UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 orOR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SeptemberJune 30, 20192020
ORor
☐TRANSITION REPORT PURSUANT TO SECTION 13 orOR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission file number 1-10890
HORACE MANN EDUCATORS CORPORATION
(Exact name of registrant as specified in its charter)
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Delaware | 37-0911756 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
1 Horace Mann Plaza, Springfield, Illinois 62715-0001
(Address of principal executive offices, including Zipoffices) (Zip Code)
Registrant’s Telephone Number, Including Area Code:telephone number, including area code: 217-789-2500
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Securities registered pursuant to Section 12(b) of the Act: |
Title of each class | | Trading Symbol | | Name of each exchange on which registered |
Common Stock, $0.001 par value | | HMN | | New York Stock Exchange |
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.
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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 ☑
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Securities registered pursuant to Section 12(b) of the Act: |
Title of each class | | Trading Symbol | | Name of each exchange
on which registered
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Common Stock, $0.001 par value | | HMN | | New York Stock Exchange |
As of OctoberJuly 31, 2019,2020, the registrant had 41,219,73741,344,546 common shares, of Common Stock,$0.001 par value, $0.001 per share, outstanding.
HORACE MANN EDUCATORS CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBERJUNE 30, 20192020
INDEXTABLE OF CONTENTS
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Item 1A. | | |
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Item 5. | | |
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Item 6. | | |
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PART I: FINANCIAL INFORMATION
Item 1.IConsolidated Financial Statements
1. Consolidated Financial StatementsReport of Independent Registered Public Accounting Firm��
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 SeptemberJune 30, 2019,2020, the related consolidated statements of operations, comprehensive income (loss) and changes in shareholders' equity for the three-month and nine-monthsix-month periods ended SeptemberJune 30, 20192020 and 2018,2019, and cash flows for the nine-month periodssix-month period ended SeptemberJune 30, 20192020 and 2018,2019, 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, 2018,2019, 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,February 28, 2020, 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, 2018,2019, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
Basis for Review Results
This consolidated interim financial information is the responsibility of the Company’s management. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our reviews in accordance with the standards of the PCAOB. A review of consolidated interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
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/s/ KPMG LLP |
KPMG LLP |
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Chicago, Illinois | |
November 8, 2019August 7, 2020 | |
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Horace Mann Educators Corporation | 1 | Quarterly Report on Form 10-Q |
HORACE MANN EDUCATORS CORPORATION
CONSOLIDATED BALANCE SHEETS
($ in thousands, except share data)
| | | | September 30, 2019 | | December 31, 2018 | | June 30, 2020 | | December 31, 2019 |
| | (Unaudited) | | | | (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 |
| |
Fixed maturity securities, available for sale, at fair value (amortized cost 2020, $5,604,405; 2019, $5,456,980) | | | $ | 6,021,983 |
| | $ | 5,791,676 |
|
Equity securities at fair value | | | 90,338 |
| | 101,864 |
|
Limited partnership interests | | 354,611 |
| | 328,516 |
| | 392,192 |
| | 383,717 |
|
Short-term and other investments | | 433,336 |
| | 295,093 |
| | 376,297 |
| | 361,976 |
|
Total investments | | 6,732,990 |
| | 8,250,677 |
| | 6,880,810 |
| | 6,639,233 |
|
Cash | | 39,349 |
| | 11,906 |
| | 82,390 |
| | 25,508 |
|
Deferred policy acquisition costs | | 269,215 |
| | 298,742 |
| | 257,129 |
| | 276,668 |
|
Deposit asset on reinsurance | | 2,342,305 |
| | — |
| | 2,373,267 |
| | 2,346,166 |
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Intangible assets, net | | 181,145 |
| | — |
| | 169,845 |
| | 177,217 |
|
Goodwill | | 48,744 |
| | 47,396 |
| | 49,079 |
| | 49,079 |
|
Other assets | | 410,663 |
| | 422,047 |
| | 442,284 |
| | 474,364 |
|
Separate Account (variable annuity) assets | | 2,308,134 |
| | 2,001,128 |
| | 2,316,900 |
| | 2,490,469 |
|
Total assets | | $ | 12,332,545 |
| | $ | 11,031,896 |
| | $ | 12,571,704 |
| | $ | 12,478,704 |
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| | | | | | | | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | Policy liabilities | | | | | | | | |
Investment contract and policy reserves | | $ | 6,207,888 |
| | $ | 5,711,193 |
| | $ | 6,320,577 |
| | $ | 6,234,452 |
|
Unpaid claims and claim expenses | | 412,272 |
| | 396,714 |
| | 444,558 |
| | 442,854 |
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Unearned premiums | | 285,215 |
| | 276,225 |
| | 266,406 |
| | 279,163 |
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Total policy liabilities | | 6,905,375 |
| | 6,384,132 |
| | 7,031,541 |
| | 6,956,469 |
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Other policyholder funds | | 672,845 |
| | 767,988 |
| | 741,859 |
| | 647,283 |
|
Other liabilities | | 434,626 |
| | 290,358 |
| | 404,421 |
| | 384,173 |
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Short-term debt | | 135,000 |
| | — |
| | 135,000 |
| | 135,000 |
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Long-term debt | | 297,953 |
| | 297,740 |
| | 302,172 |
| | 298,025 |
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Separate Account (variable annuity) liabilities | | 2,308,134 |
| | 2,001,128 |
| | 2,316,900 |
| | 2,490,469 |
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Total liabilities | | 10,753,933 |
| | 9,741,346 |
| | 10,931,893 |
| | 10,911,419 |
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Preferred stock, $0.001 par value, authorized 1,000,000 shares; none issued | | — |
| | — |
| | — |
| | — |
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Common stock, $0.001 par value, authorized 75,000,000 shares; issued, 2019, 66,063,569; 2018, 65,820,369 | | 66 |
| | 66 |
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Common stock, $0.001 par value, authorized 75,000,000 shares; issued, 2020, 66,218,003; 2019, 66,088,808 | | | 66 |
| | 66 |
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Additional paid-in capital | | 478,650 |
| | 475,109 |
| | 483,754 |
| | 480,962 |
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Retained earnings | | 1,331,663 |
| | 1,216,582 |
| | 1,375,737 |
| | 1,352,539 |
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Accumulated other comprehensive income (loss), net of tax: | | | | |
| | | | |
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Net unrealized investment gains on fixed maturity securities | | 266,381 |
| | 96,941 |
| | 279,129 |
| | 230,448 |
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Net funded status of benefit plans | | (12,185 | ) | | (12,185 | ) | | (10,767 | ) | | (10,767 | ) |
Treasury stock, at cost, 2019, 24,850,484 shares; 2018, 24,850,484 shares | | (485,963 | ) | | (485,963 | ) | |
Treasury stock, at cost, 2020, 24,902,579 shares; 2019, 24,850,484 shares | | | (488,108 | ) | | (485,963 | ) |
Total shareholders’ equity | | 1,578,612 |
| | 1,290,550 |
| | 1,639,811 |
| | 1,567,285 |
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Total liabilities and shareholders’ equity | | $ | 12,332,545 |
| | $ | 11,031,896 |
| | $ | 12,571,704 |
| | $ | 12,478,704 |
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See Notes to Consolidated Financial Statements.
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Horace Mann Educators Corporation | 2 | Quarterly Report on Form 10-Q |
HORACE MANN EDUCATORS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
($ in thousands, except per share data)
| | | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2019 | | 2018 | | 2019 | | 2018 | | 2020 | | 2019 | | 2020 | | 2019 |
Revenues | | |
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Insurance premiums and contract charges earned | | $ | 239,681 |
| | $ | 206,820 |
| | $ | 657,562 |
| | $ | 615,428 |
| | $ | 225,431 |
| | $ | 208,096 |
| | $ | 461,696 |
| | $ | 417,881 |
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Net investment income | | 93,071 |
| | 99,083 |
| | 279,329 |
| | 288,048 |
| | 80,410 |
| | 93,458 |
| | 162,685 |
| | 186,258 |
|
Net investment gains (losses) | | (2,156 | ) | | 2,803 |
| | 151,594 |
| | 1,884 |
| | 3,162 |
| | 146,333 |
| | (15,302 | ) | | 153,750 |
|
Other income | | 3,822 |
| | 2,612 |
| | 10,624 |
| | 7,704 |
| | 5,926 |
| | 6,223 |
| | 13,095 |
| | 12,097 |
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Total revenues | | 334,418 |
| | 311,318 |
| | 1,099,109 |
| | 913,064 |
| | 314,929 |
| | 454,110 |
| | 622,174 |
| | 769,986 |
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Benefits, losses and expenses | | | | | | | | | | | | | | | | |
Benefits, claims and settlement expenses | | 154,191 |
| | 161,846 |
| | 446,267 |
| | 473,686 |
| | 143,010 |
| | 152,692 |
| | 281,670 |
| | 292,076 |
|
Interest credited | | 53,576 |
| | 52,124 |
| | 160,092 |
| | 153,229 |
| | 50,674 |
| | 53,594 |
| | 102,219 |
| | 106,516 |
|
Operating expenses | | 61,414 |
| | 50,989 |
| | 169,637 |
| | 149,376 |
| | 55,775 |
| | 57,343 |
| | 116,437 |
| | 113,518 |
|
DAC unlocking and amortization expense | | 26,344 |
| | 26,066 |
| | 82,965 |
| | 79,357 |
| | 20,426 |
| | 31,648 |
| | 50,401 |
| | 56,621 |
|
Intangible asset amortization expense | | 3,781 |
| | — |
| | 4,863 |
| | — |
| | 3,686 |
| | 541 |
| | 7,372 |
| | 1,082 |
|
Interest expense | | 4,608 |
| | 3,253 |
| | 11,223 |
| | 9,717 |
| | 3,941 |
| | 3,312 |
| | 8,169 |
| | 6,615 |
|
Other expense - goodwill impairment | | — |
| | — |
| | 28,025 |
| | — |
| | — |
| | 28,025 |
| | — |
| | 28,025 |
|
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Total benefits, losses and expenses | | 303,914 |
| | 294,278 |
| | 903,072 |
| | 865,365 |
| | 277,512 |
| | 327,155 |
| | 566,268 |
| | 604,453 |
|
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Income before income taxes | | 30,504 |
| | 17,040 |
| | 196,037 |
| | 47,699 |
| | 37,417 |
| | 126,955 |
| | 55,906 |
| | 165,533 |
|
Income tax expense | | 5,050 |
| | 4,512 |
| | 44,595 |
| | 9,099 |
| | 6,839 |
| | 33,133 |
| | 6,856 |
| | 39,545 |
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Net income | | $ | 25,454 |
| | $ | 12,528 |
| | $ | 151,442 |
| | $ | 38,600 |
| | $ | 30,578 |
| | $ | 93,822 |
| | $ | 49,050 |
| | $ | 125,988 |
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Net income per share | | | | | | | | | | | | | | | | |
Basic | | $ | 0.61 |
| | $ | 0.30 |
| | $ | 3.63 |
| | $ | 0.93 |
| | $ | 0.73 |
| | $ | 2.25 |
| | $ | 1.17 |
| | $ | 3.02 |
|
Diluted | | $ | 0.60 |
| | $ | 0.30 |
| | $ | 3.61 |
| | $ | 0.93 |
| | $ | 0.73 |
| | $ | 2.24 |
| | $ | 1.17 |
| | $ | 3.01 |
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Weighted average number of shares and equivalent shares | | | | | | | | | | | | | | | | |
Basic | | 41,785 |
| | 41,683 |
| | 41,715 |
| | 41,586 |
| | 41,879 |
| | 41,762 |
| | 41,856 |
| | 41,685 |
|
Diluted | | 42,030 |
| | 41,850 |
| | 41,911 |
| | 41,727 |
| | 41,996 |
| | 41,921 |
| | 42,008 |
| | 41,851 |
|
| | | | | | | | | | | | | | | | |
Net investment gains (losses) | | | | | | | | | | | | | | | | |
Total other-than-temporary impairment losses on securities | | $ | (5 | ) | | $ | (70 | ) | | $ | (276 | ) | | $ | (1,357 | ) | | $ | (523 | ) | | $ | (34 | ) | | $ | (4,215 | ) | | $ | (271 | ) |
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 | ) | | (523 | ) | | (34 | ) | | (4,215 | ) | | (271 | ) |
Sales and other, net | | 608 |
| | (1,331 | ) | | 147,513 |
| | 2,661 |
| | 352 |
| | 142,067 |
| | 4,909 |
| | 146,905 |
|
Change in fair value - equity securities | | 1,081 |
| | 2,000 |
| | 8,029 |
| | (4,342 | ) | | 6,600 |
| | 3,441 |
| | (7,886 | ) | | 6,948 |
|
Change in fair value and gains realized on settlements - derivatives | | (3,840 | ) | | 2,204 |
| | (3,672 | ) | | 4,922 |
| |
Change in fair value and gains (losses) realized on settlements - derivatives | | | (3,267 | ) | | 859 |
| | (8,110 | ) | | 168 |
|
Total | | $ | (2,156 | ) | | $ | 2,803 |
| | $ | 151,594 |
| | $ | 1,884 |
| | $ | 3,162 |
| | $ | 146,333 |
| | $ | (15,302 | ) | | $ | 153,750 |
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See Notes to Consolidated Financial Statements.
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Horace Mann Educators Corporation | 3 | Quarterly Report on Form 10-Q |
HORACE MANN EDUCATORS CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
($ in thousands)
| | | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2019 | | 2018 | | 2019 | | 2018 | | 2020 | | 2019 | | 2020 | | 2019 |
Comprehensive income (loss) | | |
| | |
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Net income | | $ | 25,454 |
| | $ | 12,528 |
| | $ | 151,442 |
| | $ | 38,600 |
| | $ | 30,578 |
| | $ | 93,822 |
| | $ | 49,050 |
| | $ | 125,988 |
|
Other comprehensive income (loss), net of tax: | | |
| | |
| | | | | | |
| | |
| | | | |
Change in net unrealized investment gains (losses) on fixed maturity securities | | 63,304 |
| | (49,638 | ) | | 169,440 |
| | (209,178 | ) | | 142,450 |
| | (7,762 | ) | | 48,681 |
| | 106,136 |
|
Change in net funded status of benefit plans | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Cumulative effect of change in accounting principle | | — |
| | — |
| | — |
| | (15,041 | ) | |
Other comprehensive income (loss) | | 63,304 |
| | (49,638 | ) | | 169,440 |
| | (224,219 | ) | | 142,450 |
| | (7,762 | ) | | 48,681 |
| | 106,136 |
|
Total | | $ | 88,758 |
| | $ | (37,110 | ) | | $ | 320,882 |
| | $ | (185,619 | ) | | $ | 173,028 |
| | $ | 86,060 |
| | $ | 97,731 |
| | $ | 232,124 |
|
See Notes to Consolidated Financial Statements.
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Horace Mann Educators Corporation | 4 | Quarterly Report on Form 10-Q |
HORACE MANN EDUCATORS CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)
($ in thousands, except per share data)
| | | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2019 | | 2018 | | 2019 | | 2018 | | 2020 | | 2019 | | 2020 | | 2019 |
Common stock, $0.001 par value | | | | | | | | | | | | | | | | |
Beginning balance | | $ | 66 |
| | $ | 66 |
| | $ | 66 |
| | $ | 65 |
| | $ | 66 |
| | $ | 66 |
| | $ | 66 |
| | $ | 66 |
|
Options exercised | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Conversion of common stock units | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Conversion of restricted stock units | | — |
| | — |
| | — |
| | 1 |
| | — |
| | — |
| | — |
| | — |
|
Ending balance | | 66 |
| | 66 |
| | 66 |
| | 66 |
| | 66 |
| | 66 |
| | 66 |
| | 66 |
|
| | | | | | | | | | | | | | | | |
Additional paid-in capital | | | | | | | | | | | | | | | | |
Beginning balance | | 476,353 |
| | 470,652 |
| | 475,109 |
| | 464,246 |
| | 481,917 |
| | 474,336 |
| | 480,962 |
| | 475,109 |
|
Options exercised and conversion of common stock units and restricted stock units | | 447 |
| | 1,003 |
| | (1,314 | ) | | 3,262 |
| | 447 |
| | 344 |
| | 268 |
| | (1,761 | ) |
Share-based compensation expense | | 1,850 |
| | 1,941 |
| | 4,855 |
| | 6,088 |
| | 1,390 |
| | 1,673 |
| | 2,524 |
| | 3,005 |
|
Ending balance | | 478,650 |
| | 473,596 |
| | 478,650 |
| | 473,596 |
| | 483,754 |
| | 476,353 |
| | 483,754 |
| | 476,353 |
|
| | | | | | | | | | | | | | | | |
Retained earnings | | | | | | | | | | | | | | | | |
Beginning balance | | 1,318,329 |
| | 1,248,305 |
| | 1,216,582 |
| | 1,231,177 |
| | 1,357,833 |
| | 1,236,621 |
| | 1,352,539 |
| | 1,216,582 |
|
Net income | | 25,454 |
| | 12,528 |
| | 151,442 |
| | 38,600 |
| | 30,578 |
| | 93,822 |
| | 49,050 |
| | 125,988 |
|
Dividends, 2019, $0.2875, $0.8625 per share; 2018, $0.2850, $0.8550 per share | | (12,120 | ) | | (12,019 | ) | | (36,361 | ) | | (36,004 | ) | |
Dividends, 2020, $0.30, $0.60 per share; 2019, $0.2875, $0.5750 per share | | | (12,674 | ) | | (12,114 | ) | | (25,343 | ) | | (24,241 | ) |
Cumulative effect of change in accounting principle | | — |
| | — |
| | — |
| | 15,041 |
| | — |
| | — |
| | (509 | ) | | — |
|
Ending balance | | 1,331,663 |
| | 1,248,814 |
| | 1,331,663 |
| | 1,248,814 |
| | 1,375,737 |
| | 1,318,329 |
| | 1,375,737 |
| | 1,318,329 |
|
| | | | | | | | | | | | | | | | |
Accumulated other comprehensive income (loss), net of tax: | | | | | | | | | | | | | | | | |
Beginning balance | | 190,892 |
| | 112,379 |
| | 84,756 |
| | 286,960 |
| | 125,912 |
| | 198,654 |
| | 219,681 |
| | 84,756 |
|
Change in net unrealized investment gains (losses) on fixed maturity securities | | 63,304 |
| | (49,638 | ) | | 169,440 |
| | (209,178 | ) | | 142,450 |
| | (7,762 | ) | | 48,681 |
| | 106,136 |
|
Change in net funded status of benefit plans | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Cumulative effect of change in accounting principle | | — |
| | — |
| | — |
| | (15,041 | ) | |
Ending balance | | 254,196 |
| | 62,741 |
| | 254,196 |
| | 62,741 |
| | 268,362 |
| | 190,892 |
| | 268,362 |
| | 190,892 |
|
| | | | | | | | | | | | | | | | |
Treasury stock, at cost | | | | | | | | | | | | | | | | |
Beginning balance | | (485,963 | ) | | (480,961 | ) | | (485,963 | ) | | (480,875 | ) | | (488,108 | ) | | (485,963 | ) | | (485,963 | ) | | (485,963 | ) |
Acquisition of shares | | — |
| | — |
| | — |
| | (86 | ) | | — |
| | — |
| | (2,145 | ) | | — |
|
Ending balance | | (485,963 | ) | | (480,961 | ) | | (485,963 | ) | | (480,961 | ) | | (488,108 | ) | | (485,963 | ) | | (488,108 | ) | | (485,963 | ) |
| | | | | | | | | |
Shareholders' equity at end of period | | $ | 1,578,612 |
| | $ | 1,304,256 |
| | $ | 1,578,612 |
| | $ | 1,304,256 |
| | $ | 1,639,811 |
| | $ | 1,499,677 |
| | $ | 1,639,811 |
| | $ | 1,499,677 |
|
See Notes to Consolidated Financial Statements.
|
| | |
Horace Mann Educators Corporation | 5 | Quarterly Report on Form 10-Q |
HORACE MANN EDUCATORS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
($ in thousands)
| | | | Nine Months Ended September 30, | | Six Months Ended June 30, |
| | 2019 | | 2018 | | 2020 | | 2019 |
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 | ) | |
Net income | | | $ | 49,050 |
| | $ | 125,988 |
|
Adjustments to reconcile net income to net cash provided by operating activities | | | | | |
Net investment (gains) losses | | | 15,302 |
| | (153,750 | ) |
Amortization of premiums and accretion of discounts on fixed maturity securities, net | | | 2,837 |
| | (348 | ) |
Depreciation and intangible asset amortization | | | 11,655 |
| | 4,433 |
|
Share-based compensation expense | | | 2,786 |
| | 3,451 |
|
Other expense - goodwill impairment | | | — |
| | 28,025 |
|
Changes in: | | | | | |
Accrued investment income | | | (568 | ) | | 20,277 |
|
Insurance liabilities | | | 38,416 |
| | (51,018 | ) |
Premium receivables | | | 2,063 |
| | 3,541 |
|
Deferred policy acquisitions | | | 1,507 |
| | 3,766 |
|
Reinsurance recoverables | | | (2,860 | ) | | 20,718 |
|
Income tax liabilities | | | 7,215 |
| | 39,466 |
|
Other operating assets and liabilities | | | 16,683 |
| | 61,029 |
|
Other | | 5,711 |
| | (4,691 | ) | | 21,503 |
| | (7,742 | ) |
Net cash provided by operating activities | | 207,236 |
| | 217,474 |
| | 165,589 |
| | 97,836 |
|
| | | | | |
Cash flows - investing activities | | |
| | |
| | |
| | |
|
Fixed maturity securities | | |
| | |
| | |
| | |
|
Purchases | | (845,967 | ) | | (1,044,002 | ) | | (818,151 | ) | | (644,104 | ) |
Sales | | 651,058 |
| | 360,246 |
| | 294,162 |
| | 501,739 |
|
Maturities, paydowns, calls and redemptions | | 645,946 |
| | 577,425 |
| | 372,412 |
| | 342,998 |
|
Equity securities | | | | | | | | |
Purchases | | (10,510 | ) | | (8,578 | ) | | (11,752 | ) | | (5,282 | ) |
Sales and repayments | | 20,989 |
| | 8,493 |
| | 12,059 |
| | 17,122 |
|
Limited partnership interests | | | | | | | | |
Purchases | | (42,388 | ) | | (84,444 | ) | | (30,310 | ) | | (29,357 | ) |
Sales | | 36,108 |
| | 11,754 |
| | 5,666 |
| | 15,029 |
|
Change in short-term and other investments, net | | (99,702 | ) | | (4,700 | ) | | (19,058 | ) | | (156,748 | ) |
Acquisition of businesses, net of cash acquired | | (421,174 | ) | | — |
| |
Net cash used in investing activities | | (65,640 | ) | | (183,806 | ) | |
| | | | | |
Acquisition of business, net of cash acquired | | | — |
| | (18,198 | ) |
Net cash provided by (used in) investing activities | | | (194,972 | ) | | 23,199 |
|
Cash flows - financing activities | | |
| | |
| | |
| | |
|
Dividends paid to shareholders | | (35,477 | ) | | (35,016 | ) | | (24,777 | ) | | (23,630 | ) |
Principal borrowings on Bank Credit Facility | | 135,000 |
| | — |
| |
FHLB borrowings | | | 4,000 |
| | — |
|
Acquisition of treasury stock | | — |
| | (86 | ) | | (2,145 | ) | | — |
|
Proceeds from exercise of stock options | | 1,105 |
| | 3,191 |
| | 899 |
| | 722 |
|
Withholding tax payments on RSUs tendered | | (3,560 | ) | | (2,190 | ) | | (1,517 | ) | | (3,366 | ) |
Annuity contracts: variable, fixed and FHLB funding agreements | | |
| | |
| | |
| | |
|
Deposits | | 519,636 |
| | 326,003 |
| | 325,019 |
| | 266,310 |
|
Benefits, withdrawals and net transfers to Separate Account (variable annuity) assets | | (313,653 | ) | | (333,473 | ) | | (196,972 | ) | | (214,243 | ) |
Principal repayment on FHLB funding agreements | | (275,000 | ) | | — |
| |
Life policy accounts | | | | |
| | | | |
|
Deposits | | 7,143 |
| | 5,618 |
| | 4,580 |
| | 4,638 |
|
Withdrawals and surrenders | | (2,682 | ) | | (3,766 | ) | | (2,126 | ) | | (1,733 | ) |
Change in deposit asset on reinsurance, net | | (130,740 | ) | | — |
| |
Change in deposit asset on reinsurance | | | (19,894 | ) | | (134,682 | ) |
Change in book overdrafts | | (15,925 | ) | | 4,855 |
| | (802 | ) | | (19,341 | ) |
Net cash used in financing activities | | (114,153 | ) | | (34,864 | ) | |
| | | | | |
Net cash provided by (used in) financing activities | | | 86,265 |
| | (125,325 | ) |
Net increase (decrease) in cash | | 27,443 |
| | (1,196 | ) | | 56,882 |
| | (4,290 | ) |
| | | | | |
Cash at beginning of period | | 11,906 |
| | 7,627 |
| | 25,508 |
| | 11,906 |
|
| | | | | |
Cash at end of period | | $ | 39,349 |
| | $ | 6,431 |
| | $ | 82,390 |
| | $ | 7,616 |
|
See Notes to Consolidated Financial Statements.
|
| | |
Horace Mann Educators Corporation | 6 | Quarterly Report on Form 10-Q |
HORACE MANN EDUCATORS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SeptemberJune 30, 20192020 and 2018
($ in thousands, except per share data and unless noted otherwise)2019
NoteNOTE 1 - Basis of Presentation and Significant Accounting Policies
Business
The accompanying unaudited consolidated financial statements of Horace Mann Educators Corporation (HMEC;is a holding company for insurance subsidiaries that market and together with its subsidiaries,underwrite personal lines of property and casualty insurance products (primarily personal lines of automobile and property insurance), supplemental insurance products (primarily heart, cancer, accident and limited short-term supplemental disability coverages), retirement products (primarily tax-qualified annuities) and life insurance, primarily to K-12 teachers, administrators and other employees of public schools and their families (collectively, HMEC, the Company or Horace Mann).
On July 1, 2019, the Company acquired NTA Life Enterprises, LLC (NTA). As a result, the Company’s reporting segments were changed effective in the third quarter of 2019. A newly created Supplemental segment was added to report on the personal lines of supplemental insurance products that are marketed and underwritten by NTA.
Basis of Presentation
The accompanying Consolidated Financial Statements have been prepared in conformity with accounting principles generally accepted in the U.S.United States of America (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. These Consolidated Financial Statements and Notes should be read in conjunction with the Consolidated Financial Statements and Notes thereto included in Part II - Item 8 of the Company's Annual Report on Form 10-K for the year ended December 31, 2019. The Company believes that these consolidatedresults of operations for the three and six months ended June 30, 2020 are not necessarily indicative of the results to be expected for the full year.
The accompanying Consolidated Financial Statements and Notes are unaudited. These financial statements containreflect all adjustments (consisting(generally consisting only of normal recurring accruals) which are, in the opinion of management, necessary to present fairlyfor the Company'sfair presentation of the consolidated financial position, as of September 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 nine monthinterim periods. The Company's significant accounting policies are summarized in Part II - Item 8, Note 1 of the Company's Annual Report on Form 10-K for the year ended December 31, 2019.
Effective for the year ended December 31, 2019, the Company decided to change the approach it uses for presentation in its Consolidated Statements of Cash Flows from the direct method to the indirect method as management considers presentation under the indirect method as more comparable to the method used by others in the insurance industry. Accordingly, the Company has recast all prior periods ended September 30, 2019presented in the Consolidated Statements of Cash Flows to conform to the current year’s presentation.
The Company has reclassified the presentation of certain prior period information to conform to the current year's presentation.
Consolidation
All intercompany transactions and 2018. balances between HMEC and its subsidiaries and affiliates have been eliminated.
Use of Estimates
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 these estimates.
The subsidiaries of HMEC market and underwrite personal lines of property and casualty insurance products (primarily personal lines of automobile and property insurance), retirement products (primarily tax-qualified annuities) and life insurance, primarily to K-12 teachers, administrators and other employees of public schools and their families. HMEC's principal operating subsidiaries are Horace Mann Life Insurance Company, Horace Mann Insurance Company, Teachers Insurance Company, Horace Mann Property & Casualty Insurance Company, Horace Mann Lloyds and National Teachers Associates Life Insurance Company (NTA). |
| | |
Horace Mann Educators Corporation | 7 | Quarterly Report on Form 10-Q |
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's Annual Report on Form 10-K for the year ended December 31, 2018.
The results of operations for the three and nine month periods ended September 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.
NoteNOTE 1 - Basis of Presentation (Continued)and Significant Accounting Policies (continued)
Cash
Cash reported on the Consolidated Balance Sheet at September 30, 2019 includes restricted cash in the amountThe most significant accounting estimates include valuation of $672 thousand, representing funds held in segregated accounts for insurance premiums to be remitted to insurance companies on behalf of the Company’s customers or for the purpose of reimbursement to cafeteria plan participants.
Investment Contract and Policy Reserves
The following table summarizes investment contract and policy reserves.
|
| | | | | | | | |
($ in thousands) | | September 30, 2019 | | December 31, 2018 |
Investment contract reserves | | $ | 4,658,148 |
| | $ | 4,555,856 |
|
Policy reserves | | 1,549,740 |
| | 1,155,337 |
|
Total | | $ | 6,207,888 |
| | $ | 5,711,193 |
|
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) onhard-to-value fixed maturity securities (including evaluation of other-than-temporary impairments), evaluation of goodwill and the after tax change in net funded statusintangible assets for impairment, valuation of benefit planssupplemental, annuity and life deferred policy acquisition costs, valuation of liabilities for the periods as shown in the Consolidated Statementsproperty and casualty unpaid claims and claim expenses, valuation of Changes in Shareholders’ Equity. The following tables reconcile these components.certain investment contracts and policy reserves and valuation of assets acquired and liabilities assumed under purchase accounting.
|
| | | | | | | | | | | | |
($ in thousands) | | Net Unrealized Investment Gains (Losses) on Fixed Maturity Securities (1)(2) | | Net Funded Status of Benefit Plans (1) | | Total (1) |
Beginning balance, July 1, 2019 | | $ | 203,077 |
| | $ | (12,185 | ) | | $ | 190,892 |
|
Other comprehensive income (loss) before reclassifications | | 64,577 |
| | — |
| | 64,577 |
|
Amounts reclassified from AOCI | | (1,273 | ) | | — |
| | (1,273 | ) |
Net current period other comprehensive income (loss) | | 63,304 |
| | — |
| | 63,304 |
|
Ending balance, September 30, 2019 | | $ | 266,381 |
| | $ | (12,185 | ) | | $ | 254,196 |
|
| | | | | | |
Beginning balance, January 1, 2019 | | $ | 96,941 |
| | $ | (12,185 | ) | | $ | 84,756 |
|
Other comprehensive income (loss) before reclassifications | | 292,043 |
| | — |
| | 292,043 |
|
Amounts reclassified from AOCI | | (122,603 | ) | | — |
| | (122,603 | ) |
Net current period other comprehensive income (loss) | | 169,440 |
| | — |
| | 169,440 |
|
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, $1,612 thousand and $155,194 thousand, are included in net investment gains (losses) and the related income tax expenses, $339 thousand and $32,591 thousand, are included in income tax expense in the Consolidated Statements of Operations for the three and nine month periods ended September 30, 2019, respectively. |
Note 1 - BasisAdoption of Presentation (Continued)
|
| | | | | | | | | | | | |
($ in thousands) | | Net Unrealized Investment Gains (Losses) on Fixed Maturity Securities (1)(2) | | Net Funded Status of Benefit Plans (1) | | Total (1) |
Beginning balance, July 1, 2018, | | $ | 125,596 |
| | $ | (13,217 | ) | | $ | 112,379 |
|
Other comprehensive income (loss) before reclassifications | | (49,165 | ) | | — |
| | (49,165 | ) |
Amounts reclassified from AOCI | | (473 | ) | | — |
| | (473 | ) |
Net current period other comprehensive income (loss) | | (49,638 | ) | | — |
| | (49,638 | ) |
Ending balance, September 30, 2018 | | $ | 75,958 |
| | $ | (13,217 | ) | | $ | 62,741 |
|
| | | | | | |
Beginning balance, January 1, 2018 | | $ | 300,177 |
| | $ | (13,217 | ) | | $ | 286,960 |
|
Other comprehensive income (loss) before reclassifications | | (211,577 | ) | | — |
| | (211,577 | ) |
Amounts reclassified from AOCI | | 2,399 |
| | — |
| | 2,399 |
|
Cumulative effect of change in accounting principle (3) | | (15,041 | ) | | — |
| | (15,041 | ) |
Net current period other comprehensive income (loss) | | (224,219 | ) | | — |
| | (224,219 | ) |
Ending balance, September 30, 2018 | | $ | 75,958 |
| | $ | (13,217 | ) | | $ | 62,741 |
|
______________
| |
(1)
| All amounts are net of tax. |
| |
(2)
| The pretax amounts reclassified from AOCI, $599 thousand and $(3,037) thousand, are included in Net investment gains (losses) and the related income tax expenses, $126 thousand and $(638) thousand, are included in Income tax expense in the Consolidated Statements of Operations for the three and nine month periods ended September 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.
AdoptedNew 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 continues 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.
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 FASBFinancial Accounting Standards Board (FASB) issued guidance to improvewhich revises the credit loss recognition criteria for certain financial reporting by requiring timelier recording of credit losses on loans and other financial instruments,assets measured at amortized cost, including reinsurance receivables, held by companies.recoverables. The new guidance replaces the existing incurred loss impairment methodologyrecognition model with an expected loss recognition model. The objective of the expected credit loss model is for financial instruments other than available for sale debt securities and requires an organizationa reporting entity to measure and recognize all currentits estimate of expected credit losses (CECL) for affected financial assets heldin a valuation allowance that when deducted from the amortized cost basis of the related financial assets results in a net carrying value at the amount expected to be collected. A reporting date based on historical experience,entity must consider all relevant information available when estimating expected credit losses, including details about past events, 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. Anyforecasts over the life of an asset. Financial assets may be evaluated individually or on a pooled basis when they share similar risk characteristics. The measurement of credit losses related tofor available for sale debt securities will be recorded through an allowance formeasured at fair value is not affected except that credit losses with this allowance having a limit equalrecognized are limited to the amount by which fair value is below amortized cost.cost and the carrying value adjustment is recognized through a valuation allowance which may change over time but once recorded cannot subsequently be reduced to an amount below zero. 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 permitted2019, and for most affected instruments must be adopted using a modified retrospective approach, with a cumulative effect adjustment recorded to beginning after December 15, 2018. Upon adoption,retained earnings.
The Company’s implementation activities are complete and the impacts related to the Company’s commercial mortgage loan portfolio, agent advances, reinsurance recoverables and off-balance-sheet credit exposures for unfunded commercial mortgage loan commitments. The Company adopted the new guidance will be applied using the modified-retrospective approach, by whichon January 1, 2020 and recognized a cumulative-effectcumulative effect adjustment will be made tothat decreased retained earnings asby $0.5 million.
Future Adoption of the beginning of the first reporting period in which the guidance is effective. The guidance will have the most impact on the Company's available for sale fixed maturity securities portfolio. However, as the Company's fixed maturity securities portfolio is weighted towards higher rated bonds (96.7% investment grade, based on fair value, with an average quality rating of A+ at September 30, 2019), the Company does not expect that the effect of adoption will be material.
New Accounting Standards
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, 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 currently evaluating the impact this guidance will have on the results of operations and financial position of the Company.
Accounting Policies
The following accounting policy has been updated to reflect the Company's adoption of Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments as described above.
The Company conducts a periodic review to identify and evaluate invested assets that may have credit impairments.
|
| | |
Horace Mann Educators Corporation | 8 | Quarterly Report on Form 10-Q |
Note 2NOTE 1 - Acquisitions
Basis of Presentation and Significant Accounting Policies (continued)
On January 2, 2019,Credit Impairments of Fixed Maturity Securities
Some of the factors considered in assessing impairment of fixed maturity securities due to credit-related factors include: (1) the extent to which the fair value has been less than amortized cost; (2) the financial condition, near-term and long-term prospects for the issuer, including the relevant industry conditions and trends, and implications of rating agency actions and offering prices; (3) the likelihood of the recoverability of principal and interest; and (4) whether it is more likely than not that the Company completed its acquisitionwill be required to sell the investment prior to an anticipated recovery in value.
Beginning on January 1, 2020, credit losses are recognized through an allowance account. See Note 1 - Adoption of New Accounting Standards - Measurement of Credit Losses on Financial Instruments for additional information.
For fixed maturity securities that the Company does not intend to sell or for which it is more likely than not that the Company would not be required to sell before an anticipated recovery in value, the Company separates the credit loss component of the impairment from the amount related to all other factors and reports the equity interestscredit loss component in Benefit Consultants Group, Inc. (BCG) for a total purchase consideration of $25 million. BCG provides advisory and benefit plan record keeping services. BCG's results arenet investment gains (losses). The impairment related to all other factors (non-credit factors) is reported in Retirement.other comprehensive income (OCI). The acquisition of BCG gave riseallowance is adjusted for any additional credit losses and subsequent recoveries. Upon recognizing a credit loss, the cost basis is not adjusted.
For fixed maturity securities where the Company records a credit loss, a determination is made as to recognition of intangible assets of $16.2 million and goodwill of $10.1 million as a resultthe cause of the purchase accounting. The intangible assetsimpairment and whether the Company expects a recovery in the value. For fixed maturity securities where the Company expects a recovery in value, the constant effective yield method is utilized, and the investment is amortized to par.
For fixed maturity securities the Company intends to sell or for which it is more likely than not that are amortizable have lives of 10the Company will be required to 16 years. See Note 14 for further information. Thesell before an anticipated recovery in value, the full amount of goodwill thatthe impairment is included in net investment gains (losses). The new cost basis of the investment is the previous amortized cost basis less the impairment recognized in net investment gains (losses). The new cost basis is not adjusted for any subsequent recoveries in fair value.
The Company reports investment income accrued separately from fixed maturity securities, available for sale, and has elected not to measure an allowance for credit losses for investment income accrued. Investment income accrued is written off through net investment gains (losses) at the time the issuer of the fixed maturity security defaults or is expected to default on payments.
Uncollectible available for sale fixed maturity securities are written off when the Company determines that no additional payments of principal or interest will be deductible for federal income tax purposes is $10.1 million.received.
Subsequent Event
OnPG&E Corporation and Pacific Gas and Electric Company (together, PG&E) emerged from bankruptcy on July 1, 2019,2020, the Company acquired alldate the equity interests in NTA pursuant to a Purchase Agreement (Agreement) dated asDebtors' and Shareholder Proponents' Joint Chapter 11 Plan of December 10, 2018. The purchase price of the transaction was $425 million which includes $20 million representing NTA’s share of "adjusted earnings" (as determined inReorganization Dated June 19, 2020 (the Plan) became effective. In accordance with the terms of the Agreement)Plan, PG&E funded a trust from July 1,which the Company and other subrogation claimants will receive payments related to the 2018 California Camp Fire in the third quarter of 2020. The Company expects to July 1, 2019. The purchase price adjustment is subjectrecognize in the third quarter of 2020 a subrogation benefit related to finalization within 135 daysthese claims of approximately $4.8 million pretax, net of expenses and amounts that would inure to the benefit 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 (primarily heart, cancer, accident and limited supplemental disability coverages) 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. NTA's results are being reported in a newly created reporting 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 estimatesCompany's reinsurers, and the allocationreturn 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$3.5 million pretax 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 allocationreinsurance reinstatement premiums for a total of the purchase price, the fair values of the assets acquired and liabilities assumed were as follows:$8.3 million.
|
| | | | |
($ 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) Horace Mann Educators Corporation | 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.9 | Quarterly Report on Form 10-Q |
| |
(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 3NOTE 2 - Investments
Net Investment Income
The components of net investment income for the following periods were:
|
| | | | | | | | | | | | | | | | |
($ in thousands) | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
Fixed maturity securities | | $ | 58,861 |
| | $ | 83,561 |
| | $ | 118,307 |
| | $ | 167,877 |
|
Equity securities | | 1,182 |
| | 1,392 |
| | 2,390 |
| | 2,590 |
|
Limited partnership interests | | (3,485 | ) | | 9,449 |
| | (6,184 | ) | | 15,900 |
|
Short-term and other investments | | 2,784 |
| | (21,451 | ) | | 5,641 |
| | (18,063 | ) |
Investment expenses | | (2,886 | ) | | (2,688 | ) | | (5,111 | ) | | (5,241 | ) |
Net investment income - investment portfolio | | 56,456 |
| | 70,263 |
| | 115,043 |
| | 163,063 |
|
Investment income - deposit asset on reinsurance | | 23,954 |
| | 23,195 |
| | 47,642 |
| | 23,195 |
|
Total net investment income | | $ | 80,410 |
| | $ | 93,458 |
| | $ | 162,685 |
| | $ | 186,258 |
|
Net Investment Gains (Losses)
Net investment gains (losses) for the following periods were:
|
| | | | | | | | | | | | | | | | |
($ in thousands) | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
Fixed maturity securities | | $ | (642 | ) | | $ | 141,548 |
| | $ | 460 |
| | $ | 141,749 |
|
Equity securities | | 7,071 |
| | 3,926 |
| | (7,652 | ) | | 11,833 |
|
Short-term investments and other | | (3,267 | ) | | 859 |
| | (8,110 | ) | | 168 |
|
Net investment gains (losses) | | $ | 3,162 |
| | $ | 146,333 |
| | $ | (15,302 | ) | | $ | 153,750 |
|
The Company, from time to time, sells invested assets 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 or ability to hold an invested asset. The types of events that may result in a sale include significant changes in the economic facts and circumstances related to the invested asset, significant unforeseen changes in liquidity needs, or changes in the Company's investment strategy.
Net Investment Gains (Losses) by Transaction Type
The following table reconciles net investment gains (losses) pretax by transaction type:
|
| | | | | | | | | | | | | | | | |
($ in thousands) | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
Credit impairment write-downs | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Change in intent write-downs | | (523 | ) | | (34 | ) | | (4,215 | ) | | (271 | ) |
Net other-than-temporary impairment losses on securities recognized in earnings | | (523 | ) | | (34 | ) | | (4,215 | ) | | (271 | ) |
Sales and other, net | | 352 |
| | 142,067 |
| | 4,909 |
| | 146,905 |
|
Change in fair value - equity securities | | 6,600 |
| | 3,441 |
| | (7,886 | ) | | 6,948 |
|
Change in fair value and gains (losses) realized on settlements - derivatives | | (3,267 | ) | | 859 |
| | (8,110 | ) | | 168 |
|
Net investment gains (losses) | | $ | 3,162 |
| | $ | 146,333 |
| | $ | (15,302 | ) | | $ | 153,750 |
|
|
| | |
Horace Mann Educators Corporation | 10 | Quarterly Report on Form 10-Q |
NOTE 2 - Investments (continued)
Fixed Maturity Securities
The Company'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 |
September 30, 2019 | | | | | | | | |
Fixed maturity securities | | | | | | | | |
U.S. Government and federally sponsored agency obligations: (1) | | | | | | | | |
Mortgage-backed securities | | $ | 698,794 |
| | $ | 55,868 |
| | $ | 307 |
| | $ | 754,355 |
|
Other, including U.S. Treasury securities | | 430,149 |
| | 28,161 |
| | 135 |
| | 458,175 |
|
Municipal bonds | | 1,511,967 |
| | 164,811 |
| | 356 |
| | 1,676,422 |
|
Foreign government bonds | | 45,301 |
| | 2,616 |
| | 2 |
| | 47,915 |
|
Corporate bonds | | 1,465,217 |
| | 121,861 |
| | 1,970 |
| | 1,585,108 |
|
Other mortgage-backed securities | | 1,302,005 |
| | 23,465 |
| | 7,885 |
| | 1,317,585 |
|
Totals | | $ | 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 |
|
Other, including U.S. Treasury securities | | 835,096 |
| | 16,127 |
| | 17,681 |
| | 833,542 |
|
Municipal bonds | | 1,884,313 |
| | 133,150 |
| | 13,494 |
| | 2,003,969 |
|
Foreign government bonds | | 83,343 |
| | 2,321 |
| | 760 |
| | 84,904 |
|
Corporate bonds | | 2,054,105 |
| | 64,296 |
| | 38,891 |
| | 2,079,510 |
|
Other mortgage-backed securities | | 1,739,016 |
| | 10,467 |
| | 23,531 |
| | 1,725,952 |
|
Totals | | $ | 7,373,911 |
| | $ | 249,085 |
| | $ | 107,678 |
| | $ | 7,515,318 |
|
______________ |
| | | | | | | | | | | | | | | | |
($ in thousands) | | Amortized Cost | | Unrealized Gains | | Unrealized Losses | | Fair Value |
June 30, 2020 | | | | | | | | |
Fixed maturity securities | | | | | | | | |
U.S. Government and federally sponsored agency obligations: (1) | | | | | | | | |
Mortgage-backed securities | | $ | 635,342 |
| | $ | 83,843 |
| | $ | 211 |
| | $ | 718,974 |
|
Other, including U.S. Treasury securities | | 333,428 |
| | 41,453 |
| | — |
| | 374,881 |
|
Municipal bonds | | 1,633,297 |
| | 174,211 |
| | 1,958 |
| | 1,805,550 |
|
Foreign government bonds | | 39,643 |
| | 3,907 |
| | — |
| | 43,550 |
|
Corporate bonds | | 1,705,963 |
| | 169,498 |
| | 13,021 |
| | 1,862,440 |
|
Other asset-backed securities | | 1,256,732 |
| | 16,978 |
| | 57,122 |
| | 1,216,588 |
|
Totals | | $ | 5,604,405 |
| | $ | 489,890 |
| | $ | 72,312 |
| | $ | 6,021,983 |
|
| | | | | | | | |
December 31, 2019 | | | | | | | | |
Fixed maturity securities | | | | | | | | |
U.S. Government and federally sponsored agency obligations: (1) | | | | | | | | |
Mortgage-backed securities | | $ | 684,543 |
| | $ | 41,263 |
| | $ | 1,487 |
| | $ | 724,319 |
|
Other, including U.S. Treasury securities | | 436,665 |
| | 22,824 |
| | 621 |
| | 458,868 |
|
Municipal bonds | | 1,545,787 |
| | 141,996 |
| | 1,580 |
| | 1,686,203 |
|
Foreign government bonds | | 42,801 |
| | 2,569 |
| | — |
| | 45,370 |
|
Corporate bonds | | 1,464,444 |
| | 118,775 |
| | 1,795 |
| | 1,581,424 |
|
Other asset-backed securities | | 1,282,740 |
| | 20,883 |
| | 8,131 |
| | 1,295,492 |
|
Totals | | $ | 5,456,980 |
| | $ | 348,310 |
| | $ | 13,614 |
| | $ | 5,791,676 |
|
| |
(1) | Fair value includes securities issued by Federal National Mortgage Association (FNMA) of $429,676 thousand$392.6 million and $441,308 thousand;$405.1 million; Federal Home Loan Mortgage Corporation (FHLMC) of $290,964 thousand$312.9 million and $417,308 thousand;$283.1 million; and Government National Mortgage Association (GNMA) of $154,226 thousand$145.6 million and $96,466 thousand$147.4 million as of SeptemberJune 30, 20192020 and December 31, 2018,2019, respectively. |
|
| | |
Horace Mann Educators Corporation | 11 | Quarterly Report on Form 10-Q |
Note 3NOTE 2 - Investments (Continued)(continued)
The following table presents the fair value and gross unrealized losses offor fixed maturity securities in an unrealized loss position at SeptemberJune 30, 20192020 and December 31, 2018,2019, respectively. The Company views the decrease in fair value of all of the fixed maturity securities with unrealized losses at SeptemberJune 30, 2019 --2020 — which was driven largely by increasing interest rates, spread widening, financial market illiquidity and/or market volatility from the date of acquisition --— as temporary. As of SeptemberJune 30, 2019,2020, the Company has not made the decision to sell and it is not more likely than not the Company will be required to sell fixed maturity securities with unrealized losses before an anticipated recovery of the amortized cost basis.in value. Therefore, it was determined that the unrealized losses on the securities presented in the table below were not other-than-temporarily impaired as of SeptemberJune 30, 2019.2020.
| | ($ 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 |
September 30, 2019 | | | | | | | | | | | | | |
June 30, 2020 | | | | | | | | | | | | | |
Fixed maturity securities | | | | | | | | | | | | | | | | | | | | | | | | |
U.S. Government and federally sponsored agency obligations: | | | | | | | | | | | | | | | | | | | | | | | | |
Mortgage-backed securities | | $ | 21,323 |
| | $ | 204 |
| | $ | 2,795 |
| | $ | 103 |
| | $ | 24,118 |
| | $ | 307 |
| | $ | 8,344 |
| | $ | 130 |
| | $ | 933 |
| | $ | 81 |
| | $ | 9,277 |
| | $ | 211 |
|
Other | | 12,712 |
| | 128 |
| | 2,024 |
| | 7 |
| | 14,736 |
| | 135 |
| | 37 |
| | — |
| | — |
| | — |
| | 37 |
| | — |
|
Municipal bonds | | 11,707 |
| | 74 |
| | 13,185 |
| | 282 |
| | 24,892 |
| | 356 |
| | 81,279 |
| | 1,958 |
| | — |
| | — |
| | 81,279 |
| | 1,958 |
|
Foreign government bonds | | 2,500 |
| | 2 |
| | — |
| | — |
| | 2,500 |
| | 2 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Corporate bonds | | 57,329 |
| | 1,145 |
| | 16,371 |
| | 825 |
| | 73,700 |
| | 1,970 |
| | 209,868 |
| | 12,127 |
| | 6,060 |
| | 894 |
| | 215,928 |
| | 13,021 |
|
Other mortgage-backed securities | | 320,293 |
| | 3,498 |
| | 293,852 |
| | 4,387 |
| | 614,145 |
| | 7,885 |
| |
Other asset-backed securities | | | 448,358 |
| | 38,339 |
| | 387,453 |
| | 18,783 |
| | 835,811 |
| | 57,122 |
|
Total | | $ | 425,864 |
| | $ | 5,051 |
| | $ | 328,227 |
| | $ | 5,604 |
| | $ | 754,091 |
| | $ | 10,655 |
| | $ | 747,886 |
| | $ | 52,554 |
| | $ | 394,446 |
| | $ | 19,758 |
| | $ | 1,142,332 |
| | $ | 72,312 |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
Number of positions with a gross unrealized loss | | 214 |
| | | | 102 |
| | | | 316 |
| | | | 594 |
| | | | 109 |
| | | | 703 |
| | |
Fair value as a percentage of total fixed maturity securities fair value | | 7.3 | % | | | | 5.6 | % | | | | 12.9 | % | | | |
Fair value as a percentage of total fixed maturity securities at fair value | | | 12.4 | % | | | | 6.6 | % | | | | 19.0 | % | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2018 | | | | | | | | | | | | | |
December 31, 2019 | | | | | | | | | | | | | |
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 |
| | $ | 72,422 |
| | $ | 1,282 |
| | $ | 2,620 |
| | $ | 205 |
| | $ | 75,042 |
| | $ | 1,487 |
|
Other | | 263,497 |
| | 6,746 |
| | 246,213 |
| | 10,935 |
| | 509,710 |
| | 17,681 |
| | 38,341 |
| | 619 |
| | 1,527 |
| | 2 |
| | 39,868 |
| | 621 |
|
Municipal bonds | | 291,869 |
| | 7,603 |
| | 95,297 |
| | 5,891 |
| | 387,166 |
| | 13,494 |
| | 91,195 |
| | 977 |
| | 9,160 |
| | 603 |
| | 100,355 |
| | 1,580 |
|
Foreign government bonds | | 16,250 |
| | 760 |
| | — |
| | — |
| | 16,250 |
| | 760 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Corporate bonds | | 818,519 |
| | 27,429 |
| | 99,171 |
| | 11,462 |
| | 917,690 |
| | 38,891 |
| | 58,198 |
| | 886 |
| | 16,622 |
| | 909 |
| | 74,820 |
| | 1,795 |
|
Other mortgage-backed securities | | 913,858 |
| | 16,076 |
| | 291,442 |
| | 7,455 |
| | 1,205,300 |
| | 23,531 |
| |
Other asset-backed securities | | | 218,710 |
| | 1,970 |
| | 442,791 |
| | 6,161 |
| | 661,501 |
| | 8,131 |
|
Total | | $ | 2,497,440 |
| | $ | 63,640 |
| | $ | 889,418 |
| | $ | 44,038 |
| | $ | 3,386,858 |
| | $ | 107,678 |
| | $ | 478,866 |
| | $ | 5,734 |
| | $ | 472,720 |
| | $ | 7,880 |
| | $ | 951,586 |
| | $ | 13,614 |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
Number of positions with a gross unrealized loss | | 1,052 |
| | | | 359 |
| | | | 1,411 |
| | | | 330 |
| | | | 137 |
| | | | 467 |
| | |
Fair value as a percentage of total fixed maturity securities fair value | | 33.2 | % | | | | 11.8 | % | | | | 45.0 | % | | | |
Fair value as a percentage of total fixed maturity securities at fair value | | | 8.3 | % | | | | 8.2 | % | | | | 16.5 | % | | |
Fixed maturity securities with an investment grade rating represented 77.5%84.5% of the gross unrealized losses as of SeptemberJune 30, 2019.2020. 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 the amortized cost basis.
Note 3 - Investments (Continued) |
| | |
Horace Mann Educators Corporation | 12 | Quarterly Report on Form 10-Q |
NOTE 2 - Investments (continued)
Credit Losses
The following table summarizes the cumulative amounts related to the Company's credit loss component of other-than-temporary impairment (OTTI) losses on fixed maturity securities held as of June 30, 2020 and 2019 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 an anticipated recovery in value, for which the non-credit portions of OTTI losses were recognized in OCI:
|
| | | | | | | | |
($ in thousands) | | Six Months Ended June 30, |
| | 2020 | | 2019 |
Cumulative credit loss (1) | | | | |
Beginning of period | | $ | 1,529 |
| | $ | 1,529 |
|
New credit losses | | 184 |
| | — |
|
Increases to previously recognized credit losses | | — |
| | — |
|
Losses related to securities sold or paid down during the period | | (103 | ) | | — |
|
| | $ | 1,610 |
| | $ | 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 an anticipated recovery of value. |
For the three and six months ended June 30, 2020, there was no allowance recognized for current expected credit losses with respect to fixed maturity securities classified as available for sale.
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' 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 mortgage-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, 2020 |
| | June 30, 2020 | | December 31, 2019 | | Fair Value | | Amortized Cost |
Estimated expected maturity: | | | | | | | | |
Due in 1 year or less | | 4.0 | % | | 3.6 | % | | $ | 240,942 |
| | $ | 240,701 |
|
Due after 1 year through 5 years | | 27.9 | % | | 27.4 | % | | 1,680,037 |
| | 1,650,193 |
|
Due after 5 years through 10 years | | 30.1 | % | | 29.6 | % | | 1,814,204 |
| | 1,680,118 |
|
Due after 10 years through 20 years | | 24.7 | % | | 26.1 | % | | 1,487,294 |
| | 1,314,841 |
|
Due after 20 years | | 13.3 | % | | 13.3 | % | | 799,506 |
| | 718,552 |
|
Total | | 100.0 | % | | 100.0 | % | | $ | 6,021,983 |
| | $ | 5,604,405 |
|
| | | | | | | | |
Average option-adjusted duration, in years | | 6.2 |
| | 6.0 |
| | | | |
|
| | |
Horace Mann Educators Corporation | 13 | Quarterly Report on Form 10-Q |
NOTE 2 - 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, |
| | 2020 | | 2019 (1) | | 2020 | | 2019 (1) |
Fixed maturity securities | | | | | | | | |
Proceeds received | | $ | 196,004 |
| | $ | 442,015 |
| | $ | 294,162 |
| | $ | 501,739 |
|
Gross gains realized | | 5,506 |
| | 147,774 |
| | 10,285 |
| | 148,316 |
|
Gross losses realized | | (5,625 | ) | | (5,976 | ) | | (5,893 | ) | | (6,081 | ) |
| | | | | | | | |
Equity securities | | | | | | | | |
Proceeds received | | $ | 10,602 |
| | $ | 1,633 |
| | $ | 12,059 |
| | $ | 17,122 |
|
Gross gains realized | | 1,721 |
| | 389 |
| | 2,040 |
| | 5,134 |
|
Gross losses realized | | (1,249 | ) | | (166 | ) | | (1,805 | ) | | (510 | ) |
| |
(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 $2.9 billion block of in force fixed and variable annuity business. See Note 5 for further information. |
Net Unrealized Investment Gains (Losses) on Fixed Maturity Securities
The following table reconciles net unrealized investment gains (losses) on fixed maturity securities, net of tax, included in accumulated other comprehensive income (AOCI), before the impact of DAC:
|
| | | | | | | | | | | | | | | | |
($ in thousands) | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
Net unrealized investment gains (losses) on fixed maturity securities, net of tax | | | | | | | | |
Beginning of period | | $ | 149,876 |
| | $ | 245,319 |
| | $ | 264,410 |
| | $ | 111,712 |
|
Change in net unrealized investment gains (losses) on fixed maturity securities | | 174,932 |
| | 100,693 |
| | 71,159 |
| | 240,705 |
|
Reclassification of net investment (gains) losses on securities to net income | | 5,079 |
| | (114,925 | ) | | (5,682 | ) | | (121,330 | ) |
End of period | | $ | 329,887 |
| | $ | 231,087 |
| | $ | 329,887 |
| | $ | 231,087 |
|
Limited Partnership Interests
As of SeptemberJune 30, 20192020 and December 31, 2018,2019, the carrying value of equity method limited partnershipspartnership interests totaled $354,611 thousand$392.2 million and $328,516 thousand,$383.7 million, respectively. Principal factors influencing carrying value appreciation or decline include operating performance, comparable public company earnings multiples, capitalization rates and the economic environment. The Company recognizes an impairment loss for equity method limited partnershipspartnership interests when evidence demonstrates that the loss is other than temporary. Evidence of a loss in value that is other than temporary may include the absence of an ability to recover the carrying amount of the investment or the inability of the investee to sustain a level of earnings that would justify the carrying amount of the investment.
Credit Losses
The following table summarizes the cumulative amounts related to the Company's credit loss component of other-than-temporary impairment (OTTI) losses on fixed maturity securities held as of September 30, 2019 and 2018 that the Company did not intend to sell as of those dates, and it was not more likely than not that the Company would be required to sell the securities before the anticipated recovery of the amortized cost basis, for which the non-credit portions of OTTI losses were recognized in other comprehensive income (loss) (OCI):
|
| | | | | | | | |
($ in thousands) | | Nine Months Ended September 30, |
| | 2019 | | 2018 |
Cumulative credit loss (1) | | | | |
Beginning of period | | $ | 1,529 |
| | $ | 3,825 |
|
New credit losses | | — |
| | — |
|
Increases to previously recognized credit losses | | — |
| | 246 |
|
Losses related to securities sold or paid down during the period | | — |
| | (2,542 | ) |
End of period | | $ | 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' utilization of the right to call or prepay obligations with or without call or prepayment penalties. For structured securities, including mortgage-backed securities and other asset-backed securities, estimated expected maturities consider broker-dealer survey prepayment assumptions and are verified for consistency with the interest rate and economic environments.
|
| | | | | | | | | | | | | | |
($ in thousands) | | Percent of Total Fair Value | | September 30, 2019 |
| | September 30, 2019 | | December 31, 2018 | | Fair Value | | Amortized Cost |
Estimated expected maturity: | | | | | | | | |
Due in 1 year or less | | 4.0 | % | | 4.8 | % | | $ | 234,818 |
| | $ | 228,604 |
|
Due after 1 year through 5 years | | 26.5 | % | | 22.8 | % | | 1,546,779 |
| | 1,499,348 |
|
Due after 5 years through 10 years | | 29.3 | % | | 32.8 | % | | 1,709,053 |
| | 1,601,491 |
|
Due after 10 years through 20 years | | 24.9 | % | | 26.5 | % | | 1,454,033 |
| | 1,318,362 |
|
Due after 20 years | | 15.3 | % | | 13.1 | % | | 894,877 |
| | 805,628 |
|
Total | | 100.0 | % | | 100.0 | % | | $ | 5,839,560 |
| | $ | 5,453,433 |
|
| | | | | | | | |
Average option-adjusted duration, in years | | 6.0 |
| | 5.9 |
| | | | |
Sales of Fixed Maturity and Equity Securities
Proceeds received from sales of fixed maturity and equity securities, each determined using the specific identification method, and gross gains and gross losses realized as a result of those sales for each period were:
|
| | | | | | | | | | | | | | | | |
($ in thousands) | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2019 | | 2018 | | 2019 (1) | | 2018 |
Fixed maturity securities | | | | | | | | |
Proceeds received | | $ | 149,319 |
| | $ | 170,223 |
| | $ | 651,058 |
| | $ | 360,246 |
|
Gross gains realized | | 1,258 |
| | 3,980 |
| | 149,574 |
| | 8,002 |
|
Gross losses realized | | (1,047 | ) | | (5,893 | ) | | (7,128 | ) | | (7,530 | ) |
| | | | | | | | |
Equity securities | | | | | | | | |
Proceeds received | | $ | 1,367 |
| | $ | 2,710 |
| | $ | 18,489 |
| | $ | 8,493 |
|
Gross gains realized | | 428 |
| | 885 |
| | 5,562 |
| | 2,478 |
|
Gross losses realized | | (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 September 30, | | Nine Months Ended September 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
Impairment write-downs | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Change in intent write-downs | | (5 | ) | | (70 | ) | | (276 | ) | | (1,357 | ) |
Net OTTI losses 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 (losses) realized on settlements - derivatives | | (3,840 | ) | | 2,204 |
| | (3,672 | ) | | 4,922 |
|
Net investment gains (losses) | | $ | (2,156 | ) | | $ | 2,803 |
| | $ | 151,594 |
| | $ | 1,884 |
|
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 September 30, | | Nine Months Ended September 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
Net unrealized investment gains (losses) on fixed maturity securities, net of tax | | | | | | | | |
Beginning of period | | $ | 231,087 |
| | $ | 144,998 |
| | $ | 111,712 |
| | $ | 286,176 |
|
Change in net unrealized investment gains (losses) on fixed maturity securities | | 75,283 |
| | (57,903 | ) | | 315,988 |
| | (186,912 | ) |
Reclassification of net investment (gains) losses on securities to net income | | (1,330 | ) | | (473 | ) | | (122,660 | ) | | 2,399 |
|
Cumulative effect of change in accounting principle (1) | | — |
| | — |
| | — |
| | (15,041 | ) |
End of period | | $ | 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 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.
|
| | |
Horace Mann Educators Corporation | 14 | Quarterly Report on Form 10-Q |
Note 3NOTE 2 - Investments (Continued)(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 Consolidated Balance Sheets | | Net Amounts of Assets/ Liabilities Presented in the Consolidated Balance Sheets
| | 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 | | Financial Instruments | | Cash Collateral Received | | Net Amount |
September 30, 2019 | | | | | | | | | | | | | |
June 30, 2020 | | | | | | | | | | | | | |
Asset derivatives: | | | | | | | | | | | | | | | | | | | | | | | | |
Free-standing derivatives | | $ | 10,685 |
| | $ | — |
| | $ | 10,685 |
| | $ | — |
| | $ | 10,338 |
| | $ | 347 |
| | $ | 7,276 |
| | $ | — |
| | $ | 7,276 |
| | $ | 4,340 |
| | $ | 2,600 |
| | $ | 336 |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2018 | | | | | | | | | | | | | |
December 31, 2019 | | | | | | | | | | | | | |
Asset derivatives: | | | | | | | | | | | | | | | | | | | | | | | | |
Free-standing derivatives | | $ | 2,647 |
| | $ | — |
| | $ | 2,647 |
| | $ | — |
| | $ | 1,868 |
| | $ | 779 |
| | 13,239 |
| | — |
| | 13,239 |
| | 7,687 |
| | 6,640 |
| | (1,088 | ) |
Deposits
At SeptemberJune 30, 20192020 and December 31, 2018,2019, fixed maturity securities with a fair value of $26,119 thousand$26.9 million and $17,695 thousand,$26.0 million, respectively, were on deposit with governmental agencies as required by law in various states in which the insurance subsidiaries of HMEC conduct business. In addition, at SeptemberJune 30, 20192020 and December 31, 2018,2019, fixed maturity securities with a fair value of $629,010 thousand$701.9 million and $740,016 thousand,$594.2 million, 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 $575,000 thousand$644.5 million at SeptemberJune 30, 20192020 and $675,000 thousand$545.0 million at December 31, 2018.2019. The deposited securities are included in Fixed maturity securities on the Company’s Consolidated Balance Sheets.
Note 4NOTE 3 - Fair Value of Financial Instruments
The Company is required under GAAP to disclose estimated fair values for certain financial and nonfinancial assets and liabilities. Fair values of the Company’s insurance contracts other than annuity contracts (which are investment contracts) are not required to be disclosed. However, the estimated fair values of liabilities under all insurance contracts are taken into consideration in the Company’s overall management of interest rate risk through the matching of investment maturities with amounts due under insurance contracts.
Information regarding the three-level hierarchy presented below and the valuation methodologies utilized by the Company to estimate fair values at each reporting date is included in Part II - Item 8, Note 34 of the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.2019.
|
| | |
Horace Mann Educators Corporation | 15 | Quarterly Report on Form 10-Q |
Note 4NOTE 3 - Fair Value of Financial Instruments (Continued)(continued)
Financial Instruments Measured and Carried at Fair Value
on a Recurring Basis
The following table presents the Company's fair value hierarchy for those assets and liabilities measured and carried at fair value on a recurring basis. During the six months ended June 30, 2020 and 2019, there were no transfers between Level 1 and Level 2. At SeptemberJune 30, 2019,2020, Level 3 invested assets comprised 4.3%6.3% of the Company’s total investment portfolio at fair value.
| | ($ 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 |
September 30, 2019 | | | | | | | | | | | |
June 30, 2020 | | | | | | | | | | | |
Financial Assets | | | | | | | | | | | | | | | | | | | | |
Investments | | | | | | | | | | | | | | | | | | | | |
Fixed maturity securities | | | | | | | | | | | | | | | | | | | | |
U.S. Government and federally sponsored agency obligations: | | | | | | | | | | | | | | | | | | | | |
Mortgage-backed securities | | $ | 754,355 |
| | $ | 754,355 |
| | $ | — |
| | $ | 749,551 |
| | $ | 4,804 |
| | $ | 718,974 |
| | $ | 718,974 |
| | $ | — |
| | $ | 694,513 |
| | $ | 24,461 |
|
Other, including U.S. Treasury securities | | 458,175 |
| | 458,175 |
| | 17,779 |
| | 440,396 |
| | — |
| | 374,881 |
| | 374,881 |
| | 18,520 |
| | 356,361 |
| | — |
|
Municipal bonds | | 1,676,422 |
| | 1,676,422 |
| | — |
| | 1,628,717 |
| | 47,705 |
| | 1,805,550 |
| | 1,805,550 |
| | — |
| | 1,732,379 |
| | 73,171 |
|
Foreign government bonds | | 47,915 |
| | 47,915 |
| | — |
| | 47,915 |
| | — |
| | 43,550 |
| | 43,550 |
| | — |
| | 43,550 |
| | — |
|
Corporate bonds | | 1,585,108 |
| | 1,585,108 |
| | 14,506 |
| | 1,473,929 |
| | 96,673 |
| | 1,862,440 |
| | 1,862,440 |
| | 12,773 |
| | 1,723,375 |
| | 126,292 |
|
Other mortgage-backed securities | | 1,317,585 |
| | 1,317,585 |
| | — |
| | 1,175,684 |
| | 141,901 |
| |
Other asset-backed securities | | | 1,216,588 |
| | 1,216,588 |
| | — |
| | 1,040,903 |
| | 175,685 |
|
Total fixed maturity securities | | 5,839,560 |
| | 5,839,560 |
| | 32,285 |
| | 5,516,192 |
| | 291,083 |
| | 6,021,983 |
| | 6,021,983 |
| | 31,293 |
| | 5,591,081 |
| | 399,609 |
|
Equity securities | | 105,483 |
| | 105,483 |
| | 57,876 |
| | 47,491 |
| | 116 |
| | 90,338 |
| | 90,338 |
| | 35,269 |
| | 54,954 |
| | 115 |
|
Short-term investments | | 237,819 |
| | 237,819 |
| | 237,819 |
| | — |
| | — |
| | 182,670 |
| | 182,670 |
| | 179,651 |
| | 3,019 |
| | — |
|
Other investments | | 23,935 |
| | 23,935 |
| | — |
| | 23,935 |
| | — |
| | 23,604 |
| | 23,604 |
| | — |
| | 23,604 |
| | — |
|
Totals | | $ | 6,206,797 |
| | $ | 6,206,797 |
| | $ | 327,980 |
| | $ | 5,587,618 |
| | $ | 291,199 |
| | $ | 6,318,595 |
| | $ | 6,318,595 |
| | $ | 246,213 |
| | $ | 5,672,658 |
| | $ | 399,724 |
|
Separate Account (variable annuity) assets (1) | | $ | 2,308,134 |
| | $ | 2,308,134 |
| | $ | 2,308,134 |
| | $ | — |
| | $ | — |
| | $ | 2,316,900 |
| | $ | 2,316,900 |
| | $ | 2,316,900 |
| | $ | — |
| | $ | — |
|
Financial Liabilities | | | | | | | | | | | | | | | | | | | | |
Investment contract and policy reserves, embedded derivatives | | $ | 1,145 |
| | $ | 1,145 |
| | $ | — |
| | $ | 1,145 |
| | $ | — |
| | $ | 1,113 |
| | $ | 1,113 |
| | $ | — |
| | $ | 1,113 |
| | $ | — |
|
Other policyholder funds, embedded derivatives | | $ | 89,098 |
| | $ | 89,098 |
| | $ | — |
| | $ | — |
| | $ | 89,098 |
| | $ | 93,619 |
| | $ | 93,619 |
| | $ | — |
| | $ | — |
| | $ | 93,619 |
|
| | | | | | | | | | | | | | | | | | | | |
December 31, 2018 | | | | | | | | | | | |
December 31, 2019 | | | | | | | | | | | |
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 |
| | $ | 724,319 |
| | $ | 724,319 |
| | $ | — |
| | $ | 711,004 |
| | $ | 13,315 |
|
Other, including U.S. Treasury securities | | 833,542 |
| | 833,542 |
| | 13,291 |
| | 820,251 |
| | — |
| | 458,868 |
| | 458,868 |
| | 17,699 |
| | 441,169 |
| | — |
|
Municipal bonds | | 2,003,969 |
| | 2,003,969 |
| | — |
| | 1,956,438 |
| | 47,531 |
| | 1,686,203 |
| | 1,686,203 |
| | — |
| | 1,641,912 |
| | 44,291 |
|
Foreign government bonds | | 84,904 |
| | 84,904 |
| | — |
| | 84,904 |
| | — |
| | 45,370 |
| | 45,370 |
| | — |
| | 45,370 |
| | — |
|
Corporate bonds | | 2,079,510 |
| | 2,079,510 |
| | 12,281 |
| | 1,986,487 |
| | 80,742 |
| | 1,581,424 |
| | 1,581,424 |
| | 14,470 |
| | 1,463,002 |
| | 103,952 |
|
Other mortgage-backed securities | | 1,725,952 |
| | 1,725,952 |
| | — |
| | 1,608,958 |
| | 116,994 |
| |
Other asset-backed securities | | | 1,295,492 |
| | 1,295,492 |
| | — |
| | 1,161,979 |
| | 133,513 |
|
Total fixed maturity securities | | 7,515,318 |
| | 7,515,318 |
| | 25,572 |
| | 7,241,262 |
| | 248,484 |
| | 5,791,676 |
| | 5,791,676 |
| | 32,169 |
| | 5,464,436 |
| | 295,071 |
|
Equity securities | | 111,750 |
| | 111,750 |
| | 64,330 |
| | 47,415 |
| | 5 |
| | 101,864 |
| | 101,864 |
| | 49,834 |
| | 51,923 |
| | 107 |
|
Short-term investments | | 122,222 |
| | 122,222 |
| | 117,296 |
| | 4,926 |
| | — |
| | 172,667 |
| | 172,667 |
| | 172,667 |
| | — |
| | — |
|
Other investments | | 16,147 |
| | 16,147 |
| | — |
| | 16,147 |
| | — |
| | 25,997 |
| | 25,997 |
| | — |
| | 25,997 |
| | — |
|
Totals | | $ | 7,765,437 |
| | $ | 7,765,437 |
| | $ | 207,198 |
| | $ | 7,309,750 |
| | $ | 248,489 |
| | $ | 6,092,204 |
| | $ | 6,092,204 |
| | $ | 254,670 |
| | $ | 5,542,356 |
| | $ | 295,178 |
|
Separate Account (variable annuity) assets (1) | | $ | 2,001,128 |
| | $ | 2,001,128 |
| | $ | 2,001,128 |
| | $ | — |
| | $ | — |
| | $ | 2,490,469 |
| | $ | 2,490,469 |
| | $ | 2,490,469 |
| | $ | — |
| | $ | — |
|
Financial Liabilities | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Investment contract and policy reserves, embedded derivatives | | $ | 248 |
| | $ | 248 |
| | $ | — |
| | $ | 248 |
| | $ | — |
| | $ | 1,314 |
| | $ | 1,314 |
| | $ | — |
| | $ | 1,314 |
| | $ | — |
|
Other policyholder funds, embedded derivatives | | $ | 78,700 |
| | $ | 78,700 |
| | $ | — |
| | $ | — |
| | $ | 78,700 |
| | $ | 93,733 |
| | $ | 93,733 |
| | $ | — |
| | $ | — |
| | $ | 93,733 |
|
________________
(1) Separate Account (variable annuity) liabilities are equal to the estimated fair value of the Separate Account (variable annuity) assets.
|
| | |
Horace Mann Educators Corporation | 16 | Quarterly Report on Form 10-Q |
Note 4NOTE 3 - Fair Value of Financial Instruments (Continued)(continued)
During the nine month periods ended September 30, 2019 and 2018, there were no transfers betweenChanges in Level 1 and Level 2. 3 Fair Value Measurements
The following table presents reconciliations for the periods indicatedreconciliation for all Level 3 assets and liabilities measured at fair value on a recurring basis.basis using significant unobservable inputs (Level 3) was as follows:
| | ($ 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, July 1, 2019 | | $ | 46,984 |
| | $ | 79,222 |
| | $ | 128,438 |
| | $ | 254,644 |
| | $ | 69 |
| | $ | 254,713 |
| | $ | 85,961 |
| |
Beginning balance, April 1, 2020 | | | $ | 104,892 |
| | $ | 111,693 |
| | $ | 140,527 |
| | $ | 357,112 |
| | $ | 83 |
| | $ | 357,195 |
| | $ | 87,506 |
|
Transfers into Level 3 (3) | | — |
| | 18,916 |
| | 21,004 |
| | 39,920 |
| | 1 |
| | 39,921 |
| | — |
| | 10,726 |
| | 13,970 |
| | 64,239 |
| | 88,935 |
| | — |
| | 88,935 |
| | — |
|
Transfers out of Level 3 (3) | | — |
| | (2,822 | ) | | (449 | ) | | (3,271 | ) | | — |
| | (3,271 | ) | | — |
| | (45,917 | ) | | (4,166 | ) | | (3,438 | ) | | (53,521 | ) | | — |
| | (53,521 | ) | | — |
|
Total gains or losses | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net investment gains (losses) included in net income related to financial assets | | — |
| | — |
| | — |
| | — |
| | 46 |
| | 46 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 32 |
| | 32 |
| | — |
|
Net realized (gains) losses included in net income related to financial liabilities | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 3,661 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 5,966 |
|
Net unrealized investment gains (losses) included in OCI | | 842 |
| | 1,744 |
| | 397 |
| | 2,983 |
| | — |
| | 2,983 |
| | — |
| | 3,838 |
| | 5,308 |
| | 3,261 |
| | 12,407 |
| | — |
| | 12,407 |
| | — |
|
Purchases | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Issuances | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 2,033 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 2,513 |
|
Sales | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Settlements | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Paydowns, maturities and distributions | | (121 | ) | | (387 | ) | | (2,685 | ) | | (3,193 | ) | | — |
| | (3,193 | ) | | (2,557 | ) | | (368 | ) | | (513 | ) | | (4,443 | ) | | (5,324 | ) | | — |
| | (5,324 | ) | | (2,366 | ) |
Ending balance, September 30, 2019 | | $ | 47,705 |
| | $ | 96,673 |
| | $ | 146,705 |
| | $ | 291,083 |
| | $ | 116 |
| | $ | 291,199 |
| | $ | 89,098 |
| |
Ending balance, June 30, 2020 | | | $ | 73,171 |
| | $ | 126,292 |
| | $ | 200,146 |
| | $ | 399,609 |
| | $ | 115 |
| | $ | 399,724 |
| | $ | 93,619 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Beginning balance, January 1, 2019 | | $ | 47,531 |
| | $ | 80,742 |
| | $ | 120,211 |
| | $ | 248,484 |
| | $ | 5 |
| | $ | 248,489 |
| | $ | 78,700 |
| |
Beginning balance, January 1, 2020 | | | $ | 44,291 |
| | $ | 103,952 |
| | $ | 146,828 |
| | $ | 295,071 |
| | $ | 107 |
| | $ | 295,178 |
| | $ | 93,733 |
|
Transfers into Level 3 (3) | | — |
| | 24,798 |
| | 42,938 |
| | 67,736 |
| | 65 |
| | 67,801 |
| | — |
| | 74,477 |
| | 32,803 |
| | 86,714 |
| | 193,994 |
| | — |
| | 193,994 |
| | — |
|
Transfers out of Level 3 (3) | | — |
| | (7,698 | ) | | (449 | ) | | (8,147 | ) | | — |
| | (8,147 | ) | | — |
| | (45,917 | ) | | (14,188 | ) | | (6,385 | ) | | (66,490 | ) | | — |
| | (66,490 | ) | | — |
|
Total gains or losses | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net investment gains (losses) included in net income related to financial assets | | — |
| | — |
| | — |
| | — |
| | 46 |
| | 46 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 8 |
| | 8 |
| | — |
|
Net realized (gains) losses included in net income related to financial liabilities | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 8,366 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 924 |
|
Net unrealized investment gains (losses) included in OCI | | 649 |
| | 6,254 |
| | 3,052 |
| | 9,955 |
| | — |
| | 9,955 |
| | — |
| | 812 |
| | (173 | ) | | (21,101 | ) | | (20,462 | ) | | — |
| | (20,462 | ) | | — |
|
Purchases | | — |
| | 1,566 |
| | — |
| | 1,566 |
| | — |
| | 1,566 |
| | — |
| | — |
| | 6,875 |
| | 1,890 |
| | 8,765 |
| | — |
| | 8,765 |
| | — |
|
Issuances | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 7,482 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 3,867 |
|
Sales | | — |
| | — |
| | (607 | ) | | (607 | ) | | — |
| | (607 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Settlements | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Paydowns, maturities and distributions | | (475 | ) | | (8,989 | ) | | (18,440 | ) | | (27,904 | ) | | — |
| | (27,904 | ) | | (5,450 | ) | | (492 | ) | | (2,977 | ) | | (7,800 | ) | | (11,269 | ) | | — |
| | (11,269 | ) | | (4,905 | ) |
Ending balance, September 30, 2019 | | $ | 47,705 |
| | $ | 96,673 |
| | $ | 146,705 |
| | $ | 291,083 |
| | $ | 116 |
| | $ | 291,199 |
| | $ | 89,098 |
| |
Ending balance, June 30, 2020 | | | $ | 73,171 |
| | $ | 126,292 |
| | $ | 200,146 |
| | $ | 399,609 |
| | $ | 115 |
| | $ | 399,724 |
| | $ | 93,619 |
|
| |
(1) | Represents embedded derivatives, all related to the Company's fixed indexed annuity products, reported in Other policyholder funds in the Company's Consolidated Balance Sheets. |
| |
(2) | Includes U.S. Government and federally sponsored agency obligations for mortgage-backed securities and other mortgage-backed securities. |
| |
(3) | Transfers into and out of Level 3 during the three and six months ended June 30, 2020 were attributable to changes in the availability of observable market information for individual fixed maturity securities. The Company's policy is to recognize transfers into and transfers out of the levels as having occurred at the end of the reporting period in which the transfers were determined. |
_____________ |
| | |
Horace Mann Educators Corporation | 17 | Quarterly Report on Form 10-Q |
NOTE 3 - Fair Value of Financial Instruments (continued)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
($ in thousands) | | Financial Assets | | Financial Liabilities(1) |
| | 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 |
|
Transfers into Level 3 (3) | | — |
| | 2,808 |
| | — |
| | 2,808 |
| | 64 |
| | 2,872 |
| | — |
|
Transfers out of Level 3 (3) | | — |
| | (4,876 | ) | | — |
| | (4,876 | ) | | — |
| | (4,876 | ) | | — |
|
Total gains or losses | | | | | | | | | | | | | | |
Net investment gains (losses) included in net income related to financial assets | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Net realized (gains) losses included in net income related to financial liabilities | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 371 |
|
Net unrealized investment gains (losses) included in OCI | | (537 | ) | | 1,961 |
| | 2,807 |
| | 4,231 |
| | — |
| | 4,231 |
| | — |
|
Purchases | | — |
| | 1,566 |
| | — |
| | 1,566 |
| | — |
| | 1,566 |
| | — |
|
Issuances | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 2,431 |
|
Sales | | — |
| | — |
| | (607 | ) | | (607 | ) | | — |
| | (607 | ) | | — |
|
Settlements | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Paydowns, maturities and distributions | | (235 | ) | | (4,719 | ) | | (9,552 | ) | | (14,506 | ) | | — |
| | (14,506 | ) | | (1,470 | ) |
Ending balance, June 30, 2019 | | $ | 46,984 |
| | $ | 79,222 |
| | $ | 128,438 |
| | $ | 254,644 |
| | $ | 69 |
| | $ | 254,713 |
| | $ | 85,961 |
|
| | | | | | | | | | | | | | |
Beginning balance, January 1, 2019 | | $ | 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 |
| | — |
|
Transfers out of Level 3 (3) | | — |
| | (4,876 | ) | | — |
| | (4,876 | ) | | — |
| | (4,876 | ) | | — |
|
Total gains or losses | | | | | | | | | | | | | | |
Net investment gains (losses) included in net income related to financial assets | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Net realized (gains) losses included in net income related to financial liabilities | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 4,705 |
|
Net unrealized investment gains (losses) included in OCI | | (193 | ) | | 4,510 |
| | 2,655 |
| | 6,972 |
| | — |
| | 6,972 |
| | — |
|
Purchases | | — |
| | 1,566 |
| | — |
| | 1,566 |
| | — |
| | 1,566 |
| | — |
|
Issuances | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 5,449 |
|
Sales | | — |
| | — |
| | (607 | ) | | (607 | ) | | — |
| | (607 | ) | | — |
|
Settlements | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Paydowns, maturities and distributions | | (354 | ) | | (8,602 | ) | | (15,755 | ) | | (24,711 | ) | | — |
| | (24,711 | ) | | (2,893 | ) |
Ending balance, June 30, 2019 | | $ | 46,984 |
| | $ | 79,222 |
| | $ | 128,438 |
| | $ | 254,644 |
| | $ | 69 |
| | $ | 254,713 |
| | $ | 85,961 |
|
| |
(1) | Represents embedded derivatives, all related to the Company's fixed indexed annuity products, reported in Other policyholder funds in the Company's Consolidated Balance Sheets. |
| |
(2) | Includes U.S. Government and federally sponsored agency obligations for mortgage-backed securities and other mortgage-backed securities. |
| |
(3) | Transfers into and out of Level 3 during the three and nine month periodssix months ended SeptemberJune 30, 2019 were attributable to changes in the availability of observable market information for individual fixed maturity securities. The Company's policy is to recognize transfers into and transfers out of the levels as having occurred at the end of the reporting period in which the transfers were determined. |
Note 4 - Fair Value of Financial Instruments (Continued)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
($ in thousands) | | Financial Assets | | Financial Liabilities(1) |
| | Municipal Bonds | | Corporate Bonds | | Other Mortgage- Backed Securities (2) | | Total Fixed Maturity Securities | | Equity Securities | | Total | | |
Beginning balance, July 1, 2018 | | $ | 49,921 |
| | $ | 92,663 |
| | $ | 129,061 |
| | $ | 271,645 |
| | $ | 6 |
| | $ | 271,651 |
| | $ | 77,788 |
|
Transfers into Level 3 (3) | | — |
| | — |
| | 17,030 |
| | 17,030 |
| | — |
| | 17,030 |
| | — |
|
Transfers out of Level 3 (3) | | — |
| | — |
| | (970 | ) | | (970 | ) | | — |
| | (970 | ) | | — |
|
Total gains or losses | | | | | | | |
|
| | | |
|
| | |
Net investment gains (losses) included in net income related to financial assets | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Net realized (gains) losses included in net income related to financial liabilities | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 2,205 |
|
Net unrealized investment gains (losses) included in OCI | | (471 | ) | | 128 |
| | (6,184 | ) | | (6,527 | ) | | — |
| | (6,527 | ) | | — |
|
Purchases | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Issuances | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 3,940 |
|
Sales | | — |
| | — |
| | (187 | ) | | (187 | ) | | — |
| | (187 | ) | | — |
|
Settlements | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Paydowns, maturities and distributions | | (121 | ) | | (3,926 | ) | | (15,466 | ) | | (19,513 | ) | | — |
| | (19,513 | ) | | (1,668 | ) |
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 |
|
Transfers into Level 3 (3) | | — |
| | 40,487 |
| | 50,174 |
| | 90,661 |
| | — |
| | 90,661 |
| | — |
|
Transfers out of Level 3 (3) | | — |
| | (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 | ) | | — |
|
Net (gains) losses included in net income related to financial liabilities | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (1,308 | ) |
Net unrealized investment gains (losses) included in OCI | | 369 |
| | (1,459 | ) | | (5,547 | ) | | (6,637 | ) | | — |
| | (6,637 | ) | | — |
|
Purchases | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Issuances | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 7,379 |
|
Sales | | — |
| | — |
| | (187 | ) | | (187 | ) | | (3 | ) | | (190 | ) | | — |
|
Settlements | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Paydowns, maturities and distributions | | (368 | ) | | (11,617 | ) | | (23,900 | ) | | (35,885 | ) | | — |
| | (35,885 | ) | | (4,539 | ) |
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's fixed indexed annuity products, reported in Other policyholder funds in the Company's Consolidated Balance Sheets. |
| |
(2)
| Includes U.S. Government and federally sponsored agency obligations for mortgage-backed securities and other mortgage-backed securities. |
| |
(3)
| Transfers into and out of Level 3 during the three and nine month periods ended September 30, 2018 were attributable to changes in the availability of observable market information for individual fixed maturity securities . The Company's policy is to recognize transfers into and transfers out of the levels as having occurred at the end of the reporting period in which the transfers were determined. |
For the nine month periodsix months ended SeptemberJune 30, 2020 and June 30, 2019, the Company had no0 net losses on Level 3 securities. For the nine month period ended September 30, 2018, the Company had a realized net loss on three Level 3 securities of $243 thousand. For the three and nine month periodssix months ended SeptemberJune 30, 2019,2020, net investment losses of $3,661 thousand$6.0 million and $8,366 thousand$0.9 million 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 nine month periodssix months ended SeptemberJune 30, 2018,2019, the respective net investment losses were $2,205 thousand$0.4 million and net investment gains were $1,308 thousand.$4.7 million.
|
| | |
Horace Mann Educators Corporation | 18 | Quarterly Report on Form 10-Q |
Note 4NOTE 3 - Fair Value of Financial Instruments (Continued)(continued)
Quantitative Information about Level 3 Fair Value Measurements
The following table provides quantitative information about the significant unobservable inputs for recurring fair value measurements categorized within Level 3.
|
| | | | | | | | | | |
($ in thousands) |
Financial Assets | | Fair Value at June 30, 2020 | | Valuation Technique(s) | | Unobservable Inputs | | Range (Weighted Average) and Single Point Best Estimate (1) |
Municipal bonds | | $ | 73,171 |
| | discounted cash flow | | I spread (2) | | 578 bps |
Corporate bonds | | 126,292 |
| | discounted cash flow | | N spread (3) | | 762 bps |
| | | | discounted cash flow | | T spread (4) | | 378 bps |
| | | | discounted cash flow | | I spread (2) | | 495 bps |
| | | | market comparable | | EV / TTM EBITDA (x) (5) | | 5.11x |
Other asset-backed securities | | 175,685 |
| | discounted cash flow | | constant prepayment rate | | 20.0% |
| | | | vendor price | | haircut | | 3.0% |
| | | | market comparable | | EV / TTM EBITDA (x) (5) | | 5.11x |
| | | | discounted cash flow | | N spread (3) | | 732 bps |
| | | | discounted cash flow | | PDI interest margin (6) | | 7.13% |
| | | | discounted cash flow | | SBL interest margin (7) | | 4.50% |
Government mortgage-backed securities | | 24,461 |
| | vendor price | | haircut | | 3.0% |
| | | | discounted cash flow | | N spread (3) | | 109 bps |
| | | | discounted cash flow | | constant prepayment yield | | 100 bps |
| | | | discounted cash flow | | constant default rate | | 0 |
Equity securities | | 115 |
| | Black Scholes | | equity value | | low - $43.27; high - $44.53 |
|
| | | | | | | | | | |
($ in thousands) |
Financial Liabilities | | Fair Value at June 30, 2020 | | Valuation Technique(s) | | Unobservable Inputs | | Range (Weighted Average) and Single Point Best Estimate (1) |
Derivatives embedded in fixed indexed annuity products | | $ | 93,619 |
| | discounted cash flow | | lapse rate | | 5.25% |
| | | | | | mortality multiplier (8) | | 61.00% |
| | | | | | option budget | | 1.00% - 2.50% |
| | | | | | non-performance adjustment (9) | | 5.00% |
| |
(1) | When a range of unobservable inputs is not readily available, the Company uses a single point best estimate. |
| |
(2) | "I spread" is the interpolated weighted average life point on the "on the run" (OTR) point of the curve. |
| |
(3) | "N spread" is the interpolated weighted average life point on the swap curve. |
| |
(4) | "T spread" is a specific point on the OTR curve. |
| |
(5) | This represents the enterprise value (EV) for trailing twelve months (TTM) of EBITDA plus multiplier. |
| |
(6) | "PDI" stands for private debt investment. |
| |
(7) | "SBL" stands for broadly syndicated loans. |
| |
(8) | Mortality multiplier is applied to the Annuity 2000 table. |
| |
(9) | Determined as a percentage of a risk-free rate. |
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 Part II - Item 8, Note 34 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.2019. 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.
|
| | |
Horace Mann Educators Corporation | 19 | Quarterly Report on Form 10-Q |
NOTE 3 - Fair Value of Financial Instruments (continued)
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 premiumsinclude: benchmark yield, liquidity premium, estimated cash flows, prepayment and default rates.speeds, spreads, weighted average life, and credit rating. 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. These financial assets and financial liabilities are further described in Part II - Item 8, Note 4 in the Company's Annual Report on Form 10-K for the year ended December 31, 2019. The following table presents the carrying value, fair value and fair value hierarchy of these financial assets and financial liabilities.
| | ($ in thousands) | | | | Fair Value Measurements at | | | | Fair Value Measurements at |
| | Carrying | | Fair | | Reporting Date Using | | Carrying | | Fair | | Reporting Date Using |
| | Amount | | Value | | Level 1 | | Level 2 | | Level 3 | | Amount | | Value | | Level 1 | | Level 2 | | Level 3 |
September 30, 2019 | | | | | | | | | | | |
June 30, 2020 | | | | | | | | | | | |
Financial Assets | | | | | | | | | | | | | | | | | | | | |
Investments | | | | | | | | | | | | | | | | | | | | |
Other investments | | $ | 171,579 |
| | $ | 175,478 |
| | $ | — |
| | $ | — |
| | $ | 175,478 |
| | $ | 168,541 |
| | $ | 172,364 |
| | $ | — |
| | $ | — |
| | $ | 172,364 |
|
Deposit asset on reinsurance | | 2,342,305 |
| | 2,619,640 |
| | — |
| | — |
| | 2,619,640 |
| | 2,373,267 |
| | 2,846,176 |
| | — |
| | — |
| | 2,846,176 |
|
Financial Liabilities | | | | | | | | | | | | | | | | | | | | |
Investment contract and policy reserves, fixed annuity contracts | | 4,658,148 |
| | 4,581,321 |
| | — |
| | — |
| | 4,581,321 |
| | 4,742,272 |
| | 4,651,533 |
| | — |
| | — |
| | 4,651,533 |
|
Investment contract and policy reserves, account values on life contracts | | 91,788 |
| | 94,899 |
| | — |
| | — |
| | 94,899 |
| | 95,885 |
| | 100,673 |
| | — |
| | — |
| | 100,673 |
|
Other policyholder funds | | 583,747 |
| | 583,747 |
| | — |
| | 526,113 |
| | 57,634 |
| | 648,240 |
| | 648,240 |
| | — |
| | 590,693 |
| | 57,547 |
|
Short-term debt | | 135,000 |
| | 135,000 |
| | — |
| | — |
| | 135,000 |
| | 135,000 |
| | 135,000 |
| | — |
| | — |
| | 135,000 |
|
Long-term debt | | 297,953 |
| | 318,271 |
| | — |
| | 318,271 |
| | — |
| | 302,172 |
| | 332,385 |
| | — |
| | 332,385 |
| | — |
|
| | | | | | | | | | | | | | | | | | | | |
December 31, 2018 | | | | | | | | | | | |
December 31, 2019 | | | | | | | | | | | |
Financial Assets | | | | | | | | | | | | | | | | | | | | |
Investments | | | | | | | | | | | | | | | | | | | | |
Other investments | | $ | 156,725 |
| | $ | 161,449 |
| | $ | — |
| | $ | — |
| | $ | 161,449 |
| | $ | 163,312 |
| | $ | 167,185 |
| | $ | — |
| | $ | — |
| | $ | 167,185 |
|
Deposit asset on reinsurance | | | 2,346,166 |
| | 2,634,012 |
| | — |
| | — |
| | 2,634,012 |
|
Financial Liabilities | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Investment contract and policy reserves, fixed annuity contracts | | 4,555,849 |
| | 4,478,338 |
| | — |
| | — |
| | 4,478,338 |
| | 4,675,774 |
| | 4,609,880 |
| | — |
| | — |
| | 4,609,880 |
|
Investment contract and policy reserves, account values on life contracts | | 87,229 |
| | 90,402 |
| | — |
| | — |
| | 90,402 |
| | 93,465 |
| | 98,332 |
| | — |
| | — |
| | 98,332 |
|
Other policyholder funds | | 689,287 |
| | 689,287 |
| | — |
| | 626,325 |
| | 62,962 |
| | 553,550 |
| | 553,550 |
| | — |
| | 495,812 |
| | 57,738 |
|
Short-term debt | | — |
| | — |
| | — |
| | — |
| | — |
| | 135,000 |
| | 135,000 |
| | — |
| | — |
| | 135,000 |
|
Long-term debt | | 297,740 |
| | 291,938 |
| | — |
| | 291,938 |
| | — |
| | 298,025 |
| | 322,678 |
| | — |
| | 322,678 |
| | — |
|
|
| | |
Horace Mann Educators Corporation | 20 | Quarterly Report on Form 10-Q |
Note 5NOTE 4 - Derivative InstrumentsDerivatives
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 computedetermine the annual index credit is reset and new one-year call options are purchased to fund the next annual index credit. The cost of these purchases is managed through the terms of the FIA and IUL contracts, which permit changes to index return caps, participation rates and/or asset fees, subject to guaranteed minimums on each contract's anniversary date. By adjusting the index return caps, participation rates or asset fees, crediting rates generally can be managed except in cases where the contractual features would prevent further modifications.
The future annual index credits on FIA 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 derivatives 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 derivatives, including derivatives embedded in FIA and IUL contracts, are presented in the Consolidated Balance Sheets as follows:
| | ($ in thousands) | | September 30, 2019 | | December 31, 2018 | | June 30, 2020 | | December 31, 2019 |
Assets | | | | | | | | |
Derivatives included in Short-term and other investments | | $ | 10,685 |
| | $ | 2,647 |
| |
Derivatives, included in Short-term and other investments | | | $ | 7,276 |
| | $ | 13,239 |
|
| | | | | | | | |
Liabilities | | | | | | | | |
FIA - embedded derivatives, included in Other policyholder funds | | $ | 89,098 |
| | $ | 78,700 |
| | 93,619 |
| | 93,733 |
|
IUL - embedded derivatives, included in Investment contract and policy reserves | | 1,145 |
| | 248 |
| | 1,113 |
| | 1,314 |
|
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 September 30, | | Nine Months Ended September 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
Change in fair value of derivatives:(1) | | | | | | | | |
Revenues | | | | | | | | |
Net investment gains (losses) | | $ | (149 | ) | | $ | 4,683 |
| | $ | 5,280 |
| | $ | 3,832 |
|
| | | | | | | | |
Change in fair value of embedded derivatives: | | | | | | | | |
Revenues | | | | | | | | |
Net investment gains (losses) | | $ | (3,691 | ) | | $ | (2,479 | ) | | $ | (8,952 | ) | | $ | 1,090 |
|
________________ |
| | | | | | | | | | | | | | | | |
($ in thousands) | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
Change in fair value of derivatives: (1) | | | | | | | | |
Net investment gains (losses) | | $ | 3,210 |
| | $ | 1,375 |
| | $ | (7,790 | ) | | $ | 5,429 |
|
| | | | | | | | |
Change in fair value of embedded derivatives: | | | | | | | | |
Net investment gains (losses) | | (6,477 | ) | | (516 | ) | | (320 | ) | | (5,261 | ) |
| |
(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. |
|
| | |
Horace Mann Educators Corporation | 21 | Quarterly Report on Form 10-Q |
NOTE 4 - Derivatives (continued)
The Company's strategy attempts to mitigate potential risk of loss under these agreements through a regular monitoring process, which evaluates the program's effectiveness. The Company is exposed to risk of loss in the event of nonperformance by the counterparties and, accordingly, option contracts are purchased from multiple counterparties, which are evaluated for creditworthiness prior to purchase of the contracts. All of these options have been purchased from nationally recognized financial institutions with a Standard and Poor's Global Inc. (S&P)/Moody's Investors Service, Inc. (Moody's) long-term credit rating of "BBB+/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's long-term credit ratings were as follows:
| | ($ in thousands) | | September 30, 2019 | | December 31, 2018 | | June 30, 2020 | | December 31, 2019 |
| | 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 | | $ | 145,100 |
| | $ | 5,026 |
| | $ | 144,500 |
| | $ | 870 |
| | A+ | | Aa2 | | $ | 185,100 |
| | $ | 5,090 |
| | $ | 174,900 |
| | $ | 8,523 |
|
Barclays Bank PLC | | A | | A2 | | 101,700 |
| | 2,271 |
| | 28,500 |
| | 247 |
| | A | | A1 | | 108,500 |
| | 1,747 |
| | 115,300 |
| | 3,347 |
|
Citigroup Inc. | | BBB+ | | A3 | | — |
| | — |
| | — |
| | — |
| | BBB+ | | A3 | | — |
| | — |
| | — |
| | — |
|
Credit Suisse International | | A+ | | A1 | | — |
| | — |
| | 16,100 |
| | 55 |
| | A+ | | A1 | | — |
| | — |
| | — |
| | — |
|
Societe Generale | | A | | A1 | | 60,700 |
| | 3,388 |
| | 89,100 |
| | 1,475 |
| | A | | A1 | | 18,400 |
| | 439 |
| | 27,800 |
| | 1,369 |
|
| | | | | | | | | |
Total | | $ | 307,500 |
| | $ | 10,685 |
| | $ | 278,200 |
| | $ | 2,647 |
| | | $ | 312,000 |
| | $ | 7,276 |
| | $ | 318,000 |
| | $ | 13,239 |
|
As of SeptemberJune 30, 20192020 and December 31, 2018,2019, the Company held $10,338 thousand$6.9 million and $1,868 thousand,$14.3 million, respectively, of cash and financial instruments 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$0.3 million per counterparty.
Note 6NOTE 5 - Deposit Asset on Reinsurance
In the second quarter of 2019, the Company reinsured a $2.9 billion block of in force fixed and variable annuity business with a minimum crediting rate of 4.5%. This represented approximately 50% of the Company’s in force fixed annuity account balances. The arrangement contains investment guidelines and a trust to help meet the Company’s risk management objectives.
The annuity reinsurance transaction was effective April 1, 2019. Under the agreement, approximately $2.2 billion of fixed annuity reserves were reinsured on a coinsurance basis for consideration of approximately $2.3 billion which resulted in recognition of an after tax realized investment gain of $106.9 million. The separate account assets and liabilities of approximately $0.7 billion were reinsured on a modified coinsurance basis and thus, remain on the Company's consolidated financial statements, but the related results of operations are fully reinsured.
The Company determined that the reinsurance agreement does not expose the reinsurer to a reasonable possibility of a significant loss from insurance risk. Therefore, the Company recognizes the reinsurance agreement using the deposit method of accounting. The assets transferred to the reinsurer as consideration paid is reported as a Deposit asset on reinsurance. As amounts are received or paid, consistent with the underlying reinsured contracts, the Deposit asset on reinsurance is adjusted. The Deposit asset on reinsurance is accreted to the estimated ultimate cash flows using the interest method and the adjustment is reported as Net investment income.income in the Consolidated Statements of Operations.
|
| | |
Horace Mann Educators Corporation | 22 | Quarterly Report on Form 10-Q |
NOTE 6 - Goodwill and Intangible Assets, net
The Company conducts impairment testing for goodwill at least annually, or more often if events, changes or circumstances indicate that the carrying amount may not be recoverable. See Part II - Item 8, Note 1 in the Company's Annual Report on Form 10-K for the year ended December 31, 2019 for further description of impairment testing.
There were no changes in the carrying amount of goodwill by reporting unit for the three and six months ended June 30, 2020. The carrying amount of goodwill by reporting unit as of June 30, 2020 was as follows:
|
| | | | |
($ in thousands) | | June 30, 2020 |
Property and Casualty | | $ | 9,460 |
|
Supplemental | | 19,621 |
|
Retirement | | 10,087 |
|
Life | | 9,911 |
|
Total | | $ | 49,079 |
|
As of June 30, 2020, 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 Benefit Consultants Group, Inc. (BCG) resulted in initial recognition of definite-lived intangible assets subject to amortization in the amount of $14.1 million and the acquisition of NTA resulted in initial recognition of definite-lived intangible assets subject to amortization in the amount of $160.4 million. As of June 30, 2020 the outstanding amounts of definite-lived intangible assets subject to amortization were as follows:
|
| | | | | | |
($ in thousands) | | Weighted Average | | |
| | Useful Life (in Years) | | |
At inception: | | | | |
Value of business acquired | | 30 | | $ | 94,419 |
|
Value of distribution acquired | | 17 | | 53,996 |
|
Value of agency relationships | | 14 | | 16,981 |
|
Value of customer relationships | | 10 | | 9,080 |
|
Total | | 23 | | 174,476 |
|
Accumulated amortization: | | | | |
Value of business acquired | | | | (7,393 | ) |
Value of distribution acquired | | | | (3,527 | ) |
Value of agency relationships | | | | (2,774 | ) |
Value of customer relationships | | | | (2,468 | ) |
Total | | | | (16,162 | ) |
Net intangible assets subject to amortization: | | | | $ | 158,314 |
|
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 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 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.
|
| | |
Horace Mann Educators Corporation | 23 | Quarterly Report on Form 10-Q |
NOTE 6 - Goodwill and Intangible Assets, net (continued)
Estimated future amortization of the Company's definite-lived intangible assets were as follows:
|
| | | | |
($ in thousands) | | |
Year Ending December 31, | | |
2020 (excluding the six months ended June 30, 2020) | | $ | 7,116 |
|
2021 | | 13,411 |
|
2022 | | 12,433 |
|
2023 | | 11,577 |
|
2024 | | 10,805 |
|
Thereafter | | 102,972 |
|
Total | | $ | 158,314 |
|
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 is 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.
Indefinite-lived intangible assets (not subject to amortization) as of June 30, 2020 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 and BCG 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.
|
| | |
Horace Mann Educators Corporation | 24 | Quarterly Report on Form 10-Q |
NOTE 7 - 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) 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 September 30, | | Nine Months Ended September 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
Property and Casualty | | |
| | |
| | | | |
Beginning gross reserves (1) | | $ | 367,862 |
| | $ | 352,817 |
| | $ | 367,180 |
| | $ | 319,182 |
|
Less: reinsurance recoverables | | 77,345 |
| | 62,883 |
| | 89,725 |
| | 57,409 |
|
Net reserves, beginning of period (2) | | 290,517 |
| | 289,934 |
| | 277,455 |
| | 261,773 |
|
Incurred claims and claim expenses: | | |
| | |
| | | | |
Claims occurring in the current period | | 122,470 |
| | 140,035 |
| | 375,648 |
| | 408,028 |
|
Decrease in estimated reserves for claims occurring in prior periods (3) | | (3,500 | ) | | — |
| | (7,500 | ) | | (300 | ) |
Total claims and claim expenses incurred (4) | | 118,970 |
| | 140,035 |
| | 368,148 |
| | 407,728 |
|
Claims and claim expense payments for claims occurring during: | | |
| | |
| | | | |
Current period | | 101,499 |
| | 106,187 |
| | 230,968 |
| | 233,638 |
|
Prior periods | | 29,747 |
| | 28,997 |
| | 136,394 |
| | 141,078 |
|
Total claims and claim expense payments | | 131,246 |
| | 135,184 |
| | 367,362 |
| | 374,716 |
|
Net reserves, end of period (2) | | 278,241 |
| | 294,785 |
| | 278,241 |
| | 294,785 |
|
Plus: reinsurance recoverables | | 76,526 |
| | 63,262 |
| | 76,526 |
| | 63,262 |
|
Ending gross reserves (1) | | $ | 354,767 |
| | $ | 358,047 |
| | $ | 354,767 |
| | $ | 358,047 |
|
_____________ |
| | | | | | | | | | | | | | | | |
($ in thousands) | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
Property and Casualty | | |
| | |
| | | | |
Beginning gross reserves (1) | | $ | 382,248 |
| | $ | 359,701 |
| | $ | 386,976 |
| | $ | 367,180 |
|
Less: reinsurance recoverables | | 119,045 |
| | 78,328 |
| | 120,506 |
| | 89,725 |
|
Net reserves, beginning of period (2) | | 263,203 |
| | 281,373 |
| | 266,470 |
| | 277,455 |
|
Incurred claims and claim expenses: | | |
| | |
| | | | |
Claims occurring in the current period | | 109,167 |
| | 134,411 |
| | 214,621 |
| | 253,178 |
|
Decrease in estimated reserves for claims occurring in prior periods (3) | | (1,000 | ) | | (2,000 | ) | | (2,000 | ) | | (4,000 | ) |
Total claims and claim expenses incurred (4) | | 108,167 |
| | 132,411 |
| | 212,621 |
| | 249,178 |
|
Claims and claim expense payments for claims occurring during: | | |
| | |
| | | | |
Current period | | 61,420 |
| | 83,755 |
| | 104,883 |
| | 129,469 |
|
Prior periods | | 37,542 |
| | 39,512 |
| | 101,800 |
| | 106,647 |
|
Total claims and claim expense payments | | 98,962 |
| | 123,267 |
| | 206,683 |
| | 236,116 |
|
Net reserves, end of period (2) | | 272,408 |
| | 290,517 |
| | 272,408 |
| | 290,517 |
|
Plus: reinsurance recoverables | | 116,083 |
| | 77,345 |
| | 116,083 |
| | 77,345 |
|
Ending gross reserves (1) | | $ | 388,491 |
| | $ | 367,862 |
| | $ | 388,491 |
| | $ | 367,862 |
|
| |
(1) | Unpaid claims and claim expenses as reported in the Consolidated Balance Sheets also include reserves for Supplemental, Life and Retirement of $57,505 thousand$56.1 million and $26,589 thousand$30.5 million as of SeptemberJune 30, 20192020 and 2018,2019, 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 $35,221 thousand$34.8 million and $78,119 thousand$69.1 million for the three and nine month periodssix months ended SeptemberJune 30, 2019,2020, respectively, in addition to Property and Casualty amounts. Benefits, claims and settlement expenses for Life and Retirement were $21,811 thousand$20.3 million and $65,958 thousand $42.9 millionfor thethree and nine month periodssix months ended SeptemberJune 30, 2018,2019, respectively. |
Net favorable development of total reserves for Property and Casualty claims occurring in prior years was $7.5$2.0 million and $0.3$4.0 million for the nine month periodssix months ended SeptemberJune 30, 20192020 and 2018,2019, respectively. The favorable development for the nine month periodsix months ended SeptemberJune 30, 2020 was the result of favorable loss trends in auto and homeowners loss emergence for accident years 2019 and prior. The favorable development for the six months ended June 30, 2019 was the result of favorable loss trends in auto and homeowners loss emergence for accident years 2018 and prior. The favorable development for the nine month period ended September 30, 2018 was predominately the result of favorable loss trends in homeowners emergence for accident years 2017 and prior.
|
| | |
Horace Mann Educators Corporation | 25 | Quarterly Report on Form 10-Q |
Indebtedness outstanding was as follows:
|
| | | | | | | | |
($ in thousands) | | 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 $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 |
|
Total | | $ | 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 September 30, 2019, the amount outstanding on the senior revolving credit facility was $135 million. The unused portion of the Bank Credit Facility is subject to a variable commitment fee, which was 0.15% on an annual basis at September 30, 2019.
The Company recognizes the cost of reinsurance premiums over the contract periods for such premiums in proportion to the insurance protection provided. Amounts recoverable from reinsurers for unpaid claims and claim settlement expenses, including estimated amounts for unsettled claims, claims incurred but not yet reported and policy benefits, are estimated in a manner consistent with the insurance liability associated with the policy. The effects of reinsurance on premiums written and contract deposits; premiums and contract charges earned; and benefits, claims and settlement expenses were as follows:
| | ($ in thousands) | | Gross Amount | | Ceded to Other Companies (1) | | Assumed from Other Companies | | Net Amount | | Gross Amount | | Ceded to Other Companies (1) | | Assumed from Other Companies | | Net Amount |
Three months ended September 30, 2019 | | |
| | |
| | |
| | |
| |
Three months ended June 30, 2020 | | | |
| | |
| | |
| | |
|
Premiums written and contract deposits (2) | | $ | 374,598 |
| | $ | 5,968 |
| | $ | 2,586 |
| | $ | 371,216 |
| | $ | 332,379 |
| | $ | 6,379 |
| | $ | 3,169 |
| | $ | 329,169 |
|
Premiums and contract charges earned | | 245,200 |
| | 8,181 |
| | 2,662 |
| | 239,681 |
| | 230,635 |
| | 8,307 |
| | 3,103 |
| | 225,431 |
|
Benefits, claims and settlement expenses | | 154,718 |
| | 2,310 |
| | 1,783 |
| | 154,191 |
| | 143,285 |
| | 2,407 |
| | 2,132 |
| | 143,010 |
|
| | | | | | | | | | | | | | | | |
Three months ended September 30, 2018 | | |
| | |
| | |
| | |
| |
Three months ended June 30, 2019 | | | |
| | |
| | |
| | |
|
Premiums written and contract deposits (2) | | $ | 342,268 |
| | $ | 5,370 |
| | $ | 1,199 |
| | $ | 338,097 |
| | $ | 314,897 |
| | $ | 6,028 |
| | $ | 2,822 |
| | $ | 311,691 |
|
Premiums and contract charges earned | | 210,953 |
| | 5,385 |
| | 1,252 |
| | 206,820 |
| | 213,415 |
| | 8,155 |
| | 2,836 |
| | 208,096 |
|
Benefits, claims and settlement expenses | | 163,912 |
| | 3,207 |
| | 1,141 |
| | 161,846 |
| | 153,436 |
| | 2,797 |
| | 2,053 |
| | 152,692 |
|
| | | | | | | | | | | | | | | | |
Nine months ended September 30, 2019 | | | | | | | | | |
Six months ended June 30, 2020 | | | | | | | | | |
Premiums written and contract deposits (2) | | $ | 988,588 |
| | $ | 17,844 |
| | $ | 7,557 |
| | $ | 978,301 |
| | $ | 666,110 |
| | $ | 12,689 |
| | $ | 4,506 |
| | $ | 657,927 |
|
Premiums and contract charges earned | | 671,871 |
| | 22,158 |
| | 7,849 |
| | 657,562 |
| | 473,805 |
| | 16,684 |
| | 4,575 |
| | 461,696 |
|
Benefits, claims and settlement expenses | | 450,206 |
| | 9,399 |
| | 5,460 |
| | 446,267 |
| | 282,817 |
| | 4,391 |
| | 3,244 |
| | 281,670 |
|
| | | | | | | | | | | | | | | | |
Nine months ended September 30, 2018 | | | | | | | | | |
Six months ended June 30, 2019 | | | | | | | | | |
Premiums written and contract deposits (2) | | $ | 936,948 |
| | $ | 16,367 |
| | $ | 3,246 |
| | $ | 923,827 |
| | $ | 613,990 |
| | $ | 11,876 |
| | $ | 4,971 |
| | $ | 607,085 |
|
Premiums and contract charges earned | | 628,582 |
| | 16,418 |
| | 3,264 |
| | 615,428 |
| | 426,671 |
| | 13,977 |
| | 5,187 |
| | 417,881 |
|
Benefits, claims and settlement expenses | | 486,339 |
| | 15,551 |
| | 2,898 |
| | 473,686 |
| | 295,488 |
| | 7,089 |
| | 3,677 |
| | 292,076 |
|
_____________
| |
(1) | Excludes the annuity reinsurance agreementtransaction accounted for underusing the deposit method that is discussed in Note 6.5. |
| |
(2) | This measure is not based on accounting principles generally accepted in the U.S.United States of America (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 10NOTE 9 - Commitments
Investment Commitments
From time to time, the Company has outstanding commitments to purchasefund investments and/or commitments to lend funds under bridgein limited partnership interests, commercial mortgage loans and bank loans. Such unfunded commitments were $198.3$358.9 million and $145.4$306.2 million at SeptemberJune 30, 20192020 and December 31, 2018,2019, respectively.
|
| | |
Horace Mann Educators Corporation | 26 | Quarterly Report on Form 10-Q |
Note 11NOTE 10 - Segment Information
The Company conducts and manages its business through 5 segments. See Note 1 for a description of the Company's reporting segments that changed effective in the third quarter of 2019. The 4 operating segments, representing the major lines of insurance business, areare: Property and Casualty (primarily personal lines automobile and property insurance products), the newly created Supplemental (primarily heart, cancer, accident and limited short-term supplemental disability insurance coverages), Retirement (primarily tax-qualified fixed and variable annuities) and Life (life insurance). The Company does not allocate the impact of corporate-level transactions to these operating segments, consistent with the basis for management's evaluation of the results of those segments, but classifies those items in the fifth segment, Corporate and Other. In addition to ongoing transactions such as corporate debt service, net investment gains (losses) and certain public company expenses, such items also have included corporate debt retirement costs, when applicable. Summarized financial information for these segments is as follows:
| | ($ in thousands) | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2019 | | 2018 | | 2019 | | 2018 | | 2020 | | 2019 | | 2020 | | 2019 |
Insurance premiums and contract charges earned | | | | | | | | | | | | | | | | |
Property and Casualty | | $ | 170,483 |
| | $ | 168,653 |
| | $ | 512,626 |
| | $ | 501,444 |
| | $ | 156,212 |
| | $ | 171,303 |
| | $ | 322,686 |
| | $ | 342,143 |
|
Supplemental | | 32,921 |
| | N/A |
| | 32,921 |
| | N/A |
| | 33,302 |
| | N/A |
| | 66,292 |
| | N/A |
|
Retirement | | 6,624 |
| | 8,031 |
| | 22,133 |
| | 23,924 |
| | 6,717 |
| | 6,931 |
| | 14,097 |
| | 15,509 |
|
Life | | 29,653 |
| | 30,136 |
| | 89,882 |
| | 90,060 |
| | 29,200 |
| | 29,862 |
| | 58,621 |
| | 60,229 |
|
Total | | $ | 239,681 |
| | $ | 206,820 |
| | $ | 657,562 |
| | $ | 615,428 |
| | $ | 225,431 |
| | $ | 208,096 |
| | $ | 461,696 |
| | $ | 417,881 |
|
| | | | | | | | | | | | | | | | |
Net investment income | | | | | | | | | | | | | | | | |
Property and Casualty | | $ | 10,726 |
| | $ | 12,361 |
| | $ | 33,587 |
| | $ | 32,177 |
| | $ | 6,325 |
| | $ | 12,643 |
| | $ | 16,618 |
| | $ | 22,861 |
|
Supplemental | | 3,691 |
| | N/A |
| | 3,691 |
| | N/A |
| | 4,035 |
| | N/A |
| | 7,555 |
| | N/A |
|
Retirement | | 60,770 |
| | 67,750 |
| | 188,193 |
| | 199,706 |
| | 55,044 |
| | 62,684 |
| | 108,569 |
| | 127,423 |
|
Life | | 18,453 |
| | 19,123 |
| | 54,829 |
| | 56,629 |
| | 15,630 |
| | 18,324 |
| | 31,188 |
| | 36,376 |
|
Corporate and Other | | — |
| | 41 |
| | (37 | ) | | 119 |
| | (58 | ) | | (14 | ) | | (112 | ) | | (37 | ) |
Intersegment eliminations | | (569 | ) | | (192 | ) | | (934 | ) | | (583 | ) | | (566 | ) | | (179 | ) | | (1,133 | ) | | (365 | ) |
Total | | $ | 93,071 |
| | $ | 99,083 |
| | $ | 279,329 |
| | $ | 288,048 |
| | $ | 80,410 |
| | $ | 93,458 |
| | $ | 162,685 |
| | $ | 186,258 |
|
| | | | | | | | | | | | | | | | |
Net income (loss) | | | | | | | | | | | | | | | | |
Property and Casualty | | $ | 14,194 |
| | $ | (3,190 | ) | | $ | 34,347 |
| | $ | (4,364 | ) | | $ | 11,289 |
| | $ | 5,101 |
| | $ | 37,859 |
| | $ | 20,153 |
|
Supplemental | | 6,943 |
| | N/A |
| | 6,943 |
| | N/A |
| | 9,479 |
| | N/A |
| | 20,016 |
| | N/A |
|
Retirement | | 5,915 |
| | 12,120 |
| | (6,979 | ) | | 37,682 |
| | 9,733 |
| | (25,045 | ) | | 8,786 |
| | (12,894 | ) |
Life | | 5,101 |
| | 5,331 |
| | 13,617 |
| | 14,997 |
| | 1,922 |
| | 5,239 |
| | 2,563 |
| | 8,516 |
|
Corporate and Other | | (6,699 | ) | | (1,733 | ) | | 103,514 |
| | (9,715 | ) | | (1,845 | ) | | 108,527 |
| | (20,174 | ) | | 110,213 |
|
Total | | $ | 25,454 |
| | $ | 12,528 |
| | $ | 151,442 |
| | $ | 38,600 |
| | $ | 30,578 |
| | $ | 93,822 |
| | $ | 49,050 |
| | $ | 125,988 |
|
| | ($ in thousands) | | September 30, 2019 | | December 31, 2018 | | June 30, 2020 | | December 31, 2019 |
Assets | | | | | | | | |
Property and Casualty | | $ | 1,297,585 |
| | $ | 1,236,362 |
| | $ | 1,283,328 |
| | $ | 1,327,099 |
|
Supplemental | | 745,345 |
| | N/A |
| | 810,122 |
| | 747,602 |
|
Retirement | | 8,328,718 |
| | 7,866,969 |
| | 8,317,079 |
| | 8,330,127 |
|
Life | | 1,857,331 |
| | 1,821,351 |
| | 2,048,910 |
| | 1,964,993 |
|
Corporate and Other | | 156,310 |
| | 149,014 |
| | 168,108 |
| | 172,955 |
|
Intersegment eliminations | | (52,744 | ) | | (41,800 | ) | | (55,843 | ) | | (64,072 | ) |
Total | | $ | 12,332,545 |
| | $ | 11,031,896 |
| | $ | 12,571,704 |
| | $ | 12,478,704 |
|
________________
N/A - The acquisition of NTA closed on July 1, 2019.
Note 12 - Operating Leases |
| | |
Horace Mann Educators Corporation | 27 | Quarterly Report on Form 10-Q |
The Company has various operating lease agreements, primarily for real estate offices 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 certain leases for up to an additional 25 years.
The components of lease expense were as follows:
|
| | | | | | | | |
($ in thousands) | | Three Months Ended September 30, 2019 | | Nine Months Ended September 30, 2019 |
Operating lease cost | | $ | 1,124 |
| | $ | 2,720 |
|
Short-term lease cost | | 57 |
| | 155 |
|
Total lease cost | | $ | 1,181 |
| | $ | 2,875 |
|
Supplemental cash flow information related to operating leases was as follows:
|
| | | | | | | | |
($ in thousands) | | Three Months Ended September 30, 2019 | | Nine Months Ended September 30, 2019 |
Cash paid for amounts included in the measurement of lease liabilities | | $ | 1,006 |
| | $ | 2,340 |
|
Supplemental balance sheet information related to operating leases was as follows:
|
| | | | |
($ in thousands, except lease term and discount rate) | | September 30, 2019 |
Assets | | |
Right of use assets, included in Other assets | | $ | 17,527 |
|
Liabilities | | |
Operating lease liabilities, included in Other liabilities | | $ | 18,439 |
|
| | |
Weighted average remaining lease term | | 4.74 |
|
Weighted average discount rate | | 3.78 | % |
Future minimum lease payments under non-cancellable operating leases as of September 30, 2019 were as follows:
|
| | | | |
($ in thousands) | | |
Year Ending December 31, | | |
2019 (excluding the nine months ended September 30, 2019) | | $ | 1,108 |
|
2020 | | 4,443 |
|
2021 | | 4,284 |
|
2022 | | 4,156 |
|
2023 | | 3,459 |
|
Thereafter | | 2,717 |
|
Total future minimum lease payments | | 20,167 |
|
Less imputed interest | | (1,728 | ) |
Total | | $ | 18,439 |
|
As of September 30, 2019, the Company has no additional operating leases that have not yet commenced.
NOTE 11 - 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 table reconciles these components.
|
| | | | | | | | | | | | |
($ in thousands) | | Net Unrealized Investment Gains (Losses) on Securities (1)(2) | | Net Funded Status of Benefit Plans (1) | | Total (1) |
Beginning balance, April 1, 2020 | | $ | 136,679 |
| | $ | (10,767 | ) | | $ | 125,912 |
|
Other comprehensive income (loss) before reclassifications | | 147,529 |
| | — |
| | 147,529 |
|
Amounts reclassified from AOCI | | (5,079 | ) | | — |
| | (5,079 | ) |
Net current period other comprehensive income (loss) | | 142,450 |
| | — |
| | 142,450 |
|
Ending balance, June 30, 2020 | | $ | 279,129 |
| | $ | (10,767 | ) | | $ | 268,362 |
|
| | | | | | |
Beginning balance, January 1, 2020 | | $ | 230,448 |
| | $ | (10,767 | ) | | $ | 219,681 |
|
Other comprehensive income (loss) before reclassifications | | 42,999 |
| | — |
| | 42,999 |
|
Amounts reclassified from AOCI | | 5,682 |
| | — |
| | 5,682 |
|
Net current period other comprehensive income (loss) | | 48,681 |
| | — |
| | 48,681 |
|
Ending balance, June 30, 2020 | | $ | 279,129 |
| | $ | (10,767 | ) | | $ | 268,362 |
|
| |
(1) | All amounts are net of tax. |
| |
(2) | The pretax amounts reclassified from AOCI, $6.4 million and $(7.2) million, are included in Net investment gains (losses) and the related income tax expenses, $1.4 million and $(1.5) million, are included in income tax expense in the Consolidated Statements of Operations for the three and six month periods ended June 30, 2020, respectively. |
|
| | | | | | | | | | | | |
($ in thousands) | | Net Unrealized Investment Gains (Losses) on Securities (1)(2) | | Net Funded Status of Benefit Plans (1) | | Total (1) |
Beginning balance, April 1, 2019 | | $ | 210,839 |
| | $ | (12,185 | ) | | $ | 198,654 |
|
Other comprehensive income (loss) before reclassifications | | 107,163 |
| | — |
| | 107,163 |
|
Amounts reclassified from AOCI | | (114,925 | ) | | — |
| | (114,925 | ) |
Net current period other comprehensive income (loss) | | (7,762 | ) | | — |
| | (7,762 | ) |
Ending balance, June 30, 2019 | | $ | 203,077 |
| | $ | (12,185 | ) | | $ | 190,892 |
|
| | | | | | |
Beginning balance, January 1, 2019 | | $ | 96,941 |
| | $ | (12,185 | ) | | $ | 84,756 |
|
Other comprehensive income (loss) before reclassifications | | 227,466 |
| | — |
| | 227,466 |
|
Amounts reclassified from AOCI | | (121,330 | ) | | — |
| | (121,330 | ) |
Net current period other comprehensive income (loss) | | 106,136 |
| | — |
| | 106,136 |
|
Ending balance, June 30, 2019 | | $ | 203,077 |
| | $ | (12,185 | ) | | $ | 190,892 |
|
(1) All amounts are net of tax.
| |
(2) | The pretax amounts reclassified from AOCI, $145.5 million and $153.6 million, are included in Net investment gains (losses) and the related income tax expenses, $30.5 million and $32.3 million, are included in Income tax expense in the Consolidated Statements of Operations for the three and six month periods ended June 30, 2019, respectively. |
Comparative information for elements that are not required to be reclassified in their entirety to net income in the same reporting period is disclosed in Note 132.
|
| | |
Horace Mann Educators Corporation | 28 | Quarterly Report on Form 10-Q |
NOTE 12 - Supplemental Disclosure of Consolidated Cash and Cash Flow Information
|
| | | | | | | | |
($ in thousands) | | June 30, | | December 31, |
| | 2020 | | 2019 |
Cash | | $ | 81,709 |
| | $ | 25,206 |
|
Restricted cash | | 681 |
| | 302 |
|
Total cash and restricted cash shown in the Consolidated Balance Sheets and Consolidated Statements of Cash Flows | | $ | 82,390 |
| | $ | 25,508 |
|
|
| | | | | | | | |
($ in thousands) | | Six Months Ended June 30, |
| | 2020 | | 2019 |
Cash paid (recovered) during the six months for: | | | | |
Interest | | $ | 8,247 |
| | $ | 6,440 |
|
Income taxes | | (617 | ) | | 78 |
|
Non-cash investing activities include $2.1 billion of investments transferred to a reinsurer as consideration paid during the second quarter of 2019 in connection with the Company's reinsurance of a $2.9 billion block of in force fixed and variable annuity business. See Note 65 for further information.
Non-cash investing activities in respect to modifications or exchanges of fixed maturity securities as well as paid-in-kind activity for policy loans were insignificant for the ninethree and six months ended SeptemberJune 30, 2020 and 2019, and 2018, respectively.
Note 14 - GoodwillITEM 2.IManagement's Discussion 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 descriptionAnalysis of impairment testing.
The annuity reinsurance transaction described in Note 6 triggered the requirement to evaluate the goodwill associated with the annuity businessFinancial Condition and Results 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 |
|
Operations (MD&A)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.United States of America (non-GAAP) are marked with an asterisk (*) the first time they are presented within this Part I - 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.United States of America (GAAP) in the Appendix to the Company's ThirdSecond Quarter 20192020 Investor Supplement.
Increases or decreases in this MD&A that are not meaningful are marked "N.M.".
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;(referred to in Part I - Items 2 - 4 and together with its subsidiaries,Part II of this report as "we", "our", "us", the Company"Company", "Horace Mann" or Horace Mann)"HMEC") is an insurance holding company. Horace Mann isWe are not under any obligation to (and expressly disclaimsdisclaim 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’sour actual results could differ materially from those projected in forward-looking statements due to a number of risks and uncertainties inherent in the Company'sour business. See Part II - Item 1A in this Quarterly Report on Form 10-Q andas well as in the Company’sPart I - Item 1A in our Annual Report on Form 10-K for the year ended December 31, 20182019 for additional information regarding risks and uncertainties.
|
| | |
Horace Mann Educators Corporation | 29 | Quarterly Report on Form 10-Q |
Introduction
The purpose of this MD&A is to provide an understanding of the Company’sour consolidated results of operations and financial condition. This MD&A should be read in conjunction with the Consolidated Financial Statements and Notes thereto contained in Part I - Item 1 of this report.
HMEC is an insurance holding company. Throughcompany, and through its subsidiaries, HMECit 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 itsUnited States of America (U.S.). We market our 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’scovers our 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.segment and investment results.
Coronavirus Disease (COVID-19) Considerations
Beginning in March 2020, the global pandemic associated with the novel coronavirus COVID-19 and related economic conditions introduced unprecedented challenges for our country. Those challenges are ongoing. We relied on our previously developed Corporate Pandemic Plan to address preparation, prevention and response measures specific to COVID-19 while allowing flexibility to quickly react to evolving circumstances and implement varying actions accordingly.
As discussed in the Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2020, we successfully transitioned the organization, through our employees and agents, from one that relied on in-person experience to one that has become primarily virtual. While the current environment continues to present challenges, our operations are being conducted successfully and we continue to support our agents and serve our customers in an effective manner.
As of the end of June 2020, we had approximately 85% of our employees working remotely. We anticipate another 15% of our workforce will return to the offices by the end of August 2020. The return to office plans are being guided by data from the Center for Disease Control. We currently anticipate limiting office occupancy to no more than 50% of pre-COVID-19 levels to enable effective social distancing for some time. We are also implementing other prevention strategies to reduce the transmission of COVID-19, such as requiring face masks in common office areas.
Taking into account the predominantly virtual work environment, we have implemented additional cybersecurity measures including increasing security and network monitoring to proactively identify and prevent potential security threats and vulnerabilities. We also are identifying and assessing critical third-party vendors and ensuring their ability to continue to perform as anticipated.
Horace Mann markets primarily to K-12 teachers, administrators and other employees of public schools and their families and we estimate that 80% of our customer base are educators or other individuals employed by public school systems. In our experience, educators generally remain employed during periods of economic disruption. That largely remained true through the end of the recently completed 2019-2020 school year, as educators were typically asked to teach remotely when areas of the country took steps to minimize the spread of COVID-19 in their communities.
We continue to work with our network of exclusive agents to make sure they are making use of the tools that allow them to virtually reach current and potential educator customers. Our plans for this fall’s return to school includes a variety of new and modified forums to give teachers access to the financial solutions we provide. However, growth in new sales has slowed since the pandemic began, particularly sales generated from in-person events at schools. This may be exacerbated if public school systems face budget constraints in the fall due to the economic impacts of the pandemic and/or continue to restrict all "in school" access.
For further discussion regarding the current period and potential future impacts of COVID-19 and related economic conditions on us, see "Outlook for 2020" and other content within this MD&A as well as Part II—Item 1A.
In addition, over the past several years, we proactively de-risked our portfolio in anticipation of a recession and believe we are well positioned for the current dislocation in the markets. Although we have experienced the
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Horace Mann Educators Corporation | 30 | Quarterly Report on Form 10-Q |
impacts of market volatility on our fixed maturity security and limited partnership interest valuations in the second quarter of 2020, the investment portfolio is well diversified, is 95.3% investment grade-rated and has an average rating of A+. The annuity reinsurance agreement, entered into in the second quarter of 2019, which reinsured a $2.2 billion block of in force fixed annuities with a minimum crediting rate of 4.5%, helps mitigate the risk of not being able to generate spreads on the annuity business that meet our return targets. We believe our capital and reserves are adequate to address any unusual loss patterns resulting from COVID-19.
Amid rapidly changing dynamics, we are continuing to evaluate all aspects of our operations and making necessary adjustments to manage our business. Ultimately, the extent of the impact will depend on how long it takes for the economy to return to some degree of normality. To date, these steps have been effective and maintained business continuity. Based on assumptions that presume a return to a normal operating environment within six months, capital and liquidity are expected to remain at or near target levels. We believe we are financially strong despite the potential impact of the COVID-19 pandemic and continued to produce solid operating results in the second quarter of 2020.
Consolidated Financial Highlights
(All comparisons versusvs. same periodperiods in 2018,2019, unless noted otherwise)
|
| | | | | | | | | | | | | | | | | | | | | | |
($ in millions) | | Three Months Ended September 30, | | 2019-2018 | | Nine Months Ended September 30, | | 2019-2018 |
| | 2019 | | 2018 | | Change % | | 2019 | | 2018 | | Change % |
Total revenues | | $ | 334.4 |
| | $ | 311.4 |
| | 7.4 | % | | $ | 1,099.1 |
| | $ | 913.1 |
| | 20.4 | % |
Net income | | 25.4 |
| | 12.5 |
| | 103.2 | % | | 151.4 |
| | 38.6 |
| | N.M. |
|
Per diluted share: | | | | | | | | | | | | |
Net income | | $ | 0.60 |
| | $ | 0.30 |
| | 100.0 | % | | $ | 3.61 |
| | $ | 0.93 |
| | N.M. |
|
Net investment gains (losses), after tax | | (0.04 | ) | | 0.05 |
| | N.M. |
| | 2.84 |
| | 0.04 |
| | N.M. |
|
Book value per share | | | | | | | | $ | 38.30 |
| | $ | 31.78 |
| | 20.5 | % |
Net income return on equity - last twelve months | | | | | | | | 9.2 | % | | 11.8 | % | |
|
|
Net income return on equity - annualized | | | | | | | | 14.1 | % | | 3.7 | % | |
|
|
________________
N.M. - Not meaningful.
Net Income |
| | | | | | | | | | | | | | | | | | | | | | |
($ in millions) | | Three Months Ended June 30, | | 2020-2019 | | Six Months Ended June 30, | | 2020-2019 |
| | 2020 | | 2019 | | Change % | | 2020 | | 2019 | | Change % |
Total revenues | | $ | 314.9 |
| | $ | 454.1 |
| | -30.7 | % | | $ | 622.2 |
| | $ | 770.0 |
| | -19.2 | % |
Net income | | 30.5 |
| | 93.8 |
| | -67.5 | % | | 49.0 |
| | 126.0 |
| | -61.1 | % |
Per diluted share: | | | | | | | | | | | | |
Net income | | 0.73 |
| | 2.24 |
| | -67.4 | % | | 1.17 |
| | 3.01 |
| | -61.1 | % |
Net investment gains (losses), after tax | | 0.06 |
| | 2.74 |
| | N.M. |
| | (0.28 | ) | | 2.88 |
| | N.M. |
|
Book value per share | | | | | | | | $ | 39.69 |
| | $ | 36.41 |
| | 9.0 | % |
Net income return on equity - last twelve months | | | | | | | | 6.9 | % | | 8.6 | % | |
|
|
Net income return on equity - annualized | | | | | | | | 6.1 | % | | 18.1 | % | |
|
|
For the three and nine month periodssix months ended SeptemberJune 30, 2019, the Company's2020, net income increased $12.9decreased $63.3 million and $112.8$77.0 million, respectively. The increase in net income for the three month period was primarily due to lower catastrophe losses in Property and Casualty and the addition 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 second quarter of 2019 associatedwith respect to the transfer of investments as consideration in connection with the annuity reinsurance transaction. The impact from the realized investmentThat gain was partially offset by a $28.0 million annuity goodwill impairment charge. Lower catastrophe costs inmore favorable results from Property and Casualty as well as the additioninclusion of results from the newly added Supplemental also contributed tosegment in the increase in net income for the nine month period. See Item 1, Notes 2, 6 and 14 of the Consolidated Financial Statements for more information regarding Supplemental, the annuity reinsurance transaction and the goodwill impairment charge.current periods.
Net income (loss) by segment is as follows:
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Horace Mann Educators Corporation | 31 | Quarterly Report on Form 10-Q |
|
| | | | | | | | | | | | | | | | | | | | | | |
($ in millions) | | Three Months Ended September 30, | | 2019-2018 | | Nine Months Ended September 30, | | 2019-2018 |
| | 2019 | | 2018 | | Change % | | 2019 | | 2018 | | Change % |
Analysis of net income (loss) by segment: | | | | | | | | |
| | |
| | |
Property and Casualty | | $ | 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 | | 5.9 |
| | 12.1 |
| | -51.2 | % | | (6.9 | ) | | 37.6 |
| | -118.4 | % |
Life | | 5.1 |
| | 5.3 |
| | -3.8 | % | | 13.6 |
| | 15.0 |
| | -9.3 | % |
Corporate and Other | | (6.7 | ) | | (1.7 | ) | | N.M. |
| | 103.5 |
| | (9.6 | ) | | N.M. |
|
Net income | | $ | 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 Retirement in the nine month period ended September 30, 2019 is primarily due to the $28.0 million goodwill impairment charge which was triggered by the annuity reinsurance transaction.
The aforementioned $106.9 million after tax realized investment gain recognized in the second quarter of 2019 associated with the annuity reinsurance transaction is reported in the results for the Corporate and Other segment.
Consolidated Results of Operations
(All comparisons versusvs. same periodperiods in 2018,2019, unless noted otherwise)
|
| | | | | | | | | | | | | | | | | | | | | | |
($ in millions) | | Three Months Ended September 30, | | 2019-2018 | | Nine Months Ended September 30, | | 2019-2018 |
| | 2019 | | 2018 | | Change % | | 2019 | | 2018 | | Change % |
Insurance premiums and contract charges earned | | $ | 239.7 |
| | $ | 206.8 |
| | 15.9 | % | | $ | 657.6 |
| | $ | 615.4 |
| | 6.9 | % |
Net investment income | | 93.0 |
| | 99.1 |
| | -6.2 | % | | 279.3 |
| | 288.1 |
| | -3.1 | % |
Net investment gains (losses) | | (2.1 | ) | | 2.9 |
| | N.M. |
| | 151.6 |
| | 1.9 |
| | N.M. |
|
Other income | | 3.8 |
| | 2.6 |
| | 46.2 | % | | 10.6 |
| | 7.7 |
| | 37.7 | % |
Total revenues | | 334.4 |
| | 311.4 |
| | 7.4 | % | | 1,099.1 |
| | 913.1 |
| | 20.4 | % |
| | | | | | | | | | | | |
Benefits, claims and settlement expenses | | 154.2 |
| | 161.8 |
| | -4.7 | % | | 446.3 |
| | 473.7 |
| | -5.8 | % |
Interest credited | | 53.6 |
| | 52.1 |
| | 2.9 | % | | 160.1 |
| | 153.2 |
| | 4.5 | % |
Operating expenses | | 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 | | 4.6 |
| | 3.2 |
| | 43.8 | % | | 11.2 |
| | 9.7 |
| | 15.5 | % |
Other expense - goodwill impairment | | — |
| | — |
| | N.M. |
| | 28.0 |
| | — |
| | N.M. |
|
Total benefits, losses and expenses | | 303.9 |
| | 294.3 |
| | 3.3 | % | | 903.0 |
| | 865.4 |
| | 4.3 | % |
| | | | | | | | | | | | |
Income before income taxes | | 30.5 |
| | 17.1 |
| | 78.4 | % | | 196.1 |
| | 47.7 |
| | N.M. |
|
Income tax expense | | 5.1 |
| | 4.6 |
| | 10.9 | % | | 44.7 |
| | 9.1 |
| | N.M. |
|
Net income | | $ | 25.4 |
| | $ | 12.5 |
| | 103.2 | % | | $ | 151.4 |
| | $ | 38.6 |
| | N.M. |
|
________________
N.M. - Not meaningful.
|
| | | | | | | | | | | | | | | | | | | | | | |
($ in millions) | | Three Months Ended June 30, | | 2020-2019 | | Six Months Ended June 30, | | 2020-2019 |
| | 2020 | | 2019 | | Change % | | 2020 | | 2019 | | Change % |
Insurance premiums and contract charges earned | | $ | 225.4 |
| | $ | 208.1 |
| | 8.3 | % | | $ | 461.7 |
| | $ | 417.9 |
| | 10.5 | % |
Net investment income | | 80.4 |
| | 93.5 |
| | -14.0 | % | | 162.7 |
| | 186.3 |
| | -12.7 | % |
Net investment gains (losses) | | 3.2 |
| | 146.3 |
| | N.M. |
| | (15.3 | ) | | 153.7 |
| | N.M. |
|
Other income | | 5.9 |
| | 6.2 |
| | -4.8 | % | | 13.1 |
| | 12.1 |
| | 8.3 | % |
Total revenues | | 314.9 |
| | 454.1 |
| | -30.7 | % | | 622.2 |
| | 770.0 |
| | -19.2 | % |
| | | | | | | | | | | | |
Benefits, claims and settlement expenses | | 143.0 |
| | 152.7 |
| | -6.4 | % | | 281.7 |
| | 292.1 |
| | -3.6 | % |
Interest credited | | 50.7 |
| | 53.6 |
| | -5.4 | % | | 102.2 |
| | 106.5 |
| | -4.0 | % |
Operating expenses | | 55.7 |
| | 57.3 |
| | -2.8 | % | | 116.4 |
| | 113.5 |
| | 2.6 | % |
DAC unlocking and amortization expense | | 20.4 |
| | 31.6 |
| | -35.4 | % | | 50.4 |
| | 56.6 |
| | -11.0 | % |
Intangible asset amortization expense | | 3.7 |
| | 0.6 |
| | N.M. |
| | 7.4 |
| | 1.1 |
| | N.M. |
|
Interest expense | | 4.0 |
| | 3.3 |
| | 21.2 | % | | 8.2 |
| | 6.6 |
| | 24.2 | % |
Other expense - goodwill impairment | | — |
| | 28.0 |
| | N.M. |
| | — |
| | 28.0 |
| | N.M. |
|
Total benefits, losses and expenses | | 277.5 |
| | 327.1 |
| | -15.2 | % | | 566.3 |
| | 604.4 |
| | -6.3 | % |
| | | | | | | | | | | | |
Income before income taxes | | 37.4 |
| | 127.0 |
| | -70.6 | % | | 55.9 |
| | 165.6 |
| | -66.2 | % |
Income tax expense | | 6.9 |
| | 33.2 |
| | -79.2 | % | | 6.9 |
| | 39.6 |
| | -82.6 | % |
Net income | | $ | 30.5 |
| | $ | 93.8 |
| | -67.5 | % | | $ | 49.0 |
| | $ | 126.0 |
| | -61.1 | % |
Insurance Premiums and Contract Charges Earned
For the three and nine month periodssix months ended SeptemberJune 30, 2019,2020, insurance premiums and contract charges earned increased $32.9$17.3 million and $42.2$43.8 million, respectively. The increase for the three month period isrespectively, primarily due to the addition of earned premiums from Supplemental. The increase for the nine month period isThese were partially offset by lower premiums earned by Property and Casualty, including recognition of $9.8 million of automobile premium credits to our policyholders related to reduced driving activity due to the addition of earned premiums from Supplemental as well as increases in average premium per policy for both automobile and property.
COVID-19.
Net Investment Income
Excluding accreted net investment income on the deposit asset on reinsurance, net investment income for the three and nine month periodssix months ended SeptemberJune 30, 2019 declined2020, net investment income decreased $13.8 million and $48.0 million, respectively, primarily becausedue to a $2.1 billion reduction in invested assets decreased 18.4% from December 31, 2018 due to assetsinvestments transferred under the annuity reinsurance transaction in the second quarter of 2019 as well as lower than expected new money rates and prepayments that were partially offset by stronger returns on alternativelimited partnership investments. Investment yields continue to be impacted by the low interest rate environment of recent years. AnnualizedThe annualized investment yield on the investment portfolio yield is presented in the following table:excluding limited partnership interests* was as follows:
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| | | | | | | | |
| | 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% |
|
| | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
Investment yield, excluding limited partnership interests, pretax - annualized* | | 4.4% | | 4.7% | | 4.4% | | 4.8% |
Investment yield, excluding limited partnership interests, after tax - annualized* | | 3.5% | | 3.8% | | 3.6% | | 3.8% |
During the nine month periodthree and six months ended SeptemberJune 30, 2019, management2020, we continued to identify and purchase investments, including a modest level of alternative investments,limited partnership interests, with attractive risk-adjusted yields relative to market conditions without venturing into asset classes or individual securities that would be inconsistent with the Company'sour overall conservative investment guidelines.
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Horace Mann Educators Corporation | 32 | Quarterly Report on Form 10-Q |
Net Investment Gains (Losses)
For the three and nine month periodssix months ended SeptemberJune 30, 2019,2020, net investment gains decreased $5.0$143.1 million and increased $149.7$169.0 million, respectively. The decrease for the three month period wasrespectively, primarily due to changes in fair value and settlements for derivatives. The increase for the nine month period was primarily due to recognitionas a result of a realized investment gain of $135.3 million inrecognized during the second quarter of 2019 in connection with the transfer of investments related to the aforementioned annuity reinsurance transaction. The breakdown of net investment gains (losses) by transaction type is shown in the following table:were as follows:
| | ($ in millions) | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2019 | | 2018 | | 2019 | | 2018 | | 2020 | | 2019 | | 2020 | | 2019 |
OTTI losses recognized in earnings | | $ | — |
| | $ | — |
| | $ | (0.3 | ) | | $ | (1.4 | ) | |
Net other-than-temporary impairment losses on securities recognized in earnings | | | $ | (0.5 | ) | | $ | — |
| | $ | (4.2 | ) | | $ | (0.3 | ) |
Sales and other, net | | 0.6 |
| | (1.3 | ) | | 147.5 |
| | 2.7 |
| | 0.4 |
| | 142.1 |
| | 4.9 |
| | 146.9 |
|
Change in fair value - equity securities | | 1.1 |
| | 2.0 |
| | 8.0 |
| | (4.3 | ) | | 6.6 |
| | 3.4 |
| | (7.9 | ) | | 6.9 |
|
Change in fair value and gains (losses) realized on settlements - derivatives | | (3.8 | ) | | 2.2 |
| | (3.6 | ) | | 4.9 |
| | (3.3 | ) | | 0.8 |
| | (8.1 | ) | | 0.2 |
|
Net investment gains (losses) | | $ | (2.1 | ) | | $ | 2.9 |
| | $ | 151.6 |
| | $ | 1.9 |
| | $ | 3.2 |
| | $ | 146.3 |
| | $ | (15.3 | ) | | $ | 153.7 |
|
The Company, fromFrom time to time, sellswe may sell 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'sour intent to sell an invested asset.
Other Income
For the three and nine month periodssix months ended SeptemberJune 30, 2019,2020, other income increased comparedwas comparable to the prior year periods primarily due to inclusion of Benefit Consultants Group, Inc. (BCG) brokerage fees.
periods.
Benefits, Claims and Settlement Expenses
For the three and nine month periodssix months ended SeptemberJune 30, 2019,2020, benefits, claims and settlement expenses decreased $7.6$9.7 million and $27.4$10.4 million, respectively, driven primarily by lower catastrophe losses and improved automobile loss experience partially offset by higher catastrophe losses and the addition of benefits, claims and settlement expenses from the new Supplemental segment. The improved automobile loss experience is a result of lower frequency of losses related to reduced driving activity due to COVID-19.
Interest Credited
For the three and nine month periodssix months ended SeptemberJune 30, 2019, the increase in Retirement2020, interest credited reflected higher interest costs ondecreased $2.9 million and $4.3 million, respectively, driven primarily by a lower level of Federal Home Loan Bank (FHLB) funding agreements as well as a 2.4% increase in average accumulated fixed deposits.agreements. 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 September 30, 2019, excluding the reinsured block was 2.5% at June 30, 2020 and 3.6% at SeptemberJune 30, 2018.
2019, respectively.
Operating Expenses
For the three and nine month periodsmonths ended SeptemberJune 30, 2019, increases in2020, operating expenses were consistent with management's expectations asdecreased $1.6 million, primarily due to the current periods include $13.8inclusion of $9.8 million and $18.4 million, respectively, of operating expenses pertainingfrom Supplemental operations that was more than offset by expense reduction initiatives that began in 2019 as well as a lower level of expenses realized in 2020 due to NTA and BCG operations.
COVID-19. For the six months ended June 30, 2020, operating expenses increased $2.9 million, primarily due to the inclusion of $19.6 million of operating expenses from Supplemental operations offset by expense reduction initiatives that began 2019 as well as a lower level of expenses realized in 2020 due to COVID-19.
Deferred Acquisition Costs (DAC) Unlocking and Amortization Expense
For the three and nine month periodsmonths ended SeptemberJune 30, 2019,2020, DAC unlocking and amortization expense increased $0.1decreased $11.2 million and $3.5primarily due to $4.6 million respectively. The increaseof favorable DAC unlocking in Retirement for the nine month period wascurrent quarter (primarily market performance) compared to $5.6 million of unfavorable DAC unlocking in the prior year quarter primarily due to accelerated amortization of the DAC asset associated with the reinsured annuity block partially offset by favorableblock. For the six months ended June 30, 2020, DAC unlocking in Retirementand amortization expense decreased $6.2 million primarily due to market performance.the aforementioned DAC accelerated amortization that occurred in the prior year period. For Life, DAC unlocking resulted in an immaterial change to amortization for the three and nine month periodssix months ended SeptemberJune 30, 2019.2020.
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Horace Mann Educators Corporation | 33 | Quarterly Report on Form 10-Q |
Intangible Asset Amortization Expense
For the three and six months ended June 30, 2020, intangible asset amortization expense increased $3.1 million and $6.3 million, respectively, primarily due to the acquisition of NTA Life Enterprises, LLC (NTA) in 2019.
Interest Expense
For the three and nine month periodssix months ended SeptemberJune 30, 2019, intangible asset amortization expense increased $3.8 million and $4.9 million due to the acquisitions of NTA and BCG in 2019.
Interest Expense
For the three and nine month periods ended September 30, 2019,2020, interest expense increased $1.4$0.7 million and $1.5$1.6 million, respectively, as the Companywe utilized itsour senior revolving credit facility in the currentthird quarter of 2019 to partially fund the acquisition of NTA on July 1, 2019.
Other Expense - Goodwill Impairment
For the three and ninesix month periods ended SeptemberJune 30, 2019, other expense represents the aforementionedrepresented a goodwill impairment charge in Retirement.
Retirement resulting from the annuity reinsurance transaction.
Income Tax Expense
The effective income tax rate on the Company'sour pretax income, including net investment gains (losses), was 22.7%12.3% and 19.1%23.9% for the nine month periodssix months ended SeptemberJune 30, 20192020 and 2018,2019, respectively. Income from investments in tax-advantaged securities reduced the effective income tax rates by 1.85.3 and 2.81.4 percentage points for the nine month periodssix months ended SeptemberJune 30, 20192020 and 2018,2019, respectively. The goodwill impairment charge in the Retirement segment increased the effective income tax rate by 2.83.5 percentage points at SeptemberJune 30, 2019.
On March 27, 2020, H.R. 748, the Coronavirus Aid, Relief, and Economic Security Act, “the CARES Act”, was signed into legislation. The CARES Act includes tax provisions relevant to businesses, and some of the significant changes include allowance of a five year carryback of net operating losses for 2018-2020 and the suspension of the 80% limitation of taxable income for net operating loss carryforwards for 2018-2020. The effects of the CARES Act are reflected in our income tax expense calculations as of March 31, 2020. Accounting Standards Codification Topic 740: Income Taxes requires that the impact of the CARES Act be recognized in the period in which the law was enacted. As a result, total income tax expense for the six months ended June 30, 2020 includes a benefit of $2.8 million (that reduced the effective income tax rate by 5.0 percentage points) to reflect a net operating loss carryback to taxable years for which the corporate rate was 35% as compared to the current corporate rate of 21%.
The Company recordsWe record 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 hasWe have no unrecorded liabilities from uncertain tax filing positions.
At SeptemberJune 30, 2019, the Company's2020, our federal income tax returns for years prior to 2014 are no longer subject to examination by the Internal Revenue Service (IRS). Management doesService. We do not anticipate any assessments for tax years that remain subject to examination to have a material effect on the Company'sour financial position or results of operations.
Outlook for 20192020
The following discussion provides outlook information for our results of operations and capital position.
The impacts of COVID-19 and related economic conditions on our results continue to be highly uncertain and outside our control. The scope, duration and magnitude of the direct and indirect effects of COVID-19 continue to evolve in ways that are difficult or impossible to anticipate. In addition, because the unprecedented COVID-19 environment has only impacted our insurance operations for slightly more than three months, we do not believe its impact on our results for the first half of 2020 will be indicative of our results for the remainder of 2020. For additional information on the risks posed by COVID-19, see “Our business may be adversely affected by the recent COVID-19 outbreak” included in Part II - Item 1A in this Quarterly Report on Form 10-Q.
At the time of issuance of this Quarterly Report on Form 10-Q, management estimateswe estimate that 20192020 full year core earnings*net income will be within a range of $2.05$2.80 to $2.15$3.00 per diluted share generating a core returnbased on equity*analysis of around 7.0%. This projection also reflectsCOVID-19 scenarios. The increase in the range from the Outlook for 2020 we discussed in the Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2020 anticipates an effective tax rate of between 16% and 18%.
Withinincrease in the Property and Casualty planned premium rate increases,segment results as well as continued underwriting initiatives,discussed below.
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Horace Mann Educators Corporation | 34 | Quarterly Report on Form 10-Q |
Property and Casualty
Net written premiums for 2020 are expected to improvebe below 2019 levels due to the underlyingrecognition of $9.8 million of COVID-19 related premium credits in the second quarter and lower levels of new business due to the pandemic. Retention remains stable. We expect rate increases will continue to average in the low-single digits across the automobile loss ratio* by about 3.0 to 3.5 points and the underlying property loss ratio* is anticipated to remain flat compared to full year 2018. Catastrophe costs are projected to be between $50 million and $55 million and thebooks. The expense ratio is expected to be consistentflat with 2018 at around 27%.the 2019 expense ratio of 26.9 points.
Net income for RetirementWe experienced a lower level of automobile loss frequency resulting from temporary changes in policyholder driving patterns due to COVID-19 during the second quarter. Frequency was most favorably impacted in the month of April, with May and June levels rising sequentially. We anticipate frequency will continue at ato moderate as miles driven move back to near historic levels, but we project it will be lower run rate as a resultthan 2019 levels for the remainder of the recent annuityyear with an offsetting increase in severity. A 10% drop in automobile frequency represents approximately $2 million in pretax earnings per month, excluding the potential for higher severity.
In connection with the emergence of PG&E Corporation and Pacific Gas and Electric Company (together, PG&E) from bankruptcy on July 1, 2020, in the third quarter of 2020, we expect to recognize favorable prior year reserve development of approximately $4.8 million, pretax and net of reinsurance, transaction and redeploymentalong with the return of capitalreinsurance reinstatement premiums of approximately $3.5 million, for a total of $8.3 million, related to the new Supplemental segment. Net investment income declines2018 Camp Fire in California. The 2018 California Camp Fire generated gross losses of $150.0 million, and, net losses after reinsurance of $37.9 million pretax in 2018. See Part I - Item I, Note 1 in this Quarterly Report on Form 10-Q for Retirement are due tofurther discussion regarding the resulting lower levels of invested assets as well as new money rates below the average portfolio earned rate. In addition, expense levels are higher than prior year, offset by increases in fee income and other income due to the inclusion of BCG. PG&E subrogation claims.
As a result, the Property and Casualty full-year combined ratio is expected to be 91% to 93%, including catastrophe losses of approximately 10 points, reflecting the higher level of catastrophes in the second quarter. We anticipate net investment income below our previous guidance due to lower than anticipated returns on limited partnership interests. Income for RetirementProperty and Casualty is now anticipated to be in the range of $25$70 million to $27$75 million, reflecting the strong six-month results with the catastrophe losses assumption adjusted for the full year 2019.unusually high second quarter catastrophe losses.
Supplemental
LifeSupplemental is anticipated to generate a pretax profit margin in the low to mid 20% range and net investment income should continue to benefit from portfolio repositioning. As a result, we continue to anticipate net income between $31 million and $33 million. New sales are being negatively impacted by school closings due to COVID-19, delaying the growth of this segment.
Retirement
Retirement net investment income is reflecting further spread compression with rates on new investments below the average portfolio earned rate, lower than anticipated returns on limited partnership interests, as well as the impact of lower invested assets as a result of the annuity reinsurance transaction and use of capital to purchase NTA. Market volatility may continue to impact DAC amortization and asset-based fees. The impact of lower net investment income is anticipated to decline 10-15% from the prior year due to the decrease in net investment income noted above, accompaniedbe partially offset by a modest increase in mortality costs.
Netreduced level of operating expenses. As a result, we continue to expect net income for the new Supplemental segment is anticipatedRetirement to be in the range of $22 million to $24 million.
Life
We continue to expect Life to generate net income between $10 million and $12 million, reflecting a reduced level of net investment income with mortality costs continuing to $14 million for the second half of 2019, partially offset by additional interest expense of $2 million in Corporate and Other.
meet expectations.
As described in Critical Accounting Estimates, certain of the Company'sour 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'sour estimates above. Additionally, see Forward-looking Information and Part II - Item 1A in this Quarterly Report on Form 10-Q and
as well as Part I - Items 1 and 1A of the Company'sin our Annual Report on Form 10-K for the year ended December 31, 20182019 concerning other important factors that could impact actual results. Management believesWe believe 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.
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| | |
Horace Mann Educators Corporation | 35 | Quarterly Report on Form 10-Q |
Critical Accounting Estimates
The preparation of consolidated financial statements in conformity with GAAP requires the Company's managementus 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'sour consolidated assets, liabilities, shareholders' equity and net income and cash flows.income. Certain accounting estimates are particularly sensitive because of their significance to the Company'sour 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 hasWe have discussed with the Audit Committee the quality, not just the acceptability, of the Company'sour accounting principles as applied in itsour financial reporting. The discussions generally included such matters as the consistency of the Company'sour accounting policies and their application, and the clarity and completeness of the Company'sour consolidated financial statements, which include related disclosures. ForInformation regarding our accounting policies pertaining to these topics is located in the Company, areas mostNotes to the Consolidated Financial Statements contained in Part II - Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2019.
We have identified the following accounting estimates as critical in that they involve a higher degree of judgment and are subject to a significant management judgments include:
degree of variability:
Valuation of hard to valuehard-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 policy reserves
Valuation of assets acquired and liabilities assumed under purchase accounting
Except as noted below, comparedCompared to December 31, 2018,2019, at SeptemberJune 30, 2019,2020, 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’sour Annual Report on Form 10-K for the year ended December 31, 2018,2019, discussion of accounting policies, including certain sensitivity information, was presented in Management's Discussion and Analysis of Financial Condition and Results of Operations -- Critical Accounting 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 our four operating segments as well as the corporate and other line. These reporting segments are defined based on financial information management useswe use to evaluate performance and to determine the allocation of assets.
Property and Casualty
Supplementalresources (see Part I - Item I, 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 11 of the Consolidated Financial Statements in this Quarterly Report on Form 10-Q. The following sections provide analysis and discussionreport for a description of results of operations for each of thechanges to our reporting segments as well as investment results.
segments).
Property and Casualty
The following table provides certain financial information for Property and Casualty for the periods indicated.
(All comparisons versus same period in 2018, unless noted otherwise)
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| | | | | | | | | | | | | | | | | | | | | | |
($ 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: | | | | | | | | | | | | |
Premiums written*: | | | | | | | | | | | | |
Automobile | | $ | 118.8 |
| | $ | 120.5 |
| | -1.4 | % | | $ | 350.2 |
| | $ | 350.0 |
| | 0.1 | % |
Property and other | | 63.7 |
| | 62.2 |
| | 2.4 | % | | 168.3 |
| | 165.1 |
| | 1.9 | % |
Total premiums written | | 182.5 |
| | 182.7 |
| | -0.1 | % | | 518.5 |
| | 515.1 |
| | 0.7 | % |
Change in unearned insurance premiums | | (12.0 | ) | | (14.1 | ) | | -14.9 | % | | (5.9 | ) | | (13.7 | ) | | -56.9 | % |
Total insurance premiums earned | | 170.5 |
| | 168.6 |
| | 1.1 | % | | 512.6 |
| | 501.4 |
| | 2.2 | % |
Incurred claims and claims expenses: | | | | | | | | | | | | |
Claims occurring in the current year | | 122.5 |
| | 140.0 |
| | -12.5 | % | | 375.7 |
| | 408.0 |
| | -7.9 | % |
Prior years' reserve development | | 3.5 |
| | — |
| | N.M. |
| | 7.5 |
| | 0.3 |
| | N.M. |
|
Total claims and claim expenses incurred | | 119.0 |
| | 140.0 |
| | -15.0 | % | | 368.2 |
| | 407.7 |
| | -9.7 | % |
Operating expenses, including DAC amortization | | 45.0 |
| | 45.8 |
| | -1.7 | % | | 136.9 |
| | 133.7 |
| | 2.4 | % |
Underwriting gain (loss) | | 6.5 |
| | (17.2 | ) | | 137.8 | % | | 7.5 |
| | (40.0 | ) | | 118.8 | % |
Net investment income | | 10.7 |
| | 12.4 |
| | -13.7 | % | | 33.6 |
| | 32.2 |
| | 4.3 | % |
Income (loss) before income taxes | | 17.4 |
| | (4.7 | ) | | N.M. |
| | 41.8 |
| | (7.2 | ) | | N.M. |
|
Net income (loss)/core earnings* | | 14.2 |
| | (3.2 | ) | | N.M. |
| | 34.3 |
| | (4.4 | ) | | N.M. |
|
| | | | | | | | | | | | |
Operating Statistics: | | | | | | | | | | | | |
Automobile | | | | | | | | | | | | |
Loss and loss adjustment expense ratio | | 65.8 | % | | 72.1 | % | | -6.3 | pts | | 70.2 | % | | 76.7 | % | | -6.5 | pts |
Expense ratio | | 26.6 | % | | 27.4 | % | | -0.8 | pts | | 26.8 | % | | 26.7 | % | | 0.1 | pts |
Combined ratio: | | 92.4 | % | | 99.5 | % | | -7.1 | pts | | 97.0 | % | | 103.4 | % | | -6.4 | pts |
Prior years' reserve development | | -3.0 | % | | — | % | | -3.0 | pts | | -1.6 | % | | — | % | | -1.6 | pts |
Catastrophes | | 2.1 | % | | 0.7 | % | | 1.4 | pts | | 1.6 | % | | 1.6 | % | | —% |
|
Underlying combined ratio* | | 93.3 | % | | 98.8 | % | | -5.5 | pts | | 97.0 | % | | 101.8 | % | | -4.8 | pts |
Property | | | | | | | | | | | | |
Loss and loss adjustment expense ratio | | 78.2 | % | | 106.6 | % | | -28.4 | pts | | 75.3 | % | | 91.1 | % | | -15.8 | pts |
Expense ratio | | 26.1 | % | | 26.7 | % | | -0.6 | pts | | 26.7 | % | | 26.8 | % | | -0.1 | pts |
Combined ratio: | | 104.3 | % | | 133.3 | % | | -29.0 | pts | | 102.0 | % | | 117.9 | % | | -15.9 | pts |
Prior years' reserve development | | — | % | | — | % | | —% |
| | -1.2 | % | | -0.2 | % | | -1.0 | pts |
Catastrophes | | 22.6 | % | | 58.6 | % | | -36.0 | pts | | 25.9 | % | | 39.8 | % | | -13.9 | pts |
Underlying combined ratio* | | 81.7 | % | | 74.7 | % | | 7.0 | pts | | 77.3 | % | | 78.3 | % | | -1.0 | pts |
| | | | | | | | | | | | |
Policies in force (in thousands) | | | | | | | | | | | | |
Automobile (1) | | | | | | | | 441 |
| | 466 |
| | -5.4 | % |
Property | | | | | | | | 196 |
| | 202 |
| | -3.0 | % |
Total | | | | | | | | 637 |
| | 668 |
| | -4.6 | % |
________________
N.M. - Not meaningful.
(1) September 30, 2019 includes assumed policies in force of 4.
For the three and nine month periods ended September 30, 2019, core earnings* increased $17.4 million and $38.7 million, respectively. This reflects 9.5 points of improvement in the Property and Casualty combined ratio year to date due to lower catastrophe losses, favorable prior years' reserve development and improved automobile underwriting results.
On a reported basis, the improvement in the automobile combined ratio for the nine month period ended September 30, 2019 was mainly attributed to 4.9 points of improvement in the underlying loss ratio* due to rate actions combined with continued stabilization in automobile loss trends. The reported property combined ratio improved 15.9 points for the nine month period ended September 30, 2019 primarily 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 nine month period ended September 30, 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 nine months of 2019 were 4.8% for automobile and 3.5% for property.
Automobile premiums written* were comparable to the three and nine month periods ended September 30, 2018. In the first nine months of 2019, the average written premium per policy and average earned premium per policy increased 4.4% and 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, with the decrease due to recent 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 September 30, 2019, December 31, 2018 and September 30, 2018, respectively.
Property and other premiums written* increased slightly for the three and nine month periods ended September 30, 2019. While the number of property policies in force has declined, the average written premium per policy and average earned premium per policy increased 6.4% and 5.2%, respectively, in the first nine 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 and 2018, respectively. The number of educator policies has been stable relative to overall property policies as educators represented 82.6%, 82.4% and 82.4% of the property policies in force as of September 30, 2019, December 31, 2018, and September 30, 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.
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| | | | | | | | | | | | | | | | |
($ 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 $3.2 million.
Retirement
The following table provides certain information for Retirement for the periods indicated.
(All comparisons versus same period in 2018, unless noted otherwise)
|
| | | | | | | | | | | | | | | | | | | | | | |
($ 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: | | | | | | | | | | | | |
Contract charges earned | | $ | 6.6 |
| | $ | 8.0 |
| | -17.5 | % | | $ | 22.1 |
| | $ | 23.9 |
| | -7.5 | % |
Net investment income | | 60.8 |
| | 67.7 |
| | -10.2 | % | | 188.2 |
| | 199.7 |
| | -5.8 | % |
Interest credited | | 42.4 |
| | 40.8 |
| | 3.9 | % | | 126.4 |
| | 119.4 |
| | 5.9 | % |
Net interest margin without net investment gains (losses) | | 19.5 |
| | 26.9 |
| | -27.5 | % | | 64.0 |
| | 80.3 |
| | -20.3 | % |
Net interest margin - Reinsured block | | (1.1 | ) | | — |
| | N.M. |
| | (2.2 | ) | | — |
| | N.M. |
|
Mortality loss and other reserve charges | | 0.9 |
| | 1.5 |
| | -40.0 | % | | 2.7 |
| | 4.8 |
| | -43.8 | % |
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 | | — |
| | (0.3 | ) | | N.M. |
| | 3.6 |
| | 0.1 |
| | N.M. |
|
Other expense - goodwill impairment | | — |
| | — |
| | N.M. |
| | 28.0 |
| | — |
| | N.M. |
|
Income (loss) before income taxes | | 7.0 |
| | 16.8 |
| | -58.3 | % | | (3.2 | ) | | 48.0 |
| | -106.7 | % |
Net income (loss) | | 5.9 |
| | 12.1 |
| | -51.2 | % | | (6.9 | ) | | 37.6 |
| | -118.4 | % |
Core earnings* | | 5.9 |
| | 12.1 |
| | -51.2 | % | | 21.1 |
| | 37.6 |
| | -43.9 | % |
Operating Statistics: | | | | | | | | | | | | |
Annuity contract deposits* | | | | | | | | | | | | |
Variable | | $ | 54.6 |
| | $ | 53.8 |
| | 1.5 | % | | $ | 157.5 |
| | $ | 151.3 |
| | 4.1 | % |
Fixed | | 73.7 |
| | 73.2 |
| | 0.7 | % | | 187.1 |
| | 174.7 |
| | 7.1 | % |
Total | | 128.3 |
| | 127.0 |
| | 1.0 | % | | 344.6 |
| | 326.0 |
| | 5.7 | % |
Single | | 81.3 |
| | 80.1 |
| | 1.5 | % | | 193.0 |
| | 175.6 |
| | 9.9 | % |
Recurring | | 47.0 |
| | 46.9 |
| | 0.2 | % | | 151.6 |
| | 150.4 |
| | 0.8 | % |
Total | | 128.3 |
| | 127.0 |
| | 1.0 | % | | 344.6 |
| | 326.0 |
| | 5.7 | % |
Assets under administration (AUA) | | | | | | | | | | | | |
Annuity assets under management (1) | | | | | |
|
| | $ | 4,215.9 |
| | $ | 6,997.7 |
| | -39.8 | % |
Broker and advisory assets under administration (2) | | | | | |
|
| | 2,259.4 |
| | 333.6 |
| | N.M. |
|
Recordkeeping assets under administration (2) | | | | | |
|
| | 1,422.4 |
| | — |
| | N.M. |
|
Total | |
|
| |
|
| |
|
| | $ | 7,897.7 |
| | $ | 7,331.3 |
| | 7.7 | % |
Persistency | | | | | | | | | | | | |
Variable annuities | | | | | |
|
| | 94.7 | % | | 94.5 | % | | 0.2 | pts |
Fixed annuities | | | | | |
|
| | 93.9 | % | | 94.2 | % | | -0.3 | pts |
Total | | | | | |
|
| | 94.2 | % | | 94.3 | % | | -0.1 | pts |
Annuity contracts in force (thousands) | | | | | |
|
| | 227 |
| | 224 |
| | 1.3 | % |
Fixed spread - YTD annualized (basis points) | | | | | |
|
| | 198 |
| | 182 |
| | 16 | bps |
_______________
N.M. - Not meaningful.
| |
(1)
| Amount reported as of September 30, 2019 excludes $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 nine month periods ended September 30, 2019, core earnings* decreased $6.2 million and $16.5 million, respectively. The three month period reflected lower net investment income associated with the reinsured block partially offset by favorable 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 Retirement and recognized a non-cash impairment charge of $28.0 million during the second quarter of 2019.
For the three month period ended September 30, 2019, annuity contract deposits increased $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 $0.8 million and $6.2 million, respectively, for the three and nine month periods ended September 30, 2019. Fixed annuity deposits increased $0.5 million and $12.4 million, respectively, for the three and nine month periods ended September 30, 2019.
At September 30, 2019, assets under management were $2.8 billion below a year ago, driven primarily by the annuity reinsurance transaction. Variable assets under management, excluding amounts held under the modified coinsurance agreement, increased by $15.6 million primarily due to market performance. The year to date annualized net interest spread on fixed annuities, excluding reinsured 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 $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 $2.7 million in year one and $8.2 million in year two, further reducing the annualized net interest spread by approximately 8 basis points and 29 basis points in the respective periods, compared to the current period annualized net interest spread. The Company could also consider potential changes in rates credited to policyholders, tempered by any restrictions on the ability to adjust policyholder rates due to minimum guaranteed crediting rates.
The expectation for future annualized net interest spreads is also an important component in the amortization of DAC. In terms of the sensitivity of this amortization to the annualized net interest spread, based on DAC as of September 30, 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) | | September 30, 2019 |
| | | | | | Deferred Annuities at |
| | Total Deferred Annuities | | Minimum Guaranteed Rate |
| | Percent of Total | | Accumulated Value (AV) | | Percent of Total Deferred Annuities AV | | Percent of Total | | Accumulated Value |
Minimum guaranteed interest rates: | | | | | | | | | | |
Less than 2% | | 52.5 | % | | $ | 1,241.9 |
| | 46.9 | % | | 35.1 | % | | $ | 582.0 |
|
Equal to 2% but less than 3% | | 12.3 | % | | 291.6 |
| | 83.1 | % | | 14.6 | % | | 242.3 |
|
Equal to 3% but less than 4% | | 25.7 | % | | 608.7 |
| | 99.9 | % | | 36.7 | % | | 608.3 |
|
Equal to 4% but less than 5% | | 7.3 | % | | 171.7 |
| | 100.0 | % | | 10.4 | % | | 171.7 |
|
5% or higher | | 2.2 | % | | 52.2 |
| | 100.0 | % | | 3.2 | % | | 52.2 |
|
Total | | 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 Life for the periods indicated.
(All comparisons versus same period in 2018, unless noted otherwise)
|
| | | | | | | | | | | | | | | | | | | | | | |
($ 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 | | $ | 27.7 |
| | $ | 28.4 |
| | -2.5 | % | | $ | 82.5 |
| | $ | 82.7 |
| | -0.2 | % |
Insurance premiums and contract charges earned | | 29.7 |
| | 30.2 |
| | -1.7 | % | | 90.0 |
| | 90.1 |
| | -0.1 | % |
Net investment income | | 18.4 |
| | 19.1 |
| | -3.7 | % | | 54.8 |
| | 56.6 |
| | -3.2 | % |
Benefits and settlement expenses | | 19.6 |
| | 20.3 |
| | -3.4 | % | | 60.7 |
| | 61.2 |
| | -0.8 | % |
Interest credited | | 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 | | 2.0 |
| | 1.8 |
| | 11.1 | % | | 6.1 |
| | 5.5 |
| | 10.9 | % |
DAC unlocking | | — |
| | 0.1 |
| | N.M. |
| | (0.1 | ) | | 0.2 |
| | N.M. |
|
Income before income taxes | | 6.4 |
| | 7.0 |
| | -8.6 | % | | 17.1 |
| | 19.0 |
| | -10.0 | % |
Net income /core earnings* | | 5.1 |
| | 5.3 |
| | -3.8 | % | | 13.6 |
| | 15.0 |
| | -9.3 | % |
| | | | | | | | | | | | |
Operating Statistics: | | | | | | | | | | | | |
Life insurance in force | | | | | | | | $ | 18,937 |
| | $ | 18,054 |
| | 4.9 | % |
Number of policies in force (thousands) | | | | | | | | 202 |
| | 198 |
| | 2.0 | % |
Average face amount in force (in dollars) | | | | | | | | $ | 93,944 |
| | $ | 91,030 |
| | 3.2 | % |
Lapse ratio (ordinary life insurance in force) | | | | | | | | 4.5 | % | | 4.8 | % | | -0.3 | pts |
Mortality costs | | | | | | | | $ | 26.4 |
| | $ | 25.9 |
| | 1.9 | % |
______________
N.M. - Not meaningful.
For the three and nine month periods ended September 30, 2019, core earnings* decreased primarily due to lower net investment income.
Life premiums and contract deposits* for the three and nine month periods ended September 30, 2019 slightly decreased due to a decline in single premiums. The ordinary life insurance in force lapse ratio was 4.5% for the 12 months ended September 30, 2019 compared to 4.8% for the 12 month period ended September 30, 2018.
Corporate and Other
The determination of segment data are described in more detail in Part I - Item 1, Note 10 of the Consolidated Financial Statements in this report. The following sections provide analysis and discussion of the results of operations for each of the reporting segments as well as investment results.
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| | |
Horace Mann Educators Corporation | 36 | Quarterly Report on Form 10-Q |
Property and Casualty
(All comparisons vs. same periods in 2019, unless noted otherwise)
For the three and six months ended June 30, 2020, net income reflected the following factors:
Written premiums* reduced by $9.8 million of COVID-19 related premium credits
18.0 points and 11.4 points of reduction in the Property and Casualty underlying loss ratio*, respectively
Catastrophe losses increased by 9.3 points and 3.9 points, respectively
A one-time tax benefit of $2.8 million in the first quarter of 2020 as a result of the CARES Act
|
| | |
Horace Mann Educators Corporation | 37 | Quarterly Report on Form 10-Q |
The following table provides certain financial information for Property and Casualty for the periods indicated.
|
| | | | | | | | | | | | | | | | | | | | | | |
($ in millions, unless otherwise indicated) | | Three Months Ended June 30, | | 2020-2019 | | Six Months Ended June 30, | | 2020-2019 |
| | 2020 | | 2019 | | Change % | | 2020 | | 2019 | | Change % |
Financial Data: | | | | | | | | | | | | |
Written premiums*: | | | | | | | | | | | | |
Automobile | | $ | 96.7 |
| | $ | 114.6 |
| | -15.6 | % | | $ | 206.1 |
| | $ | 231.4 |
| | -10.9 | % |
Property and other | | 59.4 |
| | 59.7 |
| | -0.5 | % | | 103.6 |
| | 104.6 |
| | -1.0 | % |
Total premiums written | | 156.1 |
| | 174.3 |
| | -10.4 | % | | 309.7 |
| | 336.0 |
| | -7.8 | % |
Change in unearned insurance premiums | | 0.1 |
| | (3.0 | ) | | 103.3 | % | | 13.0 |
| | 6.1 |
| | 113.1 | % |
Total insurance premiums earned | | 156.2 |
| | 171.3 |
| | -8.8 | % | | 322.7 |
| | 342.1 |
| | -5.7 | % |
Incurred claims and claims expenses: | | | | | | | | | | | | |
Claims occurring in the current year | | 109.2 |
| | 134.4 |
| | -18.8 | % | | 214.6 |
| | 253.2 |
| | -15.2 | % |
Prior years' reserve development | | 1.0 |
| | 2.0 |
| | -50.0 | % | | 2.0 |
| | 4.0 |
| | -50.0 | % |
Total claims and claim expenses incurred | | 108.2 |
| | 132.4 |
| | -18.3 | % | | 212.6 |
| | 249.2 |
| | -14.7 | % |
Operating expenses, including DAC amortization | | 40.9 |
| | 45.4 |
| | -9.9 | % | | 84.1 |
| | 91.9 |
| | -8.5 | % |
Underwriting gain (loss) | | 7.1 |
| | (6.5 | ) | | 209.2 | % | | 26.0 |
| | 1.0 |
| | N.M. |
|
Net investment income | | 6.3 |
| | 12.7 |
| | -50.4 | % | | 16.6 |
| | 22.9 |
| | -27.5 | % |
Income before income taxes | | 14.1 |
| | 6.6 |
| | 113.6 | % | | 43.9 |
| | 24.4 |
| | 79.9 | % |
Net income/core earnings* | | 11.3 |
| | 5.1 |
| | 121.6 | % | | 37.9 |
| | 20.1 |
| | 88.6 | % |
| | | | | | | | | | | | |
Operating Statistics: | | | | | | | | | | | | |
Automobile | | | | | | | | | | | | |
Loss and loss adjustment expense ratio | | 53.2 | % | | 73.8 | % | | -20.6 | pts | | 59.8 | % | | 72.3 | % | | -12.5 | pts |
Expense ratio | | 27.1 | % | | 26.6 | % | | 0.5 | pts | | 26.5 | % | | 26.9 | % | | -0.4 | pts |
Combined ratio: | | 80.3 | % | | 100.4 | % | | -20.1 | pts | | 86.3 | % | | 99.2 | % | | -12.9 | pts |
Prior years' reserve development | | — | % | | -0.9 | % | | 0.9 | pts | | -0.5 | % | | -0.9 | % | | 0.4 | pts |
Catastrophes | | 3.1 | % | | 1.9 | % | | 1.2 | pts | | 1.5 | % | | 1.3 | % | | 0.2 | pts |
Underlying combined ratio* | | 77.2 | % | | 99.4 | % | | -22.2 | pts | | 85.3 | % | | 98.8 | % | | -13.5 | pts |
Property | | | | | | | | | | | | |
Loss and loss adjustment expense ratio | | 99.1 | % | | 84.8 | % | | 14.3 | pts | | 77.8 | % | | 73.9 | % | | 3.9 | pts |
Expense ratio | | 24.8 | % | | 26.6 | % | | -1.8 | pts | | 25.5 | % | | 27.1 | % | | -1.6 | pts |
Combined ratio: | | 123.9 | % | | 111.4 | % | | 12.5 | pts | | 103.3 | % | | 101.0 | % | | 2.3 | pts |
Prior years' reserve development | | -1.8 | % | | -1.8 | % | | — |
| | -0.9 | % | | -1.9 | % | | 1.0 | pts |
Catastrophes | | 57.9 | % | | 36.8 | % | | 21.1 | pts | | 36.8 | % | | 27.6 | % | | 9.2 | pts |
Underlying combined ratio* | | 67.8 | % | | 76.4 | % | | -8.6 | pts | | 67.4 | % | | 75.3 | % | | -7.9 | pts |
| | | | | | | | | | | | |
Risks in force (in thousands) | | | | | | | | | | | | |
Automobile (1) | | | | | | | | 418 |
| | 448 |
| | -6.7 | % |
Property | | | | | | | | 191 |
| | 198 |
| | -3.5 | % |
Total | | | | | | | | 609 |
| | 646 |
| | -5.7 | % |
(1) Includes assumed risks in force of 4.
On a reported basis, the 12.9 points of improvement in the automobile combined ratio for the six months ended June 30, 2020 was mainly attributable to a 13.1 point reduction in the automobile underlying loss ratio* reflecting lower frequency as well as the ongoing benefit of profitability initiatives. We experienced a lower level of automobile loss frequency resulting from temporary changes in policyholder driving patterns due to COVID-19. Frequency was most favorably impacted in the month of April, with May and June levels rising sequentially, resulting in an average decline in frequency for the quarter of approximately 40%. The reported property combined ratio increased 2.3 points for the six months ended June 30, 2020 due to a 9.3 point increase in
|
| | |
Horace Mann Educators Corporation | 38 | Quarterly Report on Form 10-Q |
catastrophe losses. During the six months ended June 30, 2020, the underlying property loss ratio* improved 6.3 points, reflecting lower non-catastrophe weather-related losses.
For the three and six months ended June 30, 2020, total written premiums* decreased $18.2 million and $26.3 million, respectively, primarily due to a $9.8 million reduction in automobile written premiums* during the second quarter of 2020 due to COVID-19 related credits equal to 15% of two months of automobile premiums. In addition, total written premiums declined due to lower automobile risks in force and a lower level of rate increases being implemented in 2020. For 2020, our 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 six months of 2020 were 0.9% for automobile and 1.1% for property. Growth in sales* has slowed as a result of the COVID-19 pandemic.
For the three and six months ended June 30, 2020, automobile written premiums* decreased $17.9 million and $25.3 million, respectively, significantly due to the aforementioned COVID-19 related credits. While the number of automobile risks in force has declined, the average written premium per risk and average earned premium per risk increased 2.5% and 3.6%, respectively, in the first six months of 2020. Based on risks in force, the automobile 12 month retention rate for new and renewal risks was 81.6% which was comparable to a year ago. The number of educator risks has been stable relative to overall automobile risks as educators represented 85.4%, 85.5% and 85.5% of the automobile risks in force as of June 30, 2020, December 31, 2019 and June 30, 2019, respectively.
For the three and six months ended June 30, 2020, property and other written premiums* decreased slightly. While the number of property risks in force has declined, the average written premium per risk and average earned premium per risk increased 4.6% and 5.6%, respectively, in the first six months of 2020. Based on risks in force, the property 12 month retention rate for new and renewal risks decreased to 87.5% from 87.7% at June 30, 2020 and 2019, respectively. The number of educator risks has been stable relative to overall property risks as educators represented 82.2%, 82.5% and 82.3% of the property risks in force as of June 30, 2020, December 31, 2019 and June 30, 2019, respectively.
We continue to evaluate and implement actions to further mitigate our 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.
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| | |
Horace Mann Educators Corporation | 39 | Quarterly Report on Form 10-Q |
Supplemental
The following table provides certain information for Supplemental for the periods indicated.
|
| | | | | | | | | | | | | | | | |
($ in millions, unless otherwise indicated) | | Three Months Ended June 30, | | 2020-2019 | | Six Months Ended June 30, | | 2020-2019 |
| | 2020 | | 2019 | | Change % | | 2020 | | 2019 | | Change % |
Financial Data: | | | | | | | | | | | | |
Insurance premiums and contract deposits* | | $ | 33.7 |
| | N/A | | N/A | | $ | 66.3 |
| | N/A | | N/A |
Insurance premiums and contract charges earned | | 33.3 |
| | N/A | | N/A | | 66.3 |
| | N/A | | N/A |
Net investment income | | 4.0 |
| | N/A | | N/A | | 7.5 |
| | N/A | | N/A |
Benefits and settlement expenses | | 12.5 |
| | N/A | | N/A | | 23.0 |
| | N/A | | N/A |
Operating expenses (includes DAC unlocking and amortization expense) | | 10.1 |
| | N/A | | N/A | | 20.2 |
| | N/A | | N/A |
Intangible asset amortization expense | | 3.2 |
| | N/A | | N/A | | 6.4 |
| | N/A | | N/A |
Income before income taxes | | 12.1 |
| | N/A | | N/A | | 25.5 |
| | N/A | | N/A |
Net income / core earnings* | | 9.5 |
| | N/A | | N/A | | 20.0 |
| | N/A | | N/A |
| | | | | | | | | | | | |
Operating Statistics: | | | | | | | | | | | | |
Supplemental insurance in force (thousands) | | | | | | | | 298 |
| | N/A | | N/A |
Benefits ratio (1) | | 37.5 | % | | N/A | | N/A | | 34.7 | % | | N/A | | N/A |
Operating expense ratio (2) | | 26.6 | % | | N/A | | N/A | | 26.9 | % | | N/A | | N/A |
Pretax profit margin (2) | | 31.9 | % | | N/A | | N/A | | 34.0 | % | | N/A | | N/A |
Persistency | | | | | | | | 89.3 | % | | N/A | | N/A |
N/A - The acquisition of NTA closed on July 1, 2019.
(1) Benefits ratio measured to earned premium.
(2) Operating expense ratio and pretax profit margin measured to total revenues.
For the three and six months ended June 30, 2020, Supplemental sales* were $0.7 million and $4.4 million, respectively, reflecting significantly lower sales volume primarily due to the COVID-19 pandemic as sales are dependent on in-person events at schools. Persistency remains steady at 89.3%.
For the three and six months ended June 30, 2020, Supplemental contributed $9.5 million and $20.0 million, respectively, to net income, reflecting favorable trends in reserves and some short-term benefit from changes in policyholder behavior due to the COVID-19 pandemic. 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 and $6.4 million for the three and six months ended June 30, 2020.
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| | |
Horace Mann Educators Corporation | 40 | Quarterly Report on Form 10-Q |
Retirement
(All comparisons vs. same periods in 2019, unless noted otherwise)
For the three and six months ended June 30, 2020, net income increased $34.7 million and $21.6 million, respectively, reflecting the following factors:
prior period results include a $28.0 million pretax goodwill impairment charge related to the annuity reinsurance transaction in the second quarter of 2019
$5.6 million pretax of unfavorable DAC unlocking in the prior year quarter primarily due to accelerated amortization of the DAC asset associated with the reinsured annuity block, compared to $4.6 million of favorable DAC unlocking in the current year quarter due to equity market recovery
lower levels of net investment income in 2020, reflecting lower invested asset levels resulting from the prior year annuity reinsurance transaction and use of capital to purchase NTA as well as lower returns on limited partnership interests
|
| | |
Horace Mann Educators Corporation | 41 | Quarterly Report on Form 10-Q |
The following table provides certain information for Retirement for the periods indicated.
|
| | | | | | | | | | | | | | | | | | | | | | |
($ in millions, unless otherwise indicated) | | Three Months Ended June 30, | | 2020-2019 | | Six Months Ended June 30, | | 2020-2019 |
| | 2020 | | 2019 | | Change % | | 2020 | | 2019 | | Change % |
Financial Data: | | | | | | | | | | | | |
Contract charges earned | | $ | 6.7 |
| | $ | 6.9 |
| | -2.9 | % | | $ | 14.1 |
| | $ | 15.5 |
| | -9.0 | % |
Net investment income | | 55.1 |
| | 62.7 |
| | -12.1 | % | | 108.6 |
| | 127.4 |
| | -14.8 | % |
Interest credited | | 39.4 |
| | 42.3 |
| | -6.9 | % | | 79.7 |
| | 84.0 |
| | -5.1 | % |
Net interest margin without net investment gains (losses) | | 16.7 |
| | 21.5 |
| | -22.3 | % | | 30.8 |
| | 44.5 |
| | -30.8 | % |
Net interest margin - reinsured block | | (1.0 | ) | | (1.1 | ) | | 9.1 | % | | (1.9 | ) | | (1.1 | ) | | -72.7 | % |
Mortality loss and other reserve charges | | 1.2 |
| | 1.2 |
| | — | % | | 2.8 |
| | 1.8 |
| | 55.6 | % |
Operating expenses | | 13.9 |
| | 17.4 |
| | -20.1 | % | | 30.1 |
| | 35.5 |
| | -15.2 | % |
DAC and intangible asset amortization expense, excluding DAC unlocking | | 4.8 |
| | 4.9 |
| | -2.0 | % | | 10.0 |
| | 10.3 |
| | -2.9 | % |
DAC unlocking | | (4.6 | ) | | 5.6 |
| | -182.1 | % | | (0.6 | ) | | 3.6 |
| | -116.7 | % |
Income (loss) before income taxes | | 11.2 |
| | (24.8 | ) | | N.M. |
| | 10.1 |
| | (10.2 | ) | | N.M. |
|
Net income (loss) | | 9.7 |
| | (25.0 | ) | | N.M. |
| | 8.8 |
| | (12.8 | ) | | N.M. |
|
Core earnings | | 9.7 |
| | 3.0 |
| | 223.3 | % | | 8.8 |
| | 15.2 |
| | -42.1 | % |
Operating Statistics: | | | | | | | | | | | | |
Annuity contract deposits* | | | | | | | | | | | | |
Variable | | $ | 52.3 |
| | $ | 54.1 |
| | -3.3 | % | | $ | 110.1 |
| | $ | 102.9 |
| | 7.0 | % |
Fixed | | 59.5 |
| | 54.9 |
| | 8.4 | % | | 119.4 |
| | 113.4 |
| | 5.3 | % |
Total | | 111.8 |
| | 109.0 |
| | 2.6 | % | | 229.5 |
| | 216.3 |
| | 6.1 | % |
Single | | 55.9 |
| | 55.8 |
| | 0.2 | % | | 118.1 |
| | 111.7 |
| | 5.7 | % |
Recurring | | 55.9 |
| | 53.2 |
| | 5.1 | % | | 111.4 |
| | 104.6 |
| | 6.5 | % |
Total | | 111.8 |
| | 109.0 |
| | 2.6 | % | | 229.5 |
| | 216.3 |
| | 6.1 | % |
Assets under administration (AUA) | | | | | | | | | | | | |
Annuity assets under management (1) | | | | | |
|
| | 4,324.3 |
| | 4,170.3 |
| | 3.7 | % |
Broker and advisory assets under administration | | | | | |
|
| | 2,168.0 |
| | 2,236.1 |
| | -3.0 | % |
Recordkeeping assets under administration | | | | | |
|
| | 1,460.5 |
| | 1,395.1 |
| | 4.7 | % |
Total | |
|
| |
|
| |
|
| | 7,952.8 |
| | 7,801.5 |
| | 1.9 | % |
Persistency | | | | | | | | | | | | |
Variable annuities | | | | | |
|
| | 94.9 | % | | 94.3 | % | | 0.6 | pts |
Fixed annuities | | | | | |
|
| | 94.2 | % | | 93.9 | % | | 0.3 | pts |
Total | | | | | |
|
| | 94.5 | % | | 94.0 | % | | 0.5 | pts |
Annuity contracts in force (thousands) | | | | | |
|
| | 230 |
| | 227 |
| | 1.3 | % |
Fixed spread - YTD annualized (basis points) | | | | | |
|
| | 168 |
| | 175 |
| | -7bps |
|
| |
(1) | Amounts reported as of June 30, 2020 and June 30, 2019 exclude $627.6 million and $691.6 million, respectively, of assets under management held under modified coinsurance reinsurance |
For the three and six months ended June 30, 2020, total annuity contract deposits* increased $2.8 million and $13.2 million, respectively. Variable annuity and fixed annuity deposits increased $7.2 million and $6.0 million, respectively, for the six months ended June 30, 2020 reflecting the value educators see in our Retirement savings vehicles.
At June 30, 2020, annuity assets under management were $154.0 million above a year ago primarily due to positive net inflows. Variable assets under management, excluding amounts held under the modified coinsurance agreement, increased by $70.0 million primarily due to positive net inflows. The year to date annualized net interest spread on fixed annuities, excluding reinsurance, decreased 7 basis points.
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Horace Mann Educators Corporation | 42 | Quarterly Report on Form 10-Q |
We actively manage our 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. We estimate that over the next 12 months approximately $528.1 million of the Retirement and Life combined investment portfolio and related investable cash flows will be reinvested at current market rates. As interest rates remain at low levels, borrowers may prepay or redeem the securities with greater frequency in order to borrow at lower market rates, which could increase investable cash flows and exacerbate the reinvestment risk.
As a general guideline, for a 100 basis point decline in the average reinvestment rate and based on our existing policies and investment portfolio, the impact from investing in that lower interest rate environment could further reduce Retirement net investment income by approximately $2.0 million in year one and $6.1 million in year two, further reducing the annualized net interest spread on fixed annuities by approximately 8 basis points and 21 basis points in the respective periods, compared to the current period annualized net interest spread on fixed annuities. We 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 on fixed annuities is also an important component in the amortization of DAC. In terms of the sensitivity of this amortization to the annualized net interest spread on fixed annuities, based on DAC as of June 30, 2020 and assuming all other assumptions are met, a 10 basis point deviation in the current year targeted annualized net interest rate spread on fixed annuities 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 in the second quarter of 2019, which reinsured the $2.2 billion block of in force fixed annuities with a minimum crediting rate of 4.5%, helps mitigate the risk of not being able to generate appropriate spreads on the annuity business. Information regarding the interest crediting rates and balances equal to the minimum guaranteed rate for deferred annuity account values excluding the reinsured block is shown below.
|
| | | | | | | | | | | | | | | | | |
($ in millions) | | June 30, 2020 |
| | | | | | Deferred Annuities at |
| | Total Deferred Annuities | | Minimum Guaranteed Rate |
| | Percent of Total | | Accumulated Value (AV) | | Percent of Total Deferred Annuities AV | | Percent of Total | | Accumulated Value |
Minimum guaranteed interest rates: | | | | | | | | | | |
Less than 2% | | 53.7 | % | | $ | 1,299.3 |
| | 49.4 | % | | 37.5 | % | | $ | 642.1 |
|
Equal to 2% but less than 3% | | 11.8 | % | | 286.2 |
| | 83.4 | % | | 13.9 | % | | 238.8 |
|
Equal to 3% but less than 4% | | 25.3 | % | | 612.8 |
| | 99.9 | % | | 35.7 | % | | 612.4 |
|
Equal to 4% but less than 5% | | 7.1 | % | | 170.5 |
| | 100.0 | % | | 9.9 | % | | 170.5 |
|
5% or higher | | 2.1 | % | | 50.5 |
| | 100.0 | % | | 3.0 | % | | 50.5 |
|
Total | | 100.0 | % | | $ | 2,419.3 |
| | 70.9 | % | | 100.0 | % | | $ | 1,714.3 |
|
We 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 Part I - Item 1A in our Annual Report on Form 10-K for the year ended December 31, 2019 and other factors in this report.
|
| | |
Horace Mann Educators Corporation | 43 | Quarterly Report on Form 10-Q |
Life
(All comparisons vs. same periods in 2019, unless noted otherwise)
For the three and six months ended June 30, 2020, net income and core earnings* decreased $3.3 million and $6.0 million, respectively, reflecting lower net investment income and higher mortality costs. Claims related to COVID-19 total less than $1.0 million with average face values averaging about $30 thousand.
For the three and six months ended June 30, 2020, insurance premiums and contract deposits* decreased $0.8 million and $2.4 million, respectively, primarily due to a decline in sales* of single premiums. The ordinary life insurance in force lapse ratio was 4.2% for the 12 months ended June 30, 2020 compared to 4.5% for the 12 months ended June 30, 2019.
The following table provides certain information for the Life segment for the periods indicated.
|
| | | | | | | | | | | | | | | | | | | | | | |
($ in millions, unless otherwise indicated) | | Three Months Ended June 30, | | 2020-2019 | | Six Months Ended June 30, | | 2020-2019 |
| | 2020 | | 2019 | | Change % | | 2020 | | 2019 | | Change % |
Financial Data: | | | | | | | | | | | | |
Insurance premiums and contract deposits* | | $ | 27.6 |
| | $ | 28.4 |
| | -2.8 | % | | $ | 52.4 |
| | $ | 54.8 |
| | -4.4 | % |
Insurance premiums and contract charges earned | | 29.2 |
| | 29.9 |
| | -2.3 | % | | 58.6 |
| | 60.3 |
| | -2.8 | % |
Net investment income | | 15.6 |
| | 18.3 |
| | -14.8 | % | | 31.2 |
| | 36.4 |
| | -14.3 | % |
Benefits and settlement expenses | | 21.1 |
| | 19.1 |
| | 10.5 | % | | 43.3 |
| | 41.1 |
| | 5.4 | % |
Interest credited | | 11.3 |
| | 11.3 |
| | — | % | | 22.5 |
| | 22.5 |
| | — | % |
Operating expenses | | 8.3 |
| | 9.2 |
| | -9.8 | % | | 17.4 |
| | 18.6 |
| | -6.5 | % |
DAC amortization expense, excluding unlocking | | 2.0 |
| | 2.1 |
| | -4.8 | % | | 3.9 |
| | 4.1 |
| | -4.9 | % |
DAC unlocking | | (0.2 | ) | | (0.1 | ) | | N.M. |
| | (0.3 | ) | | (0.1 | ) | | N.M. |
|
Income before income taxes | | 2.3 |
| | 6.7 |
| | -65.7 | % | | 3.0 |
| | 10.7 |
| | -72.0 | % |
Net income / core earnings* | | 1.9 |
| | 5.2 |
| | -63.5 | % | | 2.5 |
| | 8.5 |
| | -70.6 | % |
| | | | | | | | | | | | |
Operating Statistics: | | | | | | | | | | | | |
Life insurance in force | | | | | | | | $ | 19,565 |
| | $ | 18,598 |
| | 5.2 | % |
Number of policies in force (thousands) | | | | | | | | 201 |
| | 199 |
| | 1.0 | % |
Average face amount in force (in dollars) | | | | | | | | $ | 97,306 |
| | $ | 93,506 |
| | 4.1 | % |
Lapse ratio (ordinary life insurance in force) | | | | | | | | 4.2 | % | | 4.5 | % | | -0.3 | pts |
Mortality costs | | | | | | | | $ | 19.3 |
| | $ | 18.0 |
| | 7.2 | % |
|
| | |
Horace Mann Educators Corporation | 44 | Quarterly Report on Form 10-Q |
Corporate and Other
(All comparisons vs. same periods in 2019, unless noted otherwise)
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 September 30, | | 2019-2018 | | Nine Months Ended September 30, | | 2019-2018 |
| | 2019 | | 2018 | | Change % | | 2019 | | 2018 | | Change % |
Interest expense | | $ | 4.3 |
| | $ | 2.9 |
| | 48.3 | % | | $ | 10.2 |
| | $ | 8.9 |
| | 14.6 | % |
Net investment gains (losses) pretax | | (2.1 | ) | | 2.9 |
| | N.M. |
| | 151.6 |
| | 1.9 |
| | N.M. |
|
Tax on net investment gains (losses) | | (0.5 | ) | | 0.7 |
| | N.M. |
| | 32.7 |
| | 0.4 |
| | N.M. |
|
Net investment gains (losses) after tax | | (1.6 | ) | | 2.2 |
| | N.M. |
| | 118.9 |
| | 1.5 |
| | N.M. |
|
Net income (loss) | | (6.7 | ) | | (1.7 | ) | | N.M. |
| | 103.5 |
| | (9.6 | ) | | N.M. |
|
Core earnings (loss)* | | (5.1 | ) | | (3.9 | ) | | -30.8 | % | | (15.4 | ) | | (11.1 | ) | | -38.7 | % |
________________
N.M. - Not meaningful. |
| | | | | | | | | | | | | | | | | | | | | | |
($ in millions) | | Three Months Ended June 30, | | 2020-2019 | | Six Months Ended June 30, | | 2020-2019 |
| | 2020 | | 2019 | | Change % | | 2020 | | 2019 | | Change % |
Interest expense | | $ | 3.9 |
| | $ | 2.9 |
| | 34.5 | % | | $ | 7.9 |
| | $ | 5.9 |
| | 33.9 | % |
Net investment gains (losses) pretax | | 3.2 |
| | 146.3 |
| | N.M. |
| | (15.3 | ) | | 153.7 |
| | N.M. |
|
Tax on net investment gains (losses) | | 0.7 |
| | 31.6 |
| | N.M. |
| | (3.3 | ) | | 33.2 |
| | N.M. |
|
Net investment gains (losses) after tax | | 2.5 |
| | 114.7 |
| | N.M. |
| | (12.0 | ) | | 120.5 |
| | N.M. |
|
Net income (loss) | | (1.9 | ) | | 108.5 |
| | -101.8 | % | | (20.2 | ) | | 110.2 |
| | -118.3 | % |
Core earnings (loss)* | | (4.4 | ) | | (6.2 | ) | | 29.0 | % | | (8.2 | ) | | (10.3 | ) | | 20.4 | % |
For the three and nine month periodssix months ended SeptemberJune 30, 2019, core earnings*2020, net income decreased driven by increased interest expense as the Company utilized its senior revolving credit facilityprimarily due to recognition of a $106.9 million after tax realized investment gain in the currentsecond quarter of 2019 with respect to partially fund the acquisitiontransfer of NTA on July 1, 2019investments as well as acquisition costs associatedconsideration in connection with BCG and NTA.
the annuity reinsurance transaction.
Investment Results
(All comparisons versusvs. same periodperiods in 2018,2019, unless noted otherwise)
|
| | | | | | | | | | | | | | | | | | | | | | |
($ in millions) | | Three Months Ended September 30, | | 2019-2018 | | Nine Months Ended September 30, | | 2019-2018 |
| | 2019 | | 2018 | | Change % | | 2019 | | 2018 | | Change % |
Net investment income - investment portfolio | | $ | 69.2 |
| | $ | 99.1 |
| | -30.2 | % | | $ | 232.3 |
| | $ | 288.1 |
| | -19.4 | % |
Investment income - Deposit asset on reinsurance | | 23.8 |
| | — |
| | N.M. |
| | 47.0 |
| | — |
| | N.M. |
|
Pretax net investment gains (losses) | | (2.1 | ) | | 2.9 |
| | N.M. |
| | 151.6 |
| | 1.9 |
| | N.M. |
|
Pretax net unrealized investment gains on fixed maturity securities | |
| | | |
| | 386.1 |
| | 109.6 |
| | N.M. |
|
______________
N.M. - Not meaningful. |
| | | | | | | | | | | | | | | | | | | | | | |
($ in millions) | | Three Months Ended June 30, | | 2020-2019 | | Six Months Ended June 30, | | 2020-2019 |
| | 2020 | | 2019 | | Change % | | 2020 | | 2019 | | Change % |
Net investment income - Investment portfolio | | $ | 56.5 |
| | $ | 70.3 |
| | -19.6 | % | | $ | 115.1 |
| | $ | 163.1 |
| | -29.4 | % |
Investment income - Deposit asset on reinsurance | | 23.9 |
| | 23.2 |
| | 3.0 | % | | 47.6 |
| | 23.2 |
| | 105.2 | % |
Total net investment income | | 80.4 |
| | 93.5 |
| | -14.0 | % | | 162.7 |
| | 186.3 |
| | -12.7 | % |
Pretax net investment gains (losses) | | 3.2 |
| | 146.3 |
| | N.M. |
| | (15.3 | ) | | 153.7 |
| | N.M. |
|
Pretax net unrealized investment gains on fixed maturity securities | |
| | | |
| | 417.6 |
| | 292.5 |
| | 42.8 | % |
ForExcluding accreted investment income on the deposit asset on reinsurance, for the three and nine month periodssix months ended SeptemberJune 30, 2019,2020, net investment income from the investment portfoliodecreased $13.8 million and $48.0 million, respectively. The decline was lower primarily becausedue to a $2.1 billion reduction in invested assets were 18.4% below the December 31, 2018 level due to assetsfrom investments transferred under the annuity reinsurance transaction. In addition,transaction in the second quarter of 2019 as well as lower than expected new money rates and prepayments were offset by stronger returns on alternative investments.
limited partnership interests.
For the three month periodsix months ended SeptemberJune 30, 2019,2020, the pretax net investment loss was driven primarily by change in fair value and settlements of derivatives. For the nine month period ended September 30, 2019, pretax net investment gains were driven primarily by a $135.3 million pretax realized investment gain relateddue to the transfer of assets as a result of the annuity reinsurance transaction and the change in fair value of the equity securities portfolio.as well as options that we use to hedge our fixed indexed annuity (FIA) and indexed universal life (IUL) products somewhat offset by gains in the related derivatives embedded in FIA. Pretax net investment gains for the three and six months ended June 30, 2019 reflect a realized investment gain of $135.3 million recognized during the second quarter of 2019 in connection with the transfer of investments related to the annuity reinsurance transaction. Pretax net unrealized investment gains on fixed maturity securities were up $276.5$125.1 million compared to December 31, 2018,a year ago, reflecting a decline in the 10-year U.S. Treasury yield of 102135 basis points and tighterthat more than offset wider credit spreads across all asset classes as well as the addition of NTA'sfor investment portfolio, offset by the impact of the aforementioned $135.3 million pretax realized investment gain related to the annuity reinsurance transaction.
grade securities.
|
| | |
Horace Mann Educators Corporation | 45 | Quarterly Report on Form 10-Q |
Fixed Maturity and Equity Securities Portfolios
The table below presents the Company’sour fixed maturity and equity securities portfolios by major asset class, including the 10 largest sectors of the Company’sour corporate bond holdings (based on fair value).
|
| | | | | | | | | | | | | | | |
($ in millions) | | September 30, 2019 |
| | Number of Issuers | | Fair Value | | Amortized Cost | | Pretax Net Unrealized Gain (Loss) |
Fixed maturity securities | | | | | | | | |
Corporate bonds | | | | | | | | |
Banking & Finance | | 125 |
| | $ | 416.7 |
| | $ | 388.6 |
| | $ | 28.1 |
|
Insurance | | 44 |
| | 167.2 |
| | 149.1 |
| | 18.1 |
|
Energy (1) | | 71 |
| | 126.9 |
| | 117.6 |
| | 9.3 |
|
Real Estate | | 40 |
| | 114.1 |
| | 107.5 |
| | 6.6 |
|
HealthCare, Pharmacy | | 56 |
| | 113.6 |
| | 104.8 |
| | 8.8 |
|
Technology | | 35 |
| | 95.5 |
| | 90.5 |
| | 5.0 |
|
Utilities | | 54 |
| | 78.3 |
| | 69.4 |
| | 8.9 |
|
Transportation | | 31 |
| | 78.1 |
| | 72.8 |
| | 5.3 |
|
Telecommunications | | 27 |
| | 54.3 |
| | 48.8 |
| | 5.5 |
|
Food and Beverage | | 24 |
| | 50.5 |
| | 47.2 |
| | 3.3 |
|
All other corporates (2) | | 216 |
| | 289.8 |
| | 268.8 |
| | 21.0 |
|
Total corporate bonds | | 723 |
| | 1,585.0 |
| | 1,465.1 |
| | 119.9 |
|
Mortgage-backed securities | | | | | | | | |
U.S. Government and federally sponsored agencies | | 269 |
| | 525.3 |
| | 488.7 |
| | 36.6 |
|
Commercial (3) | | 119 |
| | 361.8 |
| | 339.3 |
| | 22.5 |
|
Other | | 48 |
| | 88.5 |
| | 87.8 |
| | 0.7 |
|
Municipal bonds (4) | | 538 |
| | 1,676.4 |
| | 1,511.9 |
| | 164.5 |
|
Government bonds | | | | | | | | |
U.S. | | 36 |
| | 458.2 |
| | 430.2 |
| | 28.0 |
|
Foreign | | 10 |
| | 47.9 |
| | 45.3 |
| | 2.6 |
|
Collateralized loan obligations (5) | | 118 |
| | 624.4 |
| | 628.9 |
| | (4.5 | ) |
Asset-backed securities | | 105 |
| | 472.0 |
| | 456.2 |
| | 15.8 |
|
Total fixed maturity securities | | 1,966 |
| | $ | 5,839.5 |
| | $ | 5,453.4 |
| | $ | 386.1 |
|
| | | | | | | | |
Equity securities | | | | | | | | |
Non-redeemable preferred stocks | | 12 |
| | $ | 55.6 |
| | | | |
Common stocks | | 94 |
| | 28.3 |
| | | | |
Closed-end fund | | 1 |
| | 21.6 |
| | | | |
Total equity securities | | 107 |
| | $ | 105.5 |
| | | | |
| | | | | | | | |
Total | | 2,073 |
| | $ | 5,945.0 |
| | | | |
_____________ |
| | | | | | | | | | | | | | | |
($ in millions) | | June 30, 2020 |
| | Number of Issuers | | Fair Value | | Amortized Cost or Cost | | Pretax Net Unrealized Gain (Loss) |
Fixed maturity securities | | | | | | | | |
Corporate bonds | | | | | | | | |
Banking & Finance | | 134 |
| | $ | 476.8 |
| | $ | 436.0 |
| | $ | 40.8 |
|
Insurance | | 49 |
| | 193.9 |
| | 174.1 |
| | 19.8 |
|
HealthCare,Pharmacy | | 69 |
| | 132.0 |
| | 119.2 |
| | 12.8 |
|
Energy (1) | | 68 |
| | 127.2 |
| | 114.4 |
| | 12.8 |
|
Real Estate | | 34 |
| | 120.0 |
| | 113.0 |
| | 7.0 |
|
Transportation | | 38 |
| | 94.5 |
| | 92.0 |
| | 2.5 |
|
Technology | | 37 |
| | 87.8 |
| | 81.5 |
| | 6.3 |
|
Utilities | | 55 |
| | 85.5 |
| | 74.6 |
| | 10.9 |
|
Food and Beverage | | 31 |
| | 76.6 |
| | 66.7 |
| | 9.9 |
|
Broadcasting & Media | | 25 |
| | 61.1 |
| | 52.3 |
| | 8.8 |
|
All other corporates (2) | | 306 |
| | 407.0 |
| | 382.2 |
| | 24.8 |
|
Total corporate bonds | | 846 |
| | 1,862.4 |
| | 1,706.0 |
| | 156.4 |
|
Mortgage-backed securities | | | | | | | | |
U.S. Government and federally sponsored agencies | | 270 |
| | 503.1 |
| | 448.7 |
| | 54.4 |
|
Commercial (3) | | 125 |
| | 348.7 |
| | 319.6 |
| | 29.1 |
|
Other | | 42 |
| | 63.4 |
| | 63.7 |
| | (0.3 | ) |
Municipal bonds (4) | | 597 |
| | 1,805.6 |
| | 1,633.3 |
| | 172.3 |
|
Government bonds | | | | | | | | |
U.S. | | 34 |
| | 374.9 |
| | 333.4 |
| | 41.5 |
|
Foreign | | 7 |
| | 43.6 |
| | 39.7 |
| | 3.9 |
|
Collateralized loan obligations (5) | | 136 |
| | 633.3 |
| | 655.4 |
| | (22.1 | ) |
Asset-backed securities | | 106 |
| | 387.0 |
| | 404.6 |
| | (17.6 | ) |
Total fixed maturity securities | | 2,163 |
| | $ | 6,022.0 |
| | $ | 5,604.4 |
| | $ | 417.6 |
|
| | | | | | | | |
Equity securities | | | | | | | | |
Non-redeemable preferred stocks | | 16 |
| | $ | 62.8 |
| | | | |
Common stocks | | 95 |
| | 6.5 |
| | | | |
Closed-end fund | | 1 |
| | 21.0 |
| | | | |
Total equity securities | | 112 |
| | $ | 90.3 |
| | | | |
| | | | | | | | |
Total | | 2,275 |
| | $ | 6,112.3 |
| | | | |
| |
(1) | At SeptemberJune 30, 2019,2020, the fair value amount included $10.0$8.6 million which were non-investment grade. |
| |
(2) | The All other corporates category contains 19 additional industry sectors. Industrial, broadcastingTelecom, Retail, Consumer Products, Metal & media, aerospaceMining and defense, metal and mining and retailMisc. represented $158.8$222.4 million of fair value at SeptemberJune 30, 2019,2020, with the remaining 14 sectors each representing less than $19.0$32.2 million. |
| |
(3) | At SeptemberJune 30, 2019,2020, 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, 52.6%52.5% are tax-exempt and 77.7%76.8% are revenue bonds tied to essential services, such as mass transit, water and sewer. The overall credit quality of the municipal bond portfolio was AA- at SeptemberJune 30, 2019.2020. |
| |
(5) | Based on fair value, 95.8% of the collateralized loan obligation securities were rated investment grade by Standard and Poor's Global Inc. (S&P), Moody's Investors Service, Inc. (Moody's) and/or Fitch Ratings, Inc. (Fitch) at SeptemberJune 30, 2019.2020. |
|
| | |
Horace Mann Educators Corporation | 46 | Quarterly Report on Form 10-Q |
At SeptemberJune 30, 2019, the Company’s2020, our diversified fixed maturity securities portfolio consisted of 3,0933,393 investment positions, issued by 1,9662,163 entities, and totaled approximately $5.8$6.0 billion in fair value. This portfolio was 96.7%92.8% investment grade, based on fair value, with an average quality rating of A+. The Company’sOur investment guidelines target single corporate issuer concentrations to 0.5% of invested assets for AAA or AA rated securities, 0.4%0.35% of invested assets for A or BBB rated securities, and 0.2% of invested assets$5.0 million for non-investment grade securities.
Fixed Maturity Securities - COVID-19 Related Impacts
In late 2016, we determined the economy was approaching later stages of the credit cycle and began to upgrade portfolio quality. Over the past three years, recessionary expectations were extended due to the fiscal stimulus, which lengthened the credit cycle. In 2019, management determined that it had achieved its investment initiatives and the portfolio was well positioned for any dislocation in the markets.
That proactive effort to improve portfolio quality resulted in a significant reduction in BBB-rated corporate credit, high yield and below-investment-grade structured securities. During this same period, purchases focused on government agency and agency mortgage-backed securities and high quality corporate bonds and municipal securities. Today, that proactive flight to quality has the investment portfolio in all insurance subsidiaries well positioned for market disruptions with ample liquidity.
Further, we believe the investment portfolio is well positioned to withstand an extended period of elevated investment market volatility, and has relatively modest exposure to asset sectors that it expects to be most impacted by the public health response to COVID-19. While we expect other segments of the economy to be disrupted, we believe these effects will be most acute in these sectors. Exposure to these sectors totals 6.8% of the investment portfolio, and as of June 30, 2020, informed by extensive stress testing and portfolio review, management continues to hold the following securities in the sectors that have experienced more pronounced price dislocation due to their perceived exposure to COVID-19 related impacts:
|
| | | | | | | | | | | | | | | | | |
($ in millions) | | June 30, 2020 |
| | Number of Issuers | | Fair Value | | Amortized Cost or Cost | | Pretax Net Unrealized Investment Gains (Losses) | | Credit Quality |
Fixed maturity securities (1) | | | | | | | | | | |
Travel and leisure | | 48 |
| | $ | 107.3 |
| | $ | 106.4 |
| | $ | 0.9 |
| | BBB+ |
Energy-related | | 83 |
| | 150.6 |
| | 135.3 |
| | 15.3 |
| | BBB+ |
Retail | | 22 |
| | 66.5 |
| | 62.8 |
| | 3.7 |
| | A- |
Aircraft | | 55 |
| | 145.7 |
| | 175.2 |
| | (29.5 | ) | | A- |
Total fixed maturity securities | | 208 |
| | $ | 470.1 |
| | $ | 479.7 |
| | $ | (9.6 | ) | | BBB+ |
| |
(1) | Below investment grade securities included in this population account for $55.7 million of amortized cost, $52.8 million of fair value, and $2.9 million of net unrealized investment losses. There are 90 issuers with an average rating of BB-. The majority of these securities are concentrated in the energy sector. |
|
| | |
Horace Mann Educators Corporation | 47 | Quarterly Report on Form 10-Q |
Rating of Fixed Maturity Securities and Equity Securities (1)
The following table presents the composition and fair value of the Company’sour fixed maturity and equity securities portfolios by rating category. At SeptemberJune 30, 2019, 95.9%2020, 92.5% of these combined portfolios were investment grade, based on fair value, with an overall average quality rating of A+. The Company hasWe have classified the entire fixed maturity securities portfolio as available for sale, which is carried at fair value.
Rating of Fixed Maturity Securities and Equity Securities (1)
|
| | | | | | | | | | | | | | |
($ in millions) | | Percent of Portfolio | | | | |
| | Fair Value | | September 30, 2019 |
| | December 31, 2018 | | September 30, 2019 | | Fair Value | | Amortized Cost |
Fixed maturity securities | | | | | | | | |
AAA | | 9.1 | % | | 11.2 | % | | $ | 650.5 |
| | $ | 634.1 |
|
AA (2) | | 44.5 |
| | 43.4 |
| | 2,533.8 |
| | 2,348.6 |
|
A | | 22.4 |
| | 23.0 |
| | 1,343.9 |
| | 1,237.6 |
|
BBB | | 21.2 |
| | 19.1 |
| | 1,116.6 |
| | 1,044.1 |
|
BB | | 1.8 |
| | 1.8 |
| | 105.3 |
| | 102.3 |
|
B | | 0.4 |
| | 0.5 |
| | 28.9 |
| | 28.7 |
|
CCC or lower | | 0.1 |
| | — |
| | 0.5 |
| | 0.5 |
|
Not rated (3) | | 0.5 |
| | 1.0 |
| | 60.0 |
| | 57.5 |
|
Total fixed maturity securities | | 100.0 | % | | 100.0 | % | | $ | 5,839.5 |
| | $ | 5,453.4 |
|
Equity securities | | | | | | | | |
AAA | | — |
| | — |
| | — |
| | |
AA | | — |
| | — |
| | — |
| | |
A | | — |
| | — |
| | — |
| | |
BBB | | 49.0 | % | | 52.7 | % | | $ | 55.6 |
| | |
BB | | — |
| | — |
| | — |
| | |
B | | — |
| | — |
| | — |
| | |
CCC or lower | | — |
| | — |
| | — |
| | |
Not rated | | 51.0 |
| | 47.3 |
| | 49.9 |
| | |
Total equity securities | | 100.0 | % | | 100.0 | % | | $ | 105.5 |
| | |
| | | | | | | | |
Total | | | | | | $ | 5,945.0 |
| | |
_____________ |
| | | | | | | | | | | | | | |
($ in millions) | | Percent of Portfolio | | | | |
| | Fair Value | | June 30, 2020 |
| | December 31, 2019 | | June 30, 2020 | | Fair Value | | Amortized Cost |
Fixed maturity securities | | | | | | | | |
AAA | | 11.5 | % | | 11.6 | % | | $ | 698.5 |
| | $ | 685.2 |
|
AA (2) | | 42.7 |
| | 41.0 |
| | 2,468.4 |
| | 2,232.1 |
|
A | | 23.3 |
| | 20.5 |
| | 1,235.7 |
| | 1,148.0 |
|
BBB | | 18.9 |
| | 19.7 |
| | 1,188.7 |
| | 1,112.1 |
|
BB | | 1.7 |
| | 2.1 |
| | 123.8 |
| | 124.5 |
|
B | | 0.4 |
| | 0.9 |
| | 54.1 |
| | 55.4 |
|
CCC or lower | | — |
| | 0.1 |
| | 3.0 |
| | 3.6 |
|
Not rated (3) | | 1.5 |
| | 4.1 |
| | 249.8 |
| | 243.5 |
|
Total fixed maturity securities | | 100.0 | % | | 100.0 | % | | $ | 6,022.0 |
| | $ | 5,604.4 |
|
Equity securities | | | | | | | | |
AAA | | — | % | | — | % | | $ | — |
| | |
AA | | — |
| | — |
| | — |
| | |
A | | — |
| | 0.6 |
| | 0.5 |
| | |
BBB | | 59.3 |
| | 68.1 |
| | 61.5 |
| | |
BB | | — |
| | 0.9 |
| | 0.8 |
| | |
B | | — |
| | — |
| | — |
| | |
CCC or lower | | — |
| | — |
| | — |
| | |
Not rated | | 40.7 |
| | 30.4 |
| | 27.5 |
| | |
Total equity securities | | 100.0 | % | | 100.0 | % | | $ | 90.3 |
| | |
| | | | | | | | |
Total | | | | | | $ | 6,112.3 |
| | |
| |
(1) | Ratings are as assigned primarily by S&P when available, with remaining ratings as assigned on an equivalent basis by Moody's or Fitch. Ratings for publicly traded securities are determined when the securities are acquired and are updated monthly to reflect any changes in ratings. |
| |
(2) | At SeptemberJune 30, 2019,2020, the AA rated fair value amount included $458.2$374.9 million of U.S. Government and federally sponsored agency securities and $741.3$706.0 million of mortgage-backed and asset-backed securities issued by U.S. Government and federally sponsored agencies. |
| |
(3) | This category primarily represents private placement and municipal securities not rated by either S&P, Moody's or Fitch. |
At SeptemberJune 30, 2019,2020, the fixed maturity securities portfolio had $10.7$72.3 million of pretax gross unrealized investment losses on $754.1$1,142.3 million of fair value related to 316703 positions. Of the investment positions with gross unrealized losses, there were eight32 trading below 80.0% of the carrying value at SeptemberJune 30, 2019.2020.
The Company viewsWe view the unrealized investment losses of all of theour fixed maturity securities at SeptemberJune 30, 20192020 as temporary. Future changes in circumstances related to these and other securities could require subsequent recognition of other-than-temporary impairment (OTTI).
Liquidity and Financial Resources
Off-Balance Sheet Arrangements
At SeptemberJune 30, 2020 and 2019, and 2018, the Companywe 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 iswe are not exposed to any financing, liquidity, market or credit risk that could arise if the Companywe engaged in such relationships.
Investments |
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Horace Mann Educators Corporation | 48 | Quarterly Report on Form 10-Q |
Investments
Information regarding the Company’sour investment portfolio, which is comprised primarily of investment grade fixed maturity securities, is presented in Part I - Item 1, Note 32 of the Consolidated Financial Statements andas well as Part I - Item 2 - Investments Results.
Results in this report.
Cash Flow
TheOur 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'sour 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'sour 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'sour consolidated cash flows activity for the periods indicated.
|
| | | | | | | | | | | |
($ in millions) | | Nine Months Ended September 30, | | 2019-2018 |
| | 2019 | | 2018 | | Change % |
Net cash provided by operating activities | | $ | 207.2 |
| | $ | 217.5 |
| | -4.7 | % |
Net cash used in investing activities | | (65.6 | ) | | (183.8 | ) | | 64.3 | % |
Net cash used in financing activities | | (114.2 | ) | | (34.9 | ) | | N.M. |
|
Net increase (decrease) in cash | | 27.4 |
| | (1.2 | ) | | N.M. |
|
Cash at beginning of period | | 11.9 |
| | 7.6 |
| | 56.6 | % |
Cash at end of period | | $ | 39.3 |
| | $ | 6.4 |
| | N.M. |
|
______________
N.M. - Not meaningful.
|
| | | | | | | | | | | |
($ in millions) | | Six Months Ended June 30, | | 2020-2019 |
| | 2020 | | 2019 | | Change % |
Net cash provided by operating activities | | $ | 165.6 |
| | $ | 97.8 |
| | 69.3 | % |
Net cash provided by (used in) investing activities | | (195.0 | ) | | 23.2 |
| | N.M. |
|
Net cash provided by (used in) financing activities | | 86.3 |
| | (125.3 | ) | | 168.9 | % |
Net increase (decrease) in cash | | 56.9 |
| | (4.3 | ) | | N.M. |
|
Cash at beginning of period | | 25.5 |
| | 11.9 |
| | 114.3 | % |
Cash at end of period | | $ | 82.4 |
| | $ | 7.6 |
| | N.M. |
|
Operating Activities
As a holding company, HMEC conducts itswe conduct our principal operations in the personal lines segment of the property and casualty and life insurance industries through itsour subsidiaries. HMEC'sOur 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 ninesix months ended SeptemberJune 30, 2019,2020, net cash provided by operating activities decreased $10.3increased $67.8 million, compared to the same period in 2018, primarily due to a decreaselower claims paid on insurance policies in Investment income collected and an increase in Policy acquisition and other operating expenses paid,the current year partially offset by an increaselower investment income collected in Premiums collected.
the current year as a result of a $2.1 billion reduction of invested assets from investments transferred under the annuity reinsurance transaction in the second quarter of 2019.
Investing Activities
HMEC'sOur insurance subsidiaries maintain significant investments in fixed maturity securities to meet future contractual obligations to policyholders. In conjunction with itsour management of liquidity and other asset/liability management objectives, the Company,we, 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 haswe have classified the entire fixed maturity securities portfolio as available for sale.
During the first quarter of 2019, HMEC acquired 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 the deposit asset on reinsurance, net, issuances and repurchases of HMEC'sour common stock, fluctuations in book overdraft balances, and borrowings, repayments and repurchases related to debt facilities.
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Horace Mann Educators Corporation | 49 | Quarterly Report on Form 10-Q |
Horace Mann Life Insurance Company (HMLIC), one and NTA (both subsidiaries of the Company's subsidiaries, operatesHMEC) operate under funding agreements with FHLB. In January 2019,For the six months ended June 30, 2020, HMLIC and NTA collectively received an additional $175.0$95.5 million from FHLB under funding agreements and receiptfor the six months ended June 30, 2019, HMLIC received $50.0 million from FHLB under a funding agreement. Receipt of thosethese funds have beenare reported in Annuity Contracts: Variable, Fixed and FHLB Funding Agreements, Deposits. DuringDeposits in the third quarterConsolidated Statements of 2019,Cash Flows. Advances to HMLIC paid down $275.0 million on FHLB funding agreements and thus, advances to HMLICNTA from FHLB under funding agreements totaled $525.0$590.5 million as of SeptemberJune 30, 2019.2020. For the nine month periodsix months ended SeptemberJune 30, 2019,2020, cash inflows from annuity contract deposits excluding(excluding the additional $175.0$95.5 million received from FHLB in the current year and the $50.0 million received from FHLB in the prior year) increased $18.6$13.2 million, or 5.7%6.1%, compared to the prior year period. Cash outflows from annuity contract benefits, withdrawals and net transfers to Separate Account (variable annuity) assets decreased $19.8$17.3 million, or 5.9%8.1%, compared to the prior year period.
Financing activities for the nine month period ended September 30, 2019 also includes a one-time cash payment of $124.1 million as part of the initial transfer under the annuity reinsurance transaction.
Capital Resources
The Company hasWe have 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).Commissioners. Historically, the Company’sour insurance subsidiaries have generated capital in excess of such needed capital. These excess amounts have been paid to HMECus through dividends. HMEC hasWe have then utilized these dividends and itsour access to the capital markets to fund growth initiatives, service and retire long-term debt, pay dividends to itsour shareholders, fund growth initiatives, repurchase shares of itsour common stock and for other corporate purposes. If necessary, HMECwe also hashave 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 HMECus without prior approval of the insurance regulatory authorities. The aggregate amount of dividends that may be paid in 20192020 from all of HMEC'sour insurance subsidiaries without prior regulatory approval is $43.2$105.3 million, excluding the impact and timing of prior dividends, of which $6.5$103.0 million was paid during the nine month periodsix months ended SeptemberJune 30, 2019. Management anticipates2020. We anticipate that the Company’sour sources of capital will continue to generate sufficient capital to meet the needs for business growth, debt interest payments, shareholder dividends and itsour share repurchase program. Additional information is contained in Part II - Item 8, Note 1014 of the Consolidated Financial Statements in the Company’sour Annual Report on Form 10-K for the year ended December 31, 2018.2019.
The totalTotal capital of the Company was $2,011.6$2,077.0 million at SeptemberJune 30, 2019,2020, including $433.0$437.2 million of short-term and long-term debt. Total debt represented 24.8%21.0% of total capital including net unrealized investment gains on fixed maturity securities (24.3% excluding net unrealized investment gains on fixed maturity securities (21.5% including net unrealized investment gains on fixed maturity securities)securities*) at SeptemberJune 30, 2019,2020, which was below the Company'sour long-term target of 25%.
Shareholders' equity was $1,578.6$1,639.8 million at SeptemberJune 30, 2019,2020, including net unrealized investment gains on fixed maturity securities in the Company’sour investment portfolio of $266.4$279.1 million after taxes and the related impact of DAC associated with investment contracts and life insurance products with account values. At September 30, 2019,The market value of our common stock and the market capitalization of the Company was approximately $1,909.4value per share were $1,517.5 million (41,213,085 sharesand $36.73, respectively, at $46.33 per share).June 30, 2020. Book value per share was $38.30$39.69 at SeptemberJune 30, 20192020 ($31.8432.93 excluding net unrealized investment gains on fixed maturity securities*).
Additional information regarding net unrealized investment gains on fixed maturity securities in the Company'sour investment portfolio at SeptemberJune 30, 20192020 is included in Part I - Item 1, Note 32 of the Consolidated Financial Statements andas well as in Part I - Item 2 - Investment Results of Operations by Segment in this report.
Total shareholder dividends paid were $35.5$24.8 million for the nine month periodsix months ended SeptemberJune 30, 2019.2020. In March and May and September 2019,2020, the Board of Directors (Board) approved regular quarterly dividends to $0.2875of $0.30 per share.
For the nine month periodsix months ended SeptemberJune 30, 2019, the Company did not repurchase any2020, we repurchased 52,095 shares of itsour common stock at an average price per share of $41.17 under itsour share repurchase program, which is further described in Part II - Item 8, Note 913 of the Consolidated Financial Statements in the Company'sour Annual Report on Form 10-K for the year ended December 31, 2018.2019. As of SeptemberJune 30, 2019, $22.82020, $20.6 million remained authorized for future share repurchases under the share repurchase program.
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Horace Mann Educators Corporation | 50 | Quarterly Report on Form 10-Q |
The following table summarizes the Company'sour debt obligations.
|
| | | | | | | | |
($ in millions) | | 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 $1.6 million and $1.8 million | | 248.0 |
| | 247.7 |
|
FHLB borrowing | | 50.0 |
| | 50.0 |
|
Total | | $ | 433.0 |
| | $ | 297.7 |
|
|
| | | | | | | | | | | | |
($ in millions) | | Effective Interest Rates | | Final Maturity | | | | |
| | | | June 30, 2020 | | December 31, 2019 |
Short-term debt | | | | | | | | |
Bank Credit Facility | | Variable | | 2024 | | $ | 135.0 |
| | $ | 135.0 |
|
Long-term debt (1) | | | | | | | | |
4.50% Senior Notes, Aggregate principal amount of $250,000 less unaccrued discount of $395 and $426 and unamortized debt issuance costs of $1,433 and $1,549 | | 4.50% | | 2025 | | 248.2 |
| | 248.0 |
|
Federal Home Loan Bank borrowing | | 0.52% | | 2022 | | 54.0 |
| | 50.0 |
|
Total | | | | | | $ | 437.2 |
| | $ | 433.0 |
|
(1) We designate debt obligations as "long-term" based on maturity date at issuance.
As of SeptemberJune 30, 2019, the Company2020, we had outstanding $250.0 million aggregate principal amount of 4.50% Senior Notes (Senior Notes due 2025)Notes), 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 Part II - Item 8, Note 710 of the Consolidated Financial Statements in the Company'sour Annual Report on Form 10-K for the year ended December 31, 2018.2019. The Senior Notes due 2025 are traded in the open market (HMN 4.50).
As of SeptemberJune 30, 2019, the Company2020, we had $50.0$54.0 million of borrowings outstanding with FHLB. For FHLB borrowings, theThe Board has authorized a maximum amount equal to the greater15% of 10% ofnet aggregate admitted assets or 20% of surplusless separate account assets of the consolidated property and casualty companies.insurance subsidiaries for FHLB borrowings. For the total $50.0$54.0 million received, $4.0 million matures on May 17, 2021, $25.0 million matures on October 5, 2022 and $25.0 million matures on December 2, 2022. Interest on the borrowings accruesaccrue at an annual weighted average rate of 2.45%0.52% as of SeptemberJune 30, 2019. Horace Mann Insurance Company's (HMIC)2020. The $54.0 million of FHLB borrowings of $50.0 million are included inis reported as Long-term debt onin the Consolidated Balance Sheets.
As of June 30, 2020, we had $135.0 million of short-term debt outstanding under our Bank Credit Facility. On June 21, 2019, the Company,we, as borrower, replaced itsour 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. As described in Item
On July 1, Note 8 of the Consolidated Financial Statements, the Company2019, we utilized the senior revolving credit facility to partially fund the acquisition of NTA. Moving forward,As of June 30, 2020, the Company will useamount outstanding on the senior revolving credit facility for ongoing working capital, capital expenditures and general corporate expenditures.was $135.0 million. The $90.0 million unused portion of the Bank Credit Facility is available for use and subject to a variable commitment fee, which was 0.15% on an annual basis at SeptemberJune 30, 2019. As of September 30, 2019, the Company had $135.0 million outstanding under the senior revolving credit facility.
2020.
To provide additional capital management flexibility, the Companywe 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 Companyus earlier, this
registration statement will remain effective through March 13, 2021. No securities associated with the registration statement have been issued asat the time of the dateissuance of this Quarterly Report on Form 10-Q.
On March 13, 2018, the Companywe filed a "shelf" registration statement on Form S-4 with the SEC which became effective on May 2, 2018. Under this registration statement, the Companywe may from time to time offer and issue up to 5,000,000 shares of itsour common stock in connection with future acquisitions of other businesses, assets or securities. Unless withdrawn by the Company,us, this registration statement will remain effective indefinitely. No securities associated with the registration statement have been issued asat the time of the dateissuance of this Quarterly Report on Form 10-Q.
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Horace Mann Educators Corporation | 51 | Quarterly Report on Form 10-Q |
COVID-19 Liquidity and Capital Resources Considerations
The various impacts of the COVID-19 pandemic on the U.S. economy, our operations and our investment portfolio have been material. Nonetheless we believe that the liquidity available to our holding company and its operating subsidiaries remains adequate and we do not foresee a need to suspend ordinary dividends or seek additional sources of capital at this time. Our current forecast assumes a return to a normal operating environment within six months, and as such, capital and liquidity are expected to remain at or near target levels during that period.
Financial Ratings
HMEC'sOur principal insurance subsidiaries are rated by S&P, Moody's, A.M. Best Company, Inc. (A.M. Best) and Fitch. These rating agencies have also assigned ratings to the Company's long-term debt securities.our Senior Notes. The ratings that are assigned by these agencies, which are subject to change, can impact, among other things, the Company'sour 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'sour 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's financing plans to purchase NTA. A.M. Best and S&P affirmed the ratings that were in place at December 31, 2018. Moody'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'sour Property and Casualty and the Company's Life insurance subsidiaries. Only A.MA.M. Best currently rates the Company'sour Supplemental segment's subsidiaries. Assigned ratings and respective affirmation/review dates as of OctoberJuly 31, 20192020 were as follows:
|
| | | | | | | | | | |
| | Insurance Financial | | | | Affirmed/ |
| | Strength Ratings (Outlook) | | Debt Ratings (Outlook) |
As of October 31, 2019 | | | | |
S&P | | A | | (stable) | | BBB | | (stable) |
Moody’s | | A2 | | (stable) | | Baa2 | | (stable)Reviewed |
A.M. Best | | | | | | | | | | 7/2/2020 |
HMEC (parent company) | | N.A. | | | | bbb | | (stable) | | |
HMEC's Life | | A | | (stable) | | N.A. | | | | |
HMEC's Property and Casualty subsidiaries | | A | | (stable) | | N.A. | | | | |
HMEC's Supplemental segment's subsidiaries | | A- | | (stable) | | N.A. | | | | |
Fitch | | A | | (stable) | | BBB | | (stable) | | 6/2/2020 |
Moody's | | A2 | | (stable) | | Baa2 | | (stable) | | 7/2/2019 |
S&P | | A | | (stable) | | BBB | | (stable) | | 2/19/2020 |
Reinsurance Programs
Information regarding the reinsurance programs for the Company'sour Property and Casualty, Supplemental and Life segments is located in Part II - Item 8, Note 69 of the Consolidated Financial Statements in the Company'sour 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.
2019.
Effective April 1, 2019, the Companywe reinsured a block of approximately $2.9 billion of individual annuity policy liabilities to AA- S&P rated RGA Reinsurance Company, a subsidiary of Reinsurance Group of America, Incorporated (RGA). The block includes $2.2 billion of fixed annuities reinsured under coinsurance and $0.7 billion of variable annuities reinsured under modified coinsurance. RGA's financial obligations for the general account liabilities of the reinsured annuity contracts are secured by its assets placed in a comfort trust for HMLIC'sour sole use and benefit. Upon RGA's material breach of the reinsurance agreement, deterioration of its risk-based capital (RBC) ratio to a certain level, or certain other events, HMLICwe may recapture the reinsured business.
ItemITEM 3.IQuantitative and Qualitative Disclosures about Market Risk
Market value risk, the Company'sour primary market risk exposure, is the risk that the Company'sour invested assets will decrease in value. This decrease in value may be due to (1) a change in the yields realized on the Company'sour assets and prevailing market yields for similar assets, (2) an unfavorable change in the liquidity of thean investment, (3) an unfavorable change in the financial prospects of the issuer of thean investment, or (4) a downgrade in the credit rating of the issuer of thean investment. See alsoAlso see Consolidated Results of Operations in Part I - Item 2 of this report regarding net investment gains (losses).
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| | |
Horace Mann Educators Corporation | 52 | Quarterly Report on Form 10-Q |
Significant changes in interest rates expose the Companyus 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'sour investments and the credited interest rates on the Company'sour insurance and investment contract liabilities. See alsoAlso see Consolidated Results of Operations in Part I - Item 2 of this report regarding interest credited to policyholders.
The Company seeksWe seek to manage itsour market value risk by coordinating the projected cash inflows of assets with the projected cash outflows of liabilities. For all itsof our assets and liabilities, the Company seekswe seek 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.us. Certain fees that the Company earnswe earn from variable annuity deposits are based on the market value of the funds deposited.
More detailed descriptions of the Company'sour exposure to market value risks and the management of those risks is presentedcontained in Part II - Item 7A Quantitative and Qualitative Disclosures about Market Risk of the Company'sour Annual Report on Form 10-K for the year ended December 31, 2018.
2019.
ItemITEM 4.IControls and Procedures
Management's Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
Under the supervision and with the participation of the Company'sour management, including the Company's Chief Executive Officerour chief executive officer and Chief Financial Officer, the Companychief financial officer, we conducted an evaluation of the effectiveness of the design and operation of the Company'sour disclosure controls and procedures, as such term is defined in Rule 13a-15(e) of the Securities Exchange Act of 1934 as amended (Exchange Act), as
of SeptemberJune 30, 2019 pursuant to Rule 13a-15(b) of the Exchange Act.2020. Based on this evaluation, the Chief Executive Officerchief executive officer and Chief Financial Officerchief financial officer concluded that the Company'sour disclosure controls and procedures are effective in timely alerting them to material information relating to the Companyus (including itsour consolidated subsidiaries) that is required to be included in the Company'sour periodic Securities and Exchange CommissionSEC filings. No material weaknesses in the Company'sour disclosure controls and procedures were identified in the evaluation and therefore, no corrective actions were taken. There were no significant changes in the Company'sour 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
Except as noted below, there were no changes in the Company'sour internal control over financial reporting during the period covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, the Company'sour internal control over financial reporting.
On July 1, 2019, the Companywe completed itsour acquisition of NTA. The Company isWe are in the process of integrating NTA and the Company'sour controls over financial reporting. As a result of these integration activities, certain controls will be evaluated and may be changed. Therefore, the Company haswe have elected to exclude NTA from the Company'sour assessment of internal control over financial reporting as of SeptemberJune 30, 2019.
2020.
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.
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Horace Mann Educators Corporation | 53 | Quarterly Report on Form 10-Q |
PART II: OTHER INFORMATION
ItemITEM 1A.IRisk Factors
At the time of issuance of this Quarterly Report on Form 10-Q, management believeswe believe there are no material changes from the risk factors as previously disclosed in the Company'sPart I - Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2018.2019. However, the following risk factor has emerged as a result of transactionsevents that occurred subsequent to year end.
Our business may be adversely affected by the recent COVID-19 outbreak.
The Company is subjectglobal pandemic caused by the novel coronavirus (COVID-19) was initially reported in December and has developed into a worldwide crisis over the subsequent months, causing significant human suffering and widespread economic damage. By early 2020, COVID-19 spread across the world and efforts to contain the disease intensified. The affects of the outbreak on the U.S. economy, our customers, our agents, our employees, our investments and our communities, as well as any preventative or protective actions that we, our employees and agency force, our third-party service providers and suppliers, or governments may take to mitigate the impact of COVID-19 could have an adverse effect on our ability to conduct business and on our financial condition and results of operations. Impacts to our business could be widespread and material impacts may result, including but not limited to, the credit riskfollowing:
employees contracting COVID-19;
reductions in our operating effectiveness as our employees work from home;
sustained lack of its counterparties, including reinsurers who reinsure business fromaccess to schools and teachers that could materially impact our sales and premium volumes;
public school systems facing budget constraints due to the Company's insurance companies.
The Company's insurance subsidiaries may cede certain risks to third-party insurance companies through reinsurance. Oneeconomic impacts of the Company's insurance subsidiaries, Horace Mann Life Insurance Company (HMLIC), entered into a reinsurance agreement with RGA Reinsurance Company, a subsidiary of Reinsurance Group of America, Incorporated (RGA) to effectuate the reinsurance of a block of HMLIC's in force fixed and variable annuities on a coinsurance and modified coinsurance basis. The variable portion of the 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'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's financial obligations for the general account liabilities of the reinsured annuity contracts are secured by its assets placed in a comfort trust for HMLIC's sole use and benefit. Upon RGA's material breach of the reinsurance agreement, deterioration of its risk-based capital (RBC) ratio to certain level, or certain other events, HMLIC may
recapture the reinsured business. However, in the event of RGA's insolvency, HMLIC's right to use the assets in 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'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 difficultiespandemic 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 goodwilleducator layoffs;
unprecedented volatility in financial markets that could materially affect our investment portfolio valuations 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 recognizedreturns as well as our ability to generate targeted spreads on the Company's consolidated balance sheetindexed products;
regulatory mandates and/or legislative changes, including premium grace periods and premium credits;
changes in frequency and/or severity of claims;
increased credit risk;
business disruption for insurance agents who market and sell our insurance products; and
business disruptions to third parties at their respective fair values as of the acquisition date, including recognition of intangible assets. which we outsource certain business functions to or on which we rely for technology.
Any excess of the purchase consideration over the fair value of the acquired net tangibleresulting impact on our business, financial condition, 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.
Historicaldue to the foregoing cannot be reasonably estimated at this time, although the results may not be indicativefelt for a significant period of future performance duetime. The full extent to among other things, changes inwhich COVID-19 could affect the Company’s mix ofglobal economy, the financial markets and our 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 actuarialits financial condition 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'sits results of operations or financial condition.
Conditions in the general economywill depend on future developments 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 maythat cannot 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.
predicted.
ItemITEM 2.IUnregistered 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.million of our common stock, par value $0.001 (Program). The share repurchase programProgram authorizes the repurchase of our common sharesstock in open market or privately negotiated transactions, from time to time, depending on market
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conditions. The share repurchase programProgram does not have an expiration date and may be limited or terminated at any time without notice. During the three month periodmonths ended SeptemberJune 30, 2019, the Company2020, we did not repurchase shares of HMECour common stock. As of SeptemberJune 30, 2019, $22.82020, $20.6 million remained authorized for future share repurchases.
ItemITEM 5.IOther Information
The Company isWe are not aware of any information required to be disclosed in a reportCurrent Report on Form 8-K during the three month periodmonths ended SeptemberJune 30, 20192020 which has not been filed with the SEC.
ItemITEM 6.IExhibits
The following items are filed as Exhibits. Management contracts and compensatory plans are indicated by an asterisk (*).
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(3) Articles of incorporation and bylaws: |
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(4) Instruments defining the rights of security holders, including indentures: |
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(10) Material contracts: |
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10.2(a)* | | |
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10.12 | | Stock Purchase Agreement Among Horace Mann Educators Corporation, and Robert Paglione, Paglione Family Irrevocable Trust F/B/O Adam Paglione, Paglione Family Irrevocable Trust F/B/O Lisa and Jorge Arroyo, Beau Adams and Benefit Consultants Group, Inc. dated as of October 30, 2018, incorporated by reference to Exhibit 10.12 to HMEC's Annual Report on Form 10-K for the year ended December 31, 2018, filed with the SEC on March 1, 2019. |
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(31) Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002: |
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(32) Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002: |
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32.2 | | |
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(99) Additional exhibits: |
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99.1 | | |
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(101) Interactive Data File: |
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101.INS | | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document |
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101.SCH | | XBRL Taxonomy Extension Schema |
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101.CAL | | XBRL Taxonomy Extension Calculation Linkbase |
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101.DEF | | XBRL Taxonomy Extension Definition Linkbase |
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101.LAB | | XBRL Taxonomy Extension Label Linkbase |
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101.PRE | | XBRL Taxonomy Extension Presentation Linkbase |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| | | HORACE MANN EDUCATORS CORPORATION |
| | | (Registrant) |
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Date | November 8, 2019August 7, 2020 | | /s/ Marita Zuraitis |
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| | | Marita Zuraitis |
| | | President and Chief Executive Officer |
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Date | November 8, 2019August 7, 2020 | | /s/ Bret A. Conklin |
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| | | Bret A. Conklin |
| | | Executive Vice President and |
| | | Chief Financial Officer |
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Date | November 8, 2019August 7, 2020 | | /s/ Kimberly A. Johnson |
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| | | Kimberly A. Johnson |
| | | Senior Vice President, Controller and |
| | | Principal Accounting Officer |
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Horace Mann Educators Corporation | 59 | Quarterly Report on Form 10-Q |