0000850141 hmn:AnnuityInsuranceProductLineMember 2019-01-01 2019-12-31
SECURITIES AND EXCHANGE COMMISSION
☒ANNUAL REPORT PURSUANT TO SECTION 13 orOR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year endedDecember 31, 2016OR
[ ]2019
or
☐ 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, Illinois62715-0001 (Address of principal executive offices, including Zipoffices) (Zip Code) Registrant's Telephone Number, Including Area Code: 217-789-2500217-789-2500 Securities Registered Pursuant to Section 12(b) of the Act:
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| | Name of each exchange on |
| Title of each class | Trading Symbol | which registered |
| Common Stock, par value $0.001 per share | HMN | New York Stock Exchange |
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes X ☑No☐ Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes☐No X☑ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.Yes X ☑No☐ Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).Yes X ☑No☐ Indicate by check mark
if disclosurewhether 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
delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein,"large accelerated filer," "accelerated filer," "smaller reporting company," and
will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]Indicate by check mark the registrant’s filer status, as such terms are defined"emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer X Accelerated filerNon-accelerated filer
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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(as defined in Rule 12b-2 of the Act.Exchange Act). Yes☐No X☑ The aggregate market value of the
registrant’sregistrant's Common Stock held by non-affiliates of the registrant based on the closing price of the
registrant’sregistrant's Common Stock on the New York Stock Exchange and the shares outstanding on June 30,
2016,2019, was
$1,356.3$1,619.7 million.
As of February 15,
2017, 40,339,3232020, the registrant had 41,266,751 shares of
the registrant’s Common Stock, par value $0.001 per share,
were outstanding, net of 24,672,932 shares of treasury stock.outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the
registrant’sregistrant's Proxy Statement for the
20172020 Annual Meeting of Shareholders are incorporated by reference into Part III Items 10, 11, 12, 13 and 14 of
this Form 10-K as specified in those Items and will be filed with the Securities and Exchange Commission within 120 days after December 31,
2016.2019.
HORACE MANN EDUCATORS CORPORATION
YEAR ENDED DECEMBER 31,
2016INDEX
2019
Item 1IBusiness
Measures within this Annual Report on Form 10-K that are not based on accounting principles generally accepted in the
United States (“non-GAAP”)U.S. (non-GAAP) are marked
bywith an asterisk
(“*”(*)
. the first time they are presented within Part I - Item 1 of this report. An explanation of these measures is contained in the Glossary of Selected Terms included as Exhibit 99.1 to this Annual Report on Form
10-K.10-K and are reconciled to the most directly comparable measures prepared in accordance with accounting principles generally accepted in the U.S. (GAAP) in the Appendix to the Company's Fourth Quarter 2019 Investor Supplement.
Forward-looking Information
It is important to note that the
The Company's actual results could differ materially from those projected in forward-looking statements. Additional information concerning factors that could cause actual results to differ materially from those in
the forward-looking statements is contained in
“Item 1A. Risk Factors”Part I - Item 1A and in
“Item 7. Management's Discussion and AnalysisPart II - Item 7 of
Financial Condition and Results of Operations — Forward-looking Information”.this report.
Overview,
History and Available Information
Horace Mann Educators Corporation (“HMEC”;(HMEC; and together with its subsidiaries, the “Company”Company or “Horace Mann”)Horace Mann) is an insurance holding company incorporated in Delaware. Through its subsidiaries, HMECthe Company markets and underwrites underwrites:
personal lines of property and casualty (primarily personal linesinsurance, primarily automobile and homeowners)property coverages
supplemental insurance, primarily heart, cancer, accident and limited short-term supplemental disability coverages
retirement products, (primarilyprimarily tax-qualified annuities) and annuities
life insurance, primarily whole life, term and indexed universal life (IUL)
The Company conducts and manages its business through a total of five reporting segments. The four operating segments, representing the major lines of insurance business, are: Property and Casualty, Supplemental, Retirement and Life. The Company does not allocate the impact of corporate-level transactions to the four operating segments, consistent with the basis for management's evaluation of the results of those segments, but classifies those items in the
United States of America (“U.S.”). HMEC's principal insurance subsidiaries are Horace Mann Life Insurance Company (“HMLIC”), Horace Mann Insurance Company (“HMIC”), Horace Mann Property & Casualty Insurance Company (“HMPCIC”)fifth reporting segment, Corporate and
Teachers Insurance Company (“TIC”), each of which is an Illinois corporation, and Horace Mann Lloyds (“HM Lloyds”), an insurance company domiciled in Texas.Other.
Founded by Educators for Educators®, the Company's business began in Springfield, Illinois in 1945 when two school teachers started selling automobile insurance to other teachers within Illinois. The Company expanded its business to other states and broadened its product line to include life insurance in 1949, 403(b) tax-qualified retirement annuities in 1961 and property insurance in 1965. On July 1, 2019, the Company marketsadded its productsnewest segment - Supplemental - when it acquired all of the equity interests in NTA Life Enterprises, LLC (NTA).
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| Horace Mann Educators Corporation | | Annual Report on Form 10-K 1 |
In November 1991, HMEC completed an initial public offering of its common stock. The common stock is traded on the New York Stock Exchange (NYSE) under the symbol HMN.
Today, the Company markets primarily to K-12 teachers, administrators and other employees of public schools and their families. The Company's
nearlymore than one million customers typically have moderate annual incomes, with many belonging to two-income households. Their financial planning tends to focus on retirement, security, savings and primary insurance needs. Management believes that
Horace Mannthe Company is the largest national
multilinemulti-line insurance company focused on the nation's educators as its primary market.
Horace Mann markets
and services its products primarily through a dedicated sales force of full-time
agentsExclusive Distributors supported by the
Company’sCompany's Customer Contact Center. These agents sell Horace Mann's products and limited
additional third-party vendor
products.products made available through the Horace Mann General Agency. Some of these agents are former educators or individuals with close ties to the educational community who utilize their contacts within, and knowledge of, the target market.
This dedicated agent sales force is supplemented by an independent agent distribution channel for the Company’s retirement products.The Company's insurance premiums written and contract deposits for the year ended December 31, 2016 were $1.3 billion and net income was $83.8 million. The Company's total assets were $10.6 billion at December 31, 2016. The Company's investment portfolio had an aggregate fair value of $8.0 billion at December 31, 2016 and consisted principally of investment grade, publicly traded fixed maturity securities.
The Company conducts and manages its business through four segments. The three operating segments, representing the major lines of insurance business, are: Property and Casualty insurance, Retirement products, and Life insurance. The Company does not allocate the impact of corporate-level transactions to the insurance segments, consistent with the basis for management’s evaluation of the results of those segments, but classifies those items in the fourth segment, Corporate and Other. The Property and Casualty, Retirement, and Life segments accounted for 50%, 41% and 9%, respectively, of the Company's insurance premiums written and contract deposits for the year ended December 31, 2016.
The Company is one of the largest participants in the K-12 educator portion of the 403(b) tax-qualified annuity market, measured by 403(b) net written premium on a statutory accounting basis. The Company's 403(b) tax-qualified annuities are voluntarily purchased by individuals employed by public school systems or other tax-exempt organizations through the employee benefit plans of those entities.
The Company has 403(b) payroll deduction capabilities utilizedCompany's new Supplemental segment predominantly sells a variety of guaranteed renewable supplemental health insurance products including heart, cancer, accident and limited short-term supplemental disability coverages to the K-12 education market. Approximately 80% of its 150,000 households are individuals employed by approximately one-thirdeducational institutions; the remainder generally are other public sector employees such as firefighters.
Including results for the Supplemental segment since the date it was acquired, the Company's insurance premiums and contract charges earned for the year ended December 31, 2019 were $898.0 million and insurance premiums written and contract deposits* for the year ended December 31, 2019 were $1.3 billion. Net income was $184.4 million. The Company's total assets were $12.5 billion at December 31, 2019. The Company's investment portfolio had an aggregate fair value of
the 13,500 public school districts in the U.S.$6.6 billion at December 31, 2019 and consisted primarily of investment grade fixed maturity securities.
The Company's annual
reportreports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements, and all amendments to those reports, are available free of charge through the Investors section of the Company's
Internet website,
www.horacemann.com,, as soon as reasonably practicable after such reports are electronically filed with, or furnished to, the Securities and Exchange Commission
(“SEC”)(SEC). The EDGAR filings of such reports are also available at the SEC's website,
www.sec.gov. www.sec.gov.
Also available in the Investors section of the
Company’sCompany's website are its corporate governance principles, code of conduct,
and code of ethics,
and corporate social responsibility reports, as well as the charters of the
Board’sHMEC Board of Director's (Board) Audit Committee, Compensation Committee, Executive Committee, Investment and Finance Committee, and Nominating and Governance Committee.
Copies also may be obtained by writing to Investor Relations, Horace Mann Educators Corporation, 1 Horace Mann Plaza, Springfield, Illinois 62715-0001.
On June
22, 2016,19, 2019, the Chief Executive Officer
(“CEO”)(CEO) of HMEC
timely submitted the Annual Section 12(a) CEO Certification to the
New York Stock Exchange (“NYSE”)NYSE without any qualifications. The Company filed with the SEC, as exhibits to the Annual Report on Form 10-K for the year ended December 31,
2015,2018, the CEO and Chief Financial Officer
(“CFO”)(CFO) certifications required under Section 302 of the Sarbanes-Oxley Act.
Corporate Strategy
The Company's
business was founded in Springfield, Illinois in 1945 by two school teachersvision is to
sell automobile insurancebe the company of choice to
other teachers withinprovide financial solutions for educators and others who serve their communities. Management believes the
State of Illinois. The Company expanded its business to other states and broadened its product line to include life insurance in 1949, 403(b) tax-qualified retirement annuities in 1961 and homeowners insurance in 1965. In November 1991, HMEC completed an initial public offering of its common stock (the “IPO”). The common stock is traded on the New York Stock Exchange under the symbol “HMN”.SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The following consolidated statement of operations and balance sheet data have been derived from the consolidated financial statementsunique value of the Company which have been preparedis providing solutions tailored for educators at each stage of their lives, empowering them to achieve lifelong financial success.
Education Market
Today, the Company serves approximately 470,000 educator households in
accordance with U.S. generally accepted accounting principles (“GAAP”). The consolidated financial statementsroughly half of the
Company for each of the
yearsK-12 public school buildings in its market footprint in the
five year period ended December 31, 2016 have been audited by KPMG LLP, an independent registered public accounting firm. The following selected historical consolidated financial data should be readU.S., with significant opportunity to grow in
conjunction with the consolidated financial statements of HMEC and its subsidiaries and “Management's Discussion and Analysis of Financial Condition and Results of Operations”.| | | Year Ended December 31, | |
| | | | 2016 | | | | 2015 | | | | 2014 | | | | 2013 | | | | 2012 | |
| | | (Dollars in millions, except per share data) | |
| Statement of Operations Data: | | | | | | | | | | | | | | | | | | | | |
| Insurance premiums and contract charges earned | | $ | 759.1 | | | $ | 731.9 | | | $ | 715.8 | | | $ | 690.9 | | | $ | 670.5 | |
| Net investment income | | | 361.2 | | | | 332.6 | | | | 329.8 | | | | 313.6 | | | | 306.0 | |
| Net realized investment gains | | | 4.1 | | | | 12.7 | | | | 10.9 | | | | 22.2 | | | | 27.3 | |
| Total revenues | | | 1,128.9 | | | | 1,080.4 | | | | 1,060.7 | | | | 1,031.2 | | | | 1,010.8 | |
| Interest expense | | | 11.8 | | | | 13.1 | | | | 14.2 | | | | 14.2 | | | | 14.2 | |
| Income before income taxes | | | 114.2 | | | | 129.5 | | | | 146.1 | | | | 154.1 | | | | 149.2 | |
| Net income | | | 83.8 | | | | 93.5 | | | | 104.2 | | | | 110.9 | | | | 103.9 | |
| Ratio of earnings to fixed charges (1) | | | 1.6 | x | | | 1.7 | x | | | 1.8 | x | | | 1.8 | x | | | 1.8 | x |
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| Per Share Data (2): | | | | | | | | | | | | | | | | | | | | |
| Net income per share | | | | | | | | | | | | | | | | | | | | |
| Basic | | $ | 2.04 | | | $ | 2.23 | | | $ | 2.50 | | | $ | 2.75 | | | $ | 2.63 | |
| Diluted | | $ | 2.02 | | | $ | 2.20 | | | $ | 2.47 | | | $ | 2.66 | | | $ | 2.51 | |
| Shares of Common Stock (in millions) | | | | | | | | | | | | | | | | | | | | |
| Weighted average - basic | | | 41.2 | | | | 41.9 | | | | 41.6 | | | | 40.4 | | | | 39.5 | |
| Weighted average - diluted | | | 41.5 | | | | 42.4 | | | | 42.2 | | | | 41.6 | | | | 41.4 | |
| Ending outstanding | | | 40.2 | | | | 40.6 | | | | 40.9 | | | | 40.5 | | | | 39.4 | |
| Cash dividends per share | | $ | 1.06 | | | $ | 1.00 | | | $ | 0.92 | | | $ | 0.78 | | | $ | 0.55 | |
| Book value per share | | $ | 32.15 | | | $ | 31.18 | | | $ | 32.65 | | | $ | 27.14 | | | $ | 31.65 | |
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| Balance Sheet Data, at Year End: | | | | | | | | | | | | | | | | | | | | |
| Total investments | | $ | 7,999.3 | | | $ | 7,648.0 | | | $ | 7,403.5 | | | $ | 6,539.5 | | | $ | 6,292.1 | |
| Total assets | | | 10,576.8 | | | | 10,057.0 | | | | 9,768.4 | | | | 8,826.3 | | | | 8,167.2 | |
| Total policy liabilities | | | 6,024.1 | | | | 5,683.4 | | | | 5,351.5 | | | | 5,029.2 | | | | 4,736.7 | |
| Short-term debt | | | - | | | | - | | | | 38.0 | | | | 38.0 | | | | 38.0 | |
| Long-term debt | | | 247.2 | | | | 247.0 | | | | 199.8 | | | | 199.5 | | | | 199.3 | |
| Total shareholders’ equity | | | 1,294.0 | | | | 1,264.7 | | | | 1,336.5 | | | | 1,099.3 | | | | 1,245.8 | |
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| Segment Information (3): | | | | | | | | | | | | | | | | | | | | |
| Insurance premiums written and contract deposits | | | | | | | | | | | | | | | | | | | | |
| Property and Casualty | | $ | 634.3 | | | $ | 605.8 | | | $ | 584.4 | | | $ | 570.4 | | | $ | 550.8 | |
| Retirement | | | 520.2 | | | | 548.0 | | | | 480.6 | | | | 423.0 | | | | 417.6 | |
| Life | | | 108.0 | | | | 102.7 | | | | 102.7 | | | | 100.8 | | | | 99.3 | |
| Total | | | 1,262.5 | | | | 1,256.5 | | | | 1,167.7 | | | | 1,094.2 | | | | 1,067.7 | |
| Net income (loss) | | | | | | | | | | | | | | | | | | | | |
| Property and Casualty | | | 25.6 | | | | 40.0 | | | | 46.9 | | | | 44.4 | | | | 37.1 | |
| Retirement | | | 50.7 | | | | 43.4 | | | | 45.3 | | | | 44.7 | | | | 40.5 | |
| Life | | | 16.6 | | | | 15.0 | | | | 17.5 | | | | 20.4 | | | | 21.9 | |
| Corporate and Other (4) | | | (9.1 | ) | | | (4.9 | ) | | | (5.5 | ) | | | 1.4 | | | | 4.4 | |
| Total | | | 83.8 | | | | 93.5 | | | | 104.2 | | | | 110.9 | | | | 103.9 | |
| (1) | For the purpose of determining the ratio of earnings to fixed charges, “earnings” consist of income before income taxes and fixed charges, and “fixed charges” consist of interest expense (including amortization of debt issuance cost) and interest credited to policyholders on investment contracts and life insurance products with account values. |
| (2) | Basic earnings per share is computed based on the weighted average number of shares outstanding plus the weighted average number of fully vested restricted stock units and common stock units payable as shares of HMEC common stock. Diluted earnings per share is computed based on the weighted average number of shares and common stock equivalents outstanding, to the extent dilutive. The Company's common stock equivalents relate to outstanding common stock options, common stock units (related to deferred compensation for Directors and employees) and restricted stock units. |
| (3) | Information regarding assets by segment at December 31, 2016, 2015 and 2014 is contained in “Notes to Consolidated FinancialStatements — Note 14 — Segment Information” listed on page F-1 of this report. |
| (4) | The Corporate and Other segment primarily includes interest expense on debt, the impact of net realized investment gains andlosses, corporate debt retirement costs, and certain public company expenses. |
Corporate Strategy and Marketing
The Horace Mann Value Proposition
The Horace Mann Value Proposition articulates the Company's overarching strategy and business purpose: Provide lifelong financial well-being for educators and their families through personalized service, advice, and a full range of tailored insurance and financial products.
Target Market
Management believes that Horace Mann is the largest national multiline insurance company focused on the nation's educators as its primarythis niche market. The Company's target market consists primarily of K-12 teachers, administrators and other employees of public schools and their families located throughout the U.S. The U.S. Department of Education estimates that there are approximately 6.26.4 million teachers,K-12 public school teachers,
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| 2 Annual Report on Form 10-K | | Horace Mann Educators Corporation |
administrators and support staff nationwide, a number that is steadily growing. Adjacent markets such as private education support personnel in public schools instaff offer further opportunity.
Because of the
U.S.; approximately 3.1 millionfocus on this niche market, the Company has a homogeneous customer set with similar characteristics and preferred risk profiles. This allows for more precise underwriting processes and more targeted marketing operations, amplifying the benefit of
these individuals are elementary and secondary teachers.
Distribution Strategy
successful approaches.
In addition, the Company has taken steps to increase its "business-to-business" value to administrators and business officials who make decisions on financial solution providers at the school district level.
Growth Strategy
Over the past several years, the Company has established its solutions orientation for the education market through a focus on products, distribution and infrastructure (PDI):
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| • | Products designed to meet educators’ needs and protect their unique risks; |
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| • | Knowledgeable, trusted distribution tailored to educator preferences; and, |
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| • | Modern, scalable infrastructure that is easy to do business with. |
In addition, the Company completed three transactions in 2019 that supported its PDI strategy: acquiring NTA and Benefit Consultants Group, Inc. (BCG), as well as reinsuring a $2.9 billion block of legacy annuity business. The annuity reinsurance transaction reduced the Company's interest rate risk while releasing capital that was redeployed into higher-margin products through the acquisition of NTA.
As a result, the Company has become a larger, more diverse company that expects to continue its transformation by leveraging its market leadership to increase its share of the education market.
Relevant Products
At the core of Horace Mann’s value proposition is the commitment to providing relevant products and solutions to address the issues that educators face at each stage of their career and life. For example, for young educators new to the profession, student loan debt often precludes saving for retirement at the point when those savings would have the most time to grow and make a significant impact at retirement age. Through the Company’s traditional exclusive agency force, Horace Mann continuesStudent Loan Solutions program, educators receive complimentary financial guidance to buildpursue public servant forgiveness or alternate repayment programs, or consolidate loans at a lower rate, freeing up money to begin a savings program.
Other solutions are valuable to educators across all career stages. Many educators are concerned about the rising out-of-pocket expenses stemming from unexpected medical events. Supplemental solutions, like cancer, heart and accident coverages, offer a defined dollar benefit that can be used for medical or non-medical expenses of an accident or health emergency. This can help customers address unexpected issues without needing to draw down retirement or other savings.
Trusted Distribution
The Company aims to provide multiple complementary distribution channels
(i.e., on-line quoting, direct sales channel, and institutional business to
business). These various channels allow customers to access Horace Mann how they choose.meet individual educator preferences. The
Company believes that its customers will need expert advice at the pointlargest component of
sale at some point in their lifetime, and they will choose the advice of a trusted advisor.
Dedicated Agency Force
A cornerstone of Horace Mann’s marketingthis strategy is its dedicated sales force of agents, supported by the Company’s Customer Contact Center. As of December 31, 2016, the Company had a combined total of 666 Exclusive Agencies and Employee Agents. Approximately 72% of the appointed agents are licensed by the Financial Industry Regulatory Authority, Inc. (“FINRA”) to sell variable annuities and variable universal life policies. Some individuals in the agency force were previously teachers, other members of the education profession or persons with close ties to the educational community. The Company’s dedicated agents are under contract to market only the Company's products and limited additional third-party vendor products. Collectively, the Company's principal insurance subsidiaries are licensed to write business in 49 states and the District of Columbia.
The Company’s dedicated agency force operates in its Agency Business Model (“ABM”), consisting of Exclusive Agencies as well as a limited number of Employee Agents. The Company’s Exclusive Agent (“EA”) agreement is designed to place agents in the position to become business owners in their marketing territories and invest their own capital to grow their agencies. Exclusive Agents are non-employee, independent contractors. The Company provides ongoing training and support to agents regarding the Company’s products, as well as to further embed repeatable processes and fully maximize the potential of ABM.
Broadening Distribution Options
To complement and extend the reach of the Company’s agency force, which builds strong relationships at the school and district level. These more than 800 local agents serve as a partner to more fully utilize its approved payroll slotseducational institutions, providing financial wellness workshops in schools, consulting with educators and administrators, and supporting school events and activities. This trusted adviser model builds particularly strong brand loyalty and affinity. With the acquisition of NTA, the Company added approximately 200 captive agents experienced in school systems acrossworksite marketing in largely complementary geographies.
To build brand awareness, engage with the
country,educator community, and stay abreast of developments and challenges faced by educators, the Company
utilizes a network of independent agents to distribute the Company's 403(b) tax-qualified annuity products. In addition to serving educators in areas where the Company does not have dedicated agents, the independent agents complement the annuity capabilities of the Company's agency force in under-penetrated areas. At December 31, 2016, there were 272 independent agents approved to market the Company’s annuity products throughout the U.S. During 2016, collected contract deposits from this distribution channel were approximately $46 million. Combinedpartners with
business from the Company’s dedicated agency force, total annuity collected contract deposits were $520.2 million for the year ended December 31, 2016.
Geographic Composition of Business
The Company's business is geographically diversified. For the year ended December 31, 2016, based on direct premiumsmultiple national, state and contract deposits for all product lines, the top five states and their portion of total direct insurance premiums and contract deposits were California, 8.1%; Texas, 6.7%; North Carolina, 6.4%; Florida, 6.3%; and Minnesota, 5.7%.
HMEC's Property and Casualty subsidiaries are licensed to write business in 48 states and the District of Columbia. The following table shows the Company's top ten Property and Casualty states based on total direct premiums.
Property and Casualty Segment Top Ten States
(Dollars in millions)
| | Property and Casualty |
| | Segment |
| | 2016 Direct | | Percent |
| | Premiums (1) | | of Total |
| State | | | | | | |
| California | | $ | 67.9 | | | | 10.8 | % |
| Texas | | | 46.5 | | | | 7.4 | |
| North Carolina | | | 44.5 | | | | 7.1 | |
| Minnesota | | | 39.3 | | | | 6.2 | |
| Florida | | | 37.1 | | | | 5.9 | |
| South Carolina | | | 32.5 | | | | 5.2 | |
| Louisiana | | | 30.1 | | | | 4.8 | |
| Georgia | | | 25.5 | | | | 4.0 | |
| Pennsylvania | | | 21.6 | | | | 3.4 | |
| Maine | | | 16.8 | | | | 2.7 | |
| Total of top ten states | | | 361.8 | | | | 57.5 | |
| All other areas | | | 267.7 | | | | 42.5 | |
| Total direct premiums | | $ | 629.5 | | | | 100.0 | % |
| (1) | Defined as earned premiums before reinsurance as determined under statutory accounting principles. |
HMEC's principal Life insurance subsidiary is licensed to write business in 48 states and the District of Columbia. The following table shows the Company's top ten combined Life and Retirement states based on total direct premiums and contract deposits.
Combined Life and Retirement Segments Top Ten States
(Dollars in millions)
| | 2016 Direct | | |
| | Premiums and | | Percent |
| | Contract Deposits (1) | | of Total |
| State | | | | | | |
| Illinois | | $ | 47.8 | | | | 7.6 | % |
| Florida | | | 42.8 | | | | 6.8 | |
| Pennsylvania | | | 41.4 | | | | 6.5 | |
| Texas | | | 37.4 | | | | 5.9 | |
| North Carolina | | | 36.2 | | | | 5.7 | |
| California | | | 34.0 | | | | 5.4 | |
| Minnesota | | | 33.1 | | | | 5.2 | |
| South Carolina | | | 33.0 | | | | 5.2 | |
| Virginia | | | 28.2 | | | | 4.4 | |
| Indiana | | | 26.5 | | | | 4.2 | |
| Total of top ten states | | | 360.4 | | | | 56.9 | |
| All other areas | | | 272.7 | | | | 43.1 | |
| Total direct premiums | | $ | 633.1 | | | | 100.0 | % |
| (1) | Defined as collected premiums before reinsurance as determined under statutory accounting principles. |
National, State and Local Education Associations
The Company has established relationshipslocal associations. Through strategic alliances with a numberdiverse group of educator groups throughout the U.S. These groups include the National Education Association (“NEA”); The NEA Foundation; the Association of School Business Officials International (“ASBO”); and various school administrator and principal associations such as(e.g., the American Association of School Administrators, (“AASA”), The School Superintendents Association;Association and the National Association of Elementary School Principals (“NAESP”);Business Officials), the Company builds relationships with administrators. Through partnerships with some state and local National Education Association (NEA) teacher associations and sponsoring the National Association of Secondary School Principals (“NASSP”). The Company does not pay these groups any consideration in exchange for endorsementteacher of the Company or its products. Depending onyear award with the organization, the Company does pay for certain special functions and advertising.
In recent years,NEA Foundation, the Company has developed relationshipsthe opportunity to build its brand awareness and programsdiscuss issues and challenges faced by individual educators.
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| Horace Mann Educators Corporation | | Annual Report on Form 10-K 3 |
To meet the preferences of customers who prefer "on demand" services, the Company’s direct sales team is available by phone or electronically to align its agents with school districts in a businessrespond to business relationship. In addition to working relationships, Horace Mann has strategic alliances with AASAquestions or bind coverages. Customers can also secure auto, home, supplemental and ASBO, as well as ASBO’s statelife quotes and regional affiliates. coverage comparisons online.
Modern Infrastructure
The Company
holdsis implementing a multi-year effort to upgrade its infrastructure to provide an
annual meeting with selected ASBO membersenhanced customer experience. One current example is the Guidewire property and casualty administrative platform. In 2020, the Company plans to
gain feedbackon-board 14 states on
a varietyto the Guidewire platform -- representing more than 60% of
school district programs.its customer base. This will increase customer convenience through improved digital capabilities, e-signatures, real-time policy issuance and changes, coverage comparison features and consolidated billing. The Company has had its longest relationship with the NEA, the nation's largest confederation of state and local teachers' associations, and manyfirst phase of the stateGuidewire implementation, encompassing the claims system completed in 2017, resulted in reduced cycle times and local education associations affiliated withmore insight into customer and loss trends.
Through the
NEA. The NEA has approximately 3.2 million members. A numberacquisition of
state and local associations affiliated with the NEA endorse various insurance products and services ofBCG, the Company
andstrengthened its
competitors. The Company does not pay the NEA or any affiliated associations any consideration in exchange for endorsement of Company products. The Company does pay for marketing agreements, certain special functions and advertising.
Support of Educator Programs
The Company’s agents conduct state-specific State Teacher Retirement System Workshops in additionretirement platform to Financial Success Workshops designed to help educators gain or increase their financial literacy. In addition, the Company offers services and products to school districts that helpbetter meet the needs of educators including payroll deduction options for individual insurance products, group life insuranceemployers, as well as other worksite capabilities. This strengthened Horace Mann's value proposition and Section 125 programs. To help districts determine what programs meet their needs, the Company has developed an Employer Benefit Review Serviceenhanced its retirement plan infrastructure and conducts workshopsofferings for school districts.
Reporting Segments
The Company conducts business
officials.Along with differentiating, value-added product features, the Company has a number of programs that demonstrate its commitment to the educator profession, while also further distinguishing Horace Mann from competitors within the K-12 educator market. Examples of these programs include: the NEA Foundation’s Horace Mann Awards for Teaching Excellence honoring 5 national finalists; Horace Mann is a national sponsor of DonorsChoose.org, an online, not-for-profit organization that connects corporate and individual donors to teachers with classroom projectsprimarily in need of funding; Horace Mann sponsors ASBO’s Certified Administrator of School Finance and Operations®(“SFO®”) certification program; and Horace Mann is a sponsor of the AASA National Superintendent Certification Program and AASA’s National Conference on Education.
five reporting segments: Property and Casualty, Segment
Supplemental, Retirement, Life and Corporate and Other.
These segments are defined based on the way management organizes the segments for making operating decisions and assessing performance. Management maintains discrete financial information by these segments to evaluate performance and allocate resources.
The calculations of segment data are described in more detail in Part II - Item 8, Note 18 of the Consolidated Financial Statements in this report. Additionally, the business operations of each segment are explained in this section. The financial performance of each segment is discussed in Part II - Item 7 of this report.
Property and Casualty segment represented 50% of the
The Company's
consolidated insurance premiums written and contract deposits in 2016.The primary Property and Casualty product offered by the Company isinsurance products include private passenger automobile insurance whichand residential home insurance.
The Company offers standard auto coverages, including liability, collision and comprehensive. Property coverage includes both homeowners and renters policies. For both auto and property coverage, the Company offers educators a discounted rate and the Educator Advantage® package of features. This includes value-added benefits specifically for educators, such as liability coverage for transporting students in 2016 represented 34% of the Company’s total insurance premiums writtenan insured vehicle and contract depositsreimbursement for stolen school fundraising items.
433,060 auto policies in force and 67% of Property and Casualty net written premiums. As of
193,727 property policies in force at December 31,
2016, the Company had approximately 485,000 automobile policies in force. The Company's automobile business is primarily preferred risk, defined as a household whose drivers have had no recent accidents and no more than one recent moving violation.In 2016, homeowners insurance represented 16% of the Company’s total insurance premiums written and contract deposits and 32% of Property and Casualty net written premiums. As of December 31, 2016, the Company had approximately 220,000 homeowners policies in force. The Company insures primarily residential homes.
2019
The Company has programs in a majority of states to provide higher-risk automobile and homeowners coverages, as well asproperty coverages. The Company also has a number of other insurance coverages with third-party vendors underwritingwho underwrite and bearingbear the risk of such insurance and theinsurance. The Company receivingreceives commissions on thethese sales.
Similarly, the Company has increased its offering of third-party vendor products in many areas to
includemeet additional educator needs such as coverage for small business owners
andor classic/collector
automobile owners to meet those aspects of an educator’s needs.automobiles.
|
| 7 | |
| 4 Annual Report on Form 10-K | |
Selected Historical Financial Information for the Property and Casualty Segment
The following table provides certain financial information for the Property and Casualty segment for the periods indicated.
Property and Casualty Segment
Selected Historical Financial Information
(Dollars in millions)
| | | Year Ended December 31, | |
| | | 2016 | | | 2015 | | | 2014 | |
| Financial Data: | | | | | | | | | | | | |
| Insurance premiums written | | $ | 634.3 | | | $ | 605.8 | | | $ | 584.4 | |
| Insurance premiums earned | | | 620.5 | | | | 596.0 | | | | 581.8 | |
| Net investment income | | | 39.0 | | | | 33.5 | | | | 36.8 | |
| Income before income taxes | | | 30.3 | | | | 51.3 | | | | 60.8 | |
| Net income | | | 25.6 | | | | 40.0 | | | | 46.9 | |
| Catastrophe costs, pretax (1) | | | 60.0 | | | | 44.4 | | | | 37.5 | |
| | | | | | | | | | | | | |
| Operating Statistics: | | | | | | | | | | | | |
| Loss and loss adjustment expense ratio | | | 74.8 | % | | | 70.5 | % | | | 68.7 | % |
| Expense ratio | | | 26.7 | % | | | 26.5 | % | | | 27.4 | % |
| Combined loss and expense ratio | | | 101.5 | % | | | 97.0 | % | | | 96.1 | % |
| Effect of catastrophe costs on the combined ratio (1) | | | 9.7 | % | | | 7.4 | % | | | 6.5 | % |
| | | | | | | | | | | | | |
| Automobile and Homeowners: | | | | | | | | | | | | |
| Insurance premiums written | | | | | | | | | | | | |
| Automobile | | $ | 425.9 | | | $ | 402.2 | | | $ | 383.8 | |
| Homeowners | | | 208.2 | | | | 203.4 | | | | 200.4 | |
| Insurance premiums earned | | | | | | | | | | | | |
| Automobile | | | 414.3 | | | | 393.6 | | | | 381.4 | |
| Homeowners | | | 206.0 | | | | 202.2 | | | | 200.2 | |
| Policies in force (in thousands) | | | | | | | | | | | | |
| Automobile | | | 485 | | | | 487 | | | | 481 | |
| Homeowners | | | 220 | | | | 224 | | | | 229 | |
| Total | | | 705 | | | | 711 | | | | 710 | |
| (1) | These measures are used by the Company's management to evaluate performance against historical results and establish targets on a consolidated basis. These measures are components of net income but are considered non-GAAP financial measures under applicable SEC rules because they are not displayed as separate line items in the Consolidated Statements of Operations and there is inclusion or exclusion of certain items not ordinarily included or excluded in a GAAP financial measure. In the opinion of the Company's management, a discussion of these measures is meaningful to provide investors with an understanding of the significant factors that comprise the Company's periodic results of operations. |
| · | Catastrophe costs - The sum of catastrophe losses and Property and Casualty catastrophe reinsurance reinstatement premiums. |
| · | Catastrophe losses - In categorizing Property and Casualty claims as being from a catastrophe, the Company utilizes the designations of the Property Claim Services, a subsidiary of Insurance Services Office, Inc. (“ISO”), and additionally beginning in 2007, includes losses from all such events that meet the definition of covered loss in the Company’s primary catastrophe excess of loss reinsurance contract, and reports loss and loss adjustment expense amounts net of reinsurance recoverables. A catastrophe is a severe loss resulting from natural and man-made events within a particular territory, including risks such as hurricane, fire, earthquake, windstorm, explosion, terrorism and other similar events, that causes $25 million or more in insured Property and Casualty losses for the industry and affects a significant number of Property and Casualty insurers and policyholders. Each catastrophe has unique characteristics. Catastrophes are not predictable as to timing or amount of loss in advance. Their effects are not included in earnings or claim and claim adjustment expense reserves prior to occurrence. In the opinion of the Company's management, a discussion of the impact of catastrophes is meaningful for investors to understand the variability in periodic earnings. |
| 8 | Horace Mann Educators Corporation |
Catastrophe Costs
(Pretax)
(1) The level of catastrophe costs can fluctuate significantly from year to year.
CatastropheThe Company's catastrophe costs
before federal income tax benefits for the Company for the last
tenfive years are shown in the following
table.Catastrophe Costs
(Dollarstable ($ in millions)
| | The |
| | Company (1) |
| Year Ended December 31, | |
| 2016 | | $ | 60.0 | |
| 2015 | | | 44.4 | |
| 2014 | | | 37.5 | |
| 2013 | | | 40.2 | |
| 2012 | | | 43.3 | |
| 2011 | | | 86.0 | |
| 2010 | | | 49.2 | |
| 2009 | | | 33.1 | |
| 2008 | | | 73.9 | |
| 2007 | | | 23.6 | |
|
| | | | | | | | | | |
| Year | | Month | | Event Description | | States/Region | | Total |
| 2019 | | | | | | | | $ | 52.0 |
|
| | | May | | Wind and Hail | | CO, IA, IL, IN, KS, MO, NE, OH, OK, PA, WY | | 5.5 |
|
| | | | | Other single events less than $5.0 million | | | | 46.5 |
|
| 2018 | | | | | | | | $ | 114.1 |
|
| | | March | | Winter Storm | | Northeastern U.S. | | 3.5 |
|
| | | June | | Wind and Hail | | CO, UT | | 8.2 |
|
| | | July | | Carr Fire | | CA | | 5.9 |
|
| | | September | | Hurricane Florence | | Southeast and Mid-Atlantic | | 11.4 |
|
| | | October | | Hurricane Michael | | Southeastern U.S. | | 4.5 |
|
| | | November | | Camp Fire | | CA | | 31.2 |
|
| | | | | Other single events less than $5.0 million | | | | 49.4 |
|
| 2017 | | | | | | | | $ | 61.8 |
|
| | | May | | Wind, Hail, Tornado | | CO | | 10.0 |
|
| | | June | | Wind and Hail | | MN (primarily) | | 10.0 |
|
| | | August | | Hurricane Harvey | | Southeastern U.S. | | 4.8 |
|
| | | August | | Hurricane Irma | | Eastern U.S. | | 3.0 |
|
| | | | | Other single events less than $5.0 million | | | | 34.0 |
|
| 2016 | | | | | | | | $ | 60.0 |
|
| | | April | | Wind and Hail | | FL, TX | | 9.3 |
|
| | | September | | Hurricane Matthew | | Southeastern U.S. | | 10.0 |
|
| | | | | Other single events less than $5.0 million | | | | 40.7 |
|
| 2015 | | | | | | | | $ | 44.4 |
|
| | | February | | Winter Storm | | Midwest & Eastern U.S. | | 8.9 |
|
| | | | | Other single events less than $5.0 million | | | | 35.5 |
|
| |
(1) | Net of reinsurance and before federal income tax benefits. Includes allocated loss adjustment expenses and reinsurance reinstatement premiums; excludes unallocated loss adjustment expenses. The Company's individually significant catastrophe losses net of reinsurance were as follows: |
| 2016 - | Wind/hail event in March was $3.9 million; wind/hail event in April was $9.2 million; wind/hail/tornado event in May was $3.4 million; Hurricane Matthew was $10.0 million; other weather events throughout the year were each less than $3.0 million. |
| 2015 - | Winter storm in February was $8.9 million; wind/flooding event in October was $3.0 million; other weather events throughout the year were each less than $3.0 million. |
| Horace Mann Educators Corporation | 2014 - | Wind/hail event in May was $8.5 million; other weather events throughout the year were each less than $3.0 million. |
| 2013 - | Wind/hail/tornado events in May, June and August were $10.1 million, $4.0 million and $7.9 million, respectively; winter storm events in February and April were $3.7 million and $3.4 million, respectively. |
| 2012 - | Wind/hail/tornado events in March, April, May and June were $6.6 million, $6.6 million, $5.8 million and $11.9 million, respectively; June tropical storm and wildfire events, $1.4 million combined; $4.0 million, Hurricane Isaac; $2.8 million, Hurricane/Superstorm Sandy. |
| 2011 - | Wind/hail/tornado events in April, May and June were $28.0 million, $17.6 million and $8.5 million, respectively; $8.0 million, Hurricane Irene. |
| 2010 - | Wind/hail/tornado events in March, May, June, July and October were $4.8 million, $8.3 million, $12.1 million, $5.5 million and $7.7 million, respectively. |
| 2009 - | $9.3 million, July wind/hail/tornadoes; $6.3 million, June wind/hail/tornadoes. |
| 2008 - | $16.5 million, Hurricane Gustav; $15.5 million, Hurricane Ike; $9.8 million, May wind/hail/tornadoes; $7.0 million, June wind/hail/tornadoes; $3.0 million, December winter storm. |
| 2007- | $4.7 million, August wind/hail/tornadoes; $4.5 million, October California wildfires; $3.5 million, June wind/hail/tornadoes. |
| | 9 | Annual Report on Form 10-K 5 |
Fluctuations
from year to year in
the level of catastrophe losses impact a property and casualty insurance
company’scompany's claims and claim adjustment expenses incurred and paid.
For comparison purposes, the following table provides amounts for the Company excluding catastrophe losses.Impact of Catastrophe Losses
(Dollars
Claims and Claim Expenses Incurred(1)(2), 2017-2019 ($ in millions)| | | Year Ended December 31, | |
| | | 2016 | | | 2015 | | | 2014 | |
| | | | | | | | | | |
| Claims and claim expenses incurred (1) | | $ | 464.1 | | | $ | 420.3 | | | $ | 399.5 | |
| Deduct: amount attributable to catastrophes (2) | | | 60.0 | | | | 44.4 | | | | 37.5 | |
| Excluding catastrophes (1) | | $ | 404.1 | | | $ | 375.9 | | | $ | 362.0 | |
| | | | | | | | | | | | | |
| Claims and claim expense payments | | $ | 468.8 | | | $ | 436.4 | | | $ | 393.8 | |
| Deduct: amount attributable to catastrophes (2) | | | 62.0 | | | | 44.6 | | | | 38.2 | |
| Excluding catastrophes | | $ | 406.8 | | | $ | 391.8 | | | $ | 355.6 | |
| |
(1) | IncludesClaims and claim expenses incurred include the impact of development of prior years’ reservesyears' reserve development as quantified in “PropertyProperty and Casualty Reserves”.reserves. Catastrophe totals are net of reinsurance and before income tax benefits. |
| |
(2) | Net ofExcludes 2018 reinsurance and before federal income tax benefits. Includes allocated loss adjustment expenses; excludes unallocated loss adjustment expenses.reinstatement premiums. |
Property and Casualty Reserves
Property and Casualty unpaid claims and claim expenses
(“loss reserves”)(loss reserves) represent
management’smanagement's estimate of ultimate unpaid costs of losses and settlement expenses for
reported claims
that have been reported and claims that have been incurred but not yet
reported.reported (IBNR). The Company calculates and records a single best estimate of the reserve as of each
balance sheetreporting date in conformity with generally accepted actuarial standards. For additional information regarding the process used to estimate Property and Casualty reserves and the risk factors involved, as well as a summary reconciliation of the beginning and ending Property and Casualty insurance claims and claim expense reserves and
prior years' reserve development recorded in each of the three years ended December 31,
2016,2019, see
“Notes toPart II - Item 8, Note 8 of the Consolidated Financial Statements,
— Note 5 — Property and
Casualty Unpaid Claims and Claim Expenses”, “Management’s Discussion and Analysis of Financial ConditionPart II - Item 7, Critical Accounting Estimates and Results of Operations
— Critical Accounting Policies — Liabilities for
the Property and Casualty
Claims and Claim Expenses” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of OperationsSegment for the Three Years Ended December 31,
2016 — Benefits, Claims and Settlement Expenses”.2019 in this report.
All of the Company's reserves for Property and Casualty unpaid claims and claim expenses are carried at the full value of estimated liabilities and are not discounted for interest expected to be earned on
the reserves. Due to the nature of the Company's personal lines business, the Company has no exposure to losses related to claims for toxic waste cleanup, other environmental remediation or asbestos-related illnesses other than claims under
homeownersproperty insurance policies for
environmentallyenvironmental related items such as mold.
Property and Casualty Reinsurance
All reinsurance is obtained through contracts which generally are entered into for each calendar year. Although reinsurance does not legally discharge the Company from primary liability for the full amount of its policies, it does allow for recovery from assuming reinsurers to the extent of the reinsurance ceded. Past due reinsurance recoverables as of December 31,
20162019 were not material.
The Company maintains catastrophe excess of loss reinsurance coverage. For
2016,2019, the
Company’sCompany's catastrophe excess of loss coverage consisted of one contract in addition to a minimal amount of coverage by the Florida Hurricane Catastrophe
Fund (“FHCF”).Fund. The catastrophe excess of loss contract provided 95% coverage for catastrophe losses above a
retention of $25.0 million
retention per occurrence up to $175.0 million per occurrence. This contract consisted of three layers, each of which provided for one mandatory reinstatement. The layers were $25.0 million excess of $25.0 million, $40.0 million excess of $50.0 million and $85.0 million excess of $90.0 million.
For 2017, the Company’s The Company's 2020 catastrophe excess of loss coverage consists of one contract in addition to a minimal amount of coverage by the FHCF. The catastrophe excess of loss contract provides 95% coverage for catastrophe losses above a retention of $25 million per occurrence up to $90 million per occurrence and 100% coverage for catastrophe losses above $90 million per occurrence up to $175 million per occurrence. This contract consists of three layers, each of which provide for one mandatory reinstatement. The layers are $25 million excess of $25 million, $40 million excess of $50 million and $85 million excess of $90 million.
is unchanged from 2019.
|
| | |
| 6 Annual Report on Form 10-K | | Horace Mann Educators Corporation |
The Company has not joined the California Earthquake Authority
(“CEA”)(CEA). The Company's exposure to losses from earthquakes is managed through its underwriting standards, its earthquake policy coverage limits and deductible levels, and the geographic distribution of its business, as well as its reinsurance program. After reviewing the exposure to earthquake losses from the
Company’sCompany's own policies and from what it would be with participation in the CEA, including estimated start-up and ongoing costs related to CEA participation, management believes it is in the Company's best economic interest to offer earthquake coverage directly to its
homeownersproperty policyholders.
For liability coverages, in 20162019 the Company reinsured each loss above a retention of $0.9$1.0 million up to $5.0 million on a per occurrence basis and $20.0 million in a clash event. (AA clash cover is a reinsurance casualty excess contract requiring two or more casualty coverages or policies issued by the Company to be involved in the same loss occurrence for coverage to apply.) Effective January 1, 2017, for The Company's 2020 liability coverages the retention isare unchanged from 2019.
The Company markets personal lines excess liability policies. The limits of these policies are $1.0 million
with coverage up to $5.0 million
in excess of $0.5 million of underlying auto and homeowners liability coverage. The Company reinsures these policies on a
per occurrencequota share basis
with General Reinsurance Corporation who assumes 95% of losses, including allocated loss adjustment expenses and
$20.0 millionpremiums for all states except Massachusetts. For business written in
a clash event.Massachusetts, the quota share portion is 75%.
For auto insurance sold in Michigan, Personal Injury Protection (PIP) coverage is unlimited in compliance with Michigan state law. The Company participates in the Michigan Catastrophic Claims Association (MCCA). For policies issued in 2019, MCCA reimburses PIP losses including allocated loss adjustment expenses in excess of $0.6 million.
For property coverages, in
20162019 the Company reinsured each loss above a retention of
$0.9$1.0 million up to $5.0 million
on a per risk,
basis, including catastrophe losses. Also, the Company could
submit to the reinsurers two per risk losses from the same occurrence for a total of $8.2 million of property recovery in any one event. Retention for property coverage in 2017 is $1.0 million, with coverage up to $5.0 million on a per risk basis, including catastrophe losses and the Company can submit to the reinsurers two per risk losses from the same occurrence for a total of $8.0 million of property recovery in any one event.
The Company's 2020 property coverages are unchanged from 2019. The following table identifies the Company's most significant reinsurers under the catastrophe first event excess of loss reinsurance program, their percentage participation in this program and their ratings by A.M. Best Company (“A.M. Best”)(A.M. Best) and Standard & Poor's Corporation (“S&P” or “Standard & Poor's”)Global Inc. (S&P) as of January 1, 2017.2020. No other single reinsurer's percentage participation in 20172020 or 20162019 exceeds 5%.
The Company monitors reinsurers' financial strength by reviewing A.M. Best and S&P ratings.
Property Catastrophe First Event Excess of Loss
Reinsurance Participants In Excess of 5%
| A.M. Best | | S&P | | | | | | Participation | |
| Rating | | Rating | | Reinsurer | | Parent | | | 2017 | | | | 2016 | |
| | | | | | | | | | | | | |
| A | | A+ | | Lloyd’s of London Syndicates | | | | | 33% | | | | 27% | |
| A+ | | AA- | | Swiss Re Underwriters Agency, Inc | | Swiss Re Ltd | | | 10% | | | | 10% | |
| NR | | AA- | | R+V Versicherung AG | | DZ BANK AG | | | 8% | | | | 7% | |
| A | | AA- | | SCOR Global P&C SE | | SCOR SE | | | 7% | | | | 7% | |
| A++ | | A+ | | Tokio Millennium Re AG | | Tokio Marine Holdings, Inc. | | | 2% | | | | 5% | |
|
| | | | | | | | | | | |
| A.M. Best Rating | | S&P Rating | | Reinsurer | | Parent | | 2020 | | 2019 |
| A | | A+ | | Lloyd's of London Syndicates | | | | 22% | | 28% |
| A+ | | AA- | | Swiss Re Underwriters Agency, Inc. | | Swiss Re Ltd. | | 10% | | 7% |
| NR | | AA- | | R+V Versicherung AG | | DZ BANK AG | | 9% | | 8% |
| A+ | | AA- | | SCOR Global P&C SE | | SCOR SE | | 7% | | 7% |
NR - Not rated.
For 2017
|
| | |
| Horace Mann Educators Corporation | | Annual Report on Form 10-K 7 |
Supplemental
The Company's new Supplemental insurance products include heart, cancer, accident and 2016, property catastrophe reinsurers representing 92%limited short-term supplemental disability coverages and 93%, respectively,it also markets life insurance products. A typical supplemental policy offers "HIPAA Excepted" benefits with simplified issuance. Supplemental insurance products are limited benefit products that offer defined benefit amounts paid directly to the insured, and are payable in addition to any other insurance coverages. An insured can use the supplemental payments to cover medical or non-medical costs of a covered injury or illness.
Supplemental products continue to gain popularity in the changing healthcare landscape with higher deductible health care plans and expanded voluntary offerings along with an increasing focus on health and wellness. The Company's supplemental products are well designed, offering indemnity benefits only rather than reimbursement of actual costs. The benefit risk is well controlled with no coverage for pre-existing conditions and specified benefit maximums per occurrence or time period. Diagnosis or treatment is required for benefit payment.
The limited supplemental disability products have elimination and short-term benefit periods. Sound underwriting techniques and significant underwriting expertise help ensure loss experience is commensurate with pricing expectations.
297,000 total Supplemental policies in force at December 31, 2019
Supplemental Reserves
Supplemental policy reserves represent management's estimate of the present value of the future ultimate benefits to be provided for heart, cancer, accident and limited short-term supplemental disability claims. Unpaid claims and claim expenses provide provisions for claims reported to the Company plus an estimated accrual for IBNR claims.
Supplemental Reinsurance
The Company retains all of the risk on its supplemental health product lines, including accidental death risk embedded within certain products. However, the Company’s
totalother accidental death and dismemberment risk issued through all other policies and riders are ceded 100%. The maximum life insurance risk retained on any individual life by the Company's Supplemental segment is $100,000. The excess risk on the life insurance products issued by the Company's Supplemental segment is ceded to and reinsured
catastrophe coverage wereby a third party that is rated
“A-A (Excellent)
” or above by A.M.
Best with the remaining percentages provided by a reinsurer rated “AA-” by S&P but not formally followed by A.M. Best.
Retirement
SegmentEffective December 31, 2016, the Company changed the name of its Annuity segment to Retirement. The name change better aligns our external reports with internally used terminology. This name change does not affect any previously reported results for the Retirement segment.
Educators in the Company's target market continue to benefit from the provisions of Section 403(b) of the Internal Revenue Code (the “Code”) which began in 1961.(Code). This section of the Code allows public school employees and employees of other tax-exempt organizations, such as not-for-profit private schools, to utilize pretax income to make periodic contributions to a qualified retirement plan. (Alsoplan (also see “RegulationRegulation — Regulation at Federal Level”Level).)
|
| | |
| 8 Annual Report on Form 10-K | | Horace Mann Educators Corporation |
The Company entered the educators retirement annuity market in 1961 and is one of the largest participants in the K-12 educator portion of the 403(b) tax-qualified annuity market, measured by 403(b) net written premium on a statutory accounting basis. The Company has 403(b) payroll deduction capabilities utilized by approximately one-third of the 13,500 public school districts in the U.S. Approximately 49% ofOf the Company's new annuity contract depositsdeposits* in 20162019, 51.8% were for 403(b) tax-qualified annuities; approximately 60%annuities, and 62.2% of accumulated annuity value on deposit is 403(b) tax-qualified. In 2016,To further assist registered representatives in delivering the Horace Mann Value Proposition, the Company has entered into third-party vendor agreements to market 529 college savings programs and provide brokerage clearing arrangements.
Annuity Reinsurance
Effective April 1, 2019, the Company reinsured a block of approximately $2.9 billion of policy liabilities related to legacy individual annuities
written in 2002 or earlier. The block includes $2.2 billion of fixed annuities with a minimum guaranteed crediting rate of 4.5% that represented
41%approximately 50% of the Company’s
consolidatedfixed annuity assets under management at March 31, 2019, and $700 million of variable annuities. The reinsurance is structured as coinsurance for the fixed annuities and modified coinsurance for the variable annuities with RGA Reinsurance Company, a subsidiary of Reinsurance Group of America, Incorporated (RGA). The Company determined that the reinsurance agreement does not expose the reinsurer to a reasonable possibility of significant loss from insurance
premiums written and contract deposits.risk. Therefore, the Company recognizes the reinsurance agreement using the deposit method of accounting.
Assets under Management
The Company markets both fixed and variable annuity contracts, primarily on a tax-qualified basis. Fixed onlyTotal accumulated fixed and variable annuity cash value on deposit at December 31, 2019 was $4.4 billion, net of the reinsured block.
Fixed-only annuities provide a guarantee of principal and a guaranteed minimum rate of return. These contracts are backed by the Company’sCompany's general account investments. The Company bears the investment risk associated with the investments and may change the declared interest rate on these contracts subject to contract guarantees. In 2014, the
The Company
began offeringalso offers fixed indexed annuity
(“FIA”)(FIA) products with interest crediting strategies linked to the
Standard & Poor’sS&P 500 Index and the Dow Jones Industrial
Average. These products are fixed annuities with a guaranteed minimum interest rate, as described above, plus a contingent return based on equity market performance. The Company purchases call options on the applicable indices as an investment to provide the income needed to fund the annual index credits on the indexed products.
229,000 annuity contracts in force at December 31, 2019
Variable annuities combine a fixed account option with
equity-equity-linked and bond-linked sub-account options.
In general, the contractholders bear the investment risk related to the variable annuity sub-accounts and may change their allocation between the guaranteed interest rate fixed account and the wide range of variable investment options at any time. By utilizing tools that provide assistance in determining needs and making asset allocation decisions, contractholders are able to choose the investment mix that matches their personal risk tolerance and retirement goals.
The Company’s sub-account options also include both lifecycle funds and asset allocation funds. These all-purpose funds have assets allocated among multiple investment classes within each fund based on a specific targeted retirement date or risk tolerance.Variable annuity contracts with a guaranteed minimum death benefit (“GMDB”) provide an additional benefit if the contractholder dies and the contract value is less than a contractually defined amount. The Company has a relatively low exposure to GMDB risk because approximately 32% of contract values have no guarantee; approximately 62% have only a return of premium guarantee; and only approximately 6% have a guarantee of premium roll-up at an annual rate of 3% or 5%.
As of December 31, 2016,2019, the Company had 80110 variable sub-account options including funds managed by some of the best-known nameslarger participants in the mutual fund industry, such as AllianceBernstein, American Funds, Ariel, BlackRock, Calvert, Davis, Dreyfus, Fidelity, Franklin Templeton, Goldman Sachs, JPMorgan, Lord Abbett, MFS, Neuberger Berman, Putnam, T. Rowe Price, Vanguard, Wells Fargo and Wilshire, offeringindustry.
In 2017, the
Company's customers multiple investment options to address their personal investment objectives and risk tolerance. These funds have been selected withCompany introduced the
assistance of Wilshire Associates, the Company’s fund advisor,Personal Retirement Planner annuity series, which
provides oversight and input to fund manager additions and replacements. Total accumulated fixed andincludes a flexible premium deferred variable annuity,
cash value on deposit at December 31, 2016 was $6.4 billion.Amonga flexible premium deferred fixed indexed annuity, a single premium deferred fixed annuity and a single premium immediate annuity. Consistent across all of these products is the Company’s annuity products,elimination of any surrender charges for early withdrawal.
Assets under Administration
In addition to annuities, the Goal Planning Annuity offers educatorsCompany markets the Horace Mann Retirement Advantage® open architecture platform for 403(b)(7) and other defined contribution plans. This platform combines a variable annuity with the Company’s wide array of sub-account investment choices. It includes an optional first year premium bonus and two optional riders that enhance the death benefit feature of the product. Another product, Expanding Horizon, ismutual funds integrated with a group unallocated fixed interest rate annuity contract for investors who do not want investment risk exposure.stable value fund. This product offers educators a competitive rate of interest on their retirement dollars and a choice of bonuses to optimize their benefits at retirement. The Destination Fixed Indexed Annuity product is designed to have potentially greater credited interest rates over the long term than traditional fixed rate annuities, because the credited interest rate will be linked to changes in an index, either the S&P 500 or the Dow Jones Industrial Average.In addition to individual annuities,platform provides the Company offers group variablewith greater flexibility to offer customized 403(b)(7) and fixed annuity products that allow flexibility in customizing 403(b) annuity programsother qualified plan solutions to better meet the needs of school districts.
districts and other non-for-profit plan sponsors. After the acquisition of BCG, the Company migrated the administration of its Horace Mann Retirement Advantage® platform from a third-party vendor to the BCG platform. The Company offers its group unallocated fixed annuity, Horace Mann Stable Value Solution, as an option within a number of the 401(k) plans BCG administers. BCG had $1.5 billion of recordkeeping assets and $2.0 billion of advisory assets as of December 31, 2019.
|
| 13 | |
| Horace Mann Educators Corporation | |
To assist agents in delivering the Horace Mann Value Proposition, the Company has entered into third-party vendor agreements with American Funds Distributors, Inc. and Fidelity Distributors Corporation to market their retail mutual funds and with Raymond James Financial, Inc. to market their mutual fund brokerage accounts. In addition to retail mutual fund accounts, the Company’s agents can offer a 529 college savings program and Coverdell Education Savings Accounts utilizing certain funds. The Company also markets 403(b)(7) tax-deferred mutual fund investment programs and a minimal amount of fixed indexed annuities through additional third-party vendor agreements. Third-party vendors underwrite these accounts or contracts and the Company receives commissions on the sales of these products.
Selected Historical Financial Information for the Retirement Segment
The following table provides certain information for the Retirement segment for the periods indicated.
Retirement Segment
Selected Historical Financial Information
(Dollars in millions, unless otherwise indicated)
| | | | Year Ended December 31, | |
| | | | 2016 | | | | 2015 | | | | 2014 | |
| Financial Data: | | | | | | | | | | | | |
| Contract deposits | | | | | | | | | | | | |
| Variable | | $ | 163.6 | | | $ | 174.9 | | | $ | 140.6 | |
| Fixed | | | 356.6 | | | | 373.1 | | | | 340.0 | |
| Total | | | 520.2 | | | | 548.0 | | | | 480.6 | |
| Contract charges earned | | | 24.9 | | | | 25.4 | | | | 25.6 | |
| Net investment income | | | 249.4 | | | | 228.4 | | | | 222.1 | |
| Net interest margin (without net realized investment gains and losses) | | | 102.1 | | | | 89.7 | | | | 89.6 | |
| Income before income taxes | | | 71.0 | | | | 63.3 | | | | 66.7 | |
| Net income | | $ | 50.7 | | | $ | 43.4 | | | $ | 45.3 | |
| | | | | | | | | | | | | |
| Operating Statistics: | | | | | | | | | | | | |
| Fixed | | | | | | | | | | | | |
| Accumulated value | | $ | 4,503.1 | | | $ | 4,197.0 | | | $ | 3,885.1 | |
| Accumulated value persistency | | | 94.6 | % | | | 94.8 | % | | | 94.5 | % |
| Variable | | | | | | | | | | | | |
| Accumulated value | | $ | 1,923.9 | | | $ | 1,800.7 | | | $ | 1,813.6 | |
| Accumulated value persistency | | | 94.7 | % | | | 94.3 | % | | | 94.0 | % |
| Number of contracts in force | | | 219,105 | | | | 211,071 | | | | 202,572 | |
| Average accumulated value (in dollars) | | $ | 29,333 | | | $ | 28,415 | | | $ | 28,132 | |
| Average annual deposit by contractholders (in dollars) | | $ | 2,412 | | | $ | 2,381 | | | $ | 2,352 | |
| Annuity contracts terminated due to surrender, death, maturity or other | | | | | | | | | | | | |
| Number of contracts | | | 7,482 | | | | 7,089 | | | | 7,246 | |
| Amount | | $ | 373.2 | | | $ | 343.5 | | | $ | 340.9 | |
| Fixed accumulated value grouped by applicable surrender charge | | | | | | | | | | | | |
| 0% | | $ | 2,650.4 | | | $ | 2,318.9 | | | $ | 2,000.7 | |
| Greater than 0% but less than 5% | | | 172.9 | | | | 171.2 | | | | 190.9 | |
| 5% and greater but less than 10% | | | 1,525.7 | | | | 1,542.3 | | | | 1,528.9 | |
| 10% and greater | | | 33.1 | | | | 44.9 | | | | 45.7 | |
| Supplementary contracts with life contingencies not subject to discretionary withdrawal | | | 121.0 | | | | 119.7 | | | | 118.9 | |
| Total | | $ | 4,503.1 | | | $ | 4,197.0 | | | $ | 3,885.1 | |
| 14 | Annual Report on Form 10-K 9 |
Retirement Assets Under Administration, 2017-2019 ($ in billions)
The Company entered the individual life insurance business in 1949. The Company primarily offers traditional term and whole life insurance products as well as IUL products and, from time to time, revises products and product features or develops new products. For instance,Additionally, the Company offers educator rates for its customers.
During 2019, the average face amount of ordinary life insurance policies issued by the Company was approximately $199,000 and the average face amount of all ordinary life insurance policies in force at December 31, 2019 was approximately $95,000.
The Company offers a discount for educator customers.Following is a descriptionlineup of some of the products and other features in the Company’s lifeseveral product portfolio.portfolios. Life by Design
® is a portfolio of Horace Mann manufactured and branded life insurance products whichthat specifically addressesaddress the financial planning needs of educators. The Life by Design® portfolio features individual whole life and individual term products, including 10-, 20-10, 15, 20 and 30-year level term policies. The Life by Design® policies have premiums that are guaranteed for the duration of the contract and offer lower minimum face amounts. 149,887 whole life, term and group policies in force; 50,973 Experience Life and IUL policies in force at December 31, 2019
|
| | |
| 10 Annual Report on Form 10-K | | Horace Mann Educators Corporation |
The Company offers a combination product called Life Select® that mixes a base of either traditional whole life, 20-pay life or life paid-up at age 65 with a variety of term riders to allow for more flexibility in tailoring the coverage to the customers’customers' varying life insurance needs. Additional products and features areinclude single premium whole life products as well as a preferred plus underwriting category and $500 thousand and $1 million rate band enhancements for term products. The Company offers Cash Value Term — a term policy that builds cash value while providing the income protection of traditional level term life insurance.In October 2015, the
The Company
introducedoffers an
indexed universal life (“IUL”)IUL product with interest crediting strategies linked to the
Standard & Poor’sS&P 500 Index and the
Dow Jones Industrial AverageDJIA offering a contingent return based on equity market performance. Along with expanded product offerings, new marketing support tools continue to be introduced to aid the agency force.
After December 31, 2006, the Company no longer issues new policies for its “Experience Life” product, a flexible, adjustable-premium life insurance contract that includes availability of an interest-bearing account.The Company's traditional term, whole life and group life business in force consists of approximately 144,000 policies, representing approximately $13.5 billion of life insurance in force, with annual insurance premiums and contract deposits of approximately $52.3 million as of December 31, 2016. In addition, the Company also had in force approximately 54,000 Experience
Life
policies, representing approximately $3.6 billion of life insurance in force, with annual insurance premiums and contract deposits of approximately $44.2 million.In 2016, the Life segment represented 9% of the Company’s consolidated insurance premiums written and contract deposits.
During 2016, the average face amount of ordinary life insurance policies issued by the Company was approximately $182,000 and the average face amount of all ordinary life insurance policies in force at December 31, 2016 was approximately $100,000.
The maximum individual life insurance risk retained by the CompanyCompany's Life segment is $300,000$500,000 on any individual life, while either $100,000 or $125,000 is retained on each group life policy depending on the type of coverage. The excess of the amounts retained are reinsured with life reinsurers that are rated “A-A (Excellent)” or above by A.M. Best. The Company also maintains a life catastrophe reinsurance program. In 2016,2019, the Company reinsured 100% of the catastrophe risk in excess of $1$1.0 million up to $35$35.0 million per occurrence, with one reinstatement. For 2017,2020, the Company’sCompany's catastrophe risk coverage is unchanged. The Company’sCompany's life catastrophe risk reinsurance program covers acts of terrorism and includes nuclear, biological and chemical explosions but excludes other acts of war.
Selected Historical Financial Information
Corporate and Other
Corporate and Other includes capital raising activities (including debt financing and related interest expense), net investment gains (losses), certain public company expenses and other corporate-level transactions including expenses related to business acquisition activity. The Company does not allocate the impact of corporate-level transactions to the operating segments, consistent with the basis for
management's evaluation of the
Life SegmentThe following table provides certain information for the Life segment for the periods indicated.
Life Segment
Selected Historical Financial Information
(Dollars in millions, unless otherwise indicated)
| | | | Year Ended December 31, | |
| | | | 2016 | | | | 2015 | | | | 2014 | |
| Financial Data: | | | | | | | | | | | | |
| Insurance premiums and contract deposits | | $ | 108.0 | | | $ | 102.7 | | | $ | 102.7 | |
| Insurance premiums and contract charges earned | | | 113.7 | | | | 110.5 | | | | 108.4 | |
| Net investment income | | | 73.6 | | | | 71.6 | | | | 71.8 | |
| Income before income taxes | | | 26.3 | | | | 22.9 | | | | 26.9 | |
| Net income | | | 16.6 | | | | 15.0 | | | | 17.5 | |
| | | | | | | | | | | | | |
| Operating Statistics: | | | | | | | | | | | | |
| Life insurance in force | | | | | | | | | | | | |
| Ordinary life | | $ | 16,261 | | | $ | 15,589 | | | $ | 14,871 | |
| Group life | | | 764 | | | | 916 | | | | 930 | |
| Total | | $ | 17,025 | | | $ | 16,505 | | | $ | 15,801 | |
| Number of policies in force | | | | | | | | | | | | |
| Ordinary life | | | 163,056 | | | | 162,670 | | | | 161,759 | |
| Group life | | | 34,881 | | | | 39,119 | | | | 39,108 | |
| Total | | | 197,937 | | | | 201,789 | | | | 200,867 | |
| Average face amount in force (in dollars) | | | | | | | | | | | | |
| Ordinary life | | $ | 99,726 | | | $ | 95,832 | | | $ | 91,933 | |
| Group life | | | 21,903 | | | | 23,416 | | | | 23,780 | |
| Total | | | 86,012 | | | | 81,793 | | | | 78,664 | |
| Lapse ratio (ordinary life insurance in force) | | | 4.3 | % | | | 4.1 | % | | | 4.0 | % |
| Ordinary life insurance terminated due to death, surrender, lapse or other | | | | | | | | | | | | |
| Face amount of insurance surrendered or lapsed | | $ | 674.7 | | | $ | 643.5 | | | $ | 565.2 | |
| Number of policies | | | 4,951 | | | | 5,014 | | | | 4,093 | |
| Amount of death claims opened | | $ | 55.9 | | | $ | 58.6 | | | $ | 50.0 | |
| Number of death claims opened | | | 1,512 | | | | 1,645 | | | | 1,507 | |
|
| 16 | |
| Horace Mann Educators Corporation | | Annual Report on Form 10-K 11 |
2019 Geographic Composition of Business
The Company's business is geographically diversified. For the year ended December 31, 2019, based on direct premiums and contract deposits for all product lines, the top five states and their portion of total direct insurance premiums and contract deposits were California, 9.6%; Texas, 7.7%; North Carolina, 6.6%; Minnesota, 5.7%; and Pennsylvania, 5.1%.
$686.3 million in direct premiums, defined as earned premiums before reinsurance as determined under statutory accounting principles. HMEC's property and casualty subsidiaries are licensed to write business in 49 states and the District of Columbia.
$580.6 million in direct premiums and contract deposits, defined as collected premiums before reinsurance as determined under statutory accounting principles. HMEC's principal life subsidiary is licensed to write business in 49 states and the District of Columbia.
$65.8 million in insurance premiums and contract charges earned. HMEC's principal
supplemental insurance subsidiaries are licensed to write business in all 50 states,
the U.S. Virgin Islands and the District of Columbia.
|
| | |
| 12 Annual Report on Form 10-K | | Horace Mann Educators Corporation |
Horace Mann has 75 years of experience serving the education market and is uniquely positioned to tailor financial solutions for educators at each stage of their lives, empowering them to achieve lifelong financial success. The Company
operatesbelieves this helps it succeed in a highly competitive environment. The insurance industry consists of a large number of insurance companies, some of which have substantially greater financial resources, widespread advertising campaigns, more diversified product lines, greater economies of scale and/or lower-cost marketing approaches compared to the Company. In the
Company’sCompany's target market, management believes that
theits principal competitive
factorsadvantages in the sale of
the Property and
Casualty segment’sCasualty's and Supplemental's insurance products are
price, overall service,
name recognition and worksite sales and
service.service, price, and name recognition. Management believes that
theits principal competitive
factorsadvantages in the sale of
the Retirement
segment’s products and Life
segment’s insurance are worksite sales and service, product features, perceived stability of the insurer, price, overall service and name recognition.
With the Company's focus on the educator market it can benefit from a homogeneous customer set that permits more precise underwriting processes and more targeted marketing operations, amplifying the benefit of successful approaches. The Company competesseeks to provide:
Products designed to meet educators’ needs and protect their unique risks;
Knowledgeable, trusted distribution tailored to educator preferences; and
Modern, scalable infrastructure that is easy to do business with.
Competition in its targetthis market withis from a number of national providers of personal automobile, homeownersproperty, supplemental and life insurance such asincluding State Farm, Allstate, Farmers, Liberty Mutual, Aflac, Unum and Nationwide, as well as severala number of regional companies. The Company also competes for automobile business with other companies such as GEICO, Progressive and USAA, many of which feature direct marketing distribution.Among
A number of technology start-ups have also entered the major nationalmarket. National providers of annuities
toand other financial service platforms that serve the retirement needs of educators
and others that serve the
Company’s competitors for annuity businesscommunity, include The Variable Annuity Life Insurance Company,
(“VALIC”), a subsidiary of American International
Group (“AIG”);Group; AXA; Voya Financial, Inc.; Life Insurance Company of the Southwest, a subsidiary of National Life Insurance Company;
MetLife; Security Benefit; and Teachers Insurance and Annuity Association – College Retirement Equities
Fund (“TIAA-CREF”).Fund. Select mutual fund families and financial planners also compete in this marketplace.
The market for tax-deferred retirement products in the
Company’sCompany's target market has been impacted by the revised
Internal Revenue Service (“IRS”)Code Section 403(b) regulations, which made the 403(b) market more comparable to the 401(k) market than it was in the past. While this change has and may continue to reduce the number of competitors in this market, it has made the 403(b) market more attractive to some of the larger companies experienced in 401(k) plans, including both insurance and mutual fund companies, that had not previously been active competitors in this business.
The Company's investments are selected to balance the objectives of protecting principal, minimizing exposure to interest rate risk and providing a high current yield. These objectives are implemented through a portfolio that
primarily emphasizes investment grade
publicly traded fixed maturity securities
whichthat are selected to match the anticipated duration of the
Company’sCompany's liabilities.
When impairment ofIn addition to these securities, the
value of an investment is considered other-than-temporary, the decreaseCompany also invests in
value is recordedlimited partnership interests, commercial mortgage loans and
a new cost basis is established. At December 31, 2016, fixed maturityequity securities
represented 93.2% of the Company’s total investment portfolio, at fair value. Of the fixed maturity securities portfolio, 95.6% was investment grade and 95.5% was publicly traded. At December 31, 2016, the average quality and average option-adjusted duration of the total fixed maturity securities portfolio were A and 5.9 years, respectively. At December 31, 2016, investments in non-investment grade fixed income securities represented 3.8% of the total investment portfolio, at fair value. There are no significant investments in mortgage whole loans, real estate or non-U.S. dollar-denominated foreign securities.to improve overall returns.
The Company has separate investment strategies and guidelines for its Property and Casualty,
Supplemental, Retirement and Life
assets,portfolios, which recognize different characteristics of the associated insurance liabilities, as well as different tax and regulatory environments. The Company manages interest rate exposure for its portfolios through asset/liability management techniques
whichthat attempt to coordinate the duration of the assets with the duration of the insurance policy liabilities. Duration of assets and liabilities will generally differ only because of opportunities to significantly increase yields or because policy values are not
interest-sensitive,interest rate sensitive, as is the case in
the Property and Casualty
segment.and Supplemental.
The investments of each insurance subsidiary must comply with the insurance laws of such insurance subsidiary's domiciliary state. These laws prescribe the type and amount of investments that may be purchased
|
| | |
| Horace Mann Educators Corporation | | Annual Report on Form 10-K 13 |
and held by insurance companies. In general, these laws permit investments, within specified limits and subject to certain qualifications, in federal, state and municipal obligations, corporate bonds, mortgage-backed
bonds,securities, other asset-backed
bonds,securities, preferred stocks, common stocks, real estate mortgages, real estate, and alternative investments.
The following table presents the carrying values and amortized cost of the Company's investment portfolio.
Investment Portfolio
at December 31, 2016
(Dollars in millions)
| | | Percentage | | | | | | | | |
| | | of Total | | Carrying Value | | | | | | |
| | | Carrying | | | | Life and | | Property and | | Amortized | |
| | | Value | | Total | | Retirement | | Casualty | | Cost or Cost | |
| Publicly Traded Fixed Maturity Securities, | | | | | | | | | | | | | | | | | | | | | | | |
| Equity Securities and Short-term Investments: | | | | | | | | | | | | | | | | | | | | | | | |
| U.S. Government and agency obligations, all investment grade (1): | | | | | | | | | | | | | | | | | | | | | | | |
| Mortgage-backed securities | | | 5.5 | % | | $ | 442.4 | | | $ | 439.1 | | | | $ | 3.3 | | | | $ | 412.9 | | |
| Other, including U.S. Treasury securities | | | 5.8 | | | | 467.1 | | | | 459.4 | | | | | 7.7 | | | | | 458.7 | | |
| Investment grade corporate and public utility bonds | | | 29.7 | | | | 2,375.3 | | | | 2,232.6 | | | | | 142.7 | | | | | 2,249.9 | | |
| Non-investment grade corporate and public utility bonds (2) | | | 2.3 | | | | 186.2 | | | | 116.7 | | | | | 69.5 | | | | | 184.7 | | |
| Investment grade municipal bonds | | | 21.2 | | | | 1,685.8 | | | | 1,230.4 | | | | | 455.4 | | | | | 1,561.6 | | |
| Non-investment grade municipal bonds (2) | | | 0.5 | | | | 37.1 | | | | 17.9 | | | | | 19.2 | | | | | 40.6 | | |
| Investment grade other mortgage-backed securities (3) | | | 21.9 | | | | 1,750.7 | | | | 1,677.6 | | | | | 73.1 | | | | | 1,752.6 | | |
| Non-investment grade other mortgage-backed securities (2)(3) | | | 0.7 | | | | 54.7 | | | | 54.6 | | | | | 0.1 | | | | | 49.2 | | |
| Foreign government bonds, all investment grade | | | 1.2 | | | | 98.7 | | | | 97.4 | | | | | 1.3 | | | | | 93.9 | | |
| Redeemable preferred stock, all investment grade | | | 0.2 | | | | 19.7 | | | | 19.7 | | | | | - | | | | | 17.6 | | |
| Equity securities: | | | | | | | | | | | | | | | | | | | | | | | |
| Non-redeemable preferred stocks, all investment grade | | | 0.6 | | | | 50.0 | | | | 46.1 | | | | | 3.9 | | | | | 52.3 | | |
| Common stocks | | | 0.9 | | | | 72.2 | | | | 1.1 | | | | | 71.1 | | | | | 61.7 | | |
| Closed-end fund | | | 0.2 | | | | 19.4 | | | | 19.4 | | | | | - | | | | | 20.0 | | |
| Short-term investments (4) | | | 0.6 | | | | 44.9 | | | | 9.9 | | | | | 35.0 | | | | | 44.9 | | |
| Total publicly traded securities | | | 91.3 | | | | 7,304.2 | | | | 6,421.9 | | | | | 882.3 | | | | | 7,000.6 | | |
| Other Invested Assets: | | | | | | | | | | | | | | | | | | | | | | | |
| Investment grade private placements | | | 4.0 | | | | 319.8 | | | | 319.8 | | | | | - | | | | | 311.7 | | |
| Non-investment grade private placements (2) | | | 0.3 | | | | 19.2 | | | | 19.2 | | | | | - | | | | | 18.8 | | |
| Mortgage loans (5) | | | - | | | | * | | | | * | | | | | - | | | | | * | | |
| Policy loans | | | 1.8 | | | | 151.9 | | | | 151.9 | | | | | - | | | | | 151.9 | | |
| Other | | | 2.6 | | | | 204.2 | | | | 159.2 | | | | | 45.0 | | | | | 204.2 | | |
| Total other invested assets | | | 8.7 | | | | 695.1 | | | | 650.1 | | | | | 45.0 | | | | | 686.6 | | |
| Total investments (6) | | | 100.0 | % | | $ | 7,999.3 | | | $ | 7,072.0 | | | | $ | 927.3 | | | | $ | 7,687.2 | | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| ($ in millions) | | % of Total Carrying Value | | Carrying Value | | |
| | | | Total | | Life and Retirement | | Supplemental | | Property and Casualty (7) | | Amortized Cost or Cost (8) |
Publicly Traded Fixed Maturity Securities, Equity Securities and Short-term Investments: | | | | | | | | | | | | |
U.S. Government and agency obligations: (1) | | | | | | | | | | | | |
| Mortgage-backed securities | | 10.9 | % | | $ | 724.3 |
| | $ | 547.9 |
| | $ | 130.0 |
| | $ | 46.4 |
| | $ | 684.5 |
|
| Other, including U.S. Treasury securities | | 6.9 |
| | 458.9 |
| | 440.7 |
| | 6.6 |
| | 11.6 |
| | 436.7 |
|
Investment grade corporate and public utility bonds | | 17.7 |
| | 1,173.8 |
| | 797.5 |
| | 174.9 |
| | 201.4 |
| | 1,074.8 |
|
Non-investment grade corporate and public utility bonds (2) | | 1.1 |
| | 72.6 |
| | 40.4 |
| | 7.1 |
| | 25.1 |
| | 70.1 |
|
| Investment grade municipal bonds | | 24.0 |
| | 1,592.9 |
| | 1,105.5 |
| | 78.0 |
| | 409.4 |
| | 1,457.9 |
|
Non-investment grade municipal bonds (2) | | 0.5 |
| | 34.5 |
| | 17.1 |
| | — |
| | 17.4 |
| | 32.4 |
|
Investment grade other mortgage-backed securities (3) | | 18.0 |
| | 1,195.4 |
| | 958.6 |
| | 56.3 |
| | 180.5 |
| | 1,188.7 |
|
Non-investment grade other mortgage-backed securities (2)(3) | | 0.5 |
| | 31.0 |
| | 24.4 |
| | 0.5 |
| | 6.1 |
| | 28.4 |
|
| Foreign government bonds | | 0.7 |
| | 45.4 |
| | 43.9 |
| | — |
| | 1.5 |
| | 42.8 |
|
Redeemable preferred stock, all investment grade | | 0.4 |
| | 24.3 |
| | 23.5 |
| | 0.8 |
| | — |
| | 21.9 |
|
| Equity securities: | |
|
| | | | | | | | | | |
Non-redeemable preferred stocks, all investment grade | | 0.9 |
| | 60.4 |
| | 57.9 |
| | 1.4 |
| | 1.1 |
| | 60.4 |
|
| Common stocks | | 0.3 |
| | 20.1 |
| | 0.1 |
| | — |
| | 20.0 |
| | 20.1 |
|
| Closed-end fund | | 0.3 |
| | 21.4 |
| | 21.4 |
| | — |
| | — |
| | 21.4 |
|
Short-term investments (4) | | 2.6 |
| | 172.7 |
| | 113.6 |
| | 57.5 |
| | 1.6 |
| | 172.7 |
|
| Total publicly traded securities | | 84.8 |
| | 5,627.7 |
| | 4,192.5 |
| | 513.1 |
| | 922.1 |
| | 5,312.8 |
|
| Other Invested Assets: | | | | | | | | | | | | |
| Investment grade private placements | | 5.8 |
| | 385.8 |
| | 377.4 |
| | 8.4 |
| | — |
| | 368.0 |
|
Non-investment grade private placements (2) | | 0.8 |
| | 52.8 |
| | 50.2 |
| | 2.6 |
| | — |
| | 50.8 |
|
Mortgage loans (5) | | 0.1 |
| | 9.8 |
| | 9.8 |
| | — |
| | — |
| | 9.8 |
|
Policy loans (5) | | 2.3 |
| | 153.5 |
| | 152.7 |
| | 0.8 |
| | — |
| | 153.5 |
|
| Limited partnership interests | | 5.8 |
| | 383.7 |
| | 253.1 |
| | 16.0 |
| | 114.6 |
| | 383.7 |
|
| Other | | 0.4 |
| | 25.9 |
| | 24.9 |
| | — |
| | 1.0 |
| | 25.9 |
|
| Total other invested assets | | 15.2 |
| | 1,011.5 |
| | 868.1 |
| | 27.8 |
| | 115.6 |
| | 991.7 |
|
Total investments (6) | | 100.0 | % | | $ | 6,639.2 |
| | $ | 5,060.6 |
| | $ | 540.9 |
| | $ | 1,037.7 |
| | $ | 6,304.5 |
|
| * |
(1) | Less than $0.1 million. |
| (1) | Includes $429.0All investment grade that includes $494.9 million fair value of investments guaranteed by the full faith and credit of the U.S. Government and $480.5$688.3 million fair value of federally sponsored agency securities which are not backed by the full faith and credit of the U.S. Government. |
| |
(2) | A non-investment grade rating is assigned to a security when it is acquired or when it is downgraded from investment grade, primarily on the basis of the Standard & Poor's Corporation (“Standard & Poor’s” or “S&P”)S&P rating for such security, or if there is no S&P rating, the Moody's Investors Service, Inc. (“Moody's”)(Moody's) or Fitch Ratings, Inc. (Fitch) rating for such security, or if there is no S&P, Moody's or Moody'sFitch rating, the National Association of Insurance Commissioners’ (the “NAIC”)Commissioners' (NAIC) rating for such security. The rating agencies monitor securities and their issuers regularly, and make changes to the ratings as necessary. The Company incorporates rating changes on a monthly basis. |
| |
(3) | Includes commercial mortgage-backed securities, asset-backed securities, other mortgage-backed securities and collateralized debtloan obligations. See also “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations for the Three Years Ended December 31, 2016 — Net Realized Investment Gains and Losses” listed on page F-1 of this report. |
| |
(4) | Short-term investments mature within one year of being acquired and are carried at cost, which approximates fair value. Short-term investments included $44.2of $172.7 million inare all money market funds rated AAA and one $0.7 million corporate bond rated BBB.not rated. |
| |
(5) | Mortgage and policy loans are carried at amortized cost or unpaid principal balance. |
| |
(6) | Approximately 8%7.0% of the Company's investment portfolio, having a carrying value of $628.7$462.8 million as of December 31, 2016,2019, consisted of securities with some form of credit support, such as insurance. Of the securities with credit support as of December 31, 2016,2019, municipal bonds represented $382.8$349.1 million carrying value. |
| |
(7) | Includes $1.4 million of short-term investments held in Corporate and Other. |
| |
(8) | The values of limited partnership interests are carried using the equity method of accounting which approximates fair value. |
|
| 19 | |
| 14 Annual Report on Form 10-K | | Horace Mann Educators Corporation |
Fixed Maturity Securities
and Equity SecuritiesAt December 31, 2016, approximately 33% of the Company's fixed maturity securities portfolio was expected to mature within the next 5 years. Mortgage-backed securities, including mortgage-backed securities of U.S. Governmental agencies, represented approximately 30% of the total investment portfolio at December 31, 2016. These securities typically have average lives shorter than their stated maturities due to unscheduled prepayments on the underlying mortgages. Mortgages are prepaid for a variety of reasons, including sales of existing homes, interest rate changes over time that encourage homeowners to refinance their mortgages and defaults by homeowners on mortgages that are then paid by guarantors.
For
financial reporting purposes, the Company has classified the entire
portfolio of fixed maturity securities
as "available for sale" and the portfolio
as “available for sale”. Fixed maturity securities to be held for indefinite periods of time and not intended to be held to maturity are classified as available for sale andis carried at fair value. The
net adjustment for
net unrealized investment gains
and losses(losses) on securities available for sale is
recordedrecognized as a separate component of accumulated other comprehensive income within shareholders' equity, net of applicable deferred
tax assets or liabilitiestaxes and the related impact on deferred policy acquisition costs
(DAC) associated with investment
(annuity) contracts and life insurance products with account values. Fixed maturity securities held for indefinite periods of time include securities that management intends to use as part of its asset/liability management strategy and that may be sold in response to changes in interest rates, resultant prepayment risk and other related factors, other than securities that are in an unrealized loss position for which management has the stated intent to hold until recovery.
Fixed Maturity Securities Portfolio at December 31, 2019
|
| | | | | | |
| | | % of Fixed Maturity Securities Portfolio | | % of Total Investment Portfolio |
| Investment grade | | 96.4 | % | | 84.0 | % |
| Non-investment grade | | 3.6 | % | | 3.2 | % |
| | | | | |
| Average quality | | A+ |
| | A+ |
|
| Average option-adjusted duration | | 6.0 |
| | 6.0 |
|
| Percent maturing in next 5 years | | 31.1 | % | | 27.1 | % |
Information regarding
HMEC’sHMEC's sources and uses of cash, including payment of principal and interest with respect to HMEC's indebtedness, and payment by HMEC of dividends to its shareholders, is contained in
“Notes toPart II - Item 8, Note 14 of the Consolidated Financial Statements
— Note 10 — Statutory Information and
Restrictions” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations —in Part II - Item 7, Liquidity and Financial Resources — Cash
Flow”Flow and
“—— Capital
Resources” listed on page F-1 ofResources in this report.
The ability of the insurance subsidiaries to pay cash dividends to HMEC is subject to state insurance department regulations which generally permit dividends to be paid for any 12 month period in amounts equal to the greater of (i) net income for the preceding calendar year or (ii) 10% of surplus, determined in conformity with statutory accounting principles, as of the preceding December 31st.31st. Any dividend in excess of these levels requires the prior approval of the Director or Commissioner of the state insurance department of the state in which the dividend paying insurance subsidiary is domiciled. The aggregatemaximum amount of dividends that may be paid in 20172020 from all of HMEC's insurance subsidiaries without prior regulatory approval is approximately $91 million.$105.3 million, excluding the impact and timing of prior year dividends.
Notwithstanding the foregoing, if insurance regulators otherwise determine that payment of a dividend or any other payment to an affiliate would be detrimental to an insurance subsidiary's policyholders or creditors, because of the financial condition of the insurance subsidiary or otherwise, the regulators may block dividends or other payments to affiliates that would otherwise be permitted without prior approval.
|
| 20 | |
| Horace Mann Educators Corporation | | Annual Report on Form 10-K 15 |
General Regulation at State Level
As an insurance holding company, HMEC is subject to extensive regulation by the states in which its insurance subsidiaries are domiciled or transact business. Some regulations, such as those addressing unclaimed property, generally apply to all corporations. In addition, the laws of the various states establish regulatory agencies with broad administrative powers, which relate to a wide variety of matters, including granting and revoking licenses to transact business, regulating trade practices and rate setting, licensing agents, requiring statutory financial statements, monitoring insurer solvency and reserve adequacy, and prescribing the type and amount of investments
permitted.permitted and the manner in which they may be sold. On an ongoing basis, various state legislators and insurance regulators examine the nature and scope of state insurance regulation.
In addition to individual state monitoring and regulation, state regulators develop coordinated regulatory policies through the
National Association of Insurance Commissioners (“NAIC”).NAIC. States have adopted NAIC risk-based capital guidelines to evaluate the adequacy of statutory capital and surplus in relation to an insurance company's risks. Based on current guidelines, the risk-based capital statutory requirements are not expected to have a negative regulatory impact on
HMEC’sthe Company's insurance subsidiaries. At December 31,
20162019 and
2015,2018, statutory capital and surplus of each of the
Company’sCompany's insurance subsidiaries
waswere above required levels. States have also adopted the
NAIC’sNAIC's U.S. Own Risk and Solvency Assessment
(“ORSA”) which requires insurance companies to submit their own assessment of their current and future risks and provide a consolidated group-level perspective on risk and capital formulated through an internal risk self-assessment process.
Assessments Against Insurers and Mandatory Insurance Facilities
Under insurance insolvency or guaranty laws in most states in which the Company operates, insurers doing business therein can be assessed for policyholder losses related to insolvencies of other insurance companies, and many assessments paid by the Company pursuant to these laws may be used as credits for a portion of the Company's premium taxes in certain states. Also, the Company is required to participate in various mandatory insurance facilities in proportion to the amount of the Company's direct writings in the applicable state. For the three years ended December 31,
2016,2019, the
impactimpacts of the above industry items were not material to the
Company’sCompany's results of operations.
Regulation at Federal Level
Although the federal government generally does not directly regulate the insurance industry, federal initiatives often impact the insurance business. Current and proposed federal measures which may significantly affect insurance and retirement business include employee benefits regulation, standards applied to employer sponsored retirement plans, standards applied to
certain financial advisors,broker-dealers and investment advisers, controls on the costs of medical care, medical entitlement programs such as Medicare, structure of retirement plans and accounts, changes to the insurance industry
anti-trustantitrust exemption, and minimum solvency requirements.
See also “Item 1A. Risk Factors”.Also, see Part I - Item 1A of this report. Other federal regulation such as the Patient Protection and Affordable Care Act, Fair Credit Reporting Act, Gramm-Leach-Bliley Act and USA PATRIOT Act, including its anti-money laundering regulations, also impact the
Company’sCompany's business.
The variable annuities underwritten by HMLICHorace Mann Life Insurance Company (HMLIC) are regulated by the SEC. Horace Mann Investors, Inc., and BCG Securities, Inc., the broker-dealer and Registered Investment Adviser subsidiarysubsidiaries of HMEC,the Company, are also is regulated by the SEC, FINRA,the Financial Industry Regulatory Authority, Inc., the Municipal Securities Rule-making Board (“MSRB”) and various state securities regulators.
Federal income taxation of the build-up of cash value within a life insurance policy or an annuity contract could have a materially adverse impact on the Company's ability to market and sell such products. Various legislation to this effect has been proposed in the past, but has not been enacted. Although no such legislative proposals are known to exist at this time, such proposals may be made again in the future. Changes in other federal and state laws and regulations could also affect the relative tax and other advantages of the Company's annuity and life
products to customers.products.
|
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| 16 Annual Report on Form 10-K | | Horace Mann Educators Corporation |
Financial Regulation Legislation
The Dodd-Frank Wall Street Reform and Consumer Protection Act
(“Dodd-Frank”)(Dodd-Frank) created the Federal Insurance Office
(“FIO”)(FIO) within the U.S. Department of the Treasury.
The FIO studies the current insurance regulatory system and is charged with monitoring and providing specific reports on various aspects of the insurance industry. However,
the FIO does not have general supervisory or regulatory authority over the business of insurance.
The FIO has suggested an expanded federal role in some circumstances.
TheIn 2017, the executive branch
has requested a review of financial regulation, including Dodd-Frank. Management will continue to monitor
these future developments for impact on the Company, insurers of similar size and the insurance industry as a whole.
At December 31,
2016,2019, the Company had
approximately 1,4401,516 non-agent employees and
3322 full-time Employee Agents.
(ThisThis does not include
588 Exclusive
Agent independent contractorsDistributors that were part of the
Company’sCompany's total dedicated agency force at December 31,
2016.)2019. The Company has no collective bargaining
agreementagreements with any employees.
The following are certain risk factors that could affect the
Company’sCompany's business, financial
resultsposition and results of operations.
In addition, refer to the risk factors disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Forward-looking Information”, listed on page F-1 of this report for certain important factors that may cause our financial condition and results of operations to differ materially from current expectations. The risks that the Company has highlighted in
these two sectionsthe following section of this report are not the only ones that the Company faces.
In this discussion, the Company is also referred to as “our”, “we” and “us”.The
Company’sCompany's business involves various risks and uncertainties which are based on the lines of business the Company writes as well as more global risks associated with the general business and insurance industry environments.
Risks Related to Economic Conditions, Market Conditions and Investments
Volatile financial markets and adverse economic environments can impact financial market risk as well as
ourthe Company's financial condition and results of operations.
Financial markets in the U.S. and elsewhere can experience extreme volatility and disruption for uncertain periods of time. During such times, stresses affecting the global banking system can lead to economic volatility which can exert significant downward pressure on prices of equity securities and many other investment asset classes and result in
substantially increased market volatility, severely constrained credit and capital markets, particularly for financial institutions, and an overall loss of investor confidence. Many states and local governments can also be impacted by adverse economic conditions which could have an impact on both the
Company’sCompany's niche market and its investment portfolio. Like other financial institutions which face significant financial market risk in their operations, the Company
washas been adversely affected by these conditions and could be adversely impacted by similar circumstances in the future. The
Company’sCompany's ability to access the capital markets to refinance outstanding indebtedness or raise capital could be impaired during significant financial market disruptions.
As discussed further in subsequent risk factors, in addition to the effects of financial markets volatility, a prolonged economic recession may have other adverse impacts on
ourthe Company's financial condition and results of operations.
If ourthe Company's investment strategy is not successful, wethe Company could suffer unexpected losses.
The success of
ourthe Company's investment strategy is crucial to the success of
ourits business. Specifically,
ourthe Company's fixed
incomematurity securities portfolio is subject to a number of risks including:
| · |
| • | | interest rate risk, which is the risk that interest rates will decline and funds reinvested will earn less than expected; |
| |
| • | · | | market value risk, which is the risk that our invested assets will decrease in value due to a changechanges in the yields realized on ourthe assets and prevailing market yields for similar assets, an unfavorable change in the liquidity of the investmentasset or an unfavorable change in the financial prospects or a downgrade in the credit rating of the issuer of the investment;asset; |
|
| · | |
| Horace Mann Educators Corporation | | Annual Report on Form 10-K 17 |
| |
| • | credit risk, which is the risk that the value of certain investments becomesbecome impaired due to deterioration in the financial condition of one or more issuers of those instruments or the deterioration in performance or credit quality of the underlying collateral of certain structured securities and, ultimately, the risk of permanent loss in the event of default by an issuer or underlying credit; |
| |
| • | · | | market fundamentals risk, which is the risk that there are changes in the market that can have an unfavorable impact on securities valuation such as availability of credit in the capital markets, re-pricing of credit risk, reduced market liquidity due to broker-dealers’broker-dealers' unwillingness to hold inventory, and increased market volatility; |
| |
| • | · | | concentration risk, which is the risk that the portfolio may be too heavily concentrated in the securities of one or more issuers, sectors or industries, which could result in a significant decrease in the value of the portfolio in the event of deterioration in the financial condition of those issuers or the market value of their securities; |
| |
| • | · | | liquidity risk, which is the risk that liabilities are surrendered or mature sooner than anticipated requiring us to sellthe sale of assets at an undesirable time to provide for policyholder surrenders, withdrawals or claims; and, |
| |
| • | · | | regulatory risk, which is the risk that regulatory bodies or governments, in the U.S. or in other countries, may make substantial investments or take significant ownership positions in, or ultimately nationalize, financial institutions or other issuers of securities held in the Company’sCompany's investment portfolio, which could adversely impact the seniority or contractual terms of the securities. Regulatory risk could also come from changes in tax laws or bankruptcy laws that wouldcould adversely impact the valuation and/or after tax yields of certain invested assets. |
In addition to significant steps taken to attempt to mitigate these risks through
ourthe Company's investment guidelines, policies and procedures,
wethe Company also
attemptattempts to mitigate these risks through product pricing, product features and the establishment of policy reserves, but
weit cannot provide assurance that assets will be properly matched to meet anticipated liabilities or that
ourthe investments will provide sufficient returns to enable
us to satisfy oursatisfaction of guaranteed fixed benefit obligations.
The
Company’sCompany's investment strategy and guidelines have resulted in an investment portfolio
whichthat is comprised primarily of investment grade fixed maturity securities. Inclusion of alternative investments,
even thosealthough consistent with the
Company’sCompany's overall conservative investment guidelines, could result in some volatility in
ourthe Company's financial condition and results of operations.
From time to time, the Company couldmay enter into foreign currency, interest rate, credit derivative and other hedging transactions in an effort to manage risks, including risks that may be attributable to any new products offered by the Company. For instance, the Company recently began utilizingutilizes call options to manage interest crediting risk related to its newly introduced fixed indexed annuityFIA and indexed universal lifeIUL products. WeThe Company cannot provide complete assurance that weit will successfully structure derivatives and hedges so as to effectively manage risks. If ourthe Company's calculations are incorrect, or if we doit does not properly structure our derivatives or hedges, weit may have unexpected losses and our assetsthat may not be adequaterequire it to meet our needed reserves,draw on surplus, which could adversely affect ourthe Company's financial condition and results of operations.
Although the
Company’sCompany's defined benefit pension plan
ishas been frozen
since 2002, declining financial markets could also cause, and in the past have caused, the value of the investments in this
pension plan to decrease, resulting in additional pension expense, a reduction in other comprehensive income and an increase in required contributions to
the defined benefit pensionthis plan, which could have an adverse effect on
ourthe Company's financial condition and results of operations.
The determination of
the fair value of
ourthe Company's fixed maturity
and equity securities
portfolio includes methodologies, estimations and assumptions that are subject to differing interpretations and could result in changes to investment valuations that may materially impact
ourthe Company's financial condition and results of operations.
The determination of fair values is made at a specific point in time, based on available market information and judgments about financial instruments, including estimates of the timing and amounts of expected future cash flows and the credit standing of the issuer or counterparty. The use of different methodologies and assumptions may have a material effect on the estimated fair value amounts. During periods of market disruption, including periods of rapidly widening credit spreads or illiquidity, it may be difficult to value certain of our securities if trading
|
| | |
| 18 Annual Report on Form 10-K | | Horace Mann Educators Corporation |
becomes less frequent and/or market data becomes less observable. There may be certain asset classes that were in active markets with significant observable data that become illiquid due to the financial environment. In such cases, fair value determination may require more subjectivity and management judgment and those fair values may differ materially from the value at which the investments
could ultimately
could be sold. Further, rapidly changing and unprecedented credit and equity market conditions could materially impact the valuation of securities and the period-to-period changes in value could vary significantly. The difference between fair value and amortized cost,
or cost, net of applicable deferred income
tax asset or liabilitytaxes and the related impact on
deferred policy acquisition costsDAC associated with investment (annuity) contracts and life insurance products with account values, and interest-sensitive life contracts, is reflected as a component of accumulated other comprehensive income within shareholders' equity. Decreases in the fair value of
our investments could have a material adverse effect on
ourthe Company's financial condition and results of operations.
A sustained period of low interest rates or interest rate fluctuations could negatively affect the income we derive from the difference between the interest rates we earnEquity method adjustments on our investments and the interest we pay under our fixed annuity contracts and life insurance products with account values.
Significant changes in interest rates expose us to the risk of not earning income or experiencing losses based on the differences between the interest rates earned on our investments and the credited interest rates paid on our outstanding fixed annuity contracts and life insurance products with account values. Significant changes in interest rates may affect:
| · | | the ability to maintain appropriate interest rate spreads over the fixed rates guaranteed in our annuity and life products; |
| · | | the book yield of our investment portfolio; and |
| · | | the unrealized gains and losses in our investment portfolio and the related after tax effect on our shareholders’ equity and total capital. |
Both rising and declining interest rates can negatively affect the income we derive from our annuity and life products’ interest rate spreads. During periods of falling interest rates or a sustained period of low interest rates, our investment earnings will be lower because newcertain investments in fixed maturity securities likely will bear lower interest rates. We may not be able to fully offset the decline in investment earnings with lower crediting rates on our annuity contracts, particularly in a multi-year period of low interest rates. As of the time of this Annual Report on Form 10-K, new money rates remain at historically low levels. If interest rates do remain low over an extended period of time, it could pressure our net investment income by having to invest insurance cash flows and reinvest the cash flows from the investment portfolio in lower yielding securities.
During periods of rising interest rates, there may be competitive pressure to increase the crediting rates on our annuity contracts. We may not, however, immediately have the ability to acquire investments with interest rates sufficient to offset an increase in crediting rates under our annuity contracts. Although we develop and maintain asset/liability management programs and procedures designed to reduce the volatility of our income when interest rates are rising or falling, changes in interest rates can affect our interest rate spreads.
Changes in interest rates may also affect our business in other ways. For example, a rapidly changing interest rate environment may result in less competitive crediting rates on certain of our fixed rate products which could make those products less attractive, leading to lower sales and/or increases in the level of life insurance and annuity product surrenders and withdrawals. New business volume also could be negatively impacted by product or agent compensation changes which we might make to mitigate the income effect of spread compression. Interest rate fluctuations that impact future profits may also impact the amortization of deferred policy acquisition costs.
As another example of potential interest rate impacts, our Retirement and Life operations participate in the cash flow testing procedures imposed by statutory insurance regulations, the purpose of which is to ensure that such liabilities are adequate to meet the Company’s obligations under a variety of interest rate scenarios. A continuation of the current low interest rate environment over a prolonged period of time could cause the Company to increase statutory reserveslimited partnership interests as a result of cash flow testing, which would reduce statutory surplus of the Life insurance subsidiaries and potentially limit the subsidiaries’ ability to distribute cash to the holding company or write insurance business (as further described in a subsequent risk factor).
Regulatory initiatives, including the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”), could adversely impact liquidity and volatility of financial markets in which we participate.
In response to the credit and financial crisis, U.S. and overseas governmental and regulatory authorities are considering or implementing enhanced or new regulatory requirements intended to prevent future crises or stabilize the institutions under their supervision. Such measures are leading to stricter regulation of financial institutions. Changes from Dodd-Frank and other U.S. and overseas governmental initiatives have created uncertainty and could continue to adversely impact liquidity and increase volatility of the financial markets in which we participate and, in turn, negatively affect our financial condition or results of operations. The executive branch has requested a review of financial regulations including Dodd-Frank, which may eliminate or mitigate this risk.
Our Retirement business may be, and in the past has been, adversely affected by volatile or declining financial market conditions.
Conditions in the U.S. and international financial markets affect the sale and profitability of our annuity products. In general, sales of variable annuities decrease when financial markets are declining or experiencing a higher than normal level of volatility over an extended period of time. Therefore, weak and/or volatile financial market performance may adversely affect sales of our variable annuity products to potential customers, may cause current customers to withdraw or reduce the amounts invested in our variable annuity products and may reduce the market value of existing customers’ investments in our variable annuity products, in turn reducing the amount of variable annuity fee revenues generated. In addition, some of our variable annuity contracts offer guaranteed minimum death benefit features, which provide for a benefit if the contractholder dies and the contract value is less than a specified amount. A decline in the financial markets could cause the contract value to fall below this specified amount, increasing our exposure to losses from variable annuity products featuring guaranteed minimum death benefits. Declining or volatile financial markets that impact future profits may also impact the amortization of deferred policy acquisition costs.
We may experience volatility in our results of operations and financial condition due to thewell as fair value accounting for derivative instruments.
All derivative instruments, including derivative instruments embedded in fixed indexed annuity contracts and indexed universal life policies, are recognized in the balance sheet at their fair values. Changes in the fair value of these instruments are recognized immediately in our results of operations as follows:
| · | | Call options purchased to fund the annual index credits on our fixed indexed annuity and indexed universal life products are presented at fair value. The fair value of the call options is based on the amount of cash expected to be received to settle the call options obtained from the counterparties adjusted for the nonperformance risk of the counterparty. The change in fair value of derivatives includes the gains or losses recognized at expiration of the option term or upon early termination as well as changes in fair value for open positions. |
| · | | The fixed indexed annuity contractual obligations for future annual index credits are treated as a "series of embedded derivatives" over the expected lives of the applicable contracts. Increases or decreases in the fair value of embedded derivatives generally correspond to increases or decreases in equity market performance and changes in the interest rates used to discount the excess of the projected policy contract values over the projected minimum guaranteed contract values. |
| · | | The indexed universal life contractual obligations for future index credits are set equal to the fair value of outstanding 12 month derivatives held in support of the applicable contracts. |
In future periods, the application of fair value accounting for derivatives and embedded derivatives to our fixed indexed annuity and indexed universal life businessequity securities may cause volatility in our results of operations.
Mark-to-market adjustments on certain equity method investments may reduce our profitability and/or cause volatility in our reportedthe Company's results of operations.
We invest a portion of our invested assets
The Company invests in limited partnership
funds,interests, which are accounted for using the equity method
withof accounting. This means that the Company's proportionate share of the changes in fair value
of the underlying net asset values are reported in net investment income in the Consolidated
StatementStatements of Operations.
The amount and timing of income from such investment funds tend to be uneven as a result of the performance of the underlying investments. The timing of distributions from the funds, which depends on particular events relating to the underlying investments, as well as the funds’ schedules for making distributions and their needs for cash, can be difficult to predict. As a result, the amount of
net investment income
that we recordrecognized from these investments can vary substantially from period to period.
Recent equityEquity and credit market volatility may reduce
net investment income from these types of investments and negatively impact
ourthe results of operations.
An inability Changes in fair value from applying fair value accounting to access Federal Home Loan Bank (“FHLB”) funding could adversely affect ourequity securities that are reported in net investment gains (losses) in the Consolidated Statements of Operations may cause volatility in the Company's results of operations.
Any changes in requirements
Risks Related to
retain membership in the Federal Home Loan Bank, or changes in regulation, could impact our eligibility for continued FHLB membership or our FHLB funding capacity. Any event that adversely affects amounts received from FHLB could have an adverse effect on our results of operations.
Property and Casualty Segment
Losses due to defaults by others could reduce our profitability or negatively affect the value of our investments.
Third-party debtors may not pay or perform their obligations. These parties may include the issuers whose securities we hold, customers, reinsurers, borrowers under mortgage loans, trading counterparties, counterparties under swaps and other derivative contracts, clearing agents, exchanges, clearing houses and other financial intermediaries. These parties may default on their obligations to us due to bankruptcy, lack of liquidity, downturns in the economy or real estate values, operational failure or other reasons.
During or following an economic downturn, our municipal bond portfolio could be subject to a higher risk of default or impairment due to declining municipal tax bases and revenue. States are currently barred from seeking protection in federal bankruptcy court. However, federal legislation could possibly be enacted to allow states to declare bankruptcy in connection with deficit reductions or mounting unfunded pension liabilities, which could adversely impact the value of our investment portfolio.
The default of a major market participant could disrupt the securities markets or clearance and settlement systems in the U.S. or abroad. A failure of a major market participant could cause some clearance and settlement systems to assess members of that system, including our broker-dealer and Registered Investment Adviser regulatory entities, or could lead to a chain of defaults that could adversely affect us. A default of a major market participant could disrupt various markets, which could in turn cause market declines or volatility and negatively impact our financial condition and results of operations.
Catastrophic events, as well as significant weather events not designated as catastrophes, can have a material adverse effect on ourthe Company's financial condition and results of operations.
Underwriting results of property and casualty insurers are subject to weather and other conditions prevailing in an accident year. While one year may be relatively free of major weather or other disasters — not all of which are designated by the insurance industry as a catastrophe, another year may have numerous such events causing results for such a year to be materially worse than for
otherprevious years.
Our
The Company's Property and Casualty insurance subsidiaries have experienced, and
we anticipatethe Company anticipates that in the future they will continue to experience, catastrophe losses. A catastrophic event, a series of multiple catastrophic events or a series of non-catastrophe severe weather events could have a material adverse effect on the financial condition and results of operations of
ourthe insurance subsidiaries.
Various events can cause catastrophes, including hurricanes, windstorms, hail, severe winter weather, wildfires, earthquakes, explosions and terrorism. The frequency and severity of these catastrophes are inherently unpredictable. The extent of losses from a catastrophe is a function of both the total amount of insured exposures in the area affected by the event and the severity of the event. Although catastrophes can cause losses in a variety of Propertyproperty and Casualtycasualty lines, most of the catastrophe-related claims of ourthe Company's insurance subsidiaries are related to homeowners’property coverages. OurThe Company's ability to provide accurate estimates of ultimate catastrophe costs is based on several factors, including:
| · | | the proximity of the catastrophe occurrence date to the date of our estimate; |
| · | | potential inflation of property repair costs in the affected area; |
| · | | the occurrence of multiple catastrophes in a geographic area over a relatively short period of time; and |
| · | | the outcome of litigation which may be filed against the Company by policyholders, state attorneys general and other parties relative to loss coverage disputes and loss settlement payments. |
the proximity of the catastrophe occurrence date to the date of the Company's estimate;
potential inflation of property repair costs in the affected area;
the occurrence of multiple catastrophes in a geographic area over a relatively short period of time; and
the outcome of litigation which may be filed against the Company by policyholders, state attorneys general and other parties relative to loss coverage disputes and loss settlement payments.
Based on 20162019 direct premiums earned, 57%57.4% of the total annual premiums for ourthe Company's Property and Casualty business were for policies issued in the ten largest states in which ourthe insurance subsidiaries write property and casualty coverage. Included in this top ten group are certain states which are considered to be
|
| | |
| Horace Mann Educators Corporation | | Annual Report on Form 10-K 19 |
more prone to catastrophe occurrences: California,
Texas, North Carolina,
Texas,Minnesota, South Carolina, Florida,
Louisiana and
Louisiana.As an ongoing practice, we manage our exposure to catastrophes, as well as our exposure to non-catastrophe weather and other property loss risks. Reductions in Property and Casualty business written in catastrophe-prone areas may have a negative impact on near-term business growth and results of operations.
In addition to the potential impact on our Property and Casualty subsidiaries, our Life subsidiary could experience claims of a catastrophic magnitude from events such as pandemics; terrorism; nuclear, biological or chemical explosions; or other acts of war.
OurColorado.
The Company's insurance subsidiaries seek to reduce their exposure to catastrophe losses through their underwriting strategies,
pooling of losses and the purchase of catastrophe reinsurance.
Nevertheless,However, reinsurance may prove inadequate under certain circumstances.
Uncollectible reinsurance, as well as reinsurance availability
Climate change may adversely affect the Company’s financial position, results of operations and
pricing, can have a material adverse effect upon our business volume and profitability.Reinsurance is a contract by which one insurer, called a reinsurer, agrees to cover a portion of the losses incurred by a second insurer in the event a claim is made under a policy issued by the second insurer. Our insurance subsidiaries obtain reinsurance to help manage their exposure to property, casualty and life insurance risks. Although a reinsurer is liable to our insurance subsidiaries accordingcash flows.
Climate change presents risk to the
termsCompany and there are concerns that the increased frequency and severity of
its reinsurance policy, the insurance subsidiaries remain primarily liableweather-related catastrophes and other losses is indicative of changing weather patterns, whether as
the direct insurers on all risks reinsured. As a result
reinsurance doesof climate-warming trends (global climate change) caused by human activities or otherwise, which could cause such events to persist. Increased weather-related catastrophes could lead to higher overall losses, which the Company may not
eliminate the obligation of our insurance subsidiariesbe able to
pay all claims, and each insurance subsidiary is subject to the risk that one or more of its reinsurers will be unable or unwilling to honor its obligations.Although we limit participation in our reinsurance programs to reinsurers with high financial strength ratings and also limit the amount of coverage from each reinsurer, our insurance subsidiaries cannot guarantee that their reinsurers will payrecoup, particularly in a timely fashion, if at all. Reinsurers may become financially unsound by the time that they are called upon to pay amounts due, which may not occur for many years.
Additionally, the availabilityhighly regulated and cost ofcompetitive environment, and higher reinsurance are subject to prevailing market conditions beyond our control. For example, significant losses from hurricanes or terrorist attacks,costs. Certain catastrophe models assume an increase in capital requirements,frequency and severity of certain weather or other events, which could result in a future lapsedisproportionate impact on insurers with certain geographic concentrations of risk. This could also likely increase the provisionsrisks of writing property insurance in coastal areas or areas susceptible to wildfires or flooding, particularly in jurisdictions that restrict pricing and underwriting flexibility. The threat of rising sea levels or other catastrophe losses as a result of global climate change may also cause property values in coastal or such other communities to decrease, reducing the Terrorism Risk Insurance Acttotal amount of insurance coverage that is required.
In addition, global climate change could have
a significant adversean impact on the
reinsurance market.If one of our insurance subsidiaries is unable to obtain adequate reinsurance at reasonable rates,Company’s fixed maturity security and limited partnership portfolios, resulting in realized and unrealized losses in future periods that insurance subsidiary would have to increase its risk exposure and/or reduce the level of its underwriting commitments, which could have a material adverse effect uponon the business volumeCompany’s financial position, results of operations and profitabilitycash flows. It is not possible to foresee which, if any, assets, industries or markets may be materially and adversely affected, nor is it possible to foresee the magnitude of such effect. Further, it is also possible that the subsidiary. Alternately, the insurance subsidiary could electlegal, regulatory and social responses to pay the higher than reasonable rates for reinsurance coverage, whichclimate change could have a materialan adverse effect upon its profitability until policy premium rates could be raised, in some cases subject to approval by state regulators, to incorporate this additional cost.
Ouron the Company’s financial condition, results of operations and cash flows.
The Company's Property and Casualty loss reserves may not be adequate.
Our
The Company's Property and Casualty insurance subsidiaries maintain loss reserves to provide for their estimated ultimate liability for losses and loss adjustment expenses with respect to reported and unreported claims incurred as of the end of each
accounting period.reporting date. If these loss reserves prove inadequate,
we will record a loss
is recognized and measured by the amount of the shortfall and, as a result, the financial condition and results of operations of
ourthe insurance subsidiaries
willmay be adversely affected, potentially affecting their ability to distribute cash to
the holding company.HMEC.
Reserves do not represent an exact calculation of liability. Reserves represent estimates, generally involving actuarial projections at a given time, of what
ourthe insurance subsidiaries expect the ultimate settlement and adjustment of claims will cost, net of salvage and subrogation. Estimates are based on assessments of known facts and circumstances, assumptions related to the ultimate cost to settle such claims, estimates of future trends in claims severity and frequency, changing judicial theories of liability, and other factors. These variables are affected by both internal and external events, including changes in claims handling procedures, economic inflation, unpredictability of court decisions,
plaintiffs’plaintiffs' expanded theories of liability, risks inherent in major litigation and legislative changes. Many of these items are not directly quantifiable, particularly on a prospective basis. Significant reporting lags may exist between the occurrence of an insured event and the time it is actually reported.
OurThe Company's insurance subsidiaries adjust their reserve estimates regularly as experience develops and further claims are reported and settled.
Due to the inherent uncertainty in estimating reserves for losses and loss adjustment expenses,
wethe Company cannot be certain that the ultimate liability will not exceed amounts reserved, with a resulting adverse effect on
ourthe financial condition and results of operations.
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| 31 | |
| 20 Annual Report on Form 10-K | | Horace Mann Educators Corporation |
Changing climate conditions
Risks Related to Supplemental Segment
Actual experience in the Supplemental segment may differ from actuarial assumptions which could adversely affect ourprofitability, results of operations and financial condition,condition.
Historical results may not be indicative of future performance due to, among other things, changes in the Company’s mix of business, regulatory actions or changes in legal doctrine impacting the Company's products or lines of business, or any number of economic cyclical effects. Reserves do not represent an exact calculation of future benefit liabilities but are instead actuarial and statistical-based estimates. Actual experience may differ from the Company's reserve assumptions. There are no assurances that reserves will be sufficient to fund the Company's future liabilities in all scenarios. Future loss development may require reserves to be increased, which could adversely affect earnings in current and future periods. Adjustments to reserve amounts may be required in the event of changes from the assumptions regarding future morbidity, mortality, persistency, and interest rates used in calculating the reserve amounts, which could have a material adverse effect on the Company's results of operations or
cash flows.
Many scientists indicate thatfinancial condition.
Risks Related to Life and Retirement Segments
A sustained period of low interest rates or interest rate fluctuations could negatively affect net interest margin derived from the world’s overall climate is getting warmer. Climate change,difference between interest earned on investments and interest paid under fixed annuity and life insurance products with account values.
Significant changes in interest rates expose the Company to the extent it produces rising temperaturesrisk of not earning the appropriate level of income or experiencing losses based on the differences between the interest earned on investments and the credited interest paid on outstanding fixed annuity and life insurance products with account values. Significant changes in weather patterns,interest rates may affect:
the ability to maintain appropriate interest rate spreads over the rates guaranteed in fixed annuity and life products;
the book yield of the investment portfolio; and
the net unrealized investment gains (losses) in the portfolio and the related after tax effect on shareholders' equity and total capital.
Both rising and declining interest rates can negatively affect the income derived from fixed annuity and life products' interest rate spreads. During periods of falling interest rates or a sustained period of low interest rates, investment earnings will be lower because new investments in fixed maturity securities likely will bear lower interest rates. The Company may not be able to fully offset the decline in investment earnings with lower crediting rates on fixed annuity products, particularly in a multi-year period of low interest rates. As of the time of issuance of this Annual Report on Form 10-K, rates on new investments remain at historically low levels. If interest rates do remain low over an extended period of time, it could impactpressure investment income by having to invest insurance cash flows and reinvest the frequency and/or severitycash flows from the investment portfolio in lower yielding securities.
During periods of weather events and wildfires,rising interest rates, there may be competitive pressure to increase the affordability and availability of our catastrophe reinsurance coverage, and our results of operations. Ifcrediting rates on fixed annuity products. The Company may not, however, immediately have the ability to acquire investments with interest rates sufficient to offset an increase in weather eventscrediting rates under fixed annuity products. Therefore, changes in interest rates could affect interest rate spreads.
Changes in interest rates may also affect business in other ways. For example, a rapidly changing interest rate environment may result in less competitive crediting rates on certain fixed rate products which could make those products less attractive, leading to lower sales and/or wildfires wereincreases in the level of life insurance and fixed annuity product surrenders and withdrawals. New business volume also could be negatively impacted by product or agent compensation changes which the Company might make to occur,mitigate the income effect of spread compression. Interest rate fluctuations that impact future profits may also impact DAC amortization.
The Company's Life and Retirement operations participate in additioncash flow testing procedures imposed by statutory insurance regulations, the purpose of which is to ensure that reserves are adequate to meet the attendantCompany's obligations under a variety of interest rate scenarios. Risk based capital requirements are also calculated under a variety of interest rate and market rate scenarios. A continuation of the current low interest rate environment
|
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| Horace Mann Educators Corporation | | Annual Report on Form 10-K 21 |
could cause the Company to increase in claim costs,statutory reserves as a result of cash flow testing or increase required capital levels, which could reduce available statutory surplus of the Life insurance subsidiaries and potentially limit the subsidiaries' ability to distribute cash to HMEC or write insurance business (as further described in a subsequent risk factor).
The Retirement business may be, and in the past has been, adversely affected by volatile or declining financial market conditions.
Conditions in the U.S. and international financial markets affect the sale and profitability of retirement products. In general, sales of fee-based products decrease when financial markets are declining or experiencing a higher than normal level of volatility over an extended period of time. Therefore, weak and/or volatile financial market performance may adversely affect sales of fee-based products to potential customers, may cause current customers to withdraw or reduce the amounts invested in fee-based products and may reduce the market value of existing customers' investments in fee-based products, in turn reducing the amount of fee-based product revenues generated. In addition, some variable annuity products offer guaranteed minimum death benefit features, which provide for a benefit if the contractholder dies and the contract value is less than a specified amount. A decline in the financial markets could cause the contract value to fall below this specified amount, increasing exposure to losses from variable annuity products featuring guaranteed minimum death benefits. Declining or volatile financial markets that impact ourfuture profits may also impact DAC amortization.
The Company may experience volatility in its results of operations and financial condition concentrationsdue to fair value accounting for derivatives.
All derivatives, including derivatives embedded in FIA and IUL products, are recognized on the balance sheet at fair value. Changes in the fair value of insurance risk could impact our ability to make homeowners insurance available to our customers. This could adversely impact our volume of business and ourthese instruments are recognized immediately in the Company's results of operations as follows:
Call options purchased to fund the annual index credits on FIA and IUL products are carried at fair value. Fair value is based on the amount of cash expected to be received to settle the call options adjusted for the nonperformance risk of the counterparty. Changes in fair value of derivatives include the gains or
cash flows.losses recognized at expiration of the option term or upon early termination as well as changes in fair value for open positions.
FIA contractual obligations for future annual index credits are accounted for as a "series of embedded derivatives" over the expected lives of the applicable contracts. Increases or decreases in the fair value of embedded derivatives generally correspond to increases or decreases in equity market performance and changes in interest rates used to discount the excess of the projected policy contract values over the projected minimum guaranteed contract values.
The IUL contractual obligations for future index credits are set equal to the fair value of outstanding 12 month derivatives held in support of the applicable contracts.
In future periods, the application of fair value accounting for derivatives and embedded derivatives for FIA and IUL business may cause volatility in the Company's results of operations.
Deviations from assumptions regarding future market appreciation, interest spreads, business persistency, mortality and morbidity used in calculating life and annuity reserves and
deferred policy acquisition expense amountsDAC amortization could have a material adverse impact on
ourthe Company's financial condition and results of operations.
The processes of calculating
reservereserves and
deferred policy acquisition expense amountsDAC amortization for
ourthe life and annuity businesses involve the use of a number of assumptions, including those related to market appreciation (the rate of growth in market value of the underlying variable annuity
subaccountssub-accounts due to price appreciation), interest spreads (the interest rates expected to be received on investments less the rate of interest credited to contractholders), business persistency (how long a contract stays with the
company)Company), mortality (the relative incidence of death over a given period of time) and morbidity (the relative incidence of disability resulting from disease or physical impairment).
WeThe Company periodically
reviewreviews the adequacy of these reserves and
deferred policy acquisition expensesDAC recoverability on an aggregate basis and, if future experience is estimated to differ significantly from previous assumptions, adjustments to reserves and
deferred policy acquisition expensesDAC amortization may be required
which could have a material adverse effect on our financial condition and results of operations.An impairment of all or part of our goodwill could adversely affect our results of operations.
At December 31, 2016, we had $47.4 million of goodwill recorded on our Consolidated Balance Sheet. Goodwill was recorded when the Company was acquired in 1989 and when Horace Mann Property & Casualty Insurance Company was acquired in 1994, in both instances reflecting the excess of cost over the fair market value of net assets acquired. In 2016, the goodwill balance was evaluated for impairment, as described in “Notes to Consolidated Financial Statements — Note 1 — Summary of Significant Accounting Policies”, with no impairment charge resulting from such assessment. The evaluation of goodwill considers a number of factors including the impacts of a volatile financial market on earnings, discount rate assumptions, liquidity and the Company’s market capitalization. If an evaluation of the Company’s fair value or of the Company’s segments’ fair value indicated that all or a portion of the goodwill balance was impaired, the Company would be required to write off the impaired portion. Such a write-off could have a material adverse effect on our results of operations in the period of the write-off; however, management does not anticipate a material effect on the Company’s financial condition.
Any downgrade in or adverse change in outlook for our claims-paying ratings, financial strength ratings or credit ratings could adversely affect our financial condition and results of operations.
Claims-paying ratings and financial strength ratings have become an increasingly important factor in establishing the competitive position of insurance companies. In the evolving 403(b) annuity market, school districts and benefit consultants have placed an emphasis on the relative financial strength ratings of competing companies. Each rating agency reviews its ratings periodically and from time to time may modify its rating criteria including, among other factors, its expectations regarding capital adequacy, profitability and revenue growth. A downgrade in the ratings or adverse change in the ratings outlook of any of our insurance subsidiaries by a major rating agency could result in a substantial loss of business for that subsidiary if school districts, policyholders or independent agents move their business to other companies having higher claims-paying ratings and financial strength ratings than we do. This loss of business could have a material adverse effect on the results of operations and financial condition of that subsidiary.
A downgrade in our holding company debt rating also could adversely impact our cost and flexibility of borrowing which could have an adverse impact on our liquidity,Company's financial condition and results of operations.
Reduction of the statutory surplus of our insurance subsidiaries could adversely affect their ability to write insurance business.
Insurance companies write business based, in part, upon guidelines including capital ratios considered by the NAIC and various rating agencies. Some of these ratios include risk-based capital ratios for both property and casualty insurance companies and life insurance companies, as well as a ratio of premiums to surplus for property and casualty insurance companies. Risk-based capital ratios measure an insurer’s capital adequacy and consider various risks such as underwriting, investment, credit, asset concentration and interest rate. If our insurance subsidiaries cannot maintain profitability in the future or if significant investment valuation losses are incurred, they may be required to draw on their surplus, thereby reducing capital adequacy, in order to pay dividends to us to enable us to meet our financial obligations. As their surplus is reduced by the payment of dividends, continuing losses or both, our insurance subsidiaries’ ability to write business and maintain acceptable financial strength ratings could also be reduced. This could have a material adverse effect upon the business volume and profitability of our insurance subsidiaries.
If we are not able to effectively develop and expand our marketing operations, including agents and other points of distribution, our financial condition and results of operations could be adversely affected.
The Company’s agencies are owned primarily by non-employee, independent contractor, Exclusive Agents and nearly all of these agencies operate under the Agency Business Model — agents in outside offices with licensed producers — which is designed to remove capacity constraints while increasing productivity. The economic viability of each agency is directly dependent of the productivity of the agency and the success at penetrating, serving and cross-selling the Company’s educator market.
Our success in marketing and selling our products is largely dependent upon the efforts of our agent sales force and the success of their agency operations. As we expand our business, we may need to expand the number of agencies marketing our products. If we are unable to appoint additional agents, fail to retain high-producing agents, are unable to maintain the productivity of those agency operations or are unable to maintain market penetration in existing territories, sales of our products likely would decline and our financial condition and results of operations could be adversely affected.
If we are not able to maintain and secure (1) access to educators and (2) endorsements and other relationships with the educational community, our financial condition and results of operations could be adversely affected.
Our ability to successfully increase new business in the educator market is largely dependent on our ability to effectively access educators either in their school buildings or through other approaches. While this is especially true for the sale of 403(b) tax-qualified annuity products via payroll deduction, any significant decrease in access, either through fewer payroll slots, increased security measures, impacts of state or federal level pension reform initiatives, requirements of national and state Do Not Call registries, or for other reasons could adversely affect the sale of all lines of our business and require us to change our traditional approach to worksite marketing and promotion, as well as contact with potential customers. With the current IRS regulations regarding Section 403(b) arrangements, including annuities, our ability to maintain and increase our share of the 403(b) market, and the access it gives us for other product lines, will depend on our ability to successfully compete in this market. Some school districts and benefit consultants have placed an emphasis on the relative financial strength ratings of competing companies, as well as low cost product and distribution approaches, which may put us at a competitive disadvantage relative to other more highly-rated insurance companies.
Our ability to maintain and obtain product and corporate endorsements from, and/or marketing agreements with, local, state and national education-related associations is important to our marketing strategy. In addition to teacher organizations, we have established relationships with various other educator, principal, school administrator and school business official groups. These contacts and endorsements help to establish our brand name and presence in the educational community and to enhance our access to educators.
The Department of Labor (“DOL”) fiduciary rule and the possible adoption by the Securities and Exchange Commission (“SEC”) of a fiduciary standard of care could have a material adverse effect on our business, financial condition and results of operations.
On April 6, 2016, the DOL released a final regulation which more broadly defines the types of activities that will result in a person being deemed a “fiduciary” for purposes of the prohibited transaction rules of the Employee Retirement Income Security Act (“ERISA”) and Internal Revenue Code Section 4975. Section 4975 prohibits certain kinds of compensation with respect to transactions involving assets in certain accounts, including individual retirement accounts (“IRAs”).
The DOL regulation provides that its requirements will generally become applicable on April 10, 2017, with certain requirements becoming applicable on January 1, 2018.
The DOL regulation will affect the ways in which financial services representatives can be compensated for sales to participants in ERISA employer-sponsored qualified plans and sales to IRA customers, and it will impose significant additional legal obligations and disclosure requirements. The DOL regulation could have a material adverse effect on our business and results of operations. While the regulation does not affect non-ERISA employer-sponsored qualified plans, such as public school 403(b) plans, it could have the following impacts, among others:
| ·22 Annual Report on Form 10-K | | It could inhibit our ability to sell and service IRAs, resulting in a change and/or a reduction of the types of products we offer for IRAs, and impact our relationship with current clients. |
| · | | It could require changes in the way that we compensate our agents, thereby impacting our agents’ business model. |
| · | | It could require changes in our distribution model for financial services products and could result in a decrease in the number of our agents. |
| · | | It could increase our costs of doing IRA business and increase our litigation and regulatory risks. |
| · | | It could increase the cost and complexity of regulatory compliance for our Retirement segment’s products, including our recently introduced fixed indexed annuity product. |
At the request of the executive branch, the DOL is evaluating the fiduciary role, and the related prohibited transaction exception. As a result of this review, the implementation of the rule may be delayed. At this point, however, the regulatory landscape is uncertain.
Further, in January 2011, under the authority of the Dodd-Frank Act, the SEC submitted a report to Congress recommending that the SEC adopt a fiduciary standard of conduct for broker-dealers. According to the SEC, notice of proposed rulemaking is anticipated in 2017. This regulatory activity by the SEC also has the potential to adversely impact our business, financial condition and results of operations.
Economic and other factors affecting our niche market could adversely impact our financial condition and results of operations.
Horace Mann's strategic objective is to become the company of choice in meeting the insurance and financial services needs of the educational community. With K-12 teachers, administrators, and support personnel representing a significant percentage of our business, the financial condition and results of operations of our subsidiaries could be more prone than many of our competitors to the effects of economic forces and other issues affecting the educator market including, but not limited to, federal, state and local budget deficits and cut-backs and adverse changes in state and local tax revenues.
While the U.S. financial market and certain sectors of the economy have shown improvement over recent years, federal and state revenue shortages continue to pressure the budgets of many school districts. Teacher layoffs and early retirements have taken place and it is possible that additional reductions could occur. Similar to others in the insurance industry, the Company has experienced periods with pressure on new business sales levels. However, despite the economic headwinds, as of the time of this Annual Report on Form 10-K, the Company’s retention of annuity accumulated values remains strong with continued positive total annuity net fund flows. However, there can be no assurance that these business factors will remain favorable.
| 35 | Horace Mann Educators Corporation |
The personal lines insurance and annuity markets are highly competitive and our financial condition and results of operations may be adversely affected by competitive forces.
We operate in a highly competitive environment and compete with numerous insurance companies, as well as mutual fund families, independent agent companies and financial planners. In some instances and geographic locations, competitors have specifically targeted the educator marketplace with specialized products and programs. We compete in our target market with a number of national providers of personal automobile and homeowners insurance and life insurance and annuities.
The insurance industry consists of a large number of insurance companies, some of which have substantially greater financial resources, more diversified product lines, more sophisticated product pricing, greater economies of scale and/or lower-cost marketing approaches compared to us. In our target market, we believe that the principal competitive factors in the sale of property and casualty insurance products are price, overall service, name recognition and worksite sales and service. We believe that for our market the principal competitive factors in the sale of annuity products and life insurance are worksite sales and service, product features, perceived stability of the insurer, price, overall service and name recognition. And, we believe that the Company’s focus on the educator market niche, as well as the knowledge obtained regarding this niche throughout the Company’s history, contribute to our ability to effectively and profitably serve this market.
Particularly in the property and casualty business, our insurance subsidiaries from time to time, generally on a cyclical basis, experience periods of intense competition during which they may be unable to increase policyholders and revenues without adversely impacting profit margins. During the current cycle, and potentially beyond, competition from direct writers and large, mass market carriers has been particularly aggressive, evidenced in part by their significant national advertising expenditures. In addition, advancements in vehicle technology and safety features, such as accident prevention technologies or the development of autonomous or partially autonomous vehicles — once widely available and utilized, as well as expanded availability of usage-based insurance could materially alter the way that automobile insurance is marketed, priced and underwritten. The inability of our insurance subsidiaries to effectively anticipate the impact of these issues on our business and compete successfully in the property and casualty business could adversely affect the subsidiaries’ financial condition and results of operations and the resulting ability to distribute cash to the holding company.
In our Retirement business, the current IRS Section 403(b) regulations make the 403(b) market similar to the 401(k) market. These regulations have reduced and could continue to reduce the number of competitors in this market as the 403(b) market has become more attractive to some of the larger companies experienced in 401(k) plans, including both insurance and mutual fund companies, that had not previously been active competitors in this business. While not yet widespread, there has been continued pressure in some states to adopt state-sponsored or mandated 403(b) plans with single- or limited-provider options; this pressure has come from competitor lobbying efforts and state legislature-initiated pension reform initiatives. The inability of our insurance subsidiaries to compete successfully in these markets could adversely affect the subsidiaries’ financial condition and results of operations and the resulting ability to distribute cash to the holding company.
A reduction or elimination of the tax advantages of
annuityretirement and life products and/or a change in the tax benefits of various government-authorized retirement programs, such as 403(b)
annuitiesproducts and individual retirement accounts
(“IRAs”)(IRAs), could make
ourthe Company's products less attractive to clients and adversely affect
our operating results.its results of operations.
A significant part of
our Retirementthe Company's retirement business involves fixed and variable 403(b) tax-qualified
annuities,products, which are
annuities purchased voluntarily by individuals employed by public school systems or other tax-exempt organizations.
OurThe Company's financial condition and results of operations could be adversely affected by changes in federal and state laws and regulations that affect the relative tax and other advantages of
ourits life and
annuityretirement products to clients or the tax benefits of programs utilized by
ourits customers. As a result of persisting economic conditions, revenue challenges exist at federal, state and local government levels. These challenges could increase the risk of future adverse impacts on current tax-advantaged products or result in notable reforms to educator pension programs.
See also “Item 1. Business —Also, see Part I - Item 1, Regulation
— Regulation at Federal Level”.of this report.
Current federal income tax laws generally permit the tax-deferred accumulation of earnings on the premiums paid by the holders of retirement and life insurance products. Taxes, if any, are generally payable on income attributable to a distribution under the contract for the year in which the distribution is made. From time to time, Congress has considered legislation that would reduce or eliminate the benefit of such deferral of taxation on the accretion of value within life insurance and non-qualified annuity contracts. Enactment of this legislation, or other tax reform efforts, including a simplified
“flat tax”"flat tax" income structure with an exemption from taxation for investment income, could result in fewer sales of
our life insurance and
annuityretirement products.
Strategic Risks and Operational Risks
The
insurance industry is highly regulated.We are subjectintegration of 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 extensive regulation and supervisiondiffer from its expectations or the expectations of the investor community. Potential difficulties that may be encountered in the jurisdictions in which we do business. Each jurisdiction has a unique and complex set of laws and regulations. Furthermore, certain federal laws impose additional requirements on businesses, including insurers. Regulation generally is designed to protect the interests of policyholders, as opposed to stockholders and non-policyholder creditors. Such regulations,integration process include, among other things, impose restrictionsfactors:
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; and,
the disruption of, or the loss of momentum in, each company's ongoing business.
Lack of successful execution on acquisition strategies could result in impairment of goodwill and intangible assets that could adversely affect the results of operations.
The Company accounted for the NTA and BCG acquisitions using the acquisition method of accounting, which requires that the assets acquired and liabilities assumed be recognized on the amountCompany's consolidated balance sheet at their respective fair values as of the acquisition date, including recognition of intangible assets. Any excess of the purchase consideration over the fair value of the acquired net tangible and typeintangible assets is recognized as goodwill.
As of investments our subsidiariesDecember 31, 2019, the Company's consolidated balance sheet reflected goodwill of $29.7 million and intangible assets of $177.2 million recognized in connection with the NTA and BCG acquisitions (see Part II - Item 8, Note 7 of the Consolidated Financial Statements for more information). 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 hold. Certain states also regulate the rates insurers may charge for certain property and casualty products. Legislation and voter initiatives have expanded, in some instances, the states’ regulation of rates and have increased data reporting requirements. Consumer-related pressuresbe required to roll back rates, even if not enacted by legislation or upheld upon judicial appeal, may affect our abilityrecognize material non-cash charges relating to obtain timely rate increases or operate at desired levels of profitability. Changes in insurance regulations, including those affecting the ability of our insurance subsidiaries to distribute cash to us and those affecting the ability of our insurance subsidiaries to write profitable property and casualty insurance policies in one or more states, maysuch impairment, which could adversely affect its results of operations.
The personal lines insurance and retirement markets are highly competitive and the Company's financial condition and results of operations of our insurance subsidiaries. In addition, consumer privacy requirements may increase our cost of processing business. Our ability to comply with laws and regulations, at a reasonable cost, and to obtain necessary regulatory actionbe adversely affected by competitive forces.
The Company operates in a
timely manner, ishighly competitive environment and
will continue to be critical to our success.Regulation that could adversely affect ourcompetes with numerous insurance subsidiaries also includes statutory surplus and risk-based capital requirements. Maintaining appropriate levels of surplus,companies, as measured by statutory accounting principles, is considered important by state insurance regulatory authorities and the private agencies that rate insurers’ claims-paying abilitieswell as mutual fund families, independent agent companies and financial strength. The failure of an insurance subsidiary to maintain levels of statutory surplus
planners. In some instances and
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| 37 | |
| Horace Mann Educators Corporation | | Annual Report on Form 10-K 23 |
geographic locations, competitors have specifically targeted the educator marketplace with specialized products and programs. The Company competes in its target market with a number of national providers of personal automobile and property insurance and life insurance and retirement products.
The insurance industry consists of a large number of insurance companies, some of which have substantially greater financial resources, more diversified product lines, more sophisticated product pricing, greater economies of scale and/or lower-cost marketing approaches compared to the Company. In the Company's target market, it believes that
are sufficient for the
amount of its insurance written could resultprincipal competitive factors in
increased regulatory scrutiny, action by state regulatory authorities or a downgrade by rating agencies.Similarly, the NAIC has adopted a system of assessing minimum capital adequacy that is applicable to our insurance subsidiaries. This system, known as risk-based capital, is used to identify companies that may merit further regulatory action by analyzing the adequacy of the insurer’s surplus in relation to statutory requirements.
Because state legislatures remain concerned about the availability and affordabilitysale of property and casualty insurance products and supplemental insurance products are overall service, worksite sales and service, price, and name recognition. The Company believes that for its market, the protectionprincipal competitive factors in the sale of policyholders, ourretirement products and life insurance subsidiaries expect that they will continue to face efforts by those legislatures to expand regulations to address these concerns. Resulting new legislation could adversely affect the financial conditionare worksite sales and results of operations of our insurance subsidiaries.
In the event of the insolvency, liquidation or other reorganization of any of our insurance subsidiaries, our creditors and stockholders would have no right to proceed against any such insurance subsidiary or to cause the liquidation or bankruptcy of any such insurance subsidiary under federal or state bankruptcy laws. The insurance laws of the domiciliary state would govern such proceedings and the relevant insurance commissioner would act as liquidator or rehabilitator for the insurance subsidiary. Creditors and policyholders of any such insurance subsidiary would be entitled to payment in full from the assets of the insurance subsidiary before we, as a stockholder, would be entitled to receive any distribution.
The financial position of our insurance subsidiaries also may be affected by court decisions that expand insurance coverage beyond the intentionservice, product features, perceived stability of the insurer, at the time it originally issued an insurance policy.
Dodd-Frank created the Federal Insurance Office (“FIO”) within the U.S. Department of the Treasury. The FIO studies the current insurance regulatory systemprice, overall service and is charged with monitoring and providing specific reports on various aspects of the insurance industry. However, the FIO does not have general supervisory or regulatory authority over the business of insurance. The FIO has suggested an expanded federal role in some circumstances. Management will continue to monitor developments under Dodd-Frank, as various aspects of it continue to be addressed by governmental bodies. Additional regulations could adversely affect the efficiency and effectiveness of business processes, financial condition and results of operations of the Company, insurers of similar size and/or the insurance industry as a whole.
The insurance industry is highly cyclical.
The results of companiesname recognition.
Particularly in the
Property and Casualty business, the Company's insurance
industry historically have been subject to significant fluctuations due to competition, economic conditions, interest rates and other factors. In particular, companies in the property and casualty insurance segment of the industry historicallysubsidiaries have experienced pricing and profitability cycles.
During these periods of intense competition, they may be unable to increase policyholders and revenues without adversely impacting profit margins. With respect to these cycles, the factors having the greatest impact include significant and/or rapid changes in loss costs, including changes in loss frequency and/or severity; prior approval and restrictions in certain states for price increases; intense price competition; less restrictive underwriting standards; aggressive marketing; and increased advertising, which have resulted in higher industry-wide combined loss and expense ratios.
During the current cycle, and potentially beyond, competition from direct writers and large, mass market carriers has been particularly aggressive, evidenced in part by their significant national advertising expenditures. In addition, advancements in vehicle technology and safety features, such as accident prevention technologies or the development of autonomous or partially autonomous vehicles — once widely available and utilized, as well as expanded availability of usage-based insurance, could materially alter the way that automobile insurance is marketed, priced and underwritten. The inability of the Company's insurance subsidiaries to effectively anticipate the impact of these issues on its business and compete successfully in the property and casualty business could adversely affect the subsidiaries' financial condition and results of operations and the resulting ability to distribute cash to HMEC. In the Retirement business, the current IRS Section 403(b) regulations have made the 403(b) market similar to the 401(k) market. These regulations have reduced and could continue to reduce the number of competitors in this market as the 403(b) market has become more attractive to some of the larger companies experienced in 401(k) plans, including both insurance and mutual fund companies, that had not previously been active competitors in this business. While not yet widespread, there has been continued pressure in some states to adopt state-sponsored or mandated 403(b) plans with single-provider or limited-provider options; this pressure has come from competitor lobbying efforts and state legislature pension reform initiatives. The inability of the Company's insurance subsidiaries to compete successfully in these markets could adversely affect the subsidiaries' financial condition and results of operations and the resulting ability to distribute cash to HMEC.
If the Company is not able to effectively develop and expand its marketing operations, including agents and other points of distribution, its financial condition and results of operations could be adversely affected.
The Company's agencies are owned primarily by non-employee, independent contractor Exclusive Distributors with most agencies operating in outside offices with licensed producers. The economic viability of each agency is directly dependent on the productivity of the agency and the success at penetrating, serving and cross-selling the Company's educator market.
The Company's success in marketing and selling its products is largely dependent upon the efforts of its agent sales force and the success of their agency operations. As the Company expands its business, it may need to expand the number of agencies marketing its products. If the Company is unable to appoint additional agents, fails to retain high-producing agents, is unable to maintain the productivity of those agency operations or is unable to maintain market penetration in existing territories, sales of the Company's products could likely decline and the Company's financial condition and results of operations could be adversely affected.
If the Company is not able to maintain secure access to educators, its financial condition and results of operations could be adversely affected.
The Company's ability to successfully increase new business in the educator market is largely dependent on its ability to effectively access educators either in their school buildings or through other approaches. While this is
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| 24 Annual Report on Form 10-K | | Horace Mann Educators Corporation |
Cybersecurity Requirements
especially true for
Financial Services Companies at State LevelIndividualthe sale of 403(b) tax-qualified retirement products via payroll deduction, any significant decrease in access, either through fewer payroll slots, increased security measures, impacts of state regulationor federal level pension reform initiatives, requirements of Cybersecurity programs are being adopted on anational and state by state basisDo Not Call registries, or for other reasons, could adversely affect the sale of all lines of business and require the Company to ensurechange its traditional approach to worksite marketing and promotion, as well as contact with potential customers. With the safetycurrent IRS regulations regarding Section 403(b) arrangements, including retirement products, the Company's ability to maintain and soundnessincrease its share of the institution403(b) market, and protectthe access it gives for other product lines, will depend on its customers.ability to successfully compete in this market. Some school districts and benefit consultants have placed emphasis on the relative financial strength ratings of competing companies, as well as low cost product and distribution approaches, which may put the Company at a competitive disadvantage relative to other more highly-rated insurance companies.
The Company's ability to maintain and obtain product and corporate endorsements from, and/or marketing agreements with, local, state and national education-related associations is important to its marketing strategy. In addition to teacher organizations, the Company has established relationships with various other educator, principal, school administrator and school business official groups. These contacts and endorsements help to establish the Company's brand name and presence in the educational community and to enhance access to educators.
Economic and other factors affecting the Company's niche market could adversely impact its financial condition and results of operations.
The Company's strategic objective is to become the company of choice in meeting the insurance and financial services needs of the educational community. With K-12 teachers, administrators, and support personnel representing the majority of its business, the financial condition and results of operations of the Company's subsidiaries could be more prone than many of its competitors to the effects of economic forces and other issues affecting the educator market including, but not limited to, federal, state and local budget deficits and cut-backs and adverse changes in state and local tax revenues.
While the U.S. financial markets and certain sectors of the economy have shown improvement over recent years, federal and state revenue shortages continue to pressure the budgets of many school districts. Teacher layoffs and early retirements have taken place and it is possible that additional reductions could occur. Similar to others in the insurance industry, the Company has experienced periods with pressure on new business sales levels.
Individual states may impose additional cybersecurity regulations, increasing the complexity of compliance.
In the absence of overarching federal law, individual states are adopting their own privacy and cybersecurity laws and regulations. Indeed, most states have passed some form of privacy and/or cybersecurity laws or regulations, including New York, South Carolina, and California. For example, the New York State Department of Financial Services adopted a regulation providing minimum standards for an organization’s Cybersecurityorganization's cybersecurity program and requiring an annual certification confirming compliance. AdditionalAlso, in May 2018, South Carolina passed a cybersecurity bill requiring, among other things, any insurance entity operating in the state to establish and implement a cybersecurity program protecting their business and their customers from a data breach, to investigate data breaches and notify regulators of a cybersecurity event. In July 2018, California passed a broad-based privacy law which provides consumers with the following new rights: (1) the right to request information about personal information a company has collected about them; (2) the right to require deletion of their personal information; (3) the right to request disclosures of information about how their personal information is collected and shared; and (4) the right to instruct a company not to share their personal information. In the absence of overarching federal laws and regulations on data privacy and cybersecurity, it is anticipated that individual states will enact new or amended state laws and regulations governing data privacy and cybersecurity which could increase the Company's expenses for compliance.
Data security breaches or denial of service on the Company's websites could have an adverse impact on its business and reputation.
Unauthorized access to and unintentional dissemination of the Company's confidential, highly-sensitive customer, employee or Company data or other breaches of data security in the Company's facilities, networks or databases, or those of its agents or third-party vendors - including information technology and software vendors, could result in loss or theft of assets or sensitive information, data corruption or operational disruption that may
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| Horace Mann Educators Corporation | | Annual Report on Form 10-K 25 |
expose the Company to liability and/or regulatory action and may have an adverse impact on the Company’s customers, employees, investors, reputation and business. In addition, any compromise of the security of Company data or prolonged denial of service on the Company's websites could harm its business and reputation. Additionally, the Company recognizes the increased external threats of data breaches in the marketplace resulting in non-public data of customers becoming increasingly available in the public domain. The Company has industry-compliant procedures for protection of confidential information and sensitive corporate data, including response procedures to help contain or prevent data loss if a breach were to occur and the evaluation of its customer identification authentication programs. The Company has also implemented multiple technical security protections and contractual obligations regarding security breaches for its agents and third-party vendors. Even with these efforts, there can be no assurance that security breaches or service disruptions will be prevented.
Successful execution of the Company's business growth strategy is dependent on effective implementation of new or enhanced technology systems and applications.
The Company's ability to effectively execute its business growth strategy and leverage potential economies of scale is dependent on its ability to provide the requisite technology components for that strategy. While the Company has effectively upgraded its infrastructure technologies with improvements in its data center, a new communications platform and enhancements to its disaster recovery capabilities, its ability to replace or supplement dated, monolithic legacy business systems — such as the Company's Life, Retirement and Property and Casualty policy administrative systems — with more flexible, maintainable, and customer accessible solutions will be necessary to achieve its plans. The inherent difficulty in replacing and/or modernizing these older technologies, coupled with the Company's limited experience in these endeavors, presents an increased risk to delivering these technology solutions in a cost effective and timely manner. The Company's scale will require it to develop innovative solutions to address these challenges, including consideration of "software as a service" arrangements and other third-party based information technology capabilities. More modern approaches to software development and utilization of third-party vendors can augment the Company's internal capacity for these implementations, but may not adequately reduce the operational risks of timely and cost effective delivery.
Loss of key vendor relationships could affect the Company's operations.
The Company increasingly relies on services and products provided by a number of vendors in the U.S. and abroad. These include, for example, vendors of computer hardware and software, including on-demand software, and vendors of services such as investment management advisement, information technology services — such as those associated with the Life, Retirement and Property and Casualty policy administrative systems — and delivery services for customer policy-level communications. In the event that one or more of the Company's vendors suffers a bankruptcy or otherwise becomes unable to continue to provide products or services, the Company may suffer operational difficulties and financial losses.
Financial Strength, Credit and Counterparty Risks
Losses due to defaults by others could reduce the Company's profitability or negatively affect the value of its investments.
Third-party debtors may not pay or perform their obligations. These parties may include the issuers whose securities the Company holds, customers, reinsurers, borrowers under mortgage loans, trading counterparties, derivative counterparties, clearing agents, exchanges, clearing houses and other financial intermediaries. These parties may default on their obligations to the Company due to bankruptcy, lack of liquidity, downturns in the economy or real estate values, operational failure or other reasons.
During or following an economic downturn, the Company's municipal bond portfolio could be subject to a higher risk of default or impairment due to declining municipal tax bases and revenue. States are currently barred from seeking protection in federal bankruptcy court. However, federal legislation could possibly be enacted to allow states to declare bankruptcy in connection with deficit reductions or mounting unfunded pension liabilities, which could adversely impact the value of the Company's investment portfolio.
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| 26 Annual Report on Form 10-K | | Horace Mann Educators Corporation |
The default of a major market participant could disrupt the securities markets or clearance and settlement systems in the U.S. or abroad. A failure of a major market participant could cause some clearance and settlement systems to assess members of that system, including the Company's broker-dealer and Registered Investment Adviser regulatory entities, or could lead to a chain of defaults that could adversely affect the Company. A default of a major market participant could disrupt various markets, which could in turn cause market declines or volatility and negatively impact the Company's financial condition and results of operations.
Uncollectible reinsurance, as well as reinsurance availability and pricing, can have a material adverse effect upon the Company's business volume and profitability.
Reinsurance is a contract by which one insurer, called a reinsurer, agrees to cover a portion of the losses incurred by a second insurer in the event a claim is made under a policy issued by the second insurer. Although a reinsurer is liable to the Company's insurance subsidiaries according to the terms of its reinsurance policy, the insurance subsidiaries remain primarily liable as the direct insurers on all risks reinsured. As a result, reinsurance does not eliminate the obligation of the insurance subsidiaries to pay all claims, and each insurance subsidiary is subject to the risk that one or more of its reinsurers will be unable or unwilling to honor its obligations.
Although the Company limits participation in its reinsurance programs to reinsurers with high financial strength ratings and also limits the amount of coverage from each reinsurer, the Company's insurance subsidiaries cannot guarantee that their reinsurers will pay in a timely fashion, if at all. Reinsurers may become financially unsound by the time that they are called upon to pay amounts due, which may not occur for many years.
Additionally, the availability and cost of reinsurance are subject to prevailing market conditions beyond the Company's control. For example, significant losses from hurricanes or terrorist attacks, an increase in capital requirements, or a future lapse of the provisions of the Terrorism Risk Insurance Act could have a significant adverse impact on the reinsurance market.
If one of the Company's insurance subsidiaries is unable to obtain adequate reinsurance at reasonable rates, that insurance subsidiary would have to increase its risk exposure and/or reduce the level of its underwriting commitments, which could have a material adverse effect upon the business volume and profitability of the subsidiary. Alternately, the insurance subsidiary could elect to pay the higher than reasonable rates for reinsurance coverage, which could have a material adverse effect upon its profitability until policy premium rates could be raised, in some cases subject to approval by state regulators, to incorporate this additional cost.
The Company is subject to the credit risk of its counterparties, including reinsurers who reinsure business from the Company's insurance companies.
The Company's insurance subsidiaries may cede certain risks to third-party insurance companies through reinsurance. HMLIC entered into a reinsurance agreement with RGA to effectuate the reinsurance of a block of 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 in its separate accounts. Because the reinsurance agreement covers a large volume of the Company's in force annuity business, the transaction exposes 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 the Company's sole use and benefit. Upon RGA's material breach of the reinsurance agreement, deterioration of its risk-based capital ratio to a certain level, or certain other events, the Company may recapture the reinsured business. However, in the event of RGA's insolvency, the Company'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, the Company's claims to the extent not covered by the assets in the trust would be those of a general creditor.
Any downgrade in or adverse change in outlook for the Company's claims-paying ratings, financial strength ratings or credit ratings could adversely affect its financial condition and results of operations.
Claims-paying ratings and financial strength ratings have become an increasingly important factor in establishing the competitive position of insurance companies. In the evolving 403(b) retirement market, school districts and benefit consultants have placed an emphasis on the relative financial strength ratings of competing companies. Each rating agency reviews its ratings periodically and from time to time may modify its rating criteria including, among other factors, its expectations regarding capital adequacy, profitability and revenue growth. A downgrade
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| Horace Mann Educators Corporation | | Annual Report on Form 10-K 27 |
in the ratings or adverse change in the ratings outlook of any of the Company's insurance subsidiaries by a major rating agency could result in substantial loss of business for that subsidiary if school districts, policyholders or independent agents move their business to other companies having higher claims-paying ratings and financial strength ratings than the Company has. This loss of business could have a material adverse effect on the results of operations and financial condition of that subsidiary.
A downgrade of the Company's debt rating also could adversely impact its cost and flexibility of borrowing, which could have an adverse impact on its liquidity, financial condition and results of operations.
Reduction of the statutory surplus of the Company's insurance subsidiaries could adversely affect their ability to write insurance business.
Insurance companies write business based, in part, upon guidelines including capital ratios considered by the NAIC and various rating agencies. Some of these ratios include risk-based capital ratios for property and casualty insurance companies, supplemental insurance companies and life insurance companies, as well as a ratio of premiums to surplus for property and casualty insurance companies. Risk-based capital ratios measure an insurer's capital adequacy and consider various risks such as underwriting, investment, credit, asset concentration and interest rate. If the Company's insurance subsidiaries cannot maintain profitability in the future or if significant investment valuation losses are incurred, they may be required to draw on their surplus, thereby reducing capital adequacy, in order to pay dividends to the Company to enable it to meet its financial obligations. As their surplus is reduced by the payment of dividends, continuing losses or both, the Company's insurance subsidiaries' ability to write business and maintain acceptable financial strength ratings could also be reduced. This could have a material adverse effect upon the business volume and profitability of the insurance subsidiaries.
An inability to access Federal Home Loan Bank (FHLB) funding could adversely affect the Company's results of operations.
Any changes in requirements to retain membership in the FHLB, or changes in regulation, could impact the Company's eligibility for continued FHLB membership or its FHLB funding capacity. Any event that adversely affects amounts received from FHLB could have an adverse effect on the Company's results of operations. See Part II - Item 7, Financing Activities for more information about FHLB activities.
Regulatory and Legal Risks
The insurance industry is highly regulated.
The Company is subject to extensive regulation and supervision in the jurisdictions in which it does business. Each jurisdiction has a unique and complex set of laws and regulations. Furthermore, certain federal laws impose additional requirements on businesses, including insurers. Regulation generally is designed to protect the interests of policyholders, as opposed to stockholders and non-policyholder creditors. Such regulations, among other things, impose restrictions on the amount and type of investments the Company's subsidiaries may hold. Certain states also regulate the rates insurers may charge for certain property and casualty products. Legislation and voter initiatives have expanded, in some instances, the states' regulation of rates and have increased data reporting requirements. Consumer-related pressures to roll back rates, even if not enacted by legislation or upheld upon judicial appeal, may affect the Company's ability to obtain timely rate increases or operate at desired levels of profitability. Changes in insurance regulations, including those affecting the ability of the Company's insurance subsidiaries to distribute cash to HMEC and those affecting the ability of its insurance subsidiaries to write profitable property and casualty insurance policies in one or more states, may establish Cybersecurityadversely affect the financial condition and results of operations of the insurance subsidiaries. In addition, consumer privacy requirements may increase the Company's cost of processing business. The Company's ability to comply with laws and regulations, at a reasonable cost, and to obtain necessary regulatory action in a timely manner, is and will continue to be critical to its success.
Regulation that could adversely affect the Company's insurance subsidiaries also includes statutory surplus and risk-based capital requirements. Maintaining appropriate levels of surplus, as measured by statutory accounting principles, is considered important by state insurance regulatory authorities and the private agencies that rate insurers' claims-paying abilities and financial strength. The failure of an insurance subsidiary to maintain levels of statutory surplus that are sufficient for the amount of its insurance written could result in increased regulatory scrutiny, action by state regulatory authorities or a downgrade by rating agencies.
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| 28 Annual Report on Form 10-K | | Horace Mann Educators Corporation |
Similarly, the NAIC has adopted a system of assessing minimum capital adequacy that is applicable to the Company's insurance subsidiaries. This system, known as risk-based capital, is used to identify companies that may merit further regulatory action by analyzing the adequacy of the insurer's surplus in relation to statutory requirements.
Because state legislatures remain concerned about the availability and affordability of property and casualty insurance and the protection of policyholders, the Company's insurance subsidiaries expect that they will continue to face efforts by those legislatures to expand regulations to address these concerns. Resulting new legislation could adversely affect the financial condition and results of operations of the insurance subsidiaries.
In the event of insolvency, liquidation or other reorganization of any of the Company's insurance subsidiaries, its creditors and stockholders would have no right to proceed against any such insurance subsidiary or cause the liquidation or bankruptcy of any such insurance subsidiary under federal or state bankruptcy laws. The insurance laws of the domiciliary state would govern such proceedings and the relevant insurance commissioner would act as liquidator or rehabilitator for the insurance subsidiary. Creditors and policyholders of any such insurance subsidiary would be entitled to full payment from the assets of the insurance subsidiary before the Company, as a stockholder, would be entitled to receive any distribution.
The financial position of the Company's insurance subsidiaries also may be affected by court decisions that expand insurance coverage beyond the intention of the insurer at the time it originally issued an insurance policy.
Dodd-Frank created FIO within the U.S. Department of the Treasury. FIO studies the current insurance regulatory system and is charged with varyingmonitoring and providing specific reports on various aspects of the insurance industry. However, FIO does not have general supervisory or regulatory authority over the business of insurance. FIO has suggested an expanded federal role in some circumstances. Additional regulations could adversely affect the efficiency and effectiveness of business processes, financial condition and results of operations of the Company, insurers of similar size and/or the insurance industry as a whole.
Regulatory initiatives, including the enactment of Dodd-Frank, could adversely impact liquidity and volatility of financial markets in which the Company participates.
In response to the credit and financial crisis, U.S. and overseas governmental and regulatory authorities are considering or implementing enhanced or new regulatory requirements intended to prevent future crises or stabilize the institutions under their supervision. Such measures are leading to stricter regulation of financial institutions. Changes from Dodd-Frank and other U.S. and overseas governmental initiatives have created uncertainty and could continue to adversely impact liquidity and increase volatility of the financial markets in which the Company participates and, in turn, negatively affect its financial condition or results of operations. The executive branch has requested a review of financial regulations including Dodd-Frank, which may eliminate or mitigate this risk.
Adopted and proposed regulatory and legislative actions, including standards of conduct adopted by the SEC, could make it more difficult for the Company to sell securities products and other investment vehicles, adversely impacting its financial condition and results of operations.
In 2018, the U.S. Court of Appeals for the 5th Circuit vacated the U.S. Department of Labor’s regulations defining who would be a “fiduciary” of an employee benefit plan under the Employee Retirement Income Security Act (ERISA) as a result of giving investment advice (Fiduciary Rule), as well as the accompanying prohibited transaction exemptions, including the Best Interest Contract Exemption. Recently, the Department of Labor announced its intention to propose a revised fiduciary regulation, but it is unclear when that will occur or what form the regulations may take.
In June 2019, the SEC adopted rules and interpretations addressing the standards of conduct applicable to broker-dealers and investment advisers and their associated persons, including Regulation Best Interest that may affect securities sales practices. As a result of the new rules, beginning June 30, 2020, broker-dealers recommending securities products to retail customers will be required to comply with a “best interest” standard. In the June 2019 action, the SEC did not define a “best interest” standard but confirmed the standard is greater than the current suitability standard but would not rise to the level of “fiduciary.” The new rules also require additional disclosures about standards of conduct and conflicts of interest, including a new standardized client relationship summary disclosure (Form CRS).
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| Horace Mann Educators Corporation | | Annual Report on Form 10-K 29 |
Separately, the NAIC has stated it is close to adopting an amendment to its Suitability in Annuity Transactions Model Regulation to include a “best interest” standard of care. Significant activity at the state legislative level appears to be directed to incorporating "fiduciary" and/or "best interest" standards of conduct for financial intermediaries into state-level oversight of securities.
Finally, the SEC and a number of state insurance departments have begun investigations into sales and disclosure practices and distribution of retirement products to teachers, including 403(b) and 457(b) annuity products sold to teachers. A significant part of the Company's retirement business involves fixed and variable 403(b) tax qualified annuity products, which are purchased voluntarily by individuals employed by public school systems or other tax-exempt organizations. The Company's financial condition and results of operations could be adversely affected by recently adopted or pending changes in federal and state laws and regulations that affect the manner in which these products are sold to educators.
Individually and collectively, these federal and state regulatory and legislative activities have the potential to increase the Company's regulatory and compliance
requirements.
burden, as well as constrain its sales practices. Additionally, the activities could limit the type, amount or structure of compensation arrangements into which the Company may enter, which could negatively impact its ability to compete with other companies to recruit and retain key personnel. Such changes could adversely impact the Company's business, financial condition and results of operations.
Litigation may harm
ourthe Company's financial strength or reduce
ourits profitability.
Companies in the insurance industry have been subject to substantial litigation resulting from claims, disputes and other matters. Most recently, they have faced expensive claims, including class action lawsuits, alleging, among other things, improper sales practices and improper claims settlement procedures. Negotiated settlements of certain such actions have had a material adverse effect on many insurance companies. The resolution of similar future claims against any of
ourthe Company's insurance subsidiaries, including the potential adverse effect on
ourits reputation and charges against the earnings of
ourits insurance subsidiaries as a result of legal defense costs, a settlement agreement or an adverse finding or findings against
ourits insurance subsidiaries in such a claim, could have a material adverse effect on the financial condition and results of operations of
ourthe insurance subsidiaries.
Data
Events, including those external to the Company's operations, could damage the Company's reputation.
There are many events which may harm the Company’s reputation, including, but not limited to, those discussed in this Item 1A regarding regulatory investigations, legal proceedings, and cyber or other information security breachesincidents. Any negative public perception, founded or denialotherwise, can be widely and rapidly shared over social media or other means, and could cause damage to the Company’s reputation. Damage to the Company’s reputation could reduce demand for its insurance products, reduce its ability to recruit and retain employees, or lead to greater regulatory scrutiny of service on our websites could haveits operations
As an
adverse impact oninsurance company, the Company is paid to accept certain risks. Those who conduct the Company’s business,
including executive officers and
reputation.Unauthorized access tomembers of management, employees and unintentional dissemination of our confidential, highly-sensitive customer, employee or Company data or other breaches of data securityindependent agents, do so in our facilities, networks or databases, or those of our agents or third-party vendors — including information technology and software vendors, could result in loss or theft of assets or sensitive information, data corruption or operational disruptionpart by making decisions that may exposeinvolve exposing the Company to liabilityrisk. These include decisions such as maintaining effective underwriting and pricing discipline, maintaining effective claim management and customer service performance, managing the Company’s investment portfolio, delivering effective technology solutions, complying with established sales practices, executing the Company’s capital management strategy, exiting a line of business and/or regulatory actionpursuing strategic growth initiatives, and may have an adverse impact onother decisions. Although the Company’s customers, employees, investors, reputationCompany employs controls and business. In addition, any compromise ofprocedures designed to monitor business decisions and prevent the security of our dataCompany from taking excessive risks or prolonged denial of service on our websites could harm the Company’s businessunintentionally failing to comply with internal policies and reputation. We have designed, implemented and routinely test industry-compliant procedures for protection of confidential information and sensitive corporate data, including rapid response procedures to help contain or prevent data loss if a breach were to occur. We have also implemented multiple technical security protections and contractual obligations regarding security breaches for our agents and third-party vendors. Even with these efforts,practices, there can be no assurance that security breaches or service disruptionsthese controls and procedures will be prevented.
effective. If the Company’s employees and independent agents take excessive risks and/or fail to comply with internal policies and practices, the impact of those events may damage the Company’s market position and reputation.
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| 30 Annual Report on Form 10-K | | Horace Mann Educators Corporation |
Successful execution of our business growthstrategy is dependent on effective implementation of new or enhanced technology systems and applications.
Our ability to effectively execute our business growth strategy and leverage potential economies of scale is dependent on our ability to provide the requisite technology components for that strategy. While we have effectively upgraded our infrastructure technologies with improvements in our data center, a new communications platform and enhancements to our disaster recovery capabilities, our ability to replace or supplement dated, monolithic legacy business systems — such as our life, annuity and property and casualty policy administrative systems — with more flexible, maintainable, and customer accessible solutions will be necessary to achieve our plans. The inherent difficulty in replacing and/or modernizing these older technologies, coupled with the Company’s limited experience in these endeavors, presents an increased risk to delivering these technology solutions in a cost effective and timely manner. Our scale will require us to develop innovative solutions to address these challenges, including consideration of “software as a service” arrangements and other third-party based information technology capabilities. More modern approaches to software development and utilization of third-party vendors can augment the Company’s internal capacity for these implementations, but may not adequately reduce the operational risks of timely and cost effective delivery.
Loss of key vendor relationships could affect our operations.
We increasing rely on services and products provided by a number of vendors in the United States and abroad. These include, for example, vendors of computer hardware and software, including on-demand software, and vendors of services such as investment management advisement, information technology services — such as those associated with our life, annuity and property and casualty policy administrative systems — and delivery services for customer policy-level communications. In the event that one or more of our vendors suffers a bankruptcy or otherwise becomes unable to continue to provide products or services, we may suffer operational difficulties and financial losses.
ITEM 1B.I Unresolved Staff Comments ITEM 2. IPropertiesHMEC's home office property
As of December 31, 2019, the Company owned its headquarters of approximately 225,000 square feet located at 1 Horace Mann Plaza in Springfield,
Illinois, consisting of an office building totaling 225,000 square feet, is owned by the Company.Illinois. Also in Springfield, the Company owns and leases some smaller buildings at other locations. In addition, the Company leases office space in suburban
Chicago, Illinois, suburban Dallas, Texas
and(approximately 114,000 of rentable square feet), suburban Raleigh, North Carolina,
for its claims operations and
leases some office space related to its field marketing operations. These properties,Cherry Hill, New Jersey which are utilized by
one or more of all
offive reporting segments, depending on the
Company’s businesslocation. For more information on reporting segments,
see Part I - Item 1, Reporting Segments. The Company believes its properties and facilities are
suitable and adequate
and suitable for
the Company's current
and anticipated future needs.operations.
ITEM 3. ILegal Proceedings At the time
of issuance of this Annual Report on Form 10-K, the Company does not have pending litigation from which there is a reasonable possibility of material loss.
ITEM 4.I Mine Safety Disclosures
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| Horace Mann Educators Corporation | | Annual Report on Form 10-K 31 |
ITEM 5. I Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Market Information and Dividends
HMEC's common stock is traded on the NYSE under the symbol of HMN. The following table provides the high and low closing prices of the common stock on the NYSE Composite Tape and the cash dividends paid per share of common stock during the periods indicated.
| | | | Market Price | | | Dividend |
| Fiscal Period | | | High | | | | Low | | | Paid |
| 2016: | | | | | | | | | | | | |
| Fourth Quarter | | $ | 43.30 | | | $ | 33.30 | | | $ | 0.265 | |
| Third Quarter | | | 37.36 | | | | 33.40 | | | | 0.265 | |
| Second Quarter | | | 34.51 | | | | 30.36 | | | | 0.265 | |
| First Quarter | | | 32.30 | | | | 27.59 | | | | 0.265 | |
| 2015: | | | | | | | | | | | | |
| Fourth Quarter | | $ | 36.42 | | | $ | 32.42 | | | $ | 0.250 | |
| Third Quarter | | | 37.74 | | | | 31.84 | | | | 0.250 | |
| Second Quarter | | | 37.04 | | | | 33.97 | | | | 0.250 | |
| First Quarter | | | 34.29 | | | | 30.38 | | | | 0.250 | |
|
| | | | | | | | | | | | |
| | | Market Price | | Dividend |
| Fiscal Period | | High | | Low | | Paid |
| 2019: | | | | | | |
| Fourth Quarter | | $ | 45.87 |
| | $ | 42.83 |
| | $ | 0.2875 |
|
| Third Quarter | | 47.68 |
| | 40.87 |
| | 0.2875 |
|
| Second Quarter | | 41.83 |
| | 35.23 |
| | 0.2875 |
|
| First Quarter | | 42.18 |
| | 34.68 |
| | 0.2875 |
|
| 2018: | | | | | | |
| Fourth Quarter | | $ | 43.60 |
| | $ | 35.81 |
| | $ | 0.2850 |
|
| Third Quarter | | 46.56 |
| | 42.66 |
| | 0.2850 |
|
| Second Quarter | | 45.12 |
| | 40.77 |
| | 0.2850 |
|
| First Quarter | | 43.86 |
| | 37.68 |
| | 0.2850 |
|
The payment of dividends in the future is subject to the discretion of the Board
of Directors of HMEC and will depend upon general business conditions, legal restrictions and other factors the Board
of Directors may deem to be relevant. Additional information is contained in
“Notes toPart I - Item 1, Cash Flow and in Part II - Item 8, Note 14 of the Consolidated Financial Statements
— Note 10 — Statutory Information and Restrictions” listed on page F-1 ofin this
report and in “Item 1. Business — Cash Flow”.report.
|
| 41 | |
| 32 Annual Report on Form 10-K | | Horace Mann Educators Corporation |
Shareholder Return Performance Graph
The graph below
compares cumulativesets forth the total
return* of Horace Mann Educators Corporation’sfive-year shareholder return on HMEC common
stock,stock. The graph assumes a $100 investment at December 31, 2014. The S&P 500 Index and the S&P 500 Insurance Index
and the S&P 500 Index.assume an annual reinvestment of dividends in calculating total return. The
graphCompany assumes
$100 invested on December 31, 2011 in HMEC, the S&P 500 Insurance Index and the S&P 500 Index. 
| | | 12/11 | | 12/12 | | 12/13 | | 12/14 | | 12/15 | | 12/16 |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| HMEC | | $ | 100 | | | $ | 150 | | | $ | 242 | | | $ | 262 | | | $ | 270 | | | $ | 357 | |
| S&P 500 Insurance Index | | | 100 | | | | 119 | | | | 174 | | | | 188 | | | | 193 | | | | 226 | |
| S&P 500 Index | | | 100 | | | | 116 | | | | 153 | | | | 174 | | | | 176 | | | | 197 | |
Comparison of Cumulative Five Year Total Return to Shareholders
| * | The S&P 500 Index and the S&P 500 Insurance Index, as published by S&P, assume an annual reinvestment of dividends in calculating total return. Horace Mann Educators Corporation assumes reinvestment of quarterly dividends when paid. |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Dec. 2014 | | Dec. 2015 | | Dec. 2016 | | Dec. 2017 | | Dec. 2018 | | Dec. 2019 |
| HMEC | | $ | 100 |
| | $ | 103 |
| | $ | 137 |
| | $ | 145 |
| | $ | 126 |
| | $ | 151 |
|
| S&P 500 Insurance Index | | 100 |
| | 102 |
| | 120 |
| | 140 |
| | 124 |
| | 161 |
|
| S&P 500 Index | | 100 |
| | 101 |
| | 113 |
| | 138 |
| | 132 |
| | 174 |
|
Holders and Shares Issued
As of February 15,
2017,2020, the
approximate number of holders of
HMEC’sHMEC's common stock was
12,000.approximately 28,000.
During
2016,2019, stock options were exercised for the issuance of
142,20364,095 shares
0.4%or 0.2% of the
Company’sHMEC's common
stock shares outstanding at December 31,
2015.2018. The Company received
$3.0$1.7 million
as a resultin proceeds from the exercise of
these option exercises, including related federal income tax benefits,stock options which was used for general corporate purposes.
Regarding the equity compensation plan
For information required by Item 201(d) of Regulation S-K
regarding the equity compensation plan, see
“Item 12. Security OwnershipPart III - Item 12, of
Certain Beneficial Owners and Management, and Related Stockholder Matters”.this report.
|
| 42 | |
| Horace Mann Educators Corporation | | Annual Report on Form 10-K 33 |
Issuer Purchases of Equity Securities
On December 7, 2011,September 30, 2015, the Company’s Board of Directors (the “Board”) authorized a share repurchase program allowing repurchases of up to $50.0 million of Horace Mann Educators Corporation’s Common Stock,HMEC's common stock, par value $0.001 (the “2011 Plan”)(Program). On September 30, 2015, the Board authorized an additional share repurchase program allowing repurchases of up to $50.0 million to begin following the completion of the 2011 Plan and utilization of that authorization began in January 2016. Both share repurchase programs authorizeThe Program authorizes the repurchase of common shares in open market or privately negotiated transactions, from time to time, depending on market conditions. The current share repurchase programProgram does not have an expiration date and may be limited or terminated at any time without notice. During the three months ended December 31, 2016, the Company2019, HMEC did not repurchase shares of its common stock under the Program.
For the quarterly periods ended in 2019 and 2018, HMEC
repurchased shares of its common
stock. As of December 31, 2016, $29.5 million remained authorized for future share repurchases.stock under the Program as follows:
|
| | | | | | | | | | | | |
| Period | |
Total Number
of Shares
Purchased | |
Average Price
Paid per Share | | Total Number of
Shares Purchased
under the Program | | Approximate Dollar
Value of Shares
that may yet be
Purchased under the Program |
| Fourth Quarter 2019 | | — |
| | — |
| | — |
| | $22.8 million |
| | | | | | | | | |
| Third Quarter 2019 | | — |
| | — |
| | — |
| | $22.8 million |
| | | | | | | | | |
| Second Quarter 2019 | | — |
| | — |
| | — |
| | $22.8 million |
| | | | | | | | | |
| First Quarter 2019 | | — |
| | — |
| | — |
| | $22.8 million |
| | | | | | | | | |
| Fourth Quarter 2018 | | 126,951 |
| | $ | 39.41 |
| | 126,951 |
| | $22.8 million |
| | | | | | | | | |
| Third Quarter 2018 | | — |
| | — |
| | — |
| | $27.8 million |
| | | | | | | | | |
| Second Quarter 2018 | | 2,000 |
| | 39.72 |
| | 2,000 |
| | $27.8 million |
| | | | | | | | | |
| First Quarter 2018 | | 161 |
| | 37.52 |
| | 161 |
| | $27.8 million |
|
| | |
| 34 Annual Report on Form 10-K | | Horace Mann Educators Corporation |
ITEM 6. I Selected Financial Data The
information required by Item 301following consolidated statement of
Regulation S-K is containedoperations and balance sheet data have been derived from the consolidated financial statements of the Company, which have been prepared in
the tableaccordance with GAAP. The selected financial data should be read in
“Item 1. Business — Selected Historical Consolidated Financial Data”.ITEM 7.conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations
The information required by in Part II - Item 303 of Regulation S-K is listed on page F-17 of this report and the Consolidated Financial Statements of the Company and its subsidiaries presented in Part II - Item 8 of this report.
|
| | | | | | | | | | | | | | | | | | | | |
| ($ in millions, except per share data) | | Year Ended December 31, |
| | | 2019 | | 2018 | | 2017 | | 2016 | | 2015 |
| Consolidated Statement of Operations Data: | | |
| | |
| | |
| | |
| | |
|
| Insurance premiums and contract charges earned | | $ | 898.0 |
| | $ | 817.3 |
| | $ | 794.7 |
| | $ | 759.1 |
| | $ | 731.9 |
|
| Net investment income | | 365.1 |
| | 376.5 |
| | 373.6 |
| | 361.2 |
| | 332.6 |
|
| Net investment gains (losses) | | 153.3 |
| | (12.5 | ) | | (3.4 | ) | | 4.1 |
| | 12.7 |
|
| Other income | | 14.1 |
| | 10.3 |
| | 6.6 |
| | 4.5 |
| | 3.2 |
|
| Total revenues | | 1,430.5 |
| | 1,191.6 |
| | 1,171.5 |
| | 1,128.9 |
| | 1,080.4 |
|
| Interest expense | | 15.6 |
| | 13.0 |
| | 11.9 |
| | 11.8 |
| | 13.1 |
|
| Income before income taxes | | 236.4 |
| | 19.5 |
| | 88.7 |
| | 114.2 |
| | 129.5 |
|
Net income (1) | | 184.4 |
| | 18.3 |
| | 169.4 |
| | 83.8 |
| | 93.5 |
|
| | | | | | | | | | | |
Per Share Data: (2) | | | | | | | | | | |
| Net income per share | | |
| | |
| | |
| | |
| | |
|
| Basic | | $ | 4.42 |
| | $ | 0.44 |
| | $ | 4.10 |
| | $ | 2.04 |
| | $ | 2.23 |
|
| Diluted | | 4.40 |
| | 0.44 |
| | 4.08 |
| | 2.02 |
| | 2.20 |
|
| Shares of Common Stock (in millions) | | |
| | |
| | |
| | |
| | |
|
| Weighted average - basic | | 41.7 |
| | 41.6 |
| | 41.4 |
| | 41.2 |
| | 41.9 |
|
| Weighted average - diluted | | 41.9 |
| | 41.9 |
| | 41.6 |
| | 41.5 |
| | 42.4 |
|
| Ending outstanding | | 41.2 |
| | 41.0 |
| | 40.7 |
| | 40.2 |
| | 40.6 |
|
| Cash dividends per share | | $ | 1.15 |
| | $ | 1.14 |
| | $ | 1.10 |
| | $ | 1.06 |
| | $ | 1.00 |
|
| Book value per share | | 38.01 |
| | 31.50 |
| | 36.88 |
| | 32.15 |
| | 31.18 |
|
| | | | | | | | | | | |
| Balance Sheet Data, at Year End: | | |
| | |
| | |
| | |
| | |
|
| Total investments | | $ | 6,639.2 |
| | $ | 8,250.7 |
| | $ | 8,352.3 |
| | $ | 7,999.3 |
| | $ | 7,648.0 |
|
| Total assets | | 12,478.7 |
| | 11,031.9 |
| | 11,198.3 |
| | 10,576.8 |
| | 10,057.0 |
|
| Total policy liabilities | | 6,956.5 |
| | 6,384.1 |
| | 6,182.0 |
| | 6,024.1 |
| | 5,683.4 |
|
| Short-term debt | | 135.0 |
| | — |
| | — |
| | — |
| | — |
|
| Long-term debt | | 298.0 |
| | 297.7 |
| | 297.5 |
| | 247.2 |
| | 247.0 |
|
| Total shareholders' equity | | 1,567.3 |
| | 1,290.6 |
| | 1,501.6 |
| | 1,294.0 |
| | 1,264.7 |
|
| | | | | | | | | | | |
Segment Information: (3) | | | | | | | | | | |
| Insurance premiums written and contract deposits | | |
| | |
| | |
| | |
| | |
|
| Property and Casualty | | $ | 683.1 |
| | $ | 681.5 |
| | $ | 662.8 |
| | $ | 634.3 |
| | $ | 605.8 |
|
| Supplemental | | 65.7 |
| | — |
| | — |
| | — |
| | — |
|
| Retirement | | 462.5 |
| | 439.1 |
| | 453.1 |
| | 520.2 |
| | 548.0 |
|
| Life | | 113.2 |
| | 114.4 |
| | 111.2 |
| | 108.0 |
| | 102.7 |
|
| Total | | 1,324.5 |
| | 1,235.0 |
| | 1,227.1 |
| | 1,262.5 |
| | 1,256.5 |
|
| Net income (loss) | | |
| | |
| | |
| | |
| | |
|
| Property and Casualty | | $ | 54.3 |
| | $ | (14.3 | ) | | $ | 17.8 |
| | $ | 25.6 |
| | $ | 40.0 |
|
| Supplemental | | 18.0 |
| | — |
| | — |
| | — |
| | — |
|
| Retirement | | (4.8 | ) | | 41.7 |
| | 88.4 |
| | 50.7 |
| | 43.4 |
|
| Life | | 17.6 |
| | 18.8 |
| | 77.6 |
| | 16.6 |
| | 15.0 |
|
Corporate and Other (4) | | 99.3 |
| | (27.9 | ) | | (14.4 | ) | | (9.1 | ) | | (4.9 | ) |
| Total | | 184.4 |
|
| 18.3 |
| | 169.4 |
| | 83.8 |
| | 93.5 |
|
| |
(1) | Net income in 2019 reflects an after tax realized investment gain of $106.9 million associated with an annuity reinsurance transaction. 2018 reflects after tax impacts of $90.1 million from catastrophes. 2017 reflects a one-time income tax benefit of $99.0 million from TCJA. |
| |
(2) | Basic earnings per share is computed based on the weighted average number of shares outstanding plus the weighted average number of fully vested restricted common stock units and common stock units payable as shares of HMEC common stock. Diluted earnings per share is computed based on the weighted average number of shares and common stock equivalents outstanding, to the extent dilutive. The Company's common stock equivalents relate to outstanding common stock options, common stock units (related to deferred compensation for Directors and employees) and restricted common stock units. |
| |
(3) | Information regarding assets by segment at December 31, 2019, 2018 and 2017 is contained in Part II - Item 8, Note 18 of the Consolidated Financial Statements in this report. |
| |
(4) | The Corporate and Other segment primarily includes interest expense on debt, the impact of net investment gains (losses), corporate debt retirement costs, and certain public company expenses. |
|
| | |
| Horace Mann Educators Corporation | | Annual Report on Form 10-K 35 |
ITEM 7A. Quantitative and Qualitative Disclosures About Market RiskThe information required by Item 305 of Regulation S-K is contained under the heading “Market Value Risk” in “Management’s7.
I Management's Discussion and Analysis of Financial Condition and Results of Operations” listedOperations (MD&A) ($ in millions, except per share data)
Measures within this MD&A that are not based on
page F-1accounting principles generally accepted in the U.S. (non-GAAP) are marked with an asterisk (*) the first time they are presented within Part II - Item 7 of this report.
ITEM 8. Consolidated Financial Statements and Supplementary Data
The Company's consolidated financial statements, financial statement schedules, An explanation of these measures is contained in the reportGlossary of its independent registered public accounting firm and the selected quarterly financial data required by Item 302 of Regulation S-K are listed on page F-1 of this report.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
ITEM 9A. Controls and Procedures
a.) Management’s Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, we conducted an evaluation of our disclosure controls and procedures,Selected Terms included as such term is defined under Rule 13a-15(e) of the Securities and Exchange Act of 1934 as amended (the “Exchange Act”) as of December 31, 2016. Based on this evaluation, our chief executive officer and our chief financial officer concluded that our disclosure controls and procedures were effective as of December 31, 2016, the end of the period covered byExhibit 99.1 to this Annual Report on Form 10-K.
b.) Management’s Annual Report on Internal Control Over Financial Reporting
Management of Horace Mann is responsible for establishing10-K and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) ofare reconciled to the Exchange Act. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposesmost directly comparable measures prepared in accordance with U.S.accounting principles generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that:
| (i) | Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; |
| (ii) | Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and |
| (iii) | Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the consolidated financial statements. |
Management of Horace Mann conducted an evaluation of the effectiveness of the Company's internal control over financial reporting as of December 31, 2016, using the criteria set forth inInternal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Based on this evaluation, management, including our CEO and our CFO, determined that, as of December 31, 2016, the Company maintained effective internal control over financial reporting.
The effectiveness of the Company’s internal control over financial reporting as of December 31, 2016 has been audited by KPMG LLP, the independent registered public accounting firm that audited the Company’s consolidated financial statements, as stated in their report listed on page F-1 of this Annual Report on Form 10-K.
c.) Independent Registered Public Accounting Firm’s Report on Internal Control Over Financial Reporting
The information required by Item 308(b) of Regulation S-K is contained in the “Report of Independent Registered Public Accounting Firm” listed on page F-1 of this report.
d.) Changes in Internal Control Over Financial Reporting
There were no changesU.S. (GAAP) in the Company’s internal control over financial reporting that occurred during the Company’s last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
ITEM 9B. Other Information
None.
PART III
ITEM 10. Directors, Executive Officers and Corporate Governance
The information required by Items 401, 405, 406, 407(c)(3), 407(d)(4) and 407(d)(5) of Regulation S-K is incorporated by referenceAppendix to the Company's Proxy Statement for the 2017 Annual Meeting of Shareholders.
Horace Mann Educators Corporation has adopted a code of ethicsFourth Quarter 2019 Investor Supplement.
Increases or decreases in this MD&A that
applies to its principal executive officer, principal financial officer, principal accounting officer and all other employees of the Company. In addition, the Board of Directors of Horace Mann Educators Corporation has adopted the code of ethics for its Board members as it applies to each Board member’s business conduct on behalf of the Company. The code of ethics is posted on the Company’s website,www.horacemann.com, under “Investors — Corporate Overview — Governance Documents”are not meaningful are marked "N.M.".
In addition, amendments to the code of ethics and any grant of a waiver from a provision of the code of ethics requiring disclosure under applicable SEC rules will be disclosed at the same location as the code of ethics on the Company’s website. ITEM 11. Executive CompensationThe information required by Items 402, 407(e)(4) and 407(e)(5) of Regulation S-K is incorporated by reference to the Company's Proxy Statement for the 2017 Annual Meeting of Shareholders.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management, and Related Stockholder Matters
The information required by Items 201(d) and 403 of Regulation S-K is incorporated by reference to the Company's Proxy Statement for the 2017 Annual Meeting of Shareholders.
ITEM 13. Certain Relationships and Related Transactions, and Director Independence
The information required by Items 404 and 407(a) of Regulation S-K is incorporated by reference to the Company's Proxy Statement for the 2017 Annual Meeting of Shareholders.
ITEM 14. Principal Accounting Fees and Services
The information required by Item 9(e) of Schedule 14A is incorporated by reference to the Company’s Proxy Statement for the 2017 Annual Meeting of Shareholders.
PART IV
ITEM 15. Exhibits and Financial Statement Schedules
(a)(1) The following consolidated financial statements of the Company are contained in the Index to Financial Information on page F-1 of this report:
Consolidated Balance Sheets as of December 31, 2016 and 2015.
Consolidated Statements of Operations for the Years Ended December 31, 2016, 2015 and 2014.
Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2016, 2015 and 2014.
Consolidated Statements of Changes in Shareholders' Equity for the Years Ended December 31, 2016, 2015 and 2014.
Consolidated Statements of Cash Flows for the Years Ended December 31, 2016, 2015 and 2014.
(a)(2) The following financial statement schedules of the Company are contained in the Index to Financial Information on page F-1 of this report:
Schedule I - Summary of Investments - Other than Investments in Related Parties.
Schedule II - Condensed Financial Information of Registrant.
Schedules III and VI Combined - Supplementary Insurance Information and Supplemental Information Concerning Property and Casualty Insurance Operations.
Schedule IV - Reinsurance.
(a)(3) The following items are filed as Exhibits. Management contracts and compensatory plans are indicated by an asterisk (*).
Exhibit | | |
No. | | Description |
| | |
(3) | Articles of incorporation and bylaws: |
| | |
| 3.1 | Restated Certificate of Incorporation of HMEC, filed with the Delaware Secretary of State on June 24, 2003, incorporated by reference to Exhibit 3.1 to HMEC’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2003, filed with the Securities and Exchange Commission (the “SEC”) on August 14, 2003. |
| | |
| 3.2 | Form of Certificate for shares of Common Stock, $0.001 par value per share, of HMEC, incorporated by reference to Exhibit 4.5 to HMEC’s Registration Statement on Form S-3 (Registration No. 33-53118) filed with the SEC on October 9, 1992. |
| | |
| 3.3 | Bylaws of HMEC, incorporated by reference to Exhibit 3.2 to HMEC’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2003, filed with the SEC on August 14, 2003. |
| | |
(4) | Instruments defining the rights of security holders, including indentures: |
| | |
| 4.1 | Indenture, dated as of November 23, 2015, by and between HMEC and The Bank of New York Mellon Trust Company, N.A., as trustee, incorporated by reference to Exhibit 4.1 to HMEC’s Current Report on Form 8-K dated November 18, 2015, filed with the SEC on November 23, 2015. |
| | |
| 4.1(a) | Form of HMEC 4.5000% Senior Notes due 2025, incorporated by reference to Exhibit 4.2 to HMEC’s Current Report on Form 8-K dated November 18, 2015, filed with the SEC on November 23, 2015. |
| | |
| 4.2 | Certificate of Designations for HMEC Series A Cumulative Convertible Preferred Stock, incorporated by reference to Exhibit 4.3 to HMEC’s Annual Report on Form 10-K for the year ended December 31, 2005, filed with the SEC on March 16, 2006. |
| | |
(10) | Material contracts: |
| | |
| 10.1 | Amended and Restated Credit Agreement dated as of July 30, 2014 among HMEC, certain financial institutions named therein and JPMorgan Chase Bank, N.A., as administrative agent, incorporated by reference to Exhibit 10.1 to HMEC’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014, filed with the SEC on August 8, 2014. |
Exhibit | | |
No. | | Description |
| | |
| 10.1(a) | First Amendment to Credit Agreement dated as of November 16, 2015 among HMEC, certain financial institutions named therein and JPMorgan Chase Bank, N.A., as administrative agent, incorporated by reference to Exhibit 10.1(a) to HMEC’s Annual Report on Form 10-K for the year ended December 31, 2015, filed with the SEC on February 29, 2016. |
| | |
| 10.2* | Horace Mann Educators Corporation Amended and Restated 2002 Incentive Compensation Plan (“2002 Incentive Compensation Plan”), incorporated by reference to Exhibit 10.2 to HMEC’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2005, filed with the SEC on August 9, 2005. |
| | |
| 10.2(a)* | Revised Specimen Employee Stock Option Agreement under the 2002 Incentive Compensation Plan, incorporated by reference to Exhibit 10.6(b) to HMEC’s Annual Report on Form 10-K for the year ended December 31, 2008, filed with the SEC on March 2, 2009. |
| | |
| 10.2(b)* | Specimen Employee Restricted Stock Unit Agreement under the 2002 Incentive Compensation Plan, incorporated by reference to Exhibit 10.6(d) to HMEC’s Annual Report on Form 10-K for the year ended December 31, 2005, filed with the SEC on March 16, 2006. |
| | |
| 10.2(c)* | Revised Specimen Employee Restricted Stock Unit Agreement under the 2002 Incentive Compensation Plan, incorporated by reference to Exhibit 10.6(f) to HMEC’s Annual Report on Form 10-K for the year ended December 31, 2008, filed with the SEC on March 2, 2009. |
| | |
| 10.2(d)* | Specimen Non-employee Director Restricted Stock Unit Agreement under the 2002 Incentive Compensation Plan, incorporated by reference to Exhibit 10.6(e) to HMEC’s Annual Report on Form 10-K for the year ended December 31, 2005, filed with the SEC on March 16, 2006. |
| | |
| 10.2(e)* | Revised Specimen Non-employee Director Restricted Stock Unit Agreement under the 2002 Incentive Compensation Plan, incorporated by reference to Exhibit 10.6(h) to HMEC’s Annual Report on Form 10-K for the year ended December 31, 2008, filed with the SEC on March 2, 2009. |
| | |
| 10.3* | HMEC 2010 Comprehensive Executive Compensation Plan As Amended and Restated, incorporated by reference to Exhibit 1 (beginning on page E-1) to HMEC’s Proxy Statement, filed with the SEC on April 8, 2015. |
| | |
| 10.3(a)* | Specimen Incentive Stock Option Agreement for Section 16 Officers under the HMEC 2010 Comprehensive Executive Compensation Plan, incorporated by reference to Exhibit 10.7(a) to HMEC’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2011, filed with the SEC on August 9, 2011. |
Exhibit | | |
No. | | Description |
| | |
| 10.3(b)* | Specimen Incentive Stock Option Agreement for Non-Section 16 Officers under the HMEC 2010 Comprehensive Executive Compensation Plan, incorporated by reference to Exhibit 10.7(b) to HMEC’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2011, filed with the SEC on August 9, 2011. |
| | |
| 10.3(c)* | Specimen Employee Service-Vested Restricted Stock Units Agreement under the HMEC 2010 Comprehensive Executive Compensation Plan, incorporated by reference to Exhibit 10.7(c) to HMEC’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2011, filed with the SEC on August 9, 2011. |
| | |
| 10.3(d)* | Specimen Employee Performance-Based Restricted Stock Units Agreement under the HMEC 2010 Comprehensive Executive Compensation Plan, incorporated by reference to Exhibit 10.7(d) to HMEC’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2011, filed with the SEC on August 9, 2011. |
| | |
| 10.3(e)* | Specimen Employee Performance-Based Restricted Stock Units Agreement - Key Strategic Grantee under the HMEC 2010 Comprehensive Executive Compensation Plan incorporated by reference to Exhibit 10.3(e) to HMEC’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2016, filed with the SEC on May 6, 2016. |
| | |
| 10.3(f)* | Specimen Non-employee Director Restricted Stock Unit Agreement under the HMEC 2010 Comprehensive Executive Compensation Plan, incorporated by reference to Exhibit 10.17(a) to HMEC’s Current Report on Form 8-K dated May 27, 2010, filed with the SEC on June 2, 2010. |
| | |
| 10.4* | Horace Mann Supplemental Employee Retirement Plan, 2002 Restatement, incorporated by reference to Exhibit 10.1 to HMEC’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2002, filed with the SEC on May 15, 2002. |
| | |
| 10.5* | Horace Mann Executive Supplemental Employee Retirement Plan, 2002 Restatement, incorporated by reference to Exhibit 10.2 to HMEC’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2002, filed with the SEC on May 15, 2002. |
| | |
| 10.6* | Amended and Restated Horace Mann Nonqualified Supplemental Money Purchase Pension Plan, incorporated by reference to Exhibit 10.9 to HMEC’s Annual Report on Form 10-K for the year ended December 31, 2008, filed with the SEC on March 2, 2009. |
| | |
| 10.7* | Summary of HMEC Non-employee Director Compensation, incorporated by reference to Exhibit 10.7 to HMEC’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2016, filed with the SEC on August 5, 2016. |
Exhibit | | |
No. | | Description |
| | |
| 10.8* | Summary of HMEC Named Executive Officer Annualized Salaries incorporated by reference to Exhibit 10.8 to HMEC’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2016, filed with the SEC on May 6, 2016. |
| | |
| 10.9* | Form of Severance Agreement between HMEC, Horace Mann Service Corporation (“HMSC”) and certain officers of HMEC and/or HMSC, incorporated by reference to Exhibit 10.13 to HMEC’s Annual Report on Form 10-K for the year ended December 31, 2012, filed with the SEC on February 28, 2013. |
| | |
| 10.9(a)* | Revised Schedule to Severance Agreements between HMEC, HMSC and certain officers of HMEC and/or HMSC, incorporated by reference to Exhibit 10.9(a) to HMEC’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2016, filed with the SEC on August 5, 2016. |
| | |
| 10.10* | HMSC Executive Change in Control Plan, incorporated by reference to Exhibit 10.15 to HMEC’s Current Report on Form 8-K dated February 15, 2012, filed with the SEC on February 22, 2012. |
| | |
| 10.10(a)* | HMSC Executive Change in Control Plan Schedule A Plan Participants incorporated by reference to Exhibit 10.10(a) to HMEC’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2016, filed with the SEC on May 6, 2016. |
| | |
| 10.11* | HMSC Executive Severance Plan, incorporated by reference to Exhibit 10.16 to HMEC’s Current Report on Form 8-K dated March 7, 2012, filed with the SEC on March 13, 2012. |
| | |
| 10.11(a)* | First Amendment to the HMSC Executive Severance Plan, incorporated by reference to Exhibit 10.16(a) to HMEC’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2012, filed with the SEC on August 9, 2012. |
| | |
| 10.11(b)* | HMSC Executive Severance Plan Schedule A Participants incorporated by reference to Exhibit 10.11(b) to HMEC’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2016, filed with the SEC on May 6, 2016. |
| | |
(11) | Statement regarding computation of per share earnings. |
| |
(12) | Statement regarding computation of ratios. |
| |
(21) | Subsidiaries of HMEC. |
| |
(23) | Consent of KPMG LLP. |
Exhibit | | |
No. | | Description |
| | |
(31) | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| | |
| 31.1 | Certification by Marita Zuraitis, Chief Executive Officer of HMEC. |
| | |
| 31.2 | Certification by Bret A. Conklin, Senior Vice President and Acting Chief Financial Officer of HMEC. |
| | |
(32) | Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| | |
| 32.1 | Certification by Marita Zuraitis, Chief Executive Officer of HMEC. |
| | |
| 32.2 | Certification by Bret A. Conklin, Senior Vice President and Acting Chief Financial Officer of HMEC. |
| | |
(99) | Additional exhibits |
| | |
| 99.1 | Glossary of Selected Terms. |
| | |
(101) | Interactive Data File |
| | |
| 101.INS | XBRL Instance Document |
| | |
| 101.SCH | XBRL Taxonomy Extension Schema |
| | |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase |
| | |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase |
| | |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase |
| | |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase |
Copies of Form 10-K, Exhibits to Form 10-K, Horace Mann Educators Corporation’s Code of Ethics and charters of the committees of the Board of Directors are available through the Investors section of the Company’s Internet website, www.horacemann.com. Copies also may be obtained by writing to Investor Relations, Horace Mann Educators Corporation, 1 Horace Mann Plaza, Springfield, Illinois 62715-0001.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Horace Mann Educators Corporation has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
HORACE MANN EDUCATORS CORPORATION | |
| |
/s/ Marita Zuraitis | |
Marita Zuraitis | |
President and Chief Executive Officer | |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of Horace Mann Educators Corporation and in the capacities and on the date indicated.
Principal Executive Officer: | | Directors: |
| | |
/s/ Marita Zuraitis | | /s/ Gabriel L. Shaheen |
Marita Zuraitis | | Gabriel L. Shaheen, Chairman of the Board of Directors |
President, Chief Executive Officer and a Director | | |
| | /s/ Daniel A. Domenech |
| | Daniel A. Domenech, Director |
| | |
| | /s/ Stephen J. Hasenmiller |
Principal Financial and Accounting Officer: | | Stephen J. Hasenmiller, Director |
| | |
/s/ Bret A. Conklin | | /s/ Ronald J. Helow |
Bret A. Conklin | | Ronald J. Helow, Director |
Senior Vice President and Acting Chief Financial Officer | | |
| | /s/ Beverley J. McClure |
| | Beverley J. McClure, Director |
| | |
| | /s/ H. Wade Reece |
| | H. Wade Reece, Director |
| | |
| | /s/ Robert Stricker |
| | Robert Stricker, Director |
| | |
| | /s/ Steven O. Swyers |
| | Steven O. Swyers, Director |
| | |
Dated: March 1, 2017
HORACE MANN EDUCATORS CORPORATION
INDEX TO FINANCIAL INFORMATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (“MD&A”)
(Dollars in millions, except per share data)
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 MannHMEC is not under any obligation to (and expressly disclaims any such obligation to) update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. It is important to note that the Company’s actual results could differ materially from those projected in forward-looking statements due to a number of risks and uncertainties inherent in the
Company’sCompany's business.
ForSee Part I - Item 1A in this Annual Report on Form 10-K for additional information regarding risks and
uncertainties, see “Item 1A. Risk Factors”. That discussion includes factors such as: | · | The impact that a prolonged economic recession may have on the Company’s investment portfolio; volume of new business for automobile, homeowners, retirement and life products; policy renewal rates; and additional annuity contract deposit receipts. |
| · | Fluctuations in the fair value of securities in the Company’s investment portfolio and the related after tax effect on the Company’s shareholders’ equity and total capital through either realized or unrealized investment losses. |
| · | Prevailing low interest rate levels, including the impact of interest rates on (1) the Company’s ability to maintain appropriate interest rate spreads over minimum fixed rates guaranteed in the Company’s annuity and life products, (2) the book yield of the Company’s investment portfolio, (3) unrealized gains and losses in the Company’s investment portfolio and the related after tax effect on the Company’s shareholders’ equity and total capital, (4) amortization of deferred policy acquisition costs and (5) capital levels of the Company’s life insurance subsidiaries. |
| · | The frequency and severity of events such as hurricanes, storms, earthquakes and wildfires, and the ability of the Company to provide accurate estimates of ultimate claim costs in its consolidated financial statements. |
| · | The Company’s risk exposure to catastrophe-prone areas. Based on full year 2016 Property and Casualty direct earned premiums, the Company’s ten largest states represented 57% of the segment total. Included in this top ten group are certain states which are considered more prone to catastrophe occurrences: California, North Carolina, Texas, South Carolina, Florida and Louisiana. |
| · | The ability of the Company to maintain a favorable catastrophe reinsurance program considering both availability and cost; and the collectibility of reinsurance receivables. |
| · | Adverse changes in market appreciation, interest spreads, business persistency and policyholder mortality and morbidity rates and the resulting impact on both estimated reserves and the amortization of deferred policy acquisition costs. |
| · | The Company’s ability to refinance outstanding indebtedness or repurchase shares of the Company’s common stock. |
| · | The Company’s ability to (1) develop and expand its marketing operations, including agents and other points of distribution, (2) maintain and secure access to educators, school administrators, principals and school business officials; and (3) profitably expand its Property and Casualty business in highly competitive environments. |
| · | The effects of economic forces and other issues affecting the educator market including, but not limited to, federal, state and local budget deficits and cut-backs and adverse changes in state and local tax revenues. The effects of these forces can include, among others, teacher layoffs and early retirements, as well as individual concerns regarding employment and economic uncertainty. |
| · | Changes in federal and state laws and regulations, which affect the relative tax and other advantages of the Company’s life and annuity products to customers, including, but not limited to, changes in IRS regulations governing Section 403(b) plans. |
| · | Changes in public employee retirement programs as a result of federal and/or state level pension reform initiatives. |
| · | Changes in federal and state laws and regulations, which affect the relative tax advantage of certain investments or which affect the ability of debt issuers to declare bankruptcy or restructure debt. |
| · | The Company’s ability to effectively implement new or enhanced information technology systems and applications. |
| · | Changes in Cybersecurity regulations as a result of state level requirements. |
Executive Summary
Horace Mann Educators Corporation (“HMEC”;
Introduction
The purpose of this MD&A is to provide an understanding of the Company’s consolidated results of operations and togetherfinancial condition. This MD&A should be read in conjunction with its subsidiaries, the “Company” or “Horace Mann”)Consolidated Financial Statements and Notes thereto contained in Part II - Item 8 of this report.
HMEC is an insurance holding
company. Throughcompany and through its subsidiaries,
HMECthe Company markets and underwrites personal lines of property and casualty insurance,
supplemental health insurance and limited short-term supplemental disability coverages, retirement products, including annuities, and life insurance in the U.S. The Company markets its products primarily to K-12 teachers, administrators and other employees of public schools and their families.
For 2016,
On January 2, 2019, the Company acquired all of the equity interests in BCG which provides advisory and benefit plan record keeping services. BCG's results are reported in the Retirement segment.
In the second quarter of 2019, the Company reinsured a $2.9 billion block of in force fixed and variable annuity business with a minimum crediting rate of 4.5%. This represented approximately 50% of the Company’s in force fixed annuity account balances. The arrangement contains investment guidelines and a trust to help meet the Company’s risk management objectives. The annuity reinsurance transaction was effective April 1, 2019.
On July 1, 2019, the Company acquired all of the equity interests in NTA. NTA’s insurance subsidiaries predominantly sell a variety of guaranteed renewable supplemental health insurance products (primarily heart, cancer and limited short-term supplemental disability coverages). The insurance subsidiaries also market life insurance products. NTA’s insurance subsidiaries are licensed in 50 states, the U.S. Virgin Islands and the District of Columbia and their marketplace is primarily within the public sector for which approximately 80% are individuals employed by educational institutions, with the remainder employed in state and local governments and emergency services facilities. NTA’s results are reported in a newly created Supplemental segment.
This MD&A begins with the Company’s consolidated financial highlights followed by consolidated results of operations, an outlook for future performance, details about critical accounting estimates and the results of operations by segment.
|
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| 36 Annual Report on Form 10-K | | Horace Mann Educators Corporation |
Consolidated Financial Highlights
|
| | | | | | | | | | | | | | | | | | | | |
| ($ in millions) | | Year Ended December 31, | | 2019-2018 | | 2018-2017 |
| | | 2019 | | 2018 | | 2017 | | $ Change | | $ Change |
| Total revenues | | $ | 1,430.5 |
| | $ | 1,191.6 |
| | $ | 1,171.5 |
| | $ | 238.9 |
| | $ | 20.1 |
|
| Net income | | 184.4 |
| | 18.3 |
| | 169.4 |
| | 166.1 |
| | (151.1 | ) |
| Per diluted share: | | | | | | | | | |
|
|
| Net income | | 4.40 |
| | 0.44 |
| | 4.08 |
| | 3.96 |
| | (3.64 | ) |
| Net investment gains (losses), after tax | | 2.87 |
| | (0.24 | ) | | (0.04 | ) | | 3.11 |
| | (0.20 | ) |
| Book value per share | | 38.01 |
| | 31.50 |
| | 36.88 |
| | 6.51 |
| | (5.38 | ) |
| Net income return on equity - last twelve months | | 12.5 | % | | 1.3 | % | | 12.3 | % | | 11.2 | pts | | -11.0 | pts |
| | | | | | | | | | | |
| Net income (loss) by segment: | | | | | | | | | | |
| Property and Casualty | | $ | 54.3 |
| | $ | (14.3 | ) | | $ | 17.8 |
| | $ | 68.6 |
| | $ | (32.1 | ) |
| Supplemental | | 18.0 |
| | — |
| | — |
| | N/A |
| | N/A |
|
| Retirement | | (4.8 | ) | | 41.7 |
| | 88.4 |
| | (46.5 | ) | | (46.7 | ) |
| Life | | 17.6 |
| | 18.8 |
| | 77.6 |
| | (1.2 | ) | | (58.8 | ) |
| Corporate and Other | | 99.3 |
| | (27.9 | ) | | (14.4 | ) | | 127.2 |
| | (13.5 | ) |
| Net income | | $ | 184.4 |
| | $ | 18.3 |
| | $ | 169.4 |
| | $ | 166.1 |
| | $ | (151.1 | ) |
N/A - The acquisition of NTA closed on July 1, 2019.
For 2019, the Company's net income of $83.8 million decreased $9.7increased $166.1 million compared to 2015. After2018. The increase in net income was primarily due to recognition of a $106.9 million after tax net realized investment gains were $2.3gain in the second quarter of 2019 associated with an annuity reinsurance transaction. The impact from the realized investment gain was partially offset by a $28.0 million annuity goodwill impairment charge. Lower catastrophe costs of $49.0 million after tax in Property and Casualty as well as the addition of $18.0 million of net income from the Supplemental segment also contributed to the increase in consolidated net income. See Part II - Item 8, Notes 2, 6 and 7 of the Consolidated Financial Statements in this report for more information regarding Supplemental, the annuity reinsurance transaction and the goodwill impairment charge.
Net income in 2018 was negatively impacted by an elevated level of catastrophe costs of $90.1 million after tax while net income in 2017 benefited $99.0 million from the passage of the Tax Cuts and Jobs Act of 2017 (TCJA).
See Results of Operations by Segment for further details.
|
| | |
| Horace Mann Educators Corporation | | Annual Report on Form 10-K 37 |
Consolidated Results of Operations
|
| | | | | | | | | | | | | | | | | | |
| ($ in millions) | | Year Ended December 31, | | 2019-2018 | | 2018-2017 |
| | | 2019 | | 2018 | | 2017 | | Change % | | Change % |
| Insurance premiums and contract charges earned | | $ | 898.0 |
| | $ | 817.3 |
| | $ | 794.7 |
| | 9.9 | % | | 2.8 | % |
| Net investment income | | 365.1 |
| | 376.5 |
| | 373.6 |
| | -3.0 | % | | 0.8 | % |
| Net investment gains (losses) | | 153.3 |
| | (12.5 | ) | | (3.4 | ) | | N.M. |
| | N.M. |
|
| Other income | | 14.1 |
| | 10.3 |
| | 6.6 |
| | 36.9 | % | | 56.1 | % |
| Total revenues | | 1,430.5 |
| | 1,191.6 |
| | 1,171.5 |
| | 20.0 | % | | 1.7 | % |
| | | | | | | | | | | |
| Benefits, claims and settlement expenses | | 585.1 |
| | 637.6 |
| | 582.3 |
| | -8.2 | % | | 9.5 | % |
| Interest credited | | 212.8 |
| | 206.2 |
| | 198.6 |
| | 3.2 | % | | 3.8 | % |
| Operating expenses | | 234.6 |
| | 205.4 |
| | 187.8 |
| | 14.2 | % | | 9.4 | % |
| DAC unlocking and amortization expense | | 109.2 |
| | 109.9 |
| | 102.2 |
| | -0.6 | % | | 7.5 | % |
| Intangible asset amortization expense | | 8.8 |
| | — |
| | — |
| | N.M. |
| | N.M. |
|
| Interest expense | | 15.6 |
| | 13.0 |
| | 11.9 |
| | 20.0 | % | | 9.2 | % |
| Other expense - goodwill impairment | | 28.0 |
| | — |
| | — |
| | N.M. |
| | N.M. |
|
| Total benefits, losses and expenses | | 1,194.1 |
| | 1,172.1 |
| | 1,082.8 |
| | 1.9 | % | | 8.2 | % |
| | | | | | | | | | | |
| Income before income taxes | | 236.4 |
| | 19.5 |
| | 88.7 |
| | N.M. |
| | -78.0 | % |
| Income tax expense (benefit) | | 52.0 |
| | 1.2 |
| | (80.7 | ) | | N.M. |
| | -101.5 | % |
| Net income | | $ | 184.4 |
| | $ | 18.3 |
| | $ | 169.4 |
| | N.M. |
| | -89.2 | % |
Insurance Premiums and Contract Charges Earned
For 2019, insurance premiums and contract charges earned increased $80.7 million compared to
$8.6 million a year earlier. For the Property and Casualty segment, net income of $25.6 million decreased $14.4 million compared to 2015. The Property and Casualty combined ratio was 101.5% for 2016, 4.5 percentage points higher than the 97.0% in 2015, primarily as a result of a 2.3 point increase in catastrophe losses, or an increase of $15.6 million on pretax basis. One percentage increase, or $5.5 million pretax basis, was related to a lower level of favorable prior years’ reserve development in 2016 compared to the full year 2015. On an underlying basis, the combined ratio increased 1.2 percentage points to 92.9%. The underlying auto combined ratio increased 2.4 percentage points, to 105.1%, primarily as a result of higher loss frequency and severity. This increase was somewhat offset by a 1.7 percentage point improvement in the underlying property combined ratio, which for the full year 2016 was 68.6%. The improvement in property results was primarily driven by the impacts of profitability improvement initiatives, as well as, lower catastrophe reinsurance costs. The Retirement segment’s net income was $50.7 million for 2016 which increased $7.3 million compared to 2015, primarily due to an increase in investment income that drove improvement in the net interest spread offset by costs related to the Company’s continued infrastructure and strategic investments. The net interest margin amount (without net realized investment gains/losses) increased $8.1 million after tax compared to 2015, including increases in investment prepayment activity. The impact of unlocking deferred policy acquisition costs increased income by $2.4 million compared to 2015. In addition, income tax expense was reduced by approximately $0.9 million related to the filing of the prior calendar year tax return. Annuity assets under management of $6.4 billion increased 7.2% compared to a year earlier and disciplined crediting rate management continues. Life segment net income of $16.6 million increased $1.6 million compared to 2015 primarily as a result of an increase in investment income and a decrease in mortality expenses in 2016.Premiums written and contract deposits* increased slightly compared to 2015 as growth in the Property and Casualty and Life segments was offset by a decrease in the amount of annuity deposits received in 2016. Property and Casualty segment premiums written increased 4.7% compared to the prior year,2018, primarily due to the favorable impactsaddition of earned premiums from Supplemental as well as increases in average premium per policy for homeownersboth automobile and automobile, accompanied by reductions in catastrophe reinsurance costs. Life segmentproperty. For 2018, insurance premiums and contract depositscharges earned increased 5.2%$22.6 million compared to 2015. Annuity deposits received2017, primarily due to increases in average premium per policy for both automobile and property.
Net Investment Income
Excluding accreted investment income on the deposit asset on reinsurance, 2019 net investment income decreased $82.2 million compared to 2018, primarily due to a $2.1 billion reduction in invested assets from investments transferred under the annuity reinsurance transaction in the second quarter of 2019 as well as continued low rates on new investments and lower prepayment levels, partially offset by stronger returns on alternative investments. Investment yields continue to be impacted by the low interest rate environment of recent years. For 2018, net investment income reflected increased prepayment activity offset by a reduction in yields from a strategic decision to improve the quality of the portfolio. The annualized yield on the total investment portfolio for the past three years was:
|
| | | | | | |
| | | 2019 | | 2018 | | 2017 |
| Pretax yield | | 4.8% | | 5.1% | | 5.2% |
| After tax yield | | 3.8% | | 4.1% | | 3.4% |
|
| | |
| 38 Annual Report on Form 10-K | | Horace Mann Educators Corporation |
During 2019, management continued to identify and purchase investments, including alternative investments, with attractive risk-adjusted yields relative to market conditions without venturing into asset classes or individual securities that would be inconsistent with the Company's overall conservative investment guidelines.
Net Investment Gains (Losses)
For 2019, net investment gains increased primarily due to recognition of a realized investment gain of $135.3 million in the second quarter of 2019 in connection with the transfer of investments related to the aforementioned annuity reinsurance transaction.
Effective January 1, 2018, with the adoption of new accounting guidance for recognition and measurement of financial instruments, equity securities are reported at fair value with changes in fair value recognized in net investment gains (losses). The changes in fair value of equity securities accounted for the 2018 increase in net investment losses over 2017. The break down of net investment gains (losses) by transaction type is shown in the following table:
|
| | | | | | | | | | | | |
| ($ in millions) | | Year Ended December 31, |
| | | 2019 | | 2018 | | 2017 |
| Other-than-temporary impairments (OTTI) losses recognized in earnings | | $ | (1.4 | ) | | $ | (1.5 | ) | | $ | (12.6 | ) |
| Sales and other, net | | 151.5 |
| | 3.5 |
| | 7.7 |
|
| Change in fair value - equity securities | | 7.3 |
| | (18.3 | ) | | N/A |
|
Change in fair value and gains (losses) realized
on settlements - derivatives | | (4.1 | ) | | 3.8 |
| | 1.5 |
|
| Net investment gains (losses) | | $ | 153.3 |
| | $ | (12.5 | ) | | $ | (3.4 | ) |
The Company, from time to time, sells securities subsequent to a reporting date that were considered temporarily impaired at the reporting date. Such sales are due to issuer specific events occurring subsequent to the reporting date that result in a change in the Company's intent to hold an invested asset.
Other Income
For 2019, 2018 and 2017, other income steadily rose due to increases in commissions from third-party vendor products, decreases in annuity premium bonuses and the inclusion of BCG brokerage fees in 2019.
Benefits, Claims and Settlement Expenses
For 2019, benefits, claims and settlement expenses were lower due to reduced catastrophe losses and improved automobile experience, partially offset by the inclusion of losses from the new Supplemental segment. For 2018, benefits, claims and settlement expenses increased compared to 2017, driven primarily by elevated catastrophe costs in Property and Casualty.
Interest Credited
For 2019, 2018 and 2017, interest credited steadily increased, primarily due to higher interest costs on FHLB funding agreements.
Operating Expenses
For 2019, operating expenses increased $29.2 million compared to 2018, driven by the inclusion of NTA and BCG operations as well as $5.5 million of severance charges incurred in 2019 pertaining to expense reduction initiatives. The increase in operating expenses in 2018 was consistent with management's expectations as the Company incurred expenditures to support targeted strategies in product, distribution and infrastructure, which were intended to enhance the overall customer experience, increase sales, and support favorable policy retention and business cross-sale ratios. 2018 also included transaction costs of $5.1 million to acquire BCG and NTA.
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| Horace Mann Educators Corporation | | Annual Report on Form 10-K 39 |
DAC Unlocking and Amortization Expense
DAC unlocking and amortization expense was comparable to 2018. The 2018 increase in DAC amortization expense was primarily attributable to DAC unlocking in Retirement decreased 5.1%,accompanied by growth in premiums and related commissions for Property and Casualty. For Life, DAC unlocking resulted in immaterial changes to amortization for the three years ended 2019, 2018 and 2017.
Intangible Asset Amortization Expense
For 2019, the increase in intangible asset amortization expense was due to the inclusionacquisitions of a favorable impact of non-recurring depositsNTA and BCG.
Interest Expense
Interest expense increased $2.6 million in 2015 related2019, primarily due to changesthe Company utilizing its senior revolving credit facility in the Company’s employee retirement savings plansthird quarter of 2019 to partially fund the acquisition of NTA. Interest expense increased in 2018, primarily due to FHLB borrowings in the fourth quarter of 2017 as described further explained in “ResultsPart II - Item 8, Note 10 of Operations — Insurance Premiumsthe Consolidated Financial Statements in this report.
Other Expense - Goodwill Impairment
For 2019, other expense represents an annuity goodwill impairment charge in Retirement resulting from the annuity reinsurance transaction. See Part II - Item 8, Note 7 of the Consolidated Financial Statements in this report for further information.
Income Tax Expense (Benefit)
The effective income tax rate on the Company's pretax income, including net investment gains (losses) was 22.0%, 6.2% and
Contract Charges”.(91.1)% for the years ended December 31, 2019, 2018 and 2017, respectively. Income from investments in tax-exempt securities reduced the effective income tax rates by 2.3, 21.2 and 11.0 percentage points for 2019, 2018 and 2017, respectively. The Company’s book value per share was $32.15goodwill impairment charge in the Retirement segment increased the effective income tax rate by 2.3 percentage points and the acquisitions of NTA and BCG increased the effective income tax rate by 0.1 percentage points at December 31, 2016,2019. The TCJA reduced the 2017 effective tax rate by 111.6 percentage points from re-measuring the Company's deferred taxes to reflect the changes in tax rates included in the TCJA as of the date of enactment.
The Company records liabilities for uncertain tax filing positions where it is more likely than not that the position will not be sustainable upon audit by taxing authorities. These liabilities are reevaluated routinely and are adjusted appropriately based on changes in facts or law. The Company has no unrecorded liabilities from uncertain tax filing positions.
At December 31, 2019, the Company's federal income tax returns for years prior to 2014 are no longer subject to examination by the IRS. Management does not anticipate any assessments for tax years that remain subject to examination to have a material effect on the Company's financial position or results of operations. See Part II - Item 8, Note 11 of the Consolidated Financial Statements in this report for further information.
Outlook for 2020
At the time of issuance of this Annual Report on Form 10-K, management estimates that 2020 full year net income will be within a range of $2.55 to $2.75 per diluted share and that the Company anticipates generating a core return on equity* of over 8%. Management expects the Company's overall pretax net investment income to be flat with 2019, with increases from a full year of Supplemental net investment income offsetting declines in Retirement net investment income. This projection also reflects an increaseoverall effective tax rate of 3.1%between 17% and 19%.
Within Property and Casualty, low to mid-single digit planned rate increases, as well as continued underwriting initiatives, are expected to maintain the underlying loss ratios* at levels comparable to 2019. The expense ratio is expected to improve slightly from the 2019 expense ratio of 26.9 points. As a result, the Property and Casualty full-year combined ratio is expected to be 95-97%, assuming catastrophe losses add approximately 7.5 points, similar to 2019. Net income for Property and Casualty is anticipated to be in the range of $55 million to $60 million.
Supplemental is anticipated to generate a pretax profit margin in the low to mid 20% range and net investment income should begin to benefit from portfolio repositioning. As a result, net income is anticipated to be between $28 million and $30 million.
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| 40 Annual Report on Form 10-K | | Horace Mann Educators Corporation |
Retirement net investment income is expected to reflect further spread compression with rates on new investments below the average portfolio earned rate as well as the impact of lower invested assets as a result of the annuity reinsurance transaction. This should be offset by a reduced level of operating expenses. As a result, net income for Retirement is anticipated to be in the range of $27 million to $29 million.
Life is expected to generate net income between $14 million and $16 million, including a return to modeled mortality cost levels.
As described in Critical Accounting Estimates, certain of the Company's significant accounting measurements require the use of estimates and assumptions. As additional information becomes available, adjustments may be required. Those adjustments are charged or credited to income for the period in which the adjustments are made and may impact actual results compared to
12 months earlier.management's estimates above. Additionally, see Forward-looking Information in Part I - Item 1 and Part I - Item 1A of this Annual Report on Form 10-K concerning other important factors that could impact actual results. Management believes that a projection of net income is not appropriate on a forward-looking basis because it is not possible to provide a valid forecast of net investment gains (losses), which can vary substantially from one period to another and may have a significant impact on net income.
Critical Accounting
PoliciesEstimates
The preparation of consolidated financial statements in conformity with
U.S.accounting principles generally accepted
accounting principles (“GAAP”)in the U.S. (GAAP) requires the Company's management to make estimates and assumptions based on information available at the time the consolidated financial statements are prepared. These estimates and assumptions affect the reported amounts of the Company's consolidated assets, liabilities, shareholders' equity and net income. Certain accounting estimates are particularly sensitive because of their significance to the Company's consolidated financial statements and because of the possibility that subsequent events and available information may differ markedly from management's judgments at the time the consolidated financial statements were prepared. Management has discussed with the Audit Committee the quality, not just the acceptability, of the Company's accounting principles as applied in its financial reporting. The discussions generally included such matters as the consistency of the Company's accounting policies and their application, and the clarity and completeness of the Company's consolidated financial statements, which include related disclosures.
For the Company, areas most subject to significant management judgments include: fair value measurements, other-than-temporary impairment of investments, goodwill, deferred policy acquisition costs for investment contracts and life insurance products with account values, liabilities for property and casualty claims and claim expenses, liabilities for future policy benefits, deferred taxes and valuation of assets and liabilities related to the defined benefit pension plan.Information regarding the Company’sCompany's accounting policies pertaining to these topics is located in the “NotesNotes to Consolidated Financial Statements”Statements as listed on page F-1in Part II - Item 8 of this reportreport.
The Company has identified the following accounting estimates as critical in that they involve a higher degree of judgment and are subject to a significant degree of variability:
Valuation of hard-to-value fixed maturity securities, including evaluation of other-than-temporary impairments
Evaluation of goodwill and intangible assets for impairment
Valuation of supplemental, annuity and life deferred policy acquisition costs
Valuation of liabilities for property and casualty unpaid claims and claim expenses
Valuation of certain investment contracts and policy reserves
Valuation of assets acquired and liabilities assumed under purchase accounting
Although variability is
not repeatedinherent in
these accounting estimates, management believes the
discussion below.Fair Value Measurements
amounts provided are appropriate based upon the facts available during preparation of the consolidated financial statements.
Valuation of Hard-to-Value Fixed Maturity Securities
The fair value of a
financial instrumentfixed maturity security is the estimated amount at which the
instrumentsecurity could be exchanged in an orderly transaction between knowledgeable, unrelated and willing parties. The
valuation of fixed maturity securitiesCompany utilizes its investment managers and
equity securities is more subjective when markets are less liquid dueits custodian bank to
the lack of market based inputs, which may increase the potential that the estimatedobtain fair value
of an investment is not reflective of the price at which an actual transaction would occur. See also “Notes to Consolidated Financial Statements — Note 3 — Fair Value of Financial Instruments”.Valuation of Fixed Maturityprices from independent third-party valuation service providers, broker-dealer quotes, and Equity Securities
The fair value of the Company’s fixed maturity securities portfolio was $7,456.7 million at December 31, 2016. For fixed maturity securities, eachmodel prices. Each month, the Company obtains fair value prices from its investment managers and custodian bank, each of which use a variety of independent, nationally recognized pricing sources to determine market valuations.valuations for fixed maturity securities. Differences in prices between the sources that the Company considers significant are researched and the Company utilizes the price that it considers most representative of an exit price. Typical inputs used by these pricing sources include, but are not
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| Horace Mann Educators Corporation | | Annual Report on Form 10-K 41 |
limited to, reported trades, bids, offers, benchmark yield curves, benchmarking of like securities, rating designations, sector groupings, issuer spreads, bids, offers, and/or estimated cash flows, prepayment and prepayment speeds.default speeds, among others. The Company’sCompany's fixed maturity securities portfolio is primarily publicly traded, which allows for a high percentage of the portfolio to be priced through pricing services. Approximately 90%94.1% of the portfolio, based on fair value, was priced through pricing services or index priced using observable inputs as of December 31, 2016. 2019.
The
remaindervaluation of hard-to-value fixed maturity securities (generally 100 -150 securities) is more subjective because the markets are less liquid and there is a lack of observable market-based inputs. This may increase the potential that the estimated fair value of an investment is not reflective of the
portfolio was priced by broker-dealers or pricing models.price at which an actual transaction would occur. When the pricing sources cannot provide fair value determinations, the Company obtainsinvestment managers and custodian bank obtain non-binding price quotes from broker-dealers. The broker-dealers’For those securities where the investment manager cannot obtain broker-dealer quotes, they will model the security, generally using anticipated cash flows of the underlying collateral. Broker-dealers' valuation methodology ismethodologies as well as investment managers’ modeling methodologies are sometimes matrix-based, using indicative evaluation measures and adjustments for specific security characteristics and market sentiment. The selection of the market inputs utilized inand assumptions used to estimate the evaluation measuresfair value of hard-to-value fixed maturity securities require judgment and adjustments include: benchmark yield, curves, reported trades, broker/dealer quotes, ratingsliquidity premium, estimated cash flows, prepayment and corresponding issuerdefault speeds, spreads, two-sided markets, benchmark securities, bids, offers, reference data,weighted average life, and industry and economic events.credit rating. The extent of the use of each market input depends on the market sector and the market conditions. Depending on the security, the priority of the use of inputs may change or some market inputs may not be relevant. For some securities, additional inputs may be necessary.
The Company
analyzes pricegains assurance that its portfolio of fixed maturity securities and
market valuations receivedhard-to-value fixed maturity securities is appropriately valued through the execution of various processes and
has in place certain controlcontrols designed to ensure the overall reasonableness and consistent application of valuation methodologies, including inputs and assumptions, and compliance with accounting standards. The Company’s processes
to determine the reasonableness of the financial asset fair values. These processesand controls are designed to ensure (1) the
values received are reasonable and accurately recorded, (2) the data inputs and valuation
techniques utilizedmethodologies are appropriate and consistently applied,
(2) the inputs and
(3) the assumptions are reasonable and consistent with the objective of determining fair
value.Thevalue, and (3) the fair value of the Company’s equity securities portfolio was $141.6 million at December 31, 2016. All of the portfolio was priced from observable market quotations at December 31, 2016. Fair values of equity securities have been determined byare accurately recorded. For example, on a continuing basis, the Company assesses the reasonableness of individual fair values that have stale security prices or that exceed certain thresholds as compared to previous fair values received from observable market quotations, when available. When a public quotation is not available, equity securities are valued by using non-binding broker quotes or throughvaluation service providers. The Company performs procedures to understand and assess the usemethodologies, processes and controls of pricing models or analysis that is based on market information regarding interest rates, credit spreads and liquidity. The underlying source data for calculating the matrix of credit spreads relative to the U.S. Treasury curve are nationally recognized indices.valuation service providers. In addition, credit rating (or credit quality equivalent information)the Company may validate the reasonableness of securities is also factored into a pricing matrix. These inputs are based on assumptions deemed appropriate given the circumstances and are believedfair values by comparing information obtained from valuation service providers or broker-dealers to be consistent with what other market participants would use when pricing suchthird-party valuation sources for selected securities.
At December 31,
2016,2019, Level 3 invested assets comprised
approximately 3%4.8% of the
Company’sCompany's total investment portfolio fair value. Invested assets are classified as Level 3 when fair value is determined based on unobservable inputs that are supported by little or no market activity and those inputs are significant to the
determination of fair value.
Other-than-temporary ImpairmentEvaluation of Investments
Other-than-Temporary Impairments
The Company's methodology of assessing
other-than-temporary impairmentsOTTI for fixed maturity securities is based on security-specific facts and circumstances as of the
balance sheetreporting date. The Company
reviewshas a policy and process to evaluate fixed maturity securities (at the
fair value of all investments in its portfoliocusip/issuer level) on a
monthlyquarterly basis to assess whether
an other-than-temporary decline in valuethere has
occurred.been OTTI. These reviews, in conjunction with the Company's investment managers' monthly credit reports and relevant factors such as (1) the financial condition and near-term prospects of the issuer, (2) the length of time and extent to which the fair value has been less than
the amortized cost
for fixed maturity securities or cost for equity securities,basis, (3)
for fixed maturity securities, the
Company’sCompany's intent to sell a security or whether it is more likely than not the Company will be required to sell the security before the anticipated recovery of the amortized cost
basis; and for equity securities, the Company’s ability and intent to hold the security for the recovery of cost or if recovery of cost is not expected within a reasonable period of time,basis, (4)
the stock price trend of the issuer, (5) the market leadership position of the issuer,
(6)(5) the debt ratings of the issuer, and
(7)(6) the cash flows and liquidity of the issuer or the underlying cash flows for asset-backed securities, are all considered in the impairment assessment.
When an other-than-temporary impairmentOTTI is deemed to have occurred, the investment is written-down to fair value with a realized loss charged to income forat the period for the full loss amount for all equity securitiestrade lot level and the credit-related loss portion associated with impaired fixed maturity securities.is recognized as a net investment loss during the period. The amount of the total other-than-temporary impairmentOTTI related to non-credit factors for fixed maturity securities is recognized in other comprehensive income (OCI), net of applicable taxes, in which the Company has the intent to sell the security or if it is more likely than not the Company will be required to sell the security before the anticipated recovery of the amortized cost basis. See also “Notes toAlso, see Part II - Item 8, Note 1 of the Consolidated Financial Statements — Note 1 — Summaryin this report.
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| 42 Annual Report on Form 10-K | | Horace Mann Educators Corporation |
Evaluation of
Significant Accounting Policies — Other-than-temporaryGoodwill and Intangible Assets for Impairment
of Investments”.
Goodwill
Goodwill represents the excess of the amounts paid to acquire a business over the fair value of its net assets at the date of acquisition. Goodwill is not amortized, but is tested for impairment at the reporting unit level at least annually or more frequently if events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Ifvalue. Goodwill impairment is the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of the reporting unitgoodwill. A goodwill exceeds the implied goodwill value, an impairment loss would be recognized in an amount equal to that excess; the charge could have a material adverse effect on the Company’sCompany's results of operations. The Company’sCompany's reporting units, for which goodwill has been allocated, are equivalent to the Company’sCompany's operating segments. As of December 31, 2016,2019, the Company’sCompany's allocation of goodwill by reporting unit/segmentunit was as follows: $28.0 million, Retirement; $9.9 million, Life; and $9.5 million, Property and Casualty.Casualty; $19.6 million, Supplemental; $10.1 million, Retirement; and $9.9 million, Life. Also see “Notes toPart II - Item 8, Notes 1 and 7 of the Consolidated Financial Statements — Note 1 — Summaryin this report.
The goodwill impairment test, as defined in GAAP, allows an entity the option to first assess qualitative factors to determine whether the existence of
Significant Accounting Policies — Goodwill”.events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying value. If an entity determines it is more likely than not that the fair value of a reporting unit is less than its carrying value, then the entity performs a quantitative goodwill impairment test by comparing the fair value of a reporting unit to its carrying value for purposes of confirming and measuring an impairment.
The process of evaluating goodwill for impairment requires management to make multiple judgments and assumptions to determine the fair value of each reporting unit, including discounted cash flow calculations, the level of the
Company’sCompany's own share price and assumptions that market participants would make in valuing each reporting unit. Fair value estimates are based primarily on an in-depth analysis of historical experience, projected future cash flows and relevant discount rates, which consider market participant inputs and the relative risk associated with the projected cash flows. Other assumptions include levels of
economic capital, future business growth, earnings projections and assets under management for each reporting unit. Estimates of fair value are subject to assumptions that are sensitive to change and represent the Company’sCompany's reasonable expectation regarding future developments. The Company also considers other valuation techniques such as peer company price-to-earnings and price-to-book multiples.
The assessment of goodwill recoverability requires significant judgment and is subject to inherent uncertainty. The use of different assumptions, within a reasonable range, could cause the fair value
of a reporting unit to be below carrying value. Subsequent goodwill assessments could result in impairment, particularly for each reporting unit with at-risk goodwill, due to the impact of a volatile financial
marketmarkets on earnings, discount rate assumptions, liquidity and market capitalization.
The annuity reinsurance transaction triggered an assessment resulting in the write-down of a certain amount of goodwill for impairment during the second quarter of 2019 (see Part II - Item 8, Note 7 of the Consolidated Financial Statements in this report for more information). There were no
other events or material changes in circumstances during
20162019 that indicated that
aan adverse material change in the fair value of the
Company’sCompany's reporting units had occurred.
The value of business acquired (VOBA) represents the difference between the fair value of insurance contracts and insurance policy reserves measured in accordance with the Company's accounting policies for insurance contracts acquired. VOBA was based on an actuarial estimate of the present value of future distributable earnings for insurance in force on the acquisition date. VOBA was $90.7 million as of December 31, 2019 and is being amortized by product based on the present value of future premiums to be received. The Company estimates that it will recognize VOBA amortization of $7.1 million in 2020, $6.7 million in 2021, $6.2 million in 2022, $5.8 million in 2023 and $5.4 million in 2024.
The Company accounts for the value of distribution acquired (VODA) associated with the acquisition of NTA based on an actuarial estimate of the present value of future business to be written by the existing distribution channel. VODA was $47.5 million as of December 31, 2019 and is being amortized on a straight-line basis. The Company estimates that it will recognize VODA amortization of $2.9 million in each of the years 2020 through 2024, respectively.
The Company accounts for VODA associated with the acquisition of BCG based on management's estimate of the present value of future business to be written by the existing distribution channel. VODA was $4.6 million as of December 31, 2019 and is being amortized based on the present value of future profits to be received. The Company estimates that it will recognize VODA amortization of $0.4 million in each of the years 2020 through 2024, respectively.
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| Horace Mann Educators Corporation | | Annual Report on Form 10-K 43 |
The Company accounts for the value of agency relationships based on the present value of commission overrides retained by NTA. Agency relationships was $15.5 million as of December 31, 2019 and is being amortized based on the present value of future premiums to be received. The Company estimates that it will recognize agency relationships amortization of $2.6 million in 2020, $2.2 million in 2021, $1.9 million in 2022, $1.6 million in 2023 and $1.4 million in 2024.
The Company accounts for the value of customer relationships based on the present value of expected profits from existing BCG customers in force at the date of acquisition. Customer relationships was $7.3 million as of December 31, 2019 and is being amortized based on the present value of future profits to be received. The Company estimates that it will recognize customer relationships amortization of $1.5 million in 2020, $1.2 million in 2021, $1.0 million in 2022, $0.9 million in 2023 and $0.7 million in 2024.
Trade names represents the present value of future savings accruing to 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. State licenses represents the regulatory licenses held by NTA that were valued using the cost approach. Both trade names and state licenses are indefinite-lived intangibles that are not subject to amortization.
VOBA is reviewed for recoverability from future income, including net investment income, and costs which are deemed unrecoverable are expensed in the period in which the determination is made. No such costs were deemed unrecoverable during the year ended December 31, 2019.
Amortizing intangible assets (i.e., VODA, agency relationships and customer relationships) are tested for recoverability whenever events or changes in circumstances indicate that its carrying value may not be recoverable. The carrying amount of an amortizing intangible asset is not recoverable if it exceeds the sum of undiscounted cash flows expected to result from the use and eventual disposition of the asset. If the carrying value is not recoverable from undiscounted cash flows, the impairment is measured as the difference between the carrying value and fair value.
Intangible assets that are not subject to amortization (i.e., trade names and state licenses) are tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired. The impairment test consists of a comparison of the fair value of an intangible asset with its carrying value. If the carrying value of an intangible asset that is not subject to amortization exceeds its fair value, an impairment loss is to be recognized in an amount equal to that excess.
Valuation of Supplemental, Annuity and Life Deferred Policy Acquisition Costs
for Investment Contracts and Life Insurance Products with Account Values
Policy acquisition costs,
DAC, consisting of commissions, policy issuance and other costs which are incremental and directly related to the successful acquisition of new or renewal business, are deferred and amortized on a basis consistent with the type of insurance coverage. For
supplemental policies, DAC is amortized in proportion to anticipated premiums over the terms of the insurance policies (approximately 6 years, based on an estimated average duration across all supplemental products). For all investment (annuity) contracts,
deferred policy acquisition costs areDAC is amortized over 20 years in proportion to estimated gross profits.
Deferred policy acquisition costs areDAC is amortized in proportion to estimated gross profits over 20 years for certain life insurance products with account values and over 30 years for
indexed universal life contracts (“IUL”). See also “Notes toIUL. For further information, see Part II - Item 8, Note 1 of the Consolidated Financial Statements
— Note 1 — Summary of Significant Accounting Policies — Deferred Policy Acquisition Costs”.in this report.
The most significant assumptions that are involved in the estimation of annuity gross profits include interest rate spreads, future financial market performance, business surrender/lapse rates, expenses and the impact of
realizednet investment gains
and losses.(losses). For the variable deposit portion of
the Retirement,
segment, the Company amortizes
deferred policy acquisition costsDAC utilizing a future financial market performance assumption of
a 10%an 8.0% reversion to the mean approach with a 200 basis point corridor around the mean during the reversion period, representing a cap and a floor on the
Company’sCompany's long-term assumption. The
Company’sCompany's practice with regard to
returns on Separate Accountsfuture financial market performance assumes that long-term appreciation in the financial
marketmarkets is not changed by short-term market fluctuations, but is only changed when sustained annual deviations are experienced. The Company monitors these fluctuations and only changes the assumption when the long-term expectation changes. The potential effect of an increase/(decrease) by 100 basis points in the assumed future rate of return is reasonably likely to result in an estimated decrease/(increase) in
the deferred policy acquisition costsDAC amortization expense of approximately
$1$3.0 million. Although this evaluation reflects likely outcomes, it is possible an actual outcome may fall below or above these estimates. At December 31,
2016,2019, the ratio of
deferred annuity policy acquisition costsDAC to the total annuity accumulated cash value was
approximately 3%2.5%.
In the event actual experience differs significantly from assumptions or assumptions are significantly revised, the Company may be required to record a material charge or credit to current period amortization expense for the
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| 44 Annual Report on Form 10-K | | Horace Mann Educators Corporation |
period in which the adjustment is made. As noted above, there are key assumptions involved in the evaluation of
deferred policy acquisition costs.DAC. In terms of the sensitivity of this amortization to
twothree of the more significant assumptions, based on
deferred annuity policy acquisition costsDAC as of December 31,
20162019 and assuming all other assumptions are met, (1) a 10 basis point deviation in the annual targeted interest rate spread assumption would impact amortization between
$0.25$0.3 million and
$0.35$0.4 million,
and (2) a
1%1.0% deviation from the targeted financial market performance for the underlying mutual funds of the
Company’sCompany's variable annuities would impact amortization between
$0.20$0.3 million and
$0.30$0.4 million and (3) a $1.0 million net investment gain (loss) would impact amortization by approximately $0.1 million. These results may change depending on the magnitude and direction of any actual deviations but represent a range of reasonably likely experience for the noted assumptions. Detailed discussion of the impact of adjustments to
theDAC amortization
of deferred acquisition costsexpense is included in
“ResultsResults of Operations
by Segment for the Three Years Ended December 31,
2016 — Policy Acquisition Expenses Amortized”.
2019.
The most significant assumptions that are involved in the estimation of life insurance gross profits include interest rates expected to be received on investments, business persistency, and mortality. Conversions from term to permanent insurance cause an immediate write down of the associated DAC. The impact on amortization due to assumption changes has an immaterial impact on the results of operations.
The most significant assumptions that are involved in the estimation of supplemental gross profits include morbidity, persistency, expenses and interest rates expected to be received on investments. When a supplemental policy lapses, there is an immediate write down of the associated DAC. The impact on amortization due to assumption changes has an immaterial impact on the results of operations.
Annually, the Company performs a gross premium valuation on life insurance and supplemental policies to assess whether a loss recognition event has occurred. This involves discounting expected future benefits and expenses less expected future premiums. To the extent that this amount is greater than the liability for future benefits less the DAC asset, in aggregate for the life insurance or the supplemental block, a loss would be recognized by first writing off the DAC and then increasing the liability.
Valuation of Liabilities for Property and Casualty
Unpaid Claims and Claim Expenses
Underwriting results of
the Property and Casualty
segment are significantly influenced by estimates of the Company's ultimate liability for insured events. There is a high degree of uncertainty inherent in the estimates of ultimate losses underlying the
liabilityliabilities for unpaid claims and claim settlement expenses. This inherent uncertainty is particularly significant for liability-related exposures due to the extended period, often many years that
transpirestranspire between a loss event, receipt of related claims data from policyholders and ultimate settlement of the claim. Reserves for Property and Casualty claims include provisions for payments to be made on reported claims
(“case reserves”)(case reserves),
IBNR claims
incurred but not yet reported (“IBNR”) and associated settlement expenses (together,
“loss reserves”)loss reserves).
The process by which these reserves are established requires reliance upon estimates based on known facts and on interpretations of circumstances, including the Company's experience with similar cases and historical trends involving claim payments and related patterns, pending levels of unpaid claims and product mix, as well as other factors including court decisions, economic conditions, public attitudes and medical costs. The Company calculates and records a single best estimate of the reserve (which is equal to the actuarial point estimate) as of each
balance sheetreporting date.
Reserves are re-estimated quarterly. Changes to reserves are recorded in the period in which development factor changes result in reserve re-estimates. A detailed discussion of the process utilized to estimate loss reserves, risk factors considered and the impact of adjustments recorded during recent years is included in
“Notes toItem 8., Note 8 of the Consolidated Financial Statements
— Note 5 — Property and Casualty Unpaid Claims and Claim Expenses”.in this report. Due to the nature of the
Company’sCompany's personal lines business, the Company has no exposure to losses related to claims for toxic waste cleanup, other environmental remediation or asbestos-related illnesses other than claims under
homeownersproperty insurance policies for environmentally related items such as mold.
Based on the Company’sCompany's products and coverages, historical experience, and modeling of various actuarial methodologies used to develop reserve estimates, the Company estimates that the potential variability of the Property and Casualty loss reserves within a reasonable probability of other possible outcomes may be approximately plus or minus 6%6.0%, which equates to plus or minus approximately $10$13.0 million of net income based on net reserves as of December 31, 2016.2019. Although this evaluation reflects the most likely outcomes, it is possible the final outcome may fall below or above these estimates.
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| Horace Mann Educators Corporation | | Annual Report on Form 10-K 45 |
There are a number of assumptions involved in the determination of the
Company’sCompany's Property and Casualty loss reserves. Among the key factors affecting recorded loss reserves for both long-tail and short-tail related coverages, claim severity and claim frequency are of particular significance. Management estimates that a
2%2.0% change in claim severity or claim frequency for the most recent 36 month period is a reasonably likely scenario based on recent experience and would result in a change in the estimated net reserves of between $6.0 million and $10.0 million for long-tail liability related exposures (automobile liability coverages) and between
$1.0$2.0 million and
$3.0$4.0 million for short-tail liability related exposures
(homeowners(property and automobile physical damage coverages). Actual results may differ, depending on the magnitude and direction of the deviation.
The
Company’sCompany's actuaries discuss their loss and loss adjustment expense actuarial analysis with management. As part of this discussion, the indicated point estimate of the IBNR loss reserve by line of business (coverage) is reviewed. The
Company’sCompany's actuaries also discuss any indicated changes to the underlying assumptions used to calculate the indicated point estimate. Any variance between the indicated reserves from these changes in assumptions and the previously carried reserves is reviewed. After discussion of these analyses and all relevant risk factors, management determines whether the reserve balances require adjustment. The
Company’sCompany's best estimate of loss reserves may change depending on a revision in the underlying assumptions.
The
Company’sCompany's liabilities for unpaid claims and claim expenses for
the Property and Casualty
segment were as follows:
| | | December 31, 2016 | | December 31, 2015 |
| | | Case | | IBNR | | | | Case | | IBNR | | |
| | | Reserves | | Reserves | | Total (1) | | Reserves | | Reserves | | Total (1) |
| | | | | | | | | | | | | | | | | | | |
| Automobile liability | | | $ | 95.2 | | | | $ | 152.5 | | | | $ | 247.7 | | | | $ | 92.5 | | | | $ | 139.5 | | | | $ | 232.0 | |
| Automobile other | | | | 6.9 | | | | | 1.8 | | | | | 8.7 | | | | | 8.4 | | | | | 1.5 | | | | | 9.9 | |
| Homeowners | | | | 11.2 | | | | | 26.2 | | | | | 37.4 | | | | | 15.3 | | | | | 30.7 | | | | | 46.0 | |
| All other | | | | 2.9 | | | | | 11.1 | | | | | 14.0 | | | | | 4.7 | | | | | 9.0 | | | | | 13.7 | |
| Total | | | $ | 116.2 | | | | $ | 191.6 | | | | $ | 307.8 | | | | $ | 120.9 | | | | $ | 180.7 | | | | $ | 301.6 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| ($ in millions) | | December 31, 2019 | | December 31, 2018 |
| | | Case Reserves | | IBNR Reserves | | Total (1) | | Case Reserves | | IBNR Reserves | | Total (1) |
| Automobile liability | | $ | 97.9 |
| | $ | 219.2 |
| | $ | 317.1 |
| | $ | 103.5 |
| | $ | 171.7 |
| | $ | 275.2 |
|
| Automobile other | | 12.3 |
| | (5.4 | ) | | 6.9 |
| | 12.4 |
| | (4.0 | ) | | 8.4 |
|
| Property | | 12.8 |
| | 39.5 |
| | 52.3 |
| | 24.3 |
| | 48.2 |
| | 72.5 |
|
| All other | | 2.3 |
| | 8.4 |
| | 10.7 |
| | 2.1 |
| | 9.0 |
| | 11.1 |
|
| Total | | $ | 125.3 |
| | $ | 261.7 |
| | $ | 387.0 |
| | $ | 142.3 |
| | $ | 224.9 |
| | $ | 367.2 |
|
| |
(1) | These amounts are gross, before reduction for ceded reinsurance reserves. |
The facts and circumstances leading to the
Company’sCompany's re-estimate of reserves relate to revisions of the development factors used to predict how losses are likely to develop from the end of a reporting period until all claims have been paid. Re-estimates occur because actual loss amounts are different than those predicted by the estimated development factors used in prior reserve estimates. At December 31,
2016,2019, the impact of a reserve re-estimation resulting in a
1%1.0% increase in net reserves would be a decrease of approximately
$2$2.0 million in net income. A reserve re-estimation resulting in a
1%1.0% decrease in net reserves would increase net income by approximately
$2$2.0 million.
Favorable prior years’years' reserve reestimatesre-estimates increased net income in 20162019 by approximately $5$7.5 million pretax, primarily the result of favorable severity trends in propertyauto for accident years 2014 and prior.year 2018. The lower than expected claims emergence and resultant lower expected loss ratios caused the Company to lower its reserve estimate at December 31, 2016.
2019.
Valuation of Certain Investment
ContractContracts and
Life Policy Reserves
Liabilities for future benefits on lifeannuity and annuitylife policies are established in amounts adequate to meet the estimated future obligations on policies in force.
Liabilities for future benefits on deferred annuity contracts, excluding fixed indexed annuity (FIA) products, are carried at accumulated policyholder values without reduction for potential surrender or withdrawal charges. Liabilities for FIA products are bifurcated into an embedded derivative and a host contract. The embedded derivative is recognized at fair value and is reported in Other policyholder funds on the Consolidated Balance Sheets, and is determined using the option budget method. The host contract is accounted for as a debt instrument with the initial amount determined as the consideration amount less the initial embedded derivative, as described above. Any discount to the minimum account value is accreted over the life of the products using the effective yield method. Key assumptions used in the estimation of the liabilities for FIA products include the risk free interest rate, the value of options currently in force, the future expected option budget based on product pricing targets, mortality and lapses.
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| 46 Annual Report on Form 10-K | | Horace Mann Educators Corporation |
Liabilities for future benefits on payout annuity contracts are determined as the present value of expected future benefit payments. Key assumptions used in the calculation include the future investment yield and mortality, for those contracts with life contingencies.
Liabilities for future policy benefits on certainsupplemental insurance policies are computed using the net level premium method and are based on assumptions as to future investment yields, morbidity, mortality, persistency, expenses and other assumptions based on the Company’s experience, including provisions for adverse deviation. Mortality, morbidity and lapse assumptions for all policies have been based on standard actuarial tables which are modified as appropriate to reflect the Company's own experience. In the event actual experience is worse than the assumptions, additional reserves may be required. This would result in recognition of a loss for the period in which the increase in reserves occurred.
Liabilities for future policy benefits on life insurance policies, excluding indexed universal life (IUL) products, are computed using the net level premium method and are based on assumptions as to future investment yield, mortality and lapses. Mortality and lapse assumptions for all policies have been based on actuarial tables which are consistent with the Company's own experience. In the event actual experience is worse than the assumptions, additional reserves may be required. This would result in recognition of a charge to incomeloss for the period in which the increase in reserves occurred. Liabilities for future benefits on annuity contracts and certain long-duration life insurance contracts are carried at accumulated policyholder values without reduction for potential surrender or withdrawal charges. See also “Notes toAlso, see Part II - Item 8, Note 1 of the Consolidated Financial Statements — Note 1 — Summaryin this report. Liabilities for IUL products are bifurcated into an embedded derivative and a host contract. The embedded derivative is recognized at fair value and is set equal to the fair value of Significantthe current call options purchased to hedge the liability. The host contract is measured using the retrospective deposit method which is equal to the account balance.
Valuation of Assets Acquired and Liabilities Assumed under Purchase Accounting
Policies — Investment Contract and
Life Policy Reserves”.
Deferred Taxes
Deferred taxPurchase Price Allocation
In accounting for the acquisitions of NTA and BCG, assets acquired and liabilities assumed were 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 was recognized as goodwill. A significant amount of judgment was involved in estimating the individual fair values of tangible assets, intangible assets, and other assets and liabilities. The Company used all available information to make these fair value determinations and engaged third-party consultants for valuation assistance. The fair value of assets and liabilities
represent the tax effectas of the
differences between the financial statement carrying valueacquisition date were estimated using a combination of
existing assets and liabilities and their respective tax bases. The Company evaluates deferred tax assets periodically to determine if they are realizable. Factors in the determination include the performance of the businessapproaches, including the
abilityincome approach, which required the Company to
generate taxable income from a varietyproject future cash flows and apply an appropriate discount rate; the cost approach, which required estimates of
sourcesreplacement costs and
tax planning strategies. If, based on available information, it is more likely than not thatdepreciation and obsolescence estimates; and the
deferred income tax asset will not be realized, then a valuation allowance must be established with a corresponding charge to net income. Charges to establish a valuation allowance could have a material adverse effect on the Company’s results of operations and financial position. See also “Notes to Consolidated Financial Statements — Note 8 — Income Taxes”.
Valuation of Liabilities Related to the Defined Benefit Pension Plan
market approach. The Company's cost estimates for its frozen defined benefit pension plan are determined annuallyused in determining fair values were based on assumptions believed to be reasonable but which includeare inherently uncertain. Accordingly, actual results may differ materially from the projected results used to determine fair value.
The VOBA intangible asset represents the difference between the fair value of insurance contracts and insurance policy reserves measured in accordance with the Company's accounting policies for insurance contracts acquired. VOBA was based on an actuarial estimate of the present value of future distributable earnings for insurance in force on the acquisition date. The VODA intangible asset associated with the acquisition of NTA was based on an actuarial estimate of the present value of future business to be written by the existing distribution channel. The VODA intangible asset associated with the acquisition of BCG was based on management's estimate of the present value of future business to be written by the distribution channel. 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 to 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. 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 insurance contracts, consisting of VOBA and insurance policy reserves, and VODA, required management to use judgment to estimate the fair value. Assumptions included discount rate, 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. Two of the most significant inputs in these calculations are the discount rate expected return on plan assets, anticipated retirement rateassumption used to arrive at the present value of the net cash flows and estimated lump sum distributions. A discount ratethe morbidity assumption used to estimate the fair value of 3.90% was usedinsurance contracts and insurance policy reserves
|
| | |
| Horace Mann Educators Corporation | | Annual Report on Form 10-K 47 |
and future business to be produced by the
Company for estimating accumulated benefits under the plan at December 31, 2016, which was basedexisting distribution channel. Actual experience on the
average yield for long-term, high grade securities having maturities generally consistent withpurchased business may vary from these projections and the
defined benefit pension payout period. To set its discount rate, the Company looks to leading indicators, including the Mercer Above Mean Yield Curve. The expected annual return on plan assets assumed by the Company at December 31, 2016 was 6.50%. The assumption for the long-term rate of return on plan assets was determined by considering actual investment experience during the lifetimerecovery of the
plan, balanced with reasonable expectationsnet assets recorded is dependent upon the future profitability of
future growth considering the
various classes of assets and percentage allocation for each asset class. Management believes that it has adopted reasonable assumptions for investment returns, discount rates and other key factors used in the estimation of pension costs and asset values.To the extent that actual experience differs from the Company's assumptions, subsequent adjustments may be required, with the effects of those adjustments charged or credited to income and/or shareholders' equity for the period in which the adjustments are made. Generally, a change of 50 basis points in the discount rate would inversely impact pension expense and accumulated other comprehensive income (“AOCI”) by approximately $0.1 million and $1.1 million, respectively. In addition, for every $1 million increase (decrease) in the value of pension plan assets, there is a comparable pretax increase (decrease) in AOCI. See also “Notes to Consolidated Financial Statements — Note 11 — Pension Plans and Other Postretirement Benefits”.
Results of Operations
by Segment for the Three Years Ended December 31,
2016Insurance Premiums and Contract Charges
| | | Year Ended | | | Change From | | | Year Ended | |
| | | December 31, | | | Prior Year | | | December 31, | |
| | | 2016 | | | 2015 | | | Percent | | Amount | | | | 2014 | | |
| Insurance premiums written and contract deposits (includes annuity and life contract deposits) | | | | | | | | | | | | | | | | | | | | | |
| Property and Casualty | | $ | 634.3 | | | $ | 605.8 | | | | 4.7 | % | | $ | 28.5 | | | $ | 584.4 | | |
| Retirement (annuity) | | | 520.2 | | | | 548.0 | | | | -5.1 | % | | | (27.8 | ) | | | 480.6 | | |
| Life | | | 108.0 | | | | 102.7 | | | | 5.2 | % | | | 5.3 | | | | 102.7 | | |
| Total | | $ | 1,262.5 | | | $ | 1,256.5 | | | | 0.5 | % | | $ | 6.0 | | | $ | 1,167.7 | | |
| | | | | | | | | | | | | | | | | | | | | | |
| Insurance premiums and contract charges earned (excludes annuity and life contract deposits) | | | | | | | | | | | | | | | | | | | | | |
| Property and Casualty | | $ | 620.5 | | | $ | 596.0 | | | | 4.1 | % | | $ | 24.5 | | | $ | 581.8 | | |
| Retirement (annuity) | | | 24.9 | | | | 25.4 | | | | -2.0 | % | | | (0.5 | ) | | | 25.6 | | |
| Life | | | 113.7 | | | | 110.5 | | | | 2.9 | % | | | 3.2 | | | | 108.4 | | |
| Total | | $ | 759.1 | | | $ | 731.9 | | | | 3.7 | % | | $ | 27.2 | | | $ | 715.8 | | |
Number2019
Consolidated financial results primarily reflect the operating results of
Policies and Contracts in Force(actual counts)
| | | As of December 31, | |
| | | 2016 | | | 2015 | | | 2014 | |
| Property and Casualty | | | | | | | | | | | | |
| Automobile | | | 484,915 | | | | 486,939 | | | | 480,777 | |
| Property | | | 220,137 | | | | 224,531 | | | | 229,072 | |
| Total | | | 705,052 | | | | 711,470 | | | | 709,849 | |
| Retirement | | | 219,105 | | | | 211,071 | | | | 202,572 | |
| Life | | | 197,937 | | | | 201,789 | | | | 200,867 | |
For 2016, the Company’s premiums written and contract deposits* of $1,262.5 million increased $6.0 million, or 0.5%. For 2015, the Company’s premiums written and contract deposits of $1,256.5 million increased $88.8 million, or 7.6%, compared to a year earlier, led by growth in the Retirement segmentfour reporting segments as well as growththe corporate and other line. These segments are defined based on financial information management uses to evaluate performance and to determine the allocation of resources (see Part II - Item 8, Note 1 for a description of changes to the Company's reporting segments).
Property and Casualty
Supplemental
Retirement
Life
Corporate and Other
The determination of segment data is described in more detail in Part II - Item 8, Note 18 of the Consolidated Financial Statements in this report. The following sections provide analysis and discussion of results of operations for each of the reporting segments as well as investment results.
Property and Casualty
2019 net income reflected three factors:
12.8 points of improvement in the Property and Casualty segment. Changescombined ratio for the year due to lower catastrophe losses
favorable prior years' reserve development
improved automobile underwriting results
2018 core earnings reflected a significant level of catastrophe costs. The most significant catastrophe event in 2018 was the Camp Fire in California, which generated gross losses of $150.0 million, and, net losses after reinsurance of $37.9 million pretax. The Camp Fire in California was the largest single catastrophe event for the Company since Hurricane Katrina in 2005.
|
| | |
| 48 Annual Report on Form 10-K | | Horace Mann Educators Corporation |
The following table provides certain financial information for the Property and Casualty segment for the periods indicated.
|
| | | | | | | | | | | | | | | | | | |
| ($ in millions, unless otherwise indicated) | | Year Ended December 31, | | 2019-2018 | | 2018-2017 |
| | | 2019 | | 2018 | | 2017 | | Change % | | Change % |
| Financial Data: | | | | | | | | | | |
| Premiums written*: | | | | | | | | | | |
| Automobile | | $ | 461.7 |
| | $ | 469.9 |
| | $ | 450.7 |
| | -1.7 | % | | 4.3 | % |
| Property and other | | 221.4 |
| | 211.6 |
| | 212.1 |
| | 4.6 | % | | -0.2 | % |
| Total premiums written | | 683.1 |
| | 681.5 |
| | 662.8 |
| | 0.2 | % | | 2.8 | % |
| Change in unearned insurance premiums | | (0.4 | ) | | 15.8 |
| | 14.5 |
| | -102.5 | % | | 9.0 | % |
| Total insurance premiums earned | | 683.5 |
| | 665.7 |
| | 648.3 |
| | 2.7 | % | | 2.7 | % |
| Incurred claims and claims expenses: | | | | | | | | | | |
| Claims occurring in the current year | | 483.1 |
| | 548.0 |
| | 499.0 |
| | -11.8 | % | | 9.8 | % |
| Prior years' reserve development | | (7.5 | ) | | (0.3 | ) | | (2.7 | ) | | N.M. |
| | -88.9 | % |
| Total claims and claim expenses incurred | | 475.6 |
| | 547.7 |
| | 496.3 |
| | -13.2 | % | | 10.4 | % |
| Operating expenses, including DAC amortization | | 183.6 |
| | 179.8 |
| | 173.4 |
| | 2.1 | % | | 3.7 | % |
| Underwriting gain (loss) | | 24.3 |
| | (61.8 | ) | | (21.4 | ) | | -139.3 | % | | N.M. |
|
| Net investment income | | 41.7 |
| | 40.1 |
| | 36.2 |
| | 4.0 | % | | 10.8 | % |
| Income (loss) before income taxes | | 66.7 |
| | (20.9 | ) | | 14.5 |
| | N.M. |
| | N.M. |
|
| Net income (loss) | | 54.3 |
| | (14.3 | ) | | 17.8 |
| | N.M. |
| | N.M. |
|
| Core earnings (loss)* | | 54.3 |
| | (14.3 | ) | | 17.2 |
| | N.M. |
| | N.M. |
|
| | | | | | | | | | | |
| Operating Statistics: | | | | | | | | | | |
| Total Property and Casualty | | | | | | | | | | |
| Loss and loss adjustment expense ratio | | 69.6 | % | | 82.3 | % | | 76.6 | % | | -12.7 | pts | | 5.7 | pts |
| Expense ratio | | 26.9 | % | | 27.0 | % | | 26.7 | % | | -0.1 | pts | | 0.3 | pts |
| Combined ratio: | | 96.5 | % | | 109.3 | % | | 103.3 | % | | -12.8 | pts | | 6.0 | pts |
| Prior years' reserve development | | -1.1 | % | | — | % | | -0.4 | % | | -1.1 | pts | | 0.4 | pts |
| Catastrophes | | 7.6 | % | | 17.1 | % | | 9.5 | % | | -9.5 | pts | | 7.6 | pts |
| Underlying combined ratio* | | 90.0 | % | | 92.2 | % | | 94.2 | % | | -2.2 | pts | | -2.0 | pts |
| Automobile | | | | | | | | | | |
| Loss and loss adjustment expense ratio | | 70.6 | % | | 76.3 | % | | 79.4 | % | | -5.7 | pts | | -3.1 | pts |
| Expense ratio | | 27.0 | % | | 26.8 | % | | 26.9 | % | | 0.2 | pts | | -0.1 | pts |
| Combined ratio: | | 97.6 | % | | 103.1 | % | | 106.3 | % | | -5.5 | pts | | -3.2 | pts |
| Prior years' reserve development | | -1.2 | % | | — | % | | -0.1 | % | | -1.2 | pts | | 0.1 | pts |
| Catastrophes | | 1.2 | % | | 1.7 | % | | 2.3 | % | | -0.5 | pts | | -0.6 | pts |
| Underlying combined ratio* | | 97.6 | % | | 101.4 | % | | 104.1 | % | | -3.8 | pts | | -2.7 | pts |
| Property | | | | | | | | | | |
| Loss and loss adjustment expense ratio | | 67.4 | % | | 95.4 | % | | 70.5 | % | | -28.0 | pts | | 24.9 | pts |
| Expense ratio | | 26.8 | % | | 27.7 | % | | 26.5 | % | | -0.9 | pts | | 1.2 | pts |
| Combined ratio: | | 94.2 | % | | 123.1 | % | | 97.0 | % | | -28.9 | pts | | 26.1 | pts |
| Prior years' reserve development | | -0.9 | % | | -0.1 | % | | -1.2 | % | | -0.8 | pts | | 1.1 | pts |
| Catastrophes | | 21.1 | % | | 50.2 | % | | 24.5 | % | | -29.1 | pts | | 25.7 | pts |
| Underlying combined ratio* | | 74.0 | % | | 73.0 | % | | 73.7 | % | | 1.0 | pts | | -0.7 | pts |
| | | | | | | | | | | |
| Policies in force (in thousands) | | | | | | | | | | |
| Automobile | | 433 |
| | 463 |
| | 479 |
| | -6.5 | % | | -3.3 | % |
| Property | | 194 |
| | 201 |
| | 205 |
| | -3.5 | % | | -2.0 | % |
| Total | | 627 |
| | 664 |
| | 684 |
| | -5.6 | % | | -2.9 | % |
|
| | |
| Horace Mann Educators Corporation | | Annual Report on Form 10-K 49 |
On a reported basis, the improvement in the Company’s employee retirement savings plans which were effective beginningautomobile combined ratio in 2015 led2019 was mainly attributed to approximately $30 million4.0 points of improvement in the $88.8 million increaseunderlying loss ratio* due to rate actions combined with continued stabilization in 2015; consolidated and Retirement segment growth were approximately 5% and 7%, respectively,auto loss trends. The property combined ratio improved 28.9 points in 2015 excluding this item. The Company’s premiums and contract charges earned increased $27.2 million, or 3.7%, compared to 2015,2019 primarily due to increases in average premium per policy for both homeowners and automobile. For 2015,lower catastrophe losses. On an underlying basis, the Company’s premiums and contract charges earnedproperty loss ratio* increased $16.1 million, or 2.2%,1.0 point compared to 2014 primarily due to increasesthe prior year.
Catastrophe costs incurred were as follows:
|
| | | | | | | | | | | | |
| ($ in millions) | | Year Ended December 31, |
| | | 2019 | | 2018 | | 2017 |
| Three months ended in 2019 | | | | | | |
| March 31 | | $ | 10.8 |
| | $ | 9.8 |
| | $ | 17.2 |
|
| June 30 | | 22.1 |
| | 26.8 |
| | 32.4 |
|
| September 30 | | 14.7 |
| | 32.2 |
| | 8.6 |
|
| December 31 | | 4.4 |
| | 45.3 |
| | 3.6 |
|
| Total full year | | $ | 52.0 |
| | $ | 114.1 |
| | $ | 61.8 |
|
Rate actions were the primary factor for the slight increase in
average premium per policy for both homeowners and automobile.Total Property and Casualtytotal premiums written* increased 4.7%, or $28.5 million, in 2016, compared to 2015, primarily due2018. For 2019, average approved rate changes were 4.8% for automobile and 3.5% for property.
Automobile premiums written* decreased $8.2 million compared to
increases in2018. In 2019, the average written premium per policy
for both homeowners and
automobile. For 2016,average earned premium per policy increased 4.1% and 5.3%, respectively, compared to 2018. In 2018, automobile premiums written increased $19.2 million compared to 2017. In 2018, the
Company’s full year rate plan anticipated mid-single digit average
rate increases (including states with no rate actions) for both automobilewritten premium per policy and
homeowners; average
approved rate changes during 2016 were consistent with those plans at 6.5% for automobileearned premium per policy increased 6.9% and
5% for homeowners.6.8%, respectively, compared to 2017. Based on policies in force, the automobile 12 month retention rate for new and renewal policies was 83.5% compared to 84.7%81.1%, 81.9% and 83.0% at both December 31, 20152019, 2018 and 2014,2017, respectively, with the decrease due to recent rate and underwriting actions. The property 12 month new and renewal policy retention rate was 87.8%, 88.3% and 87.9% at December 31, 2016, 2015 and 2014, respectively, with decrease due to recent rate and underwriting actions.
Automobile premiums written* increased 5.9%, or $23.7 million, compared to 2015. In 2016, the average written premium per policy and average earned premium per policy increased approximately 5% and 4%, respectively, compared to a year earlier. In 2015, automobile premiums written increased 4.8%, or $18.4 million, compared to 2014. In 2015, the average written premium per policy and average earned premium per policy increased approximately 3% and 2%, respectively, compared to a year earlier, which was augmented by the 2015 increase in policies in force. The number of educator policies increased more than the total policy counthas been stable relative to overall automobile policies over the past three year periodyears as educators represented 85.4%, 85.4% and represented approximately 85%, 85% and 84%85.2% of the automobile policies in force atas of December 31, 2016, 20152019, 2018 and 2014,2017, respectively.
Homeowners
Property and other premiums written* increased 2.4%, or $4.8$9.8 million compared to 2015. Homeowners2018, as catastrophe reinstatement reinsurance premiums reduced premiums written increased 1.5%, or $3.0by approximately $6.7 million compared to 2014.in 2018. While the number of homeownersproperty policies in force has declined, the average written premium per policy and average earned premium per policy each increased approximately 4%6.2% and 5.4%, in 2016respectively, compared to a year earlier.2018. In addition, reduced catastrophe reinsurance costs benefited the current period premiums written by approximately $1.4 million. In 2015, while the number of homeowners policies in force declined,2018, the average written premium per policy and average earned premium per policy each increased approximately 3%4.3% and 3.1%, respectively, compared to a year earlier.2017. Based on policies in force, the property 12 month new and renewal policy retention rate was 87.1%, 88.0% and 87.6% at December 31, 2019, 2018 and 2017, respectively. The number of educator policies has been stable relative to overall property policies over the past three years as educators represented approximately 82%82.4%, 82.2% and 82.1% of the homeownersproperty policies in force atas of December 31, 2016, compared to approximately 81% at December 31, 20152019, 2018 and 80% at December 31, 2014, respectively,2017, respectively.
The Property and
has reflected more moderate declines than the overall homeowner policies in force count. The number of educator policiesCasualty expense ratio was 26.9%, 27.0% and
total policies has been,26.7% for 2019, 2018 and
may continue to be, impacted by the Company’s risk mitigation programs, including actions in catastrophe-prone coastal areas, involving policies of both educators and non-educators.2017, respectively.
The Company continues to evaluate and implement actions to further mitigate its risk exposure in hurricane-prone areas, as well as other areas of the country.exposure. Such actions could include, but are not limited to, non-renewal of homeownersproperty policies, restricted agent geographic placement, limitations on agent new business sales, further tightening of underwriting standards and increased utilization of third-party vendor products. By June 30, 2015,
Supplemental
The Company acquired NTA on July 1, 2019. As a result, the Company completed a non-renewal program to further address homeowners profitability and hurricane exposure issues in Florida. While this program impacted the overall policy in force count and premiumsCompany’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 short-term itsupplemental disability coverages) that are marketed and underwritten by NTA.
Supplemental contributed $18.0 million of net income during the second half of 2019. The pretax profit margin was 30.8% 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
risk exposure concentration, reduced overall catastrophe reinsurance costs and is expected to improve homeowners longer-term underwriting results. The Company continues to write policies for tenants in Florida. The Company also authorized its agents to write certain third-party vendors’ homeowners policies in Florida.pretax net income by $6.6 million.
|
| F-12 | |
| 50 Annual Report on Form 10-K | | Horace Mann Educators Corporation |
The following table provides certain information for the Supplemental segment for the periods indicated.
|
| | | | | | | | | | | | |
| ($ in millions, unless otherwise indicated) | | Year Ended December 31, | | 2019-2018 | | 2018-2017 |
| | | 2019 | | 2018 | | 2017 | | Change % | | Change % |
| Financial Data: | | | | | | | | | | |
| Insurance premiums and contract deposits | | $ | 65.7 |
| | N/A | | N/A | | N/A | | N/A |
Insurance premiums and contract charges earned | | 65.8 |
| | N/A | | N/A | | N/A | | N/A |
| Net investment income | | 7.5 |
| | N/A | | N/A | | N/A | | N/A |
| Benefits and settlement expenses | | 21.7 |
| | N/A | | N/A | | N/A | | N/A |
Operating expenses (includes DAC unlocking and amortization expense) | | 20.4 |
| | N/A | | N/A | | N/A | | N/A |
| Intangible asset amortization expense | | 6.6 |
| | N/A | | N/A | | N/A | | N/A |
| Income before income taxes | | 23.0 |
| | N/A | | N/A | | N/A | | N/A |
| Net income | | 18.0 |
| | N/A | | N/A | | N/A | | N/A |
| Core earnings* | | 18.0 |
| | N/A | | N/A | | N/A | | N/A |
| | | | | | | | | | | |
| Operating Statistics: | | | | | | | | | | |
| Supplemental insurance in force (thousands) | | 297 |
| | N/A | | N/A | | N/A | | N/A |
Benefits ratio (1) | | 37.5 | % | | N/A | | N/A | | N/A | | N/A |
Expense ratio (2) | | 27.3 | % | | N/A | | N/A | | N/A | | N/A |
Pretax profit margin (2) | | 30.8 | % | | N/A | | N/A | | N/A | | N/A |
| Persistency | | 89.3 | % | | N/A | | N/A | | 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.
Retirement
2019 net income decreased $46.5 million due to the impacts of the annuity
deposits* receivedreinsurance transaction coupled with a $28.0 million goodwill impairment charge triggered by the transaction. 2019 core earnings* decreased
5.1%, or $27.8$18.5 million compared to
the prior year, primarily due to changes in the Company’s employee retirement savings plans which resulted in non-recurring deposits received in 2015. The 2016 decrease reflected a 7.6% decrease in recurring deposit receipts and a 3.3% decrease in single premium and rollover deposit receipts. Excluding the 2015 non-recurring item, the remaining 2016 decrease was minimal. For 2015, total annuity deposits received increased 14.0%, or $67.4 million, compared to the prior year, including a 22.6% increase in recurring deposit receipts and an 8.7% increase in single premium and rollover deposit receipts.In addition to external contractholder deposits, annuity new recurring deposits include contributions and transfers by Horace Mann’s employees into the Company’s 401(k) group annuity contract. The Company’s employee retirement savings plans are described in “Notes to Consolidated Financial Statements — Note 11 — Pension Plans and Other Postretirement Benefits”. Note that deposits into the Company’s employee 401(k) group annuity contract are not reported as “sales”.
In 2016, new deposits to fixed accounts of $356.6 million decreased 4.4%, or $16.5 million, and new deposits to variable accounts of $163.6 million decreased 6.5%, or $11.3 million, compared to the prior year, including2018, reflecting the impact of the 2015 non-recurring employee retirement savings plans item described above. In 2015, new depositsannuity reinsurance transaction which ceded $2.9 billion of fixed and variable reserves (see Part II - Item 8, Note 6 of the Consolidated Financial Statements for further details). 2019 results also include higher operating expenses from the inclusion of BCG.
2018 net income declined due to
fixed accounts of $373.1 million increased 9.7%, or $33.1 million, and new deposits to variable accounts of $174.9 million increased 24.4%, or $34.3a favorable impact from TCJA enacted in 2017. 2018 core earnings decreased $7.2 million compared to
the prior year.Total annuity accumulated value2017, reflecting tightening annualized net interest spreads on deposit of $6.4 billion at December 31, 2016 increased 7.2% comparedfixed annuities, higher DAC unlocking, and higher operating expenses to a year earlier, reflecting the increase from new deposits received as well as favorable retention. Accumulated value retentionsupport long-term retirement infrastructure.
|
| | |
| Horace Mann Educators Corporation | | Annual Report on Form 10-K 51 |
The following table provides certain information for the variable annuity option was 94.7%, 94.3% and 94.0%Retirement segment for the 12 month periods ended December 31, 2016, 2015 and 2014, respectively; fixedindicated.
|
| | | | | | | | | | | | | | | | | | |
| ($ in millions, unless otherwise indicated) | | Year Ended December 31, | | 2019-2018 | | 2018-2017 |
| | | 2019 | | 2018 | | 2017 | | Change % | | Change % |
| Financial Data: | | | | | | | | | | |
| Contract charges earned | | $ | 29.1 |
| | $ | 31.2 |
| | $ | 28.0 |
| | -6.7 | % | | 11.4 | % |
| Net investment income | | 174.7 |
| | 262.6 |
| | 262.0 |
| | -33.5 | % | | 0.2 | % |
| Interest credited | | 93.6 |
| | 161.1 |
| | 153.5 |
| | -41.9 | % | | 5.0 | % |
Net interest margin without net investment gains (losses) | | 81.1 |
| | 101.5 |
| | 108.5 |
| | -20.1 | % | | -6.5 | % |
| Net interest margin - Reinsured block | | 3.4 |
| | — |
| | — |
| | N.M. |
| | N.M. |
|
| Mortality loss and other reserve charges | | 5.3 |
| | 7.6 |
| | 5.8 |
| | -30.3 | % | | 31.0 | % |
| Operating expenses | | 60.5 |
| | 57.3 |
| | 49.8 |
| | 5.6 | % | | 15.1 | % |
DAC and intangible asset amortization expense, excluding DAC unlocking | | 18.0 |
| | 19.2 |
| | 16.7 |
| | -6.3 | % | | 15.0 | % |
| DAC unlocking | | 3.5 |
| | 3.9 |
| | 1.1 |
| | -10.3 | % | | N.M. |
|
| Other expenses - goodwill impairment | | 28.0 |
| | — |
| | — |
| | N.M. |
| | N.M. |
|
| Income (loss) before income taxes | | (1.8 | ) | | 51.7 |
| | 69.0 |
| | -103.5 | % | | -25.1 | % |
| Net income (loss) | | (4.8 | ) | | 41.7 |
| | 88.4 |
| | -111.5 | % | | -52.8 | % |
| Core earnings* | | 23.2 |
| | 41.7 |
| | 48.9 |
| | -44.4 | % | | -14.7 | % |
| | | | | | | | | | | |
| Operating Statistics: | | | | | | | | | | |
| Annuity contract deposits* | | | | | | | | | | |
| Variable | | $ | 217.3 |
| | $ | 205.8 |
| | $ | 173.9 |
| | 5.6 | % | | 18.3 | % |
| Fixed | | 245.2 |
| | 233.3 |
| | 279.2 |
| | 5.1 | % | | -16.4 | % |
| Total | | 462.5 |
| | 439.1 |
| | 453.1 |
| | 5.3 | % | | -3.1 | % |
| Single | | 256.6 |
| | 234.2 |
| | 244.4 |
| | 9.6 | % | | -4.2 | % |
| Recurring | | 205.9 |
| | 204.9 |
| | 208.7 |
| | 0.5 | % | | -1.8 | % |
| Total | | 462.5 |
| | 439.1 |
| | 453.1 |
| | 5.3 | % | | -3.1 | % |
| Assets under administration (AUA) | | | | | | | | | | |
Annuity assets under management (1) | | 4,379.6 |
| | 6,713.3 |
| | 6,764.0 |
| | -34.8 | % | | -0.7 | % |
Broker and advisory assets under administration (2) | | 2,391.8 |
| | 330.3 |
| | 266.2 |
| | N.M. |
| | 24.1 | % |
Recordkeeping assets under administration (2) | | 1,499.2 |
| | — |
| | — |
| | N.M. |
| | N.M. |
|
| Total | | 8,270.6 |
| | 7,043.6 |
| | 7,030.2 |
| | 17.4 | % | | 0.2 | % |
| Persistency | | | | | | | | | | |
| Variable annuities | | 94.7 | % | | 94.4 | % | | 94.8 | % | | 0.3 | pts | | -0.4 | pts |
| Fixed annuities | | 94.0 | % | | 94.0 | % | | 94.5 | % | | — |
| | -0.5 | pts |
| Total | | 94.3 | % | | 94.1 | % | | 94.6 | % | | 0.2 | pts | | -0.5 | pts |
| Annuity contracts in force (thousands) | | 229 |
| | 226 |
| | 223 |
| | 1.3 | % | | 1.3 | % |
| Fixed spread - YTD annualized (basis points) | | 194 |
| | 171 |
| | 194 |
| | 23 | bps | | -23bps |
|
| |
(1) | Amount reported as of December 31, 2019 excludes $707.8 million of assets under management held under modified coinsurance reinsurance. |
| |
(2) | 2019 includes the results of BCG acquired on January 2, 2019. |
2019 annuity
retention was 94.6%, 94.8% and 94.5% for the respective periods.Variable annuity accumulated balances of $1.9 billion at December 31, 2016contract deposits* increased 6.8% compared to December 31, 2015, reflecting a positive impact from financial market performance over the 12 months partially offset by net balances transferred from the variable account option to the guaranteed interest rate fixed account option. Compared to 2015, Retirement segment contract charges earned decreased 2.0%, or $0.5 million. Variable annuity accumulated balances of $1.8 billion at December 31, 2015 decreased 0.7% compared to December 31, 2014, reflecting minimal impact from financial market performance over the 12 months and net balances transferred from the variable account option to the guaranteed interest rate fixed account option partially offset by net positive cash flows. Retirement segment contract charges earned decreased 0.8%, or $0.2$23.4 million compared to 2014.
Life segment premiums2018, reflecting positive momentum in retirement initiatives and contract deposits* for 2016in engaging new households. Compared to 2018, variable and fixed annuity deposits increased 5.2%, or $5.3$11.5 million compared to the prior year, including the favorable impact of new ordinary life business growth. Life segment premiums and contract deposits for 2015 were equal to the prior year, including the favorable impact of new ordinary life business growth offset by a modest decline in group life premiums. The ordinary life insurance in force lapse ratio was 4.3%, 4.1% and 4.0% for the 12 months ended$11.9, respectively.
At December 31,
2016, 2015 and 2014, respectively.Sales*
For 2016, Property and Casualty new annualized sales premiums increased 5.5% compared to 2015, as 5.7%, or $4.82019, assets under management were $2.3 billion below a year ago, driven primarily by the annuity reinsurance transaction. Variable assets under management, excluding amounts held under the modified coinsurance agreement, decreased by $218.4 million growth in new automobile sales was accompanied by growth in homeowners sales of 4.7%, or $0.8 million, compared to the prior year.
While the 2016 annuity new business levels were lower than in the prior year period, the Company’s Retirement segment new business levels continued to benefit from agent training and marketing programs, which focus on retirement planning, and build on the positive results produced in recent years. Annuity sales by Horace Mann’s agency force decreased 2.1% compared to 2015, primarily due to the impact in 2015 of non-recurring, non 401(k) rollover deposits from the Company’s employee retirement savings plans. Sales from the independent agent distribution channel, which represent approximately 9.2% of total annuity sales in 2016 and are largely single premium and rollover annuity deposits, decreased approximately 17.6% compared to a year earlier. As a result, total Horace Mann annuity sales from the combined distribution channels decreased 3.7%, or $13.8, compared to 2015.
Overall, the Company’s new recurring deposit business (measured on an annualized basis at the time of sale, compared to the reporting of new contract deposits which are recorded when cash is received) decreased 6.3% compared to 2015, and single premium and rollover deposits decreased 3.3% compared to the prior year. In February 2014, the Company expanded its annuity product portfolio by introducing a fixed indexed annuity contract. This new product continues to be well received by the Company’s customers and represented approximately one-third of total annuity sales for both 2016 and 2015. Previously, the Company offered indexed annuity products underwritten by third-party vendors.
The Company’s introduction of new educator-focused portfolios of term and whole life products in recent years, including a single premium whole life product, as well as the October 2015 introduction of the Company’s IUL product have contributed to an increase in sales of proprietary life products. For 2016, sales of Horace Mann’s proprietary life insurance products totaled $15.6 million, representing an increase of 43.1%, or $4.7 million, compared to the prior year, including an increase of $3.8 million for single premium sales.
Distribution
At December 31, 2016, there was a combined total of 666 Exclusive Agencies and Employee Agents, compared to 735 at December 31, 2015 and 755 at December 31, 2014. The Company continues to expect higher quality standards for agents and agencies to focus on improving both customer experiences and agent productivity in their respective territories. Growth in new automobile sales and life sales reflects improvement in average agency productivity. The dedicated sales force is supported by the Company’s Customer Contact Center which provides a means for educators to begin their experience directly with the Company, if that is their preference. The Customer Contact Center is also able to assist educators in territories which are not currently served by an Exclusive Agency.
As mentioned above, the Company also utilizes a nationwide network of Independent Agents who comprise an additional distribution channel for the Company’s 403(b) tax-qualified annuity products. The Independent Agent distribution channel included 272 authorized agents at December 31, 2016. During 2016, this channel generated $32.8 million in annualized new annuity sales for the Company compared to $39.8 million for 2015 and $34.4 million for 2014, with the new business primarily comprised of single and rollover deposit business over the three year period.
Net Investment Income
For 2016, pretax net investment income of $361.2 million increased 8.6%, or $28.6 million, (7.9%, or $17.7 million, after tax) compared to 2015. While asset balances in the Retirement segment continue to grow, overall investment results reflected an increase in investment prepayment activity and favorable returns on alternative investments,reinsurance transaction partially offset by the impact of the current low interest rate environment. For 2015, pretax net investment income of $332.6 million increased 0.8%, or $2.8 million, (0.7%, or $1.5 million, after tax) compared to 2014. Average invested assets increased 5.6% over the 12 months ended December 31, 2016.favorable market performance. The average pretax yield on the total investment portfolio was 5.21% (3.47% after tax) for 2016, compared to the pretax yield of 5.06% (3.39% after tax) and 5.32% (3.57% after tax) for 2015 and 2014, respectively. During 2016, management continued to identify and purchase investments, including a modest level of alternative investments, with attractive risk-adjusted yields without venturing into asset classes or individual securities that would be inconsistent with the Company’s overall conservative investment guidelines.
Net Realized Investment Gains and Losses (Pretax)
For 2016, net realized investment gains were $4.1 million compared to net realized investment gains of $12.7 million and $10.9 million in 2015 and 2014, respectively. The net gains and losses in all periods were realized primarily from ongoing investment portfolio management activity and, when determined, the recognition of other-than-temporary impairment.
For the year ended December 31, 2016, the Company’s net realized investment gains of $4.1 million included $23.3 million of gross gains realized on security sales and calls partially offset by $8.1 million of realized losses primarily on securities that were disposed of during 2016 and $11.1 million of other-than-temporary impairment charges recorded largely on Puerto Rico and energy sector fixed maturity securities, as well as some equity securities.
For the year ended December 31, 2015, the Company’s net realized investment gains of $12.7 million included $39.6 million of gross gains realized on security sales and calls partially offset by $7.4 million of realized losses on securities that were disposed of during 2015 and $19.5 million of other-than-temporary impairment charges recorded largely on energy sector and Puerto Rico fixed maturity securities and one unrelated equity security.
For the year ended December 31, 2014, the Company’s net realized investment gains of $10.9 million included $26.7 million of gross gains realized on security sales and calls partially offset by $9.4 million of realized losses on securities that were disposed of during 2014, primarily mortgage-backed and municipal securities, and the $6.4 million other-than-temporary charge recorded largely on energy sector securities in the fourth quarter.
The Company, from time to time, sells securities subsequent to the balance sheet date that were considered temporarily impaired at the balance sheet date. Such sales are due to issuer specific events occurring subsequent to the balance sheet date that result in a change in the Company’s intent to sell an invested asset.
Fixed Maturity Securities and Equity Securities Portfolios
The table below presents the Company’s fixed maturity securities and equity securities portfolios by major asset class, including the ten largest sectors of the Company’s corporate bond holdings (based on fair value). Compared to December 31, 2015, credit spreads were tighter across most asset classes at December 31, 2016 and U.S. Treasury rates increased, which resulted in net unrealized investment gains to be flat in the Company’s fixed maturity securities holdings.
| | | December 31, 2016 |
| | | | | | | | | Amortized | | Pretax Net |
| | | Number of | | Fair | | Cost or | | Unrealized |
| | | Issuers | | Value | | Cost | | Gain (Loss) |
| Fixed maturity securities | | | | | | | | | | | | | | | | | | | |
| Corporate bonds | | | | | | | | | | | | | | | | | | | |
| Banking and Finance | | | 97 | | | | $ | 709.8 | | | | $ | 682.3 | | | | $ | 27.5 | |
| Insurance | | | 51 | | | | | 260.9 | | | | | 240.8 | | | | | 20.1 | |
| Energy (1) | | | 48 | | | | | 221.8 | | | | | 208.7 | | | | | 13.1 | |
| Healthcare, Pharmacy | | | 39 | | | | | 168.2 | | | | | 161.6 | | | | | 6.6 | |
| Real estate | | | 35 | | | | | 162.5 | | | | | 156.8 | | | | | 5.7 | |
| Technology | | | 28 | | | | | 161.8 | | | | | 158.8 | | | | | 3.0 | |
| Utilities | | | 39 | | | | | 159.3 | | | | | 140.9 | | | | | 18.4 | |
| Transportation | | | 22 | | | | | 156.3 | | | | | 150.4 | | | | | 5.9 | |
| Telecommunications | | | 23 | | | | | 123.8 | | | | | 115.8 | | | | | 8.0 | |
| Natural gas | | | 19 | | | | | 96.5 | | | | | 93.1 | | | | | 3.4 | |
| All Other Corporates (2) | | | 180 | | | | | 589.4 | | | | | 563.7 | | | | | 25.7 | |
| Total corporate bonds | | | 581 | | | | | 2,810.3 | | | | | 2,672.9 | | | | | 137.4 | |
| Mortgage-backed securities | | | | | | | | | | | | | | | | | | | |
| U.S. Government and federally sponsored agencies | | | 359 | | | | | 442.4 | | | | | 412.9 | | | | | 29.5 | |
| Commercial (3) | | | 121 | | | | | 503.8 | | | | | 508.5 | | | | | (4.7 | ) |
| Other | | | 29 | | | | | 70.4 | | | | | 69.2 | | | | | 1.2 | |
| Municipal bonds (4) | | | 593 | | | | | 1,769.4 | | | | | 1,648.3 | | | | | 121.1 | |
| Government bonds | | | | | | | | | | | | | | | | | | | |
| U.S. | | | 10 | | | | | 467.1 | | | | | 458.7 | | | | | 8.4 | |
| Foreign | | | 17 | | | | | 98.7 | | | | | 93.9 | | | | | 4.8 | |
| Collateralized debt obligations (5) | | | 112 | | | | | 667.7 | | | | | 662.9 | | | | | 4.8 | |
| Asset-backed securities | | | 107 | | | | | 626.9 | | | | | 624.8 | | | | | 2.1 | |
| Total fixed maturity securities | | | 1,929 | | | | $ | 7,456.7 | | | | $ | 7,152.1 | | | | $ | 304.6 | |
| | | | | | | | | | | | | | | | | | | | |
| Equity securities | | | | | | | | | | | | | | | | | | | |
| Non-redeemable preferred stocks | | | 14 | | | | $ | 50.0 | | | | $ | 52.3 | | | | $ | (2.3 | ) |
| Common stocks | | | 177 | | | | | 72.2 | | | | | 61.7 | | | | | 10.5 | |
| Closed-end fund | | | 1 | | | | | 19.4 | | | | | 20.0 | | | | | (0.6 | ) |
| Total equity securities | | | 192 | | | | $ | 141.6 | | | | $ | 134.0 | | | | $ | 7.6 | |
| | | | | | | | | | | | | | | | | | | | |
| Total | | | 2,121 | | | | $ | 7,598.3 | | | | $ | 7,286.1 | | | | $ | 312.2 | |
| (1) | At December 31, 2016, the fair value amount included $13.9 million which were non-investment grade. |
| (2) | The All Other Corporates category contains 19 additional industry classifications. Gaming, broadcast and media, food and beverage, consumer products and retail represented $428.9 million of fair value at December 31, 2016, with the remaining 13 classifications each representing less than $34.0 million. |
| (3) | At December 31, 2016, 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, approximately 40% are tax-exempt and 78% 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 December 31, 2016. |
| (5) | Based on fair value, 96% of the collateralized debt obligation securities were rated investment grade by Standard and Poor’s Corporation (“S&P”) and/or Moody’s Investors Service, Inc. (“Moody’s”) at December 31, 2016. |
At December 31, 2016, the Company’s diversified fixed maturity securities portfolio consisted of 2,465 investment positions, issued by 1,929 entities, and totaled approximately $7.5 billion in fair value. This portfolio was 95.9% investment grade, based on fair value, with an average quality rating of A. The Company’s investment guidelines generally limit single corporate issuer concentrations to 0.5% of invested assets for “AA” or “AAA” rated securities, 0.35% of invested assets for “A” or “BBB” rated securities, and 0.2% of invested assets for non-investment grade securities.
The following table presents the composition and value of the Company’s fixed maturity securities and equity securities portfolios by rating category. At December 31, 2016, 94.7% of these combined portfolios were investment grade, based on fair value, with an overall average quality rating of A. The Company has classified the entire fixed maturity securities and equity securities portfolios as available for sale, which are carried at fair value.
Rating of Fixed Maturity Securities and Equity Securities (1)
(Dollars in millions)
| | | December 31, 2016 | |
| | | Percent | | | | | |
| | | of Total | | | | | |
| | | Fair | | Fair | | Amortized |
| | | Value | | Value | | Cost or Cost |
| Fixed maturity securities | | | | | | | | | | | | | | |
| AAA | | | 8.3 | % | | | $ | 620.8 | | | | $ | 611.6 | |
| AA (2) | | | 35.5 | | | | | 2,648.4 | | | | | 2,533.5 | |
| A | | | 23.6 | | | | | 1,759.6 | | | | | 1,663.9 | |
| BBB | | | 28.4 | | | | | 2,118.7 | | | | | 2,038.5 | |
| BB | | | 2.4 | | | | | 176.4 | | | | | 174.7 | |
| B | | | 1.0 | | | | | 76.3 | | | | | 79.5 | |
| CCC or lower | | | 0.2 | | | | | 10.9 | | | | | 10.6 | |
| Not rated (3) | | | 0.6 | | | | | 45.6 | | | | | 39.8 | |
| Total fixed maturity securities | | | 100.0 | % | | | $ | 7,456.7 | | | | $ | 7,152.1 | |
| Equity securities | | | | | | | | | | | | | | |
| AAA | | | - | | | | | - | | | | | - | |
| AA | | | - | | | | | - | | | | | - | |
| A | | | - | | | | | - | | | | | - | |
| BBB | | | 35.3 | % | | | $ | 50.0 | | | | $ | 52.3 | |
| BB | | | - | | | | | - | | | | | - | |
| B | | | - | | | | | - | | | | | - | |
| CCC or lower | | | - | | | | | - | | | | | - | |
| Not rated | | | 64.7 | | | | | 91.6 | | | | | 81.7 | |
| Total equity securities | | | 100.0 | % | | | $ | 141.6 | | | | $ | 134.0 | |
| | | | | | | | | | | | | | | |
| Total | | | | | | | $ | 7,598.3 | | | | $ | 7,286.1 | |
| (1) | Ratings are as assigned primarily by S&P when available, with remaining ratings as assigned on an equivalent basis by Moody’s. Ratings for publicly traded securities are determined when the securities are acquired and are updated monthly to reflect any changes in ratings. |
| (2) | At December 31, 2016, the AA rated fair value amount included $467.1 million of U.S. Government and federally sponsored agency securities and $522.8 million of mortgage- 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 or Moody’s. |
At December 31, 2016, the fixed maturity securities and equity securities portfolios had a combined $76.0 million pretax of gross unrealized investment losses on $2,302.4 million fair value related to 731 positions. Of the investment positions (fixed maturity securities and equity securities) with gross unrealized investment losses, 12 were trading below 80% of the carrying value at December 31, 2016 and were not considered other-than-temporarily impaired. These positions had fair value of $15.2 million, representing 0.2% of the Company’s total investment portfolio at fair value, and had a gross unrealized investment loss of $6.6 million.
The Company views the unrealized investment losses of all of the securities at December 31, 2016 as temporary. Future changes in circumstances related to these and other securities could require subsequent recognition of other-than-temporary impairment.
Benefits, Claims and Settlement Expenses
| | Year Ended December 31, | | Change From Prior Year | | Year Ended December 31, |
| | 2016 | | 2015 | | Percent | | Amount | | | 2014 | | |
| | | | | | | | | | | | | | | |
| Property and Casualty | | $ | 464.1 | | | | $ | 420.3 | | | | 10.4 | % | | | $ | 43.8 | | | | $ | 399.5 | | |
| Retirement (annuity) | | | 3.9 | | | | | 3.2 | | | | 21.9 | % | | | | 0.7 | | | | | 2.2 | | |
| Life | | | 73.1 | | | | | 72.9 | | | | 0.3 | % | | | | 0.2 | | | | | | 66.7 | | |
| Total | | $ | 541.1 | | | | $ | 496.4 | | | | 9.0 | % | | | $ | 44.7 | | | | $ | 468.4 | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Property and Casualty catastrophe losses,
included above (1) | | $ | 60.0 | | | | $ | 44.4 | | | | 35.1 | % | | | $ | 15.6 | | | | $ | 37.5 | | |
| (1) | See footnote (1) to the table below. |
Property and Casualty Claims and Claim Expenses (“losses”)
| | Year Ended December 31, | |
| | 2016 | | 2015 | | 2014 | |
| Incurred claims and claim expenses: | | | | | | | | | | | | | | | |
| Claims occurring in the current year | | $ | 471.1 | | | | $ | 432.8 | | | | $ | 416.5 | | |
| Decrease in estimated reserves for claims occurring in prior years (2) | | | (7.0 | ) | | | | (12.5 | ) | | | | (17.0 | ) | |
| Total claims and claim expenses incurred | | $ | 464.1 | | | | $ | 420.3 | | | | $ | 399.5 | | |
| | | | | | | | | | | | | | | | | |
| Property and Casualty loss ratio: | | | | | | | | | | | | | | | |
| Total | | | 74.8 | % | | | | 70.5 | % | | | | 68.7 | % | |
| Effect of catastrophe costs, included above (1) | | | 9.7 | % | | | | 7.4 | % | | | | 6.5 | % | |
| Effect of prior years’ reserve development, included above (2) | | | -1.1 | % | | | | -2.1 | % | | | | -2.9 | % | |
| (1) | Property and Casualty catastrophe losses were incurred as follows: |
| | | 2016 | | 2015 | | 2014 | |
| | Three months ended | | | | | | | | | | | | | | | |
| | March 31 | | $ | 12.7 | | | | $ | 10.5 | | | | $ | 6.3 | | |
| | June 30 | | | 27.3 | | | | | 21.3 | | | | | 23.5 | | |
| | September 30 | | | 8.4 | | | | | 5.0 | | | | | 5.7 | | |
| | December 31 | | | 11.6 | | | | | 7.6 | | | | | 2.0 | | |
| | Total full year | | $ | 60.0 | | | | $ | 44.4 | | | | $ | 37.5 | | |
| (2) | Shows the amounts by which the Company decreased its reserves in each of the periods indicated for claims occurring in previous years to reflect subsequent information on such claims and changes in their projected final settlement costs indicating that the actual and remaining projected losses for prior years are below the level anticipated in the previous December 31 loss reserve estimate. |
| | | 2016 | | 2015 | | 2014 | |
| | Three months ended | | | | | | | | | | | | | | | |
| | March 31 | | $ | (2.0 | ) | | | $ | (4.0 | ) | | | $ | (4.0 | ) | |
| | June 30 | | | (1.6 | ) | | | | (3.2 | ) | | | | (3.0 | ) | |
| | September 30 | | | (0.7 | ) | | | | (2.8 | ) | | | | (4.4 | ) | |
| | December 31 | | | (2.7 | ) | | | | (2.5 | ) | | | | (5.6 | ) | |
| | Total full year | | $ | (7.0 | ) | | | $ | (12.5 | ) | | | $ | (17.0 | ) | |
For 2016, the Company’s benefits, claims and settlement expenses increased $44.7 million, or 9.0%, compared to the prior year primarily reflecting increases in Property and Casualty current accident year loss severity and frequency — specifically, in automobile — and catastrophe costs, partially offset by a reduction in homeowners current accident year non-catastrophe losses and a $4.0 million decrease in life mortality costs. In 2015, the Company’s benefits, claims and settlement expenses increased $28.0 million, or 6.0%, compared to the prior year primarily reflecting increases in Property and Casualty current accident year loss severity — specifically, in automobile — and catastrophe costs, as well as a $4.5 million increase in life mortality costs.
For 2016, 2015 and 2014, the favorable development of prior years’ Property and Casualty reserves of $7.0 million, $12.5 million and $17.0 million, respectively, for each year was the result of actual and remaining projected losses for prior years being below the level anticipated in the immediately preceding December 31 loss reserve estimate. In 2016, the favorable development was predominantly the result of favorable severity trends in property for accident years 2014 and prior. For 2015, the favorable development was primarily for accident years 2013 and prior and predominantly the result of favorable severity trends in homeowners loss emergence, accompanied by favorable severity and frequency trends in automobile loss emergence. For 2014, the favorable development was primarily for accident years 2011 and prior and predominantly the result of favorable frequency and severity trends in automobile loss emergence.
For 2016, the automobile loss ratio of 80.2% increased by 4.8 percentage points compared to the prior year, including (1) the impact of catastrophe costs that resulted in a 1.7 percentage point increase, (2) the impacts of higher current accident year non-catastrophe losses for 2016 primarily driven by loss severity and accompanied by an increase in loss frequencies and (3) development of prior years’ reserves that had a 0.8 percentage point less favorable impact in the current year, partially offset by the favorable impact of rate actions taken in recent years. The homeowners loss ratio of 63.9% for 2016 increased 2.4 percentage points compared to a year earlier, including favorable current accident year non-catastrophe experience offset by development of prior years’ reserves that had a 0.8 percentage point less favorable impact in the current year and high catastrophe costs. Catastrophe costs represented 24.2 percentage points of the homeowners loss ratio for 2016 compared to 20.4 percentage points for 2015.
Interest Credited to Policyholders
| | Year Ended | | Change From | | Year Ended |
| | December 31, | | Prior Year | | December 31, |
| | 2016 | | 2015 | | Percent | | Amount | | | | 2014 | | |
| | | | | | | | | | | | | | | | | |
| Retirement (annuity) | | $ | 147.3 | | | | $ | 138.7 | | | | | 6.2 | % | | | $ | 8.6 | | | | | $ | 132.5 | | |
| Life | | | 44.7 | | | | | 44.1 | | | | | 1.4 | % | | | | 0.6 | | | | | | 43.6 | | |
| Total | | $ | 192.0 | | | | $ | 182.8 | | | | | 5.0 | % | | | $ | 9.2 | | | | | $ | 176.1 | | |
Compared to 2015, the 2016 increase in Retirement segment interest credited reflected a 7.6% increase in average accumulated fixed deposits, at an average crediting rate of 3.55%. Compared to a year earlier, the 2015 increase in Retirement segment interest credited reflected a 7.7% increase in average accumulated fixed deposits, partially offset by a 6194 basis point decline in the average annual interest rate credited to 3.56%. Life insurance interest credited increased slightly in both 2016 and 2015 as a result of the growth in reserves for life insurance products with account values.
The net interest spread on fixed annuity assets under management measuresfor full-year 2019 includes the difference between the rate of income earned on the underlying invested assets and the rate of interest which policyholders are credited on their account values. The142 basis point net interest spreads for the years ended December 31, 2016, 2015 and 2014, were 193 basis points, 184 basis points and 204 basis points, respectively. The interest spread increased due to an increase in investment prepayment activity as well as favorable returns within the Company’s alternative investment portfolio and a continuation of disciplined crediting rate management, partially offset by pressures of the low interest rate environment.
As of December 31, 2016, fixed annuity account values totaled $4.5 billion, including $4.3 billion of deferred annuities. As shown in the table below, for approximately 87%, or $3.7 billion of the deferred annuity account values, the credited interest rate was equal to the minimum guaranteed rate. Due to limitations on the Company’s ability to further lower interest crediting rates, coupled with the expectation for continued low reinvestment interest rates, management anticipates fixed annuity spread compression in future periods. The majority of assets backing theannualized net interest spread on fixedfor the first quarter, which was prior to the annuity business is invested in fixed maturity securities.
reinsurance transaction.
|
| | |
| 52 Annual Report on Form 10-K | | Horace Mann Educators Corporation |
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
$530$215.0 million of
the Retirement
segment and Life
segment 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.
risk.
As a general guideline, for a 100 basis point decline in the average reinvestment rate and based on the
Company’sCompany's existing policies and investment portfolio, the impact from investing in that lower interest rate environment could further reduce Retirement
segment net investment income by approximately
$1.5$2.1 million in year one and
$5.3$6.3 million in year two,further reducing the
annualized net interest spread by approximately
38 basis points and
1122 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
deferred policy acquisition costs.DAC. In terms of the sensitivity of this amortization to the
annualized net interest spread, based on
deferred policy acquisition costsDAC as of December 31,
20162019 and assuming all other assumptions are met, a 10 basis point deviation in the current year targeted interest rate spread assumption would impact amortization between
$0.25$0.3 million and
$0.35$0.4 million. This result may change depending on the magnitude and direction of any actual deviations but represents a range of reasonably likely experience for the noted assumption.
Additional informationThe 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 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 is shown below.
| | | December 31, 2016 |
| | | | | | | | | | | Deferred Annuities at |
| | | Total Deferred Annuities | | Minimum Guaranteed Rate |
| | | | | | | | | Percent of | | | | | | |
| | | Percent | | Accumulated | | Total Deferred | | Percent | | Accumulated |
| | | of Total | | Value (“AV”) | | Annuities AV | | of Total | | Value |
| Minimum guaranteed interest rates: | | | | | | | | | | | | | | | | | | | | | | | | |
| Less than 2% | | | 23.5 | | | | $ | 1,003.6 | | | | | 48.2 | % | | | | 13.1 | % | | | $ | 483.8 | |
| Equal to 2% but less than 3% | | | 7.2 | | | | | 308.6 | | | | | 82.8 | % | | | | 6.9 | | | | | 255.4 | |
| Equal to 3% but less than 4% | | | 14.2 | | | | | 606.7 | | | | | 99.8 | % | | | | 16.4 | | | | | 605.1 | |
| Equal to 4% but less than 5% | | | 53.7 | | | | | 2,290.2 | | | | | 100.0 | % | | | | 62.1 | | | | | 2,290.2 | |
| 5% or higher | | | 1.4 | % | | | | 55.5 | | | | | 100.0 | % | | | | 1.5 | | | | | 55.5 | |
| Total | | | 100.0 | % | | | $ | 4,264.6 | | | | | 86.5 | % | | | | 100.0 | % | | | $ | 3,690.0 | |
|
| | | | | | | | | | | | | | | | | |
| ($ in millions) | | December 31, 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% | | 53.0 | % | | $ | 1,261.5 |
| | 49.5 | % | | 36.8 | % | | $ | 623.9 |
|
| Equal to 2% but less than 3% | | 12.1 |
| | 289.1 |
| | 83.3 |
| | 14.2 |
| | 240.9 |
|
| Equal to 3% but less than 4% | | 25.6 |
| | 610.5 |
| | 99.9 |
| | 36.0 |
| | 610.1 |
|
| Equal to 4% but less than 5% | | 7.2 |
| | 170.6 |
| | 100.0 |
| | 10.0 |
| | 170.6 |
|
| 5% or higher | | 2.1 |
| | 50.9 |
| | 100.0 |
| | 3.0 |
| | 50.9 |
|
| Total | | 100.0 | % | | $ | 2,382.6 |
| | 71.2 | % | | 100.0 | % | | $ | 1,696.4 |
|
The Company will continue to be disciplined in executing strategies to mitigate the negative impact on profitability of a sustained low interest rate environment. However, the success of these strategies may be affected by the factors discussed in
“Item 1A. Risk Factors” in this Annual Report on Form 10-KPart I - Item 1A and other factors
discussed herein.
Policy Acquisition Expenses Amortized
Amortized policy acquisition expenses were $96.7within this report.
|
| | |
| Horace Mann Educators Corporation | | Annual Report on Form 10-K 53 |
Life
2019 net income and core earnings* decreased $1.2 million for 2016 compared to $98.92018, reflecting lower net investment income and higher expenses partially offset by lower mortality costs. 2018 net income decreased $58.8 million compared to 2017, primarily due to the benefit of a $60.3 million from TCJA enacted in 2017.
For 2019, insurance premiums and $93.8contract deposits* decreased $1.2 million in 2019 compared to 2018, primarily due to a decline in single premiums. The ordinary life insurance in force lapse ratio was 4.6%, 4.6% and 4.9% for 2019, 2018 and 2017, respectively.
The following table provides certain information for the years ended December 31, 2015Life segment for the periods indicated.
|
| | | | | | | | | | | | | | | | | | |
| ($ in millions, unless otherwise indicated) | | Year Ended December 31, | | 2019-2018 | | 2018-2017 |
| | | 2019 | | 2018 | | 2017 | | Change % | | Change % |
| Financial Data: | | | | | | | | | | |
| Insurance premiums and contract deposits* | | $ | 113.2 |
| | $ | 114.4 |
| | $ | 111.2 |
| | -1.0 | % | | 2.9 | % |
| Insurance premiums and contract charges earned | | 119.6 |
| | 120.4 |
| | 118.4 |
| | -0.7 | % | | 1.7 | % |
| Net investment income | | 72.0 |
| | 74.4 |
| | 76.2 |
| | -3.2 | % | | -2.4 | % |
| Benefits and settlement expenses | | 79.5 |
| | 82.3 |
| | 80.2 |
| | -3.4 | % | | 2.6 | % |
| Interest credited | | 45.0 |
| | 45.1 |
| | 45.1 |
| | -0.2 | % | | — | % |
| DAC amortization expense, excluding unlocking | | 8.1 |
| | 7.3 |
| | 7.7 |
| | 11.0 | % | | -5.2 | % |
| DAC unlocking | | (0.3 | ) | | 0.3 |
| | (0.2 | ) | | N.M. |
| | N.M. |
|
| Operating expenses | | 37.9 |
| | 36.4 |
| | 36.5 |
| | 4.1 | % | | -0.3 | % |
| Income before income taxes | | 21.8 |
| | 23.7 |
| | 25.7 |
| | -8.0 | % | | -7.8 | % |
| Net income | | 17.6 |
| | 18.8 |
| | 77.6 |
| | -6.4 | % | | -75.8 | % |
| Core earnings* | | 17.6 |
| | 18.8 |
| | 17.3 |
| | -6.4 | % | | 8.7 | % |
| | | | | | | | | | | |
| Operating Statistics: | | | | | | | | | | |
| Life insurance in force | | $ | 19,180 |
| | $ | 18,278 |
| | $ | 17,564 |
| | 4.9 | % | | 4.1 | % |
| Number of policies in force* (in thousands) | | 201 |
| | 199 |
| | 198 |
| | 1.0 | % | | 0.5 | % |
| Average face amount in force (in dollars) | | $ | 95,488 |
| | $ | 92,073 |
| | $ | 88,758 |
| | 3.7 | % | | 3.7 | % |
| Lapse ratio (ordinary life insurance in force) | | 4.6 | % | | 4.6 | % | | 4.9 | % | | — |
| | -0.3 | pts |
| Mortality costs | | $ | 33.5 |
| | $ | 35.1 |
| | $ | 36.1 |
| | -4.6 | % | | -2.8 | % |
|
| | |
| 54 Annual Report on Form 10-K | | Horace Mann Educators Corporation |
Corporate and 2014, respectively. Other
2019 net income increased $127.2 million compared to 2018, primarily due to recognition of a $106.9 million after tax realized investment gain in the second quarter of 2019 associated with the annuity reinsurance transaction. 2019 core earnings* decreased $3.1 compared to 2018, driven by increased interest expense as the Company utilized its senior revolving credit facility on July 1, 2019 to partially fund the acquisition of NTA as well as acquisition costs associated with BCG and NTA. 2018 core earnings decreased compared to 2017, driven by transaction costs to acquire BCG and NTA of $4.0 million after tax.
|
| | | | | | | | | | | | | | | | | | |
| ($ in millions) | | Year Ended December 31, | | 2019-2018 | | 2018-2017 |
| | | 2019 | | 2018 | | 2017 | | Change % | | Change % |
| Interest expense | | $ | 14.3 |
| | $ | 11.9 |
| | $ | 11.8 |
| | 20.2 | % | | 0.8 | % |
| Net investment gains (losses) pretax | | 153.3 |
| | (12.5 | ) | | (3.4 | ) | | N.M. |
| | N.M. |
|
| Tax on net investment gains (losses) | | 33.1 |
| | (2.4 | ) | | (1.7 | ) | | N.M. |
| | 41.2 | % |
| Net investment gains (losses) after tax | | 120.2 |
| | (10.1 | ) | | (1.7 | ) | | N.M. |
| | N.M. |
|
| Net income (loss) | | 99.3 |
| | (27.9 | ) | | (14.4 | ) | | N.M. |
| | -93.8 | % |
| Core earnings (loss)* | | (20.9 | ) | | (17.8 | ) | | (11.3 | ) | | -17.4 | % | | -57.5 | % |
Investment Results
|
| | | | | | | | | | | | | | | | | | |
| ($ in millions) | | Year Ended December 31, | | 2019-2018 | | 2018-2017 |
| | | 2019 | | 2018 | | 2017 | | Change % | | Change % |
| Net investment income - investment portfolio | | $ | 294.3 |
| | $ | 376.5 |
| | $ | 373.6 |
| | -21.8 | % | | 0.8 | % |
| Investment income - deposit asset on reinsurance | | 70.8 |
| | — |
| | — |
| | N.M. |
| | N.M. |
|
| Total net investment income | | 365.1 |
| | 376.5 |
| | 373.6 |
| | -3.0 | % | | 0.8 | % |
| Pretax net investment gains (losses) | | 153.3 |
| | (12.5 | ) | | (3.4 | ) | | N.M. |
| | N.M. |
|
| Pretax net unrealized investment gains on securities | | 334.7 |
| | 141.4 |
| | 440.3 |
| | 136.7 | % | | -67.9 | % |
Excluding accreted investment income on the deposit asset on reinsurance, 2019 net investment income decreased $82.2 million compared to 2018, primarily due to a $2.1 billion reduction of invested assets from investments transferred under the annuity reinsurance transaction in the second quarter of 2019 as well as low rates on new investments and prepayments that were partially offset by stronger returns on alternative investments. For 2018, net investment income was comparable to 2017 as increased prepayment activity and returns on alternative investments offset by a reduction in yields from a strategic decision to improve the quality of the portfolio.
For 2019, pretax net unrealized investment gains on securities were up $193.3 million compared to 2018, reflecting U.S. Treasury rates that declined 76 basis points and tighter credit spreads across most asset classes. For 2018, pretax net unrealized investment gains on securities were down $298.9 million compared to 2017, reflecting U.S. Treasury rates that rose 28 basis points and wider credit spreads across most asset classes.
|
| | |
| Horace Mann Educators Corporation | | Annual Report on Form 10-K 55 |
Fixed Maturity and Equity Securities Portfolios
The decrease in 2016 was largely attributable totable below presents the Retirement segmentCompany's fixed maturity securities portfolio by major asset class, including the impactten largest sectors of the unlocking of deferred policy acquisition costs (“unlocking”) offset byCompany's corporate bond holdings (based on fair value) as well as the growth in premiums and related commissions for the Property and Casualty segment. Company's equity securities portfolio.
|
| | | | | | | | | | | | | | | |
| ($ in millions) | | December 31, 2019 |
| | | Number of Issuers | | Fair Value | | Amortized Cost or Cost | | Pretax Net Unrealized Gain (Loss) |
| Fixed maturity securities | | | | | | | | |
| Corporate bonds | | | | | | | | |
| Banking & Finance | | 118 |
| | $ | 426.5 |
| | $ | 397.9 |
| | $ | 28.6 |
|
| Insurance | | 44 |
| | 166.2 |
| | 149.0 |
| | 17.2 |
|
Energy (1) | | 68 |
| | 121.8 |
| | 111.7 |
| | 10.1 |
|
| Healthcare, Pharmacy | | 58 |
| | 116.4 |
| | 108.5 |
| | 7.9 |
|
| Real Estate | | 36 |
| | 114.4 |
| | 108.7 |
| | 5.7 |
|
| Technology | | 30 |
| | 85.6 |
| | 80.6 |
| | 5.0 |
|
| Transportation | | 32 |
| | 84.8 |
| | 79.5 |
| | 5.3 |
|
| Utilities | | 53 |
| | 76.2 |
| | 68.0 |
| | 8.2 |
|
| Telecommunications | | 27 |
| | 52.9 |
| | 47.6 |
| | 5.3 |
|
| Food and Beverage | | 23 |
| | 46.8 |
| | 43.8 |
| | 3.0 |
|
All other corporates (2) | | 223 |
| | 289.9 |
| | 269.2 |
| | 20.7 |
|
| Total corporate bonds | | 712 |
| | 1,581.5 |
| | 1,464.5 |
| | 117.0 |
|
| Mortgage-backed securities | | |
| | |
| | |
| | |
|
| U.S. Government and federally sponsored agencies | | 268 |
| | 497.2 |
| | 470.2 |
| | 27.0 |
|
Commercial (3) | | 130 |
| | 367.1 |
| | 352.2 |
| | 14.9 |
|
| Other | | 45 |
| | 75.9 |
| | 76.2 |
| | (0.3 | ) |
Municipal bonds (4) | | 560 |
| | 1,686.1 |
| | 1,545.8 |
| | 140.3 |
|
| Government bonds | | |
| | |
| | |
| | |
|
| U.S. | | 36 |
| | 458.9 |
| | 436.7 |
| | 22.2 |
|
| Foreign | | 9 |
| | 45.4 |
| | 42.8 |
| | 2.6 |
|
Collateralized loan obligations (5) | | 117 |
| | 619.4 |
| | 621.6 |
| | (2.2 | ) |
| Asset-backed securities | | 111 |
| | 460.2 |
| | 447.0 |
| | 13.2 |
|
| Total fixed maturity securities | | 1,988 |
| | $ | 5,791.7 |
| | $ | 5,457.0 |
| | $ | 334.7 |
|
| | | | | | | | | |
| Equity securities | | |
| | |
| | |
| | |
|
| Non-redeemable preferred stocks | | 14 |
| | $ | 60.4 |
| | | | |
| Common stocks | | 94 |
| | 20.1 |
| | | | |
| Closed-end fund | | 1 |
| | 21.4 |
| | | | |
| Total equity securities | | 109 |
| | $ | 101.9 |
| |
|
| |
|
|
| | | | | | | | | |
| Total | | 2,097 |
| | $ | 5,893.6 |
| |
|
| |
|
|
| |
(1) | At December 31, 2019, the fair value amount included $9.3 million which were non-investment grade. |
| |
(2) | The All Other Corporates category contains 18 additional industry classifications. Broadcasting and media, aerospace and defense, consumer products, metal and mining and retail represented $158.4 million of fair value at December 31, 2019, with the remaining 13 classifications each representing less than $18.0 million. |
| |
(3) | At December 31, 2019, 100% were investment grade, with an overall credit rating of AA+, and the positions were well diversified by property type, geography and sponsor. |
| |
(4) | Holdings are geographically diversified, 51.4% are tax-exempt and 77.5% 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 December 31, 2019. |
| |
(5) | Based on fair value, 95.2% of the collateralized loan obligation securities were rated investment grade by Standard & Poor's Global Inc. (S&P), Moody's Investors Service, Inc. (Moody's) and/or Fitch Ratings, Inc. (Fitch) at December 31, 2019. |
|
| | |
| 56 Annual Report on Form 10-K | | Horace Mann Educators Corporation |
At December 31, 2016, Retirement segment unlocking resulted2019, the Company's diversified fixed maturity securities portfolio consisted of 3,133 investment positions, issued by 1,988 entities, and totaled approximately $5.8 billion in a $0.3fair value. This portfolio was 96.4% investment grade, based on fair value, with an average quality rating of A+. The Company's investment guidelines generally limit single corporate issuer concentrations to 0.5% of invested assets for AA or AAA rated securities, 0.35% of invested assets for A or BBB rated securities, and 0.2% of invested assets for non-investment grade securities.
The following table presents the composition and fair value of the Company's fixed maturity and equity securities portfolios by rating category. At December 31, 2019, 95.7% of these combined portfolios were investment grade, based on fair value, with an overall average quality rating of A+. The Company has classified the entire fixed maturity securities portfolio as available for sale, which is carried at fair value.
Rating of Fixed Maturity Securities and Equity Securities (1)
|
| | | | | | | | | | | |
| ($ in millions) | | December 31, 2019 |
| | | Percent of Total Fair Value | | Fair Value | | Amortized Cost or Cost |
| Fixed maturity securities | | | | | | |
| AAA | | 11.5 | % | | $ | 665.1 |
| | $ | 654.9 |
|
AA (2) | | 42.7 |
| | 2,473.4 |
| | 2,327.3 |
|
| A | | 23.3 |
| | 1,349.5 |
| | 1,250.8 |
|
| BBB | | 18.9 |
| | 1,093.3 |
| | 1,022.7 |
|
| BB | | 1.7 |
| | 98.8 |
| | 95.1 |
|
| B | | 0.4 |
| | 24.6 |
| | 23.9 |
|
| CCC or lower | | — |
| | 1.6 |
| | 1.9 |
|
Not rated (3) | | 1.5 |
| | 85.4 |
| | 80.4 |
|
| Total fixed maturity securities | | 100.0 | % | | $ | 5,791.7 |
| | $ | 5,457.0 |
|
| Equity securities | | | | | | |
| AAA | | — |
| | — |
| | |
| AA | | — |
| | — |
| | |
| A | | — |
| | — |
| | |
| BBB | | 59.3 | % | | $ | 60.4 |
| | |
| BB | | — |
| | — |
| | |
| B | | — |
| | — |
| | |
| CCC or lower | | — |
| | — |
| | |
| Not rated | | 40.7 |
| | 41.5 |
| | |
| Total equity securities | | 100.0 | % | | $ | 101.9 |
| |
|
|
| | | | | | | |
| Total | | |
| | $ | 5,893.6 |
| |
|
|
| |
(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 December 31, 2019, the AA rated fair value amount included $458.9 million of U.S. Government and federally sponsored agency securities and $708.4 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 December 31, 2019, the fixed maturity securities portfolio had $13.6 million
decrease in amortization comparedof pretax gross unrealized investment losses on $951.6 million of fair value related to
a $3.4 million increase in amortization a year earlier. For467 positions. Of the
prior period,investment positions with gross unrealized investment losses, there were six securities trading below 80.0% of the
impact was largely due to financial market performance. For the Life segment, unlocking resulted in an immaterial change in amortizationcarrying value at December 31,
2016, 2015 and 2014.Operating Expenses
In 2016, operating expenses2019.
The Company views the unrealized investment losses of
$173.1 million increased $15.7 million, or 10.0%, compared to 2015. In 2015, expenses reflected a reduction in incentive compensation expense with the majorityall of the
cost reduction benefiting the Property and Casualty segment. The 2016 expense level was consistent with management’s expectationssecurities at December 31, 2019 as
the Company makes expenditurestemporary. Future changes in circumstances related to
customer servicethese and
infrastructure improvements, which are intended to enhance the overall customer experience and support favorable policy retention and business cross-sale ratios. In 2015, operating expensesother securities could require subsequent recognition of
$157.4 million decreased $4.7 million, or 2.9%, compared to 2014.The Property and Casualty expense ratio of 26.7% for 2016 increased 0.2 percentage points compared to the prior year expense ratio of 26.5%, or slightly below management’s expectations for 2016. The 2015 incentive compensation expense reduction reduced the expense ratio for 2015 by 0.4 percentage points. The Property and Casualty expense ratio was 27.4% for 2014.
OTTI.
|
| F-21 | |
| Horace Mann Educators Corporation | |
Interest Expense and Debt Retirement Costs
In June 2015, the Company repaid its outstanding $75.0 million 6.05% Senior Notes upon maturity initially utilizing funds borrowed under its existing Bank Credit Facility. In November 2015, the Company issued $250.0 million face amount of 4.50% Senior Notes due 2025. The Company used the net proceeds from this issuance to redeem all its outstanding 6.85% Senior Notes due April 15, 2016 and to repay in full the $113.0 million of outstanding borrowings under its Bank Credit Facility. The combined impact of these transactions reduced interest expense in 2016 by $1.3 million compared to 2015 and $1.1 million in 2015, compared to 2014.
The redemption of the 6.85% Senior Notes in 2015 resulted in a pretax charge of $2.3 million, largely due to the make-whole premium.
Income Tax Expense
The effective income tax rate on the Company’s pretax income, including net realized investment gains and losses, was 26.6%, 27.8% and 28.7% for the years ended December 31, 2016, 2015 and 2014, respectively. Income from investments in tax-advantaged securities reduced the effective income tax rates 8.5, 7.9 and 7.1 percentage points for 2016, 2015 and 2014, respectively. In 2016, income tax expense was reduced by approximately $0.9 million related to the filing of the prior calendar year tax return; this item primarily benefited the Retirement segment.
The Company records liabilities for uncertain tax filing positions where it is more likely than not that the position will not be sustainable upon audit by taxing authorities. These liabilities are reevaluated routinely and are adjusted appropriately based on changes in facts or law. The Company has no unrecorded liabilities from uncertain tax filing positions.
At December 31, 2016, the Company’s federal income tax returns for years prior to 2013 are no longer subject to examination by the IRS. Management does not anticipate any assessments for tax years that remain subject to examination to have a material effect on the Company’s financial position or results of operations.
Net Income
For 2016, the Company’s net income of $83.8 million decreased $9.7 million compared to 2015. After tax net realized investment gains were $2.3 million compared to $8.6 million a year earlier. Additional detail is included in the “Executive Summary” at the beginning of this MD&A.
For 2015, the Company’s net income of $93.5 million represented a decrease of $10.7 million compared to 2014 reflecting improvement in current accident year non-catastrophe results for homeowners, pressure on automobile results primarily due to loss severity, a higher level of life mortality losses and a negative impact due to the unlocking of Retirement segment deferred policy acquisition costs. Net income in 2015 was also reduced by debt retirement costs.
For 2014, the Company’s net income of $104.2 million declined $6.7 million compared to 2013, as improvements in Property and Casualty segment and Retirement segment results, as well as solid earnings in the Life segment, were offset by a decrease in net realized investment gains. After tax net realized investment
| F-22 | Annual Report on Form 10-K 57 |
gains of $6.9 million were $7.5 million less than in 2013. For the Property and Casualty segment, net income of $46.9 million increased $2.5 million compared to 2013. The Property and Casualty combined ratio was 96.1% for 2014, a 0.2 percentage point improvement compared to 96.3% for 2013.
Net income (loss) by segment and net income per share were as follows:
| | | Year Ended | | Change From | | Year Ended | |
| | | December 31, | | Prior Year | | December 31, | |
| | | 2016 | | | 2015 | | Percent | | Amount | | | 2014 | | |
| Analysis of net income (loss) by segment: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Property and Casualty | | | $ | 25.6 | | | | $ | 40.0 | | | | -36.0 | % | | | | $ | (14.4 | ) | | | | $ | 46.9 | | | |
| Retirement | | | | 50.7 | | | | | 43.4 | | | | 16.8 | % | | | | | 7.3 | | | | | | 45.3 | | | |
| Life | | | | 16.6 | | | | | 15.0 | | | | 10.7 | % | | | | | 1.6 | | | | | | 17.5 | | | |
| Corporate and Other (1) | | | | (9.1 | ) | | | | (4.9 | ) | | | -85.7 | % | | | | | (4.2 | ) | | | | | (5.5 | ) | | |
| Net income | | | $ | 83.8 | | | | $ | 93.5 | | | | -10.4 | % | | | | $ | (9.7 | ) | | | | $ | 104.2 | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Effect of catastrophe costs, after tax, included above | | | $ | (39.1 | ) | | | $ | (28.9 | ) | | | 35.3 | % | | | | $ | 10.2 | | | | | $ | (24.4 | ) | | |
Effect of net realized investment gains, after tax,
included above | | | $ | 2.3 | | | | $ | 8.6 | | | | -73.3 | % | | | | $ | (6.3 | ) | | | | $ | 6.9 | | | |
| Effect of debt retirement costs, after tax, included above | | | $ | - | | | | $ | (1.5 | ) | | | N.M. | | | | | $ | (1.5 | ) | | | | $ | - | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Diluted: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income per share | | | $ | 2.02 | | | | $ | 2.20 | | | | -8.2 | % | | | | $ | (0.18 | ) | | | | $ | 2.47 | | | |
| Weighted average number of shares and equivalent shares (in millions) | | | | 41.5 | | | | | 42.4 | | | | -2.1 | % | | | | | (0.9 | ) | | | | | 42.2 | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Property and Casualty combined ratio: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total | | | | 101.5 | % | | | | 97.0 | % | | | N.M. | | | | | | 4.5 | % | | | | | 96.1 | % | | |
| Effect of catastrophe costs, included above | | | | 9.7 | % | | | | 7.4 | % | | | N.M. | | | | | | 2.3 | % | | | | | 6.5 | % | | |
| Effect of prior years’ reserve development, included above | | | | -1.1 | % | | | | -2.1 | % | | | N.M. | | | | | | 1.0 | % | | | | | -2.9 | % | | |
N.M. - Not meaningful.
| (1) | The Corporate and Other segment includes interest expense on debt, realized investment gains and losses, corporate debt retirement costs, certain public company expenses and other corporate-level items. The Company does not allocate the impact of corporate-level transactions to the insurance segments, consistent with the basis for management’s evaluation of the results of those segments. |
As described in footnote (1) to the table above, the Corporate and Other segment reflects corporate-level transactions. Of those transactions, net realized investment gains and losses may vary notably between reporting periods and are often the driver of fluctuations in the level of this segment’s net income or loss. For 2016, 2015 and 2014, net realized investment gains after tax were $2.3 million, $8.6 million and $6.9 million, respectively. In addition, 2016 reflected a $1.3 million pretax reduction in debt interest expense as a result of the refinancing transactions completed in 2015. The debt redemption in 2015 resulted in a pretax charge of $2.3 million, partially offset by a $1.1 million reduction in debt interest expense compared to 2014.
Return on average shareholders’ equity based on net income was 6.2%, 7.1% and 8.4% for the years ended December 31, 2016, 2015 and 2014, respectively.
Outlook for 2017
At the time of this Annual Report on Form 10-K, management estimates that 2017 full year net income before net realized investment gains and losses will be within a range of $1.95 to $2.15 per diluted share. This projection incorporates the Company’s results for 2016 and anticipates continued improvement in the Company’s underlying automobile combined ratio, modeled catastrophe losses as well as modestly lower earnings in the Retirement and Life segments reflecting lower net interest spreads, and approximately $0.10 cents of continued strategic investing in our Retirement business that we expect will accelerate growth momentum related to the Company’s continued modernization of technology and infrastructure. As a result of the continued low interest rate environment, management expects the Company’s overall portfolio yield to decline by approximately 10 basis points over the course of 2017, impacting each of the three business segments. Within the Property and Casualty segment, both approved and planned premium rate increases, as well as underwriting initiatives, are expected to improve profitability margins for the automobile line compared to 2016. The property line is anticipated to produce solid profitability, although at a reduced level that assumes non-catastrophe weather related losses return to a more normalized level than the comparison to 2016; and, catastrophe losses are estimated to be lower than the 2016 level. Net income for the Retirement segment will continue to be impacted by the prolonged interest rate environment and the 2016 net interest spread of 193 basis points is anticipated to grade down to the low 180s through the course of 2017. Assuming mortality costs consistent with the Company’s actuarial models, Life segment net income is expected to decrease compared to 2016, due to net investment income pressure and the increase in expenses. In addition to the segment-specific factors, the Company’s initiatives for customer service and infrastructure improvements, as well as enhanced training and education for the Company’s agency force, all intended to enhance the overall customer experience and support further improvement in policy retention and business cross-sale ratios, will continue and result in a moderate increase in expense levels compared to 2016.
As described in “Critical Accounting Policies”, certain of the Company’s significant accounting measurements require the use of estimates and assumptions. As additional information becomes available, adjustments may be required. Those adjustments are charged or credited to income for the period in which the adjustments are made and may impact actual results compared to management’s estimate above. Additionally, see “Forward-looking Information” and “Item 1A. Risk Factors” in this Annual Report on Form 10-K concerning other important factors that could impact actual results. Management believes that a projection of net income including net realized investment gains and losses* is not appropriate on a forward-looking basis because it is not possible to provide a valid forecast of net realized investment gains and losses, which can vary substantially from one period to another and may have a significant impact on net income.
Liquidity and Financial Resources
Off-Balance Sheet Arrangements
At December 31,
2016, 20152019, 2018 and
2014,2017, the Company did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or for other contractually narrow or limited purposes. As such, the Company is not exposed to any financing, liquidity, market or credit risk that could arise if the Company had engaged in such
relationships.relationships as of December 31, 2019. Investments
Information regarding the
Company’sCompany's investment portfolio, which is comprised primarily of investment grade, fixed maturity securities, is
locatedpresented in
“ResultsPart II - Item 7, Results of Operations
by Segment for the Three Years Ended December 31,
2016 — Net Realized Investment Gains and Losses”, “Item 1. Business — Investments”2019, Part I - Item 1, Investments and in
Part II - Item 8, Note 3 of the
“Notes to Consolidated Financial Statements
— Note 2 — Investments” listed on page F-1 ofin this report.
The short-term liquidity requirements of the Company, within a 12 month operating cycle, are for the timely payment of claims and benefits to policyholders, operating expenses, interest payments and federal income taxes. Cash flow generated from operations has been, and is expected to be, adequate to meet the
Company’sCompany's operating cash needs in the next 12 months. Cash flow in excess of operational needs has been used to fund business growth, pay dividends to shareholders and repurchase shares of
HMEC’sHMEC's common stock. Long-term liquidity requirements, beyond one year, are principally for the payment of future insurance and annuity policy claims and benefits, as well as retirement of long-term debt.
The following table summarizes the Company's consolidated cash flows activity for the periods indicated.
|
| | | | | | | | | | | | | | | | | | |
| ($ in millions) | | Year Ended December 31, | | 2019-2018 | | 2018-2017 |
| | | 2019 | | 2018 | | 2017 | | Change % | | Change % |
| Net cash provided by operating activities | | $ | 127.6 |
| | $ | 200.9 |
| | $ | 256.6 |
| | -36.5 | % | | -21.7 | % |
| Net cash provided by (used in) investing activities | | 55.9 |
| | (186.5 | ) | | (228.7 | ) | | 130.0 | % | | 18.5 | % |
| Net cash used in financing activities | | (169.9 | ) | | (10.1 | ) | | (37.0 | ) | | N.M. |
| | 72.7 | % |
| Net increase (decrease) in cash | | 13.6 |
| | 4.3 |
| | (9.1 | ) | | N.M. |
| | N.M. |
|
| Cash at beginning of period | | 11.9 |
| | 7.6 |
| | 16.7 |
| | 56.6 | % | | -54.5 | % |
| Cash at end of period | | $ | 25.5 |
| | $ | 11.9 |
| | $ | 7.6 |
| | 114.3 | % | | 56.6 | % |
As a holding company, HMEC conducts its principal operations in the personal lines segmentportion of the property and casualty and life insurance industries through its subsidiaries. HMEC's insurance subsidiaries generate cash flow from premium and investment income, generally well in excess of their immediate needs for policy obligations, operating expenses and other cash requirements. Cash provided by operating activities primarily reflects net cash generated by the insurance subsidiaries.
For
2016,2019, net cash provided by operating activities
increased slightlydecreased $73.3 million compared to
2015, largely2018, primarily due to
a decrease in claims and policyholder benefits paid in 2016, partially offset by a decrease in premiums collected and an increase inlower net investment income
collectedas a result of a $2.1 billion reduction of invested assets from investments transferred under the annuity reinsurance transaction in
2016.Paymentthe second quarter of principal and interest on debt, dividends to shareholders and parent company operating expenses is largely dependent on the ability of the insurance subsidiaries to pay cash dividends or make other cash payments to HMEC, including tax payments pursuant to tax sharing agreements. Payments for share repurchase programs also have this dependency. If necessary, HMEC also has other potential sources of liquidity that could provide for additional funding to meet corporate obligations or pay shareholder dividends, which include a revolving line of credit, as well as issuances of various securities. The insurance subsidiaries are subject to various regulatory restrictions which limit the amount of annual dividends or other distributions, including loans or cash advances, available to HMEC without prior approval of the insurance regulatory authorities. The aggregate amount of dividends that may be paid in 2017 from all of HMEC’s insurance subsidiaries without prior regulatory approval is approximately $91 million. Although regulatory restrictions exist, dividend availability from subsidiaries has been, and is expected to be, adequate for HMEC's capital needs. Additional information is contained in “Notes to Consolidated Financial Statements — Note 10 — Statutory Information and Restrictions” listed on page F-1 of this report.
Investing Activities
HMEC's insurance subsidiaries maintain significant investments in fixed maturity securities to meet future contractual obligations to policyholders. In conjunction with its management of liquidity and other asset/liability management objectives, the Company, from time to time, will sell fixed maturity securities prior to maturity, as well as equity securities, and reinvest the proceeds ininto other investments with different interest rates, maturities or credit characteristics. Accordingly, the Company has classified the entire fixed maturity securities portfolio as available for sale.
Investing activities include the Company's acquisitions of NTA and
equity securities portfolios as “available for sale”.BCG in 2019.
|
| | |
| 58 Annual Report on Form 10-K | | Horace Mann Educators Corporation |
Financing activities include primarily payment of dividends,
the receipt and withdrawal of funds by annuity contractholders, issuances and repurchases of
HMEC’sHMEC's common stock, fluctuations in
bankbook overdraft balances, and borrowings, repayments and repurchases related to
its debt facilities.
In 2013,
On July 1, 2019, the Company utilized $135.0 million of its $225.0 million senior revolving credit facility to partially fund the acquisition of NTA.
HMLIC, one of the
Company’sCompany's subsidiaries,
became a member of the Federal Home Loan Bank of Chicago (“FHLB”). That subsidiary received $250.0 millionoperates under
a funding
agreement in December 2013,agreements with FHLB. In 2019, HMLIC received an additional
$250.0$175.0 million
in September 2014, and received an additional $75.0from FHLB under funding agreements as well as repaid FHLB $305.0 million
in December 2015 with receipt of
those funds reflected inprincipal. Advances under funding agreements are reported as Annuity Contracts: Variable, Fixed and FHLB Funding Agreements, Deposits
and totaled $495.0 million as
a component of
the Company’s financing activities for the respective years. Exclusive of these transactions, the Company’s annuity business produced net positive cash flows in 2016, 2015 and 2014.December 31, 2019. For the year ended December 31,
2016, receipts2019, cash inflows from annuity
contracts, alsocontract deposits, excluding
the FHLB transactions,
decreased $27.8increased $23.4 million, or
5.1%5.3%, compared to
2015, as described in “Results of Operations for the Three Years Ended December 31, 2016 — Insurance Premiums and Contract Charges”. In total,2018. Cash outflows from annuity contract benefits, withdrawals and net transfers to
variable annuity accumulated cash valuesSeparate Account (variable annuity) assets decreased
$4.8$54.0 million, or
1.4%11.4%, compared to
the prior year.The Company’s Senior Notes due 2015 matured on June 15, 2015 and the Company repaid the $75.0 million initially utilizing funds borrowed under its existing Bank Credit Facility. Repayment of the Senior Notes due 2015 resulted in no debt retirement costs impacting the Company’s net income for 2015. In November 2015, the Company issued $250.0 million aggregate principal amount of 4.50% Senior Notes due 2025 and used the net proceeds to redeem all of its outstanding 6.85% Senior Notes due April 15, 2016 and fully repay the $113.0 million of outstanding borrowings under the Company’s Bank Credit Facility. Repayment of the Senior Notes due 2016 resulted in $2.3 million pretax of debt retirement costs impacting the Company’s net income for 2015, nearly all of which required cash. The remaining net proceeds from the issuance of the Senior Notes due 2025 were available for general corporate purposes.
Contractual Obligations
The following table shows the
Company’sCompany's contractual obligations, as well as the projected timing of payments.
| | | Payments Due By Period as of December 31, 2016 | |
| | | | | | Less Than | | 1 - 3 Years | | 3 - 5 Years | | More Than 5 Years | |
| | | | | | 1 Year | | (2018 and | | (2020 and | | (2022 and | |
| | | Total | | (2017) | | 2019) | | 2021) | | beyond) | |
Fixed annuities and fixed option of variable
annuities (1) | | | $ | 6,901.2 | | | | $ | 248.8 | | | | $ | 507.5 | | | | $ | 521.2 | | | | $ | 5,623.7 | | |
| Supplemental contracts (1)(2) | | | | 1,058.0 | | | | | 27.1 | | | | | 299.3 | | | | | 43.2 | | | | | 688.4 | | |
| Life insurance policies (1) | | | | 2,564.0 | | | | | 87.2 | | | | | 180.2 | | | | | 184.7 | | | | | 2,111.9 | | |
Property and casualty claims and claim adjustment
expenses (1) | | | | 246.6 | | | | | 161.4 | | | | | 76.0 | | | | | 8.4 | | | | | 0.8 | | |
| Long-term debt obligations | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Senior Notes due December 1, 2025 | | | | 351.3 | | | | | 11.3 | | | | | 22.5 | | | | | 22.5 | | | | | 295.0 | | |
| Operating lease obligations (4) | | | | 11.9 | | | | | 2.6 | | | | | 5.0 | | | | | 2.7 | | | | | 1.6 | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total | | | $ | 11,133.0 | | | | $ | 538.4 | | | | $ | 1,090.5 | | | | $ | 782.7 | | | | $ | 8,721.4 | | |
|
| | | | | | | | | | | | | | | | | | | | |
| ($ in millions) | | Payments Due By Period as of December 31, 2019 |
| | | Total | | Less Than 1 Year (2020) | | 1 - 3 Years (2021 and 2022) | | 3 - 5 Years (2023 and 2024) | | More Than 5 Years (2025 and beyond) |
Fixed annuities and fixed option of variable annuities (1) | | $ | 3,420.3 |
| | $ | 159.4 |
| | $ | 328.2 |
| | $ | 349.3 |
| | $ | 2,583.4 |
|
Payout annuity contracts (1)(2) | | 885.4 |
| | 154.0 |
| | 49.5 |
| | 212.2 |
| | 469.7 |
|
Supplemental and life insurance policies (1) | | 3,710.3 |
| | 158.1 |
| | 323.2 |
| | 328.9 |
| | 2,900.1 |
|
Property and Casualty claims and claim adjustment expenses (1) | | 266.5 |
| | 153.0 |
| | 103.8 |
| | 9.2 |
| | 0.5 |
|
Short-term debt obligations, Bank Credit Facility (expires June 21, 2024) (3) | | 153.5 |
| | 4.1 |
| | 8.2 |
| | 141.2 |
| | — |
|
Long-term debt obligations, FHLB borrowings due October and December 2022 (4) | | 52.8 |
| | 1.0 |
| | 51.8 |
| | — |
| | — |
|
Long-term debt obligations Senior Notes due December 1, 2025 (3) | | 317.6 |
| | 11.3 |
| | 22.5 |
| | 22.5 |
| | 261.3 |
|
Operating lease obligations (5) | | 19.1 |
| | 4.5 |
| | 8.4 |
| | 5.4 |
| | 0.8 |
|
| Total | | $ | 8,825.5 |
| | $ | 645.4 |
| | $ | 895.6 |
| | $ | 1,068.7 |
| | $ | 6,215.8 |
|
| |
(1) | This information represents estimates of both the amounts to be paid to policyholders and the timing of such payments and is net of anticipated reinsurance recoveries. |
| |
(2) | Includes $575.0$495.0 million obligation to FHLB plus interest. |
| |
(3) | Includes principal and interest. |
| |
(4) | Includes $50.0 million obligation to FHLB plus interest. |
| |
(5) | The Company has entered into various operating lease agreements, primarily for real estate (claims and marketing offices in a few states, as well as portions of the home office complex) and also for computer equipment and copy machines.offices. |
Estimated Future Policy Benefit and Claim Payments - Retirement and Life
SegmentsThis discussion addresses the following contractual obligations disclosed above: fixed annuities and fixed option of variable annuities, supplemental contracts and life insurance policies. Payment amounts reflect the
Company’sCompany's estimate of undiscounted cash flows related to these obligations and commitments. Balance sheet amounts were determined in accordance with GAAP, including the effect of discounting, and consequently in many cases differ significantly from the summation of undiscounted cash flows.
|
| | |
| Horace Mann Educators Corporation | | Annual Report on Form 10-K 59 |
For the majority of the
Company’sCompany's Retirement and Life insurance operations, the estimated contractual obligations for future policyholder benefits as presented in the table above were derived from the annual cash flow testing analysis used to develop actuarial opinions of statutory reserve adequacy for state regulatory purposes. These cash flows are materially representative of the cash flows under GAAP. Actual amounts may vary, potentially in a significant manner, from the amounts indicated due to deviations between assumptions and actual results and the addition of new business in future periods.
For the majority of the Company's Supplemental insurance operations, the estimated contractual obligations for future policyholder benefits as presented in the table above were derived from future projections of the business developed as part of the purchase accounting associated with the acquisition of NTA.
Amounts presented in the table above represent the estimated cash payments to be made to policyholders undiscounted by interest and including assumptions related to the receipt of future premiums and deposits, future interest credited, full and partial withdrawals, policy lapses, surrender charges, annuitization, mortality,
morbidity, and other contingent events as appropriate to the respective product types. Additionally, coverage levels are assumed to remain unchanged from those provided under contracts in force at December 31,
2016.2019. Separate Account (variable annuity) payments are not reflected due to the matched nature of these obligations and the fact that the contract owners maintain the investment risk on such deposits.
See “Notes toPart II - Item 8, Note 1 of the Consolidated Financial Statements — Note 1 — Summary of Significant Accounting Policies — Investment Contract and Life Policy Reserves” listed on page F-1 ofin this report for a description of the Company’sCompany's method for establishing life and annuity reserves in accordance with GAAP.
Estimated Claims and Claim Related Payments - Property and Casualty
SegmentThis discussion addresses claims and claim adjustment expenses as disclosed above. The amounts reported in the table are presented on a nominal basis, have not been discounted and represent the estimated timing of future payments for both reported and unreported claims incurred and related claim adjustment expenses. Both the total liability and the estimated payments are based on actuarial projection techniques, at a given
accountingreporting date. These estimates include assumptions of the ultimate settlement and administrative costs based on the
Company’sCompany's assessment of facts and circumstances then known, review of historical settlement patterns, estimates of trends in claims severity, frequency and other factors. Variables in the reserve estimation process can be affected by both internal and external events, such as changes in claims handling procedures, economic inflation, legal trends and legislative changes. Many of these items are not directly quantifiable, particularly on a prospective basis. Additionally, there may be significant reporting lags between the occurrence of a claim and the time it is actually reported to the Company. The future cash flows related to the items contained in the table above required estimation of both amount (including severity considerations) and timing. Amount and timing are frequently estimated separately. An estimation of both amount and timing of future cash flows related to claims and claim related payments is generally reliable only in the aggregate with some unavoidable estimation uncertainty.
The Company has determined the amount of capital which is needed to adequately fund and support business growth, primarily based on risk-based capital formulas including those developed by the NAIC. Historically, the Company's insurance subsidiaries have generated capital in excess of such needed capital. These excess amounts have been paid to HMEC through dividends. HMEC has then utilized these dividends and its access to the capital markets to service and retire long-term debt, pay dividends to its shareholders, fund growth initiatives, repurchase shares of its common stock and for other corporate purposes.
If necessary, HMEC also has other potential sources of liquidity that could provide for additional funding to meet corporate obligations or pay shareholder dividends, which include a revolving line of credit, as well as issuances of various securities. The insurance subsidiaries are subject to various regulatory restrictions which limit the amount of annual dividends or other distributions, including loans or cash advances, available to HMEC without prior approval of the insurance regulatory authorities. The maximum amount of dividends that may be paid in 2020 from all of HMEC's insurance subsidiaries without prior regulatory approval is $105.3 million, excluding the impact and timing of prior year dividends. Management anticipates that the Company's sources of capital will continue to generate sufficient capital to meet the needs for business growth, debt interest payments, shareholder dividends and its share repurchase program. Additional information is contained in
“Notes toPart II - Item 8, Note 14 of the Consolidated Financial Statements
— Note 10 — Statutory Information and Restrictions” listed on page F-1 ofin this report.
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| | |
| 60 Annual Report on Form 10-K | | Horace Mann Educators Corporation |
The total capital of the Company was
$1,541.2$2,000.3 million at December 31,
2016,2019, including
$247.2$298.0 million of long-term debt and
no$135.0 million of short-term debt outstanding. Total debt represented
18.1%21.6% of total capital including net unrealized investment gains on securities (24.5% of total capital excluding net unrealized investment gains
and losses (16.0% including net unrealized investment gains and losses)on securities*) at December 31,
2016,2019, which was below the Company's long-term target of
25%25.0%.
Shareholders' equity was
$1,294.0$1,567.3 million at December 31,
2016,2019, including
a net unrealized investment
gaingains on securities in the Company's investment portfolio of
$175.7$230.4 million after taxes and the related impact of
deferred policy acquisition costsDAC associated with investment contracts and life insurance products with account values. The market value of the Company's
common stock and the market value per share were $1,722.2$1,800.5 million and $42.80,$43.66, respectively, at December 31, 2016.2019. Book value per share was $32.15$38.01 at December 31, 20162019 ($27.7932.42 excluding net unrealized investment fair value adjustments)gains on securities*).
Additional information regarding
the net unrealized
gaininvestment gains on securities in the
Company’sCompany's investment portfolio at December 31,
20162019 is included in
“ResultsPart II - Item 7, Results of Operations
by Segment for the Three Years Ended December 31,
2016 — Net Realized Investment Gains2019 and
Losses”.Part II - Item 8, Note 3 of the Consolidated Financial Statements in this report.
Total shareholder dividends were
$44.3$47.3 million for the year ended December 31,
2016.2019. In March, May, September and December
2016,2019, the Board
of Directors announced regular quarterly dividends of
$0.265$0.2875 per share. Compared to the full year per share dividends paid in
20152018 of
$1.00,$1.14, the total
20162019 dividends paid per share of
$1.06$1.15 represented an increase of
6.0%0.9%.
In December 2011, HMEC’s
On September 30, 2015, the Board
of Directors (the “Board”) authorized a share repurchase program allowing repurchases of up to
$50,000 (the “2011 Plan”)$50.0 million of HMEC's common stock, par value $0.001 (Program).
In September 2015, the Board authorized an additional share repurchase program allowing repurchases of up to $50,000 (the “2015 Plan”) to begin following the completion of the 2011 Plan. Both share repurchase programs authorizeThe Program authorizes the repurchase of
HMEC’s common
shareshares in open market or privately negotiated transactions, from time to time, depending on market conditions. The
share repurchase programs doProgram does not have
an expiration
datesdate and may be limited or terminated at any time without notice. During
2016,2019, the Company
repurchased 701,410did not repurchase any shares of its common
stock, or 1.7%, of the outstanding shares on December 31, 2015, at an aggregate cost of $21.5 million, or an average price of $30.65 per share, under the 2011 and the 2015 Plans. Utilization of the remaining authorization under the 2011 program was completed in January 2016.stock. In total and through December 31,
2016, 2,799,6102019, 847,373 shares were repurchased under the
2011 and 2015 PlansProgram at an average price of
$25.18$32.16 per share. The repurchase of shares was funded through use of cash. As of December 31,
2016, $29.52019, $22.8 million remained authorized for future share repurchases under the
2015 Plan authorization.Program.
The following table summarizes the Company's debt obligations.
|
| | | | | | | | | | | | |
| ($ in millions) | | Effective Interest Rates | | Final Maturity | | December 31, |
| | | | | 2019 | | 2018 |
| Short-term debt | | | | | | | | |
| Bank Credit Facility | | Variable | | 2024 | | $ | 135.0 |
| | $ | — |
|
Long-term debt (1) | | | | | | | | |
4.50% Senior Notes, Aggregate principal amount of
$250,000 less unaccrued discount of $426 and
$488 and unamortized debt issuance costs
of $1,549 and $1,772 | | 4.50% | | 2025 | | 248.0 |
| | 247.7 |
|
| Federal Home Loan Bank borrowing | | 1.99% | | 2022 | | 50.0 |
| | 50.0 |
|
| Total | | | | | | $ | 433.0 |
| | $ | 297.7 |
|
(1) The Company designates debt obligations as "long-term" based on maturity date at issuance.
In November 2015, the Company issued $250.0 million aggregate principal amount of
4.50% Senior Notes,
(“Senior Notes due 2025”), which will mature on December 1, 2025, 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%.semi-annually. Detailed information regarding the redemption terms of the Senior Notes due 2025 is contained in
Part II - Item 8, Note 10 of the
“Notes to Consolidated Financial Statements
— Note 7 — Debt” listed on page F-1 ofin this report.
For information regarding the use of proceeds from the issuance, see “Liquidity and Financial Resources — Cash Flow — Financing Activities”. The Senior Notes due 2025 are traded in the open market (HMN 4.50).
|
| | |
| Horace Mann Educators Corporation | | Annual Report on Form 10-K 61 |
In 2017, Horace Mann Insurance Company (HMIC) became a member of FHLB, which provides HMIC with access to collateralized borrowings and other FHLB products. As membership requires the ownership of membership stock, in June 2017, HMIC purchased common stock to meet the membership requirement. Any borrowing from the FHLB requires the purchase of FHLB activity-based common stock in an amount equal to 4.5% of the borrowing, or a lower percentage - such as 2.0% based on the Reduced Capitalization Advance Program. In 2017, HMIC purchased common stock to meet the activity-based requirement. In 2019, the Board authorized a maximum amount equal to 15% of net aggregate admitted assets less separate account assets of the insurance subsidiaries for FHLB borrowings. In the fourth quarter of 2017, the Company received $50.0 million in executed borrowings for HMIC. For the total $50.0 million received, $25.0 million matures on October 5, 2022 and $25.0 million matures on December 2, 2022. Interest on the borrowings accrues at an annual weighted average rate of 1.99% as of December 31, 2019. HMIC's FHLB borrowings of $50.0 million are included in Long-term debt on the Consolidated Balance Sheets.
As of December 31, 2016,2019, the Company had no balance$135.0 million outstanding under its 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 provides for unsecured borrowings of upincreased the amount available on this senior revolving credit facility to $225.0 million from $150.0 millionmillion. PNC Capital Markets, LLC and expires on July 30, 2019. Interest accrues at varying spreads relative to prime or Eurodollar base rates and is payable monthly or quarterly dependingJPMorgan Chase Bank, N.A. served as joint leads on the applicable base rate.new agreement, with The Northern Trust Company, U.S. Bank National Association, KeyBank National Association, Comerica Bank and Illinois National Bank participating in the syndicate. Terms and conditions of the new Bank Credit Facility are substantially consistent with the prior agreement, with an interest rate based on LIBOR plus 115 basis points.
On July 1, 2019, the Company utilized the senior revolving credit facility to partially fund the acquisition of NTA. As of December 31, 2019, the amount outstanding on the senior revolving credit facility was $135.0 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 December 31,
2016. On June 15, 2015, the Senior Notes due 2015 matured and the Company repaid the $75.0 million aggregate principal amount initially utilizing $75.0 million of additional borrowing under the existing Bank Credit Facility. In November 2015, the Company utilized a portion of the proceeds from the issuance of the Senior Notes due 2025, described above, to fully repay the $113.0 million outstanding balance under the Company’s Bank Credit Facility.To provide additional capital management flexibility, the Company filed a “universal shelf”"universal shelf" registration on Form S-3 with the SEC on March 12, 2015.13, 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 12, 2015.13, 2018. Unless withdrawn by the Company earlier, this registration statement will remain effective through March 12, 2018. The Senior Notes due 2025, described above, were issued utilizing this registration statement.13, 2021. No other securities associated with the registration statement have been issued asat the time of the dateissuance of this Annual Report on Form 10-K.
The Company's ratio
On March 13, 2018, the Company filed a "shelf" registration statement on Form S-4 with the SEC which became effective on May 2, 2018. Under this registration statement, the Company may from time to time offer and issue up to 5,000,000 shares of
earnings to fixed charges (with fixed charges including interest credited to policyholdersits common stock in connection with future acquisitions of other businesses, assets or securities. Unless withdrawn by the Company, this registration statement will remain effective indefinitely. No securities associated with the registration statement have been issued at the time of issuance of this Annual Report on
investment contracts and life insurance products with account values) for the years ended December 31, 2016, 2015 and 2014 was 1.6x, 1.7x and 1.8x, respectively. See also “Exhibit 12 — Statement Regarding Computation of Ratios”. The Company’s ratio of earnings before interest expense to interest expense was 10.7x, 10.9x and 11.3x for the years ended December 31, 2016, 2015 and 2014, respectively.Form 10-K.
HMEC's principal insurance subsidiaries are rated by S&P,
Moody’s,Moody's, A.M. Best
Company, Inc. (“A.M. Best”) and
Fitch Ratings, Inc. (“Fitch”).Fitch. These rating agencies have also assigned ratings to the
Company’sCompany's long-term debt securities. The ratings that are assigned by these agencies, which are subject to change, can impact, among other things, the
Company’sCompany's access to sources of capital, cost of capital, and competitive position. These ratings are not a recommendation to buy or hold any of the
Company’sCompany's securities.
In March 2016,
Assigned ratings for HMEC and its Property and Casualty and 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 upgradedand 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 ratingratings placed after the announcement of NTA acquisition in December 2018.
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| 62 Annual Report on Form 10-K | | Horace Mann Educators Corporation |
All four agencies currently have assigned the
Company’ssame insurance financial strength ratings to the Company's Property and Casualty
subsidiaries to “A (Excellent)” from “A- (Excellent)”. Withand the
exception ofCompany's Life insurance subsidiaries. Only A.M Best currently rates the
ratings by A.M. Best, assignedCompany's Supplemental segment's subsidiaries. Assigned ratings as of February 15,
2017 were unchanged from the disclosure in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015. In addition, in November 2016, Moody’s affirmed the A3 insurance financial strength rating of HMEC’s Property and Casualty subsidiaries and changed the rating outlook to positive from stable. Assigned ratings2020 were as
follows (unless otherwise indicated, the insurance financial strength ratings for the Company’s Property and Casualty insurance subsidiaries and the Company’s principal Life insurance subsidiary are the same):follows: |
| | Insurance Financial | | | | | | | |
| | | | Insurance Financial Strength Ratings (Outlook) | | Debt Ratings (Outlook) |
|
| | | (Outlook)S&P | | (Outlook)A | | (stable) | | BBB | | (stable) |
As of February 15, 2017 | Moody's | | A2 | | (stable) | | Baa2 | | (stable) |
| A.M. Best | | | | | | | | |
S&P | | | A | (stable) | | | BBB | (stable) |
Moody’s | | | | | | | | |
Horace Mann Life Insurance Company | | | A3 | (positive) | | | N.A. | |
HMEC’s Property and Casualty subsidiaries | | | A3 | (positive) | | | N.A. | |
| HMEC | (parent company) | | N.A. | | | | Baa(3)bbb | (positive) | (stable) |
A.M. Best | HMEC's Life | | A | | (stable) | | N.A. | | | bbb | (stable) |
Fitch | HMEC's Property and Casualty subsidiaries | | A | | (stable) | | N.A. | | |
| HMEC's Supplemental subsidiaries | | A- | | (stable) | | N.A. | | |
| Fitch | | A | | (stable) | | BBB | (stable) |
N.A. – Not applicable.
Reinsurance Programs
Information regarding the reinsurance programprograms for the Company’sCompany's Property and Casualty, segment isSupplemental, Retirement and Life segments are located in “Item 1. Business —Part I - Item 1, Reporting Segments of this report.
Pending Accounting Standards
There are several pending accounting standards that the Company has not implemented because the implementation date has not yet occurred. For a discussion of these pending standards, see Part II - Item 8, Note 1 of the Consolidated Financial Statements in this report. The effect of implementing certain accounting standards on the Company's financial results and financial condition is often based in part on market conditions at the time of implementation of the standard and other factors that the Company is unable to determine prior to implementation. For this reason, the Company is sometimes unable to estimate the effect of certain pending accounting standards until the relevant authoritative body finalizes these standards or until the Company implements them.
Effects of Inflation and Changes in Interest Rates
The Company's operating results are affected significantly in at least three ways by changes in interest rates and inflation. First, inflation directly affects Property and Casualty
Segment —claims costs. Second, the investment income earned on the Company's investment portfolio and the fair value of the investment portfolio are related to the yields available in the fixed income markets. An increase in interest rates will decrease the fair value of the investment portfolio, but will increase investment income as investments mature and proceeds are reinvested at higher rates. Third, as interest rates increase, competitors will typically increase crediting rates on investment contracts and life insurance products with account values, and may lower premium rates on Property and Casualty
Reinsurance”.Information regardinglines to reflect the higher yields available in the market. The risk of interest rate fluctuation is managed through asset/liability management techniques, including cash flow analysis. In addition, an annuity reinsurance program foragreement entered into in the Company’s Life segment is locatedsecond quarter of 2019, which reinsured a $2.2 billion block of in “Item 1. Business — Life Segment”.
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.
ITEM 7A. I Quantitative and Qualitative Disclosures about Market Value Risk Market value risk, the Company's primary market risk exposure, is the risk that the Company's invested assets will decrease in value. This decrease in value may be due to (1) a change in the yields realized on the Company's assets and prevailing market yields for similar assets, (2) an unfavorable change in the liquidity of the investment, (3) an unfavorable change in the financial prospects of the issuer of the investment, or (4) a downgrade in the credit rating of the issuer of the investment.
See also "ResultsAlso, see Part II - Item 7, Results of Operations
by Segment for the Three Years Ended December 31,
2016 — Net Realized Investment Gains and Losses"2019 of this report regarding net investment gains (losses).
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| Horace Mann Educators Corporation | | Annual Report on Form 10-K 63 |
Significant changes in interest rates expose the Company to the risk of experiencing losses or earning a reduced level of income based on the difference between the interest rates earned on the Company's investments and the credited interest rates on the Company's insurance liabilities.
See also “ResultsAlso, see Part II - Item 7, Results of Operations
by Segment for the Three Years Ended December 31,
2016 — Interest Credited2019 of this report regarding interest credited to
Policyholders”.policyholders.
The Company seeks to manage its market value risk by coordinating the projected cash inflows of assets with the projected cash outflows of liabilities. For all its assets and liabilities, the Company seeks to maintain reasonable durations, consistent with the maximization of income without sacrificing investment quality, while providing for liquidity and diversification. The investment risk associated with variable annuity deposits and the underlying mutual funds is assumed by those contractholders, and not by the Company. Certain fees that the Company earns from variable annuity deposits are based on the market value of the funds deposited.
Through active investment management, the Company invests available funds with the objective of funding future obligations to policyholders, subject to appropriate risk considerations, and maximizing shareholder value. This objective is met through investments that (1) have similar characteristics to the liabilities they support; (2) are diversified among industries, issuers and geographic locations; and (3) are predominately investment-grade fixed maturity securities classified as available for sale. As of the time of this Annual Report on Form 10-K, derivatives are only used to manage the interest crediting rate risk within the
fixed indexed annuityFIA and
indexed universal lifeIUL products. At December 31,
2016,2019, approximately
10%15.5% of the fixed maturity securities portfolio represented investments supporting the Property and Casualty operations and approximately
90%84.5% supported
theby Supplemental, Retirement and Life business. For discussions regarding the
Company’sCompany's investments see
“ResultsPart II - Item 7, Results of Operations
by Segment for the Three Years Ended December 31,
2016 — Net Realized Investment Gains2019 of this report regarding net investment gains (losses) and
Losses” and “Item 1. Business — Investments”.Part I - Item 1, Investments of this report.
The
Company’sCompany's Retirement and Life earnings are affected by the spreads between interest yields on investments and rates credited or accruing on fixed annuity and life insurance liabilities. Although credited rates on fixed annuities may be changed annually
(subject (subject to minimum guaranteed rates), competitive pricing and other factors, including the impact on the level of surrenders and withdrawals, may limit the Company’sCompany's ability to adjust or to maintain crediting rates at levels necessary to avoid narrowing of spreads under certain market conditions. See also “ResultsHowever, an 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%, mitigates the risk of not being able to generate appropriate spreads on the annuity business. Also, see Part II - Item 7, Results of Operations by Segment for the Three Years Ended December 31, 2016 — Interest Credited2019 of this report regarding interest credited to Policyholders”.
policyholders.
Using financial modeling and other techniques, the Company regularly evaluates the appropriateness of investments relative to the characteristics of the liabilities that they support. Simulations of cash flows generated from existing business under various interest rate scenarios measure the potential gain or loss in fair value of
interest-rateinterest rate sensitive assets and liabilities. Such estimates are used to closely match the duration of assets to the duration of liabilities. The overall duration of liabilities of the
Company’sCompany's multiline insurance operations combines the characteristics of its long duration annuity and
interest-sensitiveinterest rate sensitive life liabilities with its short duration
non-interest-sensitive propertynon-interest rate sensitive Property and
casualtyCasualty liabilities. Overall, at December 31,
2016,2019, the duration of the fixed maturity securities portfolio was estimated to be approximately
5.96.0 years and the duration of the
Company’sCompany's insurance liabilities and debt was estimated to be approximately
7.55.3 years.
The
Retirement and Life operations participate in the cash flow testing procedures imposed by statutory insurance regulations, the purpose of which is to ensure that such liabilities are adequate to meet the
Company’sCompany's obligations under a variety of interest rate scenarios. Based on these procedures, the
Company’sCompany's assets and the investment income expected to be received on such assets are adequate to meet the insurance policy obligations and expenses of the
Company’sCompany's insurance activities in all but the most extreme circumstances.
The Company periodically evaluates its sensitivity to interest rate risk. Based on commonly used models, the Company projects the impact of interest rate changes, assuming a wide range of factors, including duration andprepayment,and prepayment, on the fair value of assets and liabilities. Fair value is estimated based on the net present value of cash flows or duration estimates. At December 31, 2016,Based on the most recent study, assuming an immediate decrease of 100 basis points in interest rates, the fair value of the Company’sCompany's assets and liabilities would both increase, the net of which would result in a decreasean increase in shareholders’shareholders' equity of approximately $51$41.1 million after tax, or 4.8%2.6%. A 100 basis point increase in interest rates would decrease the fair value of both assets and liabilities, the net of which would result in an increasea decrease in shareholders’shareholders' equity of approximately $4$87.7 million after tax, or 0.4%. At December 31, 2015, assuming an immediate decrease of 100 basis points in interest rates, the fair value of the Company’s assets and liabilities would both increase, the net of which would result in a decrease in shareholders’ equity of approximately $47 million after tax, or 4.0%. A 100 basis point increase in interest rates would decrease the fair value of both assets and liabilities, the net of which would result in an increase in shareholders’ equity of approximately $2 million after tax, or 0.2%5.6%. In each case,
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| 64 Annual Report on Form 10-K | | Horace Mann Educators Corporation |
these changes in interest rates assume a parallel shift in the yield curve. While the Company believes that these assumed market rate changes are reasonably possible, actual results may differ, particularly as a result of any management actions that would be taken to attempt to mitigate such hypothetical losses in fair value of
shareholders’shareholders' equity.
Interest rates continue to be at historically low levels. If interest rates remain low over an extended period of time, management recognizes it could pressure
net investment income by having to invest insurance cash flows and reinvest the cash flows from the investment portfolio in lower yielding securities. Moreover, issuers of securities in the
Company’sCompany's investment portfolio may prepay or redeem fixed maturity securities, as well as asset-backed and commercial and mortgage-backed securities, with greater frequency to borrow at lower market
rates. As a general guideline, management estimates that pretax net income in 20172020 and 20182021 would decrease by approximately $2.1$4.1 million (by segment: Retirement $1.5 million, Life $0.4 million and Property and Casualty $0.2$0.0 million, Supplemental $1.0 million, Retirement $2.4 million, and Life $0.7 million) and $7.4$9.7 million (by segment: Retirement $5.3 million, Life $1.5 million and Property and Casualty $0.6$0.3 million, Supplemental $1.3 million, Retirement $6.2 million and Life $1.9 million), respectively, for each 100 basis point decline in reinvestment rates, before assuming any reduction in annuity crediting rates on in-force contracts. In addition, declining interest rates also could negatively impact the amortization of deferred policy acquisition costs,DAC, as well as the recoverability of goodwill, due to the impacts on the estimated fair value of the Company’s reportingCompany's operating segments.
The Company has been and continues to be proactive in its investment strategies, product designs and crediting rate strategies to mitigate the risk of unfavorable consequences in this type of interest rate environment without venturing into asset classes or individual securities that would be inconsistent with the
Company’sCompany's conservative investment guidelines. Lowering interest crediting rates on annuity contracts can help offset decreases in investment margins on some products. The
Company’sCompany's ability to lower interest crediting rates could be limited by competition, regulatory approval or contractual guarantees of minimum rates and may not match the timing or magnitude of changes in investment yields.
Based on the
Company’sCompany's overall exposure to interest rate risk, the Company believes that these changes in interest rates would not materially affect its consolidated near-term financial position, results of operations or cash flows.
Pending Accounting Standards
There are several pending accounting standards that we have not implemented because the implementation date has not yet occurred. For a discussion of these pending standards, see “Notes to Consolidated
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| Horace Mann Educators Corporation | | Annual Report on Form 10-K 65 |
ITEM 8. I Financial Statements — Note 1 — Summary of Significant Accounting Policies — Pending Accounting Standards”.Effects of Inflation and Changes in Interest Rates
The Company's operating results are affected significantly in at least three ways by changes in interest rates and inflation. First, inflation directly affects property and casualty claims costs. Second, the investment income earned on the Company's investment portfolio and the fair value of the investment portfolio are related to the yields available in the fixed income markets. An increase in interest rates will decrease the fair value of the investment portfolio, but will increase investment income as investments mature and proceeds are reinvested at higher rates. Third, as interest rates increase, competitors will typically increase crediting rates on investment contracts and life insurance products with account values, and may lower premium rates on property and casualty lines to reflect the higher yields available in the market. The risk of interest rate fluctuation is managed through asset/liability management techniques, including cash flow analysis.
Supplementary Data HORACE MANN EDUCATORS CORPORATION
INDEX TO FINANCIAL INFORMATION
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| 66 Annual Report on Form 10-K | | Horace Mann Educators Corporation |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMThe
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors
and Shareholders Horace Mann Educators Corporation:
Opinion on the Consolidated Financial Statements
We have audited the accompanying
consolidatedbalanceconsolidated balance sheets of Horace Mann Educators Corporation and subsidiaries (the Company) as of December 31,
20162018 and
2015, and2019, the related consolidated statements of operations, comprehensive income (loss), changes in shareholders’ equity, and cash flows for each of the years in the
three-yearthree‑year period ended December 31,
2016. In connection with our audits of2019, and the
consolidated financial statements, we also have auditedrelated notes and financial statement schedules I to IV and
VI. We also have audited the Company’s internal control over financial reporting as of December 31, 2016, based on criteria established inInternal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these consolidated financial statements and financial statement schedules, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting (Item 9A.b.). Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedules, and an opinion on the Company's internal control over financial reporting based on our audits.We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits ofVI (collectively, the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
statements). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 20162019 and 2015,2018, and the results of its operations and its cash flows for each of the years in the three-yearthree‑year period ended December 31, 2016,2019, in conformity with U.S. generally accepted accounting principles. Also
We also have audited, in our opinion,accordance with the related financial statement schedules, when considered in relation tostandards of the basic consolidated financial statements taken as a whole, present fairly, in all material respects,Public Company Accounting Oversight Board (United States) (PCAOB), the information set forth therein.Also in our opinion, the Company maintained, in all material respects, effectiveCompany’s internal control over financial reporting as of December 31, 2016,2019, based on criteria established in
Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, (COSO)./s/ KPMG LLP
KPMG LLP
Chicago, Illinois
Marchand our report dated February 28, 2020 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Change in Accounting Principle
As discussed in Note 1 2017to the consolidated financial statements, the Company changed its method of accounting for the change in fair value of equity investments effective January 1, 2018 due to the adoption of ASU No. 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. 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 audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Assessment of the estimate of fair value for hard-to-value fixed maturity securities
As discussed in Notes 1 and 4 to the consolidated financial statements, as of December 31, 2019, the Company has recorded an estimated fair value for fixed maturity securities, of which a portion represent securities that are
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HORACE MANN EDUCATORS CORPORATION
CONSOLIDATED BALANCE SHEETS
hard-to-value. This includes securities that use both level II (observable) and level III (unobservable) inputs in the estimation of fair value. The Company estimates the fair value of hard-to-value fixed maturity securities, which includes securities that do not have market observable prices or that trade infrequently. The Company uses judgment to determine the appropriate inputs and assumptions used to estimate the fair value of these hard-to-value securities. The significant inputs and assumptions include benchmark yields, liquidity premium, estimated cash flows, and prepayment and default speeds. As of December 31, 20162019, the estimated fair value of fixed maturity securities was $5,791.7 million.
We identified the assessment of the Company’s estimate of the fair value of hard-to-value fixed maturity securities as a critical audit matter. Due to the significant measurement uncertainty associated with the fair value of such securities, there was a high degree of subjectivity and
2015judgment in evaluating the fair value and certain related assumptions. Our assessment included evaluating the specific inputs and assumptions to which the estimate is most sensitive.
The primary procedures we performed to address this critical audit matter included the following. We tested certain internal controls over the Company’s process to measure the fair value of hard-to-value securities. In addition, we tested internal controls over the Company’s pricing assumptions and methodologies for hard-to-value fixed maturity securities. We involved valuation professionals with specialized skills and knowledge, who assisted in:
Developing an independent range of fair value estimates using information from the Company, market data sources, models, and key assumptions for a selection of securities; and
Comparing the Company’s fair value estimates of hard-to-value securities to our independent range of fair value estimates for the same selection of securities.
Assessment of the estimate of property and casualty unpaid claims and claim expenses
As discussed in Notes 1 and 8 of the consolidated financial statements, the Company employs actuarial techniques to estimate the liability for property and casualty unpaid claims and claims expenses (reserves). The Company develops reserves based on the application of appropriate methods and assumptions to historical claim experience. The reserves are continually updated by the Company as experience develops and new information becomes known. The Company recorded an estimated liability of $266.5 million for property and casualty unpaid claims and claim expenses as of December 31, 2019.
We identified the assessment of the estimate of reserves as a critical audit matter because it involved measurement uncertainty requiring complex auditor judgment. Complex auditor judgment and specialized skills and knowledge were required in evaluating the Company’s methods and key assumptions, including the selection of loss development factors and changes in claim frequency and severity trends. The assumptions included a range of potential inputs and changes to these assumptions could affect the reserves recorded by the Company.
The primary procedures we performed to address this critical audit matter included the following. We tested certain internal controls over the Company’s process for the development of the estimate of reserves, including controls over methods and assumptions used for the Company’s best estimate. We also involved an actuarial professional with specialized skills and knowledge, who assisted in:
Evaluating the Company’s reserving methods, procedures, key assumptions and judgments by comparing to generally accepted actuarial standards;
Developing an independent estimate of the reserves for certain lines of business;
Examining the Company’s internal actuarial analyses for certain remaining lines of business;
Developing an independent range of reserves based on actuarial methodologies in order to evaluate the Company’s recorded reserves; and
Assessing any movement of the Company’s recorded reserves within the range of reserves.
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| 68 Annual Report on Form 10-K | | Horace Mann Educators Corporation |
Assessment of the fair value of insurance contracts acquired in the National Teachers Association business combination
As discussed in Notes 1, 2, and 7 to the consolidated financial statements, on July 1, 2019, the Company acquired NTA Life Enterprises, LLC (NTA) in a business combination. As a result of the transaction, the Company acquired the assets and assumed the liabilities of NTA. The Company uses judgment to determine the appropriate assumptions used to estimate the fair value of the insurance contracts, consisting of the value of business acquired (VOBA) and insurance policy reserves, and the future business to be written by the existing distribution channel (VODA). The acquisition-date balance was $94.4 million, $366.8 million and $49.0 million for VOBA, insurance policy reserves, and VODA, respectively.
We identified the assessment of the fair value of the insurance contracts acquired, consisting of VOBA and insurance policy reserves, and VODA, as a critical audit matter. There was a high degree of subjective auditor judgment in evaluating the valuation methods and certain assumptions used to estimate the fair value of the insurance contracts, consisting of VOBA and insurance policy reserves, and VODA. Changes in certain assumptions, specifically morbidity and discount rate, could affect the fair value of the balances recorded by the Company. Specialized skills and knowledge were required to assess the valuation methods, models, and assumptions used to estimate fair value.
The primary procedures we performed to address this critical audit matter included the following. We tested certain internal controls over the Company’s acquisition-date valuation process to develop the key assumptions as well as the valuation methods and models used to estimate the fair value of the insurance contracts, consisting of VOBA and insurance policy reserves, and VODA.
We involved actuarial professionals with specialized skills and knowledge, who assisted in:
Evaluating the valuation methods, models, and assumptions used to estimate the fair value of the insurance contracts, consisting of VOBA and insurance policy reserves, and VODA, in light of the generally accepted actuarial standards;
Performing independent estimates of insurance policy reserves using the Company’s policy data and assumptions for a selection of policies; and
Assessing the morbidity and discount rate assumptions in light of NTA’s historical experience as well as industry trends.
We involved valuation professionals with specialized skills and knowledge, who assisted in:
Comparing the Company’s discount rate, to a discount rate that was independently developed using publicly available market data for comparable entities; and
Comparing the estimated fair value of VODA to an independent estimate derived using a multi-period excess earnings method under the income approach based on NTA’s forecasted business production.
/s/ KPMG LLP
KPMG LLP
We have served as the Company’s auditor since 1989.
Chicago, Illinois
February 28, 2020
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| Horace Mann Educators Corporation | | Annual Report on Form 10-K 69 |
HORACE MANN EDUCATORS CORPORATION
CONSOLIDATED BALANCE SHEETS
As of December 31, 2019 and 2018
(
Dollars$ in thousands, except
per share data)
| | | December 31, | |
| | | 2016 | | | 2015 | |
| ASSETS | | | | | | | | |
| Investments | | | | | | | | |
| Fixed maturities, available for sale, at fair value (amortized cost 2016, $7,152,127; 2015, $6,785,626) | | $ | 7,456,708 | | | $ | 7,091,340 | |
| Equity securities, available for sale, at fair value (cost 2016, $134,013; 2015, $95,722) | | | 141,649 | | | | 99,797 | |
| Short-term and other investments | | | 401,015 | | | | 456,893 | |
| Total investments | | | 7,999,372 | | | | 7,648,030 | |
| Cash | | | 16,670 | | | | 15,509 | |
| Deferred policy acquisition costs | | | 267,580 | | | | 253,176 | |
| Goodwill | | | 47,396 | | | | 47,396 | |
| Other assets | | | 321,874 | | | | 292,139 | |
| Separate Account (variable annuity) assets | | | 1,923,932 | | | | 1,800,722 | |
| Total assets | | $ | 10,576,824 | | | $ | 10,056,972 | |
| | | | | | | | | |
| LIABILITIES AND SHAREHOLDERS' EQUITY |
| Policy liabilities | | | | | | | | |
| Investment contract and life policy reserves | | $ | 5,447,969 | | | $ | 5,126,842 | |
| Unpaid claims and claim expenses | | | 329,888 | | | | 323,720 | |
| Unearned premiums | | | 246,274 | | | | 232,841 | |
| Total policy liabilities | | | 6,024,131 | | | | 5,683,403 | |
| Other policyholder funds | | | 708,950 | | | | 692,652 | |
| Other liabilities | | | 378,620 | | | | 368,559 | |
| Long-term debt | | | 247,209 | | | | 246,975 | |
| Separate Account (variable annuity) liabilities | | | 1,923,932 | | | | 1,800,722 | |
| Total liabilities | | | 9,282,842 | | | | 8,792,311 | |
| Preferred stock, $0.001 par value, authorized 1,000,000 shares; none issued | | | - | | | | - | |
| Common stock, $0.001 par value, authorized 75,000,000 shares; issued, 2016, 64,917,683; 2015, 64,537,554 | | | 65 | | | | 65 | |
| Additional paid-in capital | | | 453,479 | | | | 442,648 | |
| Retained earnings | | | 1,155,732 | | | | 1,116,277 | |
| Accumulated other comprehensive income (loss), net of taxes: | | | | | | | | |
| Net unrealized gains on fixed maturities and equity securities | | | 175,738 | | | | 175,167 | |
| Net funded status of benefit plans | | | (11,817 | ) | | | (11,794 | ) |
| Treasury stock, at cost, 2016, 24,672,932 shares; 2015, 23,971,522 shares | | | (479,215 | ) | | | (457,702 | ) |
| Total shareholders' equity | | | 1,293,982 | | | | 1,264,661 | |
| Total liabilities and shareholders' equity | | $ | 10,576,824 | | | $ | 10,056,972 | |
|
| | | | | | | | |
| | | December 31, |
| | | 2019 | | 2018 |
| ASSETS |
| Investments | | | | |
Fixed maturity securities, available for sale, at fair value (amortized cost 2019, $5,456,980; 2018, $7,373,911) | | $ | 5,791,676 |
| | $ | 7,515,318 |
|
| Equity securities at fair value | | 101,864 |
| | 111,750 |
|
| Limited partnership interests | | 383,717 |
| | 328,516 |
|
| Short-term and other investments | | 361,976 |
| | 295,093 |
|
| Total investments | | 6,639,233 |
| | 8,250,677 |
|
| Cash | | 25,508 |
| | 11,906 |
|
| Deferred policy acquisition costs | | 276,668 |
| | 298,742 |
|
| Deposit asset on reinsurance | | 2,346,166 |
| | — |
|
| Intangible assets, net | | 177,217 |
| | — |
|
| Goodwill | | 49,079 |
| | 47,396 |
|
| Other assets | | 474,364 |
| | 422,047 |
|
| Separate Account (variable annuity) assets | | 2,490,469 |
| | 2,001,128 |
|
| Total assets | | $ | 12,478,704 |
| | $ | 11,031,896 |
|
| | | | | |
| LIABILITIES AND SHAREHOLDERS' EQUITY |
| Policy liabilities | | | | |
| Investment contract and policy reserves | | $ | 6,234,452 |
| | $ | 5,711,193 |
|
| Unpaid claims and claim expenses | | 442,854 |
| | 396,714 |
|
| Unearned premiums | | 279,163 |
| | 276,225 |
|
| Total policy liabilities | | 6,956,469 |
| | 6,384,132 |
|
| Other policyholder funds | | 647,283 |
| | 767,988 |
|
| Other liabilities | | 384,173 |
| | 290,358 |
|
| Short-term debt | | 135,000 |
| | — |
|
| Long-term debt | | 298,025 |
| | 297,740 |
|
| Separate Account (variable annuity) liabilities | | 2,490,469 |
| | 2,001,128 |
|
| Total liabilities | | 10,911,419 |
| | 9,741,346 |
|
Preferred stock, $0.001 par value, authorized 1,000,000 shares; none issued | | — |
| | — |
|
Common stock, $0.001 par value, authorized 75,000,000 shares; issued, 2019, 66,088,808; 2018, 65,820,369 | | 66 |
| | 66 |
|
| Additional paid-in capital | | 480,962 |
| | 475,109 |
|
| Retained earnings | | 1,352,539 |
| | 1,216,582 |
|
| Accumulated other comprehensive income (loss), net of tax: | | | | |
|
| Net unrealized investment gains on fixed maturity securities | | 230,448 |
| | 96,941 |
|
| Net funded status of benefit plans | | (10,767 | ) | | (12,185 | ) |
Treasury stock, at cost, 2019, 24,850,484 shares; 2018, 24,850,484 shares | | (485,963 | ) | | (485,963 | ) |
| Total shareholders' equity | | 1,567,285 |
| | 1,290,550 |
|
| Total liabilities and shareholders' equity | | $ | 12,478,704 |
| | $ | 11,031,896 |
|
See accompanying Notes to Consolidated Financial Statements.
|
| F-36 | |
| 70 Annual Report on Form 10-K | | Horace Mann Educators Corporation |
HORACE MANN EDUCATORS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(
Dollars$ in thousands, except per share data)
| | | Year Ended December 31, | |
| | | 2016 | | | 2015 | | | 2014 | |
| | | | | | | | | | |
| Revenues | | | | | | | | | | | | |
| Insurance premiums and contract charges earned | | $ | 759,146 | | | $ | 731,880 | | | $ | 715,760 | |
| Net investment income | | | 361,186 | | | | 332,600 | | | | 329,815 | |
| Net realized investment gains | | | 4,123 | | | | 12,713 | | | | 10,917 | |
| Other income | | | 4,455 | | | | 3,255 | | | | 4,193 | |
| | | | | | | | | | | | | |
| Total revenues | | | 1,128,910 | | | | 1,080,448 | | | | 1,060,685 | |
| | | | | | | | | | | | | |
| Benefits, losses and expenses | | | | | | | | | | | | |
| Benefits, claims and settlement expenses | | | 541,004 | | | | 496,364 | | | | 468,426 | |
| Interest credited | | | 192,022 | | | | 182,842 | | | | 176,139 | |
| Policy acquisition expenses amortized | | | 96,732 | | | | 98,919 | | | | 93,817 | |
| Operating expenses | | | 173,112 | | | | 157,411 | | | | 161,992 | |
| Interest expense | | | 11,808 | | | | 13,122 | | | | 14,198 | |
| Debt retirement costs | | | - | | | | 2,338 | | | | - | |
| | | | | | | | | | | | | |
| Total benefits, losses and expenses | | | 1,014,678 | | | | 950,996 | | | | 914,572 | |
| | | | | | | | | | | | | |
| Income before income taxes | | | 114,232 | | | | 129,452 | | | | 146,113 | |
| Income tax expense | | | 30,467 | | | | 35,970 | | | | 41,870 | |
| | | | | | | | | | | | | |
| Net income | | $ | 83,765 | | | $ | 93,482 | | | $ | 104,243 | |
| | | | | | | | | | | | | |
| Net income per share | | | | | | | | | | | | |
| Basic | | $ | 2.04 | | | $ | 2.23 | | | $ | 2.50 | |
| Diluted | | $ | 2.02 | | | $ | 2.20 | | | $ | 2.47 | |
| | | | | | | | | | | | | |
| Weighted average number of shares and equivalent shares | | | | | | | | | | | | |
| Basic | | | 41,158,349 | | | | 41,914,864 | | | | 41,646,281 | |
| Diluted | | | 41,475,516 | | | | 42,424,806 | | | | 42,230,559 | |
| | | | | | | | | | | | | |
| Net realized investment gains | | | | | | | | | | | | |
| Total other-than-temporary impairment losses on securities | | $ | (11,401 | ) | | $ | (23,796 | ) | | $ | (6,385 | ) |
| Portion of losses recognized in other comprehensive income (loss) | | | (290 | ) | | | (4,300 | ) | | | - | |
| Net other-than-temporary impairment losses on securities recognized in earnings | | | (11,111 | ) | | | (19,496 | ) | | | (6,385 | ) |
| Realized gains, net | | | 15,234 | | | | 32,209 | | | | 17,302 | |
| Total | | $ | 4,123 | | | $ | 12,713 | | | $ | 10,917 | |
|
| | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2019 | | 2018 | | 2017 |
| Revenues | | |
| | |
| | |
|
| Insurance premiums and contract charges earned | | $ | 897,954 |
| | $ | 817,333 |
| | $ | 794,703 |
|
| Net investment income | | 365,064 |
| | 376,507 |
| | 373,630 |
|
| Net investment gains (losses) | | 153,340 |
| | (12,543 | ) | | (3,406 | ) |
| Other income | | 14,127 |
| | 10,302 |
| | 6,623 |
|
| | | | | | | |
| Total revenues | | 1,430,485 |
| | 1,191,599 |
| | 1,171,550 |
|
| | | | | | | |
| Benefits, losses and expenses | | |
| | |
| | |
|
| Benefits, claims and settlement expenses | | 585,068 |
| | 637,560 |
| | 582,306 |
|
| Interest credited | | 212,786 |
| | 206,199 |
| | 198,635 |
|
| Operating expenses | | 234,609 |
| | 205,413 |
| | 187,789 |
|
| DAC unlocking and amortization expense | | 109,181 |
| | 109,889 |
| | 102,185 |
|
| Intangible asset amortization expense | | 8,790 |
| | — |
| | — |
|
| Interest expense | | 15,577 |
| | 13,001 |
| | 11,948 |
|
| Other expense - goodwill impairment | | 28,025 |
| | — |
| | — |
|
| | | | | | | |
| Total benefits, losses and expenses | | 1,194,036 |
| | 1,172,062 |
| | 1,082,863 |
|
| | | | | | | |
| Income before income taxes | | 236,449 |
| | 19,537 |
| | 88,687 |
|
| Income tax expense (benefit) | | 52,006 |
| | 1,194 |
| | (80,772 | ) |
| | | | | | | |
| Net income | | $ | 184,443 |
| | $ | 18,343 |
| | $ | 169,459 |
|
| | | | | | | |
| Net income per share | | |
| | |
| | |
|
| Basic | | $ | 4.42 |
| | $ | 0.44 |
| | $ | 4.10 |
|
| Diluted | | $ | 4.40 |
| | $ | 0.44 |
| | $ | 4.08 |
|
| | | | | | | |
| Weighted average number of shares and equivalent shares | | |
| | |
| | |
|
| Basic | | 41,737,876 |
| | 41,570,492 |
| | 41,364,546 |
|
| Diluted | | 41,948,531 |
| | 41,894,232 |
| | 41,564,979 |
|
| | | | | | | |
| Net investment gains (losses) | | | | | | |
| Total other-than-temporary impairment losses on securities | | $ | (1,380 | ) | | $ | (1,530 | ) | | $ | (12,620 | ) |
Portion of losses recognized in other comprehensive income (loss) | | — |
| | — |
| | — |
|
Net other-than-temporary impairment losses on securities recognized in earnings | | (1,380 | ) |
| (1,530 | ) |
| (12,620 | ) |
| Sales and other, net | | 151,495 |
| | 3,491 |
| | 7,756 |
|
| Change in fair value - equity securities | | 7,308 |
| | (18,323 | ) | | — |
|
Change in fair value and gains realized on settlements - derivatives | | (4,083 | ) | | 3,819 |
| | 1,458 |
|
| Total | | $ | 153,340 |
| | $ | (12,543 | ) | | $ | (3,406 | ) |
See accompanying Notes to Consolidated Financial Statements.
|
| F-37 | |
| Horace Mann Educators Corporation | | Annual Report on Form 10-K 71 |
HORACE MANN EDUCATORS CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(
Dollars$ in thousands)
| | | Year Ended December 31, | |
| | | 2016 | | | 2015 | | | 2014 | |
| | | | | | | | | | |
| Comprehensive income (loss) | | | | | | | | | | | | |
| Net income | | $ | 83,765 | | | $ | 93,482 | | | $ | 104,243 | |
| Other comprehensive income (loss), net of taxes: | | | | | | | | | | | | |
| Change in net unrealized investment gains and losses on fixed maturities and equity securities | | | 571 | | | | (122,387 | ) | | | 163,564 | |
| Change in net funded status of benefit plans | | | (23 | ) | | | 1,159 | | | | (1,177 | ) |
| Other comprehensive income (loss) | | | 548 | | | | (121,228 | ) | | | 162,387 | |
| Total | | $ | 84,313 | | | $ | (27,746 | ) | | $ | 266,630 | |
|
| | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2019 | | 2018 | | 2017 |
| Comprehensive income (loss) | | |
| | |
| | |
|
| Net income | | $ | 184,443 |
| | $ | 18,343 |
| | $ | 169,459 |
|
| Other comprehensive income (loss), net of tax: | | |
| | |
| | |
|
Change in net unrealized investment gains (losses) on securities | | 133,507 |
| | (188,195 | ) | | 74,405 |
|
| Change in net funded status of benefit plans | | 1,418 |
| | 1,032 |
| | 734 |
|
| Cumulative effect of change in accounting principle | | — |
| | (15,041 | ) | | — |
|
| Other comprehensive income (loss) | | 134,925 |
| | (202,204 | ) | | 75,139 |
|
| Total | | $ | 319,368 |
| | $ | (183,861 | ) | | $ | 244,598 |
|
See accompanying Notes to Consolidated Financial Statements.
|
| F-38 | |
| 72 Annual Report on Form 10-K | | Horace Mann Educators Corporation |
HORACE MANN EDUCATORS CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(
Dollars$ in thousands, except per share data)
| | | Year Ended December 31, | |
| | | 2016 | | | 2015 | | | 2014 | |
| | | | | | | | | | |
| Common stock, $0.001 par value | | | | | | | | | | | | |
| Beginning balance | | $ | 65 | | | $ | 64 | | | $ | 64 | |
Options exercised, 2016, 142,203 shares; 2015, 85,532 shares;
2014, 435,665 shares | | | - | | | | - | | | | - | |
Conversion of common stock units, 2016, 15,629 shares; 2015, 8,293 shares;
2014, 10,834 shares | | | - | | | | - | | | | - | |
Conversion of restricted stock units, 2016, 222,297 shares; 2015, 198,681 shares;
2014, 169,444 shares | | | - | | | | 1 | | | | - | |
| Ending balance | | | 65 | | | | 65 | | | | 64 | |
| | | | | | | | | | | | | |
| Additional paid-in capital | | | | | | | | | | | | |
| Beginning balance | | | 442,648 | | | | 422,232 | | | | 407,056 | |
| Options exercised and conversion of common stock units and restricted stock units | | | 2,696 | | | | 13,605 | | | | 13,906 | |
| Share-based compensation expense | | | 8,135 | | | | 6,811 | | | | 1,270 | |
| Ending balance | | | 453,479 | | | | 442,648 | | | | 422,232 | |
| | | | | | | | | | | | | |
| Retained earnings | | | | | | | | | | | | |
| Beginning balance | | | 1,116,277 | | | | 1,065,318 | | | | 1,000,312 | |
| Net income | | | 83,765 | | | | 93,482 | | | | 104,243 | |
Cash dividends, 2016, $1.06 per share; 2015, $1.00 per share;
2014, $0.92 per share | | | (44,310 | ) | | | (42,523 | ) | | | (39,237 | ) |
| Ending balance | | | 1,155,732 | | | | 1,116,277 | | | | 1,065,318 | |
| | | | | | | | | | | | | |
| Accumulated other comprehensive income (loss), net of taxes | | | | | | | | | | | | |
| Beginning balance | | | 163,373 | | | | 284,601 | | | | 122,214 | |
Change in net unrealized investment gains and losses on fixed maturities
and equity securities | | | 571 | | | | (122,387 | ) | | | 163,564 | |
| Change in net funded status of benefit plans | | | (23 | ) | | | 1,159 | | | | (1,177 | ) |
| Ending balance | | | 163,921 | | | | 163,373 | | | | 284,601 | |
| | | | | | | | | | | | | |
| Treasury stock, at cost | | | | | | | | | | | | |
Beginning balance, 2016, 23,971,522 shares; 2015, 23,308,430 shares;
2014, 23,117,554 shares | | | (457,702 | ) | | | (435,752 | ) | | | (430,341 | ) |
Acquisition of shares, 2016, 701,410 shares; 2015, 663,092 shares;
2014, 190,876 shares | | | (21,513 | ) | | | (21,950 | ) | | | (5,411 | ) |
Ending balance, 2016, 24,672,932 shares; 2015, 23,971,522 shares;
2014, 23,308,430 shares | | | (479,215 | ) | | | (457,702 | ) | | | (435,752 | ) |
| | | | | | | | | | | | | |
| Shareholders' equity at end of period | | $ | 1,293,982 | | | $ | 1,264,661 | | | $ | 1,336,463 | |
|
| | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2019 | | 2018 | | 2017 |
| Common stock, $0.001 par value | | |
| | |
| | |
|
| Beginning balance | | $ | 66 |
| | $ | 65 |
| | $ | 65 |
|
| Options exercised | | — |
| | — |
| | — |
|
| Conversion of common stock units | | — |
| | — |
| | — |
|
| Conversion of restricted common stock units | | — |
| | 1 |
| | — |
|
| Ending balance | | 66 |
| | 66 |
| | 65 |
|
| | | | | | | |
| Additional paid-in capital | | | | | | |
| Beginning balance | | 475,109 |
| | 464,246 |
| | 453,479 |
|
Options exercised and conversion of common stock units and restricted stock units | | (555 | ) | | 3,008 |
| | 2,962 |
|
| Share-based compensation expense | | 6,408 |
| | 7,855 |
| | 7,805 |
|
| Ending balance | | 480,962 |
| | 475,109 |
| | 464,246 |
|
| | | | | | | |
| Retained earnings | | | | | | |
| Beginning balance | | 1,216,582 |
| | 1,231,177 |
| | 1,155,732 |
|
| Net income | | 184,443 |
| | 18,343 |
| | 169,459 |
|
Dividends, 2019, $1.15 per share; 2018, $1.14 per share; 2017, $1.10 per share | | (48,486 | ) | | (47,979 | ) | | (46,114 | ) |
| Reclassification of deferred taxes | | — |
| | — |
| | (47,900 | ) |
| Cumulative effect of change in accounting principle | | — |
| | 15,041 |
| | — |
|
| Ending balance | | 1,352,539 |
| | 1,216,582 |
| | 1,231,177 |
|
| | | | | | | |
| Accumulated other comprehensive income (loss), net of tax: | | | | | | |
| Beginning balance | | 84,756 |
| | 286,960 |
| | 163,921 |
|
| Change in net unrealized investment gains (losses) on securities | | 133,507 |
| | (188,195 | ) | | 74,405 |
|
| Change in net funded status of benefit plans | | 1,418 |
| | 1,032 |
| | 734 |
|
| Reclassification of deferred taxes | | — |
| | — |
| | 47,900 |
|
| Cumulative effect of change in accounting principle | | — |
| | (15,041 | ) | | — |
|
| Ending balance | | 219,681 |
| | 84,756 |
| | 286,960 |
|
| | | | | | | |
| Treasury stock, at cost | | | | | | |
| Beginning balance | | (485,963 | ) | | (480,875 | ) | | (479,215 | ) |
| Acquisition of shares | | — |
| | (5,088 | ) | | (1,660 | ) |
| Ending balance | | (485,963 | ) | | (485,963 | ) | | (480,875 | ) |
| Shareholders' equity at end of period | | $ | 1,567,285 |
| | $ | 1,290,550 |
| | $ | 1,501,573 |
|
See accompanying Notes to Consolidated Financial Statements.
|
| F-39 | |
| Horace Mann Educators Corporation | | Annual Report on Form 10-K 73 |
HORACE MANN EDUCATORS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(
Dollars$ in thousands)
| | | Year Ended December 31, | |
| | | 2016 | | | 2015 | | | 2014 | |
| Cash flows - operating activities | | | | | | | | | | | | |
| Premiums collected | | $ | 710,646 | | | $ | 723,705 | | | $ | 707,275 | |
| Policyholder benefits paid | | | (511,017 | ) | | | (534,359 | ) | | | (486,295 | ) |
| Policy acquisition and other operating expenses paid | | | (277,076 | ) | | | (267,854 | ) | | | (262,765 | ) |
| Federal income taxes paid | | | (27,847 | ) | | | (24,861 | ) | | | (29,195 | ) |
| Investment income collected | | | 344,778 | | | | 330,034 | | | | 324,252 | |
| Interest expense paid | | | (11,754 | ) | | | (13,521 | ) | | | (13,902 | ) |
| Other | | | (20,312 | ) | | | (6,101 | ) | | | (17,437 | ) |
| Net cash provided by operating activities | | | 207,418 | | | | 207,043 | | | | 221,933 | |
| | | | | | | | | | | | | |
| Cash flows - investing activities | | | | | | | | | | | | |
| Fixed maturities | | | | | | | | | | | | |
| Purchases | | | (1,566,047 | ) | | | (1,490,376 | ) | | | (1,309,267 | ) |
| Sales | | | 429,251 | | | | 445,100 | | | | 261,696 | |
| Maturities, paydowns, calls and redemptions | | | 799,653 | | | | 683,335 | | | | 451,074 | |
| Purchase of other invested assets | | | (83,588 | ) | | | (38,018 | ) | | | (16,041 | ) |
| Net cash provided by (used in) short-term and other investments | | | 95,371 | | | | (15,890 | ) | | | 47,023 | |
| Net cash used in investing activities | | | (325,360 | ) | | | (415,849 | ) | | | (565,515 | ) |
| | | | | | | | | | | | | |
| Cash flows - financing activities | | | | | | | | | | | | |
| Dividends paid to shareholders | | | (44,310 | ) | | | (42,523 | ) | | | (39,237 | ) |
| Proceeds from issuance of Senior Notes due 2025 | | | - | | | | 246,937 | | | | - | |
| Redemption of Senior Notes due 2016 | | | - | | | | (127,292 | ) | | | - | |
| Maturity of Senior Notes due 2015 | | | - | | | | (75,000 | ) | | | - | |
| Principal repayment on Bank Credit Facility | | | - | | | | (38,000 | ) | | | - | |
| Acquisition of treasury stock | | | (21,513 | ) | | | (21,950 | ) | | | (5,411 | ) |
| Exercise of stock options | | | 3,329 | | | | 1,629 | | | | 8,252 | |
| Annuity contracts: variable, fixed and FHLB funding agreements | | | | | | | | | | | | |
| Deposits | | | 520,211 | | | | 623,021 | | | | 730,632 | |
| Benefits, withdrawals and net transfers to | | | | | | | | | | | | |
| Separate Account (variable annuity) assets | | | (349,915 | ) | | | (354,735 | ) | | | (326,374 | ) |
| Life policy accounts | | | | | | | | | | | | |
| Deposits | | | 4,018 | | | | 1,455 | | | | 1,093 | |
| Withdrawals and surrenders | | | (3,965 | ) | | | (3,985 | ) | | | (4,883 | ) |
| Cash received (paid) related to repurchase agreements | | | - | | | | - | | | | (25,848 | ) |
| Change in bank overdrafts | | | 11,248 | | | | 3,083 | | | | (1,156 | ) |
| Net cash provided by financing activities | | | 119,103 | | | | 212,640 | | | | 337,068 | |
| | | | | | | | | | | | | |
| Net increase (decrease) in cash | | | 1,161 | | | | 3,834 | | | | (6,514 | ) |
| | | | | | | | | | | | | |
| Cash at beginning of period | | | 15,509 | | | | 11,675 | | | | 18,189 | |
| | | | | | | | | | | | | |
| Cash at end of period | | $ | 16,670 | | | $ | 15,509 | | | $ | 11,675 | |
|
| | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2019 | | 2018 | | 2017 |
| Cash flows from operating activities | | |
| | |
| | |
|
| Net income | | $ | 184,443 |
| | $ | 18,343 |
| | $ | 169,459 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | |
| Net investment (gains) losses | | (153,340 | ) | | 12,543 |
| | 3,406 |
|
Amortization of premiums and accretion of discounts on fixed maturity securities, net | | 3,806 |
| | (10,095 | ) | | (13,385 | ) |
| Depreciation and intangible asset amortization | | 15,629 |
| | 7,357 |
| | 6,615 |
|
| Share-based compensation expense | | 7,338 |
| | 8,346 |
| | 8,592 |
|
| Other expense - goodwill impairment | | 28,025 |
| | — |
| | — |
|
| Changes in: | | | | | | |
| Accrued investment income | | 46,858 |
| | 4,449 |
| | (3,404 | ) |
| Insurance liabilities | | (96,802 | ) | | 203,370 |
| | 119,311 |
|
| Premium receivables | | (5,031 | ) | | (10,026 | ) | | (12,917 | ) |
| Deferred policy acquisition costs | | (1,274 | ) | | (783 | ) | | (7,967 | ) |
| Reinsurance recoverables | | 22,006 |
| | (21,317 | ) | | 11 |
|
| Income tax liabilities | | 28,726 |
| | (3,383 | ) | | (4,620 | ) |
| Other operating assets and liabilities | | 53,406 |
| | (2,048 | ) | | (1,692 | ) |
| Other | | (6,217 | ) | | (5,868 | ) | | (6,823 | ) |
| Net cash provided by operating activities | | 127,573 |
|
| 200,888 |
|
| 256,586 |
|
| | | | | | | |
| Cash flows from investing activities | | |
| | |
| | |
|
| Fixed maturity securities | | |
| | |
| | |
|
| Purchases | | (1,058,747 | ) | | (1,428,889 | ) | | (1,569,220 | ) |
| Sales | | 805,887 |
| | 625,527 |
| | 500,760 |
|
| Maturities, paydowns, calls and redemptions | | 799,526 |
| | 737,535 |
| | 927,665 |
|
| Equity securities | | | | | | |
| Purchases | | (15,583 | ) | | (13,430 | ) | | (32,312 | ) |
| Sales and repayments | | 33,502 |
| | 25,498 |
| | 53,100 |
|
| Limited partnership interests | | | | | | |
| Purchases | | (129,389 | ) | | (93,545 | ) | | (103,200 | ) |
| Sales | | 91,587 |
| | 16,997 |
| | 20,234 |
|
| Change in short-term and other investments, net | | (49,325 | ) | | (56,192 | ) | | (25,691 | ) |
| Acquisition of businesses, net of cash acquired | | (421,516 | ) | | — |
| | — |
|
| Net cash provided by (used in) investing activities | | 55,942 |
| | (186,499 | ) | | (228,664 | ) |
| | | | | | | |
| Cash flows from financing activities | | |
| | |
| | |
|
| Dividends paid to shareholders | | (47,333 | ) | | (46,689 | ) | | (46,114 | ) |
| Principal borrowings on senior revolving credit facility | | 135,000 |
| | — |
| | — |
|
| FHLB borrowings | | — |
| | — |
| | 50,000 |
|
| Acquisition of treasury stock | | — |
| | (5,088 | ) | | (1,660 | ) |
| Proceeds from exercise of stock options | | 1,730 |
| | 3,627 |
| | 4,190 |
|
| Withholding tax payments on RSUs tendered | | (3,680 | ) | | (3,165 | ) | | (3,245 | ) |
| Annuity contracts: variable, fixed and FHLB funding agreements | | |
| | |
| | |
|
| Deposits | | 637,538 |
| | 489,097 |
| | 453,146 |
|
Benefits, withdrawals and net transfers to Separate Account (variable annuity) assets | | (419,001 | ) | | (473,003 | ) | | (411,061 | ) |
| Principal repayment on FHLB funding agreements | | (305,005 | ) | | — |
| | — |
|
| Transfer of Company 401(k) to a third-party provider | | — |
| | — |
| | (77,898 | ) |
| Life policy accounts | | |
| | |
| | |
|
| Deposits | | 9,391 |
| | 8,149 |
| | 4,883 |
|
| Withdrawals and surrenders | | (3,558 | ) | | (4,910 | ) | | (4,458 | ) |
| Change in deposit asset on reinsurance, net | | (150,434 | ) | | — |
| | — |
|
| Change in book overdrafts | | (24,561 | ) | | 21,872 |
| | (4,748 | ) |
| Net cash used in financing activities | | (169,913 | ) | | (10,110 | ) | | (36,965 | ) |
| Net increase (decrease) in cash | | 13,602 |
| | 4,279 |
| | (9,043 | ) |
| Cash and restricted cash at beginning of period | | 11,906 |
| | 7,627 |
| | 16,670 |
|
| Cash and restricted cash at end of period | | $ | 25,508 |
| | $ | 11,906 |
| | $ | 7,627 |
|
See accompanying Notes to Consolidated Financial Statements.
|
| F-40 | |
| 74 Annual Report on Form 10-K | | Horace Mann Educators Corporation |
HORACE MANN EDUCATORS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31,
2016, 20152019, 2018 and
2014(Dollars in thousands, except per share data)
2017
NOTE 1 - Summary of Significant Accounting Policies
The accompanying
audited consolidated financial statements
of Horace Mann Educators Corporation and its wholly-owned subsidiaries (HMEC; and together with its subsidiaries, the Company or Horace Mann) have been prepared in accordance with
United States (“U.S.”)accounting principles generally accepted
accounting principles (“GAAP”)in the U.S. (GAAP) and with the rules and regulations of the Securities and Exchange Commission
(“SEC”), specifically Regulation S-X and the instructions to Form 10-K.(SEC). The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect (1) the reported amounts of assets and liabilities, (2) disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and (3) the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
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 presented in the Consolidated Statements of Cash Flows to conform to the current year’s presentation.
The consolidated financial statements include the accounts of
Horace Mann Educators CorporationHMEC and its wholly-owned
subsidiaries (“HMEC”; and together with its subsidiaries, the “Company” or “Horace Mann”).subsidiaries. HMEC and its subsidiaries have common management, share office facilities and are parties to intercompany service agreements for management, administrative, utilization of personnel, financial, investment advisory, underwriting, claims adjusting, agency and data processing services. Under these agreements, costs have been allocated among the companies in conformity with GAAP. In addition, certain of the subsidiaries have entered into intercompany reinsurance agreements. HMEC and its subsidiaries
(with exception of National Teachers Associates Life Insurance Company and NTA Life Insurance Company of New York) file a consolidated federal income tax return, and there are related tax sharing agreements. All significant intercompany balances and transactions have been eliminated in consolidation.
The subsidiaries of HMEC market and underwrite personal lines of property and casualty insurance products (primarily personal lines automobile and
homeownersproperty insurance)
, supplemental insurance products (primarily heart, cancer, accident and limited 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.
HMEC’sHMEC's principal operating subsidiaries are Horace Mann Life Insurance Company, Horace Mann Insurance Company, Teachers Insurance Company, Horace Mann Property & Casualty Insurance Company,
and Horace Mann
Lloyds.Lloyds, National Teachers Associates Life Insurance Company and NTA Life Insurance Company of New York.
As described more fully in Note 2, the Company acquired NTA Life Enterprises, LLC (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 short-term supplemental disability coverages) that are marketed and underwritten by NTA.
The Company has evaluated subsequent events through the date these consolidated financial statements were issued. There were no subsequent events requiring adjustment to the
consolidated financial statements or disclosure.
Cash
Cash reported on the Consolidated Balance Sheet at December 31, 2019 includes restricted cash in the amount of $0.3 million, 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.
|
| F-41 | |
| Horace Mann Educators Corporation | | Annual Report on Form 10-K 75 |
NOTE 1 - Summary of Significant Accounting
Policies-(Continued)
Policies (continued)
The Company invests primarilypredominantly in fixed maturity securities (“fixed maturities”).securities. This category includes primarily bonds and notes, but also includes redeemable preferred stocks. These securities are classified as available for sale and carried at fair value. value, of which a portion represent securities that are hard-to-value.
The fair value of a fixed maturity security is the estimated amount at which the security could be exchanged in an orderly transaction between knowledgeable, unrelated and willing parties. The Company utilizes its investment managers and its custodian bank to obtain fair value prices from independent third-party valuation service providers, broker-dealer quotes, and model prices. Each month, the Company obtains fair value prices from its investment managers and custodian bank, each of which use a variety of independent, nationally recognized pricing sources to determine market valuations for fixed maturity securities. Differences in prices between the sources that the Company considers significant are researched and the Company utilizes the price that it considers most representative of an exit price. Typical inputs used by these pricing sources include, but are not limited to, reported trades, bids, offers, benchmark yield curves, benchmarking of like securities, rating designations, sector groupings, issuer spreads, and/or estimated cash flows, prepayment and default speeds, among others. The Company's fixed maturity securities portfolio is primarily publicly traded, which allows for a high percentage of the portfolio to be priced through pricing services. Approximately 94.1% of the portfolio, based on fair value, was priced through pricing services or index priced using observable inputs as of December 31, 2019.
The valuation of hard-to-value fixed maturity securities (generally 100 -150 securities) is more subjective because the markets are less liquid and there is a lack of observable market-based inputs. This may increase the potential that the estimated fair value of an investment is not reflective of the price at which an actual transaction would occur. When the pricing sources cannot provide fair value determinations, the investment managers and custodian bank obtain non-binding price quotes from broker-dealers. For those securities where the investment manager cannot obtain broker-dealer quotes, they will model the security, generally using anticipated cash flows of the underlying collateral. Broker-dealers' valuation methodologies as well as investment managers’ modeling methodologies are sometimes matrix-based, using indicative evaluation measures and adjustments for specific security characteristics and market sentiment. The selection of the market inputs and assumptions used to estimate the fair value of hard-to-value fixed maturity securities require judgment and include: benchmark yield, liquidity premium, estimated cash flows, prepayment and default speeds, spreads, weighted average life, and credit rating. The extent of the use of each market input depends on the market sector and market conditions. Depending on the security, the priority of the use of inputs may change or some market inputs may not be relevant. For some securities, additional inputs may be necessary.
An adjustment for net unrealized investment gains
and losses(losses) on all securities available for sale
and carried at fair value, is
recordedrecognized as a separate component of accumulated other comprehensive income
(AOCI) within shareholders' equity, net of applicable deferred taxes and the related impact on
deferred policy acquisition costsDAC associated with annuity contracts and life insurance products with account values that would have occurred if the securities had been sold at their aggregate fair value and the proceeds reinvested at current yields.
Equity
Beginning January 1, 2018, equity securities are
classified as available for sale and carried at fair
value.value with changes in fair value recognized as Net investment gains (losses). This category includes nonredeemable preferred stocks and common stocks.
Limited partnership interests include investments in commercial mortgage loans, infrastructure, corporate credit, private equity, real estate and other funds. All investments in limited partnership interests are accounted for in accordance with the equity method of accounting.
Short-term and other investments are comprised of short-term fixed maturity securities, generally carried at cost which approximates fair value;
derivative instruments (all call options),derivatives, carried at fair value; policy loans, carried at unpaid principal balances; mortgage loans, carried at unpaid
principal; certain alternative investments (primarily investments in limited partnerships) which are accounted for as equity method investments;principal balances; and restricted Federal Home Loan Bank
(FHLB) membership and activity stocks, carried at redemption value which approximates fair value.
The Company invests in fixed maturity securities and alternative investment funds that could qualify as
interests in variable interest entities
(VIEs), including corporate securities, mortgage-backed securities and asset-backed securities. Such
securitiesinterests in VIEs have been reviewed and
the Company determined
that those VIEs are not
to be subject to consolidation as the Company is not the primary beneficiary
of these securities because
the Companyit does not have the power to direct the activities that most significantly impact
the entities’those VIEs' economic performance.
|
| | |
| 76 Annual Report on Form 10-K | | Horace Mann Educators Corporation |
NOTE 1 - Summary of Significant Accounting Policies (continued)
Investment income is recognized as earned. Investment income reflects amortization of premiums and accrual of discounts on an effective-yield basis.
Realized gains and losses arising from the disposal (recorded on a trade date basis) or impairment of securities are determined based upon specific identification of securities. The Company evaluates all investments in its portfolio for other-than-temporary declines in
fair value as described in the following section.
NOTE 1 - Summary of Significant Accounting Policies-(Continued)
Other-than-temporary Impairment of Investments
The Company's methodology of assessing other-than-temporary impairments
(OTTI) for fixed maturity securities is based on security-specific facts and circumstances as of the
balance sheetreporting date. Based on these facts,
for fixed maturity securities if (1) the Company has the intent to sell the
fixed maturity security, (2) it is more likely than not the Company will be required to sell the
fixed maturity security before the anticipated recovery of the amortized cost basis, or (3) management does not expect to recover the entire
amortized cost basis of the
fixed maturity security,
an other-than-temporary impairment is considered to have occurred. For equity securities, if (1) the Company does not have the ability and intent to hold the security for the recovery of cost or (2) recovery of cost is not expected within a reasonable period of time, an other-than-temporary impairmentOTTI is considered to have occurred. Additionally, if events become known that call into question whether the security issuer has the ability to honor its contractual commitments, such security holding will be evaluated to determine whether or not such security has suffered an other-than-temporary decline in
fair value.
The Company
reviewshas a policy and process to evaluate fixed maturity securities (at the
fair value of all investments in its portfoliocusip/issuer level) on a
monthlyquarterly basis to assess whether
an other-than-temporary decline in valuethere has
occurred.been OTTI. These reviews, in conjunction with the Company's investment managers' monthly credit reports and relevant factors such as (1) the financial condition and near-term prospects of the issuer, (2) the length of time and extent to which the fair value has been less than
the amortized cost
for fixed maturity securities or cost for equity securities,basis (3)
for fixed maturity securities, the
Company’sCompany's intent to sell a security or whether it is more likely than not the Company will be required to sell the security before the anticipated recovery
inof the amortized cost
basis; and for equity securities, the Company’s ability and intent to hold the security for the recovery of cost or if recovery of cost is not expected within a reasonable period of time,basis, (4)
the stock price trend of the issuer, (5) the market leadership position of the issuer,
(6)(5) the debt ratings of the issuer, and
(7)(6) the cash flows and liquidity of the issuer or the underlying cash flows for asset-backed securities, are all considered in the impairment assessment. When
an other-than-temporary impairmentOTTI is deemed to have occurred, the investment is written-down to fair value
with a realized loss charged to income forat the
period for the full loss amount for all equity securitiestrade lot level and the credit-related loss portion
associated with impaired fixed maturity securities.is recognized as a net investment loss during the period. The amount of
the total
other-than-temporary impairmentOTTI related to non-credit factors for fixed maturity securities is recognized in other comprehensive income
(OCI), net of applicable taxes, in which the Company has the intent to sell the security or if it is more likely than not the Company will be required to sell the security before the anticipated recovery of the amortized cost basis.
With respect to fixed maturity securities involving securitized financial assets — primarily asset-backed and commercial mortgage-backed securities in the
Company’sCompany's portfolio — the
securitized financial asset securities’ underlying collateral cash flows are stress tested to determine if there has been any adverse change in the expected
future cash flows.
NOTE 1 - Summary of Significant Accounting Policies-(Continued)
A decline in fair value below the amortized cost basis is not assumed to be other-than-temporary for fixed maturity investmentssecurities with unrealized losses due to spread widening, market illiquidity or changes in interest rates where there exists a reasonable expectation based on the Company’sCompany's consideration of all objective information available that the Company will recover the entire amortized cost basis of the security and the Company does not have the intent to sell the investmentsecurity before maturity or a market recovery is realized and it is more likely than not the Company will not be required to sell the investment. An other-than-temporary impairment losssecurity. OTTI will be recognized based upon all relevant facts and circumstances for each investment, as appropriate.
Additional considerations for certain types of securities include the following:
Corporate Fixed Maturity Securities
Judgments regarding whether a corporate fixed maturity security is other-than-temporarily impaired include analyzing the
issuer’sissuer's financial condition and whether there has been a decline in the
issuer’sissuer's ability to service the specific security. The analysis of the security issuer is based on asset coverage, cash flow multiples or other industry standards. Several factors assessed include, but are not limited to, credit quality ratings, cash flow sustainability, liquidity, financial strength, industry and market position. Sources of information include, but are not limited to, management projections, independent consultants, external
analysts’analysts' research, peer analysis and the
Company’sCompany's internal analysis.
If the Company has concerns regarding the viability of the issuer or its ability to service the specific security after this assessment, a cash flow analysis is prepared to determine if the present value of future cash flows has declined below the amortized cost basis of the fixed maturity security. This analysis to determine an estimate of ultimate recovery value is combined with the estimated timing to recovery and any other applicable cash flows that are expected.expected to be collected. If a cash flow analysis estimate is not feasible, then the market’smarket's view of cash
|
| | |
| Horace Mann Educators Corporation | | Annual Report on Form 10-K 77 |
NOTE 1 - Summary of Significant Accounting Policies (continued)
flows implied by the period end fair value, market discount rates and effective yield are the primary factors used to estimate
aan ultimate recovery value.
Mortgage-Backed Securities Not Issued By the U.S. Government or Federally Sponsored Agencies
The Company uses an estimate of future cash flows expected to be collected to evaluate its mortgage-backed securities for
other-than-temporary impairment.OTTI. The determination of cash flow estimates is inherently subjective and methodologies may vary depending on facts and circumstances specific to the security. All reasonably available information relevant to the collectability of the security, including past events, current conditions, and reasonable and supportable assumptions and forecasts, are considered when developing the estimate of
future cash flows expected to be collected. Information includes, but is not limited to, debt-servicing, missed refinancing opportunities and geography.
NOTE 1 - Summary of Significant Accounting Policies-(Continued)
Loan level characteristics such as issuer, FICO score, payment terms, level of documentation, property or residency type, and economic outlook are also utilized in financial models, along with historical performance, to estimate or measure the loan’sloan's propensity to default. Additionally, financial models take into account loan age, lease rollovers, rent volatilities, vacancy rates and exposure to refinancing as additional drivers of default. For transactions where loan level data is not available, financial models use a proxy that is based on the collateral characteristics. Loss severity is a function of multiple factors including, but not limited to, the unpaid balance, interest rate, mortgage insurance ratios, assessed property value at origination, change in property valuation and loan-to-value ratio at origination. Prepayment speeds, both actual and estimated, cost of capital rates and debt service ratios are also considered. The cash flows generated by the collateral securing these securities are then estimated with these default, loss severity and prepayment assumptions. These collateral cash flows are then utilized, along with consideration for the issue’sCompany's position in the overall structure, to estimate the future cash flows associated with the residential or commercial mortgage-backed security held by the Company.
The
Company’sCompany's municipal bond portfolio consists primarily of
special revenue bonds, which present unique considerations in evaluating
other-than-temporary impairments,OTTI, but also includes general obligation bonds. The Company evaluates
special revenue bonds for
other-than-temporary impairmentOTTI based on guarantees associated with the repayment from revenues generated by the specified revenue-generating activity associated with the purpose of the bonds. Judgments regarding whether a municipal bond is other-than-temporarily impaired include analyzing the
issuer’sissuer's financial condition and whether there has been a decline in the overall financial condition of the issuer or its ability to service the specific security. Security credit ratings are reviewed with emphasis on the economy, finances, debt and management of the municipal issuer. Certain securities may be guaranteed by the
mono-linemono - line credit insurers or other forms of guarantee.
While not relied upon in the initial security purchase decision, insurance benefits are considered in the assessments for
other-than-temporary impairment,OTTI, including the credit-worthiness of the guarantor. Municipalities possess unique powers, along with a special legal standing and protections, that enable them to act quickly to restore budgetary balance and fiscal integrity. These powers include the sovereign power to tax, access to one-time revenue sources, capacity to issue or restructure debt, and ability to shift spending to other authorities. State governments often provide secondary support to local governments in times of financial stress and the federal government has provided assistance to state governments during recessions.
If the Company has concerns regarding the viability of the municipal issuer or its ability to service the specific security after this analysis, a cash flow analysis is prepared to determine a present value and whether it has declined below the amortized cost
basis of the security. If a cash flow analysis is not feasible, then the
market’smarket's view of the period end fair value, market discount rates and effective yield are the primary factors used to estimate the present value.
NOTE 1 - Summary of Significant Accounting Policies-(Continued)
Credit Losses
The Company estimates the amount of the credit loss component of a fixed maturity security impairment as the difference between amortized cost basis and the present value of the expected future cash flows of the security. The present value is determined using the best estimate of cash flows discounted at the effective interest rate implicit to the security at the date of purchase or the current yield to accrete an asset-backed or floating rate security. The methodology and assumptions for establishing the best estimate of cash flows vary depending on the type of security. Corporate fixed maturity security and municipal bond cash flow estimates are derived from scenario-based outcomes of expected restructurings or the disposition of assets using specific facts and other circumstances, including timing, security interests and loss severity and when not reasonably estimable, such securities are impaired to fair value as management’smanagement's best estimate of the present value of future cash flows.
|
| | |
| 78 Annual Report on Form 10-K | | Horace Mann Educators Corporation |
NOTE 1 - Summary of Significant Accounting Policies (continued)
The cash flow estimates for mortgage-backed and other structured securities are based on security specific facts and circumstances that may include collateral characteristics, expectations of delinquency and default rates, loss severity and prepayment speeds, and structural support, including subordination and guarantees.
Deferred Policy Acquisition Costs
The
Company’sCompany's deferred policy acquisition costs
(“DAC”) asset(DAC) by
reporting segment was as follows:
| | | December 31, | |
| | | | 2016 | | | | | 2015 | | |
| | | | | | | |
| Retirement (annuity) | | $ | 188,117 | | | $ | 178,300 | |
| Life | | | 51,859 | | | | 48,191 | |
| Property and Casualty | | | 27,604 | | | | 26,685 | |
| Total | | $ | 267,580 | | | $ | 253,176 | |
Policy acquisition costs, consisting
|
| | | | | | | | |
| ($ in thousands) | | December 31, |
| | | 2019 | | 2018 |
| Property and Casualty | | $ | 28,616 |
| | $ | 30,033 |
|
| Supplemental | | 1,967 |
| | N/A |
|
| Retirement (annuity) | | 185,294 |
| | 209,231 |
|
| Life | | 60,791 |
| | 59,478 |
|
| Total | | $ | 276,668 |
| | $ | 298,742 |
|
DAC consists of commissions, policy issuance and other costs which are incremental and directly related to the successful acquisition of new or renewal business,
which are deferred and amortized on a basis consistent with the type of insurance coverage. For
property and casualty policies, DAC is amortized over the terms of the insurance policies (6 or 12 months). For supplemental policies, DAC is amortized in proportion to anticipated premiums over the terms of the insurance policies (approximately 6 years, based on an estimated average duration across all supplemental products). For all investment (annuity) contracts,
deferred policy acquisition costs areDAC is amortized over 20 years in proportion to estimated gross profits.
Deferred policy acquisition costs areDAC is amortized in proportion to estimated gross profits over 20 years for certain life insurance products with account values and over 30 years for indexed universal life
contracts.(IUL) products. For other individual life contracts,
deferred policy acquisition costs areDAC is amortized in proportion to anticipated premiums over the terms of the insurance policies (10, 15, 20,
or 30 years).
For Property and Casualty policies, deferred policy acquisition costs are amortized over the terms of the insurance policies (6 or 12 months).NOTE 1 - Summary of Significant Accounting Policies-(Continued)
The Company periodically reviews the assumptions and estimates used in deferring policy acquisition costsDAC and also periodically reviews its estimations of gross profits, a process sometimes referred to as “unlocking”"unlocking". The most significant assumptions that are involved in the estimation of annuity gross profits include interest rate spreads, future financial market performance, business surrender/lapse rates, expenses and the impact of net realized investment gains (losses) on fixed maturity and losses.equity securities. For the variable deposit portion of the Retirement, segment, the Company amortizes deferred policy acquisition costsDAC utilizing a future financial market performance assumption of a 10%an 8% reversion to the mean approach with a 200 basis point corridor around the mean during the reversion period, representing a cap and a floor on the Company’sCompany's long-term assumption. The Company’sCompany's practice with regard to returns on Separate Accountsfuture financial market performance assumes that long-term appreciation in the financial marketmarkets is not changed by short-term market fluctuations, but is only changed when sustained deviations are experienced. The Company monitors these fluctuations and only changes the assumption when its long-term expectation changes.
expectations change.
The most significant assumptions that are involved in the estimation of life insurance gross profits include interest rates expected to be received on investments, business persistency, and mortality. Conversions from term to permanent insurance cause an immediate write down of the associated DAC. The impact on amortization due to assumption changes has an immaterial impact on the results of operations.
The most significant assumptions that are involved in the estimation of supplemental gross profits include morbidity, persistency, expenses and interest rates expected to be received on investments. When a supplemental policy lapses, there is an immediate write down of the associated DAC. The impact on amortization due to assumption changes has an immaterial impact on the results of operations.
Annually, the Company performs a gross premium valuation on life insurance and supplemental policies to assess whether a loss recognition event has occurred. This involves discounting expected future benefits and expenses less expected future premiums. To the extent that this amount is greater than the liability for future benefits less the DAC asset, in aggregate for the life insurance or the supplemental block, a loss would be recognized by first writing off the DAC and then increasing the liability.
|
| | |
| Horace Mann Educators Corporation | | Annual Report on Form 10-K 79 |
NOTE 1 - Summary of Significant Accounting Policies (continued)
In the event actual experience differs significantly from assumptions or assumptions are significantly revised, the Company may be required to
recordrecognize a material charge or credit to current period amortization expense for the period in which the adjustment is made. The Company
recordedrecognized the following adjustments to amortization expense as a result of evaluating actual experience and prospective assumptions, the impact of unlocking:
| | | Year Ended December 31, | |
| | | 2016 | | | 2015 | | | 2014 | |
| Increase (decrease) to amortization: | | | | | | | | | | | | |
| Annuity | | $ | (313 | ) | | $ | 3,403 | | | $ | 1,224 | |
| Life | | | (394 | ) | | | (34 | ) | | | (131 | ) |
| Total | | $ | (707 | ) | | $ | 3,369 | | | $ | 1,093 | |
Deferred policy acquisition costs
|
| | | | | | | | | | | | |
| ($ in thousands) | | Year Ended December 31, |
| | | 2019 | | 2018 | | 2017 |
| Increase (decrease) to DAC amortization expense: | | | | | | |
| Retirement | | $ | 3,480 |
| | $ | 3,948 |
| | $ | 1,081 |
|
| Life | | (267 | ) | | 283 |
| | (200 | ) |
| Total | | $ | 3,213 |
| | $ | 4,231 |
| | $ | 881 |
|
DAC for investment contracts and life insurance products with account values are adjusted for the impact on estimated future gross profits as if net unrealized investment gains
and losses(losses) on securities had been realized at the
balance sheetreporting date. This adjustment reduced
the deferred policy acquisition costsDAC by
$40,274$41.2 million and
$38,819$17.9 million at December 31,
20162019 and
2015,2018, respectively. The after tax impact of this adjustment is included in
accumulated other comprehensive incomeAOCI (net unrealized investment gains
and losses(losses) on
fixed maturities and equity securities) within shareholders' equity.
Deferred policy acquisition costs
DAC is reviewed for recoverability from future income, including net investment income, and costs that are deemed unrecoverable are expensed in the period in which the determination is made. No such costs were deemed unrecoverable during the years ended December 31, 2019, 2018 and 2017.
Intangible Assets
The value of business acquired (VOBA) represents the difference between the fair value of insurance contracts and insurance policy reserves measured in accordance with the Company's accounting policies for insurance contracts acquired. VOBA was based on an actuarial estimate of the present value of future distributable earnings for insurance in force on the acquisition date. VOBA was $90.7 million as of December 31, 2019 and is being amortized by product based on the present value of future premiums to be received. The Company estimates that it will recognize VOBA amortization of $7.1 million in 2020, $6.7 million in 2021, $6.2 million in 2022, $5.8 million in 2023 and $5.4 million in 2024.
The Company accounts for the value of distribution acquired (VODA) associated with the acquisition of NTA based on an actuarial estimate of the present value of future business to be written by the existing distribution channel. VODA was $47.5 million as of December 31, 2019 and is being amortized on a straight-line basis. The Company estimates that it will recognize VODA amortization of $2.9 million in each of the years 2020 through 2024, respectively.
The Company accounts for VODA associated with the acquisition of Benefit Consultants Group, Inc. (BCG) based on management's estimate of the present value of future business to be written by the existing distribution channel. VODA was $4.6 million as of December 31, 2019 and is being amortized based on the present value of future profits to be received. The Company estimates that it will recognize VODA amortization of $0.4 million in each of the years 2020 through 2024, respectively.
The Company accounts for the value of agency relationships based on the present value of commission overrides retained by NTA. Agency relationships was $15.5 million as of December 31, 2019 and is being amortized based on the present value of future premiums to be received. The Company estimates that it will recognize agency relationships amortization of $2.6 million in 2020, $2.2 million in 2021, $1.9 million in 2022, $1.6 million in 2023 and $1.4 million in 2024.
The Company accounts for the value of customer relationships based on the present value of expected profits from existing BCG customers in force at the date of acquisition. Customer relationships was $7.3 million as of December 31, 2019 and is being amortized based on the present value of future profits to be received. The Company estimates that it will recognize customer relationships amortization of $1.5 million in 2020, $1.2 million in 2021, $1.0 million in 2022, $0.9 million in 2023 and $0.7 million in 2024.
Trade names represents the present value of future savings accruing to 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. State licenses
|
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| 80 Annual Report on Form 10-K | | Horace Mann Educators Corporation |
NOTE 1 - Summary of Significant Accounting Policies (continued)
represents the regulatory licenses held by NTA that were valued using the cost approach. Both trade names and state licenses are indefinite-lived intangibles that are not subject to amortization.
VOBA is reviewed for recoverability from future income, including net investment income, and costs which are deemed unrecoverable are expensed in the period in which the determination is made. No such costs were deemed unrecoverable during the yearsyear ended December 31, 2016, 20152019.
Amortizing intangible assets (i.e., VODA, agency relationships and
2014.customer relationships) are tested for recoverability whenever events or changes in circumstances indicate that its carrying value may not be recoverable. The carrying amount of an amortizing intangible asset is not recoverable if it exceeds the sum of undiscounted cash flows expected to result from the use and eventual disposition of the asset. If the carrying value is not recoverable from undiscounted cash flows, the impairment is measured as the difference between the carrying value and fair value.
Intangible assets that are not subject to amortization (i.e., trade names and state licenses) are tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired. The impairment test consists of a comparison of the fair value of an intangible asset with its carrying value. If the carrying value of an intangible asset that is not subject to amortization exceeds its fair value, an impairment loss is to be recognized in an amount equal to that excess.
When the Company was acquired
from CIGNA Corporation by HME Holdings, Inc. in 1989, intangible assets were
recordedrecognized as goodwill in the application of purchase
accounting to recognize goodwill.accounting. In addition, goodwill was
recordedrecognized in 1994 related to the
purchaseacquisition of Horace Mann Property & Casualty Insurance
Company.Company and in 2019 related to the acquisitions of BCG and NTA. NOTE 1 - Summary of Significant Accounting Policies-(Continued)
Goodwill represents the excess of the amounts paid to acquire a business over the fair value of its net assets at the date of acquisition. Goodwill is not amortized, but is tested for impairment at the reporting unit level at least annually or more frequently if events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. A reporting unit is defined as an operating segment or a business unit one level below an operating segment, if separate financial information is prepared and regularly reviewed by management at that level. The Company’sCompany's reporting units, for which goodwill has been allocated, are equivalent to the Company’sCompany's operating segments.
The Refer to Note 7 for the allocation of goodwill by reporting unit is as follows:
| Retirement | | $ | 28,025 | |
| Life | | | 9,911 | |
| Property and Casualty | | | 9,460 | |
| Total | | $ | 47,396 | |
of December 31, 2019.
The goodwill impairment test, as defined in
the accounting guidance,GAAP, allows an entity the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying
amount.value. If an entity determines it is more likely than not that the fair value of a reporting unit is less than its carrying
amount,value, then the entity
followsperforms a
two-step process. In the first step,quantitative goodwill impairment test by comparing the fair value of a reporting unit
is compared to its carrying
value. If the carrying value
of a reporting unit exceeds its fair value, the second step of the impairment test is performed for purposes of confirming and measuring
thean impairment. In the second
step,quarter of 2019, the
Company adopted guidance to eliminate Step 2 of the goodwill impairment test. Goodwill impairment is now the amount by which a reporting unit’s carrying value exceeds its fair value,
of the reporting unit is allocatednot to
all of the assets and liabilities of the reporting unit to determine an implied goodwill value. Ifexceed the carrying amount of
the reporting unit goodwill exceeds the implied goodwill value, an impairment loss would be recognized in an amount equal to that excess.goodwill. Any amount of goodwill determined to be impaired will be
recordedrecognized as an expense in the period in which the impairment determination is made.
The Company completed its annual goodwill assessment for the individual reporting units as
As of October 1,
2016 and did not utilize2019, the
optionCompany performed a qualitative assessment to determine whether it was necessary to perform
an initiala quantitative goodwill impairment test. Based on the assessment of qualitative
factors. The first step of the Company’s analysis indicatedfactors, there were no events or circumstances that
fair value exceeded carrying value for all reporting units. The process of evaluating goodwill for impairment required managementlead to
make multiple judgments and assumptions to determinea determination that it is more likely than not that the fair value of
eacha reporting unit
including discounted cash flow calculations, the level of the Company’s own share price and assumptions that market participants would make in valuing each reporting unit. Fair value estimates were based primarily on an in-depth analysis of historical experience, projected future cash flows and relevant discount rates, which considered market participant inputs and the relative risk associated with the projected cash flows. Other assumptions included levels of economic capital, future business growth, earnings projections and assets under management for each reporting unit. Estimates of fair value are subject to assumptions that are sensitive to change and represent the Company’s reasonable expectation regarding future developments. The Company also considered other valuation techniques such as peer company price-to-earnings and price-to-book multiples.is less than its carrying value. NOTE 1 - Summary of Significant Accounting Policies-(Continued)
As part of the Company’s October 1, 2016 goodwill analysis, the Company compared the fair value of the aggregated reporting units to the market capitalization of the Company. The difference between the aggregated fair value of the reporting units and the market capitalization of the Company was attributed to several factors, most notably market sentiment, trading volume and transaction premium. The amount of the transaction premium was determined to be reasonable based on insurance industry and Company-specific facts and circumstances. There were no other events or material changes in circumstances during 2016 that indicated that a material change in the fair value of the Company’s reporting units had occurred.
During each year from 20142017 through 2016,2019, the Company completed the required annual testing;goodwill impairment testing. With exception to the goodwill impairment charge described in Note 7, no other goodwill impairment charges were necessary as a result of such assessments. The assessment of goodwill recoverability requires significant judgment and is subject to inherent uncertainty. The use of different assumptions, within a reasonable range, could cause the fair value to be below the carrying value. Subsequent goodwill assessments could result in impairment, particularly for any reporting unit with at-risk goodwill, due to the impact of a volatile financial market on earnings, discount rate assumptions, liquidity and market capitalization.
|
| | |
| Horace Mann Educators Corporation | | Annual Report on Form 10-K 81 |
NOTE 1 - Summary of Significant Accounting Policies (continued)
Property and equipment are carried at cost less accumulated depreciation, which is calculated
onusing the straight-line method based on the estimated useful lives of the assets. The estimated life for real estate is identified by specific property and ranges from 20 to 45 years. The estimated useful lives of leasehold improvements and other property and equipment, including capitalized software, generally range from
23 to 10 years. The following amounts are included in Other assets in the Consolidated Balance Sheets:
| | | December 31, | |
| | | | 2016 | | | | | 2015 | | |
| | | | | | | |
| Property and equipment | | $ | 120,712 | | | $ | 107,876 | |
| Less: accumulated depreciation | | | 88,524 | | | | 82,236 | |
| Total | | $ | 32,188 | | | $ | 25,640 | |
|
| | | | | | | | |
| ($ in thousands) | | December 31, |
| | | 2019 | | 2018 |
| Property and equipment | | $ | 166,583 |
| | $ | 142,243 |
|
| Less: accumulated depreciation | | 106,458 |
| | 101,267 |
|
| Total | | $ | 60,125 |
| | $ | 40,976 |
|
Separate Account (Variable Annuity) Assets and Liabilities
Separate Account assets represent variable annuity contractholder funds invested in various mutual funds.
The Separate Account assets comprise actively traded mutual funds that have daily quoted net asset values that are readily determinable for identical assets that the Company can access. Net asset values for the actively traded mutual funds in which the Separate Account assets are
recorded at fair value primarily based on market quotations ofinvested are obtained daily from the
underlying securities.fund managers. Separate Account liabilities are equal to the estimated fair value of Separate Account assets. The investment income, gains and losses of these accounts accrue directly to the contractholders and are not included in the operations of the Company. The activity of the Separate Accounts is not reflected in the Consolidated Statements of Operations except for (1) contract charges earned, (2) the activity related to contract guarantees, which are benefits on existing variable annuity contracts, and (3) the impact of financial market performance on the amortization of
deferred policy acquisition costs.DAC. The
Company’sCompany's contract charges earned include fees charged to the Separate Accounts, including mortality charges, risk charges, policy administration fees, investment management fees and surrender charges.
NOTE 1 - Summary of Significant Accounting Policies-(Continued)
Investment Contract and Life Policy Reserves
This table summarizes the
Company’sCompany's investment contract and
life policy reserves.
| | | December 31, | |
| | | | 2016 | | | | | 2015 | | |
| | | | | | | |
| Investment contract reserves | | $ | 4,360,456 | | | $ | 4,072,102 | |
| Life policy reserves | | | 1,087,513 | | | | 1,054,740 | |
| Total | | $ | 5,447,969 | | | $ | 5,126,842 | |
|
| | | | | | | | |
| ($ in thousands) | | December 31, |
| | | 2019 | | 2018 |
| Investment contract reserves | | $ | 4,675,774 |
| | $ | 4,555,856 |
|
| Policy reserves | | 1,558,678 |
| | 1,155,337 |
|
| Total | | $ | 6,234,452 |
| | $ | 5,711,193 |
|
Liabilities for future benefits on
supplemental, life and annuity policies are established in amounts adequate to meet the estimated future obligations on policies in force.
Liabilities for future policy benefits on certain
supplemental and life insurance policies are computed using the net level premium method including assumptions as to investment yields, mortality,
morbidity, persistency, expenses and other assumptions based on the
Company’sCompany's experience, including a provision for adverse deviation. These assumptions are established at the time the policy is issued and are intended to estimate the experience for the period the policy benefits are payable. If experience is less favorable than the assumptions, additional liabilities may be established, resulting in
recognition of a
charge to incomeloss for that period.
At December 31, 2016, reserve investment yield assumptions ranged from 3.5% to 8.0%.Liabilities for future benefits on annuity contracts and certain long-duration life insurance contracts are carried at accumulated policyholder values without reduction for potential surrender or withdrawal charges. The liability also includes provisions for the unearned portion of certain policy charges.
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| 82 Annual Report on Form 10-K | | Horace Mann Educators Corporation |
NOTE 1 - Summary of Significant Accounting Policies (continued)
A guaranteed minimum death benefit
(“GMDB”)(GMDB) generally provides an additional benefit if the contractholder dies and the variable annuity contract value is less than a contractually defined amount. The Company has estimated and recorded a GMDB reserve on variable annuity contracts in accordance with
accounting guidance.GAAP. Contractually defined amounts vary from contract to contract based on the date the contract was entered into as well as the GMDB feature elected by the contractholder. The Company regularly monitors the GMDB reserve considering fluctuations in
the financial
market.markets. The Company has a relatively low exposure to GMDB risk as shown below.
| | | December 31, | |
| | | | 2016 | | | | 2015 | |
| | | | | | | |
| GMDB reserve | | $ | 225 | | | $ | 358 | |
| Aggregate in-the-money death benefits under the GMDB provision | | | 32,106 | | | | 35,563 | |
| Variable annuity contract value distribution based on GMDB feature: | | | | | | | | |
| No guarantee | | | 32 | % | | | 32 | % |
| Return of premium guarantee | | | 62 | % | | | 62 | % |
| Guarantee of premium roll-up at an annual rate of 3% or 5% | | | 6 | % | | | 6 | % |
| Total | | | 100 | % | | | 100 | % |
|
| | | | | | | | |
| ($ in thousands) | | December 31, |
| | | 2019 | | 2018 |
| GMDB reserve | | $ | 126 |
| | $ | 258 |
|
| Aggregate in-the-money death benefits under the GMDB provision | | 29,367 |
| | 48,083 |
|
| Variable annuity contract value distribution based on GMDB feature: | | | | |
| No guarantee | | 28 | % | | 30 | % |
| Return of premium guarantee | | 67 | % | | 65 | % |
| Guarantee of premium roll-up at an annual rate of 3% or 5% | | 5 | % | | 5 | % |
| Total | | 100 | % | | 100 | % |
NOTE 1 - Summary of Significant Accounting Policies-(Continued)
Reserves for Fixed Indexed Annuities and Indexed Universal Life Policies
In 2014, the
The Company
began offeringoffers fixed indexed annuity
(“FIA”)(FIA) products with interest crediting strategies linked to the Standard &
Poor’sPoor's (S&P) 500 Index and the Dow Jones Industrial
Average.Average (DJIA). The Company purchases call options on the applicable indices as an investment to provide the income needed to fund the annual index credits on the indexed products. These products are deferred fixed annuities with a guaranteed minimum interest rate plus a contingent return based on equity market performance and are considered hybrid financial instruments under
the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) Topic 815 “Derivatives and Hedging”.GAAP.
The Company elected to not use hedge accounting for derivative transactions related to the FIA products. As a result, the Company
recordsaccounts for the purchased call options and the embedded derivative related to the provision of a contingent return at fair value, with changes in fair value
reported inrecognized as Net
realized investment gains
and losses(losses) in the Consolidated Statements of Operations. The embedded derivative is bifurcated from the host contract and included in Other policyholder funds in the Consolidated Balance Sheets. The host contract is accounted for as a debt instrument in accordance with
ASC Topic 944 “Financial Services — Insurance”GAAP and is included in Investment contract and life policy reserves in the Consolidated Balance Sheets with any discount to the minimum account value being accreted using the effective yield method. In the Consolidated Statements of Operations, accreted interest for FIA products and benefit claims on these products incurred during the reporting period are included in Benefits, claims and settlement expenses.
In October 2015, the
The Company
began offeringoffers indexed universal life
(“IUL”)(IUL) products as part of its product portfolio with interest crediting strategies linked to the
Standard & Poor’sS&P 500 Index and the
Dow Jones Industrial AverageDJIA as well as a fixed option. The Company purchases call options monthly to
economically hedge the potential liabilities arising in IUL accounts. The Company elected to not use hedge accounting for derivative transactions related to the IUL products. As a result, the Company records the purchased call options and the embedded derivative related to the provision of a contingent return at fair value, with changes in fair value reported in Net
realized investment gains
and losses(losses) in the Consolidated Statements of Operations. IUL policies with a balance in one or more indexed accounts are considered to have an embedded derivative. The benefit reserve for the host contract is measured using the retrospective deposit method, which for Horace
Mann’sMann's IUL product is equal to the account balance. The embedded derivative is bifurcated from the host contract, carried at fair value, and included in Investment contract and life policy reserves in the Consolidated Balance Sheets.
More
See Note 4 for more information regarding the determination of fair value
offor the FIA and IUL embedded derivatives and purchased call
options, the only derivative instruments utilized by the Company, is included in “Note 3 — Fair Value of Financial Instruments”.
NOTE 1 - Summary of Significant Accounting Policies-(Continued)
Unpaid Claims and Claim Expenses
Liabilities for Property and Casualty unpaid claims and claim expenses include provisions for payments to be made on reported claims, claims incurred but not yet reported (IBNR) and associated settlement expenses. All of the Company's reserves for Property and Casualty unpaid claims and claim expenses are carried at the full value of estimated liabilities and are not discounted for interest expected to be earned on reserves. Estimated amounts
|
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| Horace Mann Educators Corporation | | Annual Report on Form 10-K 83 |
NOTE 1 - Summary of Significant Accounting Policies (continued)
of salvage and subrogation on unpaid Property and Casualty claims are deducted from the liability for unpaid claims. Due to the nature of the Company's personal lines business, the Company has no exposure to losses related to claims for toxic waste cleanup, other environmental remediation or asbestos-related illnesses other than claims under
homeownersproperty insurance policies for environmentally related items such as mold.
Other policyholder funds includes
supplementarypayout annuity contracts without life contingencies and dividend accumulations, as well as balances outstanding under
the funding agreements with
the Federal Home Loan Bank of Chicago (“FHLB”)FHLB and embedded derivatives related to
fixed indexed annuities.FIA products. Except for embedded derivatives, each of these components is carried at cost. Embedded derivatives are carried at fair value. Amounts received and repaid under
the FHLB funding agreements are classified
as financing activities in the
financing activities section of the Company’sCompany's Consolidated Statements of Cash Flows combined with annuity contract deposits and disbursements, respectively.
Federal Home Loan Bank
In 2013, one of the Company's subsidiaries, Horace Mann Life Insurance Company (“HMLIC”)(HMLIC), and in 2019, NTA became a membermembers of the FHLB, which provides HMLICboth subsidiaries with access to collateralized borrowings and other FHLB products. As membership requires the ownership of member stock, in June 2013, HMLIC purchased common stock to meet the membership requirement. Any borrowing from the FHLB requires the purchase of FHLB activity-based common stock in an amount equal to 5.0%4.5% of the borrowing, or a lower percentage — such as 2.0% based on the Reduced Capitalization Advance Program. For FHLB advances and funding agreements combined,In 2019, HMEC's Board of Directors has(Board) authorized a maximum amount equal to 10%15% of HMLIC’snet aggregate admitted assets using prescribed statutory accounting principles. On both September 18, 2014less separate account assets of the insurance subsidiaries for FHLB advances and December 27, 2013, the Companyfunding agreements combined. In 2019, HMLIC received $250,000an additional $175.0 million from FHLB under funding agreements as well as repaid FHLB $305.0 million of principal. Outstanding advances under funding agreements are reported as Other policyholder funds in the Consolidated Balance Sheets and ontotaled $495.0 million as of December 28, 2015, an additional $75,000 was received under a funding agreement. For the total $575,000 received, $250,00031, 2019 of which $125.0 million matures on September 13, 2019, $125,00011, 2020, $20.0 million matures on November 15, 2023, $100.0 million matures on December 15, 2023, $50.0 million matures on January 12, 2024 and $200,000the remaining $200.0 million matures on January 16, 2026. Interest on the funding agreements accrues at an annual weighted average rate of 0.52%1.87% as of December 31, 2016. FHLB borrowings2019.
Reinsurance
The Company enters into reinsurance arrangements pursuant to which it cedes certain insurance risks to unaffiliated reinsurers. Cessions under reinsurance agreements do not discharge the Company's obligations as the primary insurer. The accounting for reinsurance arrangements depends on whether the arrangement provides indemnification against loss or liability relating to insurance risk in accordance with GAAP.
If the Company determines that a reinsurance agreement exposes the reinsurer to a reasonable possibility of $575,000a significant loss from insurance risk, the ceded unearned premiums and reinsurance balances recoverable on paid and unpaid losses and settlement expenses are included in Other policyholder funds inreported separately as assets, instead of being netted with the related liabilities, since reinsurance does not relieve the Company of its legal liability to its policyholders. See Note 9 for further details.
If the Company determines that a reinsurance agreement does not expose the reinsurer to a reasonable possibility of a significant loss from insurance risk, 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 on the Company's Consolidated Balance Sheet.
As amounts are received or paid or received, 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. See Note 6 for further details.
NOTE 1 - Summary of Significant Accounting Policies-(Continued)
Insurance Premiums and Contract Charges Earned
Property and Casualty insurance premiums are recognized as revenue ratably over the related contract periods in proportion to the risks insured. The unexpired portions of these Property and Casualty premiums are recorded as unearned premiums, using the monthly pro rata method.
Premiums and contract charges for life insurance contracts with account values and investment (annuity) contracts consist of charges for the cost of insurance, policy administration and withdrawals. Premiums for long-term traditional life and supplemental policies are recognized as revenues when due over the premium-paying
|
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| 84 Annual Report on Form 10-K | | Horace Mann Educators Corporation |
NOTE 1 - Summary of Significant Accounting Policies (continued)
period. Contract deposits to investment contracts and life insurance contracts with account values represent funds deposited by policyholders and are not included in the Company's premiums or contract charges earned.
The Company grants stock options and both service-based and performance-based restricted common stock units
(“RSUs”)(RSUs) to executive officers, other employees and Directors in an effort to attract and retain individuals while also aligning compensation with the interests of the
Company’sCompany's shareholders. Additional information regarding the Company's share-based compensation plans is contained in
“Note 9 — Shareholders' Equity and Common Stock Equivalents”.Note 13.
Stock options are accounted for under the fair value method of accounting using a Black-Scholes valuation model to measure stock option expense at the date of grant. The fair value of RSUs is measured at the market price of the
Company’sCompany's common stock on the date of grant, with the exception of market-based performance awards, for which the Company uses a Monte Carlo simulation model to determine fair value for purposes of measuring RSU expense. For the years ended December 31,
2016, 20152019, 2018 and
2014,2017, the Company recognized
$1,207, $1,285$1.2 million, $1.2 million, and
$1,270,$1.3 million, respectively,
inof stock option expense as a result of the vesting of stock options during the respective periods. For the years ended December 31,
2016, 20152019, 2018 and
2014,2017, the Company recognized
$6,929, $892$5.2 million, $6.6 million and
$6,132,$6.5 million, respectively, in RSU expense as a result of the
earningperformance and/or vesting of RSUs during the respective periods.
NOTE 1 - Summary of Significant Accounting Policies-(Continued)
In 2016, 20152019, 2018 and 2014,2017, the Company granted stock options as quantified in the table below, which also provides the weighted average grant date fair value for stock options granted in each year. The fair value of stock options granted was estimated on the respective dates of grant using the Black-Scholes option pricing model with the weighted average assumptions shown in the following table.
| | | Year Ended December 31, | |
| | | | 2016 | | | | 2015 | | | | 2014 | |
| | | | | | | | | | |
| Number of stock options granted | | | 307,176 | | | | 142,908 | | | | 175,632 | |
| Weighted average grant date fair value of stock options granted | | $ | 5.01 | | | $ | 11.18 | | | $ | 9.01 | |
| Weighted average assumptions: | | | | | | | | | | | | |
| Risk-free interest rate | | | 1.3 | % | | | 1.7 | % | | | 1.9 | % |
| Expected dividend yield | | | 3.2 | % | | | 2.6 | % | | | 2.5 | % |
| Expected life, in years | | | 4.9 | | | | 7.2 | | | | 5.7 | |
| Expected volatility (based on historical volatility) | | | 25.6 | % | | | 42.8 | % | | | 40.3 | % |
|
| | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2019 | | 2018 | | 2017 |
| Number of stock options granted | | 282,040 |
| | 223,208 |
| | 222,828 |
|
| Weighted average grant date fair value of stock options granted | | $ | 6.26 |
| | $ | 7.16 |
| | $ | 6.57 |
|
| Weighted average assumptions: | | | | | | |
| Risk-free interest rate | | 2.5 | % | | 2.6 | % | | 2.0 | % |
| Expected dividend yield | | 2.9 | % | | 2.6 | % | | 2.5 | % |
| Expected life, in years | | 5.0 |
| | 4.8 |
| | 4.9 |
|
| Expected volatility (based on historical volatility) | | 21.9 | % | | 21.5 | % | | 21.4 | % |
The weighted average fair value of nonvested stock options outstanding on December 31,
20162019 was
$6.82.$6.42. Total unrecognized compensation expense relating to the nonvested stock options outstanding as of December 31,
20162019 was approximately
$2,299.$2.4 million. This amount will be recognized as expense over the remainder of the vesting period, which is scheduled to be
20172020 through
2020.2023. Expense is reflected on a straight-line basis over the vesting period for the entire award.
Forfeitures of unvested amounts due to terminations and/or early retirements are recognized as a reduction to the related expenses.
Total unrecognized compensation expense relating to RSUs outstanding as of December 31,
20162019 was approximately
$9,517.$6.6 million. This amount will be recognized as expense over the remainder of the
earning andperformance and/or vesting period, which is scheduled to be
20172020 through
2020.2022. Expense is reflected on a straight-line basis from the date of grant through the end of the
performance and/or vesting period for the entire award.
Forfeitures of unvested amounts due to terminations are recognized as a reduction to the related expenses.
The Company uses the asset and liability method for calculating deferred federal income taxes. Income tax provisions are generally based on income reported for financial statement purposes. The provisions for federal income taxes for the years ended December 31,
2016, 20152019, 2018 and
20142017 included amounts currently payable and deferred income taxes resulting from the cumulative differences in the Company's assets and liabilities, determined on a tax return versus financial statement basis.
Deferred tax assets and liabilities include provisions for
net unrealized investment gains
and losses(losses) on securities as well as the net funded status of
pension and other postretirement benefit
obligationsplans with the changes for each period included in the respective components of
accumulated other comprehensive income (loss)AOCI within shareholders' equity.
|
| F-54 | |
| Horace Mann Educators Corporation | | Annual Report on Form 10-K 85 |
NOTE 1 - Summary of Significant Accounting
Policies-(Continued)Policies (continued)
Basic earnings per share is computed based on the weighted average number of common shares outstanding plus the weighted average number of fully vested
restricted stock unitsRSUs and common stock units
(CSUs) payable as shares of HMEC common stock. Diluted earnings per share is computed based on the weighted average number of common shares and common stock equivalents outstanding, to the extent dilutive. The
Company’sCompany's common stock equivalents relate to outstanding common stock options, deferred compensation
common stock unitsCSUs and incentive compensation
restricted common stock units,RSUs, which are described in
“Note 9 — Shareholders’ Equity and Common Stock Equivalents”.Note 13.
The computations of net income per share on both basic and diluted bases, including reconciliations of the numerators and denominators, were as follows:
| | | | Year Ended December 31, | |
| | | | 2016 | | | | 2015 | | | | 2014 | |
| Basic: | | | | | | | | | | | | |
| Net income for the period | | $ | 83,765 | | | $ | 93,482 | | | $ | 104,243 | |
| Weighted average number of common shares during the period (in thousands) | | | 41,158 | | | | 41,915 | | | | 41,646 | |
| Net income per share - basic | | $ | 2.04 | | | $ | 2.23 | | | $ | 2.50 | |
| | | | | | | | | | | | | |
| Diluted: | | | | | | | | | | | | |
| Net income for the period | | $ | 83,765 | | | $ | 93,482 | | | $ | 104,243 | |
| Weighted average number of common shares during the period (in thousands) | | | 41,158 | | | | 41,915 | | | | 41,646 | |
Weighted average number of common equivalent shares to reflect the dilutive effect
of common | | | | | | | | | | | | |
| stock equivalent securities (in thousands): | | | | | | | | | | | | |
| Stock options | | | 100 | | | | 158 | | | | 137 | |
| Common stock units related to deferred compensation for employees | | | 52 | | | | 55 | | | | 70 | |
| Restricted common stock units related to incentive compensation | | | 166 | | | | 297 | | | | 378 | |
Total common and common equivalent shares adjusted to calculate diluted
earnings per share (in thousands) | | | 41,476 | | | | 42,425 | | | | 42,231 | |
| Net income per share - diluted | | $ | 2.02 | | | $ | 2.20 | | | $ | 2.47 | |
|
| | | | | | | | | | | | |
| ($ in thousands) | | Year Ended December 31, |
| | | 2019 | | 2018 | | 2017 |
| Basic: | | | | | | |
| Net income for the period | | $ | 184,443 |
| | $ | 18,343 |
| | $ | 169,459 |
|
Weighted average number of common shares during the period (in thousands) | | 41,738 |
| | 41,570 |
| | 41,365 |
|
| Net income per share - basic | | $ | 4.42 |
| | $ | 0.44 |
| | $ | 4.10 |
|
| | | | | | | |
| Diluted: | | | | | | |
| Net income for the period | | $ | 184,443 |
| | $ | 18,343 |
| | $ | 169,459 |
|
Weighted average number of common shares during the period (in thousands) | | 41,738 |
| | 41,570 |
| | 41,365 |
|
| Weighted average number of common equivalent shares to reflect the dilutive effect of common stock equivalent securities (in thousands): | | | | | | |
| Stock options | | 79 |
| | 100 |
| | 112 |
|
| CSUs related to deferred compensation for employees | | — |
| | 25 |
| | 25 |
|
| RSUs related to incentive compensation | | 132 |
| | 199 |
| | 63 |
|
Total common and common equivalent shares adjusted to calculate diluted earnings per share (in thousands) | | 41,949 |
| | 41,894 |
| | 41,565 |
|
| Net income per share - diluted | | $ | 4.40 |
| | $ | 0.44 |
| | $ | 4.08 |
|
Options to purchase
413,406622,500 shares of common stock at
$31.01$38.05 to
$36.04$44.75 per share were granted in
2015 through 20162017, 2018 and 2019 but were not included in the computation of
20162019 diluted earnings per share because of their anti-dilutive
effect as a result of the effect of unrecognized compensation cost. Theeffect. These options, which expire in
2025 through 2026,2027, 2028 and 2029, were still outstanding at December 31,
2016.2019.
|
| F-55 | |
| 86 Annual Report on Form 10-K | | Horace Mann Educators Corporation |
NOTE 1 - Summary of Significant Accounting
Policies-(Continued)
Policies (continued)
Comprehensive Income (Loss) and Accumulated Other Comprehensive Income (Loss)
Comprehensive income (loss) represents the change in
shareholders’shareholders' equity during a reporting period from transactions and other events and circumstances from non-shareholder sources. For the Company, comprehensive income (loss) is equal to net income plus or minus the after tax change in net unrealized
investment gains
and losses(losses) on
fixed maturities and equity securities and the after tax change in net funded status of benefit plans for the
periodperiods as shown in the Consolidated Statements of Changes in Shareholders' Equity.
Accumulated other comprehensive income (loss)AOCI represents the accumulated change in
shareholders’shareholders' equity from these transactions and other events and circumstances from non-shareholder sources as shown in the Consolidated Balance Sheets.
In the Consolidated Balance Sheets, the Company recognizes the
net funded status of benefit plans as a component of
accumulated other comprehensive income (loss),AOCI, net of tax.
Comprehensive Income (Loss)
The components of comprehensive income (loss) were as follows:
| | | | Year Ended December 31, | |
| | | | 2016 | | | | 2015 | | | | 2014 | |
| | | | | | | | | | |
| Net income | | $ | 83,765 | | | $ | 93,482 | | | $ | 104,243 | |
| Other comprehensive income (loss): | | | | | | | | | | | | |
Change in net unrealized investment gains and losses on fixed maturities
and equity securities: | | | | | | | | | | | | |
Net unrealized investment gains and losses on fixed maturities and
equity securities arising during the period | | | 6,144 | | | | (178,035 | ) | | | 264,136 | |
Less: reclassification adjustment for net gains included in income
before income tax | | | 5,176 | | | | 11,667 | | | | 10,943 | |
| Total, before tax | | | 968 | | | | (189,702 | ) | | | 253,193 | |
| Income tax expense (benefit) | | | 397 | | | | (67,315 | ) | | | 89,629 | |
| Total, net of tax | | | 571 | | | | (122,387 | ) | | | 163,564 | |
| Change in net funded status of benefit plan obligations: | | | | | | | | | | | | |
| Before tax | | | (37 | ) | | | 1,815 | | | | (1,810 | ) |
| Income tax expense (benefit) | | | (14 | ) | | | 656 | | | | (633 | ) |
| Total, net of tax | | | (23 | ) | | | 1,159 | | | | (1,177 | ) |
| Total comprehensive income (loss) | | $ | 84,313 | | | $ | (27,746 | ) | | $ | 266,630 | |
|
| | | | | | | | | | | | |
| ($ in thousands) | | Year Ended December 31, |
| | | 2019 | | 2018 | | 2017 |
| Net income | | $ | 184,443 |
| | $ | 18,343 |
| | $ | 169,459 |
|
| Other comprehensive income (loss): | | | | | | |
| Change in net unrealized investment gains (losses) on securities: | | | | | | |
Net unrealized investment gains (losses) on securities arising during the period | | 327,363 |
| | (275,094 | ) | | 105,475 |
|
Less: reclassification adjustment for net investment gains (losses) included in income before income tax | | 157,423 |
| | (16,363 | ) | | (4,863 | ) |
| Total, before tax | | 169,940 |
| | (258,731 | ) | | 110,338 |
|
| Income tax expense (benefit) | | 36,433 |
| | (55,495 | ) | | 35,933 |
|
| Total, net of tax | | 133,507 |
| | (203,236 | ) | | 74,405 |
|
| Change in net funded status of benefit plans: | | | | | | |
| Before tax | | 1,805 |
| | 1,294 |
| | 1,461 |
|
| Income tax expense | | 387 |
| | 262 |
| | 727 |
|
| Total, net of tax | | 1,418 |
| | 1,032 |
| | 734 |
|
| Total comprehensive income (loss) | | $ | 319,368 |
| | $ | (183,861 | ) | | $ | 244,598 |
|
|
| F-56 | |
| Horace Mann Educators Corporation | | Annual Report on Form 10-K 87 |
NOTE 1 - Summary of Significant Accounting
Policies-(Continued)Policies (continued)
Accumulated Other Comprehensive Income (Loss)
The following table reconciles the components of
accumulated other comprehensive income (loss)AOCI for the periods indicated.
| | | Unrealized | | | | | | | | | |
| | | Gains and | | | | | | | | | |
| | | Losses on | | | | | | | | | |
| | | Fixed Maturities | | | | | | | | | |
| | | and Equity | | | | Defined | | | | | |
| | | Securities (1)(2) | | | | Benefit Plans (1) | | | | Total (1) | |
| | | | | | | | | | | | |
| Beginning balance, January 1, 2016 | | $ | 175,167 | | | | $ | (11,794 | ) | | | $ | 163,373 | |
| Other comprehensive income (loss) before reclassifications | | | 3,935 | | | | | (23 | ) | | | | 3,912 | |
| Amounts reclassified from accumulated other comprehensive income (loss) | | | (3,364 | ) | | | | - | | | | | (3,364 | ) |
| Net current period other comprehensive income (loss) | | | 571 | | | | | (23 | ) | | | | 548 | |
| Ending balance, December 31, 2016 | | $ | 175,738 | | | | $ | (11,817 | ) | | | $ | 163,921 | |
| | | | | | | | | | | | | | | |
| Beginning balance, January 1, 2015 | | $ | 297,554 | | | | $ | (12,953 | ) | | | $ | 284,601 | |
| Other comprehensive income (loss) before reclassifications | | | (114,803 | ) | | | | 1,159 | | | | | (113,644 | ) |
| Amounts reclassified from accumulated other comprehensive income (loss) | | | (7,584 | ) | | | | - | | | | | (7,584 | ) |
| Net current period other comprehensive income (loss) | | | (122,387 | ) | | | | 1,159 | | | | | (121,228 | ) |
| Ending balance, December 31, 2015 | | $ | 175,167 | | | | $ | (11,794 | ) | | | $ | 163,373 | |
| | | | | | | | | | | | | | | |
| Beginning balance, January 1, 2014 | | $ | 133,990 | | | | $ | (11,776 | ) | | | $ | 122,214 | |
| Other comprehensive income (loss) before reclassifications | | | 170,677 | | | | | (1,177 | ) | | | | 169,500 | |
| Amounts reclassified from accumulated other comprehensive income (loss) | | | (7,113 | ) | | | | - | | | | | (7,113 | ) |
| Net current period other comprehensive income (loss) | | | 163,564 | | | | | (1,177 | ) | | | | 162,387 | |
| Ending balance, December 31, 2014 | | $ | 297,554 | | | | $ | (12,953 | ) | | | $ | 284,601 | |
|
| | | | | | | | | | | | |
| ($ in thousands) | | Net Unrealized Investment Gains (Losses) on Securities (1)(2) | | Net Funded Status of Benefit Plans (1) | | Total (1)(3) |
| Beginning balance, January 1, 2019 | | $ | 96,941 |
| | $ | (12,185 | ) | | $ | 84,756 |
|
| Other comprehensive income (loss) before reclassifications | | 257,871 |
| | 1,418 |
| | 259,289 |
|
| Amounts reclassified from AOCI | | (124,364 | ) | | — |
| | (124,364 | ) |
| Net current period other comprehensive income (loss) | | 133,507 |
| | 1,418 |
| | 134,925 |
|
| Ending balance, December 31, 2019 | | $ | 230,448 |
| | $ | (10,767 | ) | | $ | 219,681 |
|
| | | | | | | |
| Beginning balance, January 1, 2018 | | $ | 300,177 |
| | $ | (13,217 | ) | | $ | 286,960 |
|
| Other comprehensive income (loss) before reclassifications | | (201,122 | ) | | 1,032 |
| | (200,090 | ) |
| Amounts reclassified from AOCI | | 12,927 |
| | — |
| | 12,927 |
|
Cumulative effect of change in accounting principle (4) | | (15,041 | ) | | — |
| | (15,041 | ) |
| Net current period other comprehensive income (loss) | | (203,236 | ) | | 1,032 |
| | (202,204 | ) |
| Ending balance, December 31, 2018 | | $ | 96,941 |
| | $ | (12,185 | ) | | $ | 84,756 |
|
| | | | | | | |
| Beginning balance, January 1, 2017 | | $ | 175,738 |
| | $ | (11,817 | ) | | $ | 163,921 |
|
| Other comprehensive income (loss) before reclassifications | | 71,244 |
| | 734 |
| | 71,978 |
|
| Amounts reclassified from AOCI | | 3,161 |
| | — |
| | 3,161 |
|
Reclassification of deferred taxes (3) | | 50,034 |
| | (2,134 | ) | | 47,900 |
|
| Net current period other comprehensive income (loss) | | 124,439 |
| | (1,400 | ) | | 123,039 |
|
| Ending balance, December 31, 2017 | | $ | 300,177 |
| | $ | (13,217 | ) | | $ | 286,960 |
|
(1) All amounts are net of tax.
| (1) | All amounts are net of tax. |
| (2) | The pretax amounts reclassified from accumulated other comprehensive income, $5,176, $11,667AOCI, $157.4 million, $(16.4) million and $10,943,$(4.9) million, are included in net realized investment gains and losses(losses) and the related tax expenses, $1,812, $4,083$33.1 million, $(3.4) million and $3,830,$(1.7) million, are included in income tax expense in the Consolidated Statements of Operations for the years ended December 31, 2016, 20152019, 2018 and 2014,2017, respectively. |
| |
(3) | Forthe period ended December 31, 2017, deferred taxes attributable to net unrealized investment gains (losses) on fixed maturity and equity securities and Defined benefit plans were re-measured as a result of the enactment of the Tax Cuts and Jobs Act of 2017 (TCJA). ASC 740, Income Taxes, requires that the income tax effect from the deferred tax re-measurement be reflected in the Company’s income tax expense, even if the deferred taxes being re-measured were originally established through AOCI. The mismatch between deferred taxes established in AOCI at 35% and re-measuring these same deferred taxes at 21% through income tax expense results in stranded deferred taxes in AOCI. On February 14, 2018, the Financial Accounting Standards Board (FASB) issued accounting guidance that permits recognition of a reclassification adjustment between AOCI and Retained earnings for stranded deferred tax amounts related to the reduced corporate tax rate enacted under the TCJA. As permitted under its provisions, the Company early adopted the accounting guidance effective for the quarterly period that ended December 31, 2017 and has elected to reclassify the stranded deferred tax amounts. The impact from early adoption resulted in an increase to AOCI and a reduction to Retained earnings of approximately $47.9 million; representing the stranded deferred tax liabilities of $50.0 million and $(2.1) million for net unrealized investment gains (losses) on fixed maturity and equity securities and Defined benefit plans, respectively. |
| |
(4) | The Company adopted guidance on January 1, 2018 that resulted in reclassifying $15.0 million 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 located in
“Note 2 — Investments — Unrealized Gains and Losses on Fixed Maturities and Equity Securities”.Note 3.
For purposes of the Consolidated Statements of Cash Flows, cash constitutes cash on deposit at
banks.Reclassification and Retrospective Adoption
The Company has reclassified the presentation of certain prior period information to conform to the current year’s presentation.
banks as well as restricted cash. See Note 17 for further information.
|
| F-57 | |
| 88 Annual Report on Form 10-K | | Horace Mann Educators Corporation |
NOTE 1 - Summary of Significant Accounting
Policies-(Continued)
Policies (continued)
Adopted Accounting Standards
Disclosures About Short-Duration Insurance Contracts
Accounting for Leases
Effective
Decemberfor the quarter ended March 31,
2016,2019, the Company adopted
accounting guidance
which requires expanded disclosure regarding claims on short-duration insurance contracts, which applies primarilyfor leases and elected to utilize a cumulative-effect adjustment to the
contracts inopening balance of retained earnings. Accordingly, the Company’s
Property and Casualty segment.Presentation of Debt Issuance Costs
Effective January 1, 2016,reporting for the Company adopted accounting guidance which was issuedcomparative periods prior to simplify the presentation of costs incurred to issue debt securities. The guidance requires debt issuance costs associated with specific debt securitiesadoption continues to be presented in the balance sheet asfinancial 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 direct deduction fromlease or contains a lease and whether the carryinglease is an operating or finance lease. The adoption of the guidance resulted in the Company recognizing a $14.5 million lease liability equal to the present value of lease payments and a $13.9 million right-of-use (ROU) asset, which is the associated debtcorresponding lease liability consistent with the presentation of a debt discount. Costs incurred related to line of credit arrangements continue to be presented as anadjusted for qualifying accrued lease payments. The lease liability and ROU asset are reported in Other liabilities and Other assets on the Consolidated Balance Sheet. Also, the guidance does not affect the recognition and measurementSheets. The impact of debt issuance costs. The guidance required retrospective application. As a result of thisthese changes at adoption the following items in the Company’s December 31, 2015 Consolidated Balance Sheet were each reduced by $2,371: Other assets, Total assets, Long-term debt, Total liabilities and Total liabilities and shareholders’had no impact on net income or shareholders' equity. Net income per share (basic and diluted) did not change as a result of the adopted accounting change.
Pending Accounting Standards
Simplifying the Test for Goodwill Impairment
In January 2017,
Effective for the Financial Accounting Standards Board (“FASB”) issuedquarter ended June 30, 2019, the Company adopted guidance to simplify the accounting for goodwill impairment. TheAdoption of this guidance removesremoved Step 2 of the goodwill impairment test, which requiresrequired a hypothetical purchase price allocation. A goodwillGoodwill impairment willis now be the amount by which a reporting unit’sunit's carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. All other goodwill impairment
Pending Accounting Standards
Measurement of Credit Losses on Financial Instruments
In June 2016 , the FASB issued guidance will remain largely unchanged. Entities will continuewhich revises the credit loss recognition criteria for certain financial assets measured at amortized cost, including reinsurance recoverables. The new guidance replaces the existing incurred loss recognition model with an expected loss recognition model. The objective of the expected credit loss model is for a reporting entity to haverecognize its estimate of expected credit losses for affected financial assets in a valuation allowance that when deducted from the optionamortized cost basis of the related financial assets results in a net carrying value at the amount expected to performbe collected. A reporting entity must consider all relevant information available when estimating expected credit losses, including details about past events, current conditions, and reasonable and supportable forecasts over the life of an asset. Financial assets may be evaluated individually or on a qualitative assessmentpooled basis when they share similar risk characteristics. The measurement of credit losses for available-for-sale debt securities measured at fair value is not affected except that credit losses recognized are limited to determine ifthe amount by which fair value is below amortized cost and the carrying value adjustment is recognized through a quantitative impairment testvaluation allowance which may change over time but once recorded cannot subsequently be reduced to an amount below zero. The guidance is necessary. effective for reporting periods beginning after December 15, 2019, and for most affected instruments must be adopted using a modified retrospective approach, with a cumulative effect adjustment recorded to beginning retained earnings.
The same one-step impairment test will be appliedCompany’s implementation activities are substantially complete and the impacts relate primarily to goodwill at all reporting units, even those with zero or negative carrying amounts. Entitiesthe Company’s commercial mortgage portfolio, property and casualty reinsurance recoverables and off-balance-sheet credit exposures for unfunded commercial mortgage loan commitments. The Company adopted the new guidance on January 1, 2020 and recognized a cumulative effect adjustment that decreased retained earnings by an insignificant amount.
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
disclosebe 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
amountliabilities that will be equivalent to the yield from a high-quality bond. The new guidance also changes the amortization of
goodwillDAC 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
reporting units with zero or negative carrying amounts. Publiclong-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 should adopt the guidance prospectively for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early application is permitted. Management believes the adoption of this accounting guidance will not have a material effect on how it tests goodwill for impairment.
|
| F-58 | |
| Horace Mann Educators Corporation | | Annual Report on Form 10-K 89 |
NOTE 1 - Summary of Significant Accounting
Policies-(Continued)
Statement of Cash Flows — Classification
In August 2016, the FASB issued guidance to reduce diversity in practice in the statement of cash flows between operating, investing and financing activities related to the classification of cash receipts and cash payments for eight specific issues. The FASB acknowledged that current GAAP either is unclear or does not include specific guidance on these eight cash flow classification issues: (1) debt prepayment or extinguishment costs; (2) settlement of zero-coupon bonds (pertains to issuers); (3) contingent consideration payments made after a business combination; (4) proceeds from the settlement of insurance claims (pertains to claimants); (5) proceeds from the settlement of corporate-owned life insurance policies; (6) distributions received from equity method investees; (7) beneficial interests in securitization transactions (pertains to transferors) and (8) separately identifiable cash flows and application of the predominance principle. For public business Policies (continued)
entities, the guidance is effective for annual reporting periods beginning after December 15,
2017, including interim periods within those years, using a retrospective approach. The guidance allows prospective adoption for individual issues if it is impracticable to apply the amendments retrospectively for those issues. Early application is permitted. Management believes the adoption of this accounting guidance will not have a material effect on the classifications in the Company’s consolidated statement of cash flows. The adoption of this accounting guidance will not have any effect on the results of operations or financial position of the Company.Measurement of Credit Losses on Financial Instruments
In June 2016, the FASB issued guidance to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments, including reinsurance receivables, held by companies. The new guidance replaces the incurred loss impairment methodology and requires an organization to measure and recognize all current expected credit losses (“CECL”) for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Companies will need to utilize forward-looking information to better inform their credit loss estimates. Companies will continue to use judgment to determine which loss estimation method is appropriate for their circumstances. Credit losses related to available for sale debt securities — which represent over 90% of Horace Mann’s total investment portfolio — will be recorded through an allowance for credit losses with this allowance having a limit equal to the amount by which fair value is below amortized cost. The guidance also requires enhanced qualitative and quantitative disclosures to provide additional information about the amounts recorded in the financial statements. For public business entities that are SEC filers, the guidance is effective for annual reporting periods beginning after December 15, 2019, including interim periods within those years, using a modified-retrospective approach. Early application is permitted for annual reporting periods, and interim periods within those years, beginning after December 15, 2018. Management is evaluating the impact this guidance will have on the results of operations and financial position of the Company.
NOTE 1 - Summary of Significant Accounting Policies-(Continued)
Employee Share-based Payment Accounting
In March 2016, the FASB issued guidance to simplify and improve the accounting for employee share-based payment transactions. Under the new guidance, several aspects of the accounting for share-based payment transactions are changed including: (1) the entire tax impact of the difference between a company’s share-based payment deduction for tax purposes and the compensation cost recognized in the financial statements (“excess tax benefits”) will be recorded in the income statement (the additional paid-in capital pool is eliminated) and classified with other income tax cash flows as an operating activity in the statement of cash flows; (2) election of an accounting policy regarding forfeitures, either retaining the current GAAP approach of estimating forfeitures or accounting for forfeitures when they occur; (3) companies may withhold up to the maximum individual statutory tax rate without triggering classification of the award as a liability; (4) cash paid to satisfy the statutory income tax withholding obligation is to be classified as a financing activity in the statement of cash flows; and (5) certain additional aspects which apply only to nonpublic entities. There are different approaches specified for transition to the new guidance encompassing prospective, retrospective and modified retrospective (cumulative-effect adjustment) approaches. The guidance is effective for annual reporting periods beginning after December 15, 2016,2021, including interim periods within those years. Early application is permitted; however, all componentsWith regards to the liability for future policy benefits and DAC, the guidance applies to contracts in force as of the guidance must be implemented at the same time. Management is evaluating the impact this guidance will have on the results of operations and financial positionbeginning of the Company.
Accounting for Leases
In February 2016,earliest period presented and may be applied retrospectively. With regards to MRBs, the FASB issued accounting and disclosure guidance to improve financial reporting and comparability among organizations about leasing transactions. Under the new guidance, for leases with lease terms of more than 12 months, a lessee will be required to recognize assets and liabilities on the balance sheet for the rights and obligations created by those leases. Consistent with current accounting guidance, the recognition, measurement and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or an operating lease. However, while current guidance requires only capital leasesis to be recognized on the balance sheet, the new guidance will require both operating and capital leases to be recognized on the balance sheet. In transition to the new guidance, companies are required to recognize and measure leasesapplied retrospectively at the beginning of the earliest period presented using a modified retrospective approach. The guidance is effective for annual reporting periods beginning after December 15, 2018, including interim periods within those years.presented. Early applicationadoption is permitted. Management is evaluating the impact this guidance will have on the results of operations and financial position of the Company.
NOTE 2 - Acquisitions
On January 2, 2019, the Company acquired all of the equity interests in BCG for a total purchase consideration of $25.0 million. BCG provides advisory and benefit plan record keeping services. BCG's results are reported in Retirement. The acquisition of BCG resulted in the recognition of intangible assets of $16.2 million and goodwill of $10.1 million as a result of the purchase accounting. The intangible assets that are amortizable have lives of 10 to 16 years. See Note 7 for further information. The amount of goodwill that is expected to be deductible for federal income tax purposes is $10.1 million.
On July 1, 2019, the Company acquired all the equity interests in NTA pursuant to a Purchase Agreement (Agreement) dated as of December 10, 2018. The purchase price of the transaction was $425.9 million which includes $20.9 million representing NTA's share of "adjusted earnings" (as determined in accordance with the terms of the Agreement) from July 1, 2018 to July 1, 2019. As a result of the acquisition, NTA became a wholly owned subsidiary of the Company. NTA provides supplemental insurance products (primarily heart, cancer, accident and limited short-term supplemental disability coverages) primarily within the public sector for which approximately 80% are individuals employed by educational institutions, with the remainder employed in state and local governments and emergency services facilities. NTA's results are being reported in a newly created reporting segment titled "Supplemental".
During the fourth quarter of 2019, the Company finalized its estimates of the fair value of NTA assets acquired and liabilities assumed, including, but not limited to, intangible assets, policy reserves, certain tax-related balances and certain investments. In accordance with Accounting Standards Codification (ASC) 805, Business Combinations, changes to the preliminary estimates and allocation as a result of events or conditions as of the acquisition date have been reported in the Company's consolidated financial statements as adjustments to the assets acquired and liabilities assumed. Such adjustments were insignificant. The Company has allocated all of the goodwill associated with the NTA acquisition to the Supplemental segment. The factors that contributed to recognition of goodwill include synergies from economies of scale within underwriting operations, acquiring a talented workforce and cost savings opportunities.
Based on the Company's final allocation of the purchase price, the fair value of the assets acquired and liabilities assumed were as follows:
|
| | | | |
| ($ in millions) | | |
| Assets: | | |
| Investments | | $ | 542.6 |
|
| Cash and short-term investments | | 73.8 |
|
Intangible assets(1) | | 169.8 |
|
| Other assets | | 18.3 |
|
| Liabilities: | | |
| Policy reserves | | 366.8 |
|
| Policy claims | | 21.8 |
|
| Unearned premiums | | 4.1 |
|
| Other liabilities | | 5.5 |
|
| Total identifiable net assets acquired | | 406.3 |
|
Goodwill(2) | | 19.6 |
|
| Purchase price | | $ | 425.9 |
|
| |
(1) | Intangible assets consist of the value of business acquired, value of distribution acquired, agency relationships, trade names and state licenses. The intangible assets that are amortizable have a total weighted average useful life of 23 years. See Note 7 for further information. |
| |
(2) | The amount of goodwill that is expected to be deductible for federal income tax purposes is $17.9 million. |
|
| F-60 | |
| 90 Annual Report on Form 10-K | | Horace Mann Educators Corporation |
NOTE 2 - Acquisitions (continued)
The following unaudited pro forma information presents the Company's results of operations as if the acquisition of NTA occurred on January 1,
- Summary2018. The adjustments to arrive at the unaudited pro forma information below includes, among other things, adjustments for lost investment income on the cash used to fund the acquisition, amortization of
Significant Accounting Policies-(Continued)
Recognitionan estimated fair value adjustment on NTA's policy reserves, amortization of acquired intangible assets, interest expense on debt incurred to finance the acquisition and Measurementexclusion of Financial Assets and Liabilities
In January 2016,certain transaction costs attributable to the FASB issued accounting guidance to improve certain aspectsacquisition as such costs are considered non-recurring.
|
| | | | | | | | |
| ($ in thousands, except per share data) | | Unaudited |
| | | Year Ended December 31, |
| | | 2019 | | 2018 |
| Total revenues | | $ | 1,507,352 |
| | $ | 1,339,896 |
|
| Total expenses | | 1,259,213 |
| | 1,288,690 |
|
| Income before income taxes | | 248,139 |
| | 51,206 |
|
| Net income | | $ | 193,755 |
| | $ | 43,373 |
|
| | | | | |
Net income per share: (1) | | | | |
| Basic | | $ | 4.64 |
| | $ | 1.04 |
|
| Diluted | | $ | 4.62 |
| | $ | 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 years ended December 31, 2019 and 2018, respectively. |
The unaudited pro forma financial information is not necessarily indicative of the
recognition, measurement, presentation and disclosureconsolidated results of
financial instruments. Among other things, this guidance requires public entities to measure equity investments (except those accounted for underoperations that might have been achieved had the
equity method of accounting or those that resulttransaction in
consolidation of the investee)fact occurred at
fair value with changes in fair value recognized in net income and to perform a qualitative assessment to identify impairment for equity investments without readily determinable fair values. Companies are required to apply this guidance by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the
yearperiods presented, nor does the information project results for any future period. The unaudited pro forma information does not include the impact of
adoption and, for the guidance related to equity securities without readily determinable fair values, companies are required to applyany future cost savings or synergies that may be achieved as a
prospective approach to equity investments that exist asresult of the
date of adoption. The guidance is effective for annual reporting periods beginning after December 15, 2017, including interim periods within those years. Early application is permitted. The guidance will not have an impact on the Company’s financial position and management is evaluating the impact that this guidance will have on the Company’s results of operations.
Revenue Recognition
In May 2014, the FASB issued accounting guidance to provide a single comprehensive model in accounting for revenue arising from contracts with customers. The guidance applies to all contracts with customers; however, insurance contracts are specifically excluded from this updated guidance. The guidance is effective for annual reporting periods beginning after December 15, 2017, including interim periods within those years. Early adoption is permitted only for annual reporting periods beginning after December 15, 2016. The Company plans to adopt the guidance as of January 1, 2018. Management believes the adoption of this accounting guidance will not have a material effect on the results of operations or financial position, and related disclosures, of the Company.
NOTE
23 - Investments
The Company’s investment portfolio includes free-standing derivative financial instruments (currently over the counter (“OTC”) index call option contracts) to economically hedge risk associated with its fixed indexed annuity and indexed universal life products’ contingent liabilities. The Company’s fixed indexed annuity and indexed universal life products include embedded derivative features that are discussed in “Note 1 — Summary of Significant Accounting Policies — Investment Contract and Life Policy Reserves — Reserves for Fixed Indexed Annuities and Indexed Universal Life Policies”. The Company's investment portfolio included no other free-standing derivative financial instruments (futures, forwards, swaps, option contracts or other financial instruments with similar characteristics), and there were no other embedded derivative features related to the Company’s insurance products during the three years ended December 31, 2016.
The components of net investment income for the following periods were:
| | | Year Ended December 31, | |
| | | | 2016 | | | | | 2015 | | | | | 2014 | | |
| | | | | | | | | | |
| Fixed maturities | | $ | 342,773 | | | $ | 326,207 | | | $ | 317,756 | |
| Equity securities | | | 4,703 | | | | 4,355 | | | | 4,849 | |
| Short-term and other investments | | | 9,668 | | | | 9,187 | | | | 8,459 | |
| Other invested assets (equity method investments) | | | 13,609 | | | | 1,984 | | | | 7,229 | |
| Total investment income | | | 370,753 | | | | 341,733 | | | | 338,293 | |
| Investment expenses | | | (9,567 | ) | | | (9,133 | ) | | | (8,478 | ) |
| Net investment income | | $ | 361,186 | | | $ | 332,600 | | | $ | 329,815 | |
Realized
|
| | | | | | | | | | | | |
| ($ in thousands) | | Year Ended December 31, |
| | | 2019 | | 2018 | | 2017 |
| Fixed maturity securities | | $ | 283,228 |
| | $ | 353,303 |
| | $ | 354,290 |
|
| Equity securities | | 4,923 |
| | 6,017 |
| | 6,411 |
|
| Limited partnership interests | | 25,694 |
| | 15,406 |
| | 12,555 |
|
| Short-term and other investments | | 60,703 |
| | 11,981 |
| | 10,214 |
|
| Total investment income | | 374,548 |
| | 386,707 |
| | 383,470 |
|
| Investment expenses | | (9,484 | ) | | (10,200 | ) | | (9,840 | ) |
| Net investment income | | $ | 365,064 |
| | $ | 376,507 |
| | $ | 373,630 |
|
|
| | |
| Horace Mann Educators Corporation | | Annual Report on Form 10-K 91 |
NOTE 3 - Investments (continued)
Net Investment Gains (Losses)
Net
realized investment gains (losses) for the following periods were:
| | | Year Ended December 31, | |
| | | | 2016 | | | | | 2015 | | | | | 2014 | | |
| | | | | | | | | | |
| Fixed maturities | | $ | 5,784 | | | $ | 10,289 | | | $ | 8,150 | |
| Equity securities | | | (608 | ) | | | 1,378 | | | | 2,793 | |
| Short-term investments and other | | | (1,053 | ) | | | 1,046 | | | | (26 | ) |
| Net realized investment gains | | $ | 4,123 | | | $ | 12,713 | | | $ | 10,917 | |
|
| | | | | | | | | | | | |
| ($ in thousands) | | Year Ended December 31, |
| | | 2019 | | 2018 | | 2017 |
Fixed maturity securities (1) | | $ | 141,448 |
| | $ | (5,713 | ) | | $ | (8,867 | ) |
| Equity securities | | 15,975 |
| | (10,649 | ) | | 4,003 |
|
| Short-term investments and other | | (4,083 | ) | | 3,819 |
| | 1,458 |
|
| Net investment gains (losses) | | $ | 153,340 |
| | $ | (12,543 | ) | | $ | (3,406 | ) |
| |
(1) | Net investment gains realized on fixed maturity securities 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 $2.9 billion block of in force fixed and variable annuity business. See Notes 6 and 17 for further information. |
The Company, from time to time, sells invested assets subsequent to the
balance sheetreporting date that were considered temporarily impaired at the
balance sheetreporting date. Such sales are due to issuer specific events occurring subsequent to the
balance sheetreporting date that result in a change in the
Company’sCompany's intent or ability to hold an invested asset. The types of events that may result in a sale include significant changes in the economic facts and circumstances related to the invested asset, significant unforeseen changes in liquidity needs, or changes in the
Company’sCompany's investment strategy.
Net Investment Gains (Losses) by Transaction Type
The following table reconciles net investment gains (losses) by transaction type:
|
| | | | | | | | | | | | |
| ($ in thousands) | | Year Ended December 31, |
| | | 2019 | | 2018 | | 2017 |
| Impairment write-downs | | $ | (1,105 | ) | | $ | — |
| | $ | (1,778 | ) |
| Change in intent write-downs | | (275 | ) | | (1,530 | ) | | (10,842 | ) |
| Net OTTI losses recognized in earnings | | (1,380 | ) | | (1,530 | ) | | (12,620 | ) |
| Sales and other, net | | 151,495 |
| | 3,491 |
| | 7,756 |
|
Change in fair value - equity securities (1) | | 7,308 |
| | (18,323 | ) | | — |
|
Change in fair value and gains (losses) realized on settlements - derivatives | | (4,083 | ) | | 3,819 |
| | 1,458 |
|
| Net investment gains (losses) | | $ | 153,340 |
| | $ | (12,543 | ) | | $ | (3,406 | ) |
| |
(1) | Effective January 1, 2018, with the adoption of new accounting guidance for recognition and measurement of financial instruments, equity securities are reported at fair value with changes in fair value recognized in Net investment gains (losses) and are no longer included in impairment write-downs or change in intent write-downs. |
|
| F-62 | |
| 92 Annual Report on Form 10-K | | Horace Mann Educators Corporation |
NOTE
23 -
Investments-(Continued)Investments (continued)
Fixed
Maturities and EquityMaturity Securities
The
Company’sCompany's investment portfolio is comprised primarily of fixed maturity
securities and also includes equity securities.
The amortized cost orAmortized cost, net unrealized investment gains
(losses) and
losses, fair values
and other-than-temporary impairment included in accumulated other comprehensive income (loss) (“AOCI”) of all fixed
maturities and equitymaturity securities in the portfolio were as follows:
| | Amortized | | Unrealized | | Unrealized | | Fair | | OTTI in |
| | Cost/Cost | | Gains | | Losses | | Value | | AOCI (1) |
| December 31, 2016 | | | | | | | | | | | | | | | | | | | | |
| Fixed maturity securities | | | | | | | | | | | | | | | | | | | | |
| U.S. Government and federally sponsored agency obligations (2): | | | | | | | | | | | | | | | | | | | | |
| Mortgage-backed securities | | $ | 412,891 | | | $ | 33,168 | | | $ | 3,640 | | | $ | 442,419 | | | $ | - | |
| Other, including | | | | | | | | | | | | | | | | | | | | |
| U.S. Treasury securities | | | 458,745 | | | | 18,518 | | | | 10,120 | | | | 467,143 | | | | - | |
| Municipal bonds | | | 1,648,252 | | | | 143,733 | | | | 22,588 | | | | 1,769,397 | | | | - | |
| Foreign government bonds | | | 93,864 | | | | 5,102 | | | | 297 | | | | 98,669 | | | | - | |
| Corporate bonds | | | 2,672,818 | | | | 152,229 | | | | 14,826 | | | | 2,810,221 | | | | - | |
| Other mortgage-backed securities | | | 1,865,557 | | | | 22,241 | | | | 18,939 | | | | 1,868,859 | | | | 1,618 | |
| Totals | | $ | 7,152,127 | | | $ | 374,991 | | | $ | 70,410 | | | $ | 7,456,708 | | | $ | 1,618 | |
| | | | | | | | | | | | | | | | | | | | | |
| Equity securities (3) | | $ | 134,013 | | | $ | 13,210 | | | $ | 5,574 | | | $ | 141,649 | | | $ | - | |
| | | | | | | | | | | | | | | | | | | | | |
| December 31, 2015 | | | | | | | | | | | | | | | | | | | | |
| Fixed maturity securities | | | | | | | | | | | | | | | | | | | | |
| U.S. Government and federally sponsored agency obligations (2): | | | | | | | | | | | | | | | | | | | | |
| Mortgage-backed securities | | $ | 461,862 | | | $ | 44,413 | | | $ | 1,861 | | | $ | 504,414 | | | $ | - | |
| Other, including | | | | | | | | | | | | | | | | | | | | |
| U.S. Treasury securities | | | 532,373 | | | | 21,153 | | | | 7,415 | | | | 546,111 | | | | - | |
| Municipal bonds | | | 1,553,603 | | | | 165,680 | | | | 10,340 | | | | 1,708,943 | | | | (4,140 | ) |
| Foreign government bonds | | | 67,441 | | | | 6,288 | | | | 112 | | | | 73,617 | | | | - | |
| Corporate bonds | | | 2,687,376 | | | | 140,873 | | | | 48,834 | | | | 2,779,415 | | | | - | |
| Other mortgage-backed securities | | | 1,482,971 | | | | 16,830 | | | | 20,961 | | | | 1,478,840 | | | | 1,382 | |
| Totals | | $ | 6,785,626 | | | $ | 395,237 | | | $ | 89,523 | | | $ | 7,091,340 | | | $ | (2,758 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| Equity securities (3) | | $ | 95,722 | | | $ | 8,405 | | | $ | 4,330 | | | $ | 99,797 | | | $ | - | |
|
| | | | | | | | | | | | | | | | |
| ($ in thousands) | | Amortized Cost | | Unrealized Gains | | Unrealized Losses | | Fair Value |
| 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 mortgage-backed securities | | 1,282,740 |
| | 20,883 |
| | 8,131 |
| | 1,295,492 |
|
| Totals | | $ | 5,456,980 |
| | $ | 348,310 |
| | $ | 13,614 |
| | $ | 5,791,676 |
|
| | | | | | | | | |
| 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 |
|
| (1) | Related to securities for which an unrealized loss was bifurcated to distinguish the credit-related portion and the portion driven by other market factors. Represents the amount of other-than-temporary impairment losses in AOCI which was not included in earnings; amounts also include net unrealized investment gains and losses on such impaired securities relating to changes in the fair value of those securities subsequent to the impairment measurement date. |
| (2)(1) | Fair value includes securities issued by Federal National Mortgage Association (“FNMA”)(FNMA) of $196,468$405.1 million and $231,294;$441.3 million; Federal Home Loan Mortgage Corporation (“FHLMC”)(FHLMC) of $284,050$283.1 million and $363,957;$417.3 million; and Government National Mortgage Association (“GNMA”)(GNMA) of $115,627$147.4 million and $130,940$96.5 million as of December 31, 20162019 and 2015,2018, respectively. |
|
(3) | Includes nonredeemable (perpetual) preferred stocks, common stocks and closed-end funds. | |
| Horace Mann Educators Corporation | | F-63 | Annual Report on Form 10-K 93 |
NOTE
23 -
Investments-(Continued)Investments (continued)
The following table presents the fair value and gross unrealized losses
of fixed maturities and equity securities in an unrealized loss position at December 31,
20162019 and
2015,2018, respectively. The Company views the decrease in
fair value of all of the securities with unrealized losses at December 31,
20162019 — which was driven largely by
changes inincreasing interest rates, spread widening, financial market illiquidity and/or market volatility from the date of acquisition — as temporary.
For fixed maturity securities, management doesAs of December 31, 2019, the Company has not
havemade the
intentdecision to sell
the securities and it is not more likely than not the Company will be required to sell
thefixed maturity securities
with unrealized losses before
the anticipated recovery of the amortized cost
bases, and management expects to recoverbasis. Therefore, it was determined that the
entire amortized cost bases of the fixed maturity securities. For equity securities, the Company has the ability and intent to holdunrealized losses on the securities
forpresented in the
recoverytable below were not other-than-temporarily impaired as of
cost and recovery of cost is expected within a reasonable period of time. Therefore, no impairment of these securities was recorded at December 31,
2016.| | | 12 months or less | | | More than 12 months | | | Total | |
| | | | | | Gross | | | | | | Gross | | | | | | Gross | |
| | | | | | Unrealized | | | | | | Unrealized | | | | | | Unrealized | |
| | | Fair Value | | | Losses | | | Fair Value | | | Losses | | | Fair Value | | | Losses | |
| | | | | | | | | | | | | | | | | | | |
| December 31, 2016 | | | | | | | | | | | | | | | | | | | | | | | | |
| Fixed maturity securities | | | | | | | | | | | | | | | | | | | | | | | | |
| U.S. Government and federallysponsored agency obligations: | | | | | | | | | | | | | | | | | | | | | | | | |
| Mortgage-backed securities | | $ | 76,573 | | | $ | 3,096 | | | $ | 3,235 | | | $ | 544 | | | $ | 79,808 | | | $ | 3,640 | |
| Other | | | 219,372 | | | | 10,120 | | | | - | | | | - | | | | 219,372 | | | | 10,120 | |
| Municipal bonds | | | 408,163 | | | | 19,006 | | | | 9,928 | | | | 3,582 | | | | 418,091 | | | | 22,588 | |
| Foreign government bonds | | | 24,182 | | | | 297 | | | | - | | | | - | | | | 24,182 | | | | 297 | |
| Corporate bonds | | | 459,402 | | | | 11,056 | | | | 57,261 | | | | 3,770 | | | | 516,663 | | | | 14,826 | |
| Other mortgage-backed securities | | | 750,557 | | | | 13,550 | | | | 229,106 | | | | 5,389 | | | | 979,663 | | | | 18,939 | |
| Total fixedmaturity securities | | | 1,938,249 | | | | 57,125 | | | | 299,530 | | | | 13,285 | | | | 2,237,779 | | | | 70,410 | |
| Equity securities (1) | | | 56,676 | | | | 4,567 | | | | 7,956 | | | | 1,007 | | | | 64,632 | | | | 5,574 | |
| Combined totals | | $ | 1,994,925 | | | $ | 61,692 | | | $ | 307,486 | | | $ | 14,292 | | | $ | 2,302,411 | | | $ | 75,984 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Number of positions with agross unrealized loss | | | 629 | | | | | | | | 102 | | | | | | | | 731 | | | | | |
| Fair value as a percentage oftotal fixed maturities andequity securities fair value | | | 26.3 | % | | | | | | | 4.0 | % | | | | | | | 30.3 | % | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2015 | | | | | | | | | | | | | | | | | | | | | | | | |
| Fixed maturity securities | | | | | | | | | | | | | | | | | | | | | | | | |
| U.S. Government and federallysponsored agency obligations: | | | | | | | | | | | | | | | | | | | | | | | | |
| Mortgage-backed securities | | $ | 48,097 | | | $ | 1,748 | | | $ | 1,595 | | | $ | 113 | | | $ | 49,692 | | | $ | 1,861 | |
| Other | | | 248,478 | | | | 7,338 | | | | 1,921 | | | | 77 | | | | 250,399 | | | | 7,415 | |
| Municipal bonds | | | 168,939 | | | | 5,382 | | | | 21,717 | | | | 4,958 | | | | 190,656 | | | | 10,340 | |
| Foreign government bonds | | | 11,867 | | | | 112 | | | | - | | | | - | | | | 11,867 | | | | 112 | |
| Corporate bonds | | | 858,647 | | | | 37,244 | | | | 50,340 | | | | 11,590 | | | | 908,987 | | | | 48,834 | |
| Other mortgage-backed securities | | | 929,268 | | | | 19,165 | | | | 140,561 | | | | 1,796 | | | | 1,069,829 | | | | 20,961 | |
| Total fixedmaturity securities | | | 2,265,296 | | | | 70,989 | | | | 216,134 | | | | 18,534 | | | | 2,481,430 | | | | 89,523 | |
| Equity securities (1) | | | 38,764 | | | | 3,022 | | | | 8,379 | | | | 1,308 | | | | 47,143 | | | | 4,330 | |
| Combined totals | | $ | 2,304,060 | | | $ | 74,011 | | | $ | 224,513 | | | $ | 19,842 | | | $ | 2,528,573 | | | $ | 93,853 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Number of positions with agross unrealized loss | | | 684 | | | | | | | | 78 | | | | | | | | 762 | | | | | |
| Fair value as a percentage oftotal fixed maturities andequity securities fair value | | | 32.0 | % | | | | | | | 3.1 | % | | | | | | | 35.1 | % | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| ($ in thousands) | | 12 months or less | | More than 12 months | | Total |
| | | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses |
| December 31, 2019 | | | | | | | | | | | | |
| Fixed maturity securities | | | | | | | | | | | | |
U.S. Government and federally sponsored agency obligations: | | | | | | | | | | | | |
| Mortgage-backed securities | | $ | 72,422 |
| | $ | 1,282 |
| | $ | 2,620 |
| | $ | 205 |
| | $ | 75,042 |
| | $ | 1,487 |
|
| Other | | 38,341 |
| | 619 |
| | 1,527 |
| | 2 |
| | 39,868 |
| | 621 |
|
| Municipal bonds | | 91,195 |
| | 977 |
| | 9,160 |
| | 603 |
| | 100,355 |
| | 1,580 |
|
| Foreign government bonds | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Corporate bonds | | 58,198 |
| | 886 |
| | 16,622 |
| | 909 |
| | 74,820 |
| | 1,795 |
|
| Other mortgage-backed securities | | 218,710 |
| | 1,970 |
| | 442,791 |
| | 6,161 |
| | 661,501 |
| | 8,131 |
|
| Total | | $ | 478,866 |
| | $ | 5,734 |
| | $ | 472,720 |
| | $ | 7,880 |
| | $ | 951,586 |
| | $ | 13,614 |
|
| | | | | | | | | | | | | |
Number of positions with a gross unrealized loss | | 330 |
| | | | 137 |
| | | | 467 |
| | |
Fair value as a percentage of total fixed maturities securities fair value | | 8.3 | % | | | | 8.2 | % | | | | 16.5 | % | | |
| | | | | | | | | | | | | |
| December 31, 2018 | | | | | | | | | | | | |
| Fixed maturity securities | | | | | | | | | | | | |
U.S. Government and federally sponsored agency obligations: | | | | | | | | | | | | |
| Mortgage-backed securities | | $ | 193,447 |
| | $ | 5,026 |
| | $ | 157,295 |
| | $ | 8,295 |
| | $ | 350,742 |
| | $ | 13,321 |
|
| Other | | 263,497 |
| | 6,746 |
| | 246,213 |
| | 10,935 |
| | 509,710 |
| | 17,681 |
|
| Municipal bonds | | 291,869 |
| | 7,603 |
| | 95,297 |
| | 5,891 |
| | 387,166 |
| | 13,494 |
|
| Foreign government bonds | | 16,250 |
| | 760 |
| | — |
| | — |
| | 16,250 |
| | 760 |
|
| Corporate bonds | | 818,519 |
| | 27,429 |
| | 99,171 |
| | 11,462 |
| | 917,690 |
| | 38,891 |
|
| Other mortgage-backed securities | | 913,858 |
| | 16,076 |
| | 291,442 |
| | 7,455 |
| | 1,205,300 |
| | 23,531 |
|
| Total | | $ | 2,497,440 |
| | $ | 63,640 |
| | $ | 889,418 |
| | $ | 44,038 |
| | $ | 3,386,858 |
| | $ | 107,678 |
|
| | | | | | | | | | | | | |
Number of positions with a gross unrealized loss | | 1,052 |
| | | | 359 |
| | | | 1,411 |
| | |
Fair value as a percentage of total fixed maturities and equity securities fair value | | 32.7 | % | | | | 11.7 | % | | | | 44.4 | % | | |
| (1) | Includes nonredeemable (perpetual) preferred stocks, common stocks and closed-end funds. |
NOTE 2 - Investments-(Continued)
Fixed
maturities and equitymaturity securities with an investment grade rating represented
88%93.9% of the gross unrealized
losslosses as of December 31,
2016.2019. With respect to fixed maturity securities involving securitized financial assets, the underlying collateral cash flows were stress tested to determine there was no adverse change in the present value of cash flows below the amortized cost basis.
|
| | |
| 94 Annual Report on Form 10-K | | Horace Mann Educators Corporation |
NOTE 3 - Investments (continued)
The following table summarizes the cumulative amounts related to the
Company’sCompany's credit loss component of
the other-than-temporary impairmentOTTI losses on fixed maturity securities held as of December 31,
20162019 and
20152018 that the Company did not intend to sell as of those dates, and it was not more likely than not that the Company would be required to sell the securities before the anticipated recovery of the amortized cost
bases,basis, for which the non-credit portions of
the other-than-temporary impairmentOTTI losses were recognized in
other comprehensive income (loss):| | | Year Ended December 31, | |
| | | 2016 | | | 2015 | |
| Cumulative credit loss (1) | | | | | | | | |
| Beginning of period | | $ | 7,844 | | | $ | 2,877 | |
| New credit losses | | | 300 | | | | 4,967 | |
| Increases to previously recognized credit losses | | | 5,859 | | | | - | |
| Losses related to securities sold or paid down during the period | | | (300 | ) | | | - | |
| End of period | | $ | 13,703 | | | $ | 7,844 | |
|
| | | | | | | | |
| ($ in thousands) | | Year Ended December 31, |
| | | 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 other-than-temporary impairmentOTTI 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. |
Maturities/SalesMaturities of Fixed
Maturities and EquityMaturity Securities
The following table presents the distribution of the
Company’sCompany'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.
| | | December 31, 2016 |
| | | | | | | | | Percent of |
| | | Amortized | | | Fair | | | Total Fair |
| | | Cost | | | Value | | | Value |
| Estimated expected maturity: | | | | | | | | | | | | |
| Due in 1 year or less | | $ | 276,403 | | | $ | 290,811 | | | | 3.9 | % |
| Due after 1 year through 5 years | | | 2,051,674 | | | | 2,140,074 | | | | 28.7 | % |
| Due after 5 years through 10 years | | | 2,518,896 | | | | 2,624,759 | | | | 35.2 | % |
| Due after 10 years through 20 years | | | 1,397,499 | | | | 1,454,057 | | | | 19.5 | % |
| Due after 20 years | | | 907,655 | | | | 947,007 | | | | 12.7 | % |
| Total | | $ | 7,152,127 | | | $ | 7,456,708 | | | | 100.0 | % |
| | | | | | | | | | | | | |
| Average option-adjusted duration, in years | | | 5.9 | | | | | | | | | |
|
| | | | | | | | | | | |
| ($ in thousands) | | December 31, 2019 |
| | | Amortized Cost | | Fair Value | | Percent of Total Fair Value |
| Estimated expected maturity: | | | | | | |
| Due in 1 year or less | | $ | 205,798 |
| | $ | 211,420 |
| | 3.6 | % |
| Due after 1 year through 5 years | | 1,541,749 |
| | 1,587,300 |
| | 27.4 | % |
| Due after 5 years through 10 years | | 1,613,539 |
| | 1,712,236 |
| | 29.6 | % |
| Due after 10 years through 20 years | | 1,393,503 |
| | 1,512,769 |
| | 26.1 | % |
| Due after 20 years | | 702,391 |
| | 767,951 |
| | 13.3 | % |
| Total | | $ | 5,456,980 |
| | $ | 5,791,676 |
| | 100.0 | % |
| | | | | | | |
| Average option-adjusted duration, in years | | 6.0 |
| | | | |
|
| F-65 | |
| Horace Mann Educators Corporation | | Annual Report on Form 10-K 95 |
NOTE
23 -
Investments-(Continued)Investments (continued)
Sales of Fixed Maturity and Equity Securities
Proceeds received from sales of fixed
maturitiesmaturity 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 year were:
| | | Year Ended December 31, | |
| | | | 2016 | | | | 2015 | | | | 2014 | |
| Fixed maturity securities | | | | | | | | | | | | |
| Proceeds received | | $ | 429,251 | | | $ | 445,100 | | | $ | 261,696 | |
| Gross gains realized | | | 15,915 | | | | 22,476 | | | | 13,224 | |
| Gross losses realized | | | (4,163 | ) | | | (5,487 | ) | | | (6,325 | ) |
| | | | | | | | | | | | | |
| Equity securities | | | | | | | | | | | | |
| Proceeds received | | $ | 21,210 | | | $ | 31,621 | | | $ | 17,194 | |
| Gross gains realized | | | 2,869 | | | | 6,604 | | | | 3,206 | |
| Gross losses realized | | | (935 | ) | | | (672 | ) | | | (482 | ) |
|
| | | | | | | | | | | | |
| ($ in thousands) | | Year Ended December 31, |
| | | 2019 (1) | | 2018 | | 2017 |
| Fixed maturity securities | | | | | | |
| Proceeds received | | $ | 805,887 |
| | $ | 625,527 |
| | $ | 500,760 |
|
| Gross gains realized | | 150,852 |
| | 10,536 |
| | 13,570 |
|
| Gross losses realized | | (7,807 | ) | | (14,932 | ) | | (11,842 | ) |
| | | | | | | |
| Equity securities | | | | | | |
| Proceeds received | | $ | 29,863 |
| | $ | 25,498 |
| | $ | 50,113 |
|
| Gross gains realized | | 9,193 |
| | 8,592 |
| | 7,753 |
|
| Gross losses realized | | (788 | ) | | (917 | ) | | (1,972 | ) |
| |
(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 17 for further information. |
Net Unrealized Investment Gains
and Losses(Losses) on Fixed
Maturities and EquityMaturity Securities
Net unrealized investment gains
and losses(losses) on securities are computed as the difference between fair value and amortized cost for fixed
maturitiesmaturity securities or cost for equity securities. The following table reconciles the net unrealized investment gains
and losses,(losses) on securities, net of tax, included in
accumulated other comprehensive income (loss),AOCI, before the impact on
deferred policy acquisition costs:| | | Year Ended December 31, | |
| | | | 2016 | | | | 2015 | | | | 2014 | |
| Net unrealized investment gains and losses on fixed maturity securities, net of tax | | | | | | | | | | | | |
| Beginning of period | | $ | 198,714 | | | $ | 336,604 | | | $ | 146,489 | |
| Change in unrealized investment gains and losses | | | 3,024 | | | | (131,202 | ) | | | 195,413 | |
| Reclassification of net realized investment (gains) losses to net income | | | (3,760 | ) | | | (6,688 | ) | | | (5,298 | ) |
| End of period | | $ | 197,978 | | | $ | 198,714 | | | $ | 336,604 | |
| | | | | | | | | | | | | |
| Net unrealized investment gains and losses on equity securities, net of tax | | | | | | | | | | | | |
| Beginning of period | | $ | 2,649 | | | $ | 6,988 | | | $ | 4,618 | |
| Change in unrealized investment gains and losses | | | 1,919 | | | | (3,443 | ) | | | 4,185 | |
| Reclassification of net realized investment (gains) losses to net income | | | 395 | | | | (896 | ) | | | (1,815 | ) |
| End of period | | $ | 4,963 | | | $ | 2,649 | | | $ | 6,988 | |
DAC:
|
| | | | | | | | | | | | |
| ($ in thousands) | | Year Ended December 31, |
| | | 2019 | | 2018 | | 2017 |
Net unrealized investment gains (losses) on fixed maturity securities, net of tax | | | | | | |
| Beginning of period | | $ | 111,712 |
| | $ | 286,176 |
| | $ | 202,941 |
|
Change in unrealized investment gains (losses) on fixed maturity securities | | 277,062 |
| | (172,350 | ) | | 80,073 |
|
Reclassification of net investment (gains) losses on securities to net income | | (124,364 | ) | | 12,927 |
| | 3,162 |
|
Cumulative effect of change in accounting principle (1) | | — |
| | (15,041 | ) | | — |
|
| End of period | | $ | 264,410 |
| | $ | 111,712 |
| | $ | 286,176 |
|
| |
(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. |
Limited Partnership Interests
As of December 31, 2019 and 2018, the carrying value of equity method limited partnerships totaled $383.7 million and $328.5 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 partnerships when evidence demonstrates that the loss is other than temporary. Evidence of a loss in value that is other than temporary may include the absence of an ability to recover the carrying amount of the investment or the inability of the investee to sustain a level of earnings that would justify the carrying amount of the investment.
Investment in Entities Exceeding 10% of Shareholders' Equity
At December 31,
20162019 and
2015,2018, there were no investments which exceeded 10% of total shareholders' equity in entities other than obligations of the U.S. Government and federally sponsored government agencies and authorities.
|
| F-66 | |
| 96 Annual Report on Form 10-K | | Horace Mann Educators Corporation |
NOTE
23 -
Investments-(Continued)Investments (continued)
Offsetting of Assets and Liabilities
The
Company’s derivative instrumentsCompany's derivatives (call options) are subject to enforceable master netting arrangements. Collateral support agreements associated with each master netting arrangement provide that the Company will receive or pledge
financialcash collateral in the event minimum thresholds have been reached.
The following table presents the instruments that were subject to a master netting arrangement for the Company.
| | | | | | | | | Net Amounts | | | | | | |
| | | | | | | | | of Assets/ | | | | | | |
| | | | | | Gross | | | Liabilities | | | Gross Amounts Not Offset | | | |
| | | | | | Amounts | | | Presented | | | in the Consolidated | | | |
| | | | | | Offset in the | | | in the | | | Balance Sheets | | | |
| | | | | | Consolidated | | | Consolidated | | | | | Cash | | | |
| | | Gross | | | Balance | | | Balance | | | Financial | | Collateral | | Net |
| | | Amounts | | | Sheets | | | Sheets | | | Instruments | | Received | | Amount |
| December 31, 2016 | | | | | | | | | | | | | | | | | | | | | | | | |
| Asset derivatives | | | | | | | | | | | | | | | | | | | | | | | | |
| Free-standing derivatives | | $ | 8,694 | | | $ | - | | | $ | 8,694 | | | $ | - | | | $ | 8,824 | | | $ | (130 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2015 | | | | | | | | | | | | | | | | | | | | | | | | |
| Asset derivatives | | | | | | | | | | | | | | | | | | | | | | | | |
| Free-standing derivatives | | | 2,501 | | | | - | | | | 2,501 | | | | - | | | | 2,617 | | | | (116 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| ($ 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 | | Consolidated Balance Sheets | | Consolidated Balance Sheets | | Financial Instruments | | Cash Collateral Received | | Net Amount |
| December 31, 2019 | | | | | | | | | | | | |
| Asset derivatives | | | | | | | | | | | | |
| Free-standing derivatives | | $ | 13,239 |
| | $ | — |
| | $ | 13,239 |
| | $ | 7,687 |
| | $ | 6,640 |
| | $ | (1,088 | ) |
| | | | | | | | | | | | | |
| December 31, 2018 | | | | | | | | | | | | |
| Asset derivatives | | | | | | | | | | | | |
| Free-standing derivatives | | 2,647 |
| | — |
| | 2,647 |
| | — |
| | 1,868 |
| | 779 |
|
At December 31,
20162019 and
2015,2018, fixed maturity securities with a fair value of
$18,119$26.0 million and
$18,312,$17.7 million, respectively, were on deposit with governmental agencies as required by law in various states in which the insurance subsidiaries of
HMECthe Company conduct business. In addition, at December 31,
20162019 and
2015,2018, fixed maturity securities with a fair value of
$620,489$594.2 million and
$621,077,$740.0 million, respectively, were on deposit with
the Federal Home Loan Bank of Chicago (“FHLB”)FHLB as collateral for amounts subject to funding agreements,
whichadvances and borrowings that were equal to
$575,000$545.0 million and $675.0 million at
both of the respective dates. The deposited securities are included in
“Fixed maturities”Fixed maturity securities on the
Company’sCompany's Consolidated Balance Sheets.
NOTE
34 - Fair Value of Financial Instruments
The Company is required under GAAP to disclose estimated fair values for certain financial and nonfinancial assets and liabilities. Fair values of the
Company’sCompany'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’sCompany's overall management of interest rate risk through the matching of investment maturities with amounts due under insurance contracts.
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between knowledgeable, unrelated and willing market participants on the measurement date. In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. The Company categorizes its financial and nonfinancial assets and liabilities into a three-level hierarchy based on the priority of the inputs to the valuation technique. The three levels of inputs that may be used to measure fair value are:
|
| |
| Level 1 | Unadjusted quoted prices in active markets for identical assets or liabilities. Level 1 assets and liabilities include fixed maturity and equity securities (both common stock and preferred stock) that are traded in an active exchange market, as well as U.S. Treasury securities. |
|
| | |
| Horace Mann Educators Corporation | | Annual Report on Form 10-K 97 |
NOTE 4 - Fair Value of Financial Instruments (continued)
|
| |
| Level 2 | Unadjusted observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for the assets or liabilities. Level 2 assets and liabilities include fixed maturity securities (1) with quoted prices that are traded less frequently than exchange-traded instruments or (2) values based on discounted cash flows with observable inputs. This category generally includes certain U.S. Government and agency mortgage-backed securities, non-agency structured securities, corporate fixed maturity securities, preferred stocks, derivatives and derivative securities. |
| embedded derivatives. |
| Level 3 | Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, certain discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation and for which the significant inputs are unobservable. This category generally includes certain private debt and equity investments, as well as embedded derivatives. |
When the inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement in its entirety. As a result, a Level 3 fair value measurement may include inputs that are observable (Level 1 or Level 2) and unobservable (Level 3). Net transfers into or out of each of the three levels are reported as having occurred at the end of the reporting period in which the transfers were determined.
NOTE 3 - Fair Value of Financial Instruments-(Continued)
The following discussion describes the valuation methodologies used for financial assets and financial liabilities measured at fair value. The techniques utilized in estimating the fair values are affected by the assumptions used, including discount rates and estimates of the amount and timing of expected future cash flows. The use of different methodologies, assumptions and inputs may have a material effect on the estimated fair values of the Company’s securitiesCompany's investment holdings. Care should beis exercised in deriving conclusions about the Company’sCompany's business, its value or financial position based on the fair value information of financial and nonfinancial assets and liabilities presented below.
Fair value estimates are made at a specific point in time, based on available market information and judgments about the financial asset or financial liability, including estimates of
both the timing
and amount of expected future cash flows and the credit standing of the issuer. In some cases,
the fair value estimates cannot be substantiated by comparison to independent markets. In addition, the disclosed fair value may not be realized in the immediate settlement of the financial asset or financial liability. The disclosed fair values do not reflect any premium or discount that could result from offering for sale at one time an entire holding of a particular financial asset or financial liability. In periods of market disruption, the ability to observe prices and inputs may be reduced for many instruments. This condition could cause an instrument to be reclassified from Level 1 to Level 2 or from Level 2 to Level 3. Potential taxes and other expenses that would be incurred in an actual sale or settlement are not reflected in amounts disclosed.
The fair value of a fixed maturity
securities, eachsecurity is the estimated amount at which the security could be exchanged in an orderly transaction between knowledgeable, unrelated and willing parties. The Company utilizes its investment managers and its custodian bank to obtain fair value prices from independent third-party valuation service providers, broker-dealer quotes, and model prices. Each month, the Company obtains fair value prices from its investment managers and custodian
bank. Fair valuesbank, each of which use a variety of independent, nationally recognized pricing sources to determine market valuations for
the Company’s fixed maturity
securities are based primarily on prices provided by its investment managers as well as its custodian bank for certain securities.
The prices from the custodian bank are compared to prices from the investment managers. Differences in prices between the sources that the Company considers significant are researched and the Company utilizes the price that it considers most representative of an exit price.
Both the investment managers and the custodian bank use a variety of independent, nationally recognized pricing sources to determine market valuations. Each designate specific pricing services or indexes for each sector of the market based upon the provider’s expertise. Typical inputs used by these pricing sources include, but are not limited to, reported trades,
bids, offers, benchmark yield curves, benchmarking of like securities,
ratingsrating designations, sector groupings, issuer spreads,
bids, offers, and/or estimated cash flows,
prepayment and
prepayment speeds.default speeds, among others. The Company's fixed maturity securities portfolio is primarily publicly traded, which allows for a high percentage of the portfolio to be priced through pricing services. Approximately 94.1% and 90.7% of the portfolio, based on fair value, was priced through pricing services or index priced as of December 31, 2019 and 2018, respectively. The remainder of the portfolio was priced by broker-dealers or pricing models. When non-binding broker-dealer quotes can be corroborated by comparison to other vendor quotes, pricing models or analyses, the securities are generally classified as Level 2, otherwise they are classified as Level 3. There were no significant changes to the valuation process during 2019.
|
| | |
| 98 Annual Report on Form 10-K | | Horace Mann Educators Corporation |
NOTE 4 - Fair Value of Financial Instruments (continued)
The valuation of hard-to-value fixed maturity securities (generally 100 -150 securities) is more subjective because the markets are less liquid and there is a lack of observable market-based inputs. This may increase the potential that the estimated fair value of an investment is not reflective of the price at which an actual transaction would occur. When the pricing sources cannot provide fair value determinations, the
Company obtainsinvestment managers and custodian bank obtain non-binding price quotes from broker-dealers.
The broker-dealers’For those securities where the investment manager cannot obtain broker-dealer quotes, they will model the security, generally using anticipated cash flows of the underlying collateral. Broker-dealers' valuation
methodology ismethodologies as well as investment managers’ modeling methodologies are sometimes matrix-based, using indicative evaluation measures and adjustments for specific security characteristics and market sentiment. The
selection of the market inputs
utilized inand assumptions used to estimate the
evaluation measuresfair value of hard-to-value fixed maturity securities require judgment and
adjustments include: benchmark yield,
curves, reported trades, broker/dealer quotes, ratingsliquidity premium, estimated cash flows, prepayment and
corresponding issuerdefault speeds, spreads,
two-sided markets, benchmark securities, bids, offers, reference data,weighted average life, and
industry and economic events.credit rating. The extent of the use of each market input depends on the market sector and
the market conditions. Depending on the security, the priority of the use of inputs may change or some market inputs may not be relevant. For some securities, additional inputs may be necessary.
NOTE 3 - Fair Value of Financial Instruments-(Continued)
The Company analyzes pricegains assurance that its portfolio of fixed maturity securities and market valuations receivedhard-to-value fixed maturity securities is appropriately valued through the execution of various processes and controls designed to verifyensure the overall reasonableness to understand the keyand consistent application of valuation methodologies, including inputs and assumptions, used and their sources, to conclude the prices obtained are appropriate,compliance with accounting standards. The Company’s processes and to determine an appropriate fair value hierarchy level based upon trading activity and the observability of market inputs. Based on this evaluation and investment class analysis, each security is classified into Level 1, 2, or 3. The Company has in place certain control processes to determine the reasonableness of the financial asset fair values. These processescontrols are designed to ensure (1) the values received are reasonable and accurately recorded, (2) the data inputs and valuation techniques utilizedmethodologies are appropriate and consistently applied, (2) the inputs and (3) the assumptions are reasonable and consistent with the objective of determining fair value.value, and (3) the fair values are accurately recorded. For example, on a continuing basis, the Company assesses the reasonableness of individual fair values that have stale security prices or that exceed certain thresholds as compared to previous fair values received from pricing sources that varyvaluation service providers. The Company performs procedures to understand and assess the methodologies, processes and controls of valuation service providers. In addition, the Company may validate the reasonableness of fair values by comparing information obtained from certain thresholds.
The Company’s fixed maturity securities portfolio is primarily publicly traded, which allows for a high percentage of the portfolio to be priced through pricing services. Approximately 90% of the portfolio, based on fair value, was priced through pricing servicesvaluation service providers or index priced as of both December 31, 2016 and 2015. The remainder of the portfolio was priced by broker-dealers or pricing models. When non-binding broker-dealer quotes could be corroborated by comparison to other vendor quotes, pricing models or analyses,third-party valuation sources for selected securities.
To determine the
securities were generally classified as Level 2, otherwise they were classified as Level 3. There were no significant changes to the valuation process during 2016.At December 31, 2016, all of the equity securities portfolio was priced from observable market quotations. Fair valuesfair value of equity securities, have been determined by the Company utilizes its investment managers and its custodian bank to obtain fair value prices from observable market quotations, when available. Whenindependent third-party valuation service providers. Each month, the Company obtains fair value prices from its investment managers and custodian bank, each of which use a public quotation is not available, equity securities are valued by using non-binding broker quotes or through the usevariety of pricing models or analyses that are based on market information regarding interest rates, credit spreads and liquidity. The underlying source data for calculating the matrix of credit spreads relative to the U.S. Treasury curve areindependent, nationally recognized indices. In addition, credit rating (or credit quality equivalent information) of securities is also factored into a pricing matrix. These inputs are based on assumptions deemed appropriate given the circumstancessources to determine market valuations for equity securities.
Policy loans and
are believed to be consistent with what other market participants would use when pricing such securities. There were no significant changes to the valuation process in 2016.
Short-term and other investments are comprised of short-term fixed maturity securities, derivative instruments (all call options), policy loans, mortgage loans and restricted FHLB membership and activity stocks, as well as certain alternative investments which are accounted for using the equity method and thereforeof accounting are excluded from the fair value tabular disclosures.
NOTE 3 - Fair Value of Financial Instruments-(Continued)
In summary, the following investments are carried at fair value:
| · | Fixed maturity securities, as described above. Equity securities, as described above. Short-term fixed maturity securities — Because of the nature of these assets, carrying amounts generally approximate fair values. Derivatives, all call options — Fair values are based on the amount of cash expected to be received to settle each derivative on the reporting date. These amounts are obtained from each of the counterparties using industry accepted valuation models and observable inputs. Significant inputs include contractual terms, underlying index prices, market volatilities, interest rates and dividend yields. FHLB membership and activity stocks — Fair value is based on redemption value, which is equal to par value.
| | | | | Horace Mann Educators Corporation | | Annual Report on Form 10-K 99 |
NOTE 4 - Fair Value of Financial Instruments (continued)
Financial Instruments Measured and Carried at Fair Value The following table presents the Company's fair value hierarchy for those assets and liabilities measured and carried at fair value on a recurring basis. At December 31, 2019, Level 3 investments comprised approximately 4.8% of the Company's total investment portfolio at fair value. | | | | | | | | | | | | | | | | | | | | | | | ($ in thousands) | | Carrying | | Fair | | Fair Value Measurements at Reporting Date Using | | | | Amount | | Value | | Level 1 | | Level 2 | | Level 3 | | December 31, 2019 | | | | | | | | | | | | Financial Assets | | | | | | | | | | | | Investments | | | | | | | | | | | | Fixed maturity securities | | | | | | | | | | | U.S. Government and federally sponsored agency obligations: | | | | | | | | | | | | Mortgage-backed securities | | $ | 724,319 |
| | $ | 724,319 |
| | $ | — |
| | $ | 711,004 |
| | $ | 13,315 |
| | Other, including U.S. Treasury securities | | 458,868 |
| | 458,868 |
| | 17,699 |
| | 441,169 |
| | — |
| | Municipal bonds | | 1,686,203 |
| | 1,686,203 |
| | — |
| | 1,641,912 |
| | 44,291 |
| | Foreign government bonds | | 45,370 |
| | 45,370 |
| | — |
| | 45,370 |
| | — |
| | Corporate bonds | | 1,581,424 |
| | 1,581,424 |
| | 14,470 |
| | 1,463,002 |
| | 103,952 |
| | Other mortgage-backed securities | | 1,295,492 |
| | 1,295,492 |
| | — |
| | 1,161,979 |
| | 133,513 |
| | Total fixed maturity securities | | 5,791,676 |
| | 5,791,676 |
| | 32,169 |
| | 5,464,436 |
| | 295,071 |
| | Equity securities | | 101,864 |
| | 101,864 |
| | 49,834 |
| | 51,923 |
| | 107 |
| | Short-term investments | | 172,667 |
| | 172,667 |
| | 172,667 |
| | — |
| | — |
| | Other investments | | 25,997 |
| | 25,997 |
| | — |
| | 25,997 |
| | — |
| | Totals | | $ | 6,092,204 |
| | $ | 6,092,204 |
| | $ | 254,670 |
| | $ | 5,542,356 |
| | $ | 295,178 |
| Separate Account (variable annuity) assets (1) | | $ | 2,490,469 |
| | $ | 2,490,469 |
| | $ | 2,490,469 |
| | $ | — |
| | $ | — |
| | Financial Liabilities | | | | | | | | | | | Investment contract and life policy reserves, embedded derivatives | | $ | 1,314 |
| | $ | 1,314 |
| | $ | — |
| | $ | 1,314 |
| | $ | — |
| | Other policyholder funds, embedded derivatives | | $ | 93,733 |
| | $ | 93,733 |
| | $ | — |
| | $ | — |
| | $ | 93,733 |
| | | | | | | | | | | | | | December 31, 2018 | | | | | | | | | | | | Financial Assets | | | | | | | | | | | | Investments | | | | | | | | | | | | Fixed maturity securities | | | | | | | | | | | U.S. Government and federally sponsored agency obligations: | | | | | | | | | | | | Mortgage-backed securities | | $ | 787,441 |
| | $ | 787,441 |
| | $ | — |
| | $ | 784,224 |
| | $ | 3,217 |
| | Other, including U.S. Treasury securities | | 833,542 |
| | 833,542 |
| | 13,291 |
| | 820,251 |
| | — |
| | Municipal bonds | | 2,003,969 |
| | 2,003,969 |
| | — |
| | 1,956,438 |
| | 47,531 |
| | Foreign government bonds | | 84,904 |
| | 84,904 |
| | — |
| | 84,904 |
| | — |
| | Corporate bonds | | 2,079,510 |
| | 2,079,510 |
| | 12,281 |
| | 1,986,487 |
| | 80,742 |
| | Other mortgage-backed securities | | 1,725,952 |
| | 1,725,952 |
| | — |
| | 1,608,958 |
| | 116,994 |
| | Total fixed maturity securities | | 7,515,318 |
| | 7,515,318 |
| | 25,572 |
| | 7,241,262 |
| | 248,484 |
| | Equity securities | | 111,750 |
| | 111,750 |
| | 64,330 |
| | 47,415 |
| | 5 |
| | Short-term investments | | 122,222 |
| | 122,222 |
| | 117,296 |
| | 4,926 |
| | — |
| | Other investments | | 16,147 |
| | 16,147 |
| | — |
| | 16,147 |
| | — |
| | Totals | | $ | 7,765,437 |
| | $ | 7,765,437 |
| | $ | 207,198 |
| | $ | 7,309,750 |
| | $ | 248,489 |
| Separate Account (variable annuity) assets (1) | | $ | 2,001,128 |
| | $ | 2,001,128 |
| | $ | 2,001,128 |
| | $ | — |
| | $ | — |
| | Financial Liabilities | | | | | | | | | | | Investment contract and life policy reserves, embedded derivatives | | $ | 248 |
| | $ | 248 |
| | $ | — |
| | $ | 248 |
| | $ | — |
| | Other policyholder funds, embedded derivatives | | $ | 78,700 |
| | $ | 78,700 |
| | $ | — |
| | $ | — |
| | $ | 78,700 |
|
| | (1) | Separate Account (variable annuity) assets represent contractholder funds invested in various actively traded mutual funds that have daily quoted net asset values that are readily determinable for identical assets that the Company can access. Separate Account (variable annuity) liabilities are equal to the estimated fair value of Separate Account (variable annuity) assets. |
| | | | | 100 Annual Report on Form 10-K | | Horace Mann Educators Corporation |
NOTE 4 - Fair Value of Financial Instruments (continued)
The Company did not have any transfers between Levels 1 and 2 during 2019 and 2018. The following tables present reconciliations for the periods indicated for all Level 3 assets and liabilities measured at fair value on a recurring basis. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ($ in thousands) | | Financial Assets | | Financial Liabilities(1) | | | | Municipal Bonds | | Corporate Bonds | | Other Mortgage- Backed Securities(2) | | Total Fixed Maturity Securities | | Equity Securities | | Total | | | | Beginning balance, January 1, 2019 | | $ | 47,531 |
| | $ | 80,742 |
| | $ | 120,211 |
| | $ | 248,484 |
| | $ | 5 |
| | $ | 248,489 |
| | $ | 78,700 |
| Transfers into Level 3 (3) | | — |
| | 33,475 |
| | 56,766 |
| | 90,241 |
| | 65 |
| | 90,306 |
| | — |
| Transfers out of Level 3 (3) | | — |
| | (7,698 | ) | | (2,568 | ) | | (10,266 | ) | | — |
| | (10,266 | ) | | — |
| | Total gains or losses | | | | | | | | | | | | | | | Net investment gains (losses) included in net income related to financial assets | | — |
| | — |
| | (1,105 | ) | | (1,105 | ) | | 38 |
| | (1,067 | ) | | — |
| Net realized (gains) losses included in net income related to financial liabilities | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 12,636 |
| Net unrealized investment gains (losses) included in OCI | | 474 |
| | 4,461 |
| | 6,100 |
| | 11,035 |
| | — |
| | 11,035 |
| | — |
| | Purchases | | — |
| | 2,483 |
| | — |
| | 2,483 |
| | — |
| | 2,483 |
| | — |
| | Issuances | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 10,039 |
| | Sales | | — |
| | — |
| | (607 | ) | | (607 | ) | | (1 | ) | | (608 | ) | | — |
| | Settlements | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| Paydowns, maturities and distributions | | (3,714 | ) | | (9,511 | ) | | (31,969 | ) | | (45,194 | ) | | — |
| | (45,194 | ) | | (7,642 | ) | | Ending balance, December 31, 2019 | | $ | 44,291 |
| | $ | 103,952 |
| | $ | 146,828 |
| | $ | 295,071 |
| | $ | 107 |
| | $ | 295,178 |
| | $ | 93,733 |
| | | | | | | | | | | | | | | | | | Beginning balance, January 1, 2018 | | $ | 49,328 |
| | $ | 72,979 |
| | $ | 107,944 |
| | $ | 230,251 |
| | $ | 6 |
| | $ | 230,257 |
| | $ | 80,733 |
| Transfers into Level 3 (3) | | — |
| | 40,488 |
| | 50,771 |
| | 91,259 |
| | — |
| | 91,259 |
| | — |
| 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 | | — |
| | (487 | ) | | — |
| | (487 | ) | | 3 |
| | (484 | ) | | — |
| Net realized (gains) losses included in net income related to financial liabilities | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (7,518 | ) | Net unrealized investment gains (losses) included in OCI | | (1,195 | ) | | (2,840 | ) | | (5,570 | ) | | (9,605 | ) | | — |
| | (9,605 | ) | | — |
| | Purchases | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | Issuances | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 11,183 |
| | Sales | | — |
| | (6,135 | ) | | (187 | ) | | (6,322 | ) | | (4 | ) | | (6,326 | ) | | — |
| | Settlements | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| Paydowns, maturities and distributions | | (602 | ) | | (11,984 | ) | | (27,547 | ) | | (40,133 | ) | | — |
| | (40,133 | ) | | (5,698 | ) | | Ending balance, December 31, 2018 | | $ | 47,531 |
| | $ | 80,742 |
| | $ | 120,211 |
| | $ | 248,484 |
| | $ | 5 |
| | $ | 248,489 |
| | $ | 78,700 |
|
| | (1) | Represents embedded derivatives, all related to the Company's FIA products, reported in Other policyholder funds in the Company's Consolidated Balance Sheets. |
| · | (2) | EquityIncludes U.S. Government and federally sponsored agency obligations for mortgage-backed securities as described above.and other mortgage-backed securities. |
| · | (3) | Short-termTransfers into and out of Level 3 during the years ended December 31, 2019 and 2018 were attributable to changes in the availability of observable market information for individual fixed maturity securities — Becauseand short-term investments. The Company's policy is to recognize transfers into and transfers out of the naturelevels as having occurred at the end of these assets, carrying amounts generally approximate fair values.the reporting period in which the transfers were determined. |
| · | Derivative instruments, all call options — Fair values are based on the amount of cash expected to be received to settle each derivative instrument on the reporting date. These amounts are obtained from each of the counterparties using industry accepted valuation models and observable inputs. Significant inputs include contractual terms, underlying index prices, market volatilities, interest rates and dividend yields. |
| · | FHLB membership and activity stocks — Fair value is based | | Horace Mann Educators Corporation | | Annual Report on redemption value, which is equal to par value.Form 10-K 101 |
NOTE 4 - Fair Value of Financial Instruments (continued)
At December 31, 2019, the Company realized a loss of $1.1 million on Level 3 securities. At December 31, 2018 the Company realized a loss of $0.5 million on Level 3 securities. For the years ended December 31, 2019 and 2018, a realized loss of $12.6 million and a realized gain of $7.5 million, respectively, were included in earnings that were attributable to the changes in the fair value of Level 3 liabilities (embedded derivatives) still held. The following investmentsvaluation 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 previously described in this Note. Generally, valuation techniques for fixed maturity securities include spread pricing, matrix pricing and discounted cash flow methodologies; include inputs such as quoted prices for identical or similar securities that are less liquid; and are based on lower levels of trading activity than securities classified as Level 2. The valuation techniques and significant unobservable inputs used in the fair value measurement for equity securities classified as Level 3 use similar valuation techniques and significant unobservable inputs as those used for fixed maturity securities. The sensitivity of the estimated fair values to changes in the significant unobservable inputs for fixed maturity and equity securities included in Level 3 generally relates to interest rate spreads, illiquidity premiums and default rates. Significant spread widening in isolation will adversely impact the overall valuation, while significant spread tightening will lead to substantial valuation increases. Significant increases (decreases) in illiquidity premiums in isolation will result in substantially lower (higher) valuations. Significant increases (decreases) in expected default rates in isolation will result in substantially lower (higher) valuations. Financial Instruments Not Carried at Fair Value; Disclosure Required The Company has various other financial assets and financial liabilities used in the normal course of business that are not carried at fair value;value, but for which fair value disclosure is provided:required. The following table presents the carrying value, fair value and fair value hierarchy of these financial assets and financial liabilities. | | | | | | | | | | | | | | | | | | | | | | | ($ in thousands) | | Carrying | | Fair | | Fair Value Measurements at Reporting Date Using | | | | Amount | | Value | | Level 1 | | Level 2 | | Level 3 | | December 31, 2019 | | | | | | | | | | | | Financial Assets | | | | | | | | | | | | Investments | | | | | | | | | | | | Other investments | | $ | 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 | | 4,675,774 |
| | 4,609,880 |
| | — |
| | — |
| | 4,609,880 |
| Investment contract and life policy reserves, account values on life contracts | | 93,465 |
| | 98,332 |
| | — |
| | — |
| | 98,332 |
| | Other policyholder funds | | 553,550 |
| | 553,550 |
| | — |
| | 495,812 |
| | 57,738 |
| | Short-term debt | | 135,000 |
| | 135,000 |
| | — |
| | — |
| | 135,000 |
| | Long-term debt | | 298,025 |
| | 322,678 |
| | — |
| | 322,678 |
| | — |
| | | | | | | | | | | | | | December 31, 2018 | | | | | | | | | | | | Financial Assets | | | | | | | | | | | | Investments | | | | | | | | | | | | Other investments | | $ | 156,725 |
| | $ | 161,449 |
| | $ | — |
| | $ | — |
| | $ | 161,449 |
| | Financial Liabilities | | | | | | | | | | | Investment contract and policy reserves, fixed annuity contracts | | 4,555,849 |
| | 4,478,338 |
| | — |
| | — |
| | 4,478,338 |
| Investment contract and life policy reserves, account values on life contracts | | 87,229 |
| | 90,402 |
| | — |
| | — |
| | 90,402 |
| | Other policyholder funds | | 689,287 |
| | 689,287 |
| | — |
| | 626,325 |
| | 62,962 |
| | Long-term debt | | 297,740 |
| | 291,938 |
| | — |
| | 291,938 |
| | — |
|
| · | Policy loans — Fair value is based on estimates using discounted cash flow analysis and current interest rates being offered for new loans. |
| · | Mortgage loans — Fair value is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and the same remaining maturities. | | 102 Annual Report on Form 10-K | | Horace Mann Educators Corporation |
NOTE 4 - Fair Value of Financial Instruments (continued)
Other Investments Other investments includes policy loans and mortgage loans. For policy loans, fair value is based on estimates using discounted cash flow analysis and current interest rates being offered for new loans. For mortgage loans, fair value is estimated by discounting the future cash flows using current rates at which similar loans would be made to borrowers with similar credit ratings and similar remaining maturities. Deposit Asset on Reinsurance The fair value of the deposit asset on reinsurance is estimated by discounting the future cash flows that are expected to arise out of the annuity reinsurance transaction. The treasury yield curve, plus an assumed credit spread, is used to determine the appropriate discount rate. Investment Contract and Life Policy Reserves The fair values of fixed annuity contract liabilities and policyholder account balances on life contracts are equal to the discounted estimated future cash flows (using the Company's current interest rates for similar products including consideration of minimum guaranteed interest rates). The Company carries these financial liabilities at cost.
Also, included in investment contract and life policy reserves are embedded derivatives related to the Company’s indexed universal life product,Company's IUL products which was introduced in October 2015. The fair value of these embedded derivatives is estimated to be equal to the fair value of the current call options purchased to hedge the liability. The Company carries these embedded derivativesare carried at fair value.
See Note 5 for further information. NOTE 3 - Fair Value of Financial Instruments-(Continued)
Other Policyholder Funds Other policyholder funds are liabilities related to supplementary contracts without life contingencies and dividend accumulations, as well as balances outstanding under funding agreements with the FHLB and embedded derivatives related to fixed indexed annuities (“FIA”).the FIA products. Except for embedded derivatives, each of these components is carried at cost, which management believes is a reasonable estimate of fair value due to the relatively short duration of these items, based on the Company’sCompany's past experience. The fair value of the embedded derivatives all related to the Company’s FIA products is estimated at each valuationreporting date by (1) projecting policy contract values and minimum guaranteed contract values over the expected lives of the contracts and (2) discounting the excess of the projected contract value amounts at the applicable risk free interest rates adjusted for the Company’sCompany's nonperformance risk related to those liabilities. The projections of policy contract values are based on the Company’sCompany's best estimate assumptions for future contract growth and decrements. The assumptions for future contract growth include the expected index credits which are derived from the fair values of the underlying call options purchased to fund such index credits and the expected costs of annual call options that will be purchased in the future to fund index credits beyond the next contract anniversary. Projections of minimum guaranteed contract values include the same best estimate assumptions for contract decrements used to project policy contract values.
Short-term Debt The Company carries short-term debt at amortized cost which approximates fair value. The Company carries long-term debt at amortized cost. The fair value of long-term debt is estimated based on unadjusted quoted market prices of the Company’sCompany's securities or unadjusted market prices based on similar publicly traded issues when trading activity for the Company’sCompany's securities is not sufficient to provide a market price.
NOTE 35 - Fair Value of Financial Instruments-(Continued)Financial Instruments Measured and Carried at Fair Value
The following table presents the Company’s fair value hierarchy for those assets and liabilities measured and carried at fair value on a recurring basis. At December 31, 2016, these Level 3 invested assets comprised approximately 2.7% of the Company’s total investment portfolio fair value.
| | | | | | | | | Fair Value Measurements at | | | | | Carrying | | | Fair | | | Reporting Date Using | | | | | Amount | | | Value | | | Level 1 | | | Level 2 | | | Level 3 | | | December 31, 2016 | | | | | | | | | | | | | | | | | | | | | | Financial Assets | | | | | | | | | | | | | | | | | | | | | | Investments | | | | | | | | | | | | | | | | | | | | | | Fixed maturities | | | | | | | | | | | | | | | | | | | | | | U.S. Government and federallysponsored agency obligations: | | | | | | | | | | | | | | | | | | | | | | Mortgage-backed securities | | $ | 442,419 | | | $ | 442,419 | | | $ | - | | | $ | 439,004 | | | $ | 3,415 | | | Other, including | | | | | | | | | | | | | | | | | | | | | | U.S. Treasury securities | | | 467,143 | | | | 467,143 | | | | 13,631 | | | | 453,512 | | | | - | | | Municipal bonds | | | 1,769,397 | | | | 1,769,397 | | | | - | | | | 1,722,900 | | | | 46,497 | | | Foreign government bonds | | | 98,669 | | | | 98,669 | | | | - | | | | 98,669 | | | | - | | | Corporate bonds | | | 2,810,221 | | | | 2,810,221 | | | | 13,532 | | | | 2,736,498 | | | | 60,191 | | | Other mortgage-backed securities | | | 1,868,859 | | | | 1,868,859 | | | | - | | | | 1,767,615 | | | | 101,244 | | | Total fixed maturities | | | 7,456,708 | | | | 7,456,708 | | | | 27,163 | | | | 7,218,198 | | | | 211,347 | | | Equity securities | | | 141,649 | | | | 141,649 | | | | 98,632 | | | | 43,011 | | | | 6 | | | Short-term investments | | | 44,918 | | | | 44,918 | | | | 44,167 | | | | - | | | | 751 | | | Other investments | | | 20,194 | | | | 20,194 | | | | - | | | | 20,194 | | | | - | | | Totals | | | 7,663,469 | | | | 7,663,469 | | | | 169,962 | | | | 7,281,403 | | | | 212,104 | | | Financial Liabilities | | | | | | | | | | | | | | | | | | | | | | Investment contract and life policyreserves, embedded derivatives | | | 158 | | | | 158 | | | | - | | | | 158 | | | | - | | | Other policyholder funds,embedded derivatives | | | 59,393 | | | | 59,393 | | | | - | | | | - | | | | 59,393 | | | | | | | | | | | | | | | | | | | | | | | | | December 31, 2015 | | | | | | | | | | | | | | | | | | | | | | Financial Assets | | | | | | | | | | | | | | | | | | | | | | Investments | | | | | | | | | | | | | | | | | | | | | | Fixed maturities | | | | | | | | | | | | | | | | | | | | | | U.S. Government and federally sponsored agency obligations: | | | | | | | | | | | | | | | | | | | | | | Mortgage-backed securities | | $ | 504,414 | | | $ | 504,414 | | | $ | - | | | $ | 504,414 | | | $ | - | | | Other, including | | | | | | | | | | | | | | | | | | | | | | U.S. Treasury securities | | | 546,111 | | | | 546,111 | | | | 14,258 | | | | 531,853 | | | | - | | | Municipal bonds | | | 1,708,943 | | | | 1,708,943 | | | | - | | | | 1,678,564 | | | | 30,379 | | | Foreign government bonds | | | 73,617 | | | | 73,617 | | | | - | | | | 73,617 | | | | - | | | Corporate bonds | | | 2,779,415 | | | | 2,779,415 | | | | 10,195 | | | | 2,701,645 | | | | 67,575 | | | Other mortgage-backed securities | | | 1,478,840 | | | | 1,478,840 | | | | - | | | | 1,403,374 | | | | 75,466 | | | Total fixed maturities | | | 7,091,340 | | | | 7,091,340 | | | | 24,453 | | | | 6,893,467 | | | | 173,420 | | | Equity securities | | | 99,797 | | | | 99,797 | | | | 86,088 | | | | 13,703 | | | | 6 | | | Short-term investments | | | 174,152 | | | | 174,152 | | | | 169,764 | | | | 4,388 | | | | - | | | Other investments | | | 14,001 | | | | 14,001 | | | | - | | | | 14,001 | | | | - | | | Totals | | | 7,379,290 | | | | 7,379,290 | | | | 280,305 | | | | 6,925,559 | | | | 173,426 | | | Financial Liabilities | | | | | | | | | | | | | | | | | | | | | | Investment contract and life policyreserves, embedded derivatives | | | 14 | | | | 14 | | | | - | | | | 14 | | | | - | | | Other policyholder funds,embedded derivatives | | | 39,021 | | | | 39,021 | | | | - | | | | - | | | | 39,021 | |
NOTE 3 - Fair Value of Financial Instruments-(Continued)
The Company did not have any other transfers between Levels 1 and 2 during the years ended December 31, 2016 and 2015. The following tables present reconciliations for the periods indicated for all Level 3 assets and liabilities measured at fair value on a recurring basis. | | | | | | Financial | | | | | Financial Assets | | | Liabilities(1) | | | | | Municipal
Bonds | | | | Corporate
Bonds | | | | Other
Mortgage-
Backed
Securities (2) | | | | Total
Fixed
Maturities | | | | Equity
Securities | | | | Short-term
Investments | | | | Total | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Beginning balance, January 1, 2016 | | $ | 30,379 | | | | $ | 67,575 | | | | $ | 75,466 | | | | $ | 173,420 | | | | $ | 6 | | | | $ | - | | | | $ | 173,426 | | | $ | 39,021 | | | Transfers into Level 3 (3) | | | 17,710 | | | | | 27,561 | | | | | 39,128 | | | | | 84,399 | | | | | - | | | | | 751 | | | | | 85,150 | | | | - | | | Transfers out of Level 3 (3) | | | - | | | | | (14,334 | ) | | | | (6,694 | ) | | | | (21,028 | ) | | | | - | | | | | - | | | | | (21,028 | ) | | | - | | | Total gains or losses | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net realized investment gains(losses) included in net income related tofinancial assets | | | - | | | | | (1,833 | ) | | | | (56 | ) | | | | (1,889 | ) | | | | - | | | | | - | | | | | (1,889 | ) | | | - | | | Net realized (gains) lossesincluded in net incomerelated to financial liabilities | | | - | | | | | - | | | | | - | | | | | - | | | | | - | | | | | - | | | | | - | | | | 5,011 | | | Net unrealized investment gains(losses) included in othercomprehensive income | | | (990 | ) | | | | (205 | ) | | | | 5,895 | | | | | 4,700 | | | | | - | | | | | - | | | | | 4,700 | | | | - | | | Purchases | | | - | | | | | - | | | | | - | | | | | - | | | | | - | | | | | - | | | | | - | | | | - | | | Issuances | | | - | | | | | - | | | | | - | | | | | - | | | | | - | | | | | - | | | | | - | | | | 17,113 | | | Sales | | | - | | | | | - | | | | | - | | | | | - | | | | | - | | | | | - | | | | | - | | | | - | | | Settlements | | | - | | | | | - | | | | | - | | | | | - | | | | | - | | | | | - | | | | | - | | | | - | | | Paydowns, maturities and distributions | | | (602 | ) | | | | (18,573 | ) | | | | (9,080 | ) | | | | (28,255 | ) | | | | - | | | | | - | | | | | (28,255 | ) | | | (1,752 | ) | | Ending balance, December 31, 2016 | | $ | 46,497 | | | | $ | 60,191 | | | | $ | 104,659 | | | | $ | 211,347 | | | | $ | 6 | | | | $ | 751 | | | | $ | 212,104 | | | $ | 59,393 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Beginning balance, January 1, 2015 | | $ | 13,628 | | | | $ | 74,717 | | | | $ | 82,949 | | | | $ | 171,294 | | | | $ | 6 | | | | $ | - | | | | $ | 171,300 | | | $ | 20,049 | | | Transfers into Level 3 (3) | | | 16,326 | | | | | 5,729 | | | | | 15,685 | | | | | 37,740 | | | | | - | | | | | - | | | | | 37,740 | | | | - | | | Transfers out of Level 3 (3) | | | - | | | | | (1,351 | ) | | | | (9,663 | ) | | | | (11,014 | ) | | | | - | | | | | - | | | | | (11,014 | ) | | | - | | | Total gains or losses | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net realized investment gains(losses) included in net income related tofinancial assets | | | - | | | | | 1,087 | | | | | - | | | | | 1,087 | | | | | (3 | ) | | | | - | | | | | 1,084 | | | | - | | | Net realized (gains) lossesincluded in net incomerelated to financial liabilities | | | - | | | | | - | | | | | - | | | | | - | | | | | - | | | | | - | | | | | - | | | | (2,528 | ) | | Net unrealized investment gains(losses) included in othercomprehensive income | | | 782 | | | | | (1,935 | ) | | | | (854 | ) | | | | (2,007 | ) | | | | 4 | | | | | - | | | | | (2,003 | ) | | | - | | | Purchases | | | - | | | | | - | | | | | - | | | | | - | | | | | - | | | | | - | | | | | - | | | | - | | | Issuances | | | - | | | | | - | | | | | - | | | | | - | | | | | - | | | | | - | | | | | - | | | | 23,595 | | | Sales | | | - | | | | | (476 | ) | | | | - | | | | | (476 | ) | | | | (1 | ) | | | | - | | | | | (477 | ) | | | - | | | Settlements | | | - | | | | | - | | | | | - | | | | | - | | | | | - | | | | | - | | | | | - | | | | - | | | Paydowns, maturities and distributions | | | (357 | ) | | | | (10,196 | ) | | | | (12,651 | ) | | | | (23,204 | ) | | | | - | | | | | - | | | | | (23,204 | ) | | | (2,095 | ) | | Ending balance, December 31, 2015 | | $ | 30,379 | | | | $ | 67,575 | | | | $ | 75,466 | | | | $ | 173,420 | | | | $ | 6 | | | | $ | - | | | | $ | 173,426 | | | $ | 39,021 | |
| (1) | Represents embedded derivatives, all related to the Company’soffers FIA 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 years ended December 31, 2016 and 2015 were attributable to changes in the availability of observable market information for individual fixed maturity securities and short-term investments. The Company’s policy is to recognize transfers into and transfers out of the levels as having occurred at the end of the reporting period in which the transfers were determined. |
At December 31, 2016, the Company impaired a Level 3 security for a $1,833 realized loss. At December 31, 2015, there were no net realized investment gains or losses included in earnings that were attributable to changes in the fair value of Level 3 assets still held. For the years ended December 31, 2016 and 2015, realized gains/(losses) of ($5,011) and $2,528, respectively, were included in earnings that were attributable to the changes in the fair value of Level 3 liabilities (embedded derivatives) still held.
NOTE 3 - Fair Value of Financial Instruments-(Continued)
The valuation techniques and significant unobservable inputs used in the fair value measurement for financial assets classified as Level 3 are subject to the control processes as previously described in this note for “Investments”. 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 maturities.
The sensitivity of the estimated fair values to changes in the significant unobservable inputs for fixed maturities and equity securities included in Level 3 generally relates to interest rate spreads, illiquidity premiums and default rates. Significant spread widening in isolation will adversely impact the overall valuation, while significant spread tightening will lead to substantial valuation increases. Significant increases (decreases) in illiquidity premiums in isolation will result in substantially lower (higher) valuations. Significant increases (decreases) in expected default rates in isolation will result in substantially lower (higher) valuations.
Financial Instruments Not Carried at Fair Value; Disclosure Required
The Company has various other financial assets and financial liabilities used in the normal course of business that are not carried at fair value, but for which fair value disclosure is required. The following table presents the carrying value, fair value and fair value hierarchy of these financial assets and financial liabilities.
| | | | | | | | | Fair Value Measurements at | | | | | Carrying | | | Fair | | | Reporting Date Using | | | | | Amount | | | Value | | | Level 1 | | | Level 2 | | | Level 3 | | | December 31, 2016 | | | | | | | | | | | | | | | | | | | | | | Financial Assets | | | | | | | | | | | | | | | | | | | | | | Investments | | | | | | | | | | | | | | | | | | | | | | Other investments | | $ | 151,965 | | | $ | 156,536 | | | $ | - | | | $ | - | | | $ | 156,536 | | | Financial Liabilities | | | | | | | | | | | | | | | | | | | | | Investment contract and life policyreserves, fixed annuity
contracts | | | 4,360,456 | | | | 4,280,528 | | | | - | | | | - | | | | 4,280,528 | | Investment contract and life policyreserves, account values on
life contracts | | | 79,591 | | | | 85,066 | | | | - | | | | - | | | | 85,066 | | | Other policyholder funds | | | 649,557 | | | | 649,557 | | | | - | | | | 575,253 | | | | 74,304 | | | Long-term debt | | | 247,209 | | | | 248,191 | | | | 248,191 | | | | - | | | | - | | | | | | | | | | | | | | | | | | | | | | | | | December 31, 2015 | | | | | | | | | | | | | | | | | | | | | | Financial Assets | | | | | | | | | | | | | | | | | | | | | | Investments | | | | | | | | | | | | | | | | | | | | | | Other investments | | $ | 148,759 | | | $ | 153,228 | | | $ | - | | | $ | - | | | $ | 153,228 | | | Financial Liabilities | | | | | | | | | | | | | | | | | | | | | Investment contract and life policyreserves, fixed annuity
contracts | | | 4,072,102 | | | | 4,049,840 | | | | - | | | | - | | | | 4,049,840 | | Investment contract and life policyreserves, account values on
life contracts | | | 77,429 | | | | 81,360 | | | | - | | | | - | | | | 81,360 | | | Other policyholder funds | | | 653,631 | | | | 653,631 | | | | - | | | | 575,104 | | | | 78,527 | | | Long-term debt | | | 246,975 | | | | 252,700 | | | | 252,700 | | | | - | | | | - | |
NOTE 4 - Derivative Instruments
In February 2014, the Company began offering fixed indexed annuity products (“FIA”), 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. In October 2015, theThe Company began offering indexed universal lifealso offers IUL products (“IUL”), which also 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 the changechanges in fair value included in Net realized investment gains and losses,(losses), a component of revenues, in the Consolidated Statements of Operations.
| | | | | Horace Mann Educators Corporation | | Annual Report on Form 10-K 103 |
NOTE 5 - Derivatives (continued)
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 whichthat may arise after the next deposit anniversary date. On the respective anniversary dates of the indexed deposits, the index used to compute the annual index credit is reset and new one-year call options are purchased to fund the next annual index credit. The cost of these purchases is managed through the terms of the FIA and IUL contracts, which permit changes to index return caps, participation rates and/or asset fees, subject to guaranteed minimums on each contract’scontract's anniversary date. By adjusting the index return caps, participation rates or asset fees, crediting rates generally can be managed except in cases where the contractual features would prevent further modifications. The future annual index credits on fixed indexed annuitiesFIA are treatedaccounted for as a “series"series of embedded derivatives”derivatives" over the expected life of the applicable contract with a corresponding reserve recorded.recognized. For the indexed universal life contract,IUL, the embedded derivative represents a single year liability for the index return. The Company carries all derivative instruments as assets or liabilitiesderivatives at fair value in the Consolidated Balance Sheets at fair value.Sheets. The Company elected to not use hedge accounting for derivative transactions related to the FIA and IUL products. As a result, the Company recordsrecognizes the purchased call options and the embedded derivatives related to the provision of a contingent return at fair value, with changes in the fair value of the derivatives recognized immediately as Net investment gains (losses) in the Consolidated Statements of Operations. The fair values of derivative instruments,derivatives, including derivative instrumentsderivatives embedded in FIA and IUL contracts, are presented in the Consolidated Balance Sheets were as follows: | | | December 31, | | | | | 2016 | | 2015 | | | Assets | | | | | | | | | | Derivative instruments, included in Short-term and other investments | | $ | 8,694 | | | | $ | 2,501 | | | | | | | | | | | | | | | | Liabilities | | | | | | | | | | | Fixed indexed annuities - embedded derivatives,
included in Other policyholder funds | | | 59,393 | | | | | 39,021 | | | Indexed universal life - embedded derivatives,
included in Investment contract and life policy reserves | | | 158 | | | | | 14 | | |
| | | | | | | | | | | ($ in thousands) | | December 31, | | | | 2019 | | 2018 | | Assets | | | | | | Derivatives, included in Short-term and other investments | | $ | 13,239 |
| | $ | 2,647 |
| | | | | | | | Liabilities | | | | | Fixed indexed annuities - embedded derivatives, included in Other policyholder funds | | 93,733 |
| | 78,700 |
| Indexed universal life - embedded derivatives, included in Investment contract and policy reserves | | 1,314 |
| | 248 |
|
NOTE 4 - Derivative Instruments-(Continued)
In general, the change in the fair value of the embedded derivatives related to the fixed indexed annuitiesFIA 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 thosethe embedded derivatives represent the rights of the policyholder to receive index credits over the entire period the fixed indexed annuitiesFIA 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: | | | Year Ended December 31, | | | | | 2016 | | | 2015 | | | 2014 | | | Change in fair value of derivatives (1): | | | | | | | | | | | | | | Revenues | | | | | | | | | | | | | | Net realized investment gains (losses) | | $ | 4,024 | | | $ | (1,483 | ) | | $ | 995 | | | | | | | | | | | | | | | | | Change in fair value of embedded derivatives: | | | | | | | | | | | | | | Revenues | | | | | | | | | | | | | | Net realized investment gains (losses) | | | (5,076 | ) | | | 2,529 | | | | (1,157 | ) |
| | | | | | | | | | | | | | | ($ in thousands) | | Years Ended December 31, | | | | 2019 | | 2018 | | 2017 | Change in fair value of derivatives: (1) | | | | | | | | Revenues | | | | | | | | Net investment gains (losses) | | $ | 9,493 |
| | $ | (4,112 | ) | | $ | 14,867 |
| | | | | | | | | | Change in fair value of embedded derivatives: | | | | | | | | Revenues | | | | | | | | Net investment gains (losses) | | (13,576 | ) | | 7,931 |
| | (13,410 | ) |
| | (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. |
| | | | | 104 Annual Report on Form 10-K | | Horace Mann Educators Corporation |
NOTE 5 - Derivatives (continued)
The Company’sCompany'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/Moody’sS&P/Moody's Investors Service, Inc. (Moody's) long-term credit rating of “BBB+"BBB+/ Baa1”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 cash 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: | | | December 31, 2016 | | | December 31, 2015 | | | | | Credit Rating (1) | | Notional | | | Fair | | | | Notional | | | | Fair | | | Counterparty | | S&P | | Moody’s | | Amount | | | Value | | | | Amount | | | | Value | | | | | | | | | | | | | | | | | | | | | | | | | Bank of America, N.A. | | | A+ | | | A1 | | $ | 38,500 | | | $ | 1,934 | | | | $ | 17,000 | | | | $ | 5 | | | Barclays Bank PLC | | | A- | | | A1 | | | 66,800 | | | | 1,543 | | | | | 7,600 | | | | | 137 | | | Citigroup Inc. | | | BBB+ | | | Baa1 | | | - | | | | - | | | | | 17,300 | | | | | 845 | | | Credit Suisse International | | | A | | | A1 | | | 65,200 | | | | 4,281 | | | | | 12,000 | | | | | 167 | | | Societe Generale | | | A | | | A2 | | | 15,600 | | | | 936 | | | | | 80,800 | | | | | 1,347 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total | | | | | | | | $ | 186,100 | | | $ | 8,694 | | | | $ | 134,700 | | | | $ | 2,501 | |
| | | | | | | | | | | | | | | | | | | | | | | ($ in thousands) | | December 31, 2019 | | December 31, 2018 | | | | Credit Rating | | Notional | | Fair | | Notional | | Fair | | Counterparty | | S&P | | Moody's | | Amount | | Value | | Amount | | Value | | Bank of America, N.A. | | A+ | | Aa2 | | $ | 174,900 |
| | $ | 8,523 |
| | $ | 144,500 |
| | $ | 870 |
| | Barclays Bank PLC | | A | | A2 | | 115,300 |
| | 3,348 |
| | 28,500 |
| | 247 |
| | Citigroup Inc. | | BBB+ | | A3 | | — |
| | — |
| | — |
| | — |
| | Credit Suisse International | | A+ | | A1 | | — |
| | — |
| | 16,100 |
| | 55 |
| | Societe Generale | | A | | A1 | | 27,800 |
| | 1,369 |
| | 89,100 |
| | 1,475 |
| | Total | | | | | | $ | 318,000 |
| | $ | 13,240 |
| | $ | 278,200 |
| | $ | 2,647 |
|
| (1) | As assigned by Standard & Poor’s Corporation (“S&P”) and Moody’s Investors Service, Inc. (“Moody’s”). |
NOTE 4 - Derivative Instruments-(Continued)
As of December 31, 20162019 and 2015,2018, the Company held $8,824$14.3 million and $2,617,$1.9 million, respectively, of cash and securities received from counterparties for derivative collateral, which is included in Other liabilities on the Consolidated Balance Sheets. This derivative collateral limits the Company’sCompany'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$0.3 million per counterparty.
NOTE 56 - Deposit Asset on Reinsurance 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 on the Company's Consolidated Balance Sheet. 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.
| | | | | Horace Mann Educators Corporation | | Annual Report on Form 10-K 105 |
NOTE 7 - 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 Note 1 for further description of impairment testing. The annuity reinsurance transaction described in Note 6 triggered a requirement to evaluate the goodwill associated with the annuity business of the Retirement reporting unit. For the evaluation, the fair value of the Retirement reporting unit was measured using a discounted cash flow method. The carrying value exceeded the fair value, resulting in a $28.0 million non-cash goodwill impairment charge during the second quarter of 2019. In the second quarter of 2019, the Company adopted guidance to eliminate Step 2 of the goodwill impairment test and as such, the goodwill impairment charge represented the entire balance of the goodwill associated with the annuity business of the Retirement reporting unit. The goodwill impairment charge was reported as Other expense - goodwill impairment in the Consolidated Statement of Operations. The changes in the carrying amount of goodwill by reportable segment for the year ended December 31, 2019 were as follows: | | | | | | | | | | | | | | | | | | | ($ in thousands) | | December 31, 2018 | | Impairment | | Acquisitions | | December 31, 2019 | | Property and Casualty | | $ | 9,460 |
| | $ | — |
| | $ | — |
| | $ | 9,460 |
| | Supplemental | | — |
| | — |
| | 19,621 |
| | 19,621 |
| | Retirement | | 28,025 |
| | (28,025 | ) | | 10,087 |
| | 10,087 |
| | Life | | 9,911 |
| | — |
| | — |
| | 9,911 |
| | Total | | $ | 47,396 |
| | $ | (28,025 | ) | | $ | 29,708 |
| | $ | 49,079 |
|
As of December 31, 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 $14.1 million and the acquisition of NTA resulted in initial recognition of definite-lived intangible assets subject to amortization in the amount of $160.4 million. As of December 31, 2019 the outstanding amounts of definite-lived intangible assets subject to amortization were as follows: | | | | | | | | | ($ 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 | | | | (3,697 | ) | | Value of distribution acquired | | | | (1,871 | ) | | Value of agency relationships | | | | (1,489 | ) | | Value of customer relationships | | | | (1,733 | ) | | Total | | | | (8,790 | ) | | Net intangible assets subject to amortization: | | | | $ | 165,686 |
|
| | | | | 106 Annual Report on Form 10-K | | Horace Mann Educators Corporation |
NOTE 7 - Goodwill and Intangible Assets, net (continued)
In regard to the definite-lived intangible assets in the table above, the VOBA intangible asset represents the difference between the fair value of insurance contracts and insurance policy reserves measured in accordance with the Company's accounting policies for insurance contracts acquired. VOBA was based on an actuarial estimate of the present value of future distributable earnings for insurance in force as of the acquisition date. The VODA intangible asset represents the present value of future business to be written by the existing distribution channel. 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, | | | | 2020 | | $ | 14,488 |
| | 2021 | | 13,411 |
| | 2022 | | 12,433 |
| | 2023 | | 11,577 |
| | 2024 | | 10,805 |
| | Thereafter | | 102,972 |
| | Total | | $ | 165,686 |
|
The VOBA intangible asset is being amortized by product based on the present value of future premiums to be received. The VODA intangible asset in respect to the acquisition of NTA is being amortized on a straight-line basis. The VODA intangible asset in respect to the acquisition of BCG is being amortized based on the present value of future profits to be received. 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 December 31, 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 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. NOTE 8 - Property and Casualty Unpaid Claims and Claim Expenses The following table is a summary reconciliation of the beginning and ending Property and Casualty unpaid claims and claim expense reserves for the periods indicated. The table presents reserves on both gross and net (after reinsurance) bases.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 year gross reserve (before reinsurance) balances and the reinsurance recoverable balances are reflected on a gross basis in the Consolidated Balance Sheets. | | | Year Ended December 31, | | | | | | 2016 | | | | | 2015 | | | | | 2014 | | | | Property and Casualty segment | | | | | | | | | | | | | | Gross reserves, beginning of year (1) | | $ | 301,569 | | | $ | 311,097 | | | $ | 275,809 | | | Less: reinsurance recoverables | | | 50,332 | | | | 43,740 | | | | 14,107 | | | Net reserves, beginning of year (2) | | | 251,237 | | | | 267,357 | | | | 261,702 | | | Incurred claims and claim expenses: | | | | | | | | | | | | | | Claims occurring in the current year | | | 471,099 | | | | 432,811 | | | | 416,512 | | | Decrease in estimated reserves for | | | | | | | | | | | | | | claims occurring in prior years (3) | | | (7,000 | ) | | | (12,500 | ) | | | (17,000 | ) | | Total claims and claim expenses incurred (4) | | | 464,099 | | | | 420,311 | | | | 399,512 | | | Claims and claim expense payments for claims occurring during: | | | | | | | | | | | | | | Current year | | | 323,025 | | | | 294,449 | | | | 273,699 | | | Prior years | | | 145,753 | | | | 141,982 | | | | 120,158 | | | Total claims and claim expense payments | | | 468,778 | | | | 436,431 | | | | 393,857 | | | Net reserves, end of year (2) | | | 246,558 | | | | 251,237 | | | | 267,357 | | | Plus: reinsurance recoverables | | | 61,199 | | | | 50,332 | | | | 43,740 | | | Gross reserves, end of year (1) | | $ | 307,757 | | | $ | 301,569 | | | $ | 311,097 | |
| | | | | Horace Mann Educators Corporation | | Annual Report on Form 10-K 107 |
NOTE 8 - Property and Casualty Unpaid Claims and Claim Expenses (continued)
| | | | | | | | | | | | | | | ($ in thousands) | | Years Ended December 31, | | | | 2019 | | 2018 | | 2017 | | Property and Casualty segment | | | | | | | Gross reserves, beginning of year (1) | | $ | 367,180 |
| | $ | 319,182 |
| | $ | 307,757 |
| | Less: reinsurance recoverables | | 89,725 |
| | 57,409 |
| | 61,199 |
| Net reserves, beginning of year (2) | | 277,455 |
| | 261,773 |
| | 246,558 |
| | Incurred claims and claim expenses: | | | | | | | | Claims occurring in the current year | | 483,062 |
| | 547,959 |
| | 498,989 |
| Decrease in estimated reserves for claims occurring in prior years (3) | | (7,500 | ) | | (300 | ) | | (2,700 | ) | Total claims and claim expenses incurred (4) | | 475,562 |
| | 547,659 |
| | 496,289 |
| | Claims and claim expense payments for claims occurring during: | | | | | | | | Current year | | 329,475 |
| | 369,194 |
| | 333,385 |
| | Prior years | | 157,072 |
| | 162,783 |
| | 147,689 |
| | Total claims and claim expense payments | | 486,547 |
| | 531,977 |
| | 481,074 |
| Net reserves, end of year (2) | | 266,470 |
| | 277,455 |
| | 261,773 |
| | Plus: reinsurance recoverables | | 120,506 |
| | 89,725 |
| | 57,409 |
| Gross reserves, end of year (1) | | $ | 386,976 |
| | $ | 367,180 |
| | $ | 319,182 |
|
| | (1) | Unpaid claims and claim expenses as reported in the Consolidated Balance Sheets also include reserves for theSupplemental, Retirement and Life of $55.9 million, $29.5 million and Retirement segments of $22,131, $22,151 and $14,687$28.6 million as of December 31, 2016, 20152019, 2018 and 2014,2017, respectively, in addition to Property and Casualty segment reserves. |
| | (2) | Reserves are 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. Also refer to the paragraphs below for additional information regarding the reserve development recorded in 2016, 20152019, 2018 and 2014.2017. |
| | (4) | Benefits, claims and settlement expenses as reported in the Consolidated Statements of Operations also include amounts for theSupplemental, Retirement and Life of $109.5 million, $89.9 million, and Retirement segments of $76,905, $76,053 and $68,914$86.0 million for the years ended December 31, 2016, 20152019, 2018 and 2014,2017, respectively, in addition to the Property and Casualty segment amounts. |
NOTE 5 -Underwriting results for Property and Casualty Unpaid Claims and Claim Expenses-(Continued)
Underwriting results of the Property and Casualty segment are significantly influenced by estimates of the Company's ultimate liability for insured events. There is a high degree of uncertainty inherent in the estimates of ultimate losses underlying the liability for unpaid claims and claim settlement expenses. This inherent uncertainty is particularly significant for liability-related exposures due to the extended period, often many years, thatwhich transpires between a loss event, receipt of related claims data from policyholders and ultimate settlement of the claim. Reserves for Property and Casualty claims include provisions for payments to be made on reported claims (“case reserves”)(case reserves), IBNR claims incurred but not yet reported (“IBNR”) and associated settlement expenses (together, “loss reserves”)loss reserves). The process by which these reserves are established requires reliance upon estimates based on known facts and on interpretations of circumstances, including the Company's experience with similar cases and historical trends involving claim payments and related patterns, pending levels of unpaid claims and product mix, as well as other factors including court decisions, economic conditions, public attitudes and medical costs.
The Company believes the Property and Casualty loss reserves are appropriately established based on available facts, laws, and regulations. The Company calculates and records a single best estimate of the reserve (which is equal to the actuarial point estimate) as of each balance sheetreporting date, for each line of business and its coverages for reported losses and for IBNR losses and as a result believes no other estimate is better than the recordedrecognized amount. Due to uncertainties involved, the ultimate cost of losses may vary materially from recordedrecognized amounts. The Company continually updates loss estimates using both quantitative and qualitative information from its reserving actuaries and information derived from other sources. Adjustments may be required as information develops which varies from experience, or, in some cases, augments data which previously were not considered sufficient for use in determining liabilities. The effects of these adjustments may be significant and are charged or credited to income in the period in which the adjustments are made. Numerous risk factors will affect more than one product line. One of these factors is changes in claim department practices, including claim closure rates, number of claims closed without payment, the use of third-party claim adjusters and the level of needed case reserve estimated by the adjuster. Other risk factors include changes in claim frequency, changes in claim severity, regulatory and legislative actions, court actions, changes in economic conditions and trends (e.g., medical costs, labor rates and the cost of materials), the occurrence of unusually large or frequent catastrophic loss events, timeliness of claim reporting, the state in which the claim occurred and degree of claimant fraud. The extent of the impact of a risk factor will also vary by coverages within
| | | | | 108 Annual Report on Form 10-K | | Horace Mann Educators Corporation |
NOTE 8 - Property and Casualty Unpaid Claims and Claim Expenses (continued)
a product line. Individual risk factors are also subject to interactions with other risk factors within product line coverages. While all product lines are exposed to these risks, there are some loss types or product lines for which the financial effect will be more significant. For instance, given the relatively large proportion (approximately 80%80.0% as of December 31, 2016)2019) of the Company’sCompany's reserves that are in the longer-tail automobile liability coverages, regulatory and court actions, changes in economic conditions and trends, and medical costs could be expected to impact this product line more extensively than others. NOTE 5 - Property and Casualty Unpaid Claims and Claim Expenses-(Continued)
Reserves are established for claims as they occur for each line of business based on estimates of the ultimate cost to settle the claims. The actual loss results are compared to prior estimates and differences are recorded as reestimates.re-estimates. The primary actuarial techniques (development of paid loss dollars, development of reported loss dollars, methods based on expected loss ratios and methods utilizing frequency and severity of claims) used to estimate reserves and provide for losses are applied to actual paid losses and reported losses (paid losses plus individual case reserves set by claim adjusters) for an accident year to create an estimate of how losses are likely to develop over time. An accident year refers to classifying claims based on the year in which the claimclaims occurred. For estimating short-tail coverage reserves (e.g. , homeowners and automobile physical damage), which comprise approximately 15%20.0% of the Company’sCompany's total loss reserves as of December 31, 2016,2019, the primary actuarial technique utilized is the development of paid loss dollars due to the relatively quick claim settlement period. As it relates to estimating long-tail coverage reserves (primarily related to automobile liability), which comprise approximately 85%80.0% of the Company’sCompany's total loss reserves as of December 31, 2016,2019, the primary actuarial technique utilized is the development of reported loss dollars due to the relatively long claim settlement period. In all of the loss estimation techniques referred to above, a ratio (development factor) is calculated which compares current results to results in the prior period for each accident year. Various development factors, based on historical results, are multiplied by the current experience to estimate the development of losses of each accident year from the current time period into the next time period. The development factors for the next time period for each accident year are compounded over the remaining calendar years to calculate an estimate of ultimate losses for each accident year. Occasionally, unusual aberrations in loss patterns are caused by factors such as changes in claim reporting, settlement patterns, unusually large losses, process changes, legal or regulatory environment changes, and other influences. In these instances, analyses of alternate development factor selections are performed to evaluate the effect of these factors and actuarial judgment is applied to make appropriate development factor assumptions needed to develop a best estimate of ultimate losses. Paid losses are then subtracted from estimated ultimate losses to determine the indicated loss reserves. The difference between indicated reserves and recorded reserves is the amount of reserve reestimate.re-estimate. Reserves are reestimatedre-estimated quarterly. When new development factors are calculated from actual losses, and they differ from estimated development factors used in previous reserve estimates, assumptions about losses and required reserves are revised based on the new development factors. Changes to reserves are recordedrecognized in the period in which development factor changes result in reserve reestimates.NOTE 5 - Property and Casualty Unpaid Claims and Claim Expenses-(Continued)
Claim count estimates are also established for claims as they occur for each line of business based on estimates of the ultimate claim counts. (These counts are derived by counting the number of claimants by insurance coverage.) The primary actuarial techniques (development of paid claim counts and development of reported claim counts) used to estimate ultimate claim counts are applied to actual paid claim counts and reported claim counts (paid claims plus individual unpaid claims set by claim adjusters) for an accident year to create an estimate of how claims are likely to develop over time. An accident year refers to classifying claims based on the year in which the claim occurred. The ultimate claim count generally gives equal consideration to the results of the two actuarial techniques described. Occasionally, unusual aberrations in claim reporting patterns or claims payment patterns may occur. In these instances, analyses of alternate development factor selections are performed to evaluate the effect of these factors and actuarial judgment is applied to make appropriate development factor assumptions needed to develop a best estimate of ultimate claims. See tables on the following pages of Note 58 for details of the average annual percentage payout of incurred claims by age, also referred to as a history of claims duration and tables illustrating the incurred and paid claims development information by accident year on a net basis for the lines of Homeowners, Auto Liability, and Auto Physical Damage, which represents over 97%99.0% of the Company’sCompany's incurred losses for 2016.2019 .
| | | | | Horace Mann Educators Corporation | | Annual Report on Form 10-K 109 |
NOTE 8 - Property and Casualty Unpaid Claims and Claim Expenses (continued)
Numerous actuarial estimates of the types described above are prepared each quarter to monitor losses for each line of business, including the line’sline's individual coverages; for reported losses and IBNR. Often, several different estimates are prepared for each detailed component, incorporating alternative analyses of changing claim settlement patterns and other influences on losses, from which the Company selects the best estimate for each component, occasionally incorporating additional analyses and actuarial judgment, as described above. These estimates also incorporate the historical impact of inflation into reserve estimates, the implicit assumption being that a multi-year average development factor represents an adequate provision. Based on the Company’sCompany's review of these estimates, as well as the review of the independent reserve studies, the best estimate of required reserves for each line of business, including the line’sline's individual coverages, is determined by management and is recordedrecognized for each accident year, then the required reserves for each component are summed to create the reserve balances carried on the Company’sCompany's Consolidated Balance Sheets. Based on the Company’sCompany's products and coverages, historical experience, and various actuarial methodologies used to develop reserve estimates, the Company estimates that the potential variability of the Property and Casualty loss reserves within a reasonable probability of other possible outcomes may be approximately plus or minus 6%6.0% of reserves, which equates to plus or minus approximately $10,000$13.0 million of net income as of December 31, 2016.2019. Although this evaluation reflects the most likely outcomes, it is possible the final outcome may fall below or above these estimates. NOTE 5 - Property and Casualty Unpaid Claims and Claim Expenses-(Continued)
Net favorable development of total reserves for Property and Casualty claims occurring in prior years was $17,000$7.5 million in 2014, $12,5002019, $0.3 million in 20152018 and $7,000$2.7 million in 2016. The favorable development in 2014 was predominantly the result of favorable frequency and severity trends in automobile liability loss emergence for accident years 2011 and prior.2017. In 2015,2019, the favorable development was predominantly the result of favorable frequency and severity trends in automobile liability loss emergenceAuto for accident years 2013 and prior, as well as favorable severity trends in property for accident years 2013 and prior.year 2018. In 2016,2018, the favorable development was predominantly the result of favorable severity trends in property for accident years 20142016 and prior. In 2017, the favorable development was predominantly the result of favorable severity trends in property for accident years 2015 and prior. The Company completes a detailed study of Property and Casualty reserves based on information available at the end of each quarter and year. Trends of reported losses (paid amounts and case reserves on claims reported to the Company) for each accident year are reviewed and ultimate loss costs for those accident years are estimated. The Company engages an independent property and casualty actuarial consulting firm to prepare an independent study of the Company's Property and Casualty reserves at December 31st of each year. The result of the independent actuarial study at December 31, 20162019 was consistent with management’smanagement's analysis and selected estimates and did not result in any adjustments to the Company’s recordedCompany's Property and Casualty reserves.reserves recognized. At the time each of the reserve analyses was performed, the Company believed that each estimate was based upon sound methodology and such methodologies were appropriately applied and that there were no trends which indicated the likelihood of future loss reserve development. The financial impact of the net reserve development was therefore accounted for in the period that the development was determined. No other adjustments were made in the determination of the liabilities during the periods covered by these consolidated financial statements. Management believes that, based on data currently available, it has reasonably estimated the Company's ultimate losses. Below is the average annual percentage payout of incurred claims by age, also referred to as a history of claims duration: | Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance | | Years | | 1 | | | 2 | | | 3 | | | 4 | | | 5 | | | 6 | | | 7 | | | 8 | | | 9 | | | 10 | | | Homeowners | | | 76.8 | % | | | 18.4 | % | | | 2.8 | % | | | 1.4 | % | | | 0.7 | % | | | 0.2 | % | | | 0.1 | % | | | - | | | | 0.1 | % | | | - | | | Auto liability | | | 41.0 | % | | | 34.3 | % | | | 13.8 | % | | | 6.3 | % | | | 2.4 | % | | | 1.0 | % | | | 0.4 | % | | | 0.2 | % | | | 0.1 | % | | | 0.1 | % | | Auto physical damage | | | 95.1 | % | | | 4.9 | % | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance | | Years | | 1 |
| | 2 |
| | 3 |
| | 4 |
| | 5 |
| | 6 |
| | 7 |
| | 8 |
| | 9 |
| | 10 |
| | Homeowners | | 79.5 | % | | 16.6 | % | | 2.2 | % | | 1.0 | % | | 0.4 | % | | 0.3 | % | | — |
| | — |
| | — |
| | — |
| | Auto liability | | 40.8 | % | | 34.9 | % | | 13.8 | % | | 6.1 | % | | 3.0 | % | | 1.0 | % | | 0.3 | % | | 0.1 | % | | — |
| | — |
| | Auto physical damage | | 95.6 | % | | 4.4 | % | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| | | | | 110 Annual Report on Form 10-K | | Horace Mann Educators Corporation |
NOTE 8 - Property and Casualty Unpaid Claims and Claim Expenses (continued)
The following tables illustrate the incurred and paid claims development by accident year on a net basis for the lines of homeowners, auto liability and auto physical damage. Conditions and trends that have affected the development of these reserves in the past will not necessarily recurreoccur in the future. It may not be appropriate to use this cumulative history in the projection of future performance. The information about incurred and paid claims development for the years ended December 31, 2010 to 2018 is presented as unaudited supplementary information. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ($ in thousands) | | Homeowners | | | | Incurred Claims and Allocated Claim Adjustment Expense, Net of Reinsurance | | | | | | Years Ended December 31, | | As of December 31, 2019 | | | | | | | | | | | | | | | | | | | | | | | | Total of Incurred- But-Not-Reported Liabilities Plus Expected Development on Reported Claims | | Cumulative
Number of
Reported Claims | | | | | | | | | | | | | | | | | | | | | | | | | | Accident | | Unaudited | | Unaudited | | Unaudited | | Unaudited | | Unaudited | | Unaudited | | Unaudited | | Unaudited | | Unaudited | | | | | | Year | | 2010 | | 2011 | | 2012 | | 2013 | | 2014 | | 2015 | | 2016 | | 2017 | | 2018 | | 2019 | | | | 2010 | | $ | 140,994 |
| | $ | 136,907 |
| | $ | 133,358 |
| | $ | 133,235 |
| | $ | 133,216 |
| | $ | 133,136 |
| | $ | 132,859 |
| | $ | 132,905 |
| | $ | 132,627 |
| | $ | 132,627 |
| | $ | — |
| | 25,150 |
| | 2011 | | |
| | 150,141 |
| | 150,334 |
| | 150,791 |
| | 148,860 |
| | 148,755 |
| | 148,414 |
| | 148,370 |
| | 148,079 |
| | 148,067 |
| | — |
| | 29,531 |
| | 2012 | | |
| | |
| | 108,754 |
| | 109,156 |
| | 109,360 |
| | 106,486 |
| | 106,308 |
| | 106,348 |
| | 106,000 |
| | 106,028 |
| | — |
| | 21,578 |
| | 2013 | | |
| | |
| | |
| | 105,584 |
| | 107,489 |
| | 103,982 |
| | 102,407 |
| | 102,345 |
| | 101,769 |
| | 101,709 |
| | — |
| | 19,221 |
| | 2014 | | |
| | |
| | |
| | |
| | 111,647 |
| | 113,505 |
| | 109,059 |
| | 106,844 |
| | 106,554 |
| | 106,458 |
| | 59 |
| | 20,084 |
| | 2015 | | |
| | |
| | |
| | |
| | |
| | 111,706 |
| | 115,134 |
| | 114,404 |
| | 114,053 |
| | 115,050 |
| | 276 |
| | 18,714 |
| | 2016 | | |
| | |
| | |
| | |
| | |
| | |
| | 115,931 |
| | 118,604 |
| | 117,009 |
| | 117,933 |
| | 280 |
| | 19,853 |
| | 2017 | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | 126,285 |
| | 129,818 |
| | 132,666 |
| | 2,285 |
| | 19,827 |
| | 2018 | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | 166,793 |
| | 157,404 |
| | 4,170 |
| | 20,954 |
| | 2019 | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | 130,391 |
| | 16,842 |
| | 16,155 |
| | | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | Total | | $ | 1,248,333 |
| | |
| | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ($ in thousands) | | | | | | Homeowners | | | | | | Cumulative Paid Claims and Allocated Claim Adjustment Expense, Net of Reinsurance | | | | | | Years Ended December 31, | | | | | | Accident | | Unaudited | | Unaudited | | Unaudited | | Unaudited | | Unaudited | | Unaudited | | Unaudited | | Unaudited | | Unaudited | | | | | | | | Year | | 2010 | | 2011 | | 2012 | | 2013 | | 2014 | | 2015 | | 2016 | | 2017 | | 2018 | | 2019 | | | | | | 2010 | | $ | 98,190 |
| | $ | 124,326 |
| | $ | 129,790 |
| | $ | 132,246 |
| | $ | 132,523 |
| | $ | 132,604 |
| | $ | 132,599 |
| | $ | 132,602 |
| | $ | 132,602 |
| | $ | 132,602 |
| | | | | | 2011 | | |
| | 123,046 |
| | 142,846 |
| | 145,852 |
| | 146,908 |
| | 147,451 |
| | 148,026 |
| | 148,014 |
| | 148,069 |
| | 148,067 |
| | | | | | 2012 | | |
| | |
| | 84,260 |
| | 101,566 |
| | 104,203 |
| | 105,156 |
| | 105,561 |
| | 105,909 |
| | 105,993 |
| | 106,021 |
| | | | | | 2013 | | |
| | |
| | |
| | 76,890 |
| | 96,599 |
| | 99,361 |
| | 100,968 |
| | 101,527 |
| | 101,677 |
| | 101,709 |
| | | | | | 2014 | | |
| | |
| | |
| | |
| | 83,314 |
| | 103,030 |
| | 105,704 |
| | 106,081 |
| | 106,258 |
| | 106,388 |
| | | | | | 2015 | | |
| | |
| | |
| | |
| | |
| | 90,704 |
| | 109,303 |
| | 111,882 |
| | 113,321 |
| | 114,648 |
| | | | | | 2016 | | |
| | |
| | |
| | |
| | |
| | |
| | 95,772 |
| | 113,186 |
| | 115,053 |
| | 117,537 |
| | | | | | 2017 | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | 106,800 |
| | 128,518 |
| | 129,767 |
| | | | | | 2018 | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | 130,548 |
| | 152,356 |
| | | | | | 2019 | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | 103,790 |
| | | | | | | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | Total | | 1,212,885 |
| | | | | | | | | | | | | | | | | | | | | Outstanding prior to 2010 | | 32 |
| | | | | | | | |
| | |
| | |
| | |
| | |
| | |
| | |
| Prior years paid | | 668 |
| | | | | | | | | | | | | | | | | | | | | Liabilities for claims and claim adjustment expenses, net of reinsurance | | $ | 35,480 |
| | | | |
| | F-82 | | | Horace Mann Educators Corporation | | Annual Report on Form 10-K 111 |
NOTE 58 - Property and Casualty Unpaid Claims and Claim Expenses-(Continued)| Homeowners | | | | | Incurred Claims and Allocated Claim Adjustment Expense, Net of Reinsurance | | | | | Year Ended December 31, | | As of December 31, 2016 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total of Incurred- | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | But-Not-Reported | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Liabilities Plus | | | Cumulative | | | Accident | | Unaudited | | | Unaudited | | | Unaudited | | | Unaudited | | | Unaudited | | | Unaudited | | | Unaudited | | | Unaudited | | | Unaudited | | | Audited | | | Expected Development | | | Number of | | | Year | | 2007 | | | 2008 | | | 2009 | | | 2010 | | | 2011 | | | 2012 | | | 2013 | | | 2014 | | | 2015 | | | 2016 | | | on Reported Claims | | | Reported Claims | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2007 | | $ | 85,552 | | | $ | 85,725 | | | $ | 84,666 | | | $ | 85,605 | | | $ | 83,198 | | | $ | 83,266 | | | $ | 83,241 | | | $ | 83,090 | | | $ | 83,101 | | | $ | 83,111 | | | $ | - | | | | 19,298 | | | 2008 | | | | | | | 140,469 | | | | 136,743 | | | | 136,002 | | | | 139,743 | | | | 139,232 | | | | 139,511 | | | | 139,472 | | | | 139,348 | | | | 139,306 | | | | - | | | | 31,376 | | | 2009 | | | | | | | | | | | 113,274 | | | | 112,280 | | | | 112,970 | | | | 113,096 | | | | 113,357 | | | | 113,230 | | | | 113,216 | | | | 112,900 | | | | 22 | | | | 20,320 | | | 2010 | | | | | | | | | | | | | | | 140,994 | | | | 136,907 | | | | 133,358 | | | | 133,235 | | | | 133,216 | | | | 133,136 | | | | 132,859 | | | | 235 | | | | 23,624 | | | 2011 | | | | | | | | | | | | | | | | | | | 150,141 | | | | 150,334 | | | | 150,791 | | | | 148,860 | | | | 148,755 | | | | 148,414 | | | | 358 | | | | 27,676 | | | 2012 | | | | | | | | | | | | | | | | | | | | | | | 108,754 | | | | 109,156 | | | | 109,360 | | | | 106,486 | | | | 106,309 | | | | 502 | | | | 20,239 | | | 2013 | | | | | | | | | | | | | | | | | | | | | | | | | | | 105,584 | | | | 107,489 | | | | 103,982 | | | | 102,406 | | | | 1,023 | | | | 18,066 | | | 2014 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 111,647 | | | | 113,506 | | | | 109,058 | | | | 3,136 | | | | 18,400 | | | 2015 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 111,706 | | | | 115,134 | | | | 4,480 | | | | 17,054 | | | 2016 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 115,931 | | | | 11,737 | | | | 15,578 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total | | | $ | 1,165,428 | | | | | | | | | | | | | | | | | | | | | | Homeowners | | | | | | | | | | Cumulative Paid Claims and Allocated Claim Adjustment Expense, Net of Reinsurance | | | | | | | | | | Year Ended December 31, | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Accident | | Unaudited | | | Unaudited | | | Unaudited | | | Unaudited | | | Unaudited | | | Unaudited | | | Unaudited | | | Unaudited | | | Unaudited | | | Audited | | | | | | | | | | | Year | | 2007 | | | 2008 | | | 2009 | | | 2010 | | | 2011 | | | 2012 | | | 2013 | | | 2014 | | | 2015 | | | 2016 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2007 | | $ | 59,268 | | | $ | 79,566 | | | $ | 82,272 | | | $ | 82,862 | | | $ | 82,722 | | | $ | 82,977 | | | $ | 83,028 | | | $ | 83,028 | | | $ | 83,096 | | | $ | 83,096 | | | | | | | | | | | 2008 | | | | | | | 105,401 | | | | 130,888 | | | | 134,235 | | | | 136,923 | | | | 138,802 | | | | 138,992 | | | | 139,121 | | | | 139,224 | | | | 139,256 | | | | | | | | | | | 2009 | | | | | | | | | | | 81,570 | | | | 104,407 | | | | 108,217 | | | | 110,324 | | | | 112,554 | | | | 112,720 | | | | 112,827 | | | | 112,848 | | | | | | | | | | | 2010 | | | | | | | | | | | | | | | 98,190 | | | | 124,326 | | | | 129,790 | | | | 132,246 | | | | 132,523 | | | | 132,604 | | | | 132,599 | | | | | | | | | | | 2011 | | | | | | | | | | | | | | | | | | | 123,046 | | | | 142,846 | | | | 145,852 | | | | 146,908 | | | | 147,451 | | | | 148,026 | | | | | | | | | | | 2012 | | | | | | | | | | | | | | | | | | | | | | | 84,260 | | | | 101,566 | | | | 104,203 | | | | 105,156 | | | | 105,561 | | | | | | | | | | | 2013 | | | | | | | | | | | | | | | | | | | | | | | | | | | 76,890 | | | | 96,599 | | | | 99,361 | | | | 100,968 | | | | | | | | | | | 2014 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 83,314 | | | | 103,030 | | | | 105,703 | | | | | | | | | | | 2015 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 90,704 | | | | 109,303 | | | | | | | | | | | 2016 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 95,772 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total | | | | 1,133,132 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Outstanding prior to 2006 | | | | 18 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Prior years paid | | | | 23 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Liabilities for claims and claim adjustment expenses, net ofreinsurance | | | $ | 32,314 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ($ in thousands) | | Auto Liability | | | | Incurred Claims and Allocated Claim Adjustment Expense, Net of Reinsurance | | | | Years Ended December 31, | | As of December 31, 2019 | | | | | | | | | | | | | | | | | | | | | | | | Total of Incurred- But-Not-Reported Liabilities Plus Expected Development on Reported Claims | | Cumulative
Number of
Reported Claims | | | | | | | | | | | | | | | | | | | | | | | | | | Accident | | Unaudited | | Unaudited | | Unaudited | | Unaudited | | Unaudited | | Unaudited | | Unaudited | | Unaudited | | Unaudited | | | | | | Year | | 2010 | | 2011 | | 2012 | | 2013 | | 2014 | | 2015 | | 2016 | | 2017 | | 2018 | | 2019 | | | | 2010 | | $ | 157,712 |
| | $ | 160,058 |
| | $ | 156,369 |
| | $ | 154,222 |
| | $ | 152,483 |
| | $ | 151,653 |
| | $ | 149,818 |
| | $ | 149,425 |
| | $ | 149,542 |
| | $ | 149,481 |
| | $ | — |
| | 48,942 |
| | 2011 | | |
| | 150,803 |
| | 146,713 |
| | 145,735 |
| | 143,133 |
| | 142,488 |
| | 139,840 |
| | 138,891 |
| | 138,949 |
| | 138,849 |
| | 94 |
| | 45,976 |
| | 2012 | | |
| | |
| | 156,448 |
| | 153,815 |
| | 150,336 |
| | 149,346 |
| | 147,594 |
| | 145,847 |
| | 145,620 |
| | 145,515 |
| | 204 |
| | 45,984 |
| | 2013 | | |
| | |
| | |
| | 153,860 |
| | 152,858 |
| | 150,720 |
| | 150,657 |
| | 148,111 |
| | 147,993 |
| | 148,135 |
| | 575 |
| | 47,369 |
| | 2014 | | |
| | |
| | |
| | |
| | 155,105 |
| | 157,249 |
| | 158,470 |
| | 159,937 |
| | 159,794 |
| | 159,355 |
| | 665 |
| | 49,386 |
| | 2015 | | |
| | |
| | |
| | |
| | |
| | 165,517 |
| | 172,553 |
| | 177,021 |
| | 178,325 |
| | 178,654 |
| | 1,850 |
| | 50,618 |
| | 2016 | | |
| | |
| | |
| | |
| | |
| | |
| | 180,380 |
| | 184,440 |
| | 184,567 |
| | 186,568 |
| | 2,649 |
| | 51,995 |
| | 2017 | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | 187,983 |
| | 188,756 |
| | 188,625 |
| | 8,025 |
| | 48,906 |
| | 2018 | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | 200,314 |
| | 195,284 |
| | 26,931 |
| | 47,078 |
| | 2019 | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | 181,141 |
| | 64,778 |
| | 42,587 |
| | | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | Total | | $ | 1,671,607 |
| | |
| | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ($ in thousands) | | | | | | Auto Liability | | | | | | Cumulative Paid Claims and Allocated Claim Adjustment Expense, Net of Reinsurance | | | | | | Years Ended December 31, | | | | | | Accident | | Unaudited | | Unaudited | | Unaudited | | Unaudited | | Unaudited | | Unaudited | | Unaudited | | Unaudited | | Unaudited | | | | | | | | Year | | 2010 | | 2011 | | 2012 | | 2013 | | 2014 | | 2015 | | 2016 | | 2017 | | 2018 | | 2019 | | | | | | 2010 | | $ | 63,416 |
| | $ | 118,345 |
| | $ | 137,012 |
| | $ | 144,255 |
| | $ | 147,337 |
| | $ | 148,751 |
| | $ | 149,247 |
| | $ | 149,364 |
| | $ | 149,439 |
| | $ | 149,474 |
| | | | | | 2011 | | |
| | 61,070 |
| | 108,837 |
| | 126,812 |
| | 133,931 |
| | 136,906 |
| | 138,151 |
| | 138,358 |
| | 138,689 |
| | 138,692 |
| | | | | | 2012 | | |
| | |
| | 61,279 |
| | 109,574 |
| | 127,185 |
| | 138,641 |
| | 142,916 |
| | 144,622 |
| | 145,121 |
| | 145,184 |
| | | | | | 2013 | | |
| | |
| | |
| | 62,224 |
| | 108,856 |
| | 131,214 |
| | 139,954 |
| | 145,291 |
| | 146,770 |
| | 147,409 |
| | | | | | 2014 | | |
| | |
| | |
| | |
| | 61,329 |
| | 117,468 |
| | 139,463 |
| | 149,059 |
| | 155,758 |
| | 157,596 |
| | | | | | 2015 | | |
| | |
| | |
| | |
| | |
| | 70,836 |
| | 134,473 |
| | 157,980 |
| | 170,088 |
| | 174,495 |
| | | | | | 2016 | | |
| | |
| | |
| | |
| | |
| | |
| | 73,073 |
| | 140,901 |
| | 166,815 |
| | 177,834 |
| | | | | | 2017 | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | 70,682 |
| | 139,531 |
| | 166,614 |
| | | | | | 2018 | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | 77,528 |
| | 141,537 |
| | | | | | 2019 | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | 69,665 |
| | | | | | | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | Total | | 1,468,500 |
| | | | | | | | | | | | | | | | | | | | | Outstanding prior to 2010 | | 73 |
| | | | | | | | |
| | |
| | |
| | |
| | |
| | |
| | |
| Prior years paid | | (219 | ) | | | | | | | | | | | | | | | | | | | | | Liabilities for claims and claim adjustment expenses, net of reinsurance | | $ | 203,180 |
| | | | |
| | F-83 | | | 112 Annual Report on Form 10-K | | Horace Mann Educators Corporation |
NOTE 58 - Property and Casualty Unpaid Claims and Claim Expenses-(Continued)| Auto Liability | | | | | Incurred Claims and Allocated Claim Adjustment Expense, Net of Reinsurance | | | | | Year Ended December 31, | | As of December 31, 2016 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total of Incurred- | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | But-Not-Reported | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Liabilities Plus | | | Cumulative | | | Accident | | Unaudited | | | Unaudited | | | Unaudited | | | Unaudited | | | Unaudited | | | Unaudited | | | Unaudited | | | Unaudited | | | Unaudited | | | Audited | | | Expected Development | | | Number of | | | Year | | 2007 | | | 2008 | | | 2009 | | | 2010 | | | 2011 | | | 2012 | | | 2013 | | | 2014 | | | 2015 | | | 2016 | | | on Reported Claims | | | Reported Claims | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2007 | | $ | 148,884 | | | $ | 146,400 | | | $ | 144,661 | | | $ | 139,619 | | | $ | 138,148 | | | $ | 137,151 | | | $ | 136,817 | | | $ | 136,855 | | | $ | 136,745 | | | $ | 136,826 | | | $ | - | | | | 49,856 | | | 2008 | | | | | | | 144,694 | | | | 145,669 | | | | 142,279 | | | | 149,225 | | | | 141,666 | | | | 140,648 | | | | 139,938 | | | | 139,131 | | | | 138,975 | | | | 2 | | | | 47,932 | | | 2009 | | | | | | | | | | | 159,934 | | | | 158,703 | | | | 153,662 | | | | 157,941 | | | | 151,418 | | | | 150,919 | | | | 150,568 | | | | 149,822 | | | | - | | | | 48,780 | | | 2010 | | | | | | | | | | | | | | | 157,712 | | | | 160,058 | | | | 156,369 | | | | 154,222 | | | | 152,483 | | | | 151,653 | | | | 149,818 | | | | 324 | | | | 49,310 | | | 2011 | | | | | | | | | | | | | | | | | | | 150,803 | | | | 146,713 | | | | 145,735 | | | | 143,133 | | | | 142,488 | | | | 139,840 | | | | 1,164 | | | | 46,171 | | | 2012 | | | | | | | | | | | | | | | | | | | | | | | 156,448 | | | | 153,815 | | | | 150,336 | | | | 149,347 | | | | 147,594 | | | | 2.849 | | | | 45,615 | | | 2013 | | | | | | | | | | | | | | | | | | | | | | | | | | | 153,860 | | | | 152,858 | | | | 150,720 | | | | 150,657 | | | | 6,501 | | | | 46,195 | | | 2014 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 155,105 | | | | 157,249 | | | | 158,470 | | | | 8,493 | | | | 47,146 | | | 2015 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 165,515 | | | | 172,553 | | | | 13,074 | | | | 47,529 | | | 2016 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 180,380 | | | | 55,506 | | | | 41,220 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total | | | $ | 1,524,935 | | | | | | | | | | | | | | | | | | | | | | Auto Liability | | | | | | | | | | Cumulative Paid Claims and Allocated Claim Adjustment Expense, Net of Reinsurance | | | | | | | | | | Year Ended December 31, | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Accident | | Unaudited | | | Unaudited | | | Unaudited | | | Unaudited | | | Unaudited | | | Unaudited | | | Unaudited | | | Unaudited | | | Unaudited | | | Audited | | | | | | | | | | | Year | | 2007 | | | 2008 | | | 2009 | | | 2010 | | | 2011 | | | 2012 | | | 2013 | | | 2014 | | | 2015 | | | 2016 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2007 | | $ | 56,819 | | | $ | 101,803 | | | $ | 122,129 | | | $ | 130,555 | | | $ | 134,207 | | | $ | 135,467 | | | $ | 136,056 | | | $ | 136,504 | | | $ | 136,630 | | | $ | 136,815 | | | | | | | | | | | 2008 | | | | | | | 54,750 | | | | 103,370 | | | | 123,062 | | | | 134,377 | | | | 137,980 | | | | 138,539 | | | | 138,758 | | | | 138,875 | | | | 138,962 | | | | | | | | | | | 2009 | | | | | | | | | | | 60,011 | | | | 110,921 | | | | 133,568 | | | | 142,524 | | | | 146,383 | | | | 148,783 | | | | 149,608 | | | | 149,801 | | | | | | | | | | | 2010 | | | | | | | | | | | | | | | 63,416 | | | | 118,345 | | | | 137,012 | | | | 144,255 | | | | 147,337 | | | | 148,751 | | | | 149,247 | | | | | | | | | | | 2011 | | | | | | | | | | | | | | | | | | | 61,070 | | | | 108,837 | | | | 126,812 | | | | 133,931 | | | | 136,906 | | | | 138,151 | | | | | | | | | | | 2012 | | | | | | | | | | | | | | | | | | | | | | | 61,279 | | | | 109,574 | | | | 127,185 | | | | 138,641 | | | | 142,916 | | | | | | | | | | | 2013 | | | | | | | | | | | | | | | | | | | | | | | | | | | 62,224 | | | | 108,856 | | | | 131,215 | | | | 139,954 | | | | | | | | | | | 2014 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 61,329 | | | | 117,468 | | | | 139,463 | | | | | | | | | | | 2015 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 70,834 | | | | 134,473 | | | | | | | | | | | 2016 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 73,073 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total | | | | 1,342,855 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Outstanding prior to 2006 | | | | 80 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Prior years paid | | | | 451 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Liabilities for claims and claim adjustment expenses, net ofreinsurance | | | $ | 182,162 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ($ in thousands) | | Auto Physical Damage | | | | Incurred Claims and Allocated Claim Adjustment Expense, Net of Reinsurance | | | | Years Ended December 31, | | As of December 31, 2019 | | | | | | | | | | | | | | | | | | | | | | | | Total of Incurred- But-Not-Reported Liabilities Plus Expected Development on Reported Claims | | Cumulative
Number of
Reported Claims | | | | | | | | | | | | | | | | | | | | | | | | | | Accident | | Unaudited | | Unaudited | | Unaudited | | Unaudited | | Unaudited | | Unaudited | | Unaudited | | Unaudited | | Unaudited | | | | | | Year | | 2010 | | 2011 | | 2012 | | 2013 | | 2014 | | 2015 | | 2016 | | 2017 | | 2018 | | 2019 | | | | 2010 | | $ | 84,112 |
| | $ | 83,420 |
| | $ | 83,103 |
| | $ | 83,046 |
| | $ | 83,052 |
| | $ | 83,050 |
| | $ | 83,036 |
| | $ | 83,028 |
| | $ | 83,018 |
| | $ | 83,011 |
| | $ | — |
| | 81,581 |
| | 2011 | | |
| | 86,205 |
| | 85,507 |
| | 86,023 |
| | 85,120 |
| | 85,143 |
| | 85,116 |
| | 85,108 |
| | 85,102 |
| | 85,090 |
| | — |
| | 80,804 |
| | 2012 | | |
| | |
| | 83,770 |
| | 82,337 |
| | 83,402 |
| | 83,431 |
| | 83,354 |
| | 83,342 |
| | 83,334 |
| | 83,322 |
| | — |
| | 78,165 |
| | 2013 | | |
| | |
| | |
| | 91,448 |
| | 88,856 |
| | 88,672 |
| | 88,627 |
| | 88,455 |
| | 88,525 |
| | 88,457 |
| | — |
| | 80,920 |
| | 2014 | | |
| | |
| | |
| | |
| | 95,572 |
| | 95,634 |
| | 95,422 |
| | 95,239 |
| | 95,232 |
| | 95,241 |
| | — |
| | 87,901 |
| | 2015 | | |
| | |
| | |
| | |
| | |
| | 99,291 |
| | 97,994 |
| | 97,624 |
| | 97,455 |
| | 97,612 |
| | (18 | ) | | 87,497 |
| | 2016 | | |
| | |
| | |
| | |
| | |
| | |
| | 112,430 |
| | 109,515 |
| | 109,348 |
| | 109,603 |
| | (17 | ) | | 93,225 |
| | 2017 | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | 115,483 |
| | 111,798 |
| | 110,520 |
| | (161 | ) | | 91,270 |
| | 2018 | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | 109,040 |
| | 108,886 |
| | (326 | ) | | 94,388 |
| | 2019 | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | 111,577 |
| | (6,829 | ) | | 89,207 |
| | | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | Total | | $ | 973,319 |
| | |
| | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ($ in thousands) | | | | | | Auto Physical Damage | | | | | | Cumulative Paid Claims and Allocated Claim Adjustment Expense, Net of Reinsurance | | | | | | Years Ended December 31, | | | | | | Accident | | Unaudited | | Unaudited | | Unaudited | | Unaudited | | Unaudited | | Unaudited | | Unaudited | | Unaudited | | Unaudited | | | | | | | | Year | | 2010 | | 2011 | | 2012 | | 2013 | | 2014 | | 2015 | | 2016 | | 2017 | | 2018 | | 2019 | | | | | | 2010 | | $ | 79,329 |
| | $ | 83,120 |
| | $ | 83,103 |
| | $ | 83,087 |
| | $ | 83,067 |
| | $ | 83,051 |
| | $ | 83,036 |
| | $ | 83,028 |
| | $ | 83,015 |
| | $ | 83,009 |
| | | | | | 2011 | | |
| | 83,227 |
| | 85,254 |
| | 85,181 |
| | 85,148 |
| | 85,127 |
| | 85,116 |
| | 85,108 |
| | 85,095 |
| | 85,090 |
| | | | | | 2012 | | |
| | | | 80,519 |
| | 83,418 |
| | 83,372 |
| | 83,355 |
| | 83,347 |
| | 83,342 |
| | 83,326 |
| | 83,322 |
| | | | | | 2013 | | |
| | | | | | 85,110 |
| | 88,688 |
| | 88,580 |
| | 88,532 |
| | 88,484 |
| | 88,471 |
| | 88,452 |
| | | | | | 2014 | | |
| | | | | | | | 88,939 |
| | 95,444 |
| | 95,266 |
| | 95,256 |
| | 95,258 |
| | 95,243 |
| | | | | | 2015 | | |
| | | | | | | | | | 92,138 |
| | 97,850 |
| | 97,685 |
| | 97,638 |
| | 97,625 |
| | | | | | 2016 | | |
| | | | | | | | | | | | 106,459 |
| | 109,686 |
| | 109,536 |
| | 109,611 |
| | | | | | 2017 | | |
| | | | | | | | | | | | | | 105,156 |
| | 110,817 |
| | 110,674 |
| | | | | | 2018 | | |
| | | | | | | | | | | | | | | | 103,559 |
| | 109,103 |
| | | | | | 2019 | | |
| | | | | | | | | | | | | | | | | | 106,243 |
| | | | | | | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | Total | | 968,372 |
| | | | | | | | | | | | | | | | | | | | | Outstanding prior to 2010 | | — |
| | | | | | | | | | | | | | | | | | | | | Prior years paid | | — |
| | | | | | | | | | | | | | | | | | | | | Liabilities for claims and claim adjustment expenses, net of reinsurance | | $ | 4,947 |
| | | | |
| | F-84 | | | Horace Mann Educators Corporation | | Annual Report on Form 10-K 113 |
NOTE 58 - Property and Casualty Unpaid Claims and Claim Expenses-(Continued)| Auto Physical Damage | | | | | Incurred Claims and Allocated Claim Adjustment Expense, Net of Reinsurance | | | | | Year Ended December 31, | | As of December 31, 2016 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total of Incurred- | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | But-Not-Reported | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Liabilities Plus | | | Cumulative | | | Accident | | Unaudited | | | Unaudited | | | Unaudited | | | Unaudited | | | Unaudited | | | Unaudited | | | Unaudited | | | Unaudited | | | Unaudited | | | Audited | | | Expected Development | | | Number of | | | Year | | 2007 | | | 2008 | | | 2009 | | | 2010 | | | 2011 | | | 2012 | | | 2013 | | | 2014 | | | 2015 | | | 2016 | | | on Reported Claims | | | Reported Claims | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2007 | | $ | 87,051 | | | $ | 86,178 | | | $ | 86,178 | | | $ | 85,515 | | | $ | 86,695 | | | $ | 86,713 | | | $ | 86,706 | | | $ | 86,694 | | | $ | 86,683 | | | $ | 86,680 | | | $ | - | | | | 70,280 | | | 2008 | | | | | | | 89,088 | | | | 87,854 | | | | 87,834 | | | | 86,900 | | | | 87,992 | | | | 87,979 | | | | 87,976 | | | | 87,966 | | | | 87,954 | | | | - | | | | 72,117 | | | 2009 | | | | | | | | | | | 84,539 | | | | 83,515 | | | | 83,202 | | | | 82,635 | | | | 82,000 | | | | 81,986 | | | | 81,972 | | | | 81,963 | | | | - | | | | 72,867 | | | 2010 | | | | | | | | | | | | | | | 84,112 | | | | 83,420 | | | | 83,103 | | | | 83,046 | | | | 83,052 | | | | 83,050 | | | | 83,036 | | | | - | | | | 77,343 | | | 2011 | | | | | | | | | | | | | | | | | | | 86,205 | | | | 85,507 | | | | 86,023 | | | | 85,120 | | | | 85,143 | | | | 85,116 | | | | - | | | | 76,113 | | | 2012 | | | | | | | | | | | | | | | | | | | | | | | 83,770 | | | | 82,337 | | | | 83,402 | | | | 83,431 | | | | 83,354 | | | | 7 | | | | 72,803 | | | 2013 | | | | | | | | | | | | | | | | | | | | | | | | | | | 91,448 | | | | 88,856 | | | | 88,672 | | | | 88,627 | | | | 95 | | | | 75,845 | | | 2014 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 95,572 | | | | 95,634 | | | | 95,422 | | | | 151 | | | | 82,467 | | | 2015 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 99,291 | | | | 97,994 | | | | 139 | | | | 82,335 | | | 2016 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 112,430 | | | | (944 | ) | | | 77,495 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total | | | $ | 902,576 | | | | | | | | | | | | | | | | | | | | | | Auto Physical Damage | | | | | | | | | | Cumulative Paid Claims and Allocated Claim Adjustment Expense, Net of Reinsurance | | | | | | | | | | Year Ended December 31, | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Accident | | Unaudited | | | Unaudited | | | Unaudited | | | Unaudited | | | Unaudited | | | Unaudited | | | Unaudited | | | Unaudited | | | Unaudited | | | Audited | | | | | | | | | | | Year | | 2007 | | | 2008 | | | 2009 | | | 2010 | | | 2011 | | | 2012 | | | 2013 | | | 2014 | | | 2015 | | | 2016 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2007 | | $ | 81,171 | | | $ | 86,439 | | | $ | 86,678 | | | $ | 86,637 | | | $ | 86,695 | | | $ | 86,713 | | | $ | 86,706 | | | $ | 86,694 | | | $ | 86,685 | | | $ | 86,680 | | | | | | | | | | | 2008 | | | | | | | 82,412 | | | | 87,963 | | | | 87,905 | | | | 87,949 | | | | 87,992 | | | | 87,979 | | | | 87,976 | | | | 87,966 | | | | 87,954 | | | | | | | | | | | 2009 | | | | | | | | | | | 78,456 | | | | 82,117 | | | | 82,039 | | | | 82,015 | | | | 82,000 | | | | 81,985 | | | | 81,973 | | | | 81,963 | | | | | | | | | | | 2010 | | | | | | | | | | | | | | | 79,329 | | | | 83,120 | | | | 83,103 | | | | 83,087 | | | | 83,067 | | | | 83,051 | | | | 83,036 | | | | | | | | | | | 2011 | | | | | | | | | | | | | | | | | | | 83,227 | | | | 85,254 | | | | 85,181 | | | | 85,148 | | | | 85,127 | | | | 85,116 | | | | | | | | | | | 2012 | | | | | | | | | | | | | | | | | | | | | | | 80,519 | | | | 83,418 | | | | 83,372 | | | | 83,355 | | | | 83,347 | | | | | | | | | | | 2013 | | | | | | | | | | | | | | | | | | | | | | | | | | | 85,110 | | | | 88,688 | | | | 88,580 | | | | 88,532 | | | | | | | | | | | 2014 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 88,939 | | | | 95,444 | | | | 95,266 | | | | | | | | | | | 2015 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 92,138 | | | | 97,850 | | | | | | | | | | | 2016 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 106,458 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total | | | | 896,202 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Outstanding prior to 2006 | | | | - | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Prior years paid | | | | - | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Liabilities for claims and claim adjustmentexpenses, net of reinsurance | | | $ | 6,374 | | | | | | | | | |
NOTE 5 - Property and Casualty Unpaid Claims and Claim Expenses-(Continued)
The reconciliation of the net incurred and paid claims development tables to the liability for claims and claim adjustment expenses in the Consolidated Balance Sheet is as follows: | | Year Ended December 31, | | | | | 2016 | | | | Property and Casualty segment | | | | | | Net reserves | | | | | | Homeowners | | $ | 32,314 | | | Auto liability | | | 182,162 | | | Auto physical damage | | | 6,374 | | | Other short duration lines | | | 3,588 | | | Total net reserves for unpaid claims and claim adjustment expense, net of reinsurance | | | 224,438 | | | | | | | | | Reinsurance recoverable on unpaid claims | | | | | | Homeowners | | | 375 | | | Auto liability | | | 50,959 | | | Other short duration lines | | | 9,865 | | | Total reinsurance recoverable on unpaid claims | | | 61,199 | | | | | | | | | Insurance lines other than short duration (1) | | | 22,131 | | | Unallocated claims adjustment expenses | | | 22,120 | | | Total other than short duration and unallocated claims adjustment expenses | | | 44,251 | | | | | | | | | Gross reserves, end of year (1) | | $ | 329,888 | |
| | | | | | | ($ in thousands) | | Years Ended December 31, | | | | 2019 | | Property and Casualty segment | | | | Net reserves | | | | Homeowners | | $ | 35,480 |
| | Auto liability | | 203,180 |
| | Auto physical damage | | 4,947 |
| | Other short duration lines | | 2,892 |
| Total net reserves for unpaid claims and claim adjustment expense, net of reinsurance | | 246,499 |
| | | | | | Reinsurance recoverable on unpaid claims | | | | Homeowners | | 12,394 |
| | Auto liability | | 100,866 |
| | Other short duration lines | | 7,246 |
| | Total reinsurance recoverable on unpaid claims | | 120,506 |
| | | | | Insurance lines other than short duration (1) | | 55,878 |
| | Unallocated claims adjustment expenses | | 19,971 |
| | Total other than short duration and unallocated claims adjustment expenses | | 75,849 |
| | | | | Gross reserves, end of year (1) | | $ | 442,854 |
|
| | (1) | This line includes Supplemental, Retirement and Life reserves as included in the Consolidated Balance Sheet. |
NOTE 69 - Reinsurance and Catastrophes In the normal course of business, the Company’sCompany's insurance subsidiaries assume and cede reinsurance with other insurers. Reinsurance is ceded primarily to limit losses from large events and to permit recovery of a portion of direct losses; however, such a transfer does not relieve the originating insurance company of primary liability. The Company is a national underwriter and therefore has exposure to catastrophic losses in certain coastal states and other regions throughout the U.S. Catastrophes can be caused by various events including hurricanes, windstorms, hail, severe winter weather, wildfires and earthquakes, and the frequency and severity of catastrophes are inherently unpredictable. The financial impact from catastrophic losses results from both the total amount of insured exposure in the area affected by the catastrophe as well as the severity of the event. The Company seeks to reduce its exposure to catastrophe losses through the geographic diversification of its insurance coverage, deductibles, maximum coverage limits and the purchase of catastrophe reinsurance. The Company’sCompany's catastrophe losses incurred of approximately $60,043, $44,429$52.0 million, $107.3 million and $37,500$61.8 million for the years ended December 31, 2016, 20152019, 2018 and 2014, respectively, reflected2017, respectively. For 2019, catastrophe losses fromwere impacted by winter storm events in the first part of eachthe year, wind/hail/tornado events in the spring and summer months of each year, as well as losses from several storms in the latter part of eachthe year. The fourth quarter of 2016 also included losses from Hurricane Matthew.
| | F-86 | | | 114 Annual Report on Form 10-K | | Horace Mann Educators Corporation |
NOTE 69 - Reinsurance and Catastrophes-(Continued)Catastrophes (continued)
The total amounts of reinsurance recoverable on unpaid insurance reserves classified as assets and reported in Other assets in the Consolidated Balance Sheets were as follows: | | | December 31, | | | | | 2016 | | | 2015 | | | Reinsurance recoverables on reserves and unpaid claims | | | | | | | | | | Property and Casualty | | | | | | | | | | Reinsurance companies | | $ | 10,239 | | | $ | 9,026 | | | State insurance facilities | | | 50,960 | | | | 41,306 | | | Life and health | | | 9,275 | | | | 9,780 | | | Total | | $ | 70,474 | | | $ | 60,112 | |
| | | | | | | | | | | ($ in thousands) | | December 31, | | | | 2019 | | 2018 | | Reinsurance recoverables on reserves and unpaid claims | | | | | | Property and Casualty | | | | | | Reinsurance companies | | $ | 19,640 |
| | $ | 33,754 |
| | State insurance facilities | | 100,866 |
| | 55,971 |
| | Life and health | | 8,707 |
| | 9,785 |
| | Total | | $ | 129,213 |
| | $ | 99,510 |
|
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, IBNR 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: | | | | | Ceded to | | Assumed | | | | | | | Gross | | Other | | from Other | | Net | | | | | Amount | | Companies | | Companies | | Amount | | Year ended December 31, 2016 | | | | | | | | | | | | | | | | | | Premiums written and contract deposits | | $ | 1,280,903 | | | $ | 22,728 | | | $ | 4,324 | | | $ | 1,262,499 | | | Premiums and contract charges earned | | | 777,651 | | | | 22,826 | | | | 4,321 | | | | 759,146 | | | Benefits, claims and settlement expenses | | | 562,385 | | | | 25,739 | | | | 4,358 | | | | 541,004 | | | | | | | | | | | | | | | | | | | | | Year ended December 31, 2015 | | | | | | | | | | | | | | | | | | Premiums written and contract deposits | | | 1,277,066 | | | | 24,737 | | | | 4,184 | | | | 1,256,513 | | | Premiums and contract charges earned | | | 752,798 | | | | 25,077 | | | | 4,159 | | | | 731,880 | | | Benefits, claims and settlement expenses | | | 508,904 | | | | 16,221 | | | | 3,681 | | | | 496,364 | | | | | | | | | | | | | | | | | | | | | Year ended December 31, 2014 | | | | | | | | | | | | | | | | | | Premiums written and contract deposits | | | 1,191,123 | | | | 27,144 | | | | 3,676 | | | | 1,167,655 | | | Premiums and contract charges earned | | | 739,281 | | | | 27,276 | | | | 3,755 | | | | 715,760 | | | Benefits, claims and settlement expenses | | | 504,550 | | | | 39,236 | | | | 3,112 | | | | 468,426 | |
| | | | | | | | | | | | | | | | | | | ($ in thousands) | | Gross Amount | | Ceded to Other Companies(1) | | Assumed from Other Companies | | Net Amount | | Year Ended December 31, 2019 | | | | | | | | | Premiums written and contract deposits (2) | | $ | 1,337,847 |
| | $ | 23,872 |
| | $ | 10,567 |
| | $ | 1,324,542 |
| | Premiums and contract charges earned | | 917,610 |
| | 30,412 |
| | 10,756 |
| | 897,954 |
| | Benefits, claims and settlement expenses | | 633,874 |
| | 56,325 |
| | 7,519 |
| | 585,068 |
| | | | | | | | | | | | Year Ended December 31, 2018 | | | | | | | | | Premiums written and contract deposits (2) | | 1,255,557 |
| | 28,773 |
| | 8,259 |
| | 1,235,043 |
| | Premiums and contract charges earned | | 841,147 |
| | 28,837 |
| | 5,023 |
| | 817,333 |
| | Benefits, claims and settlement expenses | | 769,664 |
| | 136,601 |
| | 4,497 |
| | 637,560 |
| | | | | | | | | | | | Year Ended December 31, 2017 | | | | | | | | | Premiums written and contract deposits (2) | | 1,244,500 |
| | 21,989 |
| | 4,606 |
| | 1,227,117 |
| | Premiums and contract charges earned | | 812,099 |
| | 22,036 |
| | 4,640 |
| | 794,703 |
| | Benefits, claims and settlement expenses | | 588,621 |
| | 10,472 |
| | 4,157 |
| | 582,306 |
|
| | (1) | Excludes the annuity reinsurance agreement accounted for under the deposit method that is discussed in Note 6. |
| | (2) | This measure is not based on accounting principles generally accepted in the U.S. (non-GAAP). An explanation of this non-GAAP measure is contained in the Glossary of Selected Terms included as an exhibit in the Company's reports filed with the SEC. |
There were no losses from uncollectible reinsurance recoverables in the three years ended December 31, 2016.2019. Past due reinsurance recoverables as of December 31, 20162019 were not material. The Company maintains catastrophe excess of loss reinsurance coverage. For 2016,2019, the Company’sCompany's catastrophe excess of loss coverage consisted of one contract and itin addition to a minimal amount of coverage by the Florida Hurricane Catastrophe Fund (FHCF). The catastrophe excess of loss contract provided 95% coverage for catastrophe losses above a retention of $25,000$25.0 million per occurrence up to $175,000$175.0 million per occurrence. This contract consisted of three layers, each of which provided for one mandatory reinstatement. The layers were $25,000$25.0 million excess of $25,000, $40,000$25.0 million, $40.0 million excess of $50,000$50.0 million and $85,000$85.0 million excess of $90,000.NOTE 6 - Reinsurance and Catastrophes-(Continued)
For liability coverages, in 2016,2019, the Company reinsured each loss above a retention of $900$1.0 million with coverage up to $5,000$5.0 million on a per occurrence basis and $20,000$20.0 million in a clash event. (A clash cover is a reinsurance casualty excess contract requiring two or more casualty coverages or policies issued by the Company to be involved in the same loss occurrence for coverage to apply.) For property coverages, in 20162019, the Company
| | | | | Horace Mann Educators Corporation | | Annual Report on Form 10-K 115 |
NOTE 9 - Reinsurance and Catastrophes (continued)
reinsured each loss above a retention of $900$1.0 million up to $5,000$5.0 million on a per risk basis, including catastrophe losses. Also, the Company could submit to the reinsurers two per risk losses from the same occurrence for a total of $8,200$8.0 million of property recovery in any one event. The maximum individual life insurance risk retained by the Company is $300$0.5 million on any individual life, while either $100$0.1 million or $125$0.125 million is retained on each group life policy depending on the type of coverage. Excess amounts are reinsured. The Company also maintains a life catastrophe reinsurance program. For 2016,2019, the Company reinsured 100% of the catastrophe risk in excess of $1,000$1.0 million up to $35,000$35.0 million per occurrence, with one reinstatement. The Company’sCompany's life catastrophe risk reinsurance program covers acts of terrorism and includes nuclear, biological and chemical explosions but excludes other acts of war.
The Company retains all of the risk on its supplemental health product lines, including accidental death risk embedded within certain products. However, the Company’s other accidental death and dismemberment risk issued through all other policies and riders are ceded 100%. The maximum risk retained on any individual life by the Company is $0.1 million. Indebtedness and scheduled maturities consisted of the following: | | | Effective | | | | | | | | | | | Interest | | | Final | | | | December 31, | | | | | Rates | | | Maturity | | | | 2016 | | | | 2015 | | | | Short-term debt | | | | | | | | | | | | | | | | | | Bank Credit Facility | | | Variable | | | | 2019 | | | $ | - | | | $ | - | | | Long-term debt (1) | | | | | | | | | | | | | | | | | | 4.50% Senior Notes, Aggregate principal amount of $250,000 less unaccrued discount of $603 and $654 and unamortized debt issuance costs of $2,188 and $2,371 | | | 4.5% | | | | 2025 | | | | 247,209 | | | | 246,975 | | | | | | | | | | | | | | | | | | | | | Total | | | | | | | | | | $ | 247,209 | | | $ | 246,975 | |
| | | | | | | | | | | | | | | ($ in thousands) | | Effective Interest Rates | | Final Maturity | | December 31, | | | | | | 2019 | | 2018 | | Short-term debt | | | | | | | | | | Bank Credit Facility | | Variable | | 2024 | | $ | 135,000 |
| | $ | — |
| Long-term debt (1) | | | | | | | | | 4.50% Senior Notes, Aggregate principal amount of $250,000 less unaccrued discount of $426 and $488 and unamortized debt issuance costs of $1,549 and $1,772 | | 4.50% | | 2025 | | 248,025 |
| | 247,740 |
| | Federal Home Loan Bank borrowing | | 1.99% | | 2022 | | 50,000 |
| | 50,000 |
| | Total | | | | | | $ | 433,025 |
| | $ | 297,740 |
|
| | (1) | The Company designates debt obligations as “long-term”"long-term" based on maturity date at issuance. |
Credit Agreement with Financial Institutions (“Bank(Bank Credit Facility”)In 2014, HMEC’s BankFacility)
On June 21, 2019, the Company, as borrower, replaced its current line of credit with a new five-year Credit Agreement (the “Bank(Bank Credit Facility”) was amended and restated to extend the commitment termination date to July 30, 2019 from the previous termination date of October 6, 2015 and to decrease the interest rate spread relative to Eurodollar base rates.Facility). The financial covenants within the agreement were not changed. Thenew Bank Credit Facility is by and between HMEC, certain financial institutions named thereinincreased 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 administrative agent, and provides for unsecured borrowings of up to $150,000. Interest accrues at varying spreads relative to prime or Eurodollar base rates and is payable monthly or quarterly dependingjoint leads on the applicable basenew agreement, with The Northern Trust Company, U.S. Bank National Association, KeyBank National Association, Comerica Bank and Illinois National Bank participating in the syndicate. Terms and conditions of the new Bank Credit Facility are substantially consistent with the prior agreement, with an interest rate (Eurodollar base ratebased on LIBOR plus 1.15%).115 basis points. On July 1, 2019, the Company utilized the senior revolving credit facility to partially fund the acquisition of NTA. As of December 31, 2019, the amount outstanding on the senior revolving credit facility was $135.0 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 December 31, 2016.NOTE 7 - Debt-(Continued)
On June 15, 2015, the Senior Notes due 2015 matured and the Company repaid the $75,000 aggregate principal amount initially utilizing $75,000 of additional borrowing under the existing Bank Credit Facility. In November 2015, the Company repaid the Bank Credit Facility balance in full utilizing a portion of the net proceeds from the issuance of the 4.50% Senior Notes due 2025, as described below.
4.50% Senior Notes due 2025 (“Senior Notes due 2025”)
On November 23, 2015, the Company issued $250,000$250.0 million aggregate principal amount of 4.50% senior notes, which will mature on December 1, 2025, issued at a discount of 0.265% resulting in an effective yield of 4.533%4.53% (Senior Notes). Interest on the Senior Notes due 2025 is payable semi-annually at a rate of 4.50%. The Senior Notes due 2025 are redeemable in whole or in part, at any time, at the Company's option, at a redemption price equal to the greater of (1) 100% of the principal amount of the notes being redeemed or (2) the sum of the present values of the remaining scheduled payments of principal and interest thereon discounted, on a semi-annual basis, at the Treasury yield (as defined in the indenture) plus 35 basis points, plus, in either of the above cases, accrued interest to the date of redemption. The net proceeds
| | | | | 116 Annual Report on Form 10-K | | Horace Mann Educators Corporation |
NOTE 10 - Debt (continued)
Federal Home Loan Bank Borrowings In 2017, Horace Mann Insurance Company (HMIC) became a member of the FHLB, which provides HMIC with access to collateralized borrowings and other FHLB products. As membership requires the ownership of membership stock, in June 2017, HMIC purchased common stock to meet the membership requirement. Any borrowing from the saleFHLB requires the purchase of FHLB activity-based common stock in an amount equal to 4.5% of the Senior Notes due 2025 were used to (1) repay the $113,000 balanceborrowing, or a lower percentage - such as 2.0% based on the Bank Credit Facility, (2) redeemReduced Capitalization Advance Program. In the Senior Notes due 2016, as described below, and (3)fourth quarter of 2017, HMIC purchased common stock to meet the activity-based requirement. In 2019, the Board authorized a maximum amount equal to 15% of net aggregate admitted assets less separate account assets of the insurance subsidiaries for general corporate purposes.
6.05% Senior Notes due 2015 (“Senior Notes due 2015”)
On June 15, 2015,FHLB borrowings. During the Senior Notes due 2015 matured andfourth quarter of 2017, the Company repaidreceived $50.0 million in executed borrowings for HMIC. Of the $75,000 aggregate principal amount initially utilizing $75,000total $50.0 million received, $25.0 million matures on October 5, 2022 and $25.0 million matures on December 2, 2022. Interest on the borrowings accrues at an annual weighted average rate of additional borrowing under the existing Bank Credit Facility.
6.85% Senior Notes due 2016 (“Senior Notes due 2016”)
On December 23, 2015, the Company redeemed all1.99% as of its outstanding Senior Notes due 2016, $125,000 aggregate principal amount, at a cost of $127,292. The redemption was funded utilizing a portion of the net proceeds from the issuance of the 4.50% Senior Notes due 2025.
Debt Retirement Charges
The redemption of the Senior Notes due 2016 resulted in a pretax charge to income for the year ended December 31, 20152019. HMIC's FHLB borrowings of $2,338.
$50.0 million are included in Long-term debt in the Consolidated Balance Sheets. The Company is in compliance with all of the financial covenants contained in the Senior Notes due 2025 indenture and the Bank Credit Facility agreement, consisting primarily of relationships of (1) debt to capital, (2) net worth, as defined in the financial covenants, (3) insurance subsidiaries' risk-based capital and (4) securities subject to funding agreements and repurchase agreements.
The income tax assets and liabilities included in Other assets and Other liabilities, respectively, in the Consolidated Balance Sheets were as follows: | | | December 31, | | | | | | 2016 | | | | | 2015 | | | | Income tax (asset) liability | | | | | | | | | | Current | | $ | (3,832 | ) | | $ | 1,000 | | | Deferred | | | 205,699 | | | | 201,208 | |
| | | | | | | | | | | ($ in thousands) | | December 31, | | | | 2019 | | 2018 | | Income tax (asset) liability | | | | | | Current | | $ | (12,184 | ) | | $ | (20,793 | ) | | Deferred | | 160,624 |
| | 103,686 |
|
| | | | | Horace Mann Educators Corporation | | Annual Report on Form 10-K 117 |
NOTE 11 - Income Taxes (continued)
Deferred tax assets and liabilities are recognized for all future tax consequences attributable to “temporary differences”"temporary differences" between the financial statement carrying value of existing assets and liabilities and their respective tax bases. There are no deferred tax liabilities that have not been recognized. The “temporary differences”"temporary differences" that gave rise to the deferred tax balances were as follows: | | | December 31, | | | | | | 2016 | | | | 2015 | | | Deferred tax assets | | | | | | | | | | Unearned premium reserve reduction | | $ | 18,253 | | | $ | 17,402 | | | Compensation accruals | | | 15,893 | | | | 13,737 | | | Impaired securities | | | 8,214 | | | | 7,635 | | | Other comprehensive income - net funded status of pension | | | | | | | | | | and other postretirement benefit obligations | | | 6,387 | | | | 6,375 | | | Discounting of unpaid claims and claim expense tax reserves | | | 2,463 | | | | 3,213 | | | Postretirement benefits other than pensions | | | 578 | | | | 664 | | | Other, net | | | - | | | | 1,189 | | | Total gross deferred tax assets | | | 51,788 | | | | 50,215 | | | Deferred tax liabilities | | | | | | | | | | Other comprehensive income - net unrealized gains | | | | | | | | | | on fixed maturities and equity securities | | | 112,311 | | | | 112,934 | | | Deferred policy acquisition costs | | | 91,028 | | | | 85,341 | | | Life insurance future policy benefit reserve | | | 33,145 | | | | 30,177 | | | Investment related adjustments | | | 15,762 | | | | 18,709 | | | Intangible assets | | | 4,262 | | | | 4,262 | | | Other, net | | | 979 | | | | - | | | Total gross deferred tax liabilities | | | 257,487 | | | | 251,423 | | | Net deferred tax liability | | $ | 205,699 | | | $ | 201,208 | |
| | | | | | | | | | | ($ in thousands) | | December 31, | | | | 2019 | | 2018 | | Deferred tax assets | | |
| | |
| | Unearned premium reserve reduction | | $ | 12,103 |
| | $ | 12,112 |
| | Compensation accruals | | 8,866 |
| | 6,866 |
| | Reinsurance commissions | | 6,804 |
| | — |
| | Impaired securities | | 1,245 |
| | 1,295 |
| | Other comprehensive income - net funded status of benefit plans | | 2,875 |
| | 3,254 |
| | Discounting of unpaid claims and claim expense tax reserves | | 2,530 |
| | 2,772 |
| | Postretirement benefits other than pensions | | 285 |
| | 302 |
| | Charitable contributions carryforwards | | — |
| | 89 |
| | Net operating loss carryforwards | | 3,803 |
| | 10,969 |
| | Total gross deferred tax assets | | 38,511 |
| | 37,659 |
| | Deferred tax liabilities | | |
| | |
| | Other comprehensive income - net unrealized gains on securities | | 74,645 |
| | 32,897 |
| | Deferred policy acquisition costs | | 49,326 |
| | 60,330 |
| | Life insurance future policy benefit reserve | | 38,210 |
| | 9,304 |
| | Life insurance future policy benefit reserve (transitional rule) | | 12,786 |
| | 14,910 |
| Discounting of unpaid claims and claim expense tax reserves (transitional rule) | | 947 |
| | 1,203 |
| | Investment related adjustments | | 15,718 |
| | 17,531 |
| | Intangibles | | 2,021 |
| | 2,557 |
| | Other, net | | 5,482 |
| | 2,613 |
| | Total gross deferred tax liabilities | | 199,135 |
| | 141,345 |
| | Net deferred tax liability | | $ | 160,624 |
| | $ | 103,686 |
|
The Company evaluated sources and character of income, including historical earnings, loss carryback potential, taxable income from future reversals of existing taxable temporary differences, future taxable income exclusive of reversing temporary differences, and taxable income from prudent and feasible tax planning strategies. Although realization of deferred tax assets is not assured, the Company believes it is more likely than not that gross deferred tax assets will be fully realized and that a valuation allowance with respect to the realization of the total gross deferred tax assets was not necessary as of December 31, 20162019 and 2015.2018. At December 31, 2016,2019, the Company did not have any losshad available the following carryforwards or credits. | | | | | | | | | ($ in thousands) | | Pretax Amount | | Expiration Year | | Operating loss carryforwards | | $ | 12,711 |
| | 2038 | | Operating loss carryforwards | | 5,397 |
| | Indefinite |
NOTE 8 - Income Taxes-(Continued)
The components of the provision for income tax expense (benefit) were as follows: | | | | Year Ended December 31, | | | | | | 2016 | | | | 2015 | | | | 2014 | | | | | | | | | | | | | | | | | Current | | $ | 26,359 | | | $ | 29,885 | | | $ | 32,295 | | | Deferred | | | 4,108 | | | | 6,085 | | | | 9,575 | | | Total income tax expense | | $ | 30,467 | | | $ | 35,970 | | | $ | 41,870 | |
| | | | | | | | | | | | | | | ($ in thousands) | | Years Ended December 31, | | | | 2019 | | 2018 | | 2017 | | Current | | $ | 31,518 |
| | $ | 4,152 |
| | $ | 3,813 |
| | Deferred | | 20,488 |
| | (2,958 | ) | | (84,585 | ) | | Total income tax expense (benefit) | | $ | 52,006 |
| | $ | 1,194 |
| | $ | (80,772 | ) |
| | | | | 118 Annual Report on Form 10-K | | Horace Mann Educators Corporation |
NOTE 11 - Income Taxes (continued)
Income tax expense for the following periods differed from the expected tax computed by applying the federal corporate tax rate of 21% for 2019 and 2018 and 35% for 2017 to income before income taxes as follows: | | | | Year Ended December 31, | | | | | | 2016 | | | | 2015 | | | | 2014 | | | | | | | | | | | | | | | | Expected federal tax on income | | $ | 39,981 | | | $ | 45,308 | | | $ | 51,140 | | | Add (deduct) tax effects of: | | | | | | | | | | | | | | Tax-exempt interest | | | (5,789 | ) | | | (6,678 | ) | | | (6,849 | ) | | Dividend received deduction | | | (3,985 | ) | | | (3,564 | ) | | | (3,566 | ) | | Other, net | | | 260 | | | | 904 | | | | 1,145 | | | Income tax expense provided on income | | $ | 30,467 | | | $ | 35,970 | | | $ | 41,870 | |
| | | | | | | | | | | | | | | ($ in thousands) | | Years Ended December 31, | | | | 2019 | | 2018 | | 2017 | | Expected federal tax on income | | $ | 49,654 |
| | $ | 4,103 |
| | $ | 31,041 |
| | Add (deduct) tax effects of: | | | | | | | | Tax-exempt interest | | (4,159 | ) | | (3,726 | ) | | (5,335 | ) | | Dividend received deduction | | (1,392 | ) | | (412 | ) | | (4,810 | ) | | Goodwill impairment | | 5,885 |
| | — |
| | — |
| | Tax Act DTL re-measurement | | — |
| | — |
| | (98,988 | ) | | Employee share-based compensation | | 272 |
| | (1,134 | ) | | (3,258 | ) | | Compensation deduction limitation | | 680 |
| | 1,754 |
| | 326 |
| | Prior year adjustments | | (716 | ) | | 300 |
| | (293 | ) | | Other, net | | 1,782 |
| | 309 |
| | 545 |
| | Income tax expense (benefit) provided on income | | $ | 52,006 |
| | $ | 1,194 |
| | $ | (80,772 | ) |
The Company’sCompany's federal income tax returns for years prior to 20132014 are no longer subject to examination by the Internal Revenue Service (“IRS”)(IRS). The Company recognizes tax benefits from tax return positions only if it is more likely than not the position will be sustainable, upon examination, on its technical merits and any relevant administrative practices or precedents. As a result, the Company applies a more likely than not recognition threshold for all tax uncertainties. The Company records liabilities for uncertain tax filing positions where it is more likely than not that the position will not be sustainable upon audit by taxing authorities. These liabilities are reevaluated routinely and are adjusted appropriately based upon changes in facts or law. The Company has no unrecorded liabilities from uncertain tax filing positions. HMEC and its subsidiaries file a consolidated federal income tax return. The federal income tax sharing agreements between HMEC and its subsidiaries, as approved by the Board, of Directors, provide that tax on income is charged to each subsidiary as if it were filing a separate tax return with the limitation that each subsidiary will receive the benefit of any losses or tax credits to the extent utilized in the consolidated tax return. Intercompany balances are settled quarterly with a final settlement after filing the consolidated federal income tax return with the IRS. National Teachers Associates Life Insurance Company and NTA Life Insurance Company of New York are not included in the consolidated federal income tax return and will file separate federal income tax returns until they are eligible to participate in the consolidated federal income tax return. This is expected to occur in 2025.
| | F-91 | | | Horace Mann Educators Corporation | | Annual Report on Form 10-K 119 |
NOTE 811 - Income Taxes-(Continued)Taxes (continued)
A reconciliation of the beginning and ending amounts of unrecognized tax benefits, excluding interest and penalties, is as follows: | | | | Year Ended December 31, | | | | | | 2016 | | | | 2015 | | | | 2014 | | | | | | | | | | | | | | | | Balance as of the beginning of the year | | $ | 1,039 | | | $ | 656 | | | $ | 641 | | | Increases related to prior year tax positions | | | 348 | | | | - | | | | - | | | Decreases related to prior year tax positions | | | - | | | | (15 | ) | | | (244 | ) | | Increases related to current year tax positions | | | 283 | | | | 398 | | | | 259 | | | Settlements | | | - | | | | - | | | | - | | | Lapse of statue | | | (76 | ) | | | - | | | | - | | | Balance as of the end of the year | | $ | 1,594 | | | $ | 1,039 | | | $ | 656 | |
| | | | | | | | | | | | | | | ($ in thousands) | | Years Ended December 31, | | | | 2019 | | 2018 | | 2017 | | Balance as of the beginning of the year | | $ | 1,734 |
| | $ | 1,790 |
| | $ | 1,594 |
| | Increases related to prior year tax positions | | 109 |
| | — |
| | 101 |
| | Decreases related to prior year tax positions | | — |
| | (152 | ) | | — |
| | Increases related to current year tax positions | | 123 |
| | 96 |
| | 422 |
| | Settlements | | — |
| | — |
| | — |
| | Lapse of statute | | — |
| | — |
| | (327 | ) | | Balance as of the end of the year | | $ | 1,966 |
| | $ | 1,734 |
| | $ | 1,790 |
|
The Company’sCompany's effective tax rate would be affected to the extent there were unrecognized tax benefits that could be recognized. There are no positions for which it is reasonably possible that the total amount of unrecognized tax benefit will significantly increasechange within the next 12 months. The Company classifies all tax related interest and penalties as income tax expense. Interest and penalties were both immaterial in each of the years ended December 31, 2016, 20152019, 2018 and 2014.2017. NOTE 912 - Operating Leases The Company has various operating lease agreements, primarily for real estate offices. Such leases have remaining lease terms of 1 year 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) | | Year Ended | | | | December 31, 2019 | | Operating lease cost | | $ | 3,841 |
| | Short-term lease cost | | 208 |
| | Total lease cost | | $ | 4,049 |
|
Supplemental cash flow information related to operating leases was as follows: | | | | | | | ($ in thousands) | | Year Ended | | | | December 31, 2019 | | Cash paid for amounts included in the measurement of lease liabilities | | $ | 3,447 |
|
Supplemental balance sheet information related to operating leases were as follows: | | | | | | | ($ in thousands, except lease term and discount rate) | | December 31, 2019 | | Assets | | | | Right of use assets, included in Other assets | | $ | 16,483 |
| | Liabilities | | | | Operating lease liabilities, included in Other liabilities | | $ | 17,499 |
| | | | | | Weighted average remaining lease term | | 4.51 |
| | Weighted average discount rate | | 3.78 | % |
| | | | | 120 Annual Report on Form 10-K | | Horace Mann Educators Corporation |
NOTE 12 - Operating Leases (continued)
Future minimum lease payments under non-cancellable operating leases as of December 31, 2019 are as follows: | | | | | | | ($ in thousands) | | | | Year Ending December 31, | | | | 2020 | | $ | 4,440 |
| | 2021 | | 4,285 |
| | 2022 | | 4,156 |
| | 2023 | | 3,459 |
| | 2024 | | 1,929 |
| | Thereafter | | 787 |
| | Total future minimum lease payments | | 19,056 |
| | Less imputed interest | | (1,557 | ) | | Total | | $ | 17,499 |
|
As of December 31, 2019, the Company has no additional operating leases that have not yet commenced. Note 13 - Shareholders' Equity and Common Stock Equivalents Share Repurchase ProgramsProgram and Treasury Shares Held (Common Stock)In December 2011, HMEC’s
On September 30, 2015, the Board of Directors (the “Board”) authorized a share repurchase program allowing repurchases of up to $50,000 (the “2011 Plan”)$50.0 million of HMEC's common stock, par value $0.001 (Program). In September 2015, the Board authorized an additional share repurchase program allowing repurchases of up to $50,000 (the “2015 Plan”) to begin following the completion of the 2011 Plan. Both share repurchase programs authorizeThe Program authorizes the repurchase of HMEC’s common shares in open market or privately negotiated transactions, from time to time, depending on market conditions. The share repurchase programs doProgram does not have an expiration datesdate and may be limited or terminated at any time without notice. During 2014,2017, the Company repurchased 190,87648,440 shares of its common stock, or 0.5%0.1% of the shares outstanding shares onas of December 31, 2013,2016, at an aggregate cost of $5,411,$1.7 million, or an average price of $28.33$34.28 per share, under the 2011 Plan.share. During 2015,2018, the Company repurchased 663,092129,112 shares of its common stock, or 1.6%0.3% of the shares outstanding shares onas of December 31, 2014,2017, at an aggregate cost of $21,950,$5.1 million, or an average price of $33.08$39.41 per share, under the 2011 Plan.share. During 2016,2019, the Company repurchased 701,410did not repurchase any shares of its common stock, or 1.7% of the outstanding shares on December 31, 2015, at an aggregate cost of $21,513, or an average price of $30.65 per share, under the 2011 and the 2015 Plans. Utilization of the remaining authorization under the 2011 program was completed in January 2016.stock. In total and through December 31, 2016, 2,799,6102019, 2,977,162 shares were repurchased under the 2011 and 2015 PlansProgram at an average price of $25.18$25.94 per share. The repurchase of shares was financedfunded through use of cash. As of December 31, 2016, $29,5112019, $22.8 million remained authorized for future share repurchases under the 2015 Plan authorization.NOTE 9 - Shareholders' Equity and Common Stock Equivalents-(Continued)
At December 31, 2016,2019, the Company held 24,67324,850,484 shares in treasury. Authorization of Preferred Stock In 1996, the shareholders of HMEC approved authorization of 1,000,000 shares of $0.001 par value preferred stock. The Board of Directors is authorized to (1) direct the issuance of the preferred stock in one or more series, (2) fix the dividend rate, conversion or exchange rights, redemption price and liquidation preference, of any series of the preferred stock, (3) fix the number of shares for any series and (4) increase or decrease the number of shares of any series. No shares of preferred stock were issued or outstanding at December 31, 20162019 and 2015.2018. 2010 Comprehensive Executive Compensation Plan In 2010, the shareholders of HMEC approved the 2010 Comprehensive Executive Compensation Plan (the “Comprehensive Plan”)Comprehensive Plan). The purpose of the Comprehensive Plan is to aid the Company in attracting, retaining, motivating and rewarding employees and non-employee Directors; to provide for equitable and competitive compensation opportunities, including deferral opportunities; to encourage long-term service; to recognize individual contributions and reward achievement of Company goals; and to promote the creation of long-term value for the Company’sCompany's shareholders by closely aligning the interests of plan participants with those of shareholders. The Comprehensive Plan authorizes share-based and cash-based incentives for plan participants. In 2012, the shareholders of HMEC approved the implementation of a fungible share pool under which grants of full value shares will count against the share limit as two and one half shares for every share subject to a full value award. In 2015, the shareholders of HMEC approved an amendment and restatement of the
| | | | | Horace Mann Educators Corporation | | Annual Report on Form 10-K 121 |
NOTE 13 - Shareholders' Equity and Common Stock Equivalents (continued)
Comprehensive Plan which included an increase of 3.25 million3,250,000 in the number of shares of common stock reserved for issuance under the Comprehensive Plan. As of December 31, 2016,2019, approximately 2.9 million1,187,200 shares were available for grant under the Comprehensive Plan. Shares of common stock issued under the Comprehensive Plan may be either authorized and unissued shares of HMEC or shares that have been reacquired by HMEC; however, new shares have been issued historically. As further described in the paragraphs below, outstandingCSUs, stock unitsoptions and stock optionsRSUs under the Comprehensive Plan were as follows: | | | | December 31, | | | | | | 2016 | | | | | 2015 | | | | | 2014 | | | | Common stock units related todeferred compensation for Directors | | | 74,058 | | | | 85,200 | | | | 87,993 | | | Common stock units related todeferred compensation for employees | | | 51,502 | | | | 55,443 | | | | 69,598 | | | Stock options | | | 747,032 | | | | 669,693 | | | | 634,437 | | | Restricted common stock unitsrelated to incentive compensation | | | 1,419,268 | | | | 1,442,325 | | | | 1,590,138 | | | Total | | | 2,291,860 | | | | 2,252,661 | | | | 2,382,166 | |
| | | | | | | | | | | | | | December 31, | | | | 2019 | | 2018 | | 2017 | | CSUs related to deferred compensation for Directors | | 28,526 |
| | 32,288 |
| | 61,677 |
| | CSUs related to deferred compensation for employees | | 25,194 |
| | 24,498 |
| | 24,903 |
| | Stock options | | 908,557 |
| | 774,821 |
| | 719,015 |
| | RSUs related to incentive compensation | | 889,438 |
| | 1,008,249 |
| | 1,149,679 |
| | Total | | 1,851,715 |
| | 1,839,856 |
| | 1,955,274 |
|
NOTE 9 - Shareholders' Equity and Common Stock Equivalents-(Continued)
Director Common Stock Units Deferred compensation offor Directors is in the form of common stock units,CSUs, which represent an equal number of common shares to be issued in the future. The outstanding units of Directors serving on the Board accrue dividends at the same rate as dividends paid to HMEC’s shareholders; outstanding units of retired Directors do not accrue dividends.HMEC's shareholders. These dividends are reinvested into additional common stock units.CSUs. Employee Common Stock Units Deferred compensation offor employees is in the form of common stock units,CSUs, which represent an equal number of common shares to be issued in the future. Distributions of employee deferred compensation are allowed to be either in common shares or cash. Through December 31, 2016,2019, all distributions have been in cash. The outstanding units accrue dividends at the same rate as dividends paid to HMEC’sHMEC's shareholders. These dividends are reinvested into additional common stock units.CSUs. Options to purchase shares of HMEC common stock may be granted to executive officers, other employees and Directors. The options become exercisable in installments based on service generally beginning in the first year from the date of grant and generally become fully vested 4 years from the date of grant. The options generally expire 7 to 10 years from the date of grant. The exercise price of the option is equal to the market price of HMEC’sHMEC's common stock on the date of grant resulting in a grant date intrinsic value of $0. Changes in outstanding options were as follows: | | | Weighted Average | | Range of | | Options | | | | | Option Price | | Option Prices | | | | Vested and | | | | | per Share | | per Share | | Outstanding | | Exercisable | | | | | | | | | | | | | | | | December 31, 2015 | | | $24.00 | | | $ 6.91-$33.41 | | | 669,693 | | | | 281,632 | | | | | | | | | | | | | | | | | | | Granted | | | $31.13 | | | $31.01-$36.04 | | | 307,176 | | | | - | | | Vested | | | $22.73 | | | $13.83-$36.04 | | | - | | | | 137,763 | | | Exercised | | | $17.02 | | | $ 6.91-$33.41 | | | (146,278 | ) | | | (146,278 | ) | | Forfeited | | | $27.53 | | | $17.32-$32.35 | | | (83,559 | ) | | | - | | | Expired | | | - | | | - | | | - | | | | - | | | | | | | | | | | | | | | | | | | December 31, 2016 | | | $27.67 | | | $13.83-$36.04 | | | 747,032 | | | | 273,117 | |
| | | | | | | | | | | | | | | Weighted Average Option Price per Share | | Range of Option Prices per Share | | Options | | | | | | Outstanding | | Vested and Exercisable | | December 31, 2018 | | $36.65 | | $17.32-$44.75 | | 774,821 |
| | 271,116 |
| | | | | | | | | | | | Granted | | $39.22 | | $38.99-$42.73 | | 282,040 |
| | — |
| | Vested | | $34.46 | | $20.60-$44.75 | | — |
| | 161,679 |
| | Exercised | | $26.98 | | $17.32-$42.95 | | (64,095 | ) | | (64,095 | ) | | Forfeited | | $39.97 | | $31.01-$44.75 | | (84,209 | ) | | — |
| | Expired | | — | | — | | — |
| | — |
| | December 31, 2019 | | $37.82 | | $20.60-$44.75 | | 908,557 |
| | 368,700 |
|
| | F-94 | | | 122 Annual Report on Form 10-K | | Horace Mann Educators Corporation |
NOTE 913 - Shareholders' Equity and Common Stock Equivalents-(Continued)Equivalents (continued)
Option information segregated by ranges of exercise prices waswere as follows: | | | December 31, 2016 | | | | | | Total Outstanding Options | | | Vested and Exercisable Options | | | | | | | | | | Weighted | | | Weighted | | | | | | Weighted | | | Weighted | | | | | Range of | | | | | Average | | | Average | | | | | | Average | | | Average | | | | | Option Prices | | | | | Option Price | | | Remaining | | | | | | Option Price | | | Remaining | | | | | per Share | | Options | | | per Share | | | Term | | | Options | | | per Share | | | Term | | | | | | | | | | | | | | | | | | | | | | | | | | | $13.83-$20.75 | | | 176,688 | | | | $18.57 | | | | 2.3 years | | | | 157,029 | | | | $18.32 | | | | 2.3 years | | | | | $28.88-$31.13 | | | 450,674 | | | | $29.91 | | | | 8.2 years | | | | 87,832 | | | | $27.50 | | | | 6.2 years | | | | | $32.35-$36.04 | | | 119,670 | | | | $32.67 | | | | 8.3 years | | | | 28,256 | | | | $32.39 | | | | 8.2 years | | | Total | | $13.83-$36.04 | | | 747,032 | | | | $27.67 | | | | 6.9 years | | | | 273,117 | | | | $22.73 | | | | 4.1 years | |
| | | | | | | | | | | | | | | | | | | | | | | December 31, 2019 | | | | | | Total Outstanding Options | | Vested and Exercisable Options | | | | Range of Option Prices per Share | | Options | | Weighted Average Option Price per Share | | Weighted Average Remaining Term | | Options | | Weighted Average Option Price per Share | | Weighted Average Remaining Term | | | | $20.60-$22.69 | | 11,100 |
| | $22.34 | | 0.36 | | 11,100 |
| | $22.34 | | 0.36 years | | | | $28.88-$32.35 | | 271,579 |
| | $30.94 | | 5.65 | | 222,499 |
| | $30.92 | | 5.53 years | | | | $38.05-$41.95 | | 415,356 |
| | $40.14 | | 8.36 | | 85,766 |
| | $41.80 | | 7.19 years | | | | $42.95-$44.75 | | 210,522 |
| | $42.94 | | 8.30 | | 49,335 |
| | $43.00 | | 8.19 years | | Total | |
| | 908,557 |
| | $37.82 | | 7.44 | | 368,700 |
| | $34.81 | | 6.11 years |
The weighted average exercise prices of vested and exercisable options as of December 31, 20152018 and 20142017 were $19.32$31.42 and $17.20,$27.12, respectively. As of December 31, 2016,2019, based on a closing stock price of $42.80$43.66 per share, the aggregate intrinsic (in-the-money) values of vested options and all options outstanding were $5,482$3.3 million and $11,303,$5.3 million, respectively. Restricted Common Stock Units Restricted common stock units
RSUs may be granted to executive officers, other employees and Directors and represent an equal number of common shares to be issued in the future. The restricted common stock unitsRSUs vest in installments based on service or attainment of performance criteria generally beginning in the first year from the date of grant and generally become fully vested 1 to 5 years from the date of grant. The outstanding units accrue dividends at the same rate as dividends paid to HMEC’sHMEC's shareholders. These dividends are reinvested into additional restricted common stock units.RSUs. Changes in outstanding restricted common stock unitsRSUs were as follows: | | | Total Outstanding Units | | Vested Units | | | | | | | Weighted Average | | | | Weighted Average | | | | | | | Grant Date Fair | | | | Grant Date Fair | | | | | Units | | Value per Unit | | | Units | | Value per Unit | | | | | | | | | | | | | | | | | | | | December 31, 2015 | | | 1,442,325 | | | | $24.29 | | | | 849,912 | | | | $15.51 | | | | | | | | | | | | | | | | | | | | | Granted (1) | | | 370,175 | | | | $31.75 | | | | - | | | | - | | | Vested | | | - | | | | - | | | | 262,074 | | | | $22.92 | | | Forfeited | | | (49,310 | ) | | | $26.01 | | | | - | | | | - | | | Distributed (2) | | | (343,922 | ) | | | $18.28 | | | | (343,922 | ) | | | $18.28 | | | | | | | | | | | | | | | | | | | | | December 31, 2016 | | | 1,419,268 | | | | $27.63 | | | | 768,064 | | | | $16.80 | |
| | | | | | | | | | | | | | | Total Outstanding Units | | Vested Units | | | | Units | | Weighted Average Grant Date Fair Value per Unit | | Units | | Weighted Average Grant Date Fair Value per Unit | | December 31, 2018 | | 1,008,249 |
| | $35.64 | | 417,179 |
| | $20.22 | | | | | | | | | | | Granted (1) | | 210,712 |
| | $41.52 | | — |
| | — | | Adjustment for performance achievement | | (3,789 | ) | | $32.16 | | — |
| | — | | Vested | | — |
| | — | | 417,454 |
| | $33.93 | | Forfeited | | (34,895 | ) | | $43.08 | | — |
| | — | Distributed (2) | | (290,839 | ) | | $31.39 | | (290,839 | ) | | $31.39 | | | | | | | | | | | | December 31, 2019 | | 889,438 |
| | $31.94 | | 543,794 |
| | $24.77 |
| | (1) | Includes dividends reinvested into additional restricted common stock units.RSUs. |
| | (2) | Includes distributed units which were utilized to satisfy withholding taxes due on the distribution. |
| | F-95 | | | Horace Mann Educators Corporation | | Annual Report on Form 10-K 123 |
NOTE 1014 - Statutory Information and Restrictions
The insurance departments of various states in which the insurance subsidiaries of HMEC are domiciled recognize as net income and surplus those amounts determined in conformity with statutory accounting principles prescribed or permitted by the insurance departments, which differ in certain respects from GAAP. Reconciliations of statutory capital and surplus and net income, as determined using statutory accounting principles, to the amounts included in the accompanying consolidated financial statements are as follows: | | | | December 31, | | | | | | | | | | 2016 | | | | 2015 | | | | | | | | | | | | | | | | | | | Statutory capital and surplus of insurance subsidiaries | | $ | 912,336 | | | $ | 883,870 | | | | | | | Increase (decrease) due to: | | | | | | | | | | | | | | Deferred policy acquisition costs | | | 267,580 | | | | 253,176 | | | | | | | Difference in policyholder reserves | | | 98,360 | | | | 95,536 | | | | | | | Goodwill | | | 47,396 | | | | 47,396 | | | | | | | Investment fair value adjustments on fixed maturities | | | 301,518 | | | | 314,705 | | | | | | | Difference in investment reserves | | | 125,805 | | | | 120,795 | | | | | | | Federal income tax liability | | | (228,090 | ) | | | (224,492 | ) | | | | | | Net funded status of pension and other postretirement benefit obligations | | | (18,250 | ) | | | (18,213 | ) | | | | | | Non-admitted assets and other, net | | | 22,888 | | | | 21,691 | | | | | | | Shareholders' equity of parent company and non-insurance subsidiaries | | | 11,648 | | | | 17,172 | | | | | | | Parent company short-term and long-term debt | | | (247,209 | ) | | | (246,975 | ) | | | | | | Shareholders' equity as reported herein | | $ | 1,293,982 | | | $ | 1,264,661 | | | | | |
| | | | Year Ended December 31, | | | | | | 2016 | | | | 2015 | | | | 2014 | | | | | | | | | | | | | | Statutory net income of insurance subsidiaries | | $ | 74,574 | | | $ | 87,619 | | | $ | 97,875 | | | Net loss of non-insurance companies | | | (5,135 | ) | | | (4,474 | ) | | | (3,906 | ) | | Interest expense | | | (11,808 | ) | | | (13,122 | ) | | | (14,198 | ) | | Debt retirement costs | | | - | | | | (2,338 | ) | | | - | | | Tax benefit of interest expense and other parent company current tax adjustments | | | 5,637 | | | | 6,829 | | | | 6,371 | | | Combined net income | | | 63,268 | | | | 74,514 | | | | 86,142 | | | Increase (decrease) due to: | | | | | | | | | | | | | | Deferred policy acquisition costs | | | 19,442 | | | | 13,249 | | | | 16,828 | | | Policyholder benefits | | | 14,919 | | | | 14,065 | | | | 15,284 | | | Federal income tax expense | | | (5,312 | ) | | | (6,678 | ) | | | (10,548 | ) | | Investment reserves | | | (1,320 | ) | | | 7,339 | | | | 3,574 | | | Other adjustments, net | | | (7,232 | ) | | | (9,007 | ) | | | (7,037 | ) | | Net income as reported herein | | $ | 83,765 | | | $ | 93,482 | | | $ | 104,243 | |
HMEC
| | | | | | | | | | | ($ in thousands) | | December 31, | | | | 2019 | | 2018 | | Statutory capital and surplus of insurance subsidiaries | | $ | 868,839 |
| | $ | 903,564 |
| | Increase (decrease) due to: | | | | | | Deferred policy acquisition costs | | 276,668 |
| | 298,742 |
| | Deposit asset on reinsurance | | 2,346,166 |
| | — |
| | Annuity reserves ceded | | (2,239,717 | ) | | — |
| | Difference in policyholder reserves | | 209,127 |
| | 142,601 |
| | Goodwill | | 49,079 |
| | 47,396 |
| | Intangible assets, net | | 177,217 |
| | — |
| | Investment fair value adjustments on fixed maturity securities | | 397,762 |
| | 142,512 |
| | Difference in investment reserves | | 102,380 |
| | 105,430 |
| | Federal income tax liability | | (178,026 | ) | | (115,667 | ) | | Net funded status of benefit plans | | (13,690 | ) | | (15,495 | ) | | Non-admitted assets and other, net | | (53,801 | ) | | 20,412 |
| Shareholders' equity of parent company and non-insurance subsidiaries | | 8,306 |
| | 8,795 |
| | Parent company short-term and long-term debt | | (383,025 | ) | | (247,740 | ) | | Shareholders' equity as reported herein | | $ | 1,567,285 |
| | $ | 1,290,550 |
|
| | | | | | | | | | | | | | | ($ in thousands) | | Years Ended December 31, | | | | 2019 | | 2018 | | 2017 | | Statutory net income of insurance subsidiaries | | $ | 62,316 |
| | $ | 45,977 |
| | $ | 82,587 |
| | Net loss of non-insurance companies | | (9,537 | ) | | (9,755 | ) | | (4,496 | ) | | Interest expense | | (14,272 | ) | | (11,892 | ) | | (11,836 | ) | Tax benefit of interest expense and other parent company current tax adjustments | | 8,993 |
| | 121 |
| | 5,654 |
| | Combined net income | | 47,500 |
| | 24,451 |
| | 71,909 |
| | Increase (decrease) due to: | | | | | | | | Deferred policy acquisition costs | | 2,101 |
| | 1,015 |
| | 9,385 |
| | Intangible asset amortization expense | | (8,790 | ) | | — |
| | — |
| | Policyholder benefits | | 117,369 |
| | 26,318 |
| | 30,609 |
| | Federal income tax (expense) benefit | | (23,492 | ) | | 3,020 |
| | 84,198 |
| | Investment reserves | | 88,627 |
| | (31,529 | ) | | (20,966 | ) | | Other adjustments, net | | (38,872 | ) | | (4,932 | ) | | (5,676 | ) | | Net income as reported herein | | $ | 184,443 |
| | $ | 18,343 |
| | $ | 169,459 |
|
The Company has principal insurance subsidiaries domiciled in Illinois, New York and Texas. The statutory financial statements of these subsidiaries are prepared in accordance with accounting principles prescribed or permitted by the Illinois Department of Insurance, the New York Department of Insurance and the Texas Department of Insurance, as applicable. Prescribed statutory accounting principles include a variety of publications of the National Association of Insurance Commissioners (the “NAIC”)(NAIC), as well as state laws, regulations and general administrative rules.
| | F-96 | | | 124 Annual Report on Form 10-K | | Horace Mann Educators Corporation |
NOTE 1014 - Statutory Information and Restrictions-(Continued)Restrictions (continued)
The NAIC has risk-based capital guidelines to evaluate the adequacy of statutory capital and surplus in relation to risks assumed in investments, reserving policies, and volume and types of insurance business written. At December 31, 20162019 and 2015,2018, the minimum statutory-basis capital and surplus required to be maintained by HMEC’sHMEC's insurance subsidiaries was $148,583$108.1 million and $139,949,$108.5 million, respectively. At December 31, 20162019 and 2015,2018, statutory capital and surplus of each of the Company’sCompany's insurance subsidiaries was above required levels. The restricted net assets of HMEC’sHMEC's insurance subsidiaries were $18,119$26.0 million and $18,312$17.7 million as of December 31, 20162019 and 2015,2018, respectively. The minimum statutory-basisstatutory basis capital and surplus amount at each date is the total estimated authorized control level risk-based capital for all of HMEC’sHMEC's insurance subsidiaries combined. Authorized control level risk-based capital represents the minimum level of statutory-basisstatutory basis capital and surplus necessary before the insurance commissioner in the respective state of domicile is authorized to take whatever regulatory actions considered necessary to protect the best interests of the policyholders and creditors of the insurer. The amount of restricted net assets represents the combined fair value of securities on deposit with governmental agencies for the insurance subsidiaries as required by law in various states in which the insurance subsidiaries of HMEC conduct business. HMEC relies largely on dividends from its insurance subsidiaries to meet its obligations for payment of principal and interest on debt, dividends to shareholders and parent company operating expenses, including tax payments pursuant to tax sharing agreements. Payments for share repurchase programs also have this dependency. HMEC’sHMEC's insurance subsidiaries are subject to various regulatory restrictions which limit the amount of annual dividends or other distributions, including loans or cash advances, available to HMEC without prior approval of the insurance regulatory authorities. As a result, HMEC may not be able to receive dividends from such subsidiaries at times and in amounts necessary to pay desired dividends to shareholders. The aggregatemaximum amount of dividends that may be paid in 20172020 from all of HMEC’sHMEC's insurance subsidiaries without prior regulatory approval is approximately $91,000.$105.3 million, excluding the impact and timing of prior year dividends. As disclosed in the reconciliation of the statutory capital and surplus of insurance subsidiaries to the consolidated GAAP shareholders’shareholders' equity, the insurance subsidiaries have statutory capital and surplus of $912,336$868.8 million as of December 31, 2016,2019, which is subject to regulatory restrictions. The parent company equity is not restricted. At December 31, 2016, HMEC had $4,069 of liquid assets, comprised of investments and cash, which could be used to fund debt interest, general corporate obligations, as well as dividend payments to shareholders. If necessary, HMEC also has other potential sources of liquidity that could provide for additional funding to meet corporate obligations or pay shareholder dividends, which include a revolving line of credit, as well as issuances of various securities.At the time of this Annual Report on Form 10-K and during each of the years in the three year period ended December 31, 2016, the Company had no financial reinsurance agreements in effect.
NOTE 1115 - PensionRetirement Plans and Other Postretirement Benefits The Company sponsors three2 qualified and two3 non-qualified retirement plans. Substantially all employees participate in the 401(k) plan and through December 31, 2014 participated in the non-contributory defined contribution plan. Both the qualified defined benefit plan and the 2 non-qualified supplemental defined benefit plans have been frozen since 2002. All participants in boththe frozen plans are 100% vested in their accrued benefit and all non-qualified supplemental defined benefit plan participants are receiving payment.payments. Certain employees participate in a non-qualified defined contribution plan.
All employees participate in the 401(k) plan and receive a 100% vested 3% “safe harbor”"safe harbor" company contribution based on employees’employees' eligible earnings. Effective January 1, 2015, theThe Company began matchingmatches each dollar of employee contributions up to a 5% maximum — in addition to maintaining the automatic 3% “safe harbor”"safe harbor" contribution. The new matching company contribution vests after 5 years of service. The 401(k) plan is fully funded. Prior to 2015, employees participated in a defined contribution plan after one year of service; contributions were made based on eligible earnings and years of service and were credited to each employee’s individual plan account.
The majority of employees received a 5% contribution. Accounts vested after 3 years of service. The Company terminated this fully funded defined contribution plan on December 31, 2014 and all participant accounts became 100% vested. The majority of plan assets were distributed to participants in 2015, with a final settlement of all remaining participant accounts in 2016 through the purchase of qualified individual annuities under a HMLIC group annuity contract.In 2002, participants ceased accruing benefits for earnings and years of service in the frozen defined benefit plan. A substantial number of those participants are former employees of the Company who are not eligible to receive an immediate annuity benefit until age 65 and/or are not eligible for a lump sum distribution. In November 2014, the Company announced a cash-out election period or “window” ending in December 2014, for terminated vested participants with accrued lump sum values under $100. During the window, 385 former employees elected to receive a total of approximately $4,200 in lump sum distributions, resulting in approximately $1,600 of additional settlement expense in 2014. Subsequently, in August of 2016, the Company announced a second cash-out election “window” ending in September 2016 for all vested terminated participants, regardless of lump sum value. During this window, 52 former employees elected to receive a total of approximately $1,400 in lump sums distributions.
The Company’sCompany's policy for the frozen defined benefit plan is to contribute to the plan amounts which are actuarially determined to provide sufficient funding to meet future benefit payments as defined by federal laws and regulations.
For the two2 qualified plans, all assets are held in their respective plan trusts.
NOTE 11 - Pension Plans and Other Postretirement Benefits-(Continued)
Non-qualified Plans The non-qualified plans were established for specific employees whose otherwise eligible earnings exceeded the statutory limits under the qualified plans. Benefit accruals under the non-qualified supplemental defined benefit planplans were frozen in 2002 and all participants are currently in payment status. Both the non-qualified frozen supplemental defined benefit planplans and the non-qualified contribution plan are unfunded plans with the Company’sCompany's contributions made at the time payments are made to participants.
| | | | | Horace Mann Educators Corporation | | Annual Report on Form 10-K 125 |
NOTE 15 - Retirement Plans and Other Postretirement Benefits (continued)
Total Expense and Contribution Plans’Plans' Information Total expense recorded for the qualified and non-qualified defined contribution, 401(k), defined benefit and supplemental retirement plans was $8,527, $8,899$9.3 million, $8.9 million and $11,850$9.1 million for the years ended December 31, 2016, 20152019, 2018 and 2014,2017, respectively. Contributions to employees' accounts under the qualified defined contribution plan, the 401(k) plan and the non-qualified defined contribution plan, as well as total assets of the plans, were as follows: | | | | Year Ended December 31, | | | | | | 2016 | | | | 2015 | | | | 2014 | | | 401(k) plan | | | | | | | | | | | | | | Contributions to employees’ accounts | | $ | 6,918 | | | $ | 6,466 | | | $ | 2,753 | | | Total assets at the end of the year | | | 177,352 | | | | 161,956 | | | | 132,053 | | | | | | | | | | | | | | | | | Qualified defined contribution plan | | | | | | | | | | | | | | Contributions to employees’ accounts | | | - | | | | - | | | | 4,580 | | | Total assets at the end of the year | | | - | | | | 9,118 | | | | 123,008 | | | | | | | | | | | | | | | | | Non-qualified defined contribution plan | | | | | | | | | | | | | | Contributions to employees’ accounts | | | 72 | | | | 122 | | | | 74 | | | Total assets at the end of the year | | | - | | | | - | | | | - | |
| | | | | | | | | | | | | | | ($ in thousands) | | Year Ended December 31, | | | | 2019 | | 2018 | | 2017 | | 401(k) plan | | | | | | | | Contributions to employees' accounts | | $ | 8,233 |
| | $ | 7,655 |
| | $ | 7,637 |
| | Total assets at the end of the year | | 206,247 |
| | 167,767 |
| | 180,514 |
| | | | | | | | | | Non-qualified defined contribution plan | | | | | | | | Contributions to employees' accounts | | 58 |
| | 70 |
| | 84 |
| | Total assets at the end of the year | | — |
| | — |
| | — |
|
| | F-99 | | | 126 Annual Report on Form 10-K | | Horace Mann Educators Corporation |
NOTE 1115 - PensionRetirement Plans and Other Postretirement Benefits-(Continued)
Benefits (continued)
Defined Benefit Plan and Supplemental Retirement Plans The following tables summarize the funded status of the defined benefit and supplemental retirement pension plans as of December 31, 2016, 20152019, 2018 and 20142017 (the measurement dates) and identify (1) the assumptions used to determine the projected benefit obligation and (2) the components of net pension cost for the defined benefit plan and supplemental retirement plans for the following periods: | | | | | | Supplemental | | | | | Defined Benefit Plan | | Defined Benefit Plans | | | | December 31, | | December 31, | | | | 2016 | | 2015 | | 2014 | | 2016 | | 2015 | | 2014 | | Change in benefit obligation: | | | | | | | | | | | | | | | | | | | | | | | | | | Projected benefit obligation at beginning of year | | $ | 31,233 | | | $ | 34,279 | | | $ | 39,483 | | | $ | 17,004 | | | $ | 18,524 | | | $ | 16,706 | | | Service cost | | | 650 | | | | 450 | | | | 360 | | | | - | | | | - | | | | - | | | Interest cost | | | 1,244 | | | | 1,189 | | | | 1,679 | | | | 687 | | | | 654 | | | | 716 | | | Plan amendments | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | Actuarial loss (gain) | | | (220 | ) | | | (1,371 | ) | | | 1,254 | | | | 488 | | | | (845 | ) | | | 2,431 | | | Benefits paid | | | (3,500 | ) | | | (3,314 | ) | | | (1,737 | ) | | | (1,332 | ) | | | (1,329 | ) | | | (1,329 | ) | | Settlements | | | - | | | | - | | | | (6,760 | ) | | | - | | | | - | | | | - | | | Projected benefit obligation at end of year | | $ | 29,407 | | | $ | 31,233 | | | $ | 34,279 | | | $ | 16,847 | | | $ | 17,004 | | | $ | 18,524 | | | Change in plan assets: | | | | | | | | | | | | | | | | | | | | | | | | | | Fair value of plan assets at beginning of year | | $ | 27,667 | | | $ | 31,408 | | | $ | 35,879 | | | $ | - | | | $ | - | | | $ | - | | | Actual return on plan assets | | | 1,766 | | | | 200 | | | | 2,535 | | | | - | | | | - | | | | - | | | Employer contributions | | | - | | | | - | | | | 2,000 | | | | 1.332 | | | | 1,329 | | | | 1,329 | | | Benefits paid | | | (3,500 | ) | | | (3,314 | ) | | | (1,737 | ) | | | (1,332 | ) | | | (1,329 | ) | | | (1,329 | ) | | Expenses paid | | | (487 | ) | | | (627 | ) | | | (509 | ) | | | - | | | | - | | | | - | | | Settlements | | | - | | | | - | | | | (6,760 | ) | | | - | | | | - | | | | - | | | Fair value of plan assets at end of year | | $ | 25,446 | | | $ | 27,667 | | | $ | 31,408 | | | $ | - | | | $ | - | | | $ | - | | | Funded status | | $ | (3,961 | ) | | $ | (3,566 | ) | | $ | (2,871 | ) | | $ | (16,847 | ) | | $ | (17,004 | ) | | $ | (18,524 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | Prepaid (accrued) benefit expense | | $ | 8,653 | | | $ | 9,265 | | | $ | 10,656 | | | $ | (11,210 | ) | | $ | (11,622 | ) | | $ | (12,024 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total amount recognized in | | | | | | | | | | | | | | | | | | | | | | | | | | Consolidated Balance Sheets, all in Other liabilities | | $ | (3,961 | ) | | $ | (3,566 | ) | | $ | (2,871 | ) | | $ | (16,847 | ) | | $ | (17,004 | ) | | $ | (18,524 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | Amounts recognized in accumulated other comprehensive income (loss) (“AOCI”): | | | | | | | | | | | | | | | | | | | | | | | | | | Prior service cost | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | Net actuarial loss | | | 12,613 | | | | 12,831 | | | | 13,527 | | | | 5,637 | | | | 5,382 | | | | 6,500 | | | Total amount recognized in AOCI | | $ | 12,613 | | | $ | 12,831 | | | $ | 13,527 | | | $ | 5,637 | | | $ | 5,382 | | | $ | 6,500 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Information for pension plans with an accumulated benefit obligation greater than plan assets: | | | | | | | | | | | | | | | | | | | | | | | | | | Projected benefit obligation | | $ | 29,407 | | | $ | 31,233 | | | $ | 34,279 | | | $ | 16,847 | | | $ | 17,004 | | | $ | 18,524 | | | Accumulated benefit obligation | | | 29,407 | | | | 31,233 | | | | 34,279 | | | | 16,847 | | | | 17,004 | | | | 18,524 | | | Fair value of plan assets | | | 25,446 | | | | 27,667 | | | | 31,408 | | | | - | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | ($ in thousands) | | Defined Benefit Plan | | Supplemental Defined Benefit Plans | | | | December 31, | | December 31, | | | | 2019 | | 2018 | | 2017 | | 2019 | | 2018 | | 2017 | | Change in benefit obligation: | | | | | | | | | | | | | Projected benefit obligation at beginning of year | | $ | 25,075 |
| | $ | 28,432 |
| | $ | 29,407 |
| | $ | 15,404 |
| | $ | 16,832 |
| | $ | 16,847 |
| | Service cost | | 650 |
| | 650 |
| | 650 |
| | — |
| | — |
| | — |
| | Interest cost | | 997 |
| | 947 |
| | 1,091 |
| | 620 |
| | 566 |
| | 631 |
| | Plan amendments | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | Actuarial loss (gain) | | 101 |
| | (2,208 | ) | | (721 | ) | | 516 |
| | (789 | ) | | 805 |
| | Benefits paid | | (2,003 | ) | | (2,746 | ) | | (1,995 | ) | | (1,312 | ) | | (1,205 | ) | | (1,451 | ) | | Settlements | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | Projected benefit obligation at end of year | | $ | 24,820 |
| | $ | 25,075 |
| | $ | 28,432 |
| | $ | 15,228 |
| | $ | 15,404 |
| | $ | 16,832 |
| | Change in plan assets: | | | | | | | | | | | | | Fair value of plan assets at beginning of year | | $ | 22,090 |
| | $ | 25,843 |
| | $ | 25,446 |
| | $ | — |
| | $ | — |
| | $ | — |
| | Actual return on plan assets | | 3,471 |
| | (640 | ) | | 2,909 |
| | — |
| | — |
| | — |
| | Employer contributions | | — |
| | — |
| | — |
| | 1,312 |
| | 1,205 |
| | 1,451 |
| | Benefits paid | | (2,003 | ) | | (2,746 | ) | | (1,995 | ) | | (1,312 | ) | | (1,205 | ) | | (1,451 | ) | | Expenses paid | | (394 | ) | | (367 | ) | | (517 | ) | | — |
| | — |
| | — |
| | Settlements | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | Fair value of plan assets at end of year | | $ | 23,164 |
| | $ | 22,090 |
| | $ | 25,843 |
| | $ | — |
| | $ | — |
| | $ | — |
| | Funded status | | $ | (1,656 | ) | | $ | (2,985 | ) | | $ | (2,589 | ) | | $ | (15,228 | ) | | $ | (15,404 | ) | | $ | (16,832 | ) | | | | | | | | | | | | | | | | Prepaid (accrued) benefit expense | | $ | 6,690 |
| | $ | 7,425 |
| | $ | 8,016 |
| | $ | (9,884 | ) | | $ | (10,320 | ) | | $ | (10,648 | ) | | | | | | | | | | | | | | | Total amount recognized in Consolidated Balance Sheets, all in Other liabilities | | $ | (1,656 | ) | | $ | (2,985 | ) | | $ | (2,589 | ) | | $ | (15,228 | ) | | $ | (15,404 | ) | | $ | (16,832 | ) | | | | | | | | | | | | | | | Amounts recognized in accumulated other comprehensive income (loss) (AOCI): | | | | | | | | | | | | | | Prior service cost | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | Net actuarial loss | | (8,345 | ) | | 10,410 |
| | 10,605 |
| | (5,345 | ) | | 5,084 |
| | 6,184 |
| | Total amount recognized in AOCI | | $ | (8,345 | ) | | $ | 10,410 |
| | $ | 10,605 |
| | $ | (5,345 | ) | | $ | 5,084 |
| | $ | 6,184 |
| | | | | | | | | | | | | | | Information for pension plans with an accumulated benefit obligation greater than plan assets: | | | | | | | | | | | | | | Projected benefit obligation | | $ | 24,820 |
| | $ | 25,075 |
| | $ | 28,432 |
| | $ | 15,228 |
| | $ | 15,404 |
| | $ | 16,832 |
| | Accumulated benefit obligation | | 24,820 |
| | 25,075 |
| | 28,432 |
| | 15,228 |
| | 15,404 |
| | 16,832 |
| | Fair value of plan assets | | 23,164 |
| | 22,090 |
| | 25,843 |
| | — |
| | — |
| | — |
|
| | F-100 | | | Horace Mann Educators Corporation | | Annual Report on Form 10-K 127 |
NOTE 1115 - PensionRetirement Plans and Other Postretirement Benefits-(Continued)Benefits (continued)
The change in the Company’sCompany's AOCI for the defined benefit plans for the year ended December 31, 20162019 was primarily attributable to better than expected asset returns, updates to mortality assumptions and updated census dates offset by a decrease in the discount rate, partially offset by the performance of plan assets.rate. The change in the Company’sCompany's AOCI for the defined benefit plans for the year ended December 31, 20152018 was primarily attributable to lower than expected asset returns and updates to mortality assumptions and an increase in the discount rate, partially offset by the performance of plan assets.rate. The change in the Company’sCompany's AOCI for the defined benefit plans for the year ended December 31, 20142017 was primarily attributable to loss recognition in 2014, duebetter than expected asset returns and updates to settlement accounting as well as loss amortization included in net periodic benefit cost for 2014. This loss recognition wasmortality assumptions partially offset by liability losses in 2014 due to a decrease in the discount rate as well as a change in the mortality assumption.| | | | | | Supplemental | | | | | Defined Benefit Plan | | Defined Benefit Plans | | | | Year Ended December 31, | | Year Ended December 31, | | | | 2016 | | 2015 | | 2014 | | 2016 | | 2015 | | 2014 | | Components of net periodic pension (income) expense: | | | | | | | | | | | | | | | | | | | | | | | | | | Service cost: | | | | | | | | | | | | | | | | | | | | | | | | | | Benefit accrual | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | Other expenses | | | 650 | | | | 450 | | | | 360 | | | | - | | | | - | | | | - | | | Interest cost | | | 1,244 | | | | 1,189 | | | | 1,679 | | | | 687 | | | | 654 | | | | 716 | | | Expected return on plan assets | | | (1,675 | ) | | | (1,875 | ) | | | (2,402 | ) | | �� | - | | | | - | | | | - | | | Settlement loss | | | - | | | | - | | | | 2,668 | | | | - | | | | - | | | | - | | | Amortization of: | | | | | | | | | | | | | | | | | | | | | | | | | | Prior service cost | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | Actuarial loss | | | 393 | | | | 1,626 | | | | 1,371 | | | | 233 | | | | 273 | | | | 157 | | | Net periodic pension expense | | $ | 612 | | | $ | 1,390 | | | $ | 3,676 | | | $ | 920 | | | $ | 927 | | | $ | 873 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Changes in plan assets and benefit obligations included in other comprehensive income (loss): | | | | | | | | | | | | | | | | | | | | | | | | | | Prior service cost | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | Net actuarial loss (gain) | | | 175 | | | | 930 | | | | (1,037 | ) | | | 488 | | | | (845 | ) | | | 2,431 | | | Amortization of: | | | | | | | | | | | | | | | | | | | | | | | | | | Prior service cost | | | - | | | | - | | | | - | | | | - | | | | - | | | | (2 | ) | | Actuarial loss | | | (393 | ) | | | (1,626 | ) | | | (1,371 | ) | | | (233 | ) | | | (273 | ) | | | (157 | ) | | Total recognized in other comprehensive income (loss) | | $ | (218 | ) | | $ | (696 | ) | | $ | (2,408 | ) | | $ | 255 | | | $ | (1,118 | ) | | $ | 2,272 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Weighted average assumptions used to determine expense: | | | | | | | | | | | | | | | | | | | | | | | | | | Discount rate | | | 4.20 | % | | | 3.66 | % | | | 4.46 | % | | | 4.20 | % | | | 3.66 | % | | | 4.46 | % | | Expected return on plan assets | | | 6.50 | % | | | 6.75 | % | | | 7.50 | % | | | 6.50 | % | | | * | | | | * | | | Annual rate of salary increase | | | * | | | | * | | | | * | | | | * | | | | * | | | | * | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Weighted average assumptions used to determine benefit obligations as of December 31: | | | | | | | | | | | | | | | | | | | | | | | | | | Discount rate | | | 3.90 | % | | | 4.20 | % | | | 3.66 | % | | | 3.90 | % | | | 4.20 | % | | | 3.66 | % | | Expected return on plan assets | | | 6.50 | % | | | 6.75 | % | | | 7.50 | % | | | 6.50 | % | | | * | | | | * | | | Annual rate of salary increase | | | * | | | | * | | | | * | | | | * | | | | * | | | | * | |
* Not applicable.
| | | | | | | | | | | | | | | | | | | | | | | | | | | ($ in thousands) | | Defined Benefit Plan | | Supplemental Defined Benefit Plans | | | | Year Ended December 31, | | Year Ended December 31, | | | | 2019 | | 2018 | | 2017 | | 2019 | | 2018 | | 2017 | Components of net periodic pension (income) expense: | | | | | | | | | | | | | | Service cost: | | | | | | | | | | | | | | Benefit accrual | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | Other expenses | | 650 |
| | 650 |
| | 650 |
| | — |
| | — |
| | — |
| | Interest cost | | 997 |
| | 947 |
| | 1,091 |
| | 620 |
| | 566 |
| | 631 |
| | Expected return on plan assets | | (1,222 | ) | | (1,377 | ) | | (1,493 | ) | | — |
| | — |
| | — |
| | Settlement loss | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | Amortization of: | | | | | | | | | | | | | | Prior service cost | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | Actuarial loss | | 310 |
| | 371 |
| | 389 |
| | 256 |
| | 310 |
| | 258 |
| | Net periodic pension expense | | $ | 735 |
| | $ | 591 |
| | $ | 637 |
| | $ | 876 |
| | $ | 876 |
| | $ | 889 |
| | | | | | | | | | | | | | | Changes in plan assets and benefit obligations included in other comprehensive income (loss): | | |
| | |
| | |
| | |
| | |
| | |
| | Prior service cost | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | Net actuarial loss (gain) | | (1,755 | ) | | 177 |
| | (1,619 | ) | | 516 |
| | (789 | ) | | 805 |
| | Amortization of: | | | | | | | | | | | | | | Prior service cost | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | Actuarial loss | | (310 | ) | | (371 | ) | | (389 | ) | | (256 | ) | | (310 | ) | | (258 | ) | Total recognized in other comprehensive income (loss) | | $ | (2,065 | ) | | $ | (194 | ) | | $ | (2,008 | ) | | $ | 260 |
| | $ | (1,099 | ) | | $ | 547 |
| | | | | | | | | | | | | | | Weighted average assumptions used to determine expense: | | |
| | |
| | |
| | |
| | |
| | |
| | Discount rate | | 4.20 | % | | 3.50 | % | | 3.90 | % | | 4.20 | % | | 3.50 | % | | 3.90 | % | | Expected return on plan assets | | 5.75 | % | | 5.90 | % | | 6.25 | % | | * |
| | * |
| | * |
| | Annual rate of salary increase | | * |
| | * |
| | * |
| | * |
| | * |
| | * |
| | | | | | | | | | | | | | | Weighted average assumptions used to determine benefit obligations as of December 31: | | |
| | |
| | |
| | |
| | |
| | |
| | Discount rate | | 3.10 | % | | 4.20 | % | | 3.50 | % | | 3.10 | % | | 4.20 | % | | 3.50 | % | | Expected return on plan assets | | 5.75 | % | | 5.90 | % | | 6.25 | % | | * |
| | * |
| | * |
| | Annual rate of salary increase | | * |
| | * |
| | * |
| | * |
| | * |
| | * |
|
| | F-101 | | | 128 Annual Report on Form 10-K | | Horace Mann Educators Corporation |
NOTE 1115 - PensionRetirement Plans and Other Postretirement Benefits-(Continued)Benefits (continued)
The discount rates at December 31, 20162019 were based on the average yield for long-term, high-grade securities available during the benefit payout period. To set its discount rate, the Company looks to leading indicators, including the Mercer Above Mean Yield Curve. The assumption for the long-term rate of return on plan assets was determined by considering actual investment experience during the lifetime of the plan, balanced with reasonable expectations of future growth considering the various classes of assets and percentage allocation for each asset class. The Company has an investment policy for the defined benefit pension plan that aligns the assets within the plan’splan's trust to an approximate allocation of 50% equity and 50% fixed income funds. Management believes this allocation will produce the targeted long-term rate of return on assets necessary for payment of future benefit obligations, while providing adequate liquidity for payments to current beneficiaries. Assets are reviewed against the defined benefit pension plan’splan's investment policy and the trustee has been directed to adjust invested assets at least quarterly to maintain the target allocation percentages. Fair values of the equity security funds and fixed income funds have been determined from public quotations. The following table presents the fair value hierarchy for the Company’sCompany's defined benefit pension plan assets, excluding cash held. | | | | | Fair Value Measurements at | | | | | | Reporting Date Using | | | | Total | | Level 1 | | Level 2 | | Level 3 | | December 31, 2016 | | | | | | | | | | | | | | | | | | | | Asset category | | | | | | | | | | | | | | | | | | | | Equity security funds (1) | | | | | | | | | | | | | | | | | | | | United States | | $ | 9,836 | | | | $ | - | | | $ | 9,836 | | | | $ | - | | | International | | | 2,492 | | | | | - | | | | 2,492 | | | | | - | | | Fixed income funds | | | 12,402 | | | | | - | | | | 12,402 | | | | | - | | | Short-term investment funds | | | 716 | | | | | 716 | | | | - | | | | | - | | | Total | | $ | 25,446 | | | | $ | 716 | | | $ | 24,730 | | | | $ | - | | | | | | | | | | | | | | | | | | | | | | | December 31, 2015 | | | | | | | | | | | | | | | | | | | | Asset category | | | | | | | | | | | | | | | | | | | | Equity security funds (1) | | | | | | | | | | | | | | | | | | | | United States | | $ | 10,844 | | | | $ | - | | | $ | 10,844 | | | | $ | - | | | International | | | 2,681 | | | | | - | | | | 2,681 | | | | | - | | | Fixed income funds | | | 13,720 | | | | | - | | | | 13,720 | | | | | - | | | Short-term investments funds | | | 422 | | | | | 422 | | | | - | | | | | - | | | Total | | $ | 27,667 | | | | $ | 422 | | | $ | 27,245 | | | | $ | - | |
| | | | | | | | | | | | | | | | | | | ($ in thousands) | | | | Fair Value Measurements at Reporting Date Using | | | | Total | | Level 1 | | Level 2 | | Level 3 | | December 31, 2019 | | | | | | | | | | Asset category | | | | | | | | | Equity security funds (1) | | | | | | | | | | United States | | $ | 8,883 |
| | $ | — |
| | $ | 8,883 |
| | $ | — |
| | International | | 2,214 |
| | — |
| | 2,214 |
| | — |
| | Fixed income funds | | 11,116 |
| | — |
| | 11,116 |
| | — |
| | Short-term investment funds | | 951 |
| | 951 |
| | — |
| | — |
| | Total | | $ | 23,164 |
| | $ | 951 |
| | $ | 22,213 |
| | $ | — |
| | | | | | | | | | | | December 31, 2018 | | | | | | | | | | Asset category | | | | | | | | | Equity security funds (1) | | | | | | | | | | United States | | $ | 8,198 |
| | $ | — |
| | $ | 8,198 |
| | $ | — |
| | International | | 2,089 |
| | — |
| | 2,089 |
| | — |
| | Fixed income funds | | 11,003 |
| | — |
| | 11,003 |
| | — |
| | Short-term investments funds | | 800 |
| | 800 |
| | — |
| | — |
| | Total | | $ | 22,090 |
| | $ | 800 |
| | $ | 21,290 |
| | $ | — |
|
(1) | | (1) | None of the trust fund assets for the defined benefit pension plan have been invested in shares of HMEC’sHMEC's common stock. |
There were no Level 3 assets held during the years ended December 31, 20162019 and 2015.NOTE 11 - Pension Plans and Other Postretirement Benefits-(Continued)
In 2017,2020, the Company expects amortization of net losses of $389$0.3 million and $258$0.3 million for the defined benefit plan and the supplemental retirement plans, respectively, and expects no amortization of prior service cost for the supplemental retirement plans to be included in net periodic pension expense. Postretirement Benefits Other than Pensions In addition to providing pension benefits, as further described below, prior to 2015 the Company also provided certain health care and life insurance benefits to a closed group of eligible employees (pre-age 65 and former employees). Postretirement benefits other than pensions of active and retired employees were accrued as expense over the employees' service years.
As of December 31, 2006, upon discontinuation of retiree medical benefits, Health Reimbursement Accounts (“HRAs”)(HRAs) were established for eligible participants and totaled $7,310.$7.3 million. As of December 31, 2016,2019, the balance of the previously established HRAs was $1,652.$1.4 million. Funding of HRAs was $218, $523$0.1 million, $0.1 million and $252$0.1 million for the years ended December 31, 2016, 20152019, 2018 and 2014,2017, respectively. In December 2013, the Company announced the elimination of postretirement medical coverage for all remaining eligible participants effective March 31, 2014. As a result of this plan change, prior service cost was amortized over the average working lifetime of active eligible participants.
In November 2014, the Company announced it would no longer sponsor the retiree group life benefit as of December 2014 and offered a conversion option to individual policies. This was the last remaining postretirement benefit other than pensions.
As a result of the changes in the plan for other postretirement benefits, the Company recorded a reduction in its expenses of $2,980 for the year ended December 31, 2014.
| | F-103 | | | Horace Mann Educators Corporation | | Annual Report on Form 10-K 129 |
NOTE 1115 - PensionRetirement Plans and Other Postretirement Benefits-(Continued)The following table presents the funded status of postretirement benefits other than pensions of active and retired employees (including employees on disability more than 2 years) as of December 31, 2014 (the measurement date) reconciled with amounts recognized in the Company's Consolidated Balance Sheets. The tables present postretirement expenses and liabilities only for those years in which the Company incurred expenses or accrued liabilities.
| | | | December 31, | | | | | | | 2014 | | | | Change in accumulated postretirement benefit obligations: | | | | | | | | Accumulated postretirement benefit obligations at beginning of year | | | $ | 1,130 | | | | Changes during fiscal year: | | | | | | | | Service cost | | | | - | | | | Interest cost | | | | 46 | | | | Plan amendment | | | | - | | | | Settlements | | | | (965 | ) | | | Employer payments net of participant contributions | | | | (95 | ) | | | Actuarial (gain) loss | | | | (116 | ) | | | Accumulated postretirement benefit obligations at end of year | | | $ | - | | | | Unfunded status | | | $ | - | | | | | | | | | | | | Total amount recognized in Consolidated Balance Sheets, all in Other liabilities | | | $ | - | | | | | | | | | | | | Amounts recognized in accumulated other comprehensive income (loss) (“AOCI”): | | | | | | | | Prior service cost (credit) | | | $ | - | | | | Net actuarial loss (gain) | | | | - | | | | Total amount recognized in AOCI | | | $ | - | | |
| | | | Year Ended | | | | | | | December 31, | | | | | | | 2014 | | | | Components of net periodic benefit: | | | | | | | | Service cost | | | $ | - | | | | Interest cost | | | | 46 | | | | Curtailment gain | | | | (713 | ) | | | Settlement gain | | | | (1,439 | ) | | | Amortization of prior service cost | | | | (628 | ) | | | Amortization of prior gain | | | | (246 | ) | | | Net periodic income | | | $ | (2,980 | ) | |
NOTE 11 - Pension Plans and Other Postretirement Benefits-(Continued)
Sensitivity Analysis and Assumptions for Postretirement Benefits Other than Pensions
A one percentage point change in the assumed health care cost trend rate for each year would change the accumulated postretirement benefit obligations as follows:
| | December 31, | | | | | | 2014 | | | Accumulated postretirement benefit obligations | | | | | | | Effect of a one percentage point increase | | | | * | | | Effect of a one percentage point decrease | | | | * | | | | | | | | | | Service and interest cost components of the net periodic postretirement benefit expense | | | | | | | Effect of a one percentage point increase | | | | * | | | Effect of a one percentage point decrease | | | | * | | | | | | | | | | Weighted average assumptions used to determine benefit obligations as of December 31: | | | | | | | Discount rate | | | | 3.66 | % | | Healthcare cost trend rate | | | | * | | | Rate to which the cost trend rate is assumed to decline (ultimate trend rate) | | | | * | | | Year the rate is assumed to reach the ultimate trend rate | | | | * | | | Expected return on plan assets | | | | * | | | | | | | | | | Weighted average assumptions used to determine net periodic benefit cost for the years ended December 31: | | | | | | | Discount rate | | | | 4.46 | % | | Healthcare cost trend rate | | | | * | | | Rate to which the cost trend rate is assumed to decline (ultimate trend rate) | | | | * | | | Year the rate is assumed to reach the ultimate trend rate | | | | * | | | Expected return on plan assets | | | | * | | |
2020 Contributions *Not applicable.
The discount rates were based on the average yield for long-term, high-grade securities available during the benefit payout period. To set its discount rate, the Company looks to leading indicators, including the Mercer Above Mean Yield Curve.
2017 Contributions
In 2017,2020, there is no minimum funding requirement for the Company’sCompany's defined benefit plan. The following table discloses that minimum funding requirement and the expected full year contributions for the Company’sCompany's plans. | | | Defined Benefit Pension Plans | | | | | Defined | | | Supplemental | | | | | Benefit | | | Defined Benefit | | | | | Plan | | | Plans | | | | | | | | | | | Minimum funding requirement for 2017 | | $ | - | | | | N/A | | | Expected contributions (approximations) for the year ended December 31, 2017 as of the time of this Form 10-K (1) | | | - | | | $ | 1,318 | |
| | | | | | | | | | | ($ in thousands) | | Defined Benefit Pension Plans | | | | Defined Benefit Plan | | Supplemental Defined Benefit Plans | | Minimum funding requirement for 2019 | | $ | — |
| | N/A |
| Expected contributions (approximations) for the year ended December 31, 2020 as of the time of this Form 10-K (1) | | $ | — |
| | $ | 1,282 |
|
(1) HMEC’sHMEC's Annual Report on Form 10-K for the year ended December 31, 2016.NOTE 11 - Pension Plans and Other Postretirement Benefits-(Continued)
Estimated Future Benefit Payments The Company’sCompany's defined benefit plan may be subject to settlement accounting. Assumptions for both the number of individuals retiring in a calendar year and their elections regarding lump sum distributions are significant factors impacting the payout patterns for each of the plans below. Therefore, actual results could vary from the estimates shown. Estimated future benefit payments as of December 31, 20162019 were as follows: | | | 2017 | | | 2018 | | | 2019 | | | 2020 | | | 2021 | | | 2022-2026 | | | Pension plans | | | | | | | | | | | | | | | | | | | | | | | | | | Defined benefit plan | | $ | 2,850 | | | $ | 2,752 | | | $ | 3,043 | | | $ | 2,431 | | | $ | 2,180 | | | $ | 10,275 | | | Supplemental retirement plans | | | 1,318 | | | | 1,305 | | | | 1,291 | | | | 1,274 | | | | 1,256 | | | | 5,909 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | ($ in thousands) | | 2020 | | 2021 | | 2022 | | 2023 | | 2024 | | 2025-2029 | | Pension plans | | | | | | | | | | | | | | Defined benefit plan | | $ | 2,478 |
| | $ | 2,277 |
| | $ | 2,219 |
| | $ | 1,987 |
| | $ | 2,099 |
| | $ | 7,927 |
| | Supplemental retirement plans | | 1,282 |
| | 1,265 |
| | 1,245 |
| | 1,222 |
| | 1,195 |
| | 5,407 |
|
NOTE 1216 - Contingencies and Commitments Lawsuits and Legal Proceedings Companies in the insurance industry have been subject to substantial litigation resulting from claims, disputes and other matters. For instance, they have faced expensive claims, including class action lawsuits, alleging, among other things, improper sales practices and improper claims settlement procedures. Negotiated settlements of certain such actions have had a material adverse effect on many insurance companies. At the time of issuance of this Annual Report on Form 10-K, the Company does not have pending litigation from which there is a reasonable possibility of material loss. Assessments for Insolvencies of Unaffiliated Insurance Companies The Company is contingently liable for possible assessments under regulatory requirements pertaining to potential insolvencies of unaffiliated insurance companies. Liabilities, which are established based upon regulatory guidance, have generally been insignificant. Leases
The Company has entered into various operating lease agreements, primarily for real estate (claims and marketing offices in a few states, as well as portions of the home office complex) and also for computer equipment and copy machines. Rental expenses were $2,546, $2,872 and $2,823 for the years ended December 31, 2016, 2015 and 2014, respectively. Future minimum lease payments under leases expiring subsequent to December 31, 2016 are as follows:
| | | As of December 31, 2016 | | | | | 2017 | | | 2018 | | | 2019 | | | 2020 | | | 2021 | | | 2022-
2026 | | | 2027 and
beyond | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Minimum operating lease payments | | $ | 2,608 | | | $ | 2,583 | | | $ | 2,400 | | | $ | 1,598 | | | $ | 1,147 | | | $ | 1,627 | | | $ | - | |
NOTE 12 - Contingencies and Commitments-(Continued)
Investment Commitments From time to time, the Company has outstanding commitments to purchasefund investments and/orin limited partnership interests, commercial mortgage loans and bank loans. Such unfunded commitments to lend funds under bridge loans. Unfunded commitments to purchase investments were $135,054$306.2 million and $147,139$145.4 million for the years ended December 31, 20162019 and 2015,2018, respectively. NOTE 13 - Supplementary Data on Cash Flows
A reconciliation of net income to net cash provided by operating activities as presented in the Consolidated Statements of Cash Flows is as follows:
| | | Year Ended December 31, | | | | | 2016 | | | 2015 | | | 2014 | | | | | | | | | | | | | | Cash flows from operating activities | | | | | | | | | | | | | | Net income | | $ | 83,765 | | | $ | 93,482 | | | $ | 104,243 | | | Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | | | | | Net realized investment gains | | | (4,123 | ) | | | (12,713 | ) | | | (10,917 | ) | | Increase in accrued investment income | | | (2,208 | ) | | | (2,566 | ) | | | (5,563 | ) | | Increase (decrease) in accrued expenses | | | 4,378 | | | | (5,798 | ) | | | 1,513 | | | Depreciation and amortization | | | 6,896 | | | | 7,734 | | | | 7,958 | | | Increase in insurance liabilities | | | 176,315 | | | | 145,313 | | | | 153,423 | | | Increase in premium receivables | | | (11,496 | ) | | | (8,641 | ) | | | (3,638 | ) | | Increase in deferred policy acquisition costs | | | (15,859 | ) | | | (8,981 | ) | | | (12,662 | ) | | (Increase) decrease in reinsurance recoverables | | | (481 | ) | | | (748 | ) | | | 1,570 | | | (Decrease) increase in income tax liabilities | | | (1,293 | ) | | | 8,935 | | | | 9,745 | | | Debt retirement costs | | | - | | | | 2,338 | | | | - | | | Other | | | (28,476 | ) | | | (11,312 | ) | | | (23,739 | ) | | Total adjustments | | | 123,653 | | | | 113,561 | | | | 117,690 | | | Net cash provided by operating activities | | $ | 207,418 | | | $ | 207,043 | | | $ | 221,933 | |
The Company’s redemption of debt in 2015 resulted in non-cash financing charges of $45.
| | F-107 | | | 130 Annual Report on Form 10-K | | Horace Mann Educators Corporation |
NOTE 1417 - Supplemental Disclosure of Consolidated Cash Flow Information
| | | | | | | | | | | | | | | ($ in thousands) | | Years Ended December 31, | | | | 2019 | | 2018 | | 2017 | | Cash | | $ | 25,206 |
| | $ | 11,906 |
| | $ | 7,627 |
| | Restricted cash | | 302 |
| | — |
| | — |
| Total cash and restricted cash shown in the Consolidated Statements of Cash Flows | | $ | 25,508 |
|
| $ | 11,906 |
|
| $ | 7,627 |
| | | | | | | | | | Cash paid during the year for: | | | | | | | | Interest | | $ | 14,104 |
| | $ | 12,532 |
| | $ | 11,555 |
| | Income taxes | | 22,946 |
| | 8,679 |
| | 16,259 |
|
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 6 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 years ended December 31, 2019, 2018 and 2017, respectively. NOTE 18 - Segment Information The Company conducts and manages its business through four5 segments. See Note 1 for a description of the Company's reporting segments that changed effective in the third quarter of 2019. The three4 operating segments, representing the major lines of insurance business, are:are Property and Casualty segment, primarily(primarily personal lines of automobile and homeowners products;property insurance products), the newly created Supplemental (primarily heart, cancer, accident and limited short-term supplemental disability coverages), Retirement segment, primarily(primarily tax-qualified fixed and variable annuities;annuities) and Life segment life insurance.(life insurance). The Company does not allocate the impact of corporate-level transactions to these operating segments, consistent with the basis for management’smanagement's evaluation of the results of those segments, but classifies those items in the fourthfifth segment, Corporate and Other. In addition to ongoing transactions such as corporate debt service, realizednet investment gains and losses(losses) and certain public company expenses, such items also have included corporate debt retirement costs/gains,costs, when applicable. The accounting policies of the segments are the same as those described in “Note 1 — Summary of Significant Accounting Policies”.Note 1. The Company accounts for intersegment transactions, primarily the allocation of operating and agency costs from the Corporate and Other segment to the Property and Casualty, Supplemental, Retirement and Life, segments, on a direct cost basis.
| | | | | Horace Mann Educators Corporation | | Annual Report on Form 10-K 131 |
NOTE 18 - Segment Information (continued)
Summarized financial information for these segments is as follows: | | | Year Ended December 31, | | | | | 2016 | | | 2015 | | | 2014 | | | Insurance premiums and contract charges earned | | | | | | | | | | | | | | Property and Casualty | | $ | 620,514 | | | $ | 595,958 | | | $ | 581,828 | | | Retirement | | | 24,937 | | | | 25,378 | | | | 25,540 | | | Life | | | 113,695 | | | | 110,544 | | | | 108,392 | | | Total | | $ | 759,146 | | | $ | 731,880 | | | $ | 715,760 | | | | | | | | | | | | | | | | | Net investment income | | | | | | | | | | | | | | Property and Casualty | | $ | 38,998 | | | $ | 33,461 | | | $ | 36,790 | | | Retirement | | | 249,410 | | | | 228,378 | | | | 222,071 | | | Life | | | 73,567 | | | | 71,614 | | | | 71,865 | | | Corporate and Other | | | 66 | | | | 38 | | | | 14 | | | Intersegment eliminations | | | (855 | ) | | | (891 | ) | | | (925 | ) | | Total | | $ | 361,186 | | | $ | 332,600 | | | $ | 329,815 | | | | | | | | | | | | | | | | | Net income (loss) | | | | | | | | | | | | | | Property and Casualty | | $ | 25,644 | | | $ | 40,043 | | | $ | 46,907 | | | Retirement | | | 50,674 | | | | 43,384 | | | | 45,336 | | | Life | | | 16,559 | | | | 14,982 | | | | 17,503 | | | Corporate and Other | | | (9,112 | ) | | | (4,927 | ) | | | (5,503 | ) | | Total | | $ | 83,765 | | | $ | 93,482 | | | $ | 104,243 | |
| | | December 31, | | | | | 2016 | | | 2015 | | | 2014 | | | Assets | | | | | | | | | | | Property and Casualty | | $ | 1,110,958 | | | $ | 1,098,415 | | | $ | 1,107,962 | | | Retirement | | | 7,449,777 | | | | 7,001,411 | | | | 6,683,473 | | | Life | | | 1,912,771 | | | | 1,862,719 | | | | 1,858,150 | | | Corporate and Other | | | 140,104 | | | | 131,635 | | | | 155,497 | | | Intersegment eliminations | | | (36,786 | ) | | | (37,208 | ) | | | (36,736 | ) | | Total | | $ | 10,576,824 | | | $ | 10,056,972 | | | $ | 9,768,346 | |
| | | | | | | | | | | | | | | ($ in thousands) | | Years Ended December 31, | | | | 2019 | | 2018 | | 2017 | | Insurance premiums and contract charges earned | | | | | | | | Property and Casualty | | $ | 683,454 |
| | $ | 665,734 |
| | $ | 648,263 |
| | Supplemental | | 65,815 |
| | N/A |
| | N/A |
| | Retirement | | 29,083 |
| | 31,269 |
| | 28,003 |
| | Life | | 119,602 |
| | 120,330 |
| | 118,437 |
| | Total | | $ | 897,954 |
| | $ | 817,333 |
| | $ | 794,703 |
| | | | | | | | | | Net investment income | | | | | | | | Property and Casualty | | $ | 41,740 |
| | $ | 40,104 |
| | $ | 36,178 |
| | Supplemental | | 7,480 |
| | N/A |
| | N/A |
| | Retirement | | 245,475 |
| | 262,634 |
| | 261,994 |
| | Life | | 71,957 |
| | 74,399 |
| | 76,195 |
| | Corporate and Other | | (85 | ) | | 142 |
| | 78 |
| | Intersegment eliminations | | (1,503 | ) | | (772 | ) | | (815 | ) | | Total | | $ | 365,064 |
| | $ | 376,507 |
| | $ | 373,630 |
| | | | | | | | | | Net income (loss) | | | | | | | | Property and Casualty | | $ | 54,359 |
| | $ | (14,243 | ) | | $ | 17,790 |
| | Supplemental | | 17,989 |
| | N/A |
| | N/A |
| | Retirement | | (4,867 | ) | | 41,736 |
| | 88,473 |
| | Life | | 17,574 |
| | 18,754 |
| | 77,595 |
| | Corporate and Other | | 99,388 |
| | (27,904 | ) | | (14,399 | ) | | Total | | $ | 184,443 |
| | $ | 18,343 |
| | $ | 169,459 |
|
| | | | | | | | | | | | | | | ($ in thousands) | | December 31, | | | | 2019 | | 2018 | | 2017 | | Assets | | | | | | | | Property and Casualty | | $ | 1,327,099 |
| | $ | 1,236,362 |
| | $ | 1,217,394 |
| | Supplemental | | 747,602 |
| | N/A |
| | N/A |
| | Retirement | | 8,330,127 |
| | 7,866,969 |
| | 8,063,912 |
| | Life | | 1,964,993 |
| | 1,821,351 |
| | 1,815,732 |
| | Corporate and Other | | 172,955 |
| | 149,014 |
| | 143,784 |
| | Intersegment eliminations | | (64,072 | ) | | (41,800 | ) | | (42,482 | ) | | Total | | $ | 12,478,704 |
| | $ | 11,031,896 |
| | $ | 11,198,340 |
|
| | F-108 | | | 132 Annual Report on Form 10-K | | Horace Mann Educators Corporation |
NOTE 1418 - Segment Information-(Continued)Information (continued)
Additional significant financial information for these segments is as follows: | | | Year Ended December 31, | | | | | 2016 | | | 2015 | | | 2014 | | | Policy acquisition expenses amortized | | | | | | | | | | | | | | Property and Casualty | | $ | 74,950 | | | $ | 73,173 | | | $ | 71,327 | | | Retirement | | | 14,635 | | | | 18,155 | | | | 14,781 | | | Life | | | 7,147 | | | | 7,591 | | | | 7,709 | | | Total | | $ | 96,732 | | | $ | 98,919 | | | $ | 93,817 | | | | | | | | | | | | | | | | | Income tax expense (benefit) | | | | | | | | | | | | | | Property and Casualty | | $ | 4,627 | | | $ | 11,274 | | | $ | 13,944 | | | Retirement | | | 20,334 | | | | 19,873 | | | | 21,319 | | | Life | | | 9,775 | | | | 7,951 | | | | 9,432 | | | Corporate and Other | | | (4,269 | ) | | | (3,128 | ) | | | (2,825 | ) | | Total | | $ | 30,467 | | | $ | 35,970 | | | $ | 41,870 | |
| | | | | | | | | | | | | | | ($ in thousands) | | Years Ended December 31, | | | | 2019 | | 2018 | | 2017 | | DAC amortization expense | | | | | | | | Property and Casualty | | $ | 79,453 |
| | $ | 79,073 |
| | $ | 76,967 |
| | Supplemental | | 438 |
| | N/A |
| | N/A |
| | Retirement | | 21,446 |
| | 23,186 |
| | 17,759 |
| | Life | | 7,844 |
| | 7,630 |
| | 7,459 |
| | Total | | $ | 109,181 |
| | $ | 109,889 |
| | $ | 102,185 |
| | | | | | | | | | Income tax expense (benefit) | | | | | | | | Property and Casualty | | $ | 13,954 |
| | $ | (6,622 | ) | | $ | (3,279 | ) | | Supplemental | | 5,105 |
| | N/A |
| | N/A |
| | Retirement | | 33,772 |
| | 10,000 |
| | (19,498 | ) | | Life | | 4,907 |
| | 4,979 |
| | (51,876 | ) | | Corporate and Other | | (5,732 | ) | | (7,163 | ) | | (6,119 | ) | | Total | | $ | 52,006 |
| | $ | 1,194 |
| | $ | (80,772 | ) |
| | | | | Horace Mann Educators Corporation | | Annual Report on Form 10-K 133 |
NOTE 1519 - Unaudited Selected Quarterly Financial Data
Selected quarterly financial data is presented below. | | | Three Months Ended | | | | December 31, | | September 30, | | June 30, | | March 31, | | 2016 | | | | | | | | | | | | | | | | | | | | | | Insurance premiums written and contract deposits | | | $ | 315,917 | | | | $ | 351,534 | | | | $ | 311,879 | | | | $ | 283,169 | | | Total revenues | | | | 282,873 | | | | | 291,176 | | | | | 283,558 | | | | | 271,303 | | | Net income | | | | 19,823 | | | | | 26,923 | | | | | 11,866 | | | | | 25,153 | | | Per share information | | | | | | | | | | | | | | | | | | | | | | Basic | | | | | | | | | | | | | | | | | | | | | | Net income | | | $ | 0.48 | | | | $ | 0.66 | | | | $ | 0.29 | | | | $ | 0.61 | | | Shares of common stock - weighted average (1) | | | | 41,093 | | | | | 41,092 | | | | | 41,082 | | | | | 41,297 | | | Diluted | | | | | | | | | | | | | | | | | | | | | | Net income | | | $ | 0.48 | | | | $ | 0.65 | | | | $ | 0.29 | | | | $ | 0.61 | | | Shares of common stock and equivalent shares - weighted average (1) | | | | 41,482 | | | | | 41,347 | | | | | 41,314 | | | | | 41,492 | | | | | | | | | | | | | | | | | | | | | | | | | 2015 | | | | | | | | | | | | | | | | | | | | | | Insurance premiums written and contract deposits | | | $ | 305,186 | | | | $ | 326,198 | | | | $ | 319,394 | | | | $ | 305,735 | | | Total revenues | | | | 276,106 | | | | | 265,753 | | | | | 268,470 | | | | | 270,119 | | | Net income | | | | 21,040 | | | | | 21,984 | | | | | 16,183 | | | | | 34,275 | | | Per share information | | | | | | | | | | | | | | | | | | | | | | Basic | | | | | | | | | | | | | | | | | | | | | | Net income | | | $ | 0.51 | | | | $ | 0.53 | | | | $ | 0.39 | | | | $ | 0.82 | | | Shares of common stock - weighted average (1) | | | | 41,564 | | | | | 41,852 | | | | | 41,990 | | | | | 41,950 | | | Diluted | | | | | | | | | | | | | | | | | | | | | | Net income | | | $ | 0.50 | | | | $ | 0.52 | | | | $ | 0.38 | | | | $ | 0.81 | | | Shares of common stock and equivalent shares - weighted average (1) | | | | 42,127 | | | | | 42,305 | | | | | 42,425 | | | | | 42,300 | | | | | | | | | | | | | | | | | | | | | | | | | 2014 | | | | | | | | | | | | | | | | | | | | | | Insurance premiums written and contract deposits | | | $ | 292,241 | | | | $ | 322,746 | | | | $ | 292,393 | | | | $ | 260,275 | | | Total revenues | | | | 269,157 | | | | | 265,520 | | | | | 264,743 | | | | | 261,265 | | | Net income | | | | 30,068 | | | | | 25,357 | | | | | 20,452 | | | | | 28,366 | | | Per share information | | | | | | | | | | | | | | | | | | | | | | Basic | | | | | | | | | | | | | | | | | | | | | | Net income | | | $ | 0.72 | | | | $ | 0.61 | | | | $ | 0.49 | | | | $ | 0.69 | | | Shares of common stock - weighted average (1) | | | | 41,748 | | | | | 41,514 | | | | | 41,432 | | | | | 41,180 | | | Diluted | | | | | | | | | | | | | | | | | | | | | | Net income | | | $ | 0.71 | | | | $ | 0.60 | | | | $ | 0.48 | | | | $ | 0.67 | | | Shares of common stock and equivalent shares - weighted average (1) | | | | 42,362 | | | | | 42,319 | | | | | 42,310 | | | | | 42,259 | |
| | | | | | | | | | | | | | | | | | | ($ in thousands, except per share data) | | Three Months Ended | | | | December 31, | | September 30, | | June 30, | | March 31, | | 2019 | | | | | | | | | Insurance premiums and contract charges earned (1) | | $ | 240,392 |
| | $ | 239,681 |
| | $ | 208,096 |
| | $ | 209,785 |
| Insurance premiums written and contract deposits (1)(2)(3) | | 346,242 |
| | 371,216 |
| | 311,691 |
| | 295,394 |
| Total revenues (1) | | 331,376 |
| | 334,418 |
| | 451,478 |
| | 313,213 |
| Net income (1) | | 33,001 |
| | 25,454 |
| | 93,822 |
| | 32,166 |
| | Per share information | | | | | | | | | | Basic | | | | | | | | | Net income (1) | | $ | 0.79 |
| | $ | 0.61 |
| | $ | 2.25 |
| | $ | 0.77 |
| Shares of common stock - weighted average (4) | | 41,814 |
| | 41,785 |
| | 41,762 |
| | 41,610 |
| | Diluted | | | | | | | | | Net income (1) | | $ | 0.78 |
| | $ | 0.60 |
| | $ | 2.24 |
| | $ | 0.77 |
| Shares of common stock and equivalent shares - weighted average (4) | | 42,093 |
| | 42,030 |
| | 41,921 |
| | 41,785 |
| | | | | | | | | | | | 2018 | | |
| | |
| | |
| | |
| | Insurance premiums and contract charges earned | | $ | 201,905 |
| | $ | 206,820 |
| | $ | 205,610 |
| | $ | 202,998 |
| Insurance premiums written and contract deposits (2) | | 311,216 |
| | 338,097 |
| | 301,722 |
| | 284,008 |
| | Total revenues | | 278,535 |
| | 311,318 |
| | 306,257 |
| | 295,489 |
| | Net income (loss) | | (20,257 | ) | | 12,528 |
| | 5,917 |
| | 20,155 |
| | Per share information | | | | | | | | | | Basic | | | | | | | | | | Net income (loss) | | $ | (0.49 | ) | | $ | 0.30 |
| | $ | 0.14 |
| | $ | 0.49 |
| Shares of common stock - weighted average (4) | | 41,596 |
| | 41,683 |
| | 41,600 |
| | 41,497 |
| | Diluted | | | | | | | | | | Net income (loss) | | $ | (0.49 | ) | | $ | 0.30 |
| | $ | 0.14 |
| | $ | 0.48 |
| Shares of common stock and equivalent shares - weighted average (4) | | 41,911 |
| | 41,850 |
| | 41,735 |
| | 41,653 |
| | | | | | | | | | | | 2017 | | |
| | |
| | |
| | |
| | Insurance premiums and contract charges earned | | $ | 204,328 |
| | $ | 198,935 |
| | $ | 195,718 |
| | $ | 195,722 |
| Insurance premiums written and contract deposits (2) | | 300,416 |
| | 318,355 |
| | 311,614 |
| | 296,732 |
| | Total revenues | | 302,993 |
| | 289,817 |
| | 291,436 |
| | 287,304 |
| | Net income | | 125,329 |
| | 26,551 |
| | 2,261 |
| | 15,318 |
| | Per share information | | | | | | | | | | Basic | | | | | | | | | Net income (5) | | $ | 3.03 |
| | $ | 0.64 |
| | $ | 0.05 |
| | $ | 0.37 |
| Shares of common stock - weighted average (4) | | 41,419 |
| | 41,433 |
| | 41,368 |
| | 41,135 |
| | Diluted | | | | | | | | | Net income (5) | | $ | 3.00 |
| | $ | 0.64 |
| | $ | 0.05 |
| | $ | 0.37 |
| Shares of common stock and equivalent shares - weighted average (4) | | 41,718 |
| | 41,575 |
| | 41,493 |
| | 41,342 |
|
| | (1) | See Note 2 for more information regarding the acquisition of NTA on July 1, 2019. |
| | (2) | This measure is not based on accounting principles generally accepted in the U.S. (non-GAAP). An explanation of this measure is contained in the Glossary of Selected Terms included as an exhibit in the Company's reports filed with the SEC. |
| | (3) | Excludes the annuity reinsurance agreement accounted for under the deposit method that is discussed in Note 6. |
| | (5) | For the three months ended December 31, 2017, net income per basic share of $3.03 and net income per diluted share of $3.00 benefited $2.39 and $2.37, respectively, from TCJA. |
| | | | | 134 Annual Report on Form 10-K | | Horace Mann Educators Corporation |
ITEM 9. I Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. ITEM 9A. I Controls and Procedures Management's Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures Under the supervision and with the participation of the Company's management, including the Company's chief executive officer and chief financial officer, the Company conducted an evaluation of the effectiveness of the design and operation of the Company's disclosure controls and procedures, as such term is defined under Rule 13a-15(e) of the Securities and Exchange Act of 1934 as amended (Exchange Act) as of December 31, 2019. Based on this evaluation, the Company's chief executive officer and chief financial officer concluded that the Company's disclosure controls and procedures were effective as of December 31, 2019, the end of the period covered by this Annual Report on Form 10-K. Changes in Internal Control Over Financial Reporting Except as noted below, there were no changes in the Company's internal control over financial reporting that occurred during the quarter ended December 31, 2019 that has materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. On July 1, 2019, the Company completed its acquisition of NTA. The Company is in the process of integrating NTA and the Company's controls over financial reporting. As a result of these integration activities, certain controls will be evaluated and may be changed. Therefore, the Company has elected to exclude NTA from the Company's assessment of internal control over financial reporting as of December 31, 2019. Concurrent with the NTA acquisition, changes were made to the relevant business processes and the related control activities over purchase accounting in order to monitor and maintain appropriate controls over financial reporting. Management's Annual Report on Internal Control Over Financial Reporting Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. The Company's internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the consolidated financial statements in accordance with U.S. generally accepted accounting principles. The Company's accounting policies and internal controls over financial reporting, established and maintained by management, are under the general oversight of the Company's Audit Committee. The Company's internal control over financial reporting includes those policies and procedures that: pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of the Company's management and directors; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
| | | | | Horace Mann Educators Corporation | | Annual Report on Form 10-K 135 |
controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Management has assessed the Company's internal control over financial reporting as of December 31, 2019. The standard measures adopted by management in making its evaluation are the measures in the Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Consistent with guidance issued by the Securities and Exchange Commission that an assessment of a recently acquired business may be omitted from management’s report on internal control over financial reporting in the year of acquisition, management excluded an assessment of the effectiveness of the Company’s internal control over financial reporting related to NTA. The Company acquired all of the equity interests of NTA on July 1, 2019. NTA represented $747.6 million of consolidated total assets and $65.8 million of consolidated total revenues included in the consolidated financial statements of the Company as of and for the year ended December 31, 2019. Based on its assessment, management concluded that the Company's internal control over financial reporting was effective at December 31, 2019, and that there were no material weaknesses in the Company's internal control over financial reporting as of that date. KPMG LLP, an independent registered public accounting firm, which has audited and reported on the Consolidated Financial Statements contained in this Annual Report on Form 10-K, has issued its report on the effectiveness of the Company’s internal control over financial reporting which follows this report. Report of Independent Registered Public Accounting Firm To the Shareholders and Board of Directors Horace Mann Educators Corporation: Opinion on Internal Control Over Financial Reporting We have audited Horace Mann Educators Corporation and subsidiaries’ (the “Company”) internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2019 and 2018, the related consolidated statements of operations, comprehensive income (loss), changes in shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2019, and the related notes and financial statement schedules I to IV and VI (collectively, the consolidated financial statements), and our report dated February 28, 2020 expressed an unqualified opinion on those consolidated financial statements. The Company acquired all of the issued and outstanding shares of NTA Life Enterprises, LLC (NTA) on July 1, 2019. Management excluded NTA from its assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2019. NTA represented $747.6 million of consolidated total assets and $65.8 million of consolidated total revenues included in the consolidated financial statements of the Company as of and for the year ended December 31, 2019. Our audit of internal control over financial reporting of the Company also excluded an evaluation of the internal control over financial reporting of NTA. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in
| | | | | 136 Annual Report on Form 10-K | | Horace Mann Educators Corporation |
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 audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) Roundedpertain to thousands.the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ KPMG LLP KPMG LLP Chicago, Illinois February 28, 2020 ITEM 9B. I Other Information None. PART III Horace Mann Educators Corporation's (Company) Proxy Statement will be filed with the SEC no later than April 30, 2020, in preparation for its 2020 Annual Meeting of Shareholders. As permitted in Paragraph G(3) of the General Instructions for Form 10-K, the Company is incorporating by reference, to that Proxy Statement, portions of the information required by Part III as noted in Item 10 through Item 14 below.
| | | | | Horace Mann Educators Corporation | | Annual Report on Form 10-K 137 |
ITEM 10. I Directors, Executive Officers and Corporate Governance | | | (a) | The following sections of the Company's Proxy Statement for its 2020 Annual Meeting of Shareholders, are incorporated herein by reference: "Board of Directors and Committees", "Executive Officers", "Section 16(a) Beneficial Ownership Reporting Compliance", and "Corporate Governance". |
| | | (b) | The Company has adopted a code of ethics that applies to its principal executive officer, principal financial officer, principal accounting officer and all other employees of the Company. In addition, the Board has adopted the code of ethics for its Board members as it applies to each Board member's business conduct on behalf of the Company. The code of ethics is posted on the Company's website, www.horacemann.com, under Investors — Corporate Overview — Governance Documents. In addition, amendments to the code of ethics and any grant of a waiver from a provision of the code of ethics requiring disclosure under applicable SEC rules will be posted on the Company's website set forth above within four days after such amendment or grant of waiver rather than by filing a Current Report on Form 8-K. |
ITEM 11. I Executive Compensation The "Proposal No. 2 - Advisory Resolution to Approve Named Executive Officers' Compensation" section of the Company's Proxy Statement for its 2020 Annual Meeting of Shareholders, is incorporated herein by reference. It includes "Compensation Discussion and Analysis", and "Compensation Committee Report". ITEM 12. I Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters | | | (a) | The "Security Ownership of Certain Beneficial Owners and Management" section of the Company's Proxy Statement for its 2020 Annual Meeting of Shareholders, is incorporated herein by reference. |
| | | (b) | The "Equity Compensation Plan Information" section of the Company's Proxy Statement for its 2020 Annual Meeting of Shareholders, is incorporated herein by reference. Additional information on share-based equity compensation under the Company's equity compensation plans is available in Part II - Item 8, Note 13 of the Consolidated Financial Statements. |
ITEM 13. I Certain Relationships and Related Transactions and Director Independence The following sections of the Company's Proxy Statement for its 2020 Annual Meeting of Shareholders, are incorporated by reference: "Corporate Governance - Director Independence", and "Corporate Governance - Related Person Transactions". ITEM 14. I Principal Accountant Fees and Services Information required for this Item 14 is incorporated herein by reference, to the Company's Proxy Statement for its 2020 Annual Meeting of Shareholders in the section "Proposal No. 3 - Ratification of Independent Registered Public Accounting Firm".
| | | | | 138 Annual Report on Form 10-K | | Horace Mann Educators Corporation |
PART IV ITEM 15. I Exhibits and Financial Statement Schedules | | | | (a)(1) The following consolidated financial statements of the Company are contained in Part II - Item 8 of this report, Page 70 to Page 134 | | | F-109 | | (a)(2) Financial statement schedules | | | | Schedule I - Summary of Investments Other than Investments in Related Parties, Page 140 | | | | Schedule II - Condensed Financial Information of Registrant, Page 141 to Page 144 | | | | Schedules III and VI Combined - Supplementary Insurance Information and Supplemental Information Concerning Property and Casualty Insurance Operations, Page 145 | | | | Schedule IV - Reinsurance, Page 146 |
| | | | | Horace Mann Educators Corporation | | Annual Report on Form 10-K 139 |
HORACE MANN EDUCATORS CORPORATION SUMMARY OF INVESTMENTS-OTHER THAN INVESTMENTS IN RELATED PARTIES December 31, 2016(Dollars2019
($ in thousands) | | | | | | | | | Amount | | | | | | | | | | | Shown in | | | | | | | | Fair | | | Balance | | | Type of Investments | | Cost (1) | | | Value | | | Sheet | | | | | | | | | | | | | | Fixed maturities | | | | | | | | | | | | | | U.S. Government and federally sponsored agency obligations | | $ | 921,477 | | | $ | 946,268 | | | $ | 946,268 | | | States, municipalities and political subdivisions | | | 1,648,252 | | | | 1,769,398 | | | | 1,769,398 | | | Foreign government bonds | | | 93,864 | | | | 98,669 | | | | 98,669 | | | Public utilities | | | 140,893 | | | | 159,328 | | | | 159,328 | | | Other bonds | | | 4,347,641 | | | | 4,483,045 | | | | 4,483,045 | | | | | | | | | | | | | | | | | Total fixed maturity securities | | | 7,152,127 | | | | 7,456,708 | | | | 7,456,708 | | | | | | | | | | | | | | | | | Equity securities | | | | | | | | | | | | | | Non-redeemable preferred stocks | | | 52,294 | | | | 50,048 | | | | 50,048 | | | Common stocks | | | 61,715 | | | | 72,233 | | | | 72,233 | | | Closed-end fund | | | 20,004 | | | | 19,368 | | | | 19,368 | | | | | | | | | | | | | | | | | Total equity securities | | | 134,013 | | | | 141,649 | | | | 141,649 | | | | | | | | | | | | | | | | | Short-term investments | | | 44,918 | | | | XXX | | | | 44,918 | | | Policy loans | | | 151,908 | | | | XXX | | | | 151,908 | | | Derivative instruments | | | 8,694 | | | | XXX | | | | 8,694 | | | Mortgage loans | | | 57 | | | | XXX | | | | 57 | | | Other | | | 195,438 | | | | XXX | | | | 195,438 | | | | | | | | | | | | | | | | | Total investments | | $ | 7,687,155 | | | | XXX | | | $ | 7,999,372 | |
| | | | | | | | | | | | | | | Type of Investments | | Cost (1) | | Fair Value | | Amount Shown in Balance Sheet | | Fixed maturity securities | | |
| | |
| | |
| | U.S. Government and federally sponsored agency obligations | | $ | 906,886 |
| | $ | 956,104 |
| | $ | 956,104 |
| | States, municipalities and political subdivisions | | 1,545,787 |
| | 1,686,203 |
| | 1,686,203 |
| | Foreign government bonds | | 42,801 |
| | 45,370 |
| | 45,370 |
| | Public utilities | | 54,519 |
| | 61,748 |
| | 61,748 |
| | All other corporate bonds | | 1,388,035 |
| | 1,495,426 |
| | 1,495,426 |
| | Asset-backed securities | | 1,068,661 |
| | 1,079,586 |
| | 1,079,586 |
| | Residential mortgage-backed securities (non-agency) | | 76,237 |
| | 75,933 |
| | 75,933 |
| | Commercial mortgage-backed securities | | 352,164 |
| | 367,055 |
| | 367,055 |
| | Redeemable preferred stocks | | 21,890 |
| | 24,251 |
| | 24,251 |
| | | | | | | | | | Total fixed maturity securities | | 5,456,980 |
| | 5,791,676 |
| | 5,791,676 |
| | | | | | | | | | Equity securities | | |
| | |
| | |
| | Industrial, miscellaneous and all other | | 13,360 |
| | 13,360 |
| | 13,360 |
| | Banking & finance and insurance companies | | 5,706 |
| | 5,706 |
| | 5,706 |
| | Public utilities | | 1,052 |
| | 1,052 |
| | 1,052 |
| | Non-redeemable preferred stocks | | 60,325 |
| | 60,325 |
| | 60,325 |
| | Closed-end fund | | 21,421 |
| | 21,421 |
| | 21,421 |
| | | | | | | | | | Total equity securities | | 101,864 |
| | 101,864 |
| | 101,864 |
| | | | | | | | | | Limited partnership interests | | 383,717 |
| | XXX | | 383,717 |
| | Short-term investments | | 172,667 |
| | XXX | | 172,667 |
| | Policy loans | | 153,541 |
| | XXX | | 153,541 |
| | Derivatives | | 8,657 |
| | $ | 13,239 |
| | 13,239 |
| | Mortgage loans | | 9,771 |
| | XXX | | 9,771 |
| | Other | | 12,758 |
| | XXX | | 12,758 |
| | | | | | | | | | Total investments | | $ | 6,299,955 |
| | XXX | | $ | 6,639,233 |
|
| | (1) | Bonds at original cost reduced by repayments and adjusted for amortization of premiums or accrual of discounts and impairment in value of specifically identified investments. |
See accompanying Report of Independent Registered Public Accounting Firm.
| | F-110 | | | 140 Annual Report on Form 10-K | | Horace Mann Educators Corporation |
HORACE MANN EDUCATORS CORPORATION CONDENSED FINANCIAL INFORMATION OF REGISTRANT BALANCE SHEETS As of December 31, 20162019 and 20152018 ( Dollars$ in thousands, except per share data) | | | | December 31, | | | | | | 2016 | | | | 2015 | | | | | | | | | | | ASSETS | | | | | | | | | | | | Investments and cash | | $ | 4,069 | | | $ | 13,237 | | | Investment in subsidiaries | | | 1,487,457 | | | | 1,451,290 | | | Other assets | | | 60,057 | | | | 57,743 | | | | | | | | | | | | | Total assets | | $ | 1,551,583 | | | $ | 1,522,270 | | | | | | | | | | | | | LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | | | | | | Long-term debt | | $ | 247,209 | | | $ | 246,975 | | | Other liabilities | | | 10,392 | | | | 10,634 | | | | | | | | | | | | | Total liabilities | | | 257,601 | | | | 257,609 | | | | | | | | | | | | | Preferred stock, $0.001 par value, authorized 1,000,000 shares; none issued | | | - | | | | - | | | Common stock, $0.001 par value, authorized 75,000,000 shares; issued, 2016, 64,917,683; 2015, 64,537,554 | | | 65 | | | | 65 | | | Additional paid-in capital | | | 453,479 | | | | 442,648 | | | Retained earnings | | | 1,155,732 | | | | 1,116,277 | | | Accumulated other comprehensive income (loss), net of taxes: | | | | | | | | | | Net unrealized investment gains on fixed maturities and equity securities | | | 175,738 | | | | 175,167 | | | Net funded status of pension benefit obligations | | | (11,817 | ) | | | (11,794 | ) | | Treasury stock, at cost, 2016, 24,672,932 shares; 2015, 23,971,522 shares | | | (479,215 | ) | | | (457,702 | ) | | | | | | | | | | | | Total shareholders' equity | | | 1,293,982 | | | | 1,264,661 | | | | | | | | | | | | | Total liabilities and shareholders' equity | | $ | 1,551,583 | | | $ | 1,522,270 | |
| | | | | | | | | | | | | December 31, | | | | 2019 | | 2018 | | ASSETS | | | | | | | | Investments and cash | | $ | 1,453 |
| | $ | 5,255 |
| | Investment in subsidiaries | | 1,901,725 |
| | 1,473,538 |
| | Other assets | | 62,442 |
| | 66,138 |
| | | | | | | | Total assets | | $ | 1,965,620 |
| | $ | 1,544,931 |
| | | | | | | | LIABILITIES AND SHAREHOLDERS' EQUITY | | | | | | | | Short-term debt | | $ | 135,000 |
| | $ | — |
| | Long-term debt | | 248,025 |
| | 247,740 |
| | Other liabilities | | 15,310 |
| | 6,641 |
| | | | | | | | Total liabilities | | 398,335 |
| | 254,381 |
| | | | | | | Preferred stock, $0.001 par value, authorized 1,000,000 shares; none issued | | — |
| | — |
| Common stock, $0.001 par value, authorized 75,000,000 shares; issued, 2019, 66,088,808; 2018, 65,820,369 | | 66 |
| | 66 |
| | Additional paid-in capital | | 480,962 |
| | 475,109 |
| | Retained earnings | | 1,352,539 |
| | 1,216,582 |
| | Accumulated other comprehensive income (loss), net of taxes: | | |
| | |
| | Net unrealized investment gains on securities | | 230,448 |
| | 96,941 |
| | Net funded status of benefit plans | | (10,767 | ) | | (12,185 | ) | Treasury stock, at cost, 2019, 24,850,484 shares; 2018, 24,850,484 shares | | (485,963 | ) | | (485,963 | ) | | | | | | | | Total shareholders' equity | | 1,567,285 |
| | 1,290,550 |
| | | | | | | | Total liabilities and shareholders' equity | | $ | 1,965,620 |
| | $ | 1,544,931 |
|
See accompanying Note to Condensed Financial Statements. See accompanying Report of Independent Registered Public Accounting Firm.
| | F-111 | | | Horace Mann Educators Corporation | | Annual Report on Form 10-K 141 |
HORACE MANN EDUCATORS CORPORATION CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENTS OF OPERATIONS (Dollars
($ in thousands) | | | | Year Ended December 31, | | | | | | 2016 | | | | 2015 | | | | 2014 | | | | | | | | | | | | | | Revenues | | | | | | | | | | | | | | Net investment income | | $ | 20 | | | $ | 33 | | | $ | 10 | | | Realized investment gains | | | - | | | | - | | | | - | | | | | | | | | | | | | | | | | Total revenues | | | 20 | | | | 33 | | | | 10 | | | | | | | | | | | | | | | | | Expenses | | | | | | | | | | | | | | Interest | | | 11,808 | | | | 13,122 | | | | 14,198 | | | Debt retirement costs | | | - | | | | 2,338 | | | | - | | | Other | | | 5,631 | | | | 5,153 | | | | 5,071 | | | | | | | | | | | | | | | | | Total expenses | | | 17,439 | | | | 20,613 | | | | 19,269 | | | | | | | | | | | | | | | | | Loss before income tax benefit and equity in net earnings of subsidiaries | | | (17,419 | ) | | | (20,580 | ) | | | (19,259 | ) | | Income tax benefit | | | (6,076 | ) | | | (7,202 | ) | | | (6,734 | ) | | Loss before equity in net earnings of subsidiaries | | | (11,343 | ) | | | (13,378 | ) | | | (12,525 | ) | | Equity in net earnings of subsidiaries | | | 95,108 | | | | 106,860 | | | | 116,768 | | | | | | | | | | | | | | | | | Net income | | $ | 83,765 | | | $ | 93,482 | | | $ | 104,243 | |
| | | | | | | | | | | | | | | | | Year Ended December 31, | | | | 2019 | | 2018 | | 2017 | | Revenues | | |
| | |
| | |
| | Net investment income | | $ | (135 | ) | | $ | 100 |
| | $ | 34 |
| | Realized investment gains | | — |
| | — |
| | — |
| | | | | | | | | | Total revenues | | (135 | ) | | 100 |
| | 34 |
| | | | | | | | | | Expenses | | | | | | | | Interest expense | | 14,272 |
| | 11,892 |
| | 11,835 |
| | Other | | 12,632 |
| | 10,898 |
| | 5,101 |
| | | | | | | | | | Total expenses | | 26,904 |
| | 22,790 |
| | 16,936 |
| | | | | | | | | | Loss before income tax benefit and equity in net earnings of subsidiaries | | (27,039 | ) | | (22,690 | ) | | (16,902 | ) | | Income tax benefit | | (6,029 | ) | | (4,723 | ) | | (6,667 | ) | | Loss before equity in net earnings of subsidiaries | | (21,010 | ) | | (17,967 | ) | | (10,235 | ) | | Equity in net earnings of subsidiaries | | 205,453 |
| | 36,310 |
| | 179,694 |
| | | | | | | | | | Net income | | $ | 184,443 |
| | $ | 18,343 |
| | $ | 169,459 |
|
See accompanying Note to Condensed Financial Statements. See accompanying Report of Independent Registered Public Accounting Firm.
| | F-112 | | | 142 Annual Report on Form 10-K | | Horace Mann Educators Corporation |
HORACE MANN EDUCATORS CORPORATION CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENTS OF CASH FLOWS ( Dollars$ in thousands) | | | | Year Ended December 31, | | | | | | 2016 | | | | 2015 | | | | 2014 | | | Cash flows - operating activities | | | | | | | | | | | | | | Interest expense paid | | $ | (11,754 | ) | | $ | (13,521 | ) | | $ | (13,902 | ) | | Federal income taxes recovered | | | 8,914 | | | | 8,413 | | | | 10,030 | | | Cash dividends received from subsidiaries | | | 59,600 | | | | 50,000 | | | | 46,000 | | | Other, net, including settlement of payables to subsidiaries | | | (3,434 | ) | | | (4,097 | ) | | | (1,478 | ) | | | | | | | | | | | | | | | | Net cash provided by operating activities | | | 53,326 | | | | 40,795 | | | | 40,650 | | | | | | | | | | | | | | | | | Cash flows - investing activities | | | | | | | | | | | | | | Net increase (decrease) in investments | | | 9,161 | | | | 15,402 | | | | (4,647 | ) | | | | | | | | | | | | | | | | Net cash provided by (used in) investing activities | | | 9,161 | | | | 15,402 | | | | (4,647 | ) | | | | | | | | | | | | | | | | Cash flows - financing activities | | | | | | | | | | | | | | Dividends paid to shareholders | | | (44,310 | ) | | | (42,523 | ) | | | (39,237 | ) | | Proceeds from issuance of Senior Notes due 2025 | | | - | | | | 246,937 | | | | - | | | Redemption of Senior Notes due 2016 | | | - | | | | (127,292 | ) | | | - | | | Maturity of Senior Notes due 2015 | | | - | | | | (75,000 | ) | | | - | | | Principal repayment on Bank Credit Facility | | | - | | | | (38,000 | ) | | | - | | | Acquisition of treasury stock | | | (21,513 | ) | | | (21,950 | ) | | | (5,411 | ) | | Exercise of stock options | | | 3,329 | | | | 1,629 | | | | 8,252 | | | | | | | | | | | | | | | | | Net cash used in financing activities | | | (62,494 | ) | | | (56,199 | ) | | | (36,396 | ) | | | | | | | | | | | | | | | | Net decrease in cash | | | (7 | ) | | | (2 | ) | | | (393 | ) | | Cash at beginning of period | | | 75 | | | | 77 | | | | 470 | | | | | | | | | | | | | | | | | Cash at end of period | | $ | 68 | | | $ | 75 | | | $ | 77 | |
| | | | | | | | | | | | | | | | | Year Ended December 31, | | | | 2019 | | 2018 | | 2017 | | Cash flows from operating activities | | |
| | |
| | |
| | Net Income | | $ | 184,443 |
| | $ | 18,343 |
| | $ | 169,459 |
| | Equity in net income of subsidiaries | | (205,453 | ) | | (36,310 | ) | | (179,694 | ) | | Dividends received from subsidiaries | | 363,250 |
| | 61,000 |
| | 56,900 |
| | Changes in: | | | | | | | | Income taxes | | 3,369 |
| | (4,939 | ) | | (7,041 | ) | | Operating assets and liabilities | | 8,310 |
| | (1,792 | ) | | (260 | ) | | Other | | 686 |
| | 13,804 |
| | 9,861 |
| | | | | | | | | | Net cash provided by operating activities | | 354,605 |
| | 50,106 |
| | 49,225 |
| | | | | | | | | | Cash flows from investing activities | | | | | | | | Net increase (decrease) in short-term investments | | 3,336 |
| | 1,621 |
| | (2,338 | ) | | Acquisition of businesses | | (444,124 | ) | | — |
| | — |
| | | | | | | | | | Net cash provided by (used in) investing activities | | (440,788 | ) |
| 1,621 |
|
| (2,338 | ) | | | | | | | | | | Cash flows from financing activities | | | | | | | | Dividends paid to shareholders | | (47,333 | ) | | (46,689 | ) | | (46,114 | ) | | Principal borrowings on senior revolving credit facility | | 135,000 |
| | — |
| | — |
| | Acquisition of treasury stock | | — |
| | (5,088 | ) | | (1,660 | ) | | Proceeds from exercise of stock options | | 1,730 |
| | 3,627 |
| | 4,190 |
| | Withholding tax payments on RSUs tendered | | (3,680 | ) | | (3,165 | ) | | (3,245 | ) | | | | | | | | | | Net cash provided by (used in) financing activities | | 85,717 |
| | (51,315 | ) | | (46,829 | ) | | | | | | | | | | Net increase (decrease) in cash | | (466 | ) | | 412 |
| | 58 |
| | Cash at beginning of period | | 538 |
| | 126 |
| | 68 |
| | | | | | | | | | Cash at end of period | | $ | 72 |
| | $ | 538 |
| | $ | 126 |
|
See accompanying Note to Condensed Financial Statements. See accompanying Report of Independent Registered Public Accounting Firm.
| | F-113 | | | Horace Mann Educators Corporation | | Annual Report on Form 10-K 143 |
HORACE MANN EDUCATORS CORPORATION CONDENSED FINANCIAL INFORMATION OF REGISTRANT NOTE TO CONDENSED FINANCIAL STATEMENTS The accompanying condensed financial statements should be read in conjunction with the Consolidated Financial Statements and the accompanying notes thereto.
| | F-114 | | | 144 Annual Report on Form 10-K | | Horace Mann Educators Corporation |
SCHEDULE III & VI (COMBINED)
HORACE MANN EDUCATORS CORPORATION SCHEDULE III: SUPPLEMENTARY INSURANCE INFORMATION SCHEDULE VI: SUPPLEMENTAL INFORMATION CONCERNING PROPERTY AND CASUALTY INSURANCE OPERATIONS ( Dollars$ in thousands) | Column identification for | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Schedule III: A | | B | | | C | | | | | | D | | | E | | | F | | | G | | | H | | | | | | I | | | J | | | | | | K | | | Schedule VI: A | | B | | | C | | | D | | | E | | | | | | F | | | G | | | | | | H | | | I | | | | | | J | | | K | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Discount, | | | | | | Other | | | | | | | | | Benefits, | | | Claims and claim | | | Amortization | | | | | | Paid | | | | | | | | Deferred | | | Future policy | | | if any, | | | | | | policy | | | Premium | | | | | | claims | | | adjustment expenses | | | of deferred | | | | | | claims | | | | | | | | policy | | | benefits, | | | deducted in | | | | | | claims and | | | revenue/ | | | Net | | | and | | | incurred related to | | | policy | | | Other | | | and claim | | | | | | | | acquisition | | | claims and | | | previous | | | Unearned | | | benefits | | | premium | | | investment | | | settlement | | | Current | | | Prior | | | acquisition | | | operating | | | adjustment | | | Premiums | | | Segment | | costs | | | claim expenses | | | column | | | premiums | | | payable | | | earned | | | income | | | expenses | | | year | | | years | | | costs | | | expenses | | | expenses | | | written | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Year Ended December 31, 2016 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Property and Casualty | | $ | 27,604 | | | $ | 307,757 | | | $ | 0 | | | $ | 244,005 | | | $ | - | | | $ | 620,514 | | | $ | 38,997 | | | $ | 464,098 | | | $ | 471,098 | | | $ | (7,000 | ) | | $ | 74,950 | | | $ | 90,802 | | | $ | 468,778 | | | $ | 634,319 | | | Retirement | | | 188,117 | | | | 4,372,062 | | | | xxx | | | | 671 | | | | 705,603 | | | | 24,937 | | | | 249,410 | | | | 151,185 | | | | xxx | | | | xxx | | | | 14,635 | | | | 40,289 | | | | xxx | | | | xxx | | | Life | | | 51,859 | | | | 1,098,038 | | | | xxx | | | | 1,598 | | | | 3,347 | | | | 113,695 | | | | 73,567 | | | | 117,743 | | | | xxx | | | | xxx | | | | 7,147 | | | | 36,806 | | | | xxx | | | | xxx | | | Other, including | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | consolidating eliminations | | | N/A | | | | N/A | | | | xxx | | | | N/A | | | | N/A | | | | N/A | | | | (788 | ) | | | N/A | | | | xxx | | | | xxx | | | | N/A | | | | 17,023 | | | | xxx | | | | xxx | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total | | $ | 267,580 | | | $ | 5,777,857 | | | | xxx | | | $ | 246,274 | | | $ | 708,950 | | | $ | 759,146 | | | $ | 361,186 | | | $ | 733,026 | | | | xxx | | | | xxx | | | $ | 96,732 | | | $ | 184,920 | | | | xxx | | | | xxx | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Year Ended December 31, 2015 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Property and Casualty | | $ | 26,685 | | | $ | 301,569 | | | $ | 0 | | | $ | 230,201 | | | $ | - | | | $ | 595,958 | | | $ | 33,461 | | | $ | 420,311 | | | $ | 432,811 | | | $ | (12,500 | ) | | $ | 73,173 | | | $ | 84,785 | | | $ | 436,431 | | | $ | 605,753 | | | Retirement | | | 178,300 | | | | 4,082,217 | | | | xxx | | | | 734 | | | | 689,116 | | | | 25,378 | | | | 228,378 | | | | 141,893 | | | | xxx | | | | xxx | | | | 18,155 | | | | 32,555 | | | | xxx | | | | xxx | | | Life | | | 48,191 | | | | 1,066,776 | | | | xxx | | | | 1,906 | | | | 3,536 | | | | 110,544 | | | | 71,614 | | | | 117,002 | | | | xxx | | | | xxx | | | | 7,591 | | | | 35,470 | | | | xxx | | | | xxx | | | Other, including | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | consolidating eliminations | | | N/A | | | | N/A | | | | xxx | | | | N/A | | | | N/A | | | | N/A | | | | (853 | ) | | | N/A | | | | xxx | | | | xxx | | | | N/A | | | | 20,061 | | | | xxx | | | | xxx | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total | | $ | 253,176 | | | $ | 5,450,562 | | | | xxx | | | $ | 232,841 | | | $ | 692,652 | | | $ | 731,880 | | | $ | 332,600 | | | $ | 679,206 | | | | xxx | | | | xxx | | | $ | 98,919 | | | $ | 172,871 | | | | xxx | | | | xxx | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Year Ended December 31, 2014 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Property and Casualty | | $ | 27,160 | | | $ | 311,097 | | | $ | 0 | | | $ | 220,406 | | | $ | - | | | $ | 581,828 | | | $ | 36,790 | | | $ | 399,512 | | | $ | 416,512 | | | $ | (17,000 | ) | | $ | 71,327 | | | $ | 88,305 | | | $ | 393,857 | | | $ | 584,393 | | | Retirement | | | 143,522 | | | | 3,781,260 | | | | xxx | | | | 708 | | | | 603,267 | | | | 25,540 | | | | 222,071 | | | | 134,760 | | | | xxx | | | | xxx | | | | 14,781 | | | | 33,210 | | | | xxx | | | | xxx | | | Life | | | 44,400 | | | | 1,035,698 | | | | xxx | | | | 2,299 | | | | 3,471 | | | | 108,392 | | | | 71,865 | | | | 110,293 | | | | xxx | | | | xxx | | | | 7,709 | | | | 36,421 | | | | xxx | | | | xxx | | | Other, including | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | consolidating eliminations | | | N/A | | | | N/A | | | | xxx | | | | N/A | | | | N/A | | | | N/A | | | | (911 | ) | | | N/A | | | | xxx | | | | xxx | | | | N/A | | | | 18,254 | | | | xxx | | | | xxx | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total | | $ | 215,082 | | | $ | 5,128,055 | | | | xxx | | | $ | 223,413 | | | $ | 606,738 | | | $ | 715,760 | | | $ | 329,815 | | | $ | 644,565 | | | | xxx | | | | xxx | | | $ | 93,817 | | | $ | 176,190 | | | | xxx | | | | xxx | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Column identification for | | | | | | | | | | | | | | | | | | | | | | | | | | | | Schedule III: A | | B | | C | | | | D | | E | | F | | G | | H | | | | I | | J | | | | K | | Schedule VI: A | | B | | C | | D | | E | | | | F | | G | | | | H | | I | | | | J | | K | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Deferred policy acquisition costs | | Future policy
benefits, claims and claim expenses | | Discount, if any, deducted in previous column | | Unearned premiums | | Other policy claims and benefits payable | | Premium revenue/ premium earned | | Net investment income | | Benefits, claims and settlement expenses | | Claims and claim adjustment expenses incurred related to | | Amortization of deferred policy acquisition costs | | Other operating expenses | | Paid claims and claim adjustment expenses | | Premiums written | | Segment | | | | | | | | | | Current year | | Prior years | | | | | | Year Ended December 31, 2019 | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | Property and Casualty | | $ | 28,616 |
| | $ | 386,976 |
| | $ | — |
| | $ | 273,998 |
| | $ | — |
| | $ | 683,454 |
| | $ | 41,740 |
| | $ | 475,563 |
| | $ | 483,062 |
| | $ | (7,500 | ) | | $ | 79,453 |
| | $ | 105,489 |
| | $ | 486,547 |
| | $ | 683,101 |
| | Supplemental | | 1,967 |
| | 390,276 |
| | xxx |
| | 3,218 |
| | — |
| | 65,815 |
| | 7,480 |
| | 24,723 |
| | xxx |
| | xxx |
| | 438 |
| | 26,476 |
| | xxx |
| | xxx |
| | Retirement | | 185,294 |
| | 4,698,461 |
| | xxx |
| | 734 |
| | 643,826 |
| | 29,083 |
| | 245,475 |
| | 173,116 |
| | xxx |
| | xxx |
| | 21,446 |
| | 90,782 |
| | xxx |
| | xxx |
| | Life | | 60,791 |
| | 1,201,593 |
| | xxx |
| | 1,213 |
| | 3,457 |
| | 119,602 |
| | 71,957 |
| | 124,452 |
| | xxx |
| | xxx |
| | 7,844 |
| | 37,820 |
| | xxx |
| | xxx |
| Other, including consolidating eliminations | | N/A |
| | N/A |
| | xxx |
| | N/A |
| | N/A |
| | N/A |
| | (1,588 | ) | | N/A |
| | xxx |
| | xxx |
| | N/A |
| | 26,434 |
| | xxx |
| | xxx |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total | | $ | 276,668 |
| | $ | 6,677,306 |
| | xxx |
| | $ | 279,163 |
| | $ | 647,283 |
| | $ | 897,954 |
| | $ | 365,064 |
| | $ | 797,854 |
| | xxx |
| | xxx |
| | $ | 109,181 |
| | $ | 287,001 |
| | xxx |
| | xxx |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Year Ended December 31, 2018 | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | Property and Casualty | | $ | 30,033 |
| | $ | 367,180 |
| | $ | — |
| | $ | 274,351 |
| | $ | — |
| | $ | 665,734 |
| | $ | 40,104 |
| | $ | 547,659 |
| | $ | 547,959 |
| | $ | (300 | ) | | $ | 79,073 |
| | $ | 101,834 |
| | $ | 531,977 |
| | $ | 681,583 |
| | Retirement | | 209,232 |
| | 4,573,170 |
| | xxx |
| | 704 |
| | 764,607 |
| | 31,269 |
| | 262,634 |
| | 168,732 |
| | xxx |
| | xxx |
| | 23,186 |
| | 57,269 |
| | xxx |
| | xxx |
| | Life | | 59,477 |
| | 1,167,557 |
| | xxx |
| | 1,170 |
| | 3,381 |
| | 120,330 |
| | 74,399 |
| | 127,368 |
| | xxx |
| | xxx |
| | 7,630 |
| | 36,314 |
| | xxx |
| | xxx |
| Other, including consolidating eliminations | | N/A |
| | N/A |
| | xxx |
| | N/A |
| | N/A |
| | N/A |
| | (630 | ) | | N/A |
| | xxx |
| | xxx |
| | N/A |
| | 22,997 |
| | xxx |
| | xxx |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total | | $ | 298,742 |
| | $ | 6,107,907 |
| | xxx |
| | $ | 276,225 |
| | $ | 767,988 |
| | $ | 817,333 |
| | $ | 376,507 |
| | $ | 843,759 |
| | xxx |
| | xxx |
| | $ | 109,889 |
| | $ | 218,414 |
| | xxx |
| | xxx |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Year Ended December 31, 2017 | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | Property and Casualty | | $ | 29,191 |
| | $ | 319,182 |
| | $ | — |
| | $ | 258,502 |
| | $ | — |
| | $ | 648,263 |
| | $ | 36,178 |
| | $ | 496,289 |
| | $ | 498,989 |
| | $ | (2,700 | ) | | $ | 76,967 |
| | $ | 96,488 |
| | $ | 481,074 |
| | $ | 662,760 |
| | Retirement | | 174,661 |
| | 4,466,039 |
| | xxx |
| | 705 |
| | 720,926 |
| | 28,003 |
| | 261,994 |
| | 159,385 |
| | xxx |
| | xxx |
| | 17,759 |
| | 49,733 |
| | xxx |
| | xxx |
| | Life | | 53,974 |
| | 1,136,263 |
| | xxx |
| | 1,332 |
| | 3,335 |
| | 118,437 |
| | 76,195 |
| | 125,267 |
| | xxx |
| | xxx |
| | 7,459 |
| | 36,550 |
| | xxx |
| | xxx |
| Other, including consolidating eliminations | | N/A |
| | N/A |
| | xxx |
| | N/A |
| | N/A |
| | N/A |
| | (737 | ) | | N/A |
| | xxx |
| | xxx |
| | N/A |
| | 16,966 |
| | xxx |
| | xxx |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total | | $ | 257,826 |
| | $ | 5,921,484 |
| | xxx |
| | $ | 260,539 |
| | $ | 724,261 |
| | $ | 794,703 |
| | $ | 373,630 |
| | $ | 780,941 |
| | xxx |
| | xxx |
| | $ | 102,185 |
| | $ | 199,737 |
| | xxx |
| | xxx |
|
See accompanying Report of Independent Registered Public Accounting Firm.
| | F-115 | | | Horace Mann Educators Corporation | | Annual Report on Form 10-K 145 |
HORACE MANN EDUCATORS CORPORATION ($ in thousands) | Column A | | Column B | | | Column C | | | Column D | | Column E | | | Column F | | | | | | | Ceded to | | | Assumed | | | | | Percentage | | | | Gross | | | Other | | | from Other | | Net | | | of Amount | | | | Amount | | | Companies | | | Companies | | Amount | | | Assumed to Net | | | | | | | | | | | | | | | | | | | | Year ended December 31, 2016 | | | | | | | | | | | | | | | | | | | | | | | Life insurance in force | | $ | 17,025,125 | | | $ | 4,065,449 | | | | $ | - | | | $ | 12,959,676 | | | | - | | | Premiums | | | | | | | | | | | | | | | | | | | | | | | Property and Casualty | | $ | 632,372 | | | $ | 16,179 | | | | $ | 4,321 | | | $ | 620,514 | | | | 0.7 | % | | Retirement | | | 24,937 | | | | - | | | | | - | | | | 24,937 | | | | - | | | Life | | | 120,342 | | | | 6,647 | | | | | - | | | | 113,695 | | | | - | | | | | | | | | | | | | | | | | | | | | | | | | | Total premiums | | $ | 777,651 | | | $ | 22,826 | | | | $ | 4,321 | | | $ | 759,146 | | | | 0.6 | % | | | | | | | | | | | | | | | | | | | | | | | | | Year ended December 31, 2015 | | | | | | | | | | | | | | | | | | | | | | | Life insurance in force | | $ | 16,504,539 | | | $ | 3,625,946 | | | | $ | - | | | $ | 12,878,593 | | | | - | | | Premiums | | | | | | | | | | | | | | | | | | | | | | | Property and Casualty | | $ | 610,347 | | | $ | 18,548 | | | | $ | 4,159 | | | $ | 595,958 | | | | 0.7 | % | | Retirement | | | 25,378 | | | | - | | | | | - | | | | 25,378 | | | | - | | | Life | | | 117,073 | | | | 6,529 | | | | | - | | | | 110,544 | | | | - | | | | | | | | | | | | | | | | | | | | | | | | | | Total premiums | | $ | 752,798 | | | $ | 25,077 | | | | $ | 4,159 | | | $ | 731,880 | | | | 0.6 | % | | | | | | | | | | | | | | | | | | | | | | | | | Year ended December 31, 2014 | | | | | | | | | | | | | | | | | | | | | | | Life insurance in force | | $ | 15,800,701 | | | $ | 3,360,016 | | | | $ | - | | | $ | 12,440,685 | | | | - | | | Premiums | | | | | | | | | | | | | | | | | | | | | | | Property and Casualty | | $ | 599,230 | | | $ | 21,157 | | | | $ | 3,755 | | | $ | 581,828 | | | | 0.6 | % | | Retirement | | | 25,540 | | | | - | | | | | - | | | | 25,540 | | | | - | | | Life | | | 114,511 | | | | 6,119 | | | | | - | | | | 108,392 | | | | - | | | | | | | | | | | | | | | | | | | | | | | | | | Total premiums | | $ | 739,281 | | | $ | 27,276 | | | | $ | 3,755 | | | $ | 715,760 | | | | 0.5 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Column A | | Column B | | Column C | | Column D | | Column E | | Column F | | | | Gross Amount | | Ceded to Other Companies | | Assumed from Other Companies | | Net Amount | | Percentage of Amount Assumed to Net | | | | | | | | | Year Ended December 31, 2019 | | |
| | |
| | |
| | |
| | |
| | Life insurance in force | | $ | 19,179,823 |
| | $ | 4,813,185 |
| | $ | — |
| | $ | 14,366,638 |
| | — |
| | Premiums | | | | | | | | | | | | Property and Casualty | | $ | 689,156 |
| | $ | 16,457 |
| | $ | 10,755 |
| | $ | 683,454 |
| | 1.6 | % | | Supplemental | | 65,918 |
| | 104 |
| | 1 |
| | 65,815 |
| | — |
| | Retirement | | 35,602 |
| | 6,519 |
| | — |
| | 29,083 |
| | — |
| | Life | | 126,934 |
| | 7,332 |
| | — |
| | 119,602 |
| | — |
| | | | | | | | | | | | | | Total premiums | | $ | 917,610 |
| | $ | 30,412 |
| | $ | 10,756 |
| | $ | 897,954 |
| | 1.2 | % | | | | | | | | | | | | | | Year Ended December 31, 2018 | | |
| | |
| | |
| | |
| | |
| | Life insurance in force | | $ | 18,277,691 |
| | $ | 4,505,208 |
| | $ | — |
| | $ | 13,772,483 |
| | — |
| | Premiums | | | | | | | | | | |
| | Property and Casualty | | $ | 682,478 |
| | $ | 21,767 |
| | $ | 5,023 |
| | $ | 665,734 |
| | 0.8 | % | | Retirement | | 31,269 |
| | — |
| | — |
| | 31,269 |
| | — |
| | Life | | 127,400 |
| | 7,070 |
| | — |
| | 120,330 |
| | — |
| | | | | | | | | | | | | | Total premiums | | $ | 841,147 |
| | $ | 28,837 |
| | $ | 5,023 |
| | $ | 817,333 |
| | 0.6 | % | | | | | | | | | | | | | | Year Ended December 31, 2017 | | |
| | |
| | |
| | |
| | |
| | Life insurance in force | | $ | 17,564,270 |
| | $ | 4,295,412 |
| | $ | — |
| | $ | 13,268,858 |
| | — |
| | Premiums | | | | | | | | | | |
| | Property and Casualty | | $ | 658,960 |
| | $ | 15,337 |
| | $ | 4,640 |
| | $ | 648,263 |
| | 0.7 | % | | Retirement | | 28,003 |
| | — |
| | — |
| | 28,003 |
| | — |
| | Life | | 125,136 |
| | 6,699 |
| | — |
| | 118,437 |
| | — |
| | | | | | | | | | | | | | Total premiums | | $ | 812,099 |
| | $ | 22,036 |
| | $ | 4,640 |
| | $ | 794,703 |
| | 0.6 | % |
Note: Premiums above include insurance premiums earned and contract charges earned.
See accompanying Report of Independent Registered Public Accounting Firm.
| | F-116 | | | 146 Annual Report on Form 10-K | | Horace Mann Educators Corporation |
HORACE MANN EDUCATORS CORPORATION
EXHIBITS
To
FORM 10-K
For the Year Ended December 31, 2016
VOLUME 1 OF 1
(a)(3) The following items are filed as Exhibits to Horace Mann Educators Corporation's ("HMEC") Annual Report on Form 10-K for the year ended December 31, 2016.Exhibits. Management contracts and compensatory plans are indicated by an asterisk (*). EXHIBIT INDEX
| | | | | Exhibit | | | | No. | | | Description | | | | | (3) | Articles of incorporation and bylaws: | | | | | | 3.1 | | | | | | | | 3.2 | Form of Certificate for shares of Common Stock, $0.001 par value per share, of HMEC, incorporated by reference to Exhibit 4.5 to HMEC’s Registration Statement on Form S-3 (Registration No. 33-53118) filed with the SEC on October 9, 1992. | | | | | 3.3 | | | | | | | (4) | Instruments defining the rights of security holders, including indentures: | | | | | | 4.1 | | | | | | | | 4.1(a) | | | | | | | | 4.2 | | | | | | | 4.3 | | | | | | | | (10) | Material contracts: | | | | | | 10.1 | Amended and Restated | Credit Agreement dated as of July 30, 2014June 21, 2019 among HMEC, certain financial institutions named therein and JPMorgan ChasePNC Bank, N.A., as administrative agent, incorporated by reference to Exhibit 10.1 to HMEC’s QuarterlyCurrent Report on Form 10-Q for the quarter ended8-K dated June 30, 2014,24, 2019, filed with the SEC on August 8, 2014. |
Exhibit | | No. | | | Description | | | | | | 10.1(a) | | | | | | | | 10.2* | | | | | | | | 10.2(a)* | | | | | | | | 10.2(b)* | | |
| | | | | Horace Mann Educators Corporation | | Annual Report on Form 10-K 147 |
| | | | | | | | | 10.2(c)* | | | | | | | | 10.2(d)* | | | | | | | | 10.2(e)* | | | | | | | | 10.3* | HMEC 2010 Comprehensive Executive Compensation Plan As Amended and Restated, incorporated by reference to Exhibit 1 (beginning on page E-1) to HMEC’s Proxy Statement, filed with the SEC on April 8, 2015. | | | | | 10.3(a)* | Specimen Incentive Stock Option Agreement for Section 16 Officers under |
Exhibit | | No. | | | Description | | | | | | 10.3(b)10.3(a)* | Specimen Incentive Stock Option Agreement for Non-Section 16 Officers under the | | | | | | | 10.3(c)10.3(b)* | Specimen Employee Service-Vested Restricted Stock Units Agreement under the |
| | | | | | 10.3(d)10.3(c)* | Specimen Employee Performance-Based Restricted Stock Units Agreement under the | | | | | | | 10.3(d)* | | | | | | | 10.3(e)* | |
| | | | | 10.3(f)* | | | | | | | | 10.3(f)10.3(g)* | | | | | | |
| | | | | 148 Annual Report on Form 10-K | | Horace Mann Educators Corporation |
Exhibit | | No. | | | Description | | | | | | 10.8* | |
| | | | | | 10.9* | |
| | | | | | 10.9(a)* | |
| | | | | | 10.10* | |
| | | | | | 10.10(a)* | |
| | | | | | 10.11* | | | | | | | | 10.11(a)* | | | | | | | | 10.11(b)* | |
| | | | | 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. | | | |
| | | | | Horace Mann Educators Corporation | | Annual Report on Form 10-K 149 |
| | | | | 10.13 | | | | | | | 10.14 | | | | | | | | (11) | | | | | | (12) | Statement regarding computation of ratios. | | | | | (21) | | | | | | | (23) | | |
Exhibit | | No. | | | Description | | | | (31) | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.2002: | | | | 31.1 | | | | 31.1 | | | | | 31.2 | | | | 31.2 | | | | | | (32) | Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.2002: | | | | 32.1 | | | | 32.1 | | | | | | | 32.2 | | | | | | | | (99) | Additional exhibitsexhibits: | | | | | | 99.1 | | | | | | | | (101) | Interactive Data FileFile: | | | | | | 101.1 | 101.INS | XBRL Instance DocumentThe following information from Horace Mann Educators Corporation’s Annual Report on Form 10-K for the year ended December 31, 2019 formatted in Inline XBRL: (i) Consolidated Balance Sheets at December 31, 2019 and 2018 (ii) Consolidated Statements of Operations for the years ended December 31, 2019, 2018 and 2017; (iii) Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2019, 2018 and 2017; (iv) Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 2019, 2018 and 2017; (v) Consolidated Statements of Cash Flows for the years ended December 31, 2019, 2018 and 2017; (vi) Notes to Consolidated Financial Statements; (vii) Financial Statement Schedules; and (viii) the cover page. | | | | | | 104.1 | 101.SCH | Cover Page Interactive Data File (Embedded within the Inline XBRL Taxonomy Extension Schemadocument and included in Exhibit 101.1). |
ITEM 16. I Form 10-K Summary On June 24, 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. On July 1, 2019, the Company acquired all the equity interests in NTA pursuant to a Purchase Agreement (Agreement) dated as of December 10, 2018. The purchase price of the transaction was $425.9 million includes $20.9 million representing NTA’s share of "adjusted earnings" (as determined in accordance with the terms of the Agreement) from July 1, 2018 to July 1, 2019.
| | | | | 150 Annual Report on Form 10-K | | Horace Mann Educators Corporation |
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Horace Mann Educators Corporation has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. | | | | | | | | | HORACE MANN EDUCATORS CORPORATION | | | | | | | | | | | By: | | /s/ Marita Zuraitis | | President and Chief Executive Officer | | February 28, 2020 | | | Marita Zuraitis | | | | |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of Horace Mann Educators Corporation and in the capacities and on the date indicated. | | | | | | | | | | Signature | | Title | | Date | | | | | | | | | By: | | /s/ Marita Zuraitis | | President, Chief Executive Officer and Director | | February 28, 2020 | | | Marita Zuraitis | | (Principal Executive Officer) | | | | | | | | | | | By: | | /s/ Bret A. Conklin | | Executive Vice President and Chief Financial Officer | | February 28, 2020 | | | Bret A. Conklin | | (Principal Financial Officer) | | | | | | | | | | | By: | | /s/ Kimberly A. Johnson | | Senior Vice President and Controller | | February 28, 2020 | | | Kimberly A. Johnson | | (Principal Accounting Officer) | | | | | | | | | | | By: | | /s/ H. Wade Reece | | Chairman of the Board of Directors | | February 28, 2020 | | | H. Wade Reece | | | | | | | 101.CAL | XBRL Taxonomy Extension Calculation Linkbase | | | | | | By: | | /s/ Mark S. Casady | | Director | | February 28, 2020 | | | Mark S. Casady | | | | | | | 101.DEF | XBRL Taxonomy Extension Definition Linkbase | | | | | | By: | | /s/ Daniel A. Domenech | | Director | | February 28, 2020 | | | Daniel A. Domenech | | | | | | | 101.LAB | XBRL Taxonomy Extension Label Linkbase | | | | | | By: | | /s/ Stephen J. Hasenmiller | | Director | | February 28, 2020 | | | Stephen J. Hasenmiller | | | | | | | 101.PRE | XBRL Taxonomy Extension Presentation Linkbase | | | | |
| By: | | /s/ Perry G. Hines | | Director | | February 28, 2020 | | | -5- | Perry G. Hines | | | | | | | | | | | | | By: | | /s/ Mark E. Konen | | Director | | February 28, 2020 | | | Mark E. Konen | | | | | | | | | | | | | By: | | /s/ Beverley J. McClure | | Director | | February 28, 2020 | | | Beverley J. McClure | | | | | | | | | | | | | By: | | /s/ Robert Stricker | | Director | | February 28, 2020 | | | Robert Stricker | | | | | | | | | | | | | By: | | /s/ Steven O. Swyers | | Director | | February 28, 2020 | | | Steven O. Swyers | | | | |
| | | | | Horace Mann Educators Corporation | | Annual Report on Form 10-K 151 |
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