.7
CCC or lower 0.1
 0.1
 0.5
 0.5
 0.1
 —
 0.5
 0.5
Not rated (3)
 0.5
 0.8
 41.1
 38.6
 0.5
 1.0
 60.0
 57.5
Total fixed maturity securities 100.0% 100.0% $5,534.3
 $5,241.8
 100.0% 100.0% $5,839.5
 $5,453.4
Equity securities  
  
  
  
        
AAA —
 —
 —
   —
 —
 —
  
AA —
 —
 —
   —
 —
 —
  
A —
 —
 —
   —
 —
 —
  
BBB 49.0% 50.4% $50.5
   49.0% 52.7% $55.6
  
BB —
 —
 —
   —
 —
 —
  
B —
 —
 —
   —
 —
 —
  
CCC or lower —
 —
 —
   —
 —
 —
  
Not rated 51.0
 49.6
 49.6
   51.0
 47.3
 49.9
  
Total equity securities 100.0% 100.0% $100.1
   100.0% 100.0% $105.5
  
                
Total  
  
 $5,634.4
       $5,945.0
  
_____________________________
(1) 
Ratings are as assigned primarily by S&P when available, with remaining ratings as assigned on an equivalent basis by Moody’sMoody'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 JuneSeptember 30, 2019, the AA rated fair value amount included $566.4$458.2 million of U.S. Government and federally sponsored agency securities and $572.2$741.3 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’sMoody's or Fitch.



At JuneSeptember 30, 2019, the fixed maturity securities portfolio had $13.0$10.7 million of pretax gross unrealized investment losses on $884.8$754.1 million of fair value related to 299316 positions. Of the investment positions with gross unrealized losses, there were threeeight trading below 80.0% of the carrying value at JuneSeptember 30, 2019.

The Company views the unrealized investment losses of all of the fixed maturity securities at JuneSeptember 30, 2019 as temporary. Future changes in circumstances related to these and other securities could require subsequent recognition of OTTI.other-than-temporary impairment (OTTI).

Liquidity and Financial Resources

Off-Balance Sheet Arrangements

At JuneSeptember 30, 2019 and 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 presented in Item 1, Note 3 of the Consolidated Financial Statements and Item 2, Investments Results.

Cash Flow

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'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 Nine Months Ended
September 30,		 2019-2018
 2019 2018 Change % 2019 2018 Change %
Net cash provided by operating activities $97.8
 $151.3
 -35.4% $207.2
 $217.5
 -4.7%
Net cash provided by (used in) investing activities 23.2
 (112.4) 120.6%
Net cash used in investing activities (65.6) (183.8) 64.3%
Net cash used in financing activities (125.3) (38.3) N.M. (114.2) (34.9) N.M.
Net increase (decrease) in cash (4.3) 0.6
 N.M. 27.4
 (1.2) N.M.
Cash at beginning of period 11.9
 7.6
 56.6% 11.9
 7.6
 56.6%
Cash at end of period $7.6
 $8.2
 -7.3% $39.3
 $6.4
 N.M.
_________________________________
N.M. - Not meaningful.



Operating Activities

As a holding company, HMEC conducts its principal operations in the personal lines segment of the property and casualty and life insurance industries through its subsidiaries. HMEC's insurance subsidiaries generate cash flow from premium 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 sixnine months ended JuneSeptember 30, 2019, net cash provided by operating activities decreased $53.5$10.3 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.paid, partially offset by an increase in Premiums collected.

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.BCG and during the third quarter of 2019, HMEC acquired NTA.

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$175.0 million from FHLB under a funding agreementagreements and receipt of those funds hashave been reported in Annuity Contracts: Variable, Fixed and FHLB Funding Agreements, Deposits. AdvancesDuring the third quarter of 2019, HMLIC paid down $275.0 million on FHLB funding agreements and thus, advances to HMLIC from FHLB under funding agreements totaled $675.0$525.0 million as of JuneSeptember 30, 2019. For the sixnine month period ended JuneSeptember 30, 2019, cash inflows from annuity contract deposits, excluding the additional $175.0 million received from FHLB, transaction, increased $17.2$18.6 million, or 8.7%5.7%, 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$19.8 million, or 2.0%5.9%, compared to the prior year period.

Financing activities for the sixnine month period ended JuneSeptember 30, 2019 also includes a one timeone-time cash payment of $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 support 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 for other 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 2019 from all of HMEC's insurance subsidiaries without prior regulatory approval is $90.7$43.2 million, of which $54.8$6.5 was paid during the sixnine month period ended JuneSeptember 30, 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 Item 8, Note 10 of the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

The total capital of the Company was $1,797.6$2,011.6 million at JuneSeptember 30, 2019, including $297.9$433.0 million of short-term and long-term debt. Total debt represented 18.7%24.8% of total capital excluding net unrealized investment gains on fixed maturity securities (16.6%(21.5% including net unrealized investment gains on fixed maturity securities) at JuneSeptember 30, 2019, which was below the Company’sCompany's long-term target of 25%.

Shareholders’Shareholders' equity was $1,499.7$1,578.6 million at JuneSeptember 30, 2019, including net unrealized investment gains on fixed maturity securities in the Company’s investment portfolio of $203.1$266.4 million after taxes and the related impact of DAC associated with investment contracts and life insurance products with account values. TheAt September 30, 2019, the market valuecapitalization of the Company’s common stock and the market valueCompany was approximately $1,909.4 million (41,213,085 shares at $46.33 per share were $1,659.4 million and $40.29, respectively, at June 30, 2019.share). Book value per share was $36.41$38.30 at JuneSeptember 30, 2019 ($31.4831.84 excluding net unrealized investment gains on fixed maturity securities)securities*).

Additional information regarding net unrealized investment gains on fixed maturity securities in the Company’sCompany's investment portfolio at JuneSeptember 30, 2019 is included in Item 1, Note 3 of the Consolidated Financial Statements and in Item 2, Results of Operations by Segment in this report.

Total shareholder dividends paid were $23.6$35.5 million for the sixnine month period ended JuneSeptember 30, 2019. In March, May and MaySeptember 2019, the Board of Directors approved regular quarterly dividends to $0.2875 per share.

For the sixnine month period ended JuneSeptember 30, 2019, the Company did not repurchase any shares of its common stock under its share repurchase program, which is further described in Item 8, Note 9 of the Consolidated Financial Statements in the Company’sCompany's Annual Report on Form 10-K for the year ended December 31, 2018. As of JuneSeptember 30, 2019, $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 September 30, 2019 December 31, 2018
Short-term debt:        
Bank Credit Facility, expires June 21, 2024 $—
 $—
 $135.0
 $—
        
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
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 $1.6 million and $1.8 million
 248.0
 247.7
FHLB borrowing 50.0
 50.0
 50.0
 50.0
Total $297.9
 $297.7
 $433.0
 $297.7

As of JuneSeptember 30, 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 Item 8, Note 7 of the Consolidated Financial Statements in the Company’sCompany's Annual Report on Form 10-K for the year ended December 31, 2018. The Senior Notes due 2025 are traded in the open market (HMN 4.50).

As of JuneSeptember 30, 2019, the Company had $50.0 million outstanding with 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 2.7230%2.45% as of JuneSeptember 30, 2019. HMIC'sHorace Mann Insurance Company's (HMIC) FHLB borrowings of $50.0 million are included in Long-term debt on the Consolidated Balance Sheet.Sheets.

On June 21, 2019, the Company, as borrower, replaced its current line of credit with a new five-year Credit Agreement (Bank Credit Facility). The credit agreement extends the commitment termination date to June 21, 2024 from the previous termination date of June 27, 2023. The new Bank Credit Facility increased the amount available on this senior revolving credit facility to $225.0 million from $150.0 million. PNC Capital Markets, LLC and JPMorgan Chase Bank, N.A. served as joint leads on the 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. TheAs described in Item 1, Note 8 of the Consolidated Financial Statements, 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 JuneSeptember 30, 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,September 30, 2019, the Company had $135$135.0 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’sHMEC's principal insurance subsidiaries are rated by S&P, Moody’s,Moody's, A.M. Best Company, Inc. (A.M. Best) and Fitch. These rating agencies have also assigned ratings to the Company’sCompany'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’sCompany'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’sCompany's securities.

Assigned ratings for HMEC and its Property and Casualty and its Life insurance subsidiaries were reviewed by all of the rating agencies in June and July 2019 in conjunction with the announcement of the Company’sCompany's financing plans to purchase NTA. A.M. Best and S&P affirmed the ratings that were in place at December 31, 2018. Moody’sMoody's and Fitch affirmed their ratings with a stable outlook, removing negative watches from their respective debt and insurance financial strength ratings placed after the announcement of NTA acquisition in December 2018.

All four agencies currently have assigned the same insurance financial strength ratings to the Company's Property and Casualty and the Company's Life insurance subsidiaries. Only A.M Best currently rates the Company's Supplemental segment's subsidiaries. Assigned ratings as of JulyOctober 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):follows:
  Insurance Financial  
  Strength Ratings (Outlook) Debt Ratings (Outlook)
As of JulyOctober 31, 2019    
S&P A (stable) BBB (stable)
Moody’s A2 (stable) Baa2 (stable)
A.M. Best 
HMEC (parent company)N.A.bbb(stable)
HMEC's LifeA (stable) bbbN.A.
HMEC's Property and Casualty subsidiariesA (stable)N.A.
HMEC's Supplemental segment's subsidiariesA-(stable)N.A.
Fitch A (stable) BBB (stable)

Reinsurance Programs

Information regarding the reinsurance programprograms for the Company’sCompany's Property and Casualty segmentand Life segments is located in Item 1, Reporting Segments8, Note 6 of the Company’s Annual Report on Form 10-K forConsolidated Financial Statements in the year ended December 31, 2018.
Information regarding the reinsurance program for the Company’s Life segment is located in Item 1, Reporting Segments of the Company’sCompany's Annual Report on Form 10-K for the year ended December 31, 2018.



A life insurance subsidiary of the Supplemental segment cedes life insurance risks on both a yearly renewable term and on a coinsurance basis in excess of certain retention limits. Ceding risks does not relieve the originating insurance company of primary liability; however, it does provide for the recovery from the reinsurer of a portion of the benefits paid. The life insurance subsidiary remains contingently liable for all amounts due to the policyholders should the reinsurer default.

Effective April 1, 2019, the Company reinsured a block of approximately $2.9 billion block of individual annuity 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’sRGA'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’sHMLIC's sole use and benefit. Upon RGA’sRGA's material breach of the reinsurance agreement, deterioration of its RBCrisk-based capital (RBC) ratio to a certain level, or certain other events, HMLIC may recapture the reinsured business.

Item 3.    Quantitative and Qualitative Disclosures about Market Risk

Market value risk, the Company’sCompany's primary market risk exposure, is the risk that the Company’sCompany'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’sCompany'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 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’sCompany's investments and the credited interest rates on the Company’sCompany'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’sCompany's exposure to market value risks and the management of those risks is presented in Item 7A, Quantitative and Qualitative Disclosures about Market Risk of the Company’sCompany's Annual Report on Form 10-K for the year ended December 31, 2018.

Item 4.     Controls and Procedures

Management’sManagement's Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

Under the supervision and with the participation of the Company’sCompany's management, including the Company’sCompany's Chief Executive Officer and Chief Financial Officer, the Company conducted an evaluation of the effectiveness of the design and operation of the Company’sCompany'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 JuneSeptember 30, 2019 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’sCompany'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’sCompany's periodic Securities and Exchange Commission filings. No material weaknesses in the Company’sCompany'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’sCompany'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

ThereExcept as noted below, there were no changes in the Company’sCompany's internal control over financial reporting that occurred during the Company’s last fiscal quarterperiod covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, the Company’sCompany's internal control over financial reporting.

On July 1, 2019, the Company completed its acquisition of NTA. The Company is in the process of integrating NTA and the Company's controls over financial reporting. As a result of these integration activities, certain controls will be evaluated and may be changed. Therefore, the Company has elected to exclude NTA from the Company's assessment of internal control over financial reporting as of September 30, 2019.

Concurrent with the NTA acquisition, changes were made to the relevant business processes and the related control activities over purchase accounting in order to monitor and maintain appropriate controls over financial reporting.
PART II: OTHER INFORMATION

Item 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’sCompany's Annual Report on Form 10-K for the year ended December 31, 2018. However, the following risk factor has emerged as a result of transactions that occurred during the three months ended June 30, 2019.subsequent to year end.

The Company is subject to the credit risk of its counterparties, including reinsurers who reinsure business from the Company’sCompany's insurance companies.

The Company’sCompany's insurance subsidiaries may cede certain risks to third-party insurance companies through reinsurance. One of the Company’sCompany'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’sHMLIC's in force fixed and variable annuities on a coinsurance and modified coinsurance basis. The variable portion of the reinsured annuities is reinsured on a modified coinsurance basis and assets supporting the variable account liabilities are still held by HMLIC in its separate accounts. Because the reinsurance agreement covers a large volume of HMLIC’sHMLIC's in force business, the transaction exposes HMLIC and in turn, the Company, to a concentration of credit risk with respect to this counterparty. RGA’sRGA'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’sHMLIC's sole use and benefit. Upon RGA’sRGA's material breach of the reinsurance agreement, deterioration of its RBCrisk-based capital (RBC) ratio to certain level, or certain other events, HMLIC may


recapture the reinsured business. However, in the event of RGA’sRGA's insolvency, HMLIC’sHMLIC's right to use the assets in the trust account may be delayed. Also, if at the time of its insolvency the trust account is not funded at a level to fully discharge all its obligations, HMLIC’sHMLIC's claims to the extent not covered by the assets in the trust would be those of a general creditor.

Risks Related to Acquisitions
The integration of National Teachers Associates Life Insurance Company (NTA) into the Company may not be as successful as anticipated.
The NTA acquisition involves numerous operational, strategic, financial, accounting, legal, tax and other risks. Difficulties in executing the acquisition strategy may cause the Company's financial results to differ from its expectations or the expectations of the investor community. Potential difficulties that may be encountered in the integration process include, among other factors:
the inability to successfully integrate the businesses and distribution force of NTA in a manner that permits the Company to achieve the full revenue and cost savings desired from the acquisition;
complexities associated with managing the larger, more complex, business;
loss of key employees
the disruption of, or the loss of momentum in, each company's ongoing business

Lack of successful execution on acquisition strategies could result in impairment of goodwill and intangible assets.

The Company accounted for the NTA and Benefit Consultants Group, Inc.(BCG) acquisitions using the acquisition method of accounting, which requires that the assets acquired and liabilities assumed be recognized on the Company's consolidated balance sheet at their respective fair values as of the acquisition date, including recognition of intangible assets. Any excess of the purchase consideration over the fair value of the acquired net tangible and intangible assets is recognized as goodwill.
As of September 30, 2019, the Company's consolidated balance sheet reflected preliminary estimates of goodwill and other intangible assets of $29.4 million and $181.1 million, respectively, recognized in connection with the NTA and BCG acquisitions. To the extent the acquisitions do not provide the modeled returns, the value of goodwill or intangible assets could become impaired and thus, the Company may be required to recognize material non-cash charges relating to such impairment.
Risks Related to Supplemental Segment

Actual experience may differ from actuarial assumptions which could adversely affect the Company's profitability, results of operations, and financial condition.

Historical results may not be indicative of future performance due to, among other things, changes in the Company’s mix of business, regulatory actions or changes in legal doctrine impacting the Company's products or lines of business, or any number of economic cyclical effects. Reserves do not represent an exact calculation of future benefit liabilities but are instead actuarial and statistical-based estimates. Actual experience may differ from the Company's reserve assumptions. There are no assurances that reserves will be sufficient to fund the Company's future liabilities in all scenarios. Future loss development may require reserves to be increased, which could adversely affect earnings in current and future periods. Adjustments to reserve amounts may be required in the event of changes from the assumptions regarding future morbidity,


mortality, persistency, and interest rates used in calculating the reserve amounts, which could have a material adverse effect on the Company's results of operations or financial condition.

Conditions in the general economy and negative developments related thereto could adversely affect the Company’s profitability, growth, and financial condition.

Unfavorable economic conditions may result in lower sales, lower premium growth and persistency, higher claims incidence, and longer claims duration-any of which may adversely affect the Company's results of operations or financial condition. In particular, factors such as unemployment levels, consumer confidence levels, consumer spending, business investment, and inflation all have the potential to affect the business and economic environment and, ultimately, the amount and profitability of the Company. Given the nature of the Company's products, in an economic environment characterized by higher unemployment, lower personal income, and reduced consumer spending, new product sales may be adversely affected. The Company's premium growth may also be negatively impacted by lower premium growth from existing customers due to lower salary growth and lower growth or decline in the number of employees in the Company's target markets. In addition, during such periods, the Company may experience higher claims incidence, longer claims duration, and/or an increase in policy lapses-any of which could have a material adverse effect on the Company's results of operations or financial condition. Programs such as healthcare reform and financial services sector reform may compete with or diminish the need or demand for the Company's products, particularly as it may affect the ability to sell the Company's products through employers or in the workplace.

The Company is subject to extensive regulation which may increase capital requirements, impact the cost or demand for the Company's products, and adversely affect the Company's profitability, liquidity, or growth.

The Company is subject to extensive regulatory scrutiny. Regulatory authorities have been established (i.e., state insurance departments) and granted broad administrative powers over many aspects of the insurance industry. These laws and regulations can be complex and subject to differing interpretations. Heightened oversight by regulatory authorities could potentially impact the Company's business, results of operations, or financial condition. Existing or future laws and regulations may become more restrictive or otherwise adversely affect the Company's operations. Failure to comply with or obtain appropriate exemptions under any applicable laws or regulations could result in restrictions on the Company's ability to do business in one or more of the jurisdictions in which it operates and could result in fines and other sanctions, which could have a material adverse effect on the Company's results of operations or financial condition.

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

Issuer Purchases of Equity Securities

On September 30, 2015, the Company's Board of Directors authorized a share repurchase program allowing repurchases of up to $50.0 million. The share repurchase program authorizes the repurchase of common shares in open market or privately negotiated transactions, from time to time, depending on market conditions. The 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 JuneSeptember 30, 2019, the Company did not repurchase shares of HMEC common stock. As of JuneSeptember 30, 2019, $22.8 million remained authorized for future share repurchases.



Item 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 JuneSeptember 30, 2019 which has not been filed with the SEC.

Item 6.    Exhibits

The following items are filed as Exhibits. Management contracts and compensatory plans are indicated by an asterisk (*).
Exhibit  
No. Description
   
(3) Articles of incorporation and bylaws:
   
3.1 
Restated Certificate of Incorporation of HMEC, filed with the Delaware Secretary of State on June 24, 2003, incorporated by reference to Exhibit 3.1 to HMEC’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2003, filed with the Securities and Exchange Commission (the "SEC") on August 14, 2003.
   
3.2 
Bylaws of HMEC, incorporated by reference to Exhibit 3.2 to HMEC’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2003, filed with the SEC on August 14, 2003.
   
(4) Instruments defining the rights of security holders, including indentures:
   
4.1 
Indenture, dated as of November 23, 2015, by and between HMEC and The Bank of New York Mellon Trust Company, N.A., as trustee, incorporated by reference to Exhibit 4.1 to HMEC’s Current Report on Form 8-K dated November 18, 2015, filed with the SEC on November 23, 2015.
   
4.1(a) 
Form of HMEC 4.500% Senior Notes due 2025, incorporated by reference to Exhibit 4.2 to HMEC’s Current Report on Form 8-K dated November 18, 2015, filed with the SEC on November 23, 2015.
   
4.2 
Certificate of Designations for HMEC Series A Cumulative Convertible Preferred Stock, incorporated by reference to Exhibit 4.3 to HMEC’s Annual Report on Form 10-K for the year ended December 31, 2005, filed with the SEC on March 16, 2006.
   
(10) Material contracts:
   
10.1 
Credit Agreement dated as of June 21, 2019 among HMEC, certain financial institutions named therein and PNC Bank, N.A., as administrative agent, incorporated by reference to Exhibit 10.1 to HMEC’s Current Report on Form 8-K dated June 24, 2019, filed with the SEC on June 24, 2019.
   
10.2* 
Horace Mann Educators Corporation Amended and Restated 2002 Incentive Compensation Plan ("2002 Incentive Compensation Plan"), incorporated by reference to Exhibit 10.2 to HMEC’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2005, filed with the SEC on August 9, 2005.
   


10.2(a)* 
Revised Specimen Employee Stock Option Agreement under the 2002 Incentive Compensation Plan, incorporated by reference to Exhibit 10.6(b) to HMEC’s Annual Report on Form 10-K for the year ended December 31, 2008, filed with the SEC on March 2, 2009.
   
10.2(b)* 
Specimen Employee Restricted Stock Unit Agreement under the 2002 Incentive Compensation Plan, incorporated by reference to Exhibit 10.6(d) to HMEC’s Annual Report on Form 10-K for the year ended December 31, 2005, filed with the SEC on March 16, 2006.
   
10.2(c)* 
Revised Specimen Employee Restricted Stock Unit Agreement under the 2002 Incentive Compensation Plan, incorporated by reference to Exhibit 10.6(f) to HMEC’s Annual Report on Form 10-K for the year ended December 31, 2008, filed with the SEC on March 2, 2009.
   
10.2(d)* 
Specimen Non-employee Director Restricted Stock Unit Agreement under the 2002 Incentive Compensation Plan, incorporated by reference to Exhibit 10.6(e) to HMEC’s Annual Report on Form 10-K for the year ended December 31, 2005, filed with the SEC on March 16, 2006.
   
10.2(e)* 
Revised Specimen Non-employee Director Restricted Stock Unit Agreement under the 2002 Incentive Compensation Plan, incorporated by reference to Exhibit 10.6(h) to HMEC’s Annual Report on Form 10-K for the year ended December 31, 2008, filed with the SEC on March 2, 2009.
   
10.3* 
First Amendment to the HMEC 2010 Comprehensive Executive Compensation Plan (As Amended and Restated Effective as of May 20, 2015), incorporated by reference to Exhibit 10.3 to HMEC's Quarterly Report on Form 10-Q for the quarter ended March 31, 2017, filed with the SEC on May 9, 2017.
   
10.3(a)* 
HMEC 2010 Comprehensive Executive Compensation Plan (As Amended and Restated Effective May 20, 2015) (Section 16 Officer) Non-Qualified Stock Option Agreement - Employee Grantee, incorporated by reference to Exhibit 10.3(a) to HMEC's Quarterly Report on Form 10-Q for the quarter ended March 31, 2017, filed with the SEC on May 9, 2017.
   
10.3(b)* 
HMEC 2010 Comprehensive Executive Compensation Plan (As Amended and Restated Effective May 20, 2015) (Non-Section 16) Non-Qualified Stock Option Agreement - Employee Grantee, incorporated by reference to Exhibit 10.3(b) to HMEC's Quarterly Report on Form 10-Q for the quarter ended March 31, 2017, filed with the SEC on May 9, 2017.
   
10.3(c)* 
HMEC 2010 Comprehensive Executive Compensation Plan (As Amended and Restated Effective May 20, 2015) Service-Vested Restricted Stock Units Agreement - Employee Grantee, incorporated by reference to Exhibit 10.3(c) to HMEC's Quarterly Report on Form 10-Q for the quarter ended March 31, 2017, filed with the SEC on May 9, 2017.
   
10.3(d)* 
HMEC 2010 Comprehensive Executive Compensation Plan (As Amended and Restated Effective May 20, 2015) Performance-Based Restricted Stock Units Agreement - Employee Grantee, incorporated by reference to Exhibit 10.3(d) to HMEC's Quarterly Report on Form 10-Q for the quarter ended March 31, 2017, filed with the SEC on May 9, 2017.
   
10.3(e)* 
HMEC 2010 Comprehensive Executive Compensation Plan (As Amended and Restated Effective May 20, 2015) Service-Vested Restricted Stock Units Agreement - Employee Grantee (One-Time Grant Service), incorporated by reference to Exhibit 10.3(e) to HMEC's Quarterly Report on Form 10-Q for the quarter ended March 31, 2017, filed with the SEC on May 9, 2017.


10.3(f)* 
Specimen Employee Performance-Based Restricted Stock Units Agreement - Key Strategic Grantee under the HMEC 2010 Comprehensive Executive Compensation Plan incorporated by reference to Exhibit 10.3(e) to HMEC’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2016, filed with the SEC on May 6, 2016.
   
10.3(g)* 
Specimen Non-employee Director Restricted Stock Unit Agreement under the HMEC 2010 Comprehensive Executive Compensation Plan, incorporated by reference to Exhibit 10.17(a) to HMEC’s Current Report on Form 8-K dated May 27, 2010, filed with the SEC on June 2, 2010.
   
10.4* 
Horace Mann Supplemental Employee Retirement Plan, 2002 Restatement, incorporated by reference to Exhibit 10.1 to HMEC’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2002, filed with the SEC on May 15, 2002.
   
10.5* 
Horace Mann Executive Supplemental Employee Retirement Plan, 2002 Restatement, incorporated by reference to Exhibit 10.2 to HMEC’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2002, filed with the SEC on May 15, 2002.
   
10.6* 
Amended and Restated Horace Mann Nonqualified Supplemental Money Purchase Pension Plan, incorporated by reference to Exhibit 10.9 to HMEC’s Annual Report on Form 10-K for the year ended December 31, 2008, filed with the SEC on March 2, 2009.
   
10.7* 
Summary of HMEC Non-employee Director Compensation.Compensation, incorporated by reference to Exhibit 10.7 to HMEC's Quarterly Report on Form 10-Q for the quarter ended June 30, 2019, filed with the SEC on August 8, 2019.
   
10.8* 
Summary of HMEC Named Executive Officer Annualized Salaries, incorporated by reference to Exhibit 10.8 to HMEC's Quarterly Report on Form 10-Q for the quarter ended March 31, 2019, filed with the SEC on May 10, 2019.
   
10.9* 
Form of Severance Agreement between HMEC, Horace Mann Service Corporation ("HMSC") and certain officers of HMEC and/or HMSC, incorporated by reference to Exhibit 10.13 to HMEC’s Annual Report on Form 10-K for the year ended December 31, 2012, filed with the SEC on February 28, 2013.
   
10.9(a)* 
Revised Schedule to Severance Agreements between HMEC, HMSC and certain officers of HMEC and/or HMSC, incorporated by reference to Exhibit 10.9(a) to HMEC's Quarterly Report on Form 10-Q for the quarter ended June 30, 2017, filed with the SEC on August 8, 2017.
   
10.10* 
HMSC Executive Change in Control Plan, incorporated by reference to Exhibit 10.15 to HMEC’s Current Report on Form 8-K dated February 15, 2012, filed with the SEC on February 22, 2012.
   
10.10(a)* 
HMSC Executive Change in Control Plan Schedule A Plan Participants, incorporated by reference to Exhibit 10.10(a) to HMEC's Quarterly Report on Form 10-Q for the quarter ended March 31, 2019, filed with the SEC on May 10, 2019.
   
10.11* 
HMSC Executive Severance Plan, incorporated by reference to Exhibit 10.16 to HMEC’s Current Report on Form 8-K dated March 7, 2012, filed with the SEC on March 13, 2012.
   


10.11(a)* 
First Amendment to the HMSC Executive Severance Plan, incorporated by reference to Exhibit 10.16(a) to HMEC’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2012, filed with the SEC on August 9, 2012.
   


10.11(b)* 
HMSC Executive Severance Plan Schedule A Participants, incorporated by reference to Exhibit 10.11(b) to HMEC's Quarterly Report on Form 10-Q for the quarter ended March 31, 2019, filed with the SEC on May 10, 2019.
   
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 March 1, 2019.
   
10.13 
Purchase Agreement By and Among Ellard Family Holdings, Inc., Brian M. Ellard, The JCE Exempt Trust and Horace Mann Educators Corporation dated as of December 10, 2018, incorporated by reference to Exhibit 10.13 to HMEC's Annual Report on Form 10-K for the year ended December 31, 2018, filed with the SEC on March 1, 2019.
   
(11) Statement regarding computation of per share earnings.
   
(15) KPMG LLP letter regarding unaudited interim financial information.
 
(31) Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002:
 
31.1 
Certification by Marita Zuraitis, Chief Executive Officer of HMEC.
 
31.2 
Certification by Bret A. Conklin, Chief Financial Officer of HMEC.
   
(32) Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002:
 
32.1 
Certification by Marita Zuraitis, Chief Executive Officer of HMEC.
   
32.2 
Certification by Bret A. Conklin, Chief Financial Officer of HMEC.
   
(99) Additional exhibits:
   
99.1 
Glossary of Selected Terms.
   
(101) Interactive Data File:
   
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
   
101.SCH XBRL Taxonomy Extension Schema
   
101.CAL XBRL Taxonomy Extension Calculation Linkbase
   
101.DEF XBRL Taxonomy Extension Definition Linkbase
   
101.LAB XBRL Taxonomy Extension Label Linkbase
   
101.PRE XBRL Taxonomy Extension Presentation Linkbase


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.
 
   HORACE MANN EDUCATORS CORPORATION
   (Registrant)
    
    
    
    
    
    
DateAugustNovember 8, 2019   /s//s/ Marita Zuraitis
    
   Marita Zuraitis
   President and Chief Executive Officer
    
    
    
    
    
    
DateAugustNovember 8, 2019   /s//s/ Bret A. Conklin
    
   Bret A. Conklin
   Executive Vice President and
   Chief Financial Officer
    
    
    
    
    
    
DateAugustNovember 8, 2019   /s//s/ Kimberly A. Johnson
    
   Kimberly A. Johnson
   Vice President, Controller and
   Principal Accounting Officer


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