UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
| |
[X] | QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SeptemberJune 30, 20172019
OR
| |
[ ] | TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
☐TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission file number 1-10890
HORACE MANN EDUCATORS CORPORATION
(Exact name of registrant as specified in its charter)
|
| |
Delaware | 37-0911756 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
1 Horace Mann Plaza, Springfield, Illinois 62715-0001
(Address of principal executive offices, including Zip Code)
Registrant’s Telephone Number, Including Area Code: 217-789-2500
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes X ☑No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes X ☑No ☐
Indicate by check mark whether the registrant’sregistrant is a large accelerated filer, status, as such terms are definedan accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
|
| | | | | |
Large accelerated filer | X☑ | | Accelerated filer | | ☐ |
Non-accelerated filer | ☐ | | Smaller reporting company | | ☐ |
Emerging growth company | | | | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
IndicateIndicate by check mark whether the registrant is a shell company as(as defined in Rule 12b-2 of the Exchange Act.
) Yes ☐No X ☑
|
| | | | |
Securities registered pursuant to Section 12(b) of the Act: |
Title of each class | | Trading Symbol | | Name of each exchange on which registered |
Common Stock, $0.001 par value | | HMN | | New York Stock Exchange |
As of OctoberJuly 31, 2017,2019, the registrant had 40,667,21141,198,167 shares of Common Stock, par value $0.001 per share, outstanding.
HORACE MANN EDUCATORS CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBERJUNE 30, 20172019
INDEX
|
| | |
| Page |
| | |
Item 1. | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
Item 2. | | |
| | |
Item 3. | | |
| | |
Item 4. | | |
| | |
| |
| | |
Item 1A. | | |
| | |
Item 2. | | |
| | |
Item 5. | | |
| | |
Item 6. | | |
| | |
| |
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TheTo the Shareholders and Board of Directors and Shareholders
Horace Mann Educators Corporation:
Results of Review of Interim Financial Information
We have reviewed the consolidated balance sheet of Horace Mann Educators Corporation and subsidiaries (the Company) as of SeptemberJune 30, 2017,2019, the related consolidated statements of operations, and comprehensive income (loss) and changes in shareholders' equity for the threethree-month and nine-monthsix-month periods ended SeptemberJune 30, 20172019 and 2016, and the related consolidated statements of changes in shareholders��� equity,2018, and cash flows for the nine-monthsix-month periods ended SeptemberJune 30, 20172019 and 2016. These2018, and the related notes (collectively, the consolidated interim financial statementsinformation). Based on our reviews, we are not aware of any material modifications that should be made to the responsibility of the Company’s management.consolidated interim financial information for it to be in conformity with U.S. generally accepted accounting principles.
We conducted our reviewhave previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States). (PCAOB), the consolidated balance sheet of the Company as of December 31, 2018, and the related consolidated statements of operations, comprehensive income (loss), changes in shareholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated March 1, 2019, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2018, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
Basis for Review Results
This consolidated interim financial information is the responsibility of the Company’s management. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our reviews in accordance with the standards of the PCAOB. A review of consolidated interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States),PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should be made to the consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Horace Mann Educators Corporation and subsidiaries as of December 31, 2016, and the related consolidated statements of operations, comprehensive income (loss), changes in shareholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated March 1, 2017, we expressed an unqualified opinion on those consolidated financial statements.
|
| |
/s/ KPMG LLP |
KPMG LLP |
| |
Chicago, Illinois | |
NovemberAugust 8, 20172019 | |
HORACE MANN EDUCATORS CORPORATION
CONSOLIDATED BALANCE SHEETS
($ in thousands, except per share data)
| | | | September 30, 2017 | | December 31, 2016 | | June 30, 2019 | | December 31, 2018 |
| | (Unaudited) | | | | (Unaudited) | | |
ASSETS | Investments | | | | | | | | |
Fixed maturity securities, available for sale, at fair value (amortized cost 2017, $7,194,397; 2016, $7,152,127) | | $ | 7,630,634 |
| | $ | 7,456,708 |
| |
Equity securities, available for sale, at fair value (cost 2017, $140,200; 2016, $134,013) | | 159,275 |
| | 141,649 |
| |
Fixed maturity securities, available for sale, at fair value (amortized cost 2019, $5,241,755; 2018, $7,373,911) | | | $ | 5,534,270 |
| | $ | 7,515,318 |
|
Equity securities, at fair value | | | 100,143 |
| | 111,750 |
|
Limited partnership interests | | | 351,515 |
| | 328,516 |
|
Short-term and other investments | | 547,227 |
| | 401,015 |
| | 433,688 |
| | 295,093 |
|
Total investments | | 8,337,136 |
| | 7,999,372 |
| | 6,419,616 |
| | 8,250,677 |
|
Cash | | 6,692 |
| | 16,670 |
| | 7,616 |
| | 11,906 |
|
Deferred policy acquisition costs | | 257,214 |
| | 267,580 |
| | 279,041 |
| | 298,742 |
|
Deposit asset on reinsurance | | | 2,315,330 |
| | — |
|
Goodwill | | 47,396 |
| | 47,396 |
| | 29,458 |
| | 47,396 |
|
Other assets | | 344,443 |
| | 321,874 |
| | 417,460 |
| | 422,047 |
|
Separate Account (variable annuity) assets | | 2,051,467 |
| | 1,923,932 |
| | 2,310,886 |
| | 2,001,128 |
|
Total assets | | $ | 11,044,348 |
| | $ | 10,576,824 |
| | $ | 11,779,407 |
| | $ | 11,031,896 |
|
| | | | | | | | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | Policy liabilities | | | | | | | | |
Investment contract and life policy reserves | | $ | 5,540,045 |
| | $ | 5,447,969 |
| | $ | 5,776,769 |
| | $ | 5,711,193 |
|
Unpaid claims and claim expenses | | 341,784 |
| | 329,888 |
| | 398,339 |
| | 396,714 |
|
Unearned premiums | | 262,029 |
| | 246,274 |
| | 270,163 |
| | 276,225 |
|
Total policy liabilities | | 6,143,858 |
| | 6,024,131 |
| | 6,445,271 |
| | 6,384,132 |
|
Other policyholder funds | | 717,369 |
| | 708,950 |
| | 821,880 |
| | 767,988 |
|
Other liabilities | | 493,810 |
| | 378,620 |
| | 403,812 |
| | 290,358 |
|
Long-term debt | | 247,403 |
| | 247,209 |
| | 297,881 |
| | 297,740 |
|
Separate Account (variable annuity) liabilities | | 2,051,467 |
| | 1,923,932 |
| | 2,310,886 |
| | 2,001,128 |
|
Total liabilities | | 9,653,907 |
| | 9,282,842 |
| | 10,279,730 |
| | 9,741,346 |
|
Preferred stock, $0.001 par value, authorized 1,000,000 shares; none issued | | — |
| | — |
| | — |
| | — |
|
Common stock, $0.001 par value, authorized 75,000,000 shares; issued, 2017, 65,382,877; 2016, 64,917,683 | | 65 |
| | 65 |
| |
Common stock, $0.001 par value, authorized 75,000,000 shares; issued, 2019, 66,036,205; 2018, 65,820,369 | | | 66 |
| | 66 |
|
Additional paid-in capital | | 462,068 |
| | 453,479 |
| | 476,353 |
| | 475,109 |
|
Retained earnings | | 1,165,282 |
| | 1,155,732 |
| | 1,318,329 |
| | 1,216,582 |
|
Accumulated other comprehensive income (loss), net of taxes: | | | | |
| |
Net unrealized investment gains on fixed maturity and equity securities | | 255,718 |
| | 175,738 |
| |
Accumulated other comprehensive income (loss), net of tax: | | | | | |
|
Net unrealized investment gains on fixed maturity securities | | | 203,077 |
| | 96,941 |
|
Net funded status of benefit plans | | (11,817 | ) | | (11,817 | ) | | (12,185 | ) | | (12,185 | ) |
Treasury stock, at cost, 2017, 24,721,372 shares; 2016, 24,672,932 shares | | (480,875 | ) | | (479,215 | ) | |
Treasury stock, at cost, 2019, 24,850,484 shares; 2018, 24,850,484 shares | | | (485,963 | ) | | (485,963 | ) |
Total shareholders’ equity | | 1,390,441 |
| | 1,293,982 |
| | 1,499,677 |
| | 1,290,550 |
|
Total liabilities and shareholders’ equity | | $ | 11,044,348 |
| | $ | 10,576,824 |
| | $ | 11,779,407 |
| | $ | 11,031,896 |
|
See Notes to Consolidated Financial Statements.
HORACE MANN EDUCATORS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
($ in thousands, except per share data)
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| | | | | | | | |
Revenues | | |
| | |
| | | | |
Insurance premiums and contract charges earned | | $ | 198,935 |
| | $ | 191,050 |
| | $ | 590,375 |
| | $ | 564,860 |
|
Net investment income | | 92,320 |
| | 94,847 |
| | 275,025 |
| | 270,685 |
|
Net realized investment gains (losses) | | (3,486 | ) | | 3,985 |
| | (1,656 | ) | | 6,911 |
|
Other income | | 2,048 |
| | 1,294 |
| | 4,813 |
| | 3,581 |
|
| | | | | | | | |
Total revenues | | 289,817 |
| | 291,176 |
| | 868,557 |
| | 846,037 |
|
| | | | | | | | |
Benefits, losses and expenses | | | | | |
|
| |
|
|
Benefits, claims and settlement expenses | | 134,895 |
| | 135,710 |
| | 444,870 |
| | 403,631 |
|
Interest credited | | 50,078 |
| | 48,658 |
| | 148,200 |
| | 142,924 |
|
Policy acquisition expenses amortized | | 24,210 |
| | 24,474 |
| | 73,904 |
| | 73,113 |
|
Operating expenses | | 44,172 |
| | 44,337 |
| | 139,156 |
| | 130,478 |
|
Interest expense | | 2,978 |
| | 2,975 |
| | 8,879 |
| | 8,858 |
|
| | | | | | | | |
Total benefits, losses and expenses | | 256,333 |
| | 256,154 |
| | 815,009 |
| | 759,004 |
|
| | | | | | | | |
Income before income taxes | | 33,484 |
| | 35,022 |
| | 53,548 |
| | 87,033 |
|
Income tax expense | | 6,933 |
| | 8,099 |
| | 9,418 |
| | 23,091 |
|
| | | | | | | | |
Net income | | $ | 26,551 |
| | $ | 26,923 |
| | $ | 44,130 |
| | $ | 63,942 |
|
| | | | | | | | |
Net income per share | | | | | |
|
| |
|
|
Basic | | $ | 0.64 |
| | $ | 0.66 |
| | $ | 1.07 |
| | $ | 1.55 |
|
Diluted | | $ | 0.64 |
| | $ | 0.65 |
| | $ | 1.06 |
| | $ | 1.55 |
|
| | | | | | | | |
Weighted average number of common and common equivalent shares (in thousands) | | | | | | | | |
Basic | | 41,433 |
| | 41,092 |
| | 41,337 |
| | 41,155 |
|
Diluted | | 41,575 |
| | 41,347 |
| | 41,467 |
| | 41,386 |
|
| | | | | | | | |
Net realized investment gains (losses) | | | | | | | | |
Total other-than-temporary impairment losses on securities | | $ | (6,091 | ) | | $ | (160 | ) | | $ | (12,452 | ) | | $ | (7,686 | ) |
Portion of losses recognized in other comprehensive income | | — |
| | — |
| | — |
| | (290 | ) |
Net other-than-temporary impairment losses on securities recognized in earnings | | (6,091 | ) | | (160 | ) | | (12,452 | ) | | (7,396 | ) |
Realized investment gains, net | | 2,605 |
| | 4,145 |
| | 10,796 |
| | 14,307 |
|
Total | | $ | (3,486 | ) | | $ | 3,985 |
| | $ | (1,656 | ) | | $ | 6,911 |
|
See Notes to Consolidated Financial Statements.
HORACE MANN EDUCATORS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
($ in thousands, except per share data)
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
Revenues | | |
| | |
| | | | |
Insurance premiums and contract charges earned | | $ | 208,096 |
| | $ | 205,610 |
| | $ | 417,881 |
| | $ | 408,608 |
|
Net investment income | | 93,458 |
| | 97,101 |
| | 186,258 |
| | 188,965 |
|
Net investment gains (losses) | | 146,333 |
| | 735 |
| | 153,750 |
| | (919 | ) |
Other income | | 3,591 |
| | 2,811 |
| | 6,802 |
| | 5,092 |
|
| | | | | | | | |
Total revenues | | 451,478 |
| | 306,257 |
| | 764,691 |
| | 601,746 |
|
| | | | | | | | |
Benefits, losses and expenses | | | | | | | | |
Benefits, claims and settlement expenses | | 152,692 |
| | 168,278 |
| | 292,076 |
| | 311,840 |
|
Interest credited | | 53,594 |
| | 51,071 |
| | 106,516 |
| | 101,105 |
|
DAC amortization expense | | 31,648 |
| | 26,586 |
| | 56,621 |
| | 53,291 |
|
Operating expenses | | 55,252 |
| | 50,218 |
| | 109,305 |
| | 98,387 |
|
Interest expense | | 3,312 |
| | 3,291 |
| | 6,615 |
| | 6,464 |
|
Other expense | | 28,025 |
| | — |
| | 28,025 |
| | — |
|
| | | | | | | | |
Total benefits, losses and expenses | | 324,523 |
| | 299,444 |
| | 599,158 |
| | 571,087 |
|
| | | | | | | | |
Income before income taxes | | 126,955 |
| | 6,813 |
| | 165,533 |
| | 30,659 |
|
Income tax expense | | 33,133 |
| | 896 |
| | 39,545 |
| | 4,587 |
|
| | | | | | | | |
Net income | | $ | 93,822 |
| | $ | 5,917 |
| | $ | 125,988 |
| | $ | 26,072 |
|
| | | | | | | | |
Net income per share | | | | | | | | |
Basic | | $ | 2.25 |
| | $ | 0.14 |
| | $ | 3.02 |
| | $ | 0.63 |
|
Diluted | | $ | 2.24 |
| | $ | 0.14 |
| | $ | 3.01 |
| | $ | 0.63 |
|
| | | | | | | | |
Weighted average number of shares and equivalent shares | | | | | | | | |
Basic | | 41,762 |
| | 41,600 |
| | 41,685 |
| | 41,531 |
|
Diluted | | 41,921 |
| | 41,735 |
| | 41,851 |
| | 41,659 |
|
| | | | | | | | |
Net investment gains (losses) | | | | | | | | |
Total other-than-temporary impairment losses on securities | | $ | (34 | ) | | $ | (1,177 | ) | | $ | (271 | ) | | $ | (1,287 | ) |
Portion of losses recognized in other comprehensive income (loss) | | — |
| | — |
| | — |
| | — |
|
Net other-than-temporary impairment losses on securities recognized in earnings | | (34 | ) | | (1,177 | ) | | (271 | ) | | (1,287 | ) |
Sales and other, net | | 142,067 |
| | 1,789 |
| | 146,905 |
| | 3,992 |
|
Change in fair value - equity securities | | 3,441 |
| | (1,156 | ) | | 6,948 |
| | (6,342 | ) |
Change in fair value and gains realized on settlements - derivative instruments | | 859 |
| | 1,279 |
| | 168 |
| | 2,718 |
|
Total | | $ | 146,333 |
| | $ | 735 |
| | $ | 153,750 |
| | $ | (919 | ) |
See Notes to Consolidated Financial Statements.
HORACE MANN EDUCATORS CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
($ in thousands)
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
Comprehensive income | | |
| | |
| | | | |
Net income | | $ | 26,551 |
| | $ | 26,923 |
| | $ | 44,130 |
| | $ | 63,942 |
|
Other comprehensive income, net of taxes: | | |
| | |
| | | | |
Change in net unrealized investment gains on fixed maturity and equity securities | | 12,208 |
| | 7,638 |
| | 79,980 |
| | 162,124 |
|
Change in net funded status of benefit plans | | — |
| | — |
| | — |
| | — |
|
Other comprehensive income | | 12,208 |
| | 7,638 |
| | 79,980 |
| | 162,124 |
|
Total | | $ | 38,759 |
| | $ | 34,561 |
| | $ | 124,110 |
| | $ | 226,066 |
|
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
Comprehensive income (loss) | | |
| | |
| | | | |
Net income | | $ | 93,822 |
| | $ | 5,917 |
| | $ | 125,988 |
| | $ | 26,072 |
|
Other comprehensive income (loss), net of tax: | | |
| | |
| | | | |
Change in net unrealized investment gains (losses) on fixed maturity securities | | (7,762 | ) | | (52,444 | ) | | 106,136 |
| | (159,540 | ) |
Change in net funded status of benefit plans | | — |
| | — |
| | — |
| | — |
|
Cumulative effect of change in accounting principle | | — |
| | — |
| | — |
| | (15,041 | ) |
Other comprehensive income (loss) | | (7,762 | ) | | (52,444 | ) | | 106,136 |
| | (174,581 | ) |
Total | | $ | 86,060 |
| | $ | (46,527 | ) | | $ | 232,124 |
| | $ | (148,509 | ) |
See Notes to Consolidated Financial Statements.
HORACE MANN EDUCATORS CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)
($ in thousands, except per share data)
| | | | Nine Months Ended September 30, | | | | | | | | | |
| | 2017 | | 2016 | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | | | | | 2019 | | 2018 | | 2019 | | 2018 |
Common stock, $0.001 par value | | | | | | | | | | | | |
Beginning balance | | $ | 65 |
| | $ | 65 |
| | $ | 66 |
| | $ | 66 |
| | $ | 66 |
| | $ | 65 |
|
Options exercised, 2017, 156,211 shares; 2016, 114,507 shares | | — |
| | — |
| |
Conversion of common stock units, 2017, 15,981 shares; 2016, 15,629 shares | | — |
| | — |
| |
Conversion of restricted stock units, 2017, 293,002 shares; 2016, 188,207 shares | | — |
| | — |
| |
Options exercised | | | — |
| | — |
| | — |
| | — |
|
Conversion of common stock units | | | — |
| | — |
| | — |
| | — |
|
Conversion of restricted stock units | | | — |
| | — |
| | — |
| | 1 |
|
Ending balance | | 65 |
| | 65 |
| | 66 |
| | 66 |
| | 66 |
| | 66 |
|
| | | | | | | | | | | | |
Additional paid-in capital | | | | | | | | | | | | |
Beginning balance | | 453,479 |
| | 442,648 |
| | 474,336 |
| | 466,277 |
| | 475,109 |
| | 464,246 |
|
Options exercised and conversion of common stock units and restricted stock units | | 2,773 |
| | 2,045 |
| | 344 |
| | 2,384 |
| | (1,761 | ) | | 2,259 |
|
Share-based compensation expense | | 5,816 |
| | 6,066 |
| | 1,673 |
| | 1,991 |
| | 3,005 |
| | 4,147 |
|
Ending balance | | 462,068 |
| | 450,759 |
| | 476,353 |
| | 470,652 |
| | 476,353 |
| | 470,652 |
|
| | | | | | | | | | | | |
Retained earnings | | | | | | | | | | | | |
Beginning balance | | 1,155,732 |
| | 1,116,277 |
| | 1,236,621 |
| | 1,254,394 |
| | 1,216,582 |
| | 1,231,177 |
|
Net income | | 44,130 |
| | 63,942 |
| | 93,822 |
| | 5,917 |
| | 125,988 |
| | 26,072 |
|
Cash dividends, 2017, $0.825 per share; 2016, $0.795 per share | | (34,580 | ) | | (33,241 | ) | |
Dividends, 2019, $0.2875, $0.5750 per share; 2018, $0.2850, $0.5700 per share | | | (12,114 | ) | | (12,006 | ) | | (24,241 | ) | | (23,985 | ) |
Cumulative effect of change in accounting principle | | | — |
| | — |
| | — |
| | 15,041 |
|
Ending balance | | 1,165,282 |
| | 1,146,978 |
| | 1,318,329 |
| | 1,248,305 |
| | 1,318,329 |
| | 1,248,305 |
|
| | | | | | | | | | | | |
Accumulated other comprehensive income, net of taxes | | | | | |
Accumulated other comprehensive income (loss), net of tax: | | | | | | | | | |
Beginning balance | | 163,921 |
| | 163,373 |
| | 198,654 |
| | 164,823 |
| | 84,756 |
| | 286,960 |
|
Change in net unrealized investment gains on fixed maturity and equity securities | | 79,980 |
| | 162,124 |
| |
Change in net unrealized investment gains on fixed maturity securities | | | (7,762 | ) | | (52,444 | ) | | 106,136 |
| | (159,540 | ) |
Change in net funded status of benefit plans | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Cumulative effect of change in accounting principle | | | — |
| | — |
| | — |
| | (15,041 | ) |
Ending balance | | 243,901 |
| | 325,497 |
| | 190,892 |
| | 112,379 |
| | 190,892 |
| | 112,379 |
|
| | | | | | | | | | | | |
Treasury stock, at cost | | | | | | | | | | | | |
Beginning balance, 2017, 24,672,932 shares; 2016, 23,971,522 shares | | (479,215 | ) | | (457,702 | ) | |
Acquisition of shares, 2017, 48,440 shares; 2016, 701,410 shares | | (1,660 | ) | | (21,513 | ) | |
Ending balance, 2017, 24,721,372 shares; 2016, 24,672,932 shares | | (480,875 | ) | | (479,215 | ) | |
Beginning balance | | | (485,963 | ) | | (480,881 | ) | | (485,963 | ) | | (480,875 | ) |
Acquisition of shares | | | — |
| | (80 | ) | | — |
| | (86 | ) |
Ending balance | | | (485,963 | ) | | (480,961 | ) | | (485,963 | ) | | (480,961 | ) |
| | | | | | | | | | | | |
Shareholders’ equity at end of period | | $ | 1,390,441 |
| | $ | 1,444,084 |
| | $ | 1,499,677 |
| | $ | 1,350,441 |
| | $ | 1,499,677 |
| | $ | 1,350,441 |
|
See Notes to Consolidated Financial Statements.
HORACE MANN EDUCATORS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
($ in thousands)
| | | | Nine Months Ended September 30, | | Six Months Ended June 30, |
| | 2017 | | 2016 | | 2019 | | 2018 |
Cash flows - operating activities | | | | | | | | |
Premiums collected | | $ | 598,882 |
| | $ | 557,816 |
| | $ | 396,887 |
| | $ | 392,103 |
|
Policyholder benefits paid | | (410,241 | ) | | (422,184 | ) | | (275,437 | ) | | (272,769 | ) |
Policy acquisition and other operating expenses paid | | (208,248 | ) | | (207,825 | ) | | (161,863 | ) | | (141,620 | ) |
Federal income taxes paid | | (10,061 | ) | | (18,156 | ) | |
Income taxes paid | | | (78 | ) | | (7,393 | ) |
Investment income collected | | 271,717 |
| | 259,373 |
| | 139,210 |
| | 184,749 |
|
Interest expense paid | | (5,821 | ) | | (6,072 | ) | | (6,440 | ) | | (6,190 | ) |
Other | | 976 |
| | 1,884 |
| | 5,557 |
| | 2,429 |
|
| | | | | |
Net cash provided by operating activities | | 237,204 |
| | 164,836 |
| | 97,836 |
| | 151,309 |
|
| | | | | | | | |
Cash flows - investing activities | | |
| | |
| | |
| | |
|
Fixed maturity securities | | |
| | |
| | |
| | |
|
Purchases | | (1,041,744 | ) | | (1,097,880 | ) | | (644,104 | ) | | (551,984 | ) |
Sales | | 315,531 |
| | 351,739 |
| | 501,739 |
| | 190,023 |
|
Maturities, paydowns, calls and redemptions | | 691,169 |
| | 634,686 |
| | 342,998 |
| | 383,090 |
|
Purchase of other invested assets | | (98,109 | ) | | (42,578 | ) | |
Net cash used in equity securities, short-term and other investments | | (54,281 | ) | | (75,665 | ) | |
| | | | | |
Net cash used in investing activities | | (187,434 | ) | | (229,698 | ) | |
Equity securities | | | | | |
Purchases | | | (5,282 | ) | | (6,028 | ) |
Sales and repayments | | | 17,122 |
| | 5,783 |
|
Limited partnership interests | | | | | |
Purchases | | | (29,357 | ) | | (33,031 | ) |
Sales | | | 15,029 |
| | 9,457 |
|
Change in short-term and other investments, net | | | (156,748 | ) | | (109,711 | ) |
Acquisition of business, net of cash acquired | | | (18,198 | ) | | — |
|
Net cash provided by (used in) investing activities | | | 23,199 |
| | (112,401 | ) |
| | | | | | | | |
Cash flows - financing activities | | |
| | |
| | |
| | |
|
Dividends paid to shareholders | | (34,580 | ) | | (33,241 | ) | | (23,630 | ) | | (23,320 | ) |
Acquisition of treasury stock | | (1,661 | ) | | (21,513 | ) | | — |
| | (86 | ) |
Proceeds from exercise of stock options | | 3,815 |
| | 2,361 |
| | 722 |
| | 2,460 |
|
Withholding tax payments on RSUs tendered | | (2,745 | ) | | (3,321 | ) | | (3,366 | ) | | (2,155 | ) |
Annuity contracts: variable, fixed and FHLB funding agreements | | |
| | |
| | |
| | |
|
Deposits | | 348,900 |
| | 391,944 |
| | 266,310 |
| | 199,074 |
|
Benefits, withdrawals and net transfers to Separate Account (variable annuity) assets | | (295,064 | ) | | (240,489 | ) | | (214,243 | ) | | (218,694 | ) |
Transfer of Company 401(k) assets to a third-party provider | | (77,898 | ) | | — |
| |
Life policy accounts | | | | |
| | | | |
|
Deposits | | 3,357 |
| | 2,957 |
| | 4,638 |
| | 3,163 |
|
Withdrawals and surrenders | | (3,340 | ) | | (3,151 | ) | | (1,733 | ) | | (2,525 | ) |
Change in bank overdrafts | | (532 | ) | | 7,422 |
| |
Change in deposit asset on reinsurance, net | | | (134,682 | ) | | — |
|
Change in book overdrafts | | | (19,341 | ) | | 3,795 |
|
Net cash used in financing activities | | | (125,325 | ) | | (38,288 | ) |
| | | | | | | | |
Net cash (used in) provided by financing activities | | (59,748 | ) | | 102,969 |
| |
| | | | | |
Net (decrease) increase in cash | | (9,978 | ) | | 38,107 |
| |
Net increase (decrease) in cash | | | (4,290 | ) | | 620 |
|
| | | | | | | | |
Cash at beginning of period | | 16,670 |
| | 15,509 |
| | 11,906 |
| | 7,627 |
|
| | | | | | | | |
Cash at end of period | | $ | 6,692 |
| | $ | 53,616 |
| | $ | 7,616 |
| | $ | 8,247 |
|
See Notes to Consolidated Financial Statements.
HORACE MANN EDUCATORS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SeptemberJUNE 30, 20172019 and 20162018
($ in thousands, except per share data)data and unless noted otherwise)
Note 1 - Basis of Presentation
The accompanying unaudited consolidated financial statements of Horace Mann Educators Corporation (“HMEC”;(HMEC; and together with its subsidiaries, the “Company”Company or “Horace Mann”)Horace Mann) have been prepared in accordanceconformity 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-Q.(SEC). Certain information and disclosures normally included in annual financial statements prepared in accordanceconformity with GAAP, but are not required for interim reporting purposes, have been omitted. The Company believes that these consolidated financial statements contain all adjustments (consisting of normal recurring accruals) which are, in the opinion of management, necessary to present fairly the Company’s consolidated financial position as of SeptemberJune 30, 2017,2019, the consolidated results of operations, and comprehensive income for the three and nine month periods ended September 30, 2017 and 2016, and the consolidated(loss), changes in shareholders’ equity and cash flows for the ninesix month periods ended SeptemberJune 30, 20172019 and 2016.2018. 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.
The subsidiaries of HMEC market and underwrite personal lines of property and casualty insurance products (primarily personal lines of automobile and homeowners) insurance,property insurance), retirement annuitiesproducts (primarily tax-qualified products)annuities) and life insurance, primarily to K-12 teachers, administrators and other employees of public schools and their families. HMEC’s principal operating subsidiaries are Horace Mann Life Insurance Company, Horace Mann Insurance Company, Teachers Insurance Company, Horace Mann Property & Casualty Insurance Company and Horace Mann Lloyds.
These consolidated financial statements should be read in conjunction with the consolidated financial statements and the related notes to consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.2018.
The results of operations for the three and ninesix month periods ended SeptemberJune 30, 20172019 are not necessarily indicative of the results to be expected for the full year.
The Company reclassified the presentation of certain prior period information to conform to the 2017 presentation. See “Adopted Accounting Standards”.
Investment Contract and Life Policy Reserves
ThisThe following table summarizes the Company’s investment contract and life policy reserves.
| | ($ in thousands) | | September 30, 2017 | | December 31, 2016 | | June 30, 2019 | | December 31, 2018 |
| | | | | |
Investment contract reserves | | $ | 4,428,989 |
| | $ | 4,360,456 |
| | $ | 4,605,272 |
| | $ | 4,555,856 |
|
Life policy reserves | | 1,111,056 |
| | 1,087,513 |
| | 1,171,497 |
| | 1,155,337 |
|
Total | | $ | 5,540,045 |
| | $ | 5,447,969 |
| | $ | 5,776,769 |
| | $ | 5,711,193 |
|
Note 1 - Basis of Presentation (Continued)
Accumulated Other Comprehensive Income (Loss)
Accumulated other comprehensive income (loss) (AOCI) represents the accumulated change in shareholders’ equity from transactions and other events and circumstances from non-shareholder sources. For the Company, accumulated other comprehensive income (loss)AOCI includes the after tax change in net unrealized investment gains and losses(losses) on fixed maturity and equity securities and the after tax change in net funded status of benefit plans for the periodperiods as shown in the Consolidated StatementStatements of Changes in Shareholders’ Equity. The following tables reconcile these components.
|
| | | | | | | | | | | | |
($ in thousands) | | Net Unrealized Investment Gains and Losses on Fixed Maturity and Equity Securities (1)(2) | | Benefit Plans (1) | | Total (1) |
| | | | | | |
Beginning balance, July 1, 2017 | | $ | 243,510 |
| | $ | (11,817 | ) | | $ | 231,693 |
|
Other comprehensive income (loss) before reclassifications | | 9,786 |
| | — |
| | 9,786 |
|
Amounts reclassified from accumulated other comprehensive income (loss) | | 2,422 |
| | — |
| | 2,422 |
|
Net current period other comprehensive income | | 12,208 |
| | — |
| | 12,208 |
|
Ending balance, September 30, 2017 | | $ | 255,718 |
| | $ | (11,817 | ) | | $ | 243,901 |
|
| | | | | | |
Beginning balance, January 1, 2017 | | $ | 175,738 |
| | $ | (11,817 | ) | | $ | 163,921 |
|
Other comprehensive income (loss) before reclassifications | | 78,419 |
| | — |
| | 78,419 |
|
Amounts reclassified from accumulated other comprehensive income (loss) | | 1,561 |
| | — |
| | 1,561 |
|
Net current period other comprehensive income | | 79,980 |
| | — |
| | 79,980 |
|
Ending balance, September 30, 2017 | | $ | 255,718 |
| | $ | (11,817 | ) | | $ | 243,901 |
|
|
| | | | | | | | | | | | |
($ in thousands) | | Net Unrealized Investment Gains (Losses) on Fixed Maturity Securities (1)(2) | | Net Funded Status of Benefit Plans (1) | | Total (1) |
Beginning balance, April 1, 2019 | | $ | 210,839 |
| | $ | (12,185 | ) | | $ | 198,654 |
|
Other comprehensive income (loss) before reclassifications | | 107,163 |
| | — |
| | 107,163 |
|
Amounts reclassified from AOCI | | (114,925 | ) | | — |
| | (114,925 | ) |
Net current period other comprehensive income (loss) | | (7,762 | ) | | — |
| | (7,762 | ) |
Ending balance, June 30, 2019 | | $ | 203,077 |
| | $ | (12,185 | ) | | $ | 190,892 |
|
| | | | | | |
Beginning balance, January 1, 2019 | | $ | 96,941 |
| | $ | (12,185 | ) | | $ | 84,756 |
|
Other comprehensive income (loss) before reclassifications | | 227,466 |
| | — |
| | 227,466 |
|
Amounts reclassified from AOCI | | (121,330 | ) | | — |
| | (121,330 | ) |
Net current period other comprehensive income (loss) | | 106,136 |
| | — |
| | 106,136 |
|
Ending balance, June 30, 2019 | | $ | 203,077 |
| | $ | (12,185 | ) | | $ | 190,892 |
|
________________
| |
(1) | All amounts are net of tax. |
| |
(2) | The pretax amounts reclassified from accumulated other comprehensive income (loss), $(3,726)AOCI, $145,474 thousand and $(2,401)$153,582 thousand, are included in net realized investment gains and losses(losses) and the related income tax expense, $(1,304)expenses, $30,549 thousand and $(840)$32,252 thousand, are included in income tax expense in the Consolidated Statements of Operations for the three and ninesix month periods ended SeptemberJune 30, 2017,2019, respectively. |
Note 1 - Basis of Presentation (Continued)
|
| | | | | | | | | | | | |
($ in thousands) | | Net Unrealized Investment Gains and Losses on Fixed Maturity and Equity Securities (1)(2) | | Benefit Plans (1) | | Total (1) |
| | | | | | |
Beginning balance, July 1, 2016 | | $ | 329,653 |
| | $ | (11,794 | ) | | $ | 317,859 |
|
Other comprehensive income (loss) before reclassifications | | 9,912 |
| | — |
| | 9,912 |
|
Amounts reclassified from accumulated other comprehensive income (loss) | | (2,274 | ) | | — |
| | (2,274 | ) |
Net current period other comprehensive income | | 7,638 |
| | — |
| | 7,638 |
|
Ending balance, September 30, 2016 | | $ | 337,291 |
| | $ | (11,794 | ) | | $ | 325,497 |
|
| | | | | | |
Beginning balance, January 1, 2016 | | $ | 175,167 |
| | $ | (11,794 | ) | | $ | 163,373 |
|
Other comprehensive income (loss) before reclassifications | | 167,692 |
| | — |
| | 167,692 |
|
Amounts reclassified from accumulated other comprehensive income (loss) | | (5,568 | ) | | — |
| | (5,568 | ) |
Net current period other comprehensive income | | 162,124 |
| | — |
| | 162,124 |
|
Ending balance, September 30, 2016 | | $ | 337,291 |
| | $ | (11,794 | ) | | $ | 325,497 |
|
|
| | | | | | | | | | | | |
($ in thousands) | | Net Unrealized Investment Gains (Losses) on Fixed Maturity Securities (1)(2) | | Net Funded Status of Benefit Plans (1) | | Total (1)(3) |
Beginning balance, April 1, 2018, | | $ | 178,040 |
| | $ | (13,217 | ) | | $ | 164,823 |
|
Other comprehensive income (loss) before reclassifications | | (52,873 | ) | | — |
| | (52,873 | ) |
Amounts reclassified from AOCI | | 429 |
| | — |
| | 429 |
|
Net current period other comprehensive income (loss) | | (52,444 | ) | | — |
| | (52,444 | ) |
Ending balance, June 30, 2018 | | $ | 125,596 |
| | $ | (13,217 | ) | | $ | 112,379 |
|
| | | | | | |
Beginning balance, January 1, 2018 | | $ | 300,177 |
| | $ | (13,217 | ) | | $ | 286,960 |
|
Other comprehensive income (loss) before reclassifications | | (162,412 | ) | | — |
| | (162,412 | ) |
Amounts reclassified from AOCI | | 2,872 |
| | — |
| | 2,872 |
|
Cumulative effect of change in accounting principle (3) | | (15,041 | ) | | — |
| | (15,041 | ) |
Net current period other comprehensive income (loss) | | (174,581 | ) | | — |
| | (174,581 | ) |
Ending balance, June 30, 2018 | | $ | 125,596 |
| | $ | (13,217 | ) | | $ | 112,379 |
|
________________
| |
(1) | All amounts are net of tax. |
| |
(2) | The pretax amounts reclassified from accumulated other comprehensive income (loss), $3,499AOCI, $(544) thousand and $8,566$(3,636) thousand, are included in net realizedNet investment gains and losses(losses) and the related income tax expense, $1,225expenses, $(115) thousand and $2,998$(764) thousand, are included in incomeIncome tax expense in the Consolidated Statements of Operations for the three and ninesix month periods ended SeptemberJune 30, 2016,2018, respectively. |
| |
(3) | The Company adopted guidance on January 1, 2018 that resulted in reclassifying $15,041 thousand of after tax net unrealized gains on equity securities from AOCI to Retained earnings. |
Comparative information for elements that are not required to be reclassified in their entirety to net income in the same reporting period is locateddisclosed in “Note 2 -- Investments -- Net Unrealized Investment Gains and Losses on Fixed Maturity and Equity Securities”.Note 3.
Adopted Accounting Standards
Employee Share-based Payment Accounting for Leases
Effective January 1, 2017,for the quarter ended March 31, 2019, the Company adopted new accounting guidance for employee share-basedleases and elected to utilize a cumulative-effect adjustment to the opening balance of retained earnings. Accordingly, the Company’s reporting for the comparative periods prior to adoption continue to be presented in the financial statements in accordance with previous lease accounting guidance. The Company elected to apply all practical expedients in the guidance for transition for leases in effect at adoption, including using hindsight to determine the lease term of existing leases, the option to not reassess whether an existing contract is a lease or contains a lease and whether the lease is an operating or finance lease. The adoption of the guidance resulted in the Company recognizing an initial $14,499 thousand lease liability equal to the present value of lease payments and an initial $13,908 thousand right-of-use (ROU) asset, which simplifies several aspectsis the corresponding lease liability adjusted for qualifying accrued lease payments. The lease liability and ROU asset are reported in Other liabilities and Other assets on the Consolidated Balance Sheets. The impact of these changes at adoption had no impact on net income or shareholders' equity.
Simplifying the Test for Goodwill Impairment
Effective for the quarter ended June 30, 2019, the Company adopted guidance to simplify the accounting for share-based payment transactions, including the income tax consequences, classificationgoodwill impairment. Adoption of awards as either equity or liabilities, and classification on the statement of cash flows. The recognition and classificationthis guidance removed Step 2 of the excess tax benefit provisions were applied prospectively ingoodwill impairment test, which required a hypothetical purchase price allocation. Goodwill impairment is now the resultsamount by which a reporting unit's carrying value exceeds its fair value, not to exceed the carrying amount of operations. This adoption resulted in additional excess tax benefits of $2,864 thousand which reduced the current provision for income taxes in the results of operations. The statutory tax withholding classification, which are cash payments made to taxing authorities for withheld taxes funded through tendered shares, were applied retrospectively and the Company reclassified the statutory tax withholding requirements in the statement of cash flows from Other in operating activities to Withholding tax payments on RSUs tendered in financing activities. This statutory withholding reclassification resulted in $2,745 thousand and $3,321 thousand being included in financing activities for the nine month periods ended September 30, 2017 and 2016, respectively. There were no cumulative effect adjustments upon adoption of the new accounting guidance.goodwill.
Note 1 - Basis of Presentation (Continued)
Pending Accounting Standards
Revenue Recognition
In May 2014, the Financial Accounting Standards Board (“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. Insurance contract revenue continues to fall under the scope of ASC 944, Financial Services - Insurance, and ASC 605, Revenue Recognition. The Company performed an evaluation of the non-insurance contract revenue that would be subject to ASC 606, Revenue from Contracts with Customers, and concluded that there is not a material impact to the consolidated financial statements upon adoption on January 1, 2018.
Recognition and Measurement of Financial Assets and Liabilities
In January 2016, the FASB issued accounting guidance to improve certain aspects of the recognition, measurement, presentation and disclosure of financial instruments. Among other things, the guidance revises the accounting related to the classification and measurement of investments in equity securities and the presentation of certain fair value changes for financial liabilities measured at fair value. The Company’s results of operations will be impacted as changes in fair value of equity securities will be reported in net income instead of reported in other comprehensive income. The effective date of the guidance is for interim and annual reporting periods beginning after December 15, 2017. The guidance has not yet been adopted. Had the Company adopted the guidance on September 30, 2017, $15,718 thousand of after-tax unrealized gains on equity securities would have been reclassified from accumulated other comprehensive income to retained earnings. The actual amount reclassified upon adoption will vary depending on the future changes in fair value of the Company's equity portfolio.
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 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.
Note 1 - Basis of Presentation (Continued)
Accounting for Leases
In February 2016, the FASB issued accounting and disclosure guidance to improve financial reporting and comparability among organizations about leasing transactions. Under the new guidance, for leases with lease terms of more than 12 months, a lessee will be required to recognize assets and liabilities on the balance sheet for the rights and obligations created by those leases. Consistent with current accounting guidance, the recognition, measurement and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or an operating lease. However, while current guidance requires only capital leases to be recognized on the balance sheet, the new guidance will require both operating and capital leases to be recognized on the balance sheet. In transition to the new guidance, companies are required to recognize and measure leases 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. Early application is permitted. Management is evaluating the impact this guidance will have on the results of operations and 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 for financial instruments other than available for sale debt securities and requires an organization to measure and recognize all current expected credit losses (“CECL”)(CECL) for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Companies will need to utilize forward-looking information to better informestimate their credit loss estimates.losses. Companies will continue to use judgment to determine which loss estimation method is appropriate for their circumstances. CreditAny 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.
This guidance is effective for annual and interim reporting periods beginning after December 15, 2019. Early adoption is permitted beginning after December 15, 2018. Upon adoption, the guidance will be applied using the modified-retrospective approach, by which a cumulative-effect adjustment will be made to retained earnings as of the beginning of the first reporting period in which the guidance is effective. The guidance will have the most impact on the Company’s available for sale fixed maturity securities portfolio. However, as the Company’s fixed maturity securities portfolio is weighted towards higher rated bonds (97.1% investment grade, based on fair value, with an average quality rating of A+ at June 30, 2019), the Company does not expect that the effect of adoption will be material.
Accounting for Long-Duration Insurance Contracts
In August 2018, the FASB issued accounting and disclosure guidance that contains targeted improvements to the accounting for long-duration insurance contracts. Under the new guidance, the cash flow assumptions used to measure the liability for future policy benefits for traditional insurance contracts will be required to be updated at least annually with changes recognized as a benefit expense (i.e., assumptions will no longer be locked-in). Insurance entities will be required to use a standard discount rate to measure the liabilities that will be equivalent to the yield from a high-quality bond. The new guidance also changes the amortization of deferred acquisition costs (DAC) to be on a constant-level basis over the expected term of the related contracts with no interest accruing on the DAC balance. The new guidance also introduces a new category of contract features associated with deposit type contracts referred to as market risk benefits (MRBs). Contract features meeting the definition of a MRB will be measured at fair value. New disclosures will be required for long-duration insurance contracts in order to provide better transparency into the exposure of insurance entities and the drivers of their results. For public business entities, that are SEC filers, the guidance is effective for annual reporting periods beginning after December 15, 2019,2020, including interim periods within those years, using a modified-retrospective approach.years. With regards to the liability for future policy benefits and DAC, the guidance applies to contracts in force as of the beginning of the earliest period presented and may be applied retrospectively. With regards to MRBs, the guidance is to be applied retrospectively at the beginning of the earliest period presented. Early applicationadoption is permitted for annual reporting periods, and interim periods within those years, beginning after December 15, 2018.permitted. Management is evaluating the impact this guidance will have on the results of operations and financial position of the Company.
The Company and Benefit Consultants Group, Inc. (BCG) entered into a Stock Purchase Agreement under which the Test for Goodwill Impairment
In January 2017, the FASB issued guidance to simplify the accounting for goodwill impairment. The guidance removes Step 2Company acquired all of the outstanding capital stock of BCG with a transaction valued at $25 million. The acquisition was approved by the Company’s Board and closed on January 2, 2019. The acquisition of BCG gave rise to recognition of intangible assets of $16.2 million and goodwill impairment test, which requiresof $10.1 million as a hypotheticalresult of the purchase accounting. The intangible assets are reported as Other assets in the Consolidated Balance Sheets. Intangible assets that are amortizable have lives of 10 to 16 years.
On July 1, 2019, the Company completed its acquisition of all the equity interests in National Teachers Associates Life Insurance Company (NTA) pursuant to a Purchase Agreement (Agreement) dated as of December 10, 2018, by and among the Company and Ellard Family Holdings, Inc., Brian M. Ellard and The JCE Exempt Trust. The purchase price allocation. A goodwill impairment will now beof the amount bytransaction was $425 million which includes $20 million representing NTA’s share of "adjusted earnings" (as determined in accordance with the terms of the Agreement) from July 1, 2018 to July 1, 2019. As a reporting unit’s carrying value exceeds its fair value, notresult of the acquisition, NTA became a wholly owned subsidiary of the Company. NTA provides supplemental insurance products, including heart and cancer, to exceed the carrying amount of goodwill. All other goodwill impairment guidance will remain largely unchanged. Entities will continue to have the option to perform a qualitative assessment to determine if a quantitative impairment test is necessary. The same one-step impairment testeducation market. NTA's results will be applied to goodwill at all reporting units, even those with zero or negative carrying amounts. Entities will be required to disclose the amount of goodwill for reporting units with zero or negative carrying amounts. Public business entities should adopt the guidance prospectively for its annual or any interim goodwill impairment testsreported 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.newly created operating segment titled "Supplemental".
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 (“FIA”) and indexed universal life (“IUL”) products’ contingent liabilities. The Company’s FIA and IUL 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” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2016. 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 investment or insurance products during the nine month periods ended September 30, 2017 and 2016.
Note 2 - Investments (Continued)
Fixed Maturity and Equity Securities
The Company’s investment portfolio is comprised primarily of fixed maturity securities and also includes equity securities. The amortizedAmortized cost, or cost,net unrealized investment gains (losses) and losses, fair values and other-than-temporary impairment (“OTTI”) included in accumulated other comprehensive income (“AOCI”) of all fixed maturity and equity securities in the portfolio were as follows:
| | ($ in thousands) | | Amortized Cost or Cost | | Unrealized Investment Gains | | Unrealized Investment Losses | | Fair Value | | OTTI in AOCI (1) | | Amortized Cost | | Unrealized Gains | | Unrealized Losses | | Fair Value |
September 30, 2017 | | | | | | | | | | | |
June 30, 2019 | | | | | | | | | |
Fixed maturity securities | | | | | | | | | | | | | | | | | | |
U.S. Government and federally sponsored agency obligations (2): | | | | | | | | | | | |
U.S. Government and federally sponsored agency obligations: (1) | | | | | | | | | |
Mortgage-backed securities | | $ | 613,761 |
| | $ | 34,712 |
| | $ | 3,071 |
| | $ | 645,402 |
| | $ | — |
| | $ | 550,059 |
| | $ | 37,900 |
| | $ | 1,201 |
| | $ | 586,758 |
|
Other, including U.S. Treasury securities | | 653,237 |
| | 24,705 |
| | 6,922 |
| | 671,020 |
| | — |
| | 546,396 |
| | 20,574 |
| | 533 |
| | 566,437 |
|
Municipal bonds | | 1,669,273 |
| | 177,359 |
| | 4,428 |
| | 1,842,204 |
| | — |
| | 1,472,794 |
| | 127,700 |
| | 801 |
| | 1,599,693 |
|
Foreign government bonds | | 93,761 |
| | 6,416 |
| | — |
| | 100,177 |
| | — |
| | 45,303 |
| | 2,064 |
| | — |
| | 47,367 |
|
Corporate bonds | | 2,635,313 |
| | 190,548 |
| | 4,158 |
| | 2,821,703 |
| | — |
| | 1,226,962 |
| | 96,535 |
| | 2,211 |
| | 1,321,286 |
|
Other mortgage-backed securities | | 1,529,052 |
| | 26,879 |
| | 5,803 |
| | 1,550,128 |
| | 1,335 |
| | 1,400,241 |
| | 20,786 |
| | 8,298 |
| | 1,412,729 |
|
Totals | | $ | 7,194,397 |
| | $ | 460,619 |
| | $ | 24,382 |
| | $ | 7,630,634 |
| | $ | 1,335 |
| | $ | 5,241,755 |
| | $ | 305,559 |
| | $ | 13,044 |
| | $ | 5,534,270 |
|
| | | | | | | | | | | | | | | | | | |
Equity securities (3) | | $ | 140,200 |
| | $ | 20,483 |
| | $ | 1,408 |
| | $ | 159,275 |
| | $ | — |
| |
| | | | | | | | | | | |
December 31, 2016 | | | | | | | | | | | |
December 31, 2018 | | | | | | | | | |
Fixed maturity securities | | | | | | | | | | | | | | | | | | |
U.S. Government and federally sponsored agency obligations (2): | | | | | | | | | | | |
U.S. Government and federally sponsored agency obligations: (1) | | | | | | | | | |
Mortgage-backed securities | | $ | 587,355 |
| | $ | 34,256 |
| | $ | 6,720 |
| | $ | 614,891 |
| | $ | — |
| | $ | 778,038 |
| | $ | 22,724 |
| | $ | 13,321 |
| | $ | 787,441 |
|
Other, including U.S. Treasury securities | | 458,745 |
| | 18,518 |
| | 10,120 |
| | 467,143 |
| | — |
| | 835,096 |
| | 16,127 |
| | 17,681 |
| | 833,542 |
|
Municipal bonds | | 1,648,252 |
| | 143,733 |
| | 22,588 |
| | 1,769,397 |
| | — |
| | 1,884,313 |
| | 133,150 |
| | 13,494 |
| | 2,003,969 |
|
Foreign government bonds | | 93,864 |
| | 5,102 |
| | 297 |
| | 98,669 |
| | — |
| | 83,343 |
| | 2,321 |
| | 760 |
| | 84,904 |
|
Corporate bonds | | 2,672,818 |
| | 152,229 |
| | 14,826 |
| | 2,810,221 |
| | — |
| | 2,054,105 |
| | 64,296 |
| | 38,891 |
| | 2,079,510 |
|
Other mortgage-backed securities | | 1,691,093 |
| | 21,153 |
| | 15,859 |
| | 1,696,387 |
| | 1,618 |
| | 1,739,016 |
| | 10,467 |
| | 23,531 |
| | 1,725,952 |
|
Totals | | $ | 7,152,127 |
| | $ | 374,991 |
| | $ | 70,410 |
| | $ | 7,456,708 |
| | $ | 1,618 |
| | $ | 7,373,911 |
| | $ | 249,085 |
| | $ | 107,678 |
| | $ | 7,515,318 |
|
| | | | | | | | | | | |
Equity securities (3) | | $ | 134,013 |
| | $ | 13,210 |
| | $ | 5,574 |
| | $ | 141,649 |
| | $ | — |
| |
________________
| |
(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 OTTI 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) | Fair value includes securities issued by Federal National Mortgage Association (“FNMA”)(FNMA) of $332,057$370,182 thousand and $272,668$441,308 thousand; Federal Home Loan Mortgage Corporation (“FHLMC”)(FHLMC) of $373,676$256,531 thousand and $378,683$417,308 thousand; and Government National Mortgage Association (“GNMA”)(GNMA) of $109,873$79,141 thousand and $115,627$96,466 thousand as of SeptemberJune 30, 20172019 and December 31, 2016,2018, respectively. |
| |
(3) | Includes nonredeemable perpetual preferred stocks, common stocks and closed-end funds. |
Note 23 - Investments (Continued)
The following table presents the fair value and gross unrealized losses of fixed maturity and equity securities in an unrealized loss position at SeptemberJune 30, 20172019 and December 31, 2016,2018, respectively. The Company views the decrease in fair value of all of the securities with unrealized losses at SeptemberJune 30, 20172019 -- which was driven largely by changes inincreasing interest rates, spread widening, financial market illiquidity and/or market volatility from the date of acquisition -- as temporary. For fixed maturity securities, management does not have the intent to sell the securities and it is not more likely than not the Company will be required to sell the securities before the anticipated recovery of thetheir amortized cost bases, and management expects to recover the entire amortized cost bases of the fixed maturity securities. For equity securities,Therefore, it was determined that the Company has the ability and intent to holdunrealized losses on the securities forpresented in the recoverytable below were not other-than-temporarily impaired as of cost and recovery of cost is expected within a reasonable period of time.
June 30, 2019.
|
| | | | | | | | | | | | | | | | | | | | | | | | |
($ in thousands) | | 12 Months or Less | | More than 12 Months | | Total |
| | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses |
September 30, 2017 | | | | | | | | | | | | |
Fixed maturity securities | | | | | | | | | | | | |
U.S. Government and federally sponsored agency obligations: | | | | | | | | | | | | |
Mortgage-backed securities | | $ | 111,456 |
| | $ | 2,213 |
| | $ | 12,879 |
| | $ | 858 |
| | $ | 124,335 |
| | $ | 3,071 |
|
Other | | 275,332 |
| | 5,901 |
| | 16,979 |
| | 1,021 |
| | 292,311 |
| | 6,922 |
|
Municipal bonds | | 118,881 |
| | 2,731 |
| | 32,710 |
| | 1,697 |
| | 151,591 |
| | 4,428 |
|
Foreign government bonds | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Corporate bonds | | 138,207 |
| | 2,287 |
| | 49,931 |
| | 1,871 |
| | 188,138 |
| | 4,158 |
|
Other mortgage-backed securities | | 349,600 |
| | 3,985 |
| | 126,297 |
| | 1,818 |
| | 475,897 |
| | 5,803 |
|
Total fixed maturity securities | | 993,476 |
| | 17,117 |
| | 238,796 |
| | 7,265 |
| | 1,232,272 |
| | 24,382 |
|
Equity securities (1) | | 10,547 |
| | 692 |
| | 2,192 |
| | 716 |
| | 12,739 |
| | 1,408 |
|
Combined totals | | $ | 1,004,023 |
| | $ | 17,809 |
| | $ | 240,988 |
| | $ | 7,981 |
| | $ | 1,245,011 |
| | $ | 25,790 |
|
| | | | | | | | | | | | |
Number of positions with a gross unrealized loss | | 393 |
| | | | 77 |
| | | | 470 |
| | |
Fair value as a percentage of total fixed maturity and equity securities fair value | | 12.9 | % | | | | 3.1 | % | | | | 16.0 | % | | |
| | | | | | | | | | | | |
December 31, 2016 | | | | | | | | | | | | |
Fixed maturity securities | | | | | | | | | | | | |
U.S. Government and federally sponsored agency obligations: | | | | | | | | | | | | |
Mortgage-backed securities | | $ | 186,439 |
| | $ | 6,176 |
| | $ | 3,235 |
| | $ | 544 |
| | $ | 189,674 |
| | $ | 6,720 |
|
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 | | 640,691 |
| | 10,470 |
| | 229,106 |
| | 5,389 |
| | 869,797 |
| | 15,859 |
|
Total fixed maturity 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 a gross unrealized loss | | 629 |
| | | | 102 |
| | | | 731 |
| | |
Fair value as a percentage of total fixed maturity and equity securities fair value | | 26.3 | % | | | | 4.0 | % | | | | 30.3 | % | | |
| |
(1) | Includes nonredeemable perpetual preferred stocks, common stocks and closed-end funds. |
Note 2 - Investments (Continued)
|
| | | | | | | | | | | | | | | | | | | | | | | | |
($ in thousands) | | 12 Months or Less | | More than 12 Months | | Total |
| | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses |
June 30, 2019 | | | | | | | | | | | | |
Fixed maturity securities | | | | | | | | | | | | |
U.S. Government and federally sponsored agency obligations: | | | | | | | | | | | | |
Mortgage-backed securities | | $ | 10,504 |
| | $ | 27 |
| | $ | 44,564 |
| | $ | 1,174 |
| | $ | 55,068 |
| | $ | 1,201 |
|
Other | | 11,463 |
| | 32 |
| | 37,575 |
| | 501 |
| | 49,038 |
| | 533 |
|
Municipal bonds | | 16,900 |
| | 93 |
| | 34,031 |
| | 708 |
| | 50,931 |
| | 801 |
|
Foreign government bonds | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Corporate bonds | | 27,858 |
| | 518 |
| | 32,997 |
| | 1,693 |
| | 60,855 |
| | 2,211 |
|
Other mortgage-backed securities | | 391,170 |
| | 3,895 |
| | 277,694 |
| | 4,403 |
| | 668,864 |
| | 8,298 |
|
Total | | $ | 457,895 |
| | $ | 4,565 |
| | $ | 426,861 |
| | $ | 8,479 |
| | $ | 884,756 |
| | $ | 13,044 |
|
| | | | | | | | | | | | |
Number of positions with a gross unrealized loss | | 143 |
| | | | 156 |
| | | | 299 |
| | |
Fair value as a percentage of total fixed maturity securities fair value | | 8.3 | % | | | | 7.7 | % | | | | 16.0 | % | | |
| | | | | | | | | | | | |
December 31, 2018 | | | | | | | | | | | | |
Fixed maturity securities | | | | | | | | | | | | |
U.S. Government and federally sponsored agency obligations: | | | | | | | | | | | | |
Mortgage-backed securities | | $ | 193,447 |
| | $ | 5,026 |
| | $ | 157,295 |
| | $ | 8,295 |
| | $ | 350,742 |
| | $ | 13,321 |
|
Other | | 263,497 |
| | 6,746 |
| | 246,213 |
| | 10,935 |
| | 509,710 |
| | 17,681 |
|
Municipal bonds | | 291,869 |
| | 7,603 |
| | 95,297 |
| | 5,891 |
| | 387,166 |
| | 13,494 |
|
Foreign government bonds | | 16,250 |
| | 760 |
| | — |
| | — |
| | 16,250 |
| | 760 |
|
Corporate bonds | | 818,519 |
| | 27,429 |
| | 99,171 |
| | 11,462 |
| | 917,690 |
| | 38,891 |
|
Other mortgage-backed securities | | 913,858 |
| | 16,076 |
| | 291,442 |
| | 7,455 |
| | 1,205,300 |
| | 23,531 |
|
Total | | $ | 2,497,440 |
| | $ | 63,640 |
| | $ | 889,418 |
| | $ | 44,038 |
| | $ | 3,386,858 |
| | $ | 107,678 |
|
| | | | | | | | | | | | |
Number of positions with a gross unrealized loss | | 1,052 |
| | | | 359 |
| | | | 1,411 |
| | |
Fair value as a percentage of total fixed maturity securities fair value | | 33.2 | % | | | | 11.8 | % | | | | 45.0 | % | | |
Fixed maturity and equity securities with an investment grade rating represented 92%84.0% of the gross unrealized losses as of SeptemberJune 30, 2017.2019. 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 thetheir amortized cost basis.bases.
Note 3 - Investments (Continued)
Limited Partnership Interests
As of June 30, 2019 and December 31, 2018, the carrying value of equity method limited partnerships totaled $351,515 thousand and $328,516 thousand, respectively. Principal factors influencing carrying value appreciation or decline include operating performance, comparable public company earnings multiples, capitalization rates and the economic environment. The Company recognizes an impairment loss for equity method limited partnerships when evidence demonstrates that the loss is other than temporary. Evidence of a loss in value that is other than temporary may include the absence of an ability to recover the carrying amount of the investment or the inability of the investee to sustain a level of earnings that would justify the carrying amount of the investment.
Credit Losses
The following table summarizes the cumulative amounts related to the Company’s credit loss component of OTTIother-than-temporary impairment (OTTI) losses on fixed maturity securities held as of SeptemberJune 30, 20172019 and 20162018 that the Company did not intend to sell as of those dates, and it was not more likely than not that the Company would be required to sell the securities before the anticipated recovery of the amortized cost bases, for which the non-credit portions of OTTI losses were recognized in other comprehensive income:
OCI:
| | ($ in thousands) | | Nine Months Ended September 30, | | Six Months Ended June 30, |
| | 2017 | | 2016 | | 2019 | | 2018 |
Cumulative credit loss (1) | | | | | | | | |
Beginning of period | | $ | 13,703 |
| | $ | 7,844 |
| | $ | 1,529 |
| | $ | 3,825 |
|
New credit losses | | — |
| | 300 |
| | — |
| | — |
|
Increases to previously recognized credit losses | | 1,994 |
| | 2,480 |
| | — |
| | 246 |
|
Gains related to securities sold or paid down during the period | | (2 | ) | | — |
| |
Losses related to securities sold or paid down during the period | | | — |
| | — |
|
End of period | | $ | 15,695 |
| | $ | 10,624 |
| | $ | 1,529 |
| | $ | 4,071 |
|
________________
| |
(1) | The cumulative credit loss amounts exclude OTTI losses on securities held as of the periods indicated that the Company intended to sell or it was more likely than not that the Company would be required to sell the security before the recovery of the amortized cost basis. |
Expected MaturityMaturities of Fixed Maturity Securities
The following table presents the distribution of the Company’s fixed maturity securities portfolio by estimated expected maturity. Estimated expected maturities differ from contractual maturities, reflecting assumptions regarding borrowers’ utilization of the right to call or prepay obligations with or without call or prepayment penalties. For structured securities, including mortgage-backed securities and other asset-backed securities, estimated expected maturities consider broker-dealer survey prepayment assumptions and are verified for consistency with the interest rate and economic environments.
| | ($ in thousands) | | Percent of Total Fair Value | | September 30, 2017 | | Percent of Total Fair Value | | June 30, 2019 |
| | September 30, 2017 | | December 31, 2016 | | Fair Value | | Amortized Cost | | June 30, 2019 | | December 31, 2018 | | Fair Value | | Amortized Cost |
Estimated expected maturity: | | | | | | | | | | | | | | | | |
Due in 1 year or less | | 3.4 | % | | 3.9 | % | | $ | 256,527 |
| | $ | 250,803 |
| | 4.7 | % | | 4.8 | % | | $ | 258,331 |
| | $ | 252,586 |
|
Due after 1 year through 5 years | | 27.5 |
| | 28.7 |
| | 2,097,243 |
| | 1,998,498 |
| | 26.7 | % | | 22.8 | % | | 1,478,291 |
| | 1,439,296 |
|
Due after 5 years through 10 years | | 33.3 |
| | 35.2 |
| | 2,540,303 |
| | 2,431,895 |
| | 29.6 | % | | 32.8 | % | | 1,638,887 |
| | 1,555,825 |
|
Due after 10 years through 20 years | | 23.3 |
| | 19.5 |
| | 1,780,760 |
| | 1,654,259 |
| | 25.6 | % | | 26.5 | % | | 1,414,857 |
| | 1,316,715 |
|
Due after 20 years | | 12.5 |
| | 12.7 |
| | 955,801 |
| | 858,942 |
| | 13.4 | % | | 13.1 | % | | 743,904 |
| | 677,333 |
|
Total | | 100.0 | % | | 100.0 | % | | $ | 7,630,634 |
| | $ | 7,194,397 |
| | 100.0 | % | | 100.0 | % | | $ | 5,534,270 |
| | $ | 5,241,755 |
|
| | | | | | | | | | | | | | | | |
Average option-adjusted duration, in years | | 6.0 |
| | 5.9 |
| | | | | | 5.6 |
| | 5.9 |
| | | | |
Note 23 - Investments (Continued)
Sales of Fixed Maturity and Equity Securities
Proceeds received from sales of fixed maturity and equity securities, each determined using the specific identification method, and gross gains and gross losses realized as a result of those sales for each period were:
| | ($ in thousands) | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2017 | | 2016 | | 2017 | | 2016 | | 2019 (1) | | 2018 | | 2019 (1) | | 2018 |
Fixed maturity securities | | | | | | | | | | | | | | | | |
Proceeds received | | $ | 85,841 |
| | $ | 94,706 |
| | $ | 315,531 |
| | $ | 351,739 |
| | $ | 442,015 |
| | $ | 100,129 |
| | $ | 501,739 |
| | $ | 190,023 |
|
Gross gains realized | | 2,293 |
| | 2,966 |
| | 8,862 |
| | 13,824 |
| | 147,774 |
| | 2,352 |
| | 148,316 |
| | 4,022 |
|
Gross losses realized | | (181 | ) | | (102 | ) | | (1,558 | ) | | (1,542 | ) | | (5,976 | ) | | (1,584 | ) | | (6,081 | ) | | (1,637 | ) |
| | | | | | | | | | | | | | | | |
Equity securities | | | | | | | | | | | | | | | | |
Proceeds received | | $ | 3,514 |
| | $ | 4,479 |
| | $ | 20,510 |
| | $ | 17,101 |
| | $ | 1,633 |
| | $ | 3,735 |
| | $ | 17,122 |
| | $ | 5,783 |
|
Gross gains realized | | 477 |
| | 790 |
| | 3,227 |
| | 1,960 |
| | 389 |
| | 977 |
| | 5,134 |
| | 1,593 |
|
Gross losses realized | | (293 | ) | | (21 | ) | | (721 | ) | | (862 | ) | | (166 | ) | | (147 | ) | | (510 | ) | | (181 | ) |
________________
| |
(1) | Gross gains realized presented above include a $135.3 million realized investment gain associated with a transfer of investments to a reinsurer as consideration paid during the second quarter of 2019 in connection with the reinsurance of a $2.9 billion block of in force fixed and variable annuity business. See Notes 6 and 13 for further information. |
Net Investment Gains (Losses)
The following table reconciles net investment gains (losses) pretax by transaction type:
|
| | | | | | | | | | | | | | | | |
($ in thousands) | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
Impairment write-downs | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Change in intent write-downs | | (34 | ) | | (1,177 | ) | | (271 | ) | | (1,287 | ) |
Net OTTI losses recognized in earnings | | (34 | ) | | (1,177 | ) | | (271 | ) | | (1,287 | ) |
Sales and other, net | | 142,067 |
| | 1,789 |
| | 146,905 |
| | 3,992 |
|
Change in fair value - equity securities | | 3,441 |
| | (1,156 | ) | | 6,948 |
| | (6,342 | ) |
Change in fair value and gains (losses) realized on settlements - derivative instruments | | 859 |
| | 1,279 |
| | 168 |
| | 2,718 |
|
Net investment gains (losses) | | $ | 146,333 |
| | $ | 735 |
| | $ | 153,750 |
| | $ | (919 | ) |
Note 3 - Investments (Continued)
Net Unrealized Investment Gains and Losses(Losses) on Fixed Maturity and Equity Securities
Net unrealized investment gains and losses are computed as the difference between fair value and amortized cost for fixed maturity securities or cost for equity securities. The following table reconciles the net unrealized investment gains and losses,(losses) on fixed maturity securities, net of tax, included in accumulated other comprehensive income (loss),AOCI, before the impact on deferred policy acquisition costs:
of DAC:
|
| | | | | | | | | | | | | | | | |
($ in thousands) | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
Net unrealized investment gains and losses on fixed maturity securities, net of tax | | | | | | | | |
Beginning of period | | $ | 270,834 |
| | $ | 371,456 |
| | $ | 197,978 |
| | $ | 198,714 |
|
Change in net unrealized investment gains and losses | | 10,133 |
| | 20,827 |
| | 83,547 |
| | 188,912 |
|
Reclassification of net realized investment (gains) losses to net income | | 2,587 |
| | (11,072 | ) | | 2,029 |
| | (6,415 | ) |
End of period | | $ | 283,554 |
| | $ | 381,211 |
| | $ | 283,554 |
| | $ | 381,211 |
|
| | | | | | | | |
Net unrealized investment gains and losses on equity securities, net of tax | | | | | | | | |
Beginning of period | | $ | 10,631 |
| | $ | 8,183 |
| | $ | 4,963 |
| | $ | 2,649 |
|
Change in net unrealized investment gains and losses | | 1,933 |
| | (2,052 | ) | | 7,905 |
| | 4,846 |
|
Reclassification of net realized investment (gains) losses to net income | | (165 | ) | | 2,211 |
| | (469 | ) | | 847 |
|
End of period | | $ | 12,399 |
| | $ | 8,342 |
| | $ | 12,399 |
| | $ | 8,342 |
|
|
| | | | | | | | | | | | | | | | |
($ in thousands) | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
Net unrealized investment gains (losses) on fixed maturity securities, net of tax | | | | | | | | |
Beginning of period | | $ | 245,319 |
| | $ | 206,293 |
| | $ | 111,712 |
| | $ | 286,176 |
|
Change in net unrealized investment gains (losses) on fixed maturity securities | | 100,693 |
| | (61,724 | ) | | 240,705 |
| | (129,009 | ) |
Reclassification of net investment (gains) losses on securities to net income | | (114,925 | ) | | 429 |
| | (121,330 | ) | | 2,872 |
|
Cumulative effect of change in accounting principle (1) | | — |
| | — |
| | — |
| | (15,041 | ) |
End of period | | $ | 231,087 |
| | $ | 144,998 |
| | $ | 231,087 |
| | $ | 144,998 |
|
________________
Note 2 - Investments (Continued)
| |
(1) | Effective January 1, 2018, with the adoption of new accounting guidance for recognition and measurement of financial instruments, available for sale equity securities were reclassified to equity securities at fair value and the related net unrealized gains were reclassified from AOCI to Retained earnings. |
Offsetting of Assets and Liabilities
The Company’s derivative instruments (call options) are subject to enforceable master netting arrangements. Collateral support agreements associated with each master netting arrangement provide that the Company will receive or pledge financial collateral in the event minimum thresholds arehave been reached.
The following table presents the instruments that were subject to a master netting arrangement for the Company.
| | ($ in thousands) | | | | Gross Amounts Offset in the | | Net Amounts of Assets/ Liabilities Presented in the | | Gross Amounts Not Offset in the Consolidated Balance Sheets | | | | | | Gross Amounts Offset in the | | Net Amounts of Assets/ Liabilities Presented in the | | Gross Amounts Not Offset in the Consolidated Balance Sheets | | |
| | Gross Amounts | | Consolidated Balance Sheets | | Consolidated Balance Sheets | | Financial Instruments | | Cash Collateral Received | | Net Amount | | Gross Amounts | | Consolidated Balance Sheets | | Consolidated Balance Sheets | | Financial Instruments | | Cash Collateral Received | | Net Amount |
September 30, 2017 | | | | | | | | | | | | | |
June 30, 2019 | | | | | | | | | | | | | |
Asset derivatives: | | | | | | | | | | | | | | | | | | | | | | | | |
Free-standing derivatives | | $ | 10,431 |
| | $ | — |
| | $ | 10,431 |
| | $ | — |
| | $ | 10,954 |
| | $ | (523 | ) | | $ | 8,753 |
| | $ | — |
| | $ | 8,753 |
| | $ | — |
| | $ | 8,663 |
| | $ | 90 |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2016 | | | | | | | | | | | | | |
December 31, 2018 | | | | | | | | | | | | | |
Asset derivatives: | | | | | | | | | | | | | | | | | | | | | | | | |
Free-standing derivatives | | $ | 8,694 |
| | $ | — |
| | $ | 8,694 |
| | $ | — |
| | $ | 8,824 |
| | $ | (130 | ) | | $ | 2,647 |
| | $ | — |
| | $ | 2,647 |
| | $ | — |
| | $ | 1,868 |
| | $ | 779 |
|
Note 3 - Investments (Continued)
Deposits
At SeptemberJune 30, 20172019 and December 31, 2016,2018, fixed maturity securities with a fair value of $18,133$18,073 thousand and $18,119$17,695 thousand, respectively, were on deposit with governmental agencies as required by law in various states in which the insurance subsidiaries of HMEC conduct business. In addition, at SeptemberJune 30, 20172019 and December 31, 2016,2018, fixed maturity securities with a fair value of $620,558$787,421 thousand and $620,489$740,016 thousand, respectively, were on deposit with the Federal Home Loan Bank of Chicago (“FHLB”)(FHLB) as collateral for amounts subject to funding agreements, advances and borrowings which were equal to $575,000$725,000 thousand at both of the respective dates.June 30, 2019 and $675,000 thousand at December 31, 2018. The deposited securities are included in Fixed maturity securities on the Company’s Consolidated Balance Sheets.
Note 34 - Fair Value of Financial Instruments
The Company is required under GAAP to disclose estimated fair values for certain financial and nonfinancial assets and liabilities. Fair values of the Company’s insurance contracts other than annuity contracts (which are investment contracts) are not required to be disclosed. However, the estimated fair values of liabilities under all insurance contracts are taken into consideration in the Company’s overall management of interest rate risk through the matching of investment maturities with amounts due under insurance contracts.
Information regarding the three-level hierarchy presented below and the valuation methodologies utilized by the Company to estimate fair values at a point in timeeach reporting date is included in Note 3 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2016, specifically in “Note 3 -- Fair Value of Financial Instruments”.2018.
Note 34 - Fair Value of Financial Instruments (Continued)
Financial Instruments Measured and Carried at Fair Value
The following table presents the Company’s fair value hierarchy for those assets and liabilities measured and carried at fair value on a recurring basis. At SeptemberJune 30, 2017,2019, Level 3 invested assets comprised 3.3%4.0% of the Company’s total investment portfolio at fair value.
| | ($ in thousands) | | | | Fair Value Measurements at | | | | Fair Value Measurements at |
| | Carrying | | Fair | | Reporting Date Using | | Carrying | | Fair | | Reporting Date Using |
| | Amount | | Value | | Level 1 | | Level 2 | | Level 3 | | Amount | | Value | | Level 1 | | Level 2 | | Level 3 |
September 30, 2017 | | | | | | | | | | | |
June 30, 2019 | | | | | | | | | | | |
Financial Assets | | | | | | | | | | | | | | | | | | | | |
Investments | | | | | | | | | | | | | | | | | | | | |
Fixed maturity securities | | | | | | | | | | | | | | | | | | | | |
U.S. Government and federally sponsored agency obligations: | | | | | | | | | | | | | | | | | | | | |
Mortgage-backed securities | | $ | 645,402 |
| | $ | 645,402 |
| | $ | — |
| | $ | 642,110 |
| | $ | 3,292 |
| | $ | 586,758 |
| | $ | 586,758 |
| | $ | — |
| | $ | 584,070 |
| | $ | 2,688 |
|
Other, including U.S. Treasury securities | | 671,020 |
| | 671,020 |
| | 13,484 |
| | 657,536 |
| | — |
| | 566,437 |
| | 566,437 |
| | 16,288 |
| | 550,149 |
| | — |
|
Municipal bonds | | 1,842,204 |
| | 1,842,204 |
| | — |
| | 1,792,992 |
| | 49,212 |
| | 1,599,693 |
| | 1,599,693 |
| | — |
| | 1,552,709 |
| | 46,984 |
|
Foreign government bonds | | 100,177 |
| | 100,177 |
| | — |
| | 100,177 |
| | — |
| | 47,367 |
| | 47,367 |
| | — |
| | 47,367 |
| | — |
|
Corporate bonds | | 2,821,703 |
| | 2,821,703 |
| | 14,798 |
| | 2,712,660 |
| | 94,245 |
| | 1,321,286 |
| | 1,321,286 |
| | 13,997 |
| | 1,228,067 |
| | 79,222 |
|
Other mortgage-backed securities | | 1,550,128 |
| | 1,550,128 |
| | — |
| | 1,431,802 |
| | 118,326 |
| | 1,412,729 |
| | 1,412,729 |
| | — |
| | 1,286,979 |
| | 125,750 |
|
Total fixed maturity securities | | 7,630,634 |
| | 7,630,634 |
| | 28,282 |
| | 7,337,277 |
| | 265,075 |
| | 5,534,270 |
| | 5,534,270 |
| | 30,285 |
| | 5,249,341 |
| | 254,644 |
|
Equity securities | | 159,275 |
| | 159,275 |
| | 103,552 |
| | 55,717 |
| | 6 |
| | 100,143 |
| | 100,143 |
| | 57,530 |
| | 42,544 |
| | 69 |
|
Short-term investments | | 111,488 |
| | 111,488 |
| | 111,488 |
| | — |
| | — |
| | 247,872 |
| | 247,872 |
| | 246,872 |
| | 1,000 |
| | — |
|
Other investments | | 21,944 |
| | 21,944 |
| | — |
| | 21,944 |
| | — |
| | 24,503 |
| | 24,503 |
| | — |
| | 24,503 |
| | — |
|
Totals | | $ | 7,923,341 |
| | $ | 7,923,341 |
| | $ | 243,322 |
| | $ | 7,414,938 |
| | $ | 265,081 |
| | $ | 5,906,788 |
| | $ | 5,906,788 |
| | $ | 334,687 |
| | $ | 5,317,388 |
| | $ | 254,713 |
|
Separate Account (variable annuity) assets (1) | | | $ | 2,310,886 |
| | $ | 2,310,886 |
| | $ | 2,310,886 |
| | $ | — |
| | $ | — |
|
Financial Liabilities | | | | | | | | | | | | | | | | | | | | |
Investment contract and life policy reserves, embedded derivatives | | $ | 390 |
| | $ | 390 |
| | $ | — |
| | $ | 390 |
| | $ | — |
| | $ | 940 |
| | $ | 940 |
| | $ | — |
| | $ | 940 |
| | $ | — |
|
Other policyholder funds, embedded derivatives | | 72,986 |
| | 72,986 |
| | — |
| | — |
| | 72,986 |
| | $ | 85,961 |
| | $ | 85,961 |
| | $ | — |
| | $ | — |
| | $ | 85,961 |
|
| | | | | | | | | | | | | | | | | | | | |
December 31, 2016 | | | | | | | | | | | |
December 31, 2018 | | | | | | | | | | | |
Financial Assets | | | | | | | | | | | | | | | | | | | | |
Investments | | | | | | | | | | | | | | | | | | | | |
Fixed maturity securities | | | | | | | | | | | | | | | | | | | | |
U.S. Government and federally sponsored agency obligations: | | | | | | | | | | | | | | | | | | | | |
Mortgage-backed securities | | $ | 614,891 |
| | $ | 614,891 |
| | $ | — |
| | $ | 611,476 |
| | $ | 3,415 |
| | $ | 787,441 |
| | $ | 787,441 |
| | $ | — |
| | $ | 784,224 |
| | $ | 3,217 |
|
Other, including U.S. Treasury securities | | 467,143 |
| | 467,143 |
| | 13,631 |
| | 453,512 |
| | — |
| | 833,542 |
| | 833,542 |
| | 13,291 |
| | 820,251 |
| | — |
|
Municipal bonds | | 1,769,397 |
| | 1,769,397 |
| | — |
| | 1,722,900 |
| | 46,497 |
| | 2,003,969 |
| | 2,003,969 |
| | — |
| | 1,956,438 |
| | 47,531 |
|
Foreign government bonds | | 98,669 |
| | 98,669 |
| | — |
| | 98,669 |
| | — |
| | 84,904 |
| | 84,904 |
| | — |
| | 84,904 |
| | — |
|
Corporate bonds | | 2,810,221 |
| | 2,810,221 |
| | 13,532 |
| | 2,736,498 |
| | 60,191 |
| | 2,079,510 |
| | 2,079,510 |
| | 12,281 |
| | 1,986,487 |
| | 80,742 |
|
Other mortgage-backed securities | | 1,696,387 |
| | 1,696,387 |
| | — |
| | 1,595,143 |
| | 101,244 |
| | 1,725,952 |
| | 1,725,952 |
| | — |
| | 1,608,958 |
| | 116,994 |
|
Total fixed maturity securities | | 7,456,708 |
| | 7,456,708 |
| | 27,163 |
| | 7,218,198 |
| | 211,347 |
| | 7,515,318 |
| | 7,515,318 |
| | 25,572 |
| | 7,241,262 |
| | 248,484 |
|
Equity securities | | 141,649 |
| | 141,649 |
| | 98,632 |
| | 43,011 |
| | 6 |
| | 111,750 |
| | 111,750 |
| | 64,330 |
| | 47,415 |
| | 5 |
|
Short-term investments | | 44,918 |
| | 44,918 |
| | 44,167 |
| | — |
| | 751 |
| | 122,222 |
| | 122,222 |
| | 117,296 |
| | 4,926 |
| | — |
|
Other investments | | 20,194 |
| | 20,194 |
| | — |
| | 20,194 |
| | — |
| | 16,147 |
| | 16,147 |
| | — |
| | 16,147 |
| | — |
|
Totals | | $ | 7,663,469 |
| | $ | 7,663,469 |
| | $ | 169,962 |
| | $ | 7,281,403 |
| | $ | 212,104 |
| | $ | 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 | | $ | 158 |
| | $ | 158 |
| | $ | — |
| | $ | 158 |
| | $ | — |
| | $ | 248 |
| | $ | 248 |
| | $ | — |
| | $ | 248 |
| | $ | — |
|
Other policyholder funds, embedded derivatives | | 59,393 |
| | 59,393 |
| | — |
| | — |
| | 59,393 |
| | $ | 78,700 |
| | $ | 78,700 |
| | $ | — |
| | $ | — |
| | $ | 78,700 |
|
________________
(1) Separate Account (variable annuity) liabilities are equal to the estimated fair value of the Separate Account (variable annuity) assets.
Note 34 - Fair Value of Financial Instruments (Continued)
During the ninesix month periodperiods ended SeptemberJune 30, 2017, an equity security was transferred into2019 and 2018, there were no transfers between Level 1 fromand Level 2 as a result of increased liquidity in the market and a sustained increase in the market activity for this asset.2. The following table presents reconciliations for the periods indicated for all Level 3 assets and liabilities measured at fair value on a recurring basis.
| | ($ in thousands) | | Financial Assets | | Financial Liabilities(1) | | Financial Assets | | Financial Liabilities(1) |
| | Municipal Bonds | | Corporate Bonds | | Mortgage- Backed Securities (2) | | Total Fixed Maturity Securities | | Equity Securities | | Short-term Investments | | Total | | | | Municipal Bonds | | Corporate Bonds | | Other Mortgage- Backed Securities (2) | | Total Fixed Maturity Securities | | Equity Securities | | Total | | |
Beginning balance, July 1, 2017 | | $ | 49,123 |
| | $ | 77,052 |
| | $ | 120,324 |
| | $ | 246,499 |
| | $ | 6 |
| | $ | — |
| | $ | 246,505 |
| | $ | 67,995 |
| |
Beginning balance, April 1, 2019 | | | $ | 47,756 |
| | $ | 82,482 |
| | $ | 135,790 |
| | $ | 266,028 |
| | $ | 5 |
| | $ | 266,033 |
| | $ | 84,629 |
|
Transfers into Level 3 (3) | | — |
| | 23,501 |
| | 11,961 |
| | 35,462 |
| | — |
| | — |
| | 35,462 |
| | — |
| | — |
| | 2,808 |
| | — |
| | 2,808 |
| | 64 |
| | 2,872 |
| | — |
|
Transfers out of Level 3 (3) | | — |
| | 1 |
| | (881 | ) | | (880 | ) | | — |
| | — |
| | (880 | ) | | — |
| | — |
| | (4,876 | ) | | — |
| | (4,876 | ) | | — |
| | (4,876 | ) | | — |
|
Total gains or losses | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| | | | | | | | | | | | | | | | |
Net realized investment gains (losses) included in net income related to financial assets | | — |
| | (1 | ) | | (160 | ) | | (161 | ) | | — |
| | — |
| | (161 | ) | | — |
| |
Net investment gains (losses) included in net income related to financial assets | | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Net realized (gains) losses included in net income related to financial liabilities | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 2,587 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 371 |
|
Net unrealized investment gains (losses) included in other comprehensive income | | 382 |
| | (192 | ) | | (377 | ) | | (187 | ) | | — |
| | — |
| | (187 | ) | | — |
| |
Net unrealized investment gains (losses) included in OCI | | | (537 | ) | | 1,961 |
| | 2,807 |
| | 4,231 |
| | — |
| | 4,231 |
| | — |
|
Purchases | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1,566 |
| | — |
| | 1,566 |
| | — |
| | 1,566 |
| | — |
|
Issuances | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 3,752 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 2,431 |
|
Sales | | — |
| | (1,999 | ) | | — |
| | (1,999 | ) | | — |
| | — |
| | (1,999 | ) | | — |
| | — |
| | — |
| | (607 | ) | | (607 | ) | | — |
| | (607 | ) | | — |
|
Settlements | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Paydowns, maturities and distributions | | (293 | ) | | (4,117 | ) | | (9,249 | ) | | (13,659 | ) | | — |
| | — |
| | (13,659 | ) | | (1,348 | ) | | (235 | ) | | (4,719 | ) | | (9,552 | ) | | (14,506 | ) | | — |
| | (14,506 | ) | | (1,470 | ) |
Ending balance, September 30, 2017 | | $ | 49,212 |
| | $ | 94,245 |
| | $ | 121,618 |
| | $ | 265,075 |
| | $ | 6 |
| | $ | — |
| | $ | 265,081 |
| | $ | 72,986 |
| |
Ending balance, June 30, 2019 | | | $ | 46,984 |
| | $ | 79,222 |
| | $ | 128,438 |
| | $ | 254,644 |
| | $ | 69 |
| | $ | 254,713 |
| | $ | 85,961 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Beginning balance, January 1, 2017 | | $ | 46,497 |
| | $ | 60,191 |
| | $ | 104,659 |
| | $ | 211,347 |
| | $ | 6 |
| | $ | 751 |
| | $ | 212,104 |
| | $ | 59,393 |
| |
Beginning balance, January 1, 2019 | | | $ | 47,531 |
| | $ | 80,742 |
| | $ | 120,211 |
| | $ | 248,484 |
| | $ | 5 |
| | $ | 248,489 |
| | $ | 78,700 |
|
Transfers into Level 3 (3) | | 5,214 |
| | 55,420 |
| | 36,482 |
| | 97,116 |
| | — |
| | — |
| | 97,116 |
| | — |
| | — |
| | 5,882 |
| | 21,934 |
| | 27,816 |
| | 64 |
| | 27,880 |
| | — |
|
Transfers out of Level 3 (3) | | (5,557 | ) | | (11,962 | ) | | (881 | ) | | (18,400 | ) | | — |
| | (751 | ) | | (19,151 | ) | | — |
| | — |
| | (4,876 | ) | | — |
| | (4,876 | ) | | — |
| | (4,876 | ) | | — |
|
Total gains or losses | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net realized investment gains (losses) included in net income related to financial assets | | — |
| | (1 | ) | | (1,874 | ) | | (1,875 | ) | | — |
| | — |
| | (1,875 | ) | | — |
| |
Net investment gains (losses) included in net income related to financial assets | | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Net realized (gains) losses included in net income related to financial liabilities | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 6,133 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 4,705 |
|
Net unrealized investment gains (losses) included in other comprehensive income | | 3,540 |
| | 263 |
| | 1,945 |
| | 5,748 |
| | — |
| | — |
| | 5,748 |
| | — |
| |
Net unrealized investment gains (losses) included in OCI | | | (193 | ) | | 4,510 |
| | 2,655 |
| | 6,972 |
| | — |
| | 6,972 |
| | — |
|
Purchases | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1,566 |
| | — |
| | 1,566 |
| | — |
| | 1,566 |
| | — |
|
Issuances | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 10,538 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 5,449 |
|
Sales | | — |
| | (1,999 | ) | | — |
| | (1,999 | ) | | — |
| | — |
| | (1,999 | ) | | — |
| | — |
| | — |
| | (607 | ) | | (607 | ) | | — |
| | (607 | ) | | — |
|
Settlements | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Paydowns, maturities and distributions | | (482 | ) | | (7,667 | ) | | (18,713 | ) | | (26,862 | ) | | — |
| | — |
| | (26,862 | ) | | (3,078 | ) | | (354 | ) | | (8,602 | ) | | (15,755 | ) | | (24,711 | ) | | — |
| | (24,711 | ) | | (2,893 | ) |
Ending balance, September 30, 2017 | | $ | 49,212 |
| | $ | 94,245 |
| | $ | 121,618 |
| | $ | 265,075 |
| | $ | 6 |
| | $ | — |
| | $ | 265,081 |
| | $ | 72,986 |
| |
Ending balance, June 30, 2019 | | | $ | 46,984 |
| | $ | 79,222 |
| | $ | 128,438 |
| | $ | 254,644 |
| | $ | 69 |
| | $ | 254,713 |
| | $ | 85,961 |
|
________________
| |
(1) | Represents embedded derivatives, all related to the Company’s FIACompany's fixed indexed annuity products, reported in Other policyholder funds in the Company’s Consolidated Balance Sheets. |
| |
(2) | Includes U.S. Government and federally sponsored agency obligations for mortgage-backed securities and other mortgage-backed securities. |
| |
(3) | Transfers into and out of Level 3 during the three and ninesix month periods ended SeptemberJune 30, 2017 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. |
Note 3 - Fair Value of Financial Instruments (Continued)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
($ in thousands) | | Financial Assets | | Financial Liabilities(1) |
| | Municipal Bonds | | Corporate Bonds | | Mortgage- Backed Securities (2) | | Total Fixed Maturity Securities | | Equity Securities | | Short-term Investments | | Total | | |
Beginning balance, July 1, 2016 | | $ | 47,647 |
| | $ | 73,408 |
| | $ | 96,581 |
| | $ | 217,636 |
| | $ | 6 |
| | $ | — |
| | $ | 217,642 |
| | $ | 47,706 |
|
Transfers into Level 3 (3) | | — |
| | 10,375 |
| | 7,655 |
| | 18,030 |
| | — |
| | — |
| | 18,030 |
| | — |
|
Transfers out of Level 3 (3) | | — |
| | (5,967 | ) | | (788 | ) | | (6,755 | ) | | — |
| | — |
| | (6,755 | ) | | — |
|
Total gains or losses | | | | | | | | | | | | | | | | |
Net realized investment gains (losses) included in net income related to financial assets | | — |
| | 1 |
| | (56 | ) | | (55 | ) | | — |
| | — |
| | (55 | ) | | — |
|
Net realized (gains) losses included in net income related to financial liabilities | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 68 |
|
Net unrealized investment gains (losses) included in other comprehensive income | | (2,361 | ) | | 1,292 |
| | 3,951 |
| | 2,882 |
| | — |
| | — |
| | 2,882 |
| | — |
|
Purchases | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Issuances | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 6,710 |
|
Sales | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Settlements | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Paydowns, maturities and distributions | | (120 | ) | | (1,488 | ) | | (5,194 | ) | | (6,802 | ) | | — |
| | — |
| | (6,802 | ) | | 695 |
|
Ending balance, September 30, 2016 | | $ | 45,166 |
| | $ | 77,621 |
| | $ | 102,149 |
| | $ | 224,936 |
| | $ | 6 |
| | $ | — |
| | $ | 224,942 |
| | $ | 55,179 |
|
| | | | | | | | | | | | | | | | |
Beginning balance, January 1, 2016 | | $ | 30,379 |
| | $ | 67,575 |
| | $ | 75,466 |
| | $ | 173,420 |
| | $ | 6 |
| | $ | — |
| | $ | 173,426 |
| | $ | 39,021 |
|
Transfers into Level 3 (3) | | 14,751 |
| | 21,451 |
| | 32,281 |
| | 68,483 |
| | — |
| | — |
| | 68,483 |
| | — |
|
Transfers out of Level 3 (3) | | — |
| | (5,967 | ) | | (788 | ) | | (6,755 | ) | | — |
| | — |
| | (6,755 | ) | | — |
|
Total gains or losses | | | | | | | | | | | | | | | | |
Net realized investment gains (losses) included in net income related to financial assets | | — |
| | (656 | ) | | (56 | ) | | (712 | ) | | — |
| | — |
| | (712 | ) | | — |
|
Net realized (gains) losses included in net income related to financial liabilities | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 2,066 |
|
Net unrealized investment gains (losses) included in other comprehensive income | | 420 |
| | 3,073 |
| | 4,173 |
| | 7,666 |
| | — |
| | — |
| | 7,666 |
| | — |
|
Purchases | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Issuances | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 15,194 |
|
Sales | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Settlements | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Paydowns, maturities and distributions | | (384 | ) | | (7,855 | ) | | (8,927 | ) | | (17,166 | ) | | — |
| | — |
| | (17,166 | ) | | (1,102 | ) |
Ending balance, September 30, 2016 | | $ | 45,166 |
| | $ | 77,621 |
| | $ | 102,149 |
| | $ | 224,936 |
| | $ | 6 |
| | $ | — |
| | $ | 224,942 |
| | $ | 55,179 |
|
| |
(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) | Includes U.S. Government and federally sponsored agency obligations for mortgage-backed securities and other mortgage-backed securities. |
| |
(3) | Transfers into and out of Level 3 during the three and nine month periods ended September 30, 20162019 were attributable to changes in the availability of observable market information for individual fixed maturity securities. The Company’s policy is to recognize transfers into and transfers out of the levels as having occurred at the end of the reporting period in which the transfers were determined. |
At September
Note 4 - Fair Value of Financial Instruments (Continued)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
($ in thousands) | | Financial Assets | | Financial Liabilities(1) |
| | Municipal Bonds | | Corporate Bonds | | Other Mortgage- Backed Securities (2) | | Total Fixed Maturity Securities | | Equity Securities | | Total | | |
Beginning balance, April 1, 2018 | | $ | 49,748 |
| | $ | 78,780 |
| | $ | 115,334 |
| | $ | 243,862 |
| | $ | 6 |
| | $ | 243,868 |
| | $ | 78,486 |
|
Transfers into Level 3 (3) | | — |
| | 29,709 |
| | 18,322 |
| | 48,031 |
| | — |
| | 48,031 |
| | — |
|
Transfers out of Level 3 (3) | | — |
| | (11,279 | ) | | (4,230 | ) | | (15,509 | ) | | — |
| | (15,509 | ) | | — |
|
Total gains or losses | | | | | | | | | | | | | | |
Net investment gains (losses) included in net income related to financial assets | | — |
| | (246 | ) | | — |
| | (246 | ) | | — |
| | (246 | ) | | — |
|
Net realized (gains) losses included in net income related to financial liabilities | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (1,291 | ) |
Net unrealized investment gains (losses) included in OCI | | 397 |
| | (700 | ) | | 1,659 |
| | 1,356 |
| | — |
| | 1,356 |
| | — |
|
Purchases | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Issuances | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 2,107 |
|
Sales | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Settlements | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Paydowns, maturities and distributions | | (224 | ) | | (3,601 | ) | | (2,024 | ) | | (5,849 | ) | | — |
| | (5,849 | ) | | (1,514 | ) |
Ending balance, June 30, 2018 | | $ | 49,921 |
| | $ | 92,663 |
| | $ | 129,061 |
| | $ | 271,645 |
| | $ | 6 |
| | $ | 271,651 |
| | $ | 77,788 |
|
| | | | | | | | | | | | | | |
Beginning balance, January 1, 2018 | | $ | 49,328 |
| | $ | 72,979 |
| | $ | 107,944 |
| | $ | 230,251 |
| | $ | 6 |
| | $ | 230,257 |
| | $ | 80,733 |
|
Transfers into Level 3 (3) | | — |
| | 40,487 |
| | 33,144 |
| | 73,631 |
| | — |
| | 73,631 |
| | — |
|
Transfers out of Level 3 (3) | | — |
| | (11,279 | ) | | (4,230 | ) | | (15,509 | ) | | — |
| | (15,509 | ) | | — |
|
Total gains or losses | | | | | | | | | | | | | | |
Net investment gains (losses) included in net income related to financial assets | | — |
| | (246 | ) | | — |
| | (246 | ) | | 3 |
| | (243 | ) | | — |
|
Net (gains) losses included in net income related to financial liabilities | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (3,513 | ) |
Net unrealized investment gains (losses) included in OCI | | 840 |
| | (1,587 | ) | | 637 |
| | (110 | ) | | — |
| | (110 | ) | | — |
|
Purchases | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Issuances | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 3,439 |
|
Sales | | — |
| | — |
| | — |
| | — |
| | (3 | ) | | (3 | ) | | — |
|
Settlements | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Paydowns, maturities and distributions | | (247 | ) | | (7,691 | ) | | (8,434 | ) | | (16,372 | ) | | — |
| | (16,372 | ) | | (2,871 | ) |
Ending balance, June 30, 2018 | | $ | 49,921 |
| | $ | 92,663 |
| | $ | 129,061 |
| | $ | 271,645 |
| | $ | 6 |
| | $ | 271,651 |
| | $ | 77,788 |
|
________________
| |
(1) | Represents embedded derivatives, all related to the Company’s fixed indexed annuity products, reported in Other policyholder funds in the Company’s Consolidated Balance Sheets. |
| |
(2) | Includes U.S. Government and federally sponsored agency obligations for mortgage-backed securities and other mortgage-backed securities. |
| |
(3) | Transfers into and out of Level 3 during the three and six month periods ended June 30, 2018 were attributable to changes in the availability of observable market information for individual fixed maturity securities . The Company’s policy is to recognize transfers into and transfers out of the levels as having occurred at the end of the reporting period in which the transfers were determined. |
For the six month period ended June 30, 2017,2019, the Company impairedhad no net losses on Level 3 securities. For the six month period ended June 30, 2018, the Company had a realized net loss on two Level 3 securities for a $1,874 thousand realized loss. At September 30, 2016, 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.$243 thousand. For the three and ninesix month periods ended SeptemberJune 30, 2017,2019, net realizedinvestment losses of $2,587$371 thousand and $6,133$4,705 thousand respectively, were included in earnings that were attributable to the changes in the fair value of Level 3 liabilities (embedded derivatives) still held; for the three and ninesix month periods ended SeptemberJune 30, 2016,2018, the respective lossgain amounts were $68$1,291 thousand and $2,066$3,513 thousand.
Note 34 - Fair Value of Financial Instruments (Continued)
The valuation techniques and significant unobservable inputs used in the fair value measurement for financial assets and liabilities classified as Level 3 are subject to the control processes as described in “NoteNote 3 -- Fair Value of Financial Instruments -- Investments” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.2018. Generally, valuation techniques for fixed maturity securities include spread pricing, matrix pricing and discounted cash flow methodologies; include inputs such as quoted prices for identical or similar securities that are less liquid; and are based on lower levels of trading activity than securities classified as Level 2. The valuation techniques and significant unobservable inputs used in the fair value measurement for equity securities classified as Level 3 use similar valuation techniques and significant unobservable inputs as those used for fixed maturity securities.
The sensitivity of the estimated fair values to changes in the significant unobservable inputs for fixed maturity and equity securities included in Level 3 generally relate to interest rate spreads, illiquidity premiums and default rates. Significant spread widening in isolation will adversely impact the overall valuation, while significant spread tightening will lead to substantial valuation increases. Significant increases (decreases) in illiquidity premiums in isolation will result in substantially lower (higher) valuations. Significant increases (decreases) in expected default rates in isolation will result in substantially lower (higher) valuations.
Financial Instruments Not Carried at Fair Value; Disclosure Required
The Company has various other financial assets and financial liabilities used in the normal course of business that are not carried at fair value, but for which fair value disclosure is required. The following table presents the carrying value, fair value and fair value hierarchy of these financial assets and financial liabilities.
| | ($ in thousands) | | | | Fair Value Measurements at | | | | Fair Value Measurements at |
| | Carrying | | Fair | | Reporting Date Using | | Carrying | | Fair | | Reporting Date Using |
| | Amount | | Value | | Level 1 | | Level 2 | | Level 3 | | Amount | | Value | | Level 1 | | Level 2 | | Level 3 |
September 30, 2017 | | | | | | | | | | | |
June 30, 2019 | | | | | | | | | | | |
Financial Assets | | | | | | | | | | | | | | | | | | | | |
Investments | | | | | | | | | | | | | | | | | | | | |
Other investments | | $ | 154,630 |
| | $ | 159,253 |
| | $ | — |
| | $ | — |
| | $ | 159,253 |
| | $ | 161,313 |
| | $ | 166,023 |
| | $ | — |
| | $ | — |
| | $ | 166,023 |
|
Financial Liabilities | | | | | | | | | | | | | | | | | | | | |
Investment contract reserves | | 4,428,989 |
| | 4,338,318 |
| | — |
| | — |
| | 4,338,318 |
| |
Life policy reserves, account values on life contracts | | 81,520 |
| | 86,906 |
| | — |
| | — |
| | 86,906 |
| |
Investment contract and life policy reserves, fixed annuity contracts | | | 4,605,272 |
| | 4,529,317 |
| | — |
| | — |
| | 4,529,317 |
|
Investment contract and life policy reserves, account values on life contracts | | | 90,239 |
| | 93,366 |
| | — |
| | — |
| | 93,366 |
|
Other policyholder funds | | 644,383 |
| | 644,383 |
| | — |
| | 575,579 |
| | 68,804 |
| | 735,919 |
| | 735,919 |
| | — |
| | 676,460 |
| | 59,459 |
|
Long-term debt | | 247,403 |
| | 264,781 |
| | 264,781 |
| | — |
| | — |
| | 297,881 |
| | 315,938 |
| | — |
| | 315,938 |
| | — |
|
| | | | | | | | | | | | | | | | | | | | |
December 31, 2016 | | | | | | | | | | | |
December 31, 2018 | | | | | | | | | | | |
Financial Assets | | | | | | | | | | | | | | | | | | | | |
Investments | | | | | | | | | | | | | | | | | | | | |
Other investments | | $ | 151,965 |
| | $ | 156,536 |
| | $ | — |
| | $ | — |
| | $ | 156,536 |
| | $ | 156,725 |
| | $ | 161,449 |
| | $ | — |
| | $ | — |
| | $ | 161,449 |
|
Financial Liabilities | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Investment contract reserves | | 4,360,456 |
| | 4,280,528 |
| | — |
| | — |
| | 4,280,528 |
| |
Life policy reserves, account values on life contracts | | 79,591 |
| | 85,066 |
| | — |
| | — |
| | 85,066 |
| |
Investment contract and life policy reserves, fixed annuity contracts | | | 4,555,849 |
| | 4,478,338 |
| | — |
| | — |
| | 4,478,338 |
|
Investment contract and life policy reserves, account values on life contracts | | | 87,229 |
| | 90,402 |
| | — |
| | — |
| | 90,402 |
|
Other policyholder funds | | 649,557 |
| | 649,557 |
| | — |
| | 575,253 |
| | 74,304 |
| | 689,287 |
| | 689,287 |
| | — |
| | 626,325 |
| | 62,962 |
|
Long-term debt | | 247,209 |
| | 248,191 |
| | 248,191 |
| | — |
| | — |
| | 297,740 |
| | 291,938 |
| | — |
| | 291,938 |
| | — |
|
Note 45 - Derivative Instruments
The Company offers FIAfixed indexed annuity (FIA) products, which are deferred fixed annuities that guarantee the return of principal to the contractholder and credit interest based on a percentage of the gain in a specified market index, and IULindex. The Company also offers indexed universal life (IUL) products 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 OTC call options on the applicable market indices to fund the index credits due to FIA and IUL policyholders. For the Company, substantially all of such call options are one-year options purchased to match the funding requirements of the underlying contracts. The call options are carried at fair value with changes in fair value included in Net realized investment gains and losses,(losses), a component of Revenues,revenues, in the Consolidated Statements of Operations.
The change in fair value of the derivatives includes the gains or losses recognized at the expiration of the option term or early termination and the changes in fair value for open positions. Call options are not purchased to fund the index liabilities which may arise after the next deposit anniversary date. On the respective anniversary dates of the indexed deposits, the index used to compute the annual index credit is reset and new one-year call options are purchased to fund the next annual index credit. The cost of these purchases is managed through the terms of the FIA and IUL contracts, which permit changes to index return caps, participation rates and/or asset fees, subject to guaranteed minimums on each contract’s anniversary date. By adjusting the index return caps, participation rates or asset fees, crediting rates generally can be managed except in cases where the contractual features would prevent further modifications.
The future annual index credits on FIA contracts are treatedaccounted for as a “series"series of embedded derivatives”derivatives" over the expected life of the applicable contract with a corresponding reserve recorded. For the IUL, contracts, the embedded derivative represents a single year liability for the index return.
The Company carries all derivative instruments as assets or liabilitiesat 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 realized investment gains (losses) in the Consolidated Statements of Operations. The fair values of derivative instruments, including derivative instruments embedded in FIA and IUL contracts, are presented in the Consolidated Balance Sheets were as follows:
| | ($ in thousands) | | September 30, 2017 | | December 31, 2016 | | June 30, 2019 | | December 31, 2018 |
Assets | | |
| | |
| | | | |
Derivative instruments, included in Short-term and other investments | | $ | 10,431 |
| | $ | 8,694 |
| | $ | 8,753 |
| | $ | 2,647 |
|
| | | | | | | | |
Liabilities | | |
| | |
| | | | |
FIA - embedded derivatives, included in Other policyholder funds | | $ | 72,986 |
| | $ | 59,393 |
| | $ | 85,961 |
| | $ | 78,700 |
|
IUL - embedded derivatives, included in Investment contract and life policy reserves | | 390 |
| | 158 |
| | 940 |
| | 248 |
|
Note 45 - Derivative Instruments (Continued)
In general, the change in the fair value of the embedded derivatives related to FIA contracts will not correspond to the change in fair value of the purchased call options because the purchased call options are one-year options while the options valued in thosethe embedded derivatives represent the rights of the policyholder to receive index credits over the entire period the FIA contracts are expected to be in force, which typically exceeds 10 years. The changes in fair value of derivatives included in the Consolidated Statements of Operations were as follows:
| | ($ in thousands) | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2017 | | 2016 | | 2017 | | 2016 | | 2019 | | 2018 | | 2019 | | 2018 |
Change in fair value of derivatives (1): | | | | | | | | | |
Change in fair value of derivatives:(1) | | | | | | | | | |
Revenues | | | | | | | | | | | | | | | | |
Net realized investment gains | | $ | 2,943 |
| | $ | 562 |
| | $ | 7,109 |
| | $ | 422 |
| |
Net investment gains (losses) | | | $ | 1,375 |
| | $ | (2 | ) | | $ | 5,429 |
| | $ | (851 | ) |
| | | | | | | | | | | | | | | | |
Change in fair value of embedded derivatives: | | | | | | | | | | | | | | | | |
Revenues | | | | | | | | | | | | | | | | |
Net realized investment losses | | $ | (2,702 | ) | | $ | (76 | ) | | $ | (6,363 | ) | | $ | (2,077 | ) | |
Net investment gains (losses) | | | $ | (516 | ) | | $ | 1,281 |
| | $ | (5,261 | ) | | $ | 3,569 |
|
________________
| |
(1) | Includes the gains or losses recognized at the expiration of the option term or early termination and the changes in fair value for open options. |
The Company’s strategy attempts to mitigate potential risk of loss under these agreements through a regular monitoring process, which evaluates the program’s effectiveness. The Company is exposed to risk of loss in the event of nonperformance by the counterparties and, accordingly, option contracts are purchased from multiple counterparties, which are evaluated for creditworthiness prior to purchase of the contracts. All of these options have been purchased from nationally recognized financial institutions with a Standard and Poor’s Financial Services LLC ("S&P")Global Inc. (S&P)/Moody's Investors Service, Inc. (Moody's) long-term credit rating of “BBB+”"BBB+/A1" or higher at the time of purchase and the maximum credit exposure to any single counterparty is subject to concentration limits. The Company also obtains credit support agreements that allow it to request the counterparty to provide collateral when the fair value of the exposure to the counterparty exceeds specified amounts.
The notional amount and fair value of call options by counterparty and each counterparty’s long-term credit ratings were as follows:
| | ($ in thousands) | | September 30, 2017 | | December 31, 2016 | | June 30, 2019 | | December 31, 2018 |
| | Credit Rating | | Notional | | Fair | | Notional | | Fair | | Credit Rating | | Notional | | Fair | | Notional | | Fair |
Counterparty | | S&P | | Amount | | Value | | Amount | | Value | | S&P | | Moody's | | Amount | | Value | | Amount | | Value |
| | | | | | | | | |
Bank of America, N.A. | | A+ | | $ | 74,400 |
| | $ | 2,466 |
| | $ | 38,500 |
| | $ | 1,934 |
| | A+ | | Aa2 | | $ | 156,800 |
| | $ | 3,560 |
| | $ | 144,500 |
| | $ | 870 |
|
Barclays Bank PLC | | A | | 68,900 |
| | 3,017 |
| | 66,800 |
| | 1,543 |
| | A | | A2 | | 72,500 |
| | 1,696 |
| | 28,500 |
| | 247 |
|
Citigroup Inc. | | BBB+ | | — |
| | — |
| | — |
| | — |
| | BBB+ | | A3 | | — |
| | — |
| | — |
| | — |
|
Credit Suisse International | | A | | 29,100 |
| | 2,041 |
| | 65,200 |
| | 4,281 |
| | A+ | | A1 | | 16,100 |
| | 295 |
| | 16,100 |
| | 55 |
|
Societe Generale | | A | | 68,900 |
| | 2,907 |
| | 15,600 |
| | 936 |
| | A | | | | 55,000 |
| | 3,202 |
| | 89,100 |
| | 1,475 |
|
| | | | | | | | | | | | | | | | |
Total | | $ | 241,300 |
| | $ | 10,431 |
| | $ | 186,100 |
| | $ | 8,694 |
| | $ | 300,400 |
| | $ | 8,753 |
| | $ | 278,200 |
| | $ | 2,647 |
|
As of SeptemberJune 30, 20172019 and December 31, 2016,2018, the Company held $10,954$8,663 thousand and $8,824$1,868 thousand, respectively, of cash received from counterparties for derivative collateral, which is included in Other liabilities inon the Consolidated Balance Sheets. This derivative collateral limits the Company’s maximum amount of economic loss due to credit risk that would be incurred if parties to the call options failed completely to perform according to the terms of the contracts to $250 thousand per counterparty.
Note 6 - Deposit Asset on Reinsurance
In the second quarter of 2019, the Company reinsured a $2.9 billion block of in force fixed and variable annuity business with a minimum crediting rate of 4.5%. This represented approximately 50% of the Company’s in force fixed annuity account balances. The arrangement contains investment guidelines and a trust to help meet the Company’s risk management objectives.
The annuity reinsurance transaction was effective April 1, 2019. Under the agreement, approximately $2.2 billion of fixed annuity reserves were reinsured on a coinsurance basis for consideration of approximately $2.3 billion which resulted in recognition of an after tax realized investment gain of $106.9 million. The separate account assets and liabilities of approximately $0.7 billion were reinsured on a modified coinsurance basis and thus, remain on the Company’s consolidated financial statements, but the related results of operations are fully reinsured.
The Company determined that the reinsurance agreement does not expose the reinsurer to a reasonable possibility of a significant loss from insurance risk. Therefore, the Company recognizes the reinsurance agreement using the deposit method of accounting. The assets transferred to the reinsurer as consideration paid is reported as a Deposit asset on reinsurance. As amounts are received or paid, consistent with the underlying reinsured contracts, the Deposit asset on reinsurance is adjusted. The Deposit asset on reinsurance is accreted to the estimated ultimate cash flows using the interest method and the adjustment is reported as Net investment income.
Note 57 - Property and Casualty Unpaid Claims and Claim Expenses
The following table is a summary reconciliation of the beginning and ending Property and Casualty unpaid claims and claim expense reserves for the periods indicated. The table presents reserves on both gross and net (after reinsurance) bases. The total net Property and Casualty insurance claims and claim expense incurred amounts are reflected in the Consolidated Statements of Operations. The end of the period gross reserve (before reinsurance) balances and the reinsurance recoverable balances are reflected on a gross basis in the Consolidated Balance Sheets.
| | ($ in thousands) | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2017 | | 2016 | | 2017 | | 2016 | | 2019 | | 2018 | | 2019 | | 2018 |
Property and Casualty segment | | |
| | |
| | | | | |
Beginning Gross reserves (1) | | $ | 329,831 |
| | $ | 320,961 |
| | $ | 307,757 |
| | $ | 301,569 |
| |
Property and Casualty | | | |
| | |
| | | | |
Beginning gross reserves (1) | | | $ | 359,701 |
| | $ | 331,255 |
| | $ | 367,180 |
| | $ | 319,182 |
|
Less: reinsurance recoverables | | 58,897 |
| | 60,499 |
| | 61,199 |
| | 50,332 |
| | 78,328 |
| | 62,917 |
| | 89,725 |
| | 57,409 |
|
Net reserves, beginning of period (2) | | 270,934 |
| | 260,462 |
| | 246,558 |
| | 251,237 |
| | 281,373 |
| | 268,338 |
| | 277,455 |
| | 261,773 |
|
Incurred claims and claim expenses: | | |
| | |
| | | | | | |
| | |
| | | | |
Claims occurring in the current period | | 115,393 |
| | 116,709 |
| | 386,945 |
| | 351,270 |
| | 134,411 |
| | 147,005 |
| | 253,178 |
| | 267,993 |
|
Decrease in estimated reserves for claims occurring in prior periods (3) | | (500 | ) | | (700 | ) | | (2,100 | ) | | (4,300 | ) | | (2,000 | ) | | — |
| | (4,000 | ) | | (300 | ) |
Total claims and claim expenses incurred (4) | | 114,893 |
| | 116,009 |
| | 384,845 |
| | 346,970 |
| | 132,411 |
| | 147,005 |
| | 249,178 |
| | 267,693 |
|
Claims and claim expense payments for claims occurring during: | | |
| | |
| | | | | | |
| | |
| | | | |
Current period | | 97,188 |
| | 99,832 |
| | 245,213 |
| | 228,462 |
| | 83,755 |
| | 80,403 |
| | 129,469 |
| | 127,451 |
|
Prior periods | | 28,054 |
| | 27,976 |
| | 125,605 |
| | 121,082 |
| | 39,512 |
| | 45,006 |
| | 106,647 |
| | 112,081 |
|
Total claims and claim expense payments | | 125,242 |
| | 127,808 |
| | 370,818 |
| | 349,544 |
| | 123,267 |
| | 125,409 |
| | 236,116 |
| | 239,532 |
|
Net reserves, end of period (2) | | 260,585 |
| | 248,663 |
| | 260,585 |
| | 248,663 |
| | 290,517 |
| | 289,934 |
| | 290,517 |
| | 289,934 |
|
Plus: reinsurance recoverables | | 57,302 |
| | 61,893 |
| | 57,302 |
| | 61,893 |
| | 77,345 |
| | 62,883 |
| | 77,345 |
| | 62,883 |
|
Ending Gross reserves (1) | | $ | 317,887 |
| | $ | 310,556 |
| | $ | 317,887 |
| | $ | 310,556 |
| |
Ending gross reserves (1) | | | $ | 367,862 |
| | $ | 352,817 |
| | $ | 367,862 |
| | $ | 352,817 |
|
________________
| |
(1) | Unpaid claims and claim expenses as reported in the Consolidated Balance Sheets also include reserves for the Life and Retirement segments of $23,897$30,477 thousand and $22,231$27,016 thousand as of SeptemberJune 30, 20172019 and 2016,2018, respectively, in addition to Property and Casualty segment reserves. |
| |
(2) | Reserves net of anticipated reinsurance recoverables. |
| |
(3) | Shows the amounts by which the Company decreased its reserves in each of the periods indicated for claims occurring in previous periods to reflect subsequent information on such claims and changes in their projected final settlement costs. |
| |
(4) | Benefits, claims and settlement expenses as reported in the Consolidated Statements of Operations also include amounts for the Life and Retirement segments of $20,002$20,281 thousand and $60,025$42,898 thousand for the three and ninesix month periods ended SeptemberJune 30, 2017,2019, respectively, in addition to the Property and Casualty segment amounts. Benefits, claims and settlement expenses for the Life and Retirement segmentswere $21,273 thousand and $44,147 thousand for the three and ninesix month periods ended SeptemberJune 30, 2016 were $19,701 thousand and $56,661 thousand,2018, respectively. |
Net favorable development of total reserves for Property and Casualty claims occurring in prior years was $2,100 thousand$4.0 million and $4,300 thousand$0.3 million for the ninesix month periods ended SeptemberJune 30, 20172019 and 2016,2018, respectively. The favorable development for both of the ninesix month periodsperiod ended SeptemberJune 30, 2017 and 20162019 was predominantly the result of favorable severityloss trends in auto and homeowners loss emergence for accident years 2018 and prior. The favorable development for the six month period ended June 30, 2018 was predominately the result of favorable loss trends in homeowners loss emergence. This favorable development wasemergence for accident years 2015 and prior for the nine month period ended September 30, 2017 and accident years 2014 and prior for the nine month period ended September 30, 2016.prior.
Indebtedness outstanding was as follows:
| | ($ in thousands) | | September 30, 2017 | | December 31, 2016 | | June 30, 2019 | | December 31, 2018 |
Short-term debt: | | |
| | |
| | |
| | |
|
Bank Credit Facility, expires July 30, 2019 | | $ | — |
| | $ | — |
| |
Bank Credit Facility, expires June 21, 2024 | | | $ | — |
| | $ | — |
|
| | | | | | | | |
Long-term debt: | | |
| | |
| | |
| | |
|
4.50% Senior Notes, due December 1, 2025. Aggregate principal amount of $250,000 thousand less unaccrued discount of $561 thousand and $603 thousand (4.5% imputed rate) and unamortized debt issuance costs of $2,036 thousand and $2,188 thousand | | 247,403 |
| | 247,209 |
| |
4.50% Senior Notes, due December 1, 2025. Aggregate principal amount of $250,000 thousand less unaccrued discount of $458 and $488 thousand (4.5% imputed rate) and unamortized debt issuance costs of $1,661 thousand and $1,772 thousand | | | 247,881 |
| | 247,740 |
|
FHLB borrowing | | | 50,000 |
| | 50,000 |
|
Total | | | $ | 297,881 |
| | $ | 297,740 |
|
The Credit Agreement with certain financial institutions (“Bank Credit Facility”) and 4.50% Senior Notes due 2025 (“Senior(Senior Notes due 2025”)2025) and the FHLB borrowing are described in “Notes to Consolidated Financial Statements -- Note 7 -- Debt” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.2018.
Credit Agreement with Financial Institutions (Bank Credit Facility)
On June 21, 2019, the Company, as borrower, replaced its current line of credit with a new five-year Credit Agreement (Bank Credit Facility). The new Bank Credit Facility increased the amount available on this senior revolving credit facility to $225 million from $150 million. PNC Capital Markets, LLC and JPMorgan Chase Bank, N.A. served as joint leads on the new agreement, with The Northern Trust Company, U.S. Bank National Association, KeyBank National Association, Comerica Bank and Illinois National Bank participating in the syndicate. Terms and conditions of the new Bank Credit Facility are substantially consistent with the prior agreement, with an interest rate based on LIBOR plus 115 basis points.
On July 1, 2019, the Company utilized the senior revolving credit facility to partially fund the acquisition of NTA. As of August 1, 2019, the amount outstanding on the senior revolving credit facility was $135 million. The unused portion of the Bank Credit Facility is subject to a variable commitment fee, which was 0.15% on an annual basis at June 30, 2019.
The Company recognizes the cost of reinsurance premiums over the contract periods for such premiums in proportion to the insurance protection provided. Amounts recoverable from reinsurers for unpaid claims and claim settlement expenses, including estimated amounts for unsettled claims, claims incurred but not yet reported and policy benefits, are estimated in a manner consistent with the insurance liability associated with the policy. The effects of reinsurance on premiums written and contract deposits; premiums and contract charges earned; and benefits, claims and settlement expenses were as follows:
| | ($ in thousands) | | Gross Amount | | Ceded to Other Companies | | Assumed from Other Companies | | Net Amount | | Gross Amount | | Ceded to Other Companies (1) | | Assumed from Other Companies | | Net Amount |
Three months ended September 30, 2017 | | |
| | |
| | |
| | |
| |
Premiums written and contract deposits | | $ | 322,428 |
| | $ | 5,189 |
| | $ | 1,116 |
| | $ | 318,355 |
| |
Three months ended June 30, 2019 | | | |
| | |
| | |
| | |
|
Premiums written and contract deposits (2) | | | $ | 314,897 |
| | $ | 6,028 |
| | $ | 2,822 |
| | $ | 311,691 |
|
Premiums and contract charges earned | | 202,988 |
| | 5,216 |
| | 1,163 |
| | 198,935 |
| | 213,415 |
| | 8,155 |
| | 2,836 |
| | 208,096 |
|
Benefits, claims and settlement expenses | | 135,508 |
| | 1,831 |
| | 1,218 |
| | 134,895 |
| | 153,436 |
| | 2,797 |
| | 2,053 |
| | 152,692 |
|
| | | | | | | | | | | | | | | | |
Three months ended September 30, 2016 | | |
| | |
| | |
| | |
| |
Premiums written and contract deposits | | $ | 356,155 |
| | $ | 5,555 |
| | $ | 934 |
| | $ | 351,534 |
| |
Three months ended June 30, 2018 | | | |
| | |
| | |
| | |
|
Premiums written and contract deposits (2) | | | $ | 305,864 |
| | $ | 5,483 |
| | $ | 1,341 |
| | $ | 301,722 |
|
Premiums and contract charges earned | | 195,654 |
| | 5,584 |
| | 980 |
| | 191,050 |
| | 209,892 |
| | 5,505 |
| | 1,223 |
| | 205,610 |
|
Benefits, claims and settlement expenses | | 139,114 |
| | 4,642 |
| | 1,238 |
| | 135,710 |
| | 170,459 |
| | 3,330 |
| | 1,149 |
| | 168,278 |
|
| | | | | | | | | | | | | | | | |
Nine months ended September 30, 2017 | | | | | | | | | |
Premiums written and contract deposits | | $ | 940,063 |
| | $ | 16,342 |
| | $ | 2,980 |
| | $ | 926,701 |
| |
Six months ended June 30, 2019 | | | | | | | | | |
Premiums written and contract deposits (2) | | | $ | 613,990 |
| | $ | 11,876 |
| | $ | 4,971 |
| | $ | 607,085 |
|
Premiums and contract charges earned | | 603,794 |
| | 16,415 |
| | 2,996 |
| | 590,375 |
| | 426,671 |
| | 13,977 |
| | 5,187 |
| | 417,881 |
|
Benefits, claims and settlement expenses | | 450,997 |
| | 8,899 |
| | 2,772 |
| | 444,870 |
| | 295,488 |
| | 7,089 |
| | 3,677 |
| | 292,076 |
|
| | | | | | | | | | | | | | | | |
Nine months ended September 30, 2016 | | | | | | | | | |
Premiums written and contract deposits | | $ | 960,945 |
| | $ | 17,244 |
| | $ | 2,881 |
| | $ | 946,582 |
| |
Six months ended June 30, 2018 | | | | | | | | | |
Premiums written and contract deposits (2) | | | $ | 594,680 |
| | $ | 10,997 |
| | $ | 2,047 |
| | $ | 585,730 |
|
Premiums and contract charges earned | | 579,283 |
| | 17,305 |
| | 2,882 |
| | 564,860 |
| | 417,629 |
| | 11,033 |
| | 2,012 |
| | 408,608 |
|
Benefits, claims and settlement expenses | | 422,352 |
| | 21,748 |
| | 3,027 |
| | 403,631 |
| | 322,427 |
| | 12,344 |
| | 1,757 |
| | 311,840 |
|
________________
| |
(1) | Excludes the annuity reinsurance agreement accounted for under the deposit method that is discussed in Note 6. |
| |
(2) | This measure is not based on accounting principles generally accepted in the U.S. (non-GAAP). An explanation of this non-GAAP measure is contained in the Glossary of Selected Terms included as an exhibit in the Company's reports filed with the SEC. |
Note 810 - Commitments
Investment Commitments
From time to time, the Company has outstanding commitments to purchase investments and/or commitments to lend funds under bridge loans. Unfunded commitments to purchase investments were $111,265 thousand$157.4 million and $135,054 thousand$145.4 million at SeptemberJune 30, 20172019 and December 31, 2016,2018, respectively.
Note 911 - Segment Information
The Company conducts and manages its business through four segments. The three operating segments, representing the major lines of insurance business, are: Property and Casualty, primarily personal lines automobile and homeownersproperty insurance products; Retirement, primarily tax-qualified fixed and variable annuities; and Life, life insurance. The Company does not allocate the impact of corporate-level transactions to these operating segments, consistent with the basis for management’s evaluation of the results of those segments, but classifies those items in the fourth segment, Corporate and Other. In addition to ongoing transactions such as corporate debt service, net realized investment gains and losses(losses) and certain public company expenses, such items also have included corporate debt retirement costs/gains,costs, when applicable. Summarized financial information for these segments is as follows:
| | ($ in thousands) | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2017 | | 2016 | | 2017 | | 2016 | | 2019 | | 2018 | | 2019 | | 2018 |
Insurance premiums and contract charges earned | | | | | | | | | | | | | | | | |
Property and Casualty | | $ | 163,209 |
| | $ | 155,727 |
| | $ | 481,987 |
| | $ | 461,520 |
| | $ | 171,303 |
| | $ | 167,333 |
| | $ | 342,143 |
| | $ | 332,791 |
|
Retirement | | 7,393 |
| | 6,448 |
| | 20,753 |
| | 18,614 |
| | 6,931 |
| | 7,825 |
| | 15,509 |
| | 15,893 |
|
Life | | 28,333 |
| | 28,875 |
| | 87,635 |
| | 84,726 |
| | 29,862 |
| | 30,452 |
| | 60,229 |
| | 59,924 |
|
Total | | $ | 198,935 |
| | $ | 191,050 |
| | $ | 590,375 |
| | $ | 564,860 |
| | $ | 208,096 |
| | $ | 205,610 |
| | $ | 417,881 |
| | $ | 408,608 |
|
| | | | | | | | | | | | | | | | |
Net investment income | | | | | | | | | | | | | | | | |
Property and Casualty | | $ | 9,167 |
| | $ | 10,018 |
| | $ | 26,457 |
| | $ | 28,997 |
| | $ | 12,643 |
| | $ | 10,300 |
| | $ | 22,861 |
| | $ | 19,816 |
|
Retirement | | 64,340 |
| | 66,174 |
| | 192,921 |
| | 186,950 |
| | 62,684 |
| | 67,787 |
| | 127,423 |
| | 131,956 |
|
Life | | 18,999 |
| | 18,852 |
| | 56,215 |
| | 55,338 |
| | 18,324 |
| | 19,166 |
| | 36,376 |
| | 37,506 |
|
Corporate and Other | | 17 |
| | 15 |
| | 47 |
| | 44 |
| | (14 | ) | | 42 |
| | (37 | ) | | 78 |
|
Intersegment eliminations | | (203 | ) | | (212 | ) | | (615 | ) | | (644 | ) | | (179 | ) | | (194 | ) | | (365 | ) | | (391 | ) |
Total | | $ | 92,320 |
| | $ | 94,847 |
| | $ | 275,025 |
| | $ | 270,685 |
| | $ | 93,458 |
| | $ | 97,101 |
| | $ | 186,258 |
| | $ | 188,965 |
|
| | | | | | | | | | | | | | | | |
Net income (loss) | | | | | | | | | | | | | | | | |
Property and Casualty | | $ | 13,407 |
| | $ | 6,715 |
| | $ | 2,186 |
| | $ | 16,047 |
| | $ | 5,101 |
| | $ | (10,896 | ) | | $ | 20,153 |
| | $ | (1,174 | ) |
Retirement | | 13,603 |
| | 15,732 |
| | 36,933 |
| | 39,348 |
| | (25,045 | ) | | 14,141 |
| | (12,894 | ) | | 25,562 |
|
Life | | 4,788 |
| | 4,583 |
| | 14,283 |
| | 13,072 |
| | 5,239 |
| | 5,879 |
| | 8,516 |
| | 9,666 |
|
Corporate and Other | | (5,247 | ) | | (107 | ) | | (9,272 | ) | | (4,525 | ) | | 108,527 |
| | (3,207 | ) | | 110,213 |
| | (7,982 | ) |
Total | | $ | 26,551 |
| | $ | 26,923 |
| | $ | 44,130 |
| | $ | 63,942 |
| | $ | 93,822 |
| | $ | 5,917 |
| | $ | 125,988 |
| | $ | 26,072 |
|
| | ($ in thousands) | | September 30, 2017 | | December 31, 2016 | | June 30, 2019 | | December 31, 2018 |
Assets | | | | | | | | |
Property and Casualty | | $ | 1,156,959 |
| | $ | 1,110,958 |
| | $ | 1,281,344 |
| | $ | 1,236,362 |
|
Retirement | | 7,793,727 |
| | 7,449,777 |
| | 8,493,089 |
| | 7,866,969 |
|
Life | | 1,988,767 |
| | 1,912,771 |
| | 1,911,569 |
| | 1,821,351 |
|
Corporate and Other | | 135,876 |
| | 140,104 |
| | 145,022 |
| | 149,014 |
|
Intersegment eliminations | | (30,981 | ) | | (36,786 | ) | | (51,617 | ) | | (41,800 | ) |
Total | | $ | 11,044,348 |
| | $ | 10,576,824 |
| | $ | 11,779,407 |
| | $ | 11,031,896 |
|
Note 12 - Operating Leases
The Company has various operating lease agreements, primarily for real estate (claims and marketing offices in a few states) as well as for computer equipment and copier machines. Such leases have remaining lease terms of 1 years to 6 years, some of which may include options to extend the leases for up to 10 years.
The components of lease expense were as follows:
|
| | | | | | | | |
($ in thousands) | | Three Months Ended June 30, 2019 | | Six Months Ended June 30, 2019 |
Operating lease cost | | $ | 791 |
| | $ | 1,600 |
|
Short-term lease cost | | 27 |
| | 51 |
|
Total lease cost | | $ | 818 |
| | $ | 1,651 |
|
Supplemental cash flow information related to operating leases was as follows:
|
| | | | | | | | |
($ in thousands) | | Three Months Ended June 30, 2019 | | Six Months Ended June 30, 2019 |
Cash paid for amounts included in the measurement of lease liabilities | | $ | 575 |
| | $ | 1,341 |
|
Supplemental balance sheet information related to operating leases was as follows:
|
| | | | |
($ in thousands, except lease term and discount rate) | | June 30, 2019 |
Assets | | |
Right of use assets, included in Other assets | | $ | 12,692 |
|
| | |
Liabilities | | |
Operating lease liabilities, included in Other liabilities | | $ | 13,429 |
|
| | |
Weighted Average Remaining Lease Term | | 5.00 |
|
| | |
Weighted Average Discount Rate | | 4.10 | % |
Future minimum lease payments under non-cancellable operating leases as of June 30, 2019 were as follows:
|
| | | | |
($ in thousands) | | |
Year Ending December 31, | | |
2019 (excluding the six months ended June 30, 2019) | | $ | 1,448 |
|
2020 | | 3,108 |
|
2021 | | 3,028 |
|
2022 | | 2,943 |
|
2023 | | 2,246 |
|
Thereafter | | 2,111 |
|
Total future minimum lease payments | | 14,884 |
|
Less imputed interest | | (1,455 | ) |
Total | | $ | 13,429 |
|
As of June 30, 2019, the Company has no additional operating leases that have not yet commenced.
Note 13 - Supplemental Cash Flow Information
Non-cash investing activities include $2.1 billion of investments and policy loans transferred to a reinsurer as consideration paid during the second quarter of 2019 in connection with the Company’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 was insignificant for the six months ended June 30, 2019 and 2018, respectively.
Note 14 - Goodwill
The Company conducts impairment testing for goodwill at least annually, or more often if events, changes or circumstances indicate that the carrying amount may not be recoverable. See Note 1 in the Company's Annual Report on Form 10-K for the year ended 2018 for further description of impairment testing.
The annuity reinsurance transaction described in Note 6 triggered the requirement to evaluate the goodwill associated with the annuity business of the Retirement segment. For the evaluation, the fair value of the Retirement segment was measured using a discounted cash flow method. The carrying value exceeded the fair value, resulting in a $28,025 thousand non-cash impairment charge during the quarter ended June 30, 2019 which represented the entire balance of the goodwill associated with the annuity business of the Retirement segment. The impairment charge was reported as Other expense in the Consolidated Statement of Operations.
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (“MD&A”)(MD&A)
(Dollars in millions, except per share data)
Measures within this MD&A that are not based on accounting principles generally accepted in the United States (“non-GAAP”)U.S. (non-GAAP) are marked bywith an asterisk (“*”(*). the first time they are presented within this Item 2. An explanation of these measures is contained in the Glossary of Selected Terms included as an exhibitExhibit 99.1 to this Quarterly Report on Form 10-Q.
10-Q and are reconciled to the most directly comparable measures prepared in accordance with accounting principles generally accepted in the U.S. (GAAP) in the Appendix to the Company's Second Quarter 2019 Investor Supplement.
Forward-looking Information
Statements made in the following discussion that are not historical in nature are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995 and are subject to known and unknown risks, uncertainties and other factors. Horace Mann Educators Corporation ("HMEC";(HMEC; and together with its subsidiaries, the "Company"Company or "Horace Mann")Horace Mann) is an insurance holding company. Horace Mann is not under any obligation to (and expressly disclaims any such obligation to) update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. It is important to note that the Company’s actual results could differ materially from those projected in forward-looking statements due to a number of risks and uncertainties inherent in the Company’s business. For additional information regarding risks and uncertainties, see “Item 1A. Risk Factors”See Item 1A in this Quarterly Report on Form 10-Q and in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016. That discussion includes factors such as:
The impact that a prolonged economic recession may have on the Company’s investment portfolio; volume of new business2018 for automobile, homeowners, retirementadditional information regarding risks 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.uncertainties.
Executive SummaryIntroduction
The purpose of this MD&A is to provide an understanding of the Company’s consolidated results of operations and financial condition. This MD&A should be read in conjunction with Item 1 of this report.
HMEC is an insurance holding company. Through its subsidiaries, HMEC markets and underwrites personal lines of property and casualty insurance, retirement products, 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.
This MD&A begins with the Company’s consolidated financial highlights followed by consolidated results of operations, an outlook for future performance, details about critical accounting estimates and the results of operations by segment.
Consolidated Financial Highlights
|
| | | | | | | | | | | | | | | | | | | | | | |
($ in millions) | | Three Months Ended June 30, | | 2019-2018 | | Six Months Ended June 30, | | 2019-2018 |
| | 2019 | | 2018 | | Change % | | 2019 | | 2018 | | Change % |
Total revenues | | $ | 451.5 |
| | $ | 306.2 |
| | 47.5 | % | | $ | 764.7 |
| | $ | 601.7 |
| | 27.1 | % |
Net income | | 93.8 |
| | 5.9 |
| | N.M. | | 126.0 |
| | 26.1 |
| | N.M. |
Per diluted share: | | | | | | | | | | | | |
Net income | | $ | 2.24 |
| | $ | 0.14 |
| | N.M. | | $ | 3.01 |
| | $ | 0.63 |
| | N.M. |
Net investment gains (losses), after tax | | 2.74 |
| | 0.01 |
| | N.M. | | 2.88 |
| | (0.01 | ) | | N.M. |
Book value per share | | | | | | | | $ | 36.41 |
| | $ | 32.93 |
| | 10.6 | % |
Net income return on equity - last twelve months | | | | | | | | 8.6 | % | | 12.7 | % | |
|
|
Net income return on equity - annualized | | | | | | | | 18.1 | % | | 3.7 | % | |
|
|
___________________
N.M. - The Company defines increases or decreases greater than or equal to 150% as "N.M." or not meaningful.
Net Income
For the three and six month periods ended June 30, 2019, the Company's net income increased $87.9 million and $99.9 million, respectively, compared to the prior year periods primarily due to recognition of a $106.9 million after tax realized investment gain in the three month period ended SeptemberJune 30, 2017,2019. The gain was associated with the Company’stransfer of investments as consideration in connection with the reinsurance of approximately 50% of the Company's fixed annuity account balances effective April 1, 2019. The impact from the realized investment gain was partially offset by a $28.0 million goodwill impairment charge. See Item 1, Note 6 and Note 14 of the Consolidated Financial Statements for more information regarding the annuity reinsurance transaction and the goodwill impairment charge.
Net income (loss) by segment is as follows:
|
| | | | | | | | | | | | | | | | | | | | | | |
($ in millions) | | Three Months Ended June 30, | | 2019-2018 | | Six Months Ended June 30, | | 2019-2018 |
| | 2019 | | 2018 | | Change % | | 2019 | | 2018 | | Change % |
Analysis of net income (loss) by segment: | | | | | | | | |
| | |
| | |
Property and Casualty | | $ | 5.1 |
| | $ | (10.9 | ) | | 146.8 | % | | $ | 20.1 |
| | $ | (1.2 | ) | | N.M. |
Retirement | | (25.0 | ) | | 14.1 |
| | N.M. | | (12.8 | ) | | 25.5 |
| | N.M. |
Life | | 5.2 |
| | 5.9 |
| | -11.9 | % | | 8.5 |
| | 9.7 |
| | -12.4 | % |
Corporate and Other | | 108.5 |
| | (3.2 | ) | | N.M. | | 110.2 |
| | (7.9 | ) | | N.M. |
Net income | | $ | 93.8 |
| | $ | 5.9 |
| | N.M. | | $ | 126.0 |
| | $ | 26.1 |
| | N.M. |
___________________
N.M. - Not meaningful.
The net incomeloss for the Retirement segment in the three month period ended June 30, 2019 is primarily due to the $28.0 million goodwill impairment which was triggered by the annuity reinsurance transaction.
The aforementioned $106.9 million after tax realized investment gain recognized in the three month period ended June 30, 2019 associated with the annuity reinsurance transaction is reported in the results for the Corporate and Other segment.
Consolidated Results of $26.5Operations
|
| | | | | | | | | | | | | | | | | | | | | | |
($ in millions) | | Three Months Ended June 30, | | 2019-2018 | | Six Months Ended June 30, | | 2019-2018 |
| | 2019 | | 2018 | | Change % | | 2019 | | 2018 | | Change % |
Insurance premiums and contract charges earned | | $ | 208.1 |
| | $ | 205.6 |
| | 1.2 | % | | $ | 417.9 |
| | $ | 408.6 |
| | 2.3 | % |
Net investment income | | 93.5 |
| | 97.1 |
| | -3.7 | % | | 186.3 |
| | 189.0 |
| | -1.4 | % |
Net investment gains (losses) | | 146.3 |
| | 0.7 |
| | N.M. | | 153.7 |
| | (1.0 | ) | | N.M. |
Other income | | 3.6 |
| | 2.8 |
| | 28.6 | % | | 6.8 |
| | 5.1 |
| | 33.3 | % |
Total revenues | | 451.5 |
| | 306.2 |
| | 47.5 | % | | 764.7 |
| | 601.7 |
| | 27.1 | % |
| | | | | | | | | | | | |
Benefits, claims and settlement expenses | | 152.7 |
| | 168.3 |
| | -9.3 | % | | 292.1 |
| | 311.9 |
| | -6.3 | % |
Interest credited | | 53.6 |
| | 51.1 |
| | 4.9 | % | | 106.5 |
| | 101.1 |
| | 5.3 | % |
DAC amortization expense | | 31.6 |
| | 26.5 |
| | 19.2 | % | | 56.6 |
| | 53.2 |
| | 6.4 | % |
Operating expenses | | 55.3 |
| | 50.2 |
| | 10.2 | % | | 109.3 |
| | 98.4 |
| | 11.1 | % |
Interest expense | | 3.3 |
| | 3.3 |
| | — | % | | 6.6 |
| | 6.5 |
| | 1.5 | % |
Other expense | | 28.0 |
| | — |
| | N.M. | | 28.0 |
| | — |
| | N.M. |
Total benefits, losses and expenses | | 324.5 |
| | 299.4 |
| | 8.4 | % | | 599.1 |
| | 571.1 |
| | 4.9 | % |
| | | | | | | | | | | | |
Income before income taxes | | 127.0 |
| | 6.8 |
| | N.M. | | 165.6 |
| | 30.6 |
| | N.M. |
Income tax expense | | 33.2 |
| | 0.9 |
| | N.M. | | 39.6 |
| | 4.5 |
| | N.M. |
Net income | | $ | 93.8 |
| | $ | 5.9 |
| | N.M. | | $ | 126.0 |
| | $ | 26.1 |
| | N.M. |
___________________
N.M. - Not meaningful.
Insurance Premiums and Contract Charges Earned
For the three and six month periods ended June 30, 2019, insurance premiums and contract charges earned increased $2.5 million decreased $0.4and $9.3 million, respectively, compared to the prior year period including an increase in Property and Casualty net income of $6.7 million offset by a $4.9 million reduction in net realized investment gains.
For the three month periodended September 30, 2017, Property and Casualty net income increased to $13.4 million compared to $6.7 million in the prior year period. The Property and Casualty combined ratio of 95.8% improved 5.7 points compared to the prior year period. These improvements wereperiods, primarily due to an improved underlying auto loss ratio*, reflecting the impact of rate actions and continued profitability initiatives, as well as a strong underlying property loss ratio and lower expenses. Prior years' reserves continue to develop favorably; however, the favorable developmentincreases in the third quarter of $0.5 million pretax was $0.2 million pretax lower than the amount a year ago. Catastrophe activity in the third quarter of 2017 totaled $8.6 million pretax compared to $8.4 million pretax in the prior year period. Losses related to Hurricane Harvey were $5.0 million pretax and losses related to Hurricane Irma were $2.5 million pretax. The remainder, $1.2 million pretax, of catastrophe losses related to four additional events.
On an underlying basis, the third quarter 2017 auto combined ratio* of 103.4% improved 4.9 points and the property combined ratio of 79.9% improved 7.8 points as compared to the prior year period. These improvements were driven by both lower loss ratios and improved expense ratios. The underlying auto loss ratio of 74.5% improved 3.2 points compared to the prior year period as a result of an increase in earned premium due to rate actions combined with continued stabilization in auto loss trends. The underlying property loss ratio of 46.3% improved 6.6 points compared to the prior year period primarily as a result of lower non-catastrophe weather-related losses in the current quarter.
Total Property and Casualty written premiums* of $177.2 million increased 4.4% compared to the prior year period. The growth was driven primarily by rate actions which resulted in an increase in the average premium per policy for both autoautomobile and property. Policy retention
Net Investment Income
Excluding accreted net investment income on the deposit asset on reinsurance, net investment income for the three and six month periods ended June 30, 2019 declined primarily because invested assets decreased 22.2% from December 31, 2018 due to assets transferred under the annuity reinsurance transaction as well as lower than expected new money rates and prepayments that were partially offset by stronger returns on alternative investments. Investment yields continue to be impacted by the low interest rate environment of recent years. Annualized investment portfolio yield is presented in the following table:
|
| | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
Pretax yield | | 5.1% | | 5.3% | | 5.1% | | 5.1% |
After tax yield | | 4.1% | | 4.2% | | 4.1% | | 4.1% |
During the six month period ended June 30, 2019, management continued to identify and purchase investments, including a modest level of alternative investments, with attractive risk-adjusted yields relative to market conditions without venturing into asset classes or individual securities that would be inconsistent with the Company's overall conservative investment guidelines.
Net Investment Gains (Losses) - Pretax
For the three and six month periods ended June 30, 2019, net investment gains increased $145.6 million and $154.7 million, respectively, compared to the prior year periods as a result of a realized investment gain of $135.3 million recognized during the three month period ended June 30, 2019 in connection with the transfer of investments related to the aforementioned annuity reinsurance transaction. The breakdown of net investment gains (losses) by transaction type is shown in the following table:
|
| | | | | | | | | | | | | | | | |
($ in millions) | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
OTTI losses recognized in earnings | | $ | — |
| | $ | (1.2 | ) | | $ | (0.3 | ) | | $ | (1.3 | ) |
Sales and other, net | | 142.1 |
| | 1.8 |
| | 146.9 |
| | 4.0 |
|
Change in fair value - equity securities | | 3.4 |
| | (1.2 | ) | | 6.9 |
| | (6.4 | ) |
Change in fair value and gains (losses) realized on settlements - derivative instruments | | 0.8 |
| | 1.3 |
| | 0.2 |
| | 2.7 |
|
Net investment gains (losses) | | $ | 146.3 |
| | $ | 0.7 |
| | $ | 153.7 |
| | $ | (1.0 | ) |
The Company, from time to time, sells securities subsequent to the reporting date that were considered temporarily impaired at the reporting date. Such sales are due to issuer specific events occurring subsequent to the reporting date that result in a change in the Company's intent to sell an invested asset.
Other Income
For the three and six month periods ended June 30, 2019, other income increased compared to the prior year periods primarily due to inclusion of BCG brokerage fees.
Benefits, Claims and Settlement Expenses
For the three and six month periods ended June 30, 2019, benefits, claims and settlement expenses decreased $15.6 million and $19.8 million, respectively, compared to the prior year periods, driven by improved automobile and property loss ratios.
Interest Credited
For the three and six month periods ended June 30, 2019, the increase in Retirement interest credited reflected higher interest costs on Federal Home Loan Bank (FHLB) funding agreements as well as a 2.3% increase in average accumulated fixed deposits. Under the deposit method of accounting, the interest credited on the annuity reinsured block continues to be strong with autoreported. The average deferred annuity credited rate was 2.5% at June 30, 2019, excluding the reinsured block, and property policy retention rates of 83.0% and 87.6%, respectively.3.6% at June 30, 2018.
DAC Amortization Expense
For the three month period ended SeptemberJune 30, 2017, Retirement net income of $13.6 million decreased $2.1 million or 13.4% compared to the prior year period which is primarily due to a $3.4 million pretax decrease in net interest margin and a $1.0 million pretax increase in operating expenses offset by a $1.1 million pretax increase in contract charges.
For the three month period ended September 30, 2017, Life net income of $4.8 million2019, DAC amortization expense increased $0.2$5.1 million compared to the prior year period primarily due to lower operating expenses. Life insurance premiums and contract deposits*$5.1 million of $26.4 million decreased 2.9% compared toaccelerated amortization of the prior year period.
DAC asset associated with the reinsured annuity block. For the ninesix month period ended SeptemberJune 30, 2017, the Company's net income of $44.1 million decreased $19.8 million compared to a year ago reflecting a record level of catastrophe losses, as well as elevated non-catastrophe weather-related losses that occurred in the first half of the year.
For the nine month period ended September 30, 2017, Property and Casualty net income decreased to $2.2 million compared to net income of $16.0 million in the prior year period as a result of elevated catastrophe losses and non-catastrophe weather-related losses that occurred in the first half of the year. The Property and Casualty combined ratio of 106.5%2019, DAC amortization increased 4.1 points compared to a year ago. Pretax catastrophe losses were $9.8 million higher than the prior year period; favorable prior years' reserve development was $2.2 million pretax less than the prior year period.
On an underlying basis, the nine month 2017 auto loss ratio of 77.0% increased 0.5 points compared to the prior year period. For property, the underlying nine month loss ratio of 49.7% increased 6.1 points compared to the prior year period and was largely related to the impact of higher non-catastrophe weather-related losses that occurred in the first half of the year. The expense ratio for Property and Casualty of 26.7% was slightly below the prior year period.
Total Property and Casualty written premiums of $498.0 million increased 4.6% compared to the prior year period. The growth was driven primarily by rate actions which resulted in an increase in the average premium per policy for both auto and property.
For the nine month period ended September 30, 2017, Retirement net income of $36.9 million decreased $2.4$3.4 million compared to the prior year period which is primarily due to a $6.8 million pretax increase in operating expenses including costs related to the Company's continued infrastructure and strategic investments,aforementioned DAC accelerated amortization partially offset by a $2.2$3.2 million pretax increaseof favorable DAC unlocking in contract charges earnedRetirement due to market performance. For Life, DAC unlocking resulted in an immaterial change to amortization for the three and a $0.9 million pretax increase in net interest margin. The ninesix month 2017 annualized net interest spread on fixed annuity assets was 188 basis points, a decrease of 7 basis points compared to a year ago. Total Retirement annuity assets under management of $6.6 billion increased 4.9% compared to a year ago, and total cash value persistency remained strong at 89.7% for variable annuities and 92.6% for fixed annuities. Annuity deposits* of $348.9 million decreased 11.0% compared to the prior year period. The decline in annuity deposits was related to lower sales of single premium annuity products in the current year.periods ended June 30, 2019.
Operating Expenses
For the ninethree and six month periods ended June 30, 2019, increases in operating expenses were consistent with management's expectations as the current periods include $2.8 million and $5.6 million, respectively, of expenses pertaining to BCG and the prior year periods benefited from a $2.2 million legal expense recovery.
The Property and Casualty expense ratio of 26.9% for the six month period ended SeptemberJune 30, 2017, Life net income of $14.3 million increased $1.2 million compared to2019 was 0.5 points above the prior year period. Life insurance premiums and contract deposits increased 1.8%, to $79.8 million comparedperiod primarily due to the prior year period. Life persistency of 95.3%legal expense recovery noted above.
Interest Expense
For the three and six month periods ended June 30, 2019, interest expense was comparable to 12 months earlier.June 30, 2018.
Other Expense
For the three and six month periods ended June 30, 2019, other expense represents the aforementioned goodwill impairment in Retirement.
Income Tax Expense
The Company’s book valueeffective income tax rate on the Company's pretax income, including net investment gains (losses), was 23.9% and 15.0% for the six month periods ended June 30, 2019 and 2018, respectively. Income from investments in tax-advantaged securities reduced the effective income tax rates by 1.4 and 4.8 percentage points for the six month periods ended June 30, 2019 and 2018, respectively. The goodwill impairment charge in the Retirement segment increased the effective income tax rate by 3.5 percentage points at June 30, 2019.
The Company records liabilities for uncertain tax filing positions where it is more likely than not that the position will not be sustainable upon audit by taxing authorities. These liabilities are reevaluated routinely and are adjusted appropriately based on changes in facts or law. The Company has no unrecorded liabilities from uncertain tax filing positions.
At June 30, 2019, the Company's federal income tax returns for years prior to 2014 are no longer subject to examination by the IRS. Management does not anticipate any assessments for tax years that remain subject to examination to have a material effect on the Company's financial position or results of operations.
Outlook for 2019
At the time of this Quarterly Report on Form 10-Q, management estimates that 2019 full year core earnings* will be within a range of $2.05 to $2.25 per diluted share, was $34.20 at September 30, 2017,generating a core return on equity* of between 7.0% and 7.5%. This projection also reflects an overall effective tax rate of between 16% and 18%.
Within Property and Casualty, planned premium rate increases, as well as continued underwriting initiatives, are expected to improve the underlying automobile loss ratio* by about 3.0 to 3.5 points and the underlying property loss ratio* by around 3 points. For 2019, management increased the estimate used for catastrophe costs by 20% to be between $45 million and $55 million or 7.0 to 7.5 points. The expense ratio is expected to be consistent with 2018 and is expected to remain around 27%.
Net income for Retirement will decrease as a result of the recent annuity reinsurance transaction and redeployment of capital to the new Supplemental segment. Net investment income for Retirement will decline due to the lower investment levels and the new money rates are anticipated to remain below the average portfolio earned rate. In addition, expense levels will rise over prior year, offset by increases in fee income and other income due to the inclusion of BCG. As a result, net income for Retirement is anticipated to be in the range of $25 million to $27 million for the full year 2019.
Life net income is anticipated to decline 15% over prior year due to the decrease in net investment income noted above accompanied by a modest increase in mortality costs.
Net income for the new Supplemental segment is anticipated to be in the range of 6.4%$12 million to $14 million for the second half of 2019, partially offset by additional interest expense of $2 million in Corporate and Other.
As described in Critical Accounting Estimates, certain of the Company's significant accounting measurements require the use of estimates and assumptions. As additional information becomes available, adjustments may be required. Those adjustments are charged or credited to income for the period in which the adjustments are made and may impact actual results compared to management's estimates above. Additionally, see Forward-looking Information and Item 1A in this Quarterly Report on Form 10-Q and Items 1 and 1A of the Company's Annual Report on Form 10-K for the year ended December 31, 20162018 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 decrease of 4.8% compared to a year ago.significant impact on net income.
Critical Accounting PoliciesEstimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”)GAAP requires the Company's management to make estimates and assumptions based on information available at the time the consolidated financial statements are prepared. These estimates and assumptions affect the reported amounts of the Company's consolidated assets, liabilities, shareholders' equity, net income and cash flows. Certain accounting estimates are particularly sensitive because of their significance to the Company's consolidated financial statements and because of the possibility that subsequent events and available information may differ markedly from management's judgments at the time the consolidated financial statements were prepared.
Management has discussed with the Audit Committee the quality, not just the acceptability, of the Company's accounting principles as applied in its financial reporting. The discussions generally included such matters as the consistency of the Company's accounting policies and their application, and the clarity and completeness of the Company's consolidated financial statements, which include related disclosures. For the Company, areas most subject to significant management judgments include: fair value measurements, other-than-temporary impairment of
investments,Valuation of fixed maturity securities, including evaluation of other-than-temporary impairments
Evaluation of goodwill for impairment
Valuation of life and annuity deferred policy acquisition costs for investment contracts and life insurance products with account values,
Valuation of liabilities for property and casualty unpaid claims and claim expenses liabilities for future
Valuation of investment contract and life policy benefits, deferred taxes and valuation of assets and liabilities related to the defined benefit pension plan.reserves
Compared to December 31, 2016,2018, at SeptemberJune 30, 2017,2019, there were no material changes to accounting policies for areas most subject to significant management judgments identified above. In addition to disclosures in “Notesthe Notes to Consolidated Financial Statements”Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016,2018, discussion of accounting policies, including certain sensitivity information, was presented in “Management’sManagement’s Discussion and Analysis of Financial Condition and Results of Operations -- Critical Accounting Policies”Estimates in that Form 10-K.
Results of Operations by Segment
Insurance PremiumsConsolidated financial results primarily reflect the operating results of three operating segments as well as the corporate and Contract Chargesother line. These reporting segments are defined based on financial information management uses to evaluate performance and to determine the allocation of assets.
Property and Casualty
Retirement
Life
Corporate and Other
The calculations of segment data are described in more detail in Item 1, Note 14 of the Consolidated Financial Statements in the Company's Annual Report on Form 10-K for the year ended December 31, 2018. The following sections provide analysis and discussion of results of operations for each of the reporting segments as well as investment results.
Property and Casualty
The following table provides certain financial information for the Property and Casualty segment for the periods indicated.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
($ in millions) | | Three Months Ended September 30, | | Change From Prior Year | | Nine Months Ended September 30, | | Change From Prior Year |
| | 2017 | | 2016 | | Percent | | Amount | | 2017 | | 2016 | | Percent | | Amount |
Insurance premiums written and contract deposits (includes annuity and life contract deposits) | | | | | | | | | | | | | | | | |
Property and Casualty | | $ | 177.2 |
| | $ | 169.8 |
| | 4.4 | % | | $ | 7.4 |
| | $ | 498.0 |
| | $ | 476.3 |
| | 4.6 | % | | $ | 21.7 |
|
Retirement (annuity) | | 114.8 |
| | 154.6 |
| | -25.7 | % | | (39.8 | ) | | 348.9 |
| | 391.9 |
| | -11.0 | % | | (43.0 | ) |
Life | | 26.4 |
| | 27.2 |
| | -2.9 | % | | (0.8 | ) | | 79.8 |
| | 78.4 |
| | 1.8 | % | | 1.4 |
|
Total | | $ | 318.4 |
| | $ | 351.6 |
| | -9.4 | % | | $ | (33.2 | ) | | $ | 926.7 |
| | $ | 946.6 |
| | (2.1 | )% | | $ | (19.9 | ) |
| | | | | | | | | | | | | | | | |
Insurance premiums and contract charges earned (excludes annuity and life contract deposits) | | | | | | | | | | | | | | | | |
Property and Casualty | | $ | 163.2 |
| | $ | 155.7 |
| | 4.8 | % | | $ | 7.5 |
| | $ | 482.0 |
| | $ | 461.5 |
| | 4.4 | % | | $ | 20.5 |
|
Retirement (annuity) | | 7.5 |
| | 6.4 |
| | 17.2 | % | | 1.1 |
| | 20.8 |
| | 18.6 |
| | 11.8 | % | | 2.2 |
|
Life | | 28.3 |
| | 29.0 |
| | -2.4 | % | | (0.7 | ) | | 87.6 |
| | 84.8 |
| | 3.3 | % | | 2.8 |
|
Total | | $ | 199.0 |
| | $ | 191.1 |
| | 4.1 | % | | $ | 7.9 |
| | $ | 590.4 |
| | $ | 564.9 |
| | 4.5 | % | | $ | 25.5 |
|
|
| | | | | | | | | | | | | | | | | | | | | | |
($ in millions, unless otherwise indicated) | | Three Months Ended June 30, | | 2019-2018 | | Six Months Ended June 30, | | 2019-2018 |
| | 2019 | | 2018 | | Change % | | 2019 | | 2018 | | Change % |
Financial Data: | | | | | | | | |
| | |
| | |
Premiums written*: | | | | | | | | | | | | |
Automobile | | $ | 114.6 |
| | $ | 114.6 |
| | — | % | | $ | 231.4 |
| | $ | 229.5 |
| | 0.8 | % |
Property and other | | 59.7 |
| | 58.4 |
| | 2.2 | % | | 104.6 |
| | 102.9 |
| | 1.7 | % |
Total premiums written | | 174.3 |
| | 173.0 |
| | 0.8 | % | | 336.0 |
| | 332.4 |
| | 1.1 | % |
Change in unearned insurance premiums | | (3.0 | ) | | (5.7 | ) | |
|
| | 6.1 |
| | 0.4 |
| |
|
Total insurance premiums earned | | 171.3 |
| | 167.3 |
| | 2.4 | % | | 342.1 |
| | 332.8 |
| | 2.8 | % |
Incurred claims and claims expenses: | | | | | | | | | | | | |
Claims occurring in the current year | | 134.4 |
| | 147.0 |
| | -8.6 | % | | 253.2 |
| | 268.0 |
| | -5.5 | % |
Prior years' reserve development | | 2.0 |
| | — |
| | N.M. | | 4.0 |
| | 0.3 |
| | N.M. |
Total claims and claim expenses incurred | | 132.4 |
| | 147.0 |
| | -9.9 | % | | 249.2 |
| | 267.7 |
| | -6.9 | % |
Operating expenses, including DAC amortization | | 45.4 |
| | 44.8 |
| | 1.3 | % | | 91.9 |
| | 87.9 |
| | 4.6 | % |
Underwriting gain (loss) | | (6.5 | ) | | (24.5 | ) | | 73.5 | % | | 1.0 |
| | (22.8 | ) | | 104.4 | % |
Net investment income | | 12.7 |
| | 10.3 |
| | 23.3 | % | | 22.9 |
| | 19.8 |
| | 15.7 | % |
Income (loss) before income taxes | | 6.6 |
| | (13.7 | ) | | 148.2 | % | | 24.4 |
| | (2.5 | ) | | N.M. |
Net income (loss)/core earnings* | | 5.1 |
| | (10.9 | ) | | 146.8 | % | | 20.1 |
| | (1.2 | ) | | N.M. |
| | | | | | | | | | | | |
Operating Statistics: | | | | | | | | |
| | |
| | |
Automobile | | | | | | | | | | | | |
Loss and loss adjustment expense ratio | | 73.8 | % | | 82.0 | % | | -8.2 | pts | | 72.3 | % | | 79.1 | % | | -6.8 | pts |
Expense ratio | | 26.6 | % | | 26.9 | % | | -0.3 | pts | | 26.9 | % | | 26.3 | % | | 0.6 | pts |
Combined ratio: | | 100.4 | % | | 108.9 | % | | -8.5 | pts | | 99.2 | % | | 105.4 | % | | -6.2 | pts |
Prior years' reserve development | | -0.9 | % | | — | % | | -0.9 | pts | | -0.9 | % | | — | % | | -0.9 | pts |
Catastrophes | | 1.9 | % | | 3.3 | % | | -1.4 | pts | | 1.3 | % | | 2.0 | % | | -0.7 | pts |
Underlying combined ratio* | | 99.4 | % | | 105.6 | % | | -6.2 | pts | | 98.8 | % | | 103.4 | % | | -4.6 | pts |
Property | | | | | | | | | | | | |
Loss and loss adjustment expense ratio | | 84.8 | % | | 100.4 | % | | -15.6 | pts | | 73.9 | % | | 83.3 | % | | -9.4 | pts |
Expense ratio | | 26.6 | % | | 26.7 | % | | -0.1 | pts | | 27.1 | % | | 26.9 | % | | 0.2 | pts |
Combined ratio: | | 111.4 | % | | 127.1 | % | | -15.7 | pts | | 101.0 | % | | 110.2 | % | | -9.2 | pts |
Prior years' reserve development | | -1.8 | % | | — | % | | -1.8 | pts | | -1.9 | % | | -0.3 | % | | -1.6 | pts |
Catastrophes | | 36.8 | % | | 43.3 | % | | -6.5 | pts | | 27.6 | % | | 30.3 | % | | -2.7 | pts |
Underlying combined ratio* | | 76.4 | % | | 83.8 | % | | -7.4 | pts | | 75.3 | % | | 80.2 | % | | -4.9 | pts |
| | | | | | | | | | | | |
Policies in force (in thousands) | | | | | | | | |
| | |
| | |
Automobile (1) | | | | | | | | 448 |
| | 471 |
| | -4.9 | % |
Property | | | | | | | | 198 |
| | 203 |
| | -2.5 | % |
Total | | | | | | | | 646 |
| | 674 |
| | -4.2 | % |
___________________
NumberN.M. - Not meaningful.
(1) June 30, 2019 includes assumed policies in force of Policies and Contracts in Force4.
(actual counts)
|
| | | | | | |
| | September 30, 2017 | | December 31, 2016 | | September 30, 2016 |
Property and Casualty | | | | | | |
Automobile | | 482,035 | | 484,915 | | 486,229 |
Property | | 217,377 | | 220,137 | | 221,094 |
Total | | 699,412 | | 705,052 | | 707,323 |
Retirement | | 221,309 | | 219,105 | | 215,445 |
Life | | 196,978 | | 197,937 | | 197,792 |
For the three and six month periodperiods ended SeptemberJune 30, 2017, the Company’s premiums written2019, core earnings* increased $16.0 million and contract deposits of $318.4$21.3 million, decreased $33.2 million, or 9.4%, primarily as a result of a decline in annuity deposits due to lower sales of single premium annuity products. The Company’s premiums and contract charges earned increased $7.9 million, or 4.1%,respectively, compared to the prior year period, primarily due to increasesperiods. These reflect 7.1 points of improvement in average premium per policy for both homeowners and automobile.
Totalthe Property and Casualty premiums written increased 4.6%, or $21.7 million,combined ratio year to date due to improved underwriting results, lower catastrophe losses and favorable prior years' reserve development.
On a reported basis, the improvement in the first nine monthsautomobile combined ratio for the six month period ended June 30, 2019 was mainly attributed to 5.2 points of 2017,improvement in the underlying loss ratio* due to rate actions combined with continued stabilization in auto loss trends. The reported property combined ratio improved for the six month period ended June 30, 2019, reflecting an improvement in the underlying loss ratio of 5.1 points as well as a 2.7 point improvement due to lower catastrophe losses.
Rate actions were the primary factor for the slight increase in total premiums written* for the three and six month periods ended June 30, 2019 compared to the prior year period, primarily due to increases in average written premium per policy for both homeowners and automobile.periods. For 2017,2019, the Company’sCompany's full year rate plan anticipates low-doublelow-single digit average rate increases for automobile and mid-single digit average rate increases for homeowners (including states with no rate actionsactions) for both automobile and homeowners);property; average approved rate changes during the first ninesix months of 20172019 were 8.7%5.3% for automobile and 4.3%4.6% for homeowners.
Based on policies in force, the current year automobile 12 month retention rate for new and renewal policies was 83.0% compared to 83.5% at September 30, 2016, with the decrease due to recent rate and underwriting actions. The current year homeowner 12 month retention rate for new and renewal policies was 87.6% at September 30, 2017 compared to 87.8% at September 30, 2016 with the decrease due to recent rate and underwriting actions.property.
Automobile premiums written increased 5.9%, or $18.8 million, comparedwritten* was comparable to the first nine months of 2016.three and six month periods ended June 30, 2018. In the first ninesix months of 2017,2019, the average written premium per policy and average earned premium per policy increased approximately 6.3%5.8% and 5.5%6.2%, respectively, compared to the prior year period. TheFor automobile, the number of educator policies has been stable relative to overall automobile policies as educators represented approximately 85%85.3%, 85.4% and 85.4% of the automobile policies in force at Septemberas of June 30, 2017,2019, December 31, 20162018 and SeptemberJune 30, 2016.2018, respectively. Based on policies in force, the automobile 12 month retention rate for new and renewal policies was 81.3% compared to 82.6% at June 30, 2019 and 2018, respectively, with the decrease due to recent rate and underwriting actions.
HomeownersProperty and other premiums writtenwritten* increased 1.7%, or $2.7 million,slightly compared to the first nine months of 2016.three and six month periods ended June 30, 2018. While the number of homeownersproperty policies in force has declined, the average written premium per policy and average earned premium per policy increased approximately 2.0%5.2% and 3.2%4.3%, respectively, in the first ninesix months of 20172019 compared to the prior year period. TheFor property, the number of educator policies has been stable relative to overall property policies as educators represented approximately 82%82.5%, 82.4% and 82.4% of the homeownersproperty policies in force at Septemberas of June 30, 2017,2019, December 31, 20162018, and SeptemberJune 30, 2016.2018, respectively. The number of educator policiesproperty 12 month new and total policies has been,renewal policy retention rate was 87.7% and may continue to be, impacted by the Company’s risk mitigation programs, including actions in catastrophe-prone coastal areas, involving policies of both educators88.0% at June 30, 2019 and non-educators.2018, respectively.
The Company continues to evaluate and implement actions to further mitigate its risk exposure in hurricane-prone areas, as well as othercatastrophe-prone areas of the country. 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.
For the nine month period ended September 30, 2017, total annuity deposits received by Retirement decreased 11.0%, or $43.0 million, compared to the prior year period. For the first nine months of 2017, the decrease reflected a 1.1% increase in recurring deposit receipts and a 18.8% decrease in single premium and rollover deposit receipts.For the nine month period ended September 30, 2017, new deposits to fixed accounts of $221.2 million decreased 19.4%, or $53.1 million, and new deposits to variable accounts of $127.7 million increased 8.6%, or $10.1 million, compared to the prior year period.
Retirement
Total annuity accumulated value on deposit of $6.6 billion at September 30, 2017 increased 4.9% compared to a year earlier, reflecting the increase from new deposits received, market appreciation as well as favorable retention. Accumulated value retention
The following table provides certain information for the variable annuity option was 89.7% and 94.6%Retirement segment for the 12 month periods ended September 30, 2017 and 2016, respectively; fixed annuity retention was 92.6% and 94.6% forindicated.
|
| | | | | | | | | | | | | | | | | | | | | | | |
($ in millions, unless otherwise indicated) | | Three Months Ended June 30, | | 2019-2018 | | Six Months Ended June 30, | | 2019-2018 |
| | 2019 | | 2018 | | Change % | | 2019 | | 2018 | | Change % |
Financial Data: | | | | | | | | |
| | |
| | |
Contract charges earned | | $ | 6.9 |
| | $ | 7.9 |
| | -12.7 | % | | $ | 15.5 |
| | $ | 15.9 |
| | -2.5 | % |
Net investment income | | 62.7 |
| | 67.8 |
| | -7.5 | % | | 127.4 |
| | 132.0 |
| | -3.5 | % |
Interest credited | | 42.3 |
| | 39.9 |
| | 6.0 | % | | 84.0 |
| | 78.6 |
| | 6.9 | % |
Net interest margin without net investment gains (losses) | | 21.5 |
| | 27.9 |
| | -22.9 | % | | 44.5 |
| | 53.4 |
| | -16.7 | % |
Net interest margin - Reinsured block | | (1.1 | ) | | — |
| | N.M. | | (1.1 | ) | | — |
| | N.M. |
Mortality loss and other reserve charges | | 1.2 |
| | 1.4 |
| | -14.3 | % | | 1.8 |
| — |
| 3.3 |
| | -45.5 | % |
DAC amortization expense, excluding unlocking | | 4.3 |
| | 4.8 |
| | -10.4 | % | | 9.2 |
| | 9.6 |
| | -4.2 | % |
DAC unlocking | | 5.6 |
| | 0.2 |
| | N.M. | | 3.6 |
| | 0.4 |
| | N.M. |
Operating expenses | | 15.4 |
| | 13.9 |
| | 10.8 | % | | 31.3 |
| | 28.3 |
| | 10.6 | % |
Other expense - goodwill impairment | | 28.0 |
| | — |
| | N.M. | | 28.0 |
| | — |
| | N.M. |
Income (loss) before income taxes | | (24.8 | ) | | 17.2 |
| | N.M. | | (10.2 | ) | | 31.2 |
| | -132.7 | % |
Net income (loss) | | (25.0 | ) | | 14.1 |
| | N.M. | | (12.8 | ) | | 25.5 |
| | N.M. |
Core earnings* | | 3.0 |
| | 14.1 |
| | -78.7 | % | | 15.2 |
| | 25.5 |
| | -40.4 | % |
Operating Statistics: | | | | | | | | | | | | |
Annuity sales deposits | | | | | | | | | | | | |
Variable | | $ | 54.1 |
| | $ | 50.7 |
| | 6.7 | % | | $ | 102.9 |
| | $ | 97.5 |
| | 5.5 | % |
Fixed | | 54.9 |
| | 49.5 |
| | 10.9 | % | | 113.4 |
| | 101.5 |
| | 11.7 | % |
Total | | 109.0 |
| | 100.2 |
| | 8.8 | % | | 216.3 |
| | 199.0 |
| | 8.7 | % |
Single | | 55.8 |
| | 46.9 |
| | 19.0 | % | | 111.7 |
| | 95.5 |
| | 17.0 | % |
Recurring | | 53.2 |
| | 53.3 |
| | -0.2 | % | | 104.6 |
| | 103.5 |
| | 1.1 | % |
Total | | 109.0 |
| | 100.2 |
| | 8.8 | % | | 216.3 |
| | 199.0 |
| | 8.7 | % |
Assets under administration (AUA) | | | | | | | | | | | | |
Annuity assets under management (1) | | | | | |
|
| | 4,170.3 |
| | 6,851.7 |
| | -39.1 | % |
Broker and advisory assets under administration (2) | | | | | |
|
| | 2,236.0 |
| | 300.5 |
| | N.M. |
Recordkeeping assets under administration (2) | | | | | |
|
| | 1,395.1 |
| | — |
| | N.M. |
Total | |
|
| |
|
| |
|
| | 7,801.4 |
| | 7,152.2 |
| | 9.1 | % |
Persistency | | | | | | | | | | | | |
Variable annuities | | | | | |
|
| | 94.3 | % | | 94.6 | % | | -0.3 | pts |
Fixed annuities | | | | | |
|
| | 93.9 | % | | 94.4 | % | | -0.5 | pts |
Total | | | | | |
|
| | 94.0 | % | | 94.5 | % | | -0.5 | pts |
Annuity contracts in force | | | | | |
|
| | 227 |
| | 224 |
| | 1.3 | % |
Fixed spread - YTD annualized (basis points) | | | | | |
|
| | 175 |
| | 181 |
| | -6bps |
|
___________________
N.M. - Not meaningful.
| |
(1) | Amount reported as of June 30, 2019 excludes $691.6 of assets under management held under modified coinsurance reinsurance. |
(2) 2019 includes the respective periods. The accumulated value retention for both variable and fixed annuities was impacted by the transferresults of the Company's 401(k) assets to a third-party provider that occurred during the first half of 2017.
Variable annuity accumulated balances of $2.1 billion at September 30, 2017 increased 9.5% compared to September 30, 2016, as positive impacts of deposits and favorable financial market performance offset withdrawals and net transfers to the guaranteed interest rate fixed account option. Compared to the nine month period ended September 30, 2016, Retirement contract charges earned increased 11.8%, or $2.2 million.
Life premiums and contract deposits for the nine month period ended September 30, 2017 increased 1.8%, or $1.4 million, compared to the prior year period. The ordinary life insurance in force lapse ratio was 4.7% for the 12 months ended September 30, 2017 compared to 4.1% for the 12 month period ended September 30, 2016.
BCG acquired on January 2, 2019.
Sales*
For the first nine months of 2017, Property and Casualty new annualized sales premiums increased 6.6% compared to the first nine months of 2016, as 6.9%, or $4.6 million, growth in new automobile sales was accompanied by growth in homeowners sales of 5.2%, or $0.7 million, compared to the prior year period.
During the second quarter of 2017, the Company introduced Department of Labor compliant annuity products featuring a level commissions structure and flexibility to move between products without surrender charges. The Company continues to focus on agent training and marketing programs which emphasize retirement planning. Annuity sales by Horace Mann’s Exclusive Distributors decreased 9.2% compared to the first nine months of 2016. Sales from the Independent Agent distribution channel, which represent approximately 7.3% of total annuity sales in the first nine months of 2017, which are largely single premium and rollover annuity deposits, decreased approximately 29.0% compared to a year earlier. As a result, total Horace Mann annuity sales from the combined distribution channels decreased 11.0%, or $43.0 million, compared to the first nine months of 2016. It should be noted that historically, reported annuity sales for HM products were determined based on annualized new recurring deposits as well as single deposits/rollovers. Effective January 1, 2017, reported annuity sales are now determined based on total recurring deposits as well as single deposits/rollovers. All historical annuity sales information presented has been revised to conform to the new reporting methodology.
The Company’s introduction of new educator-focused portfolios of term and whole life products in recent years, including a single premium whole life product, as well as the Company’s Indexed Universal Life (“IUL”) product, have contributed to an increase in sales of proprietary life products. For the first nine months of 2017, sales of Horace Mann’s proprietary life insurance products totaled $11.6 million, representing an increase of 8.4%, or $0.9 million, compared to the prior year period, including an increase of $1.4 million for single premium sales.
Distribution
At September 30, 2017, there was a combined total of 694 Exclusive Distributors, compared to 683 at December 31, 2016 and 681 at September 30, 2016. The Company continues to expect higher quality standards for Exclusive Distributors to focus on improving both customer experience and agent productivity in their respective territories. The dedicated sales force is supported by the Company’s customer contact center which provides a means for educators to begin their experience directly with the Company, if that is their preference. The customer contact center is also able to assist educators in territories which are not currently served by Exclusive Distributors.
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 274 authorized agents at September 30, 2017. During the nine month period ended September 30, 2017, this channel generated $25.5 million in annuity sales for the Company compared to $35.9 million for the prior year period, with the new business primarily comprised of single and rollover deposit business in both periods.
Net Investment Income
For the three and ninesix month periods ended SeptemberJune 30, 2017, net investment income of $92.32019, core earnings* decreased $11.1 million and $275.0$10.3 million, decreased 2.7% and increased 1.6% respectively, as compared to the prior year periods reflecting higherlower net investment income and accelerated amortization of the DAC asset balances inassociated with the Retirement segmentreinsured block partially offset by favorable benefits expense from mortality. The current periods also include higher operating expenses from the impactinclusion of the current low interest rate environment. Average invested assets increased 4.8% over the 12 months ended September 30, 2017. The average pretax yield on the total investment portfolio for the nine month period ended September 30, 2017 of 5.1% (3.4% after tax) was comparable to the prior year period. During the nine month period ended September 30, 2017, 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.
BCG.
Net Realized Investment GainsAs a result of the annuity reinsurance transaction, the Company impaired goodwill associated with the annuity business of the Retirement segment and Losses (Pretax)
For the three month period ended September 30, 2017, net realized investment losses were $3.5recorded a non-cash impairment charge of $28.0 million compared to net realized investment gains of $4.0 million in the prior year period. The net realized investment losses for the three month period ended September 30, 2017 included $5.7 million of gross realized gains on disposal of securities offset by $3.1 million of gross realized losses primarily on disposal of securities and expiration of call options during the period and $6.1 million of charges for other-than-temporary impairment (“OTTI”) recorded primarily on fixed maturity securities in the construction sector.
For the nine month periodquarter ended SeptemberJune 30, 2017, net realized investment losses of $1.7 million included $18.6 million of gross realized gains on disposal of securities offset by $7.8 million of gross losses realized primarily on disposal of securities and expiration of call options during the period and $12.5 million of OTTI charges recorded on certain equity and fixed maturity securities.
For the nine month period ended September 30, 2016, net realized investment gains of $6.9 million included $19.2 million of gross realized gains on disposal of securities partially offset by $4.9 million of gross losses realized primarily on disposal of securities during the period and $7.4 million of OTTI charges recorded largely on Puerto Rico and energy sector fixed maturity securities, as well as some equity securities.
The Company, from time to time, sells securities subsequent to the balance sheet date that were considered temporarily impaired at the balance sheet date. Such sales are due to issuer specific events occurring subsequent to the balance sheet date that result in a change in the Company’s intent to sell an invested asset.
Fixed Maturity and Equity Securities Portfolios
The table below presents the Company’s fixed maturity and equity securities portfolios by major asset class, including the ten largest sectors of the Company’s corporate bond holdings (based on fair value). Compared to December 31, 2016, credit spreads were tighter across most asset classes and U.S. Treasury rates declined, which resulted in higher net unrealized investment gains in the fixed maturity securities portfolio at September 30, 2017.
|
| | | | | | | | | | | | | | | |
($ in millions) | | September 30, 2017 |
| | Number of Issuers | | Fair Value | | Amortized Cost or Cost | | Pretax Net Unrealized Investment Gain (Loss) |
Fixed maturity securities | | |
| | |
| | |
| | |
|
Corporate bonds | | |
| | |
| | |
| | |
|
Banking & Finance | | 119 |
| | $ | 704.4 |
| | $ | 661.9 |
| | $ | 42.5 |
|
Insurance | | 56 |
| | 284.5 |
| | 255.4 |
| | 29.1 |
|
Energy (1) | | 58 |
| | 232.7 |
| | 217.8 |
| | 14.9 |
|
Real Estate | | 42 |
| | 184.6 |
| | 175.8 |
| | 8.8 |
|
Technology | | 34 |
| | 180.6 |
| | 172.0 |
| | 8.6 |
|
HealthCare, Pharmacy | | 51 |
| | 163.1 |
| | 152.3 |
| | 10.8 |
|
Utilities | | 42 |
| | 153.8 |
| | 134.5 |
| | 19.3 |
|
Transportation | | 37 |
| | 150.2 |
| | 142.8 |
| | 7.4 |
|
Telecommunications | | 26 |
| | 110.9 |
| | 102.6 |
| | 8.3 |
|
Food and Beverage | | 23 |
| | 91.1 |
| | 87.2 |
| | 3.9 |
|
All other corporates (2) | | 215 |
| | 565.8 |
| | 533.0 |
| | 32.8 |
|
Total corporate bonds | | 703 |
| | 2,821.7 |
| | 2,635.3 |
| | 186.4 |
|
Mortgage-backed securities | | |
| | |
| | |
| | |
|
U.S. Government and federally sponsored agencies | | 229 |
| | 420.4 |
| | 391.4 |
| | 29.0 |
|
Commercial (3) | | 125 |
| | 535.1 |
| | 531.4 |
| | 3.7 |
|
Other | | 28 |
| | 70.1 |
| | 69.0 |
| | 1.1 |
|
Municipal bonds (4) | | 378 |
| | 1,842.2 |
| | 1,669.3 |
| | 172.9 |
|
Government bonds | | | | | | | | |
U.S. | | 38 |
| | 671.0 |
| | 653.2 |
| | 17.8 |
|
Foreign | | 15 |
| | 100.2 |
| | 93.8 |
| | 6.4 |
|
Collateralized debt obligations (5) | | 87 |
| | 522.4 |
| | 517.4 |
| | 5.0 |
|
Asset-backed securities | | 101 |
| | 647.5 |
| | 633.6 |
| | 13.9 |
|
Total fixed maturity securities | | 1,704 |
| | $ | 7,630.6 |
| | $ | 7,194.4 |
| | $ | 436.2 |
|
| | | | | | | | |
Equity securities | | |
| | |
| | |
| | |
|
Non-redeemable preferred stocks | | 14 |
| | $ | 64.0 |
| | $ | 61.5 |
| | $ | 2.5 |
|
Common stocks | | 198 |
| | 74.7 |
| | 58.7 |
| | 16.0 |
|
Closed-end fund | | 1 |
| | 20.6 |
| | 20.0 |
| | 0.6 |
|
Total equity securities | | 213 |
| | $ | 159.3 |
| | $ | 140.2 |
| | $ | 19.1 |
|
| | | | | | | | |
Total | | 1,917 |
| | $ | 7,789.9 |
| | $ | 7,334.6 |
| | $ | 455.3 |
|
| |
(1) | At September 30, 2017, the fair value amount included $14.0 million of securities which were non-investment grade. |
| |
(2) | The All other corporates category contains 18 additional industry sectors. Natural gas, broadcasting and media, consumer products, gaming, lodging and dining, retail and metal and mining represented $408.7 million of fair value at September 30, 2017, with the remaining 12 sectors each representing less than $32.7 million. |
| |
(3) | At September 30, 2017, 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 39% 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 September 30, 2017. |
| |
(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 September 30, 2017. |
At September 30, 2017, the Company’s diversified fixed maturity securities portfolio consisted of 2,627 investment positions, issued by 1,704 entities, and totaled approximately $7.6 billion in fair value. This portfolio was 96.0% investment grade, based on fair value, with an average quality rating of A+. The Company’s investment guidelines target single corporate issuer concentrations to 0.5% of invested assets for “AA” or “AAA” rated securities, 0.35% of invested assets for “A” or “BBB” rated securities, and 0.2% of invested assets for non-investment grade securities.
The following table presents the composition and fair value of the Company’s fixed maturity and equity securities portfolios by rating category. At September 30, 2017, 95.0% of these combined portfolios were investment grade, based on fair value, with an overall average quality rating of A+. The Company has classified the entire fixed maturity and equity securities portfolios as available for sale, which are carried at fair value.
Rating of Fixed Maturity and Equity Securities (1)
|
| | | | | | | | | | | | | | |
($ in millions) | | Percent of Portfolio | | | | |
| | Fair Value | | September 30, 2017 |
| | December 31, 2016 | | September 30, 2017 | | Fair Value | | Amortized Cost or Cost |
Fixed maturity securities | | |
| | |
| | |
| | |
|
AAA | | 8.3 | % | | 7.4 | % | | $ | 563.1 |
| | $ | 544.6 |
|
AA (2) | | 35.5 |
| | 37.3 |
| | 2,843.3 |
| | 2,690.2 |
|
A | | 23.6 |
| | 24.2 |
| | 1,845.0 |
| | 1,714.8 |
|
BBB | | 28.4 |
| | 27.1 |
| | 2,071.9 |
| | 1,951.0 |
|
BB | | 2.4 |
| | 2.4 |
| | 187.0 |
| | 181.5 |
|
B | | 1.0 |
| | 0.8 |
| | 64.3 |
| | 63.1 |
|
CCC or lower | | 0.2 |
| | 0.1 |
| | 4.9 |
| | 4.9 |
|
Not rated (3) | | 0.6 |
| | 0.7 |
| | 51.1 |
| | 44.3 |
|
Total fixed maturity securities | | 100.0 | % | | 100.0 | % | | $ | 7,630.6 |
| | $ | 7,194.4 |
|
Equity securities | | |
| | |
| | |
| | |
|
AAA | | — |
| | — |
| | — |
| | — |
|
AA | | — |
| | — |
| | — |
| | — |
|
A | | — |
| | — |
| | — |
| | — |
|
BBB | | 35.3 | % | | 40.2 | % | | $ | 64.0 |
| | $ | 61.5 |
|
BB | | — |
| | — |
| | — |
| | — |
|
B | | — |
| | — |
| | — |
| | — |
|
CCC or lower | | — |
| | — |
| | — |
| | — |
|
Not rated | | 64.7 |
| | 59.8 |
| | 95.3 |
| | 78.7 |
|
Total equity securities | | 100.0 | % | | 100.0 | % | | $ | 159.3 |
| | $ | 140.2 |
|
| | | | | | | | |
Total | | |
| | |
| | $ | 7,789.9 |
| | $ | 7,334.6 |
|
| |
(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 September 30, 2017, the AA rated fair value amount included $671.0 million of U.S. Government and federally sponsored agency securities and $551.4 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 September 30, 2017, the fixed maturity and equity securities portfolios had a combined $25.8 million pretax of gross unrealized investment losses on $1,245.0 million of fair value related to 470 positions. Of the investment positions (fixed maturity and equity securities) with gross unrealized investment losses, 3 were trading below 80% of the carrying value at September 30, 2017 and were not considered other-than-temporarily impaired. These positions had fair value of $1.5 million, representing less than 0.1% of the Company’s total investment portfolio at fair value, and had a gross unrealized investment loss of $0.7 million.
The Company views the gross unrealized investment losses of all of the securities at September 30, 2017 as temporary. Future changes in circumstances related to these and other securities could require subsequent recognition of OTTI.
Benefits, Claims and Settlement Expenses
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
($ in millions) | | Three Months Ended September 30, | | Change From Prior Year | | Nine Months Ended September 30, | | Change From Prior Year |
| | 2017 | | 2016 | | Percent | | Amount | | 2017 | | 2016 | | Percent | | Amount |
Property and Casualty | | $ | 114.9 |
| | $ | 116.0 |
| | -0.9 | % | | $ | (1.1 | ) | | $ | 384.9 |
| | $ | 347.0 |
| | 10.9 | % | | $ | 37.9 |
|
Retirement | | 1.6 |
| | 1.4 |
| | 14.3 | % | | 0.2 |
| | 4.0 |
| | 3.1 |
| | 29.0 | % | | 0.9 |
|
Life | | 18.4 |
| | 18.3 |
| | 0.5 | % | | 0.1 |
| | 56.0 |
| | 53.5 |
| | 4.7 | % | | 2.5 |
|
Total | | $ | 134.9 |
| | $ | 135.7 |
| | -0.6 | % | | $ | (0.8 | ) | | $ | 444.9 |
| | $ | 403.6 |
| | 10.2 | % | | $ | 41.3 |
|
| | | | | | | | | | | | | | | | |
Property and Casualty catastrophe losses, included above | | $ | 8.6 |
| | $ | 8.4 |
| | 2.4 | % | | $ | 0.2 |
| | $ | 58.2 |
| | $ | 48.4 |
| | 20.2 | % | | $ | 9.8 |
|
Property and Casualty Claims and Claim Expenses (“losses”)
|
| | | | | | | | | | | | | | | | |
($ in millions) | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
Incurred claims and claim expenses: | | |
| | |
| | | | |
Claims occurring in the current year | | $ | 115.4 |
| | $ | 116.7 |
| | $ | 387.0 |
| | $ | 351.3 |
|
Decrease in estimated reserves for claims occurring in prior years (2) | | (0.5 | ) | | (0.7 | ) | | (2.1 | ) | | (4.3 | ) |
Total claims and claim expenses incurred | | $ | 114.9 |
| | $ | 116.0 |
| | $ | 384.9 |
| | $ | 347.0 |
|
| | | | | | | | |
Property and Casualty loss ratio: | | |
| | |
| | | | |
Total | | 70.4 | % | | 74.5 | % | | 79.8 | % | | 75.2 | % |
Effect of catastrophe costs, included above (1) | | 5.3 | % | | 5.3 | % | | 12.0 | % | | 10.5 | % |
Effect of prior years’ reserve development, included above (2) | | -0.3 | % | | -0.4 | % | | -0.4 | % | | -0.9 | % |
|
| | | | | | | | |
(1) Property and Casualty catastrophe losses were incurred as follows:
|
| | 2017 | | 2016 |
Three months ended | | | | |
March 31 | | $ | 17.2 |
| | $ | 12.7 |
|
June 30 | | 32.4 |
| | 27.3 |
|
September 30 | | 8.6 |
| | 8.4 |
|
Total year-to-date | | $ | 58.2 |
| | $ | 48.4 |
|
(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. |
| | 2017 | | 2016 |
Three months ended | | | | |
March 31 | | $ | (1.0 | ) | | $ | (2.0 | ) |
June 30 | | (0.6 | ) | | (1.6 | ) |
September 30 | | (0.5 | ) | | (0.7 | ) |
Total year-to-date | | $ | (2.1 | ) | | $ | (4.3 | ) |
2019.
For the three and six month periodperiods ended SeptemberJune 30, 2017, the Company's benefits, claims and settlement expenses decreased $0.8 million, or 0.6%,2019, contract deposits increased compared to the prior year period.
For the nine month period ended September 30, 2017, the Company's benefits, claims and settlement expenses increased $41.3 million or 10.2%, compared to the prior year period primarilyperiods, reflecting elevated catastrophe losses and non-catastrophe weather-related lossesincreases in Property and Casualty that occurred in the first half of the year.
For the nine month period ended September 30, 2017, the favorable development of prior years’ Property and Casualty reserves of $2.1 million 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. At September 30, 2017,
the favorable development was predominantly the result of favorable severity trends in the homeowners loss emergence for accident years 2015 and prior.
For the nine month period ended September 30, 2016, the favorable development of prior years’ Property and Casualty reserves of $4.3 million 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. At September 30, 2016, the favorable development was predominantly the result of favorable severity trends in the homeowners loss emergence for accident years 2014 and prior.
For the nine month period ended September 30, 2017, the automobile loss ratio of 80.1%single deposits. Variable annuity deposits increased by 0.8 points compared to the prior year period, including (1) the impact of catastrophe costs that resulted in a 0.3 point increase$3.4 million and (2) the impacts of higher current accident year non-catastrophe weather-related losses. The homeowners loss ratio of 79.2%$5.4 million for the ninethree and six month periodperiods ended SeptemberJune 30, 2017,2019. Fixed annuity deposits increased 12.5 points compared to the prior year period, including current accident year catastropheby $5.4 million and non-catastrophe weather-related loss experience as well as development of prior years’ reserves that had 1.4 points less favorable impact in the current year. Catastrophe costs represented 30.9 points of the homeowners loss ratio$11.9 million for the current period compared to 25.9 points for the prior year period.periods.
Interest Credited to Policyholders
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
($ in millions) | | Three Months Ended September 30, | | Change From Prior Year | | Nine Months Ended September 30, | | Change From Prior Year |
| | 2017 | | 2016 | | Percent | | Amount | | 2017 | | 2016 | | Percent | | Amount |
Retirement (annuity) | | $ | 38.8 |
| | $ | 37.4 |
| | 3.7 | % | | $ | 1.4 |
| | $ | 114.4 |
| | $ | 109.4 |
| | 4.6 | % | | $ | 5.0 |
|
Life | | 11.3 |
| | 11.2 |
| | 0.9 | % | | 0.1 |
| | 33.8 |
| | 33.5 |
| | 0.9 | % | | 0.3 |
|
Total | | $ | 50.1 |
| | $ | 48.6 |
| | 3.1 | % | | $ | 1.5 |
| | $ | 148.2 |
| | $ | 142.9 |
| | 3.7 | % | | $ | 5.3 |
|
For the nine month period ended SeptemberAt June 30, 2017, interest credited in the Retirement segment increased 4.6% compared to the prior year period reflecting a 5.1% increase in average accumulated fixed deposits, at an average crediting rate of 3.5%.
The net interest spread on fixed annuity2019, assets under management measuresdecreased by $2.7 billion compared to June 30, 2018 driven by the difference between the rate of income earned on the underlying investedannuity reinsurance transaction. Variable assets and the rate of interest which policyholders are credited on their account values.under management, excluding reinsurance, increased by $115.0 million primarily due to market performance. The nine month 2017year to date annualized net interest spread on fixed annuity assets was 188annuities, excluding reinsurance, decreased 6 basis points, a decrease of 7 basis points compared to the prior year period.points.
As of September 30, 2017, fixed annuity account values totaled $4.6 billion, including $4.3 billion of deferred annuities. As shown in the table below, for approximately 86.7%, or $3.8 billion of the deferred annuity account values, the credited interest rate was equal to the minimum guaranteed rate. Due to limitations on the Company’s ability to further lower interest crediting rates, coupled with the expectation for continued low reinvestment interest rates, management anticipates fixed annuity spread compression in future periods. The majority of assets backing the net interest spread on fixed annuity business is invested in fixed maturity securities.
The Company actively manages its interest rate risk exposure, considering a variety of factors, including earned interest rates, credited interest rates and the relationship between the expected durations of assets and liabilities. Management estimates that over the next 12 months approximately $467$336.0 million of the Retirement and Life combined investment portfolio and related investable cash flows will be reinvested at current market rates. As interest rates remain at low levels, borrowers may prepay or redeem the securities with greater frequency in order to borrow at lower market rates, which could increase investable cash flows and exacerbate the reinvestment risk.
As a general guideline, for a 100 basis point decline in the average reinvestment rate and based on the Company’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 $1.8$1.3 million in year one and $5.4$3.8 million in year two, further reducing the annualized net interest spread by approximately 4 basis points and 11
13 basis points in the respective periods, compared to the current period annualized net interest spread. The Company could also consider potential changes in rates credited to policyholders, tempered by any restrictions on the ability to adjust policyholder rates due to minimum guaranteed crediting rates.
The expectation for future annualized net interest spreads is also an important component in the amortization of 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 SeptemberJune 30, 20172019 and assuming all other assumptions are met, a 10 basis point deviation in the current year targeted annualized net interest rate spread assumption would impact amortization between $0.30$0.3 million and $0.40$0.4 million. This result may change depending on the magnitude and direction of any actual deviations but represents a range of reasonably likely experience for the noted assumption.
Additional information
The annuity reinsurance agreement entered into in the second quarter of 2019, which reinsured the $2.2 billion block of in force fixed annuities with a minimum crediting rate of 4.5%, mitigates the risk of being able to generate appropriate spreads on the annuity business. Information regarding the interest crediting rates and balances equal to the minimum guaranteed rate for deferred annuity account values excluding the reinsured block is shown below.
| | ($ in millions) | | September 30, 2017 | | June 30, 2019 |
| | | | | | Deferred Annuities at | | | | | | Deferred Annuities at |
| | Total Deferred Annuities | | Minimum Guaranteed Rate | | Total Deferred Annuities | | Minimum Guaranteed Rate |
| | Percent of Total | | Accumulated Value (“AV”) | | Percent of Total Deferred Annuities AV | | Percent of Total | | Accumulated Value | | Percent of Total | | Accumulated Value (AV) | | Percent of Total Deferred Annuities AV | | Percent of Total | | Accumulated Value |
Minimum guaranteed interest rates: | | |
| | |
| | |
| | |
| | |
| | | | | | | | | | |
Less than 2% | | 24.9 | % | | $ | 1,083.8 |
| | 51.3 | % | | 14.7 | % | | $ | 556.5 |
| | 52.0 | % | | $ | 1,216.2 |
| | 46.9 | % | | 34.7 | % | | $ | 570.9 |
|
Equal to 2% but less than 3% | | 7.1 |
| | 307.4 |
| | 83.0 | % | | 6.8 |
| | 255.1 |
| | 12.5 | % | | 293.0 |
| | 82.8 | % | | 14.8 | % | | 242.7 |
|
Equal to 3% but less than 4% | | 14.1 |
| | 614.0 |
| | 99.9 | % | | 16.3 |
| | 613.4 |
| | 26.0 | % | | 607.5 |
| | 99.9 | % | | 36.9 | % | | 607.0 |
|
Equal to 4% but less than 5% | | 52.6 |
| | 2,288.7 |
| | 100.0 | % | | 60.7 |
| | 2,288.7 |
| | 7.3 | % | | 171.1 |
| | 100.0 | % | | 10.4 | % | | 171.1 |
|
5% or higher | | 1.3 |
| | 55.4 |
| | 100.0 | % | | 1.5 |
| | 55.4 |
| | 2.2 | % | | 52.0 |
| | 100.0 | % | | 3.2 | % | | 52.0 |
|
Total | | 100.0 | % | | $ | 4,349.3 |
| | 86.7 | % | | 100.0 | % | | $ | 3,769.1 |
| | 100.0 | % | | $ | 2,339.8 |
| | 70.2 | % | | 100.0 | % | | $ | 1,643.7 |
|
The Company will continue to be disciplined in executing strategies to mitigate the negative impact on profitability of a sustained low interest rate environment. However, the success of these strategies may be affected by the factors discussed in “Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016,Item 1A and other factors discussed herein.within this report.
Policy Acquisition Expenses AmortizedLife
Amortized policy acquisition expenses were $24.2 million
The following table provides certain information for the three month period ended September 30, 2017, comparable to the $24.5 millionLife segment for the prior year period. periods indicated.
|
| | | | | | | | | | | | | | | | | | | | | | |
($ in millions, unless otherwise indicated) | | Three Months Ended June 30, | | 2019-2018 | | Six Months Ended June 30, | | 2019-2018 |
| | 2019 | | 2018 | | Change % | | 2019 | | 2018 | | Change % |
Financial Data: | | | | | | | | | | | | |
Insurance premiums and contract deposits | | $ | 28.4 |
| | $ | 28.5 |
| | -0.4 | % | | $ | 54.8 |
| | $ | 54.3 |
| | 0.9 | % |
Insurance premiums and contract charges earned | | 29.9 |
| | 30.4 |
| | -1.6 | % | | 60.3 |
| | 59.9 |
| | 0.7 | % |
Net investment income | | 18.3 |
| | 19.2 |
| | -4.7 | % | | 36.4 |
| | 37.5 |
| | -2.9 | % |
Benefits and settlement expenses | | 19.1 |
| | 19.9 |
| | -4.0 | % | | 41.1 |
| | 40.9 |
| | 0.5 | % |
Interest credited | | 11.3 |
| | 11.2 |
| | 0.9 | % | | 22.5 |
| | 22.5 |
| | — | % |
DAC amortization expense, excluding unlocking | | 2.1 |
| | 1.9 |
| | 10.5 | % | | 4.1 |
| | 3.7 |
| | 10.8 | % |
DAC unlocking | | (0.1 | ) | | — |
| | N.M. | | (0.1 | ) | | 0.1 |
| | N.M. |
Operating expenses | | 9.2 |
| | 9.3 |
| | -1.1 | % | | 18.6 |
| | 18.3 |
| | 1.6 | % |
Income before income taxes | | 6.7 |
| | 7.3 |
| | -8.2 | % | | 10.7 |
| | 12.0 |
| | -10.8 | % |
Net income /core earnings* | | 5.2 |
| | 5.9 |
| | -11.9 | % | | 8.5 |
| | 9.7 |
| | -12.4 | % |
| | | | | | | | | | | | |
Operating Statistics: | | | | | | | | | | | | |
Life insurance in force | | | | | | | | $ | 18,598 |
| | $ | 17,862 |
| | 4.1 | % |
Number of policies in force (in thousands) | | | | | | | | 199 |
| | 198 |
| | 0.5 | % |
Average face amount in force (in dollars) | | | | | | | | $ | 93,506 |
| | $ | 90,282 |
| | 3.6 | % |
Lapse ratio (ordinary life insurance in force) | | | | | | | | 4.5 | % | | 4.9 | % | | -0.4 | pts |
Mortality costs | | | | | | | | $ | 18.0 |
| | $ | 17.2 |
| | 4.7 | % |
___________________
N.M. - Not meaningful.
For Retirement, the unlocking of deferred policy acquisition costs (“unlocking”) resulted in a $0.7 million decrease in amortization for the three and six month periodperiods ended SeptemberJune 30, 2017 as compared to a $0.1 million decrease in amortization in the prior year period.
Amortized policy acquisition expenses were $73.9 million for the nine month period ended September 30, 2017 compared to $73.1 million for the prior year period. The increase was largely attributable to increased written premium in Property and Casualty. For Retirement, unlocking resulted in a $0.7 million favorable change in amortization for the nine month period ended September 30, 2017 as2019, core earnings* decreased compared to the prior year period.
periods, largely due to lower net investment income partially offset by lower mortality costs in the second quarter of 2019.
Operating Expenses
ForLife premiums and contract deposits* for the three and six month periodperiods ended SeptemberJune 30, 2017, operating expenses of $44.2 million2019 were comparable to the prior year periods. The ordinary life insurance in force lapse ratio was 4.5% for the 12 months ended June 30, 2019 compared to 4.9% for the 12 month period as the current period benefitted from decreases in incentive compensation accruals as well as lower employee medical costs.ended June 30, 2018.
Corporate and Other
|
| | | | | | | | | | | | | | | | | | | | | | |
($ in millions) | | Three Months Ended June 30, | | 2019-2018 | | Six Months Ended June 30, | | 2019-2018 |
| | 2019 | | 2018 | | Change % | | 2019 | | 2018 | | Change % |
Interest expense | | $ | (2.9 | ) | | $ | (3.0 | ) | | 3.3 | % | | $ | (5.9 | ) | | $ | (6.0 | ) | | 1.7 | % |
Net investment gains (losses) pretax | | 146.3 |
| | 0.7 |
| | N.M. | | 153.7 |
| | (1.0 | ) | | N.M. |
Tax on net investment gains (losses) | | 31.6 |
| | 0.1 |
| | N.M. | | 33.2 |
| | (0.3 | ) | | N.M. |
Net investment gains (losses) after tax | | 114.7 |
| | 0.6 |
| | N.M. | | 120.5 |
| | (0.7 | ) | | N.M. |
Net income (loss) | | 108.5 |
| | (3.2 | ) | | N.M. | | 110.2 |
| | (7.9 | ) | | N.M. |
Core earnings (loss)* | | (6.2 | ) | | (3.8 | ) | | -63.2 | % | | (10.3 | ) | | (7.2 | ) | | -43.1 | % |
___________________
N.M. - Not meaningful.
For the ninethree and six month periodperiods ended SeptemberJune 30, 2017, operating expenses of $139.1 million increased $8.5 million, or 6.5%,2019, core earnings* decreased compared to the prior year period, consistentperiods, driven by $3.1 and $4.0 million, respectively, of pretax acquisition costs associated with management’s expectations as the Company makes expenditures supporting targeted strategies in product, distributionBCG and infrastructure which are intended to enhance the overall customer experience, increase sales and support favorable policy retention and business cross-sale ratios.
The Property and Casualty expense ratio of 26.7% for the nine month period ended September 30, 2017 was slightly below the prior year period.NTA.
The effective income tax rate on the Company’s pretax income, including net realized investment gains and losses, was 17.6% and 26.6% for the nine month periods ended September 30, 2017 and 2016, respectively. Income from investments in tax-advantaged securities reduced the effective income tax rates by 12.5% and 7.4% for the nine month periods ended September 30, 2017 and 2016, respectively. Further, the adoption of a new accounting standard for employee share-based payments on January 1, 2017 reduced the effective income tax rate by 5.3% for the nine month period ended September 30, 2017. The new accounting standard requires that the entire excess tax benefit/deficiency from employee share-based payments be recognized in the income statement rather than allocating the excess tax benefit/deficiency between the equity section of the balance sheet and the income statement.
The Company records liabilities for uncertain tax filing positions where it is more likely than not that the position will not be sustainable upon audit by taxing authorities. These liabilities are reevaluated routinely and are adjusted appropriately based on changes in facts or law. The Company has no unrecorded liabilities from uncertain tax filing positions.
At September 30, 2017, the Company’s federal income tax returns for years prior to 2014 are no longer subject to examination by the IRS. Management does not anticipate any assessments for tax years that remain subject to examination to have a material effect on the Company’s financial position or results of operations.
Net Income
For the three month period ended September 30, 2017, the Company’s net income of $26.5 million decreased $0.4 million compared to the prior year period. For the nine month period ended September 30, 2017, the Company's net income of $44.1 million decreased $19.8 million reflecting a record level of catastrophe losses as well as elevated non-catastrophe weather-related losses that occurred in the first half of the year. Additional detail is included in the “Executive Summary” at the beginning of this MD&A.
Net income (loss) by segment and net income per share were as follows:
Investment Results
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
($ in millions) | | Three Months Ended September 30, | | Change From Prior Year | | Nine Months Ended September 30, | | Change From Prior Year |
| | 2017 | | 2016 | | Percent | | Amount | | 2017 | | 2016 | | Percent | | Amount |
Analysis of net income (loss) by segment: | | |
| | |
| | |
| | |
| | | | | | | | |
Property and Casualty | | $ | 13.4 |
| | $ | 6.7 |
| | 100.0 | % | | $ | 6.7 |
| | $ | 2.2 |
| | $ | 16.0 |
| | -86.3 | % | | $ | (13.8 | ) |
Retirement | | 13.6 |
| | 15.7 |
| | -13.4 | % | | (2.1 | ) | | 36.9 |
| | 39.3 |
| | -6.1 | % | | (2.4 | ) |
Life | | 4.8 |
| | 4.6 |
| | 4.3 | % | | 0.2 |
| | 14.3 |
| | 13.1 |
| | 9.2 | % | | 1.2 |
|
Corporate and Other (1) | | (5.3 | ) | | (0.1 | ) | | N.M. |
| | (5.2 | ) | | (9.3 | ) | | (4.5 | ) | | 106.7 | % | | (4.8 | ) |
Net income | | $ | 26.5 |
| | $ | 26.9 |
| | -1.5 | % | | $ | (0.4 | ) | | $ | 44.1 |
| | $ | 63.9 |
| | -31.0 | % | | $ | (19.8 | ) |
| | | | | | | | | | | | | | | | |
Effect of catastrophe costs, after tax, included above | | $ | (5.6 | ) | | $ | (5.5 | ) | | 1.8 | % | | $ | (0.1 | ) | | $ | (37.8 | ) | | $ | (31.5 | ) | | 20.0 | % | | $ | (6.3 | ) |
Effect of net realized investment gains (losses), after tax, included above | | $ | (2.2 | ) | | $ | 2.7 |
| | N.M. |
| | $ | (4.9 | ) | | $ | (0.8 | ) | | $ | 3.8 |
| | -121.1 | % | | $ | (4.6 | ) |
| | | | | | | | | | | | | | | | |
Diluted: | | |
| | |
| | |
| | |
| | | | | | | | |
Net income per share | | $ | 0.64 |
| | $ | 0.65 |
| | -1.5 | % | | $ | (0.01 | ) | | $ | 1.06 |
| | $ | 1.55 |
| | -31.6 | % | | $ | (0.49 | ) |
Weighted average number of common and common equivalent shares (in millions) | | 41.6 |
| | 41.3 |
| | 0.7 | % | | 0.3 |
| | 41.5 |
| | 41.4 |
| | 0.2 | % | | 0.1 |
|
| | | | | | | | | | | | | | | | |
Property and casualty combined ratio: | | |
| | |
| | |
| | |
| | | | | | | | |
Total | | 95.8 | % | | 101.5 | % | | - |
| | -5.7 pts |
| | 106.5 | % | | 102.4 | % | | - |
| | 4.1 pts |
|
Effect of catastrophe costs, included above | | 5.3 | % | | 5.3 | % | | - |
| | 0 pts |
| | 12.0 | % | | 10.5 | % | | - |
| | 1.5 pts |
|
Effect of prior years’ reserve development, included above | | -0.3 | % | | -0.4 | % | | - |
| | 0.1 pts |
| | -0.4 | % | | -0.9 | % | | - |
| | 0.5 pts |
|
|
| | | | | | | | | | | | | | | | | | | | | | |
($ in millions) | | Three Months Ended June 30, | | 2019-2018 | | Six Months Ended June 30, | | 2019-2018 |
| | 2019 | | 2018 | | Change % | | 2019 | | 2018 | | Change % |
Net investment income - investment portfolio | | $ | 70.3 |
| | $ | 97.1 |
| | -27.6 | % | | $ | 163.1 |
| | $ | 189.0 |
| | -13.7 | % |
Investment income - Deposit asset on reinsurance | | 23.2 |
| | — |
| | N.M. | | 23.2 |
| | — |
| | N.M. |
Pretax net investment gains (losses) | | 146.3 |
| | 0.7 |
| | N.M. | | 153.7 |
| | (1.0 | ) | | N.M. |
Pretax net unrealized investment gains on fixed maturity securities | |
| | | |
| | 292.5 |
| | 183.5 |
| | 59.4 | % |
___________________
N.M. - Not meaningful.
For the three and six month periods ended June 30, 2019, net investment income from the investment portfolio was lower than the prior year periods primarily because invested assets decreased 22.2% from December 31, 2018 due to assets transferred under the annuity reinsurance transaction as well as lower than expected new money rates and prepayments that were somewhat offset by stronger returns on alternative investments.
For the three and six month periods ended June 30, 2019, pretax net investment gains were driven primarily by a $135.3 million pretax realized investment gain related to the transfer of assets as a result of the annuity reinsurance transaction and the change in fair value of equity securities. Pretax net unrealized investment gains on securities were up $109.0 million compared to prior year, reflecting a decline in the 10-year U.S. Treasury yield of 85 basis points and tightening investment-grade credit spreads, offset by the impact of the aforementioned $135.3 million pretax realized investment gain related to the annuity reinsurance transaction.
Fixed Maturity and Equity Securities Portfolios
The table below presents the Company’s fixed maturity and equity securities portfolios by major asset class, including the 10 largest sectors of the Company’s corporate bond holdings (based on fair value).
|
| | | | | | | | | | | | | | | |
($ in millions) | | June 30, 2019 |
| | Number of Issuers | | Fair Value | | Amortized Cost | | Pretax Net Unrealized Gain (Loss) |
Fixed maturity securities | | |
| | |
| | |
| | |
|
Corporate bonds | | |
| | |
| | |
| | |
|
Banking & Finance | | 96 |
| | $ | 358.3 |
| | $ | 335.6 |
| | $ | 22.7 |
|
Insurance | | 36 |
| | 134.7 |
| | 120.2 |
| | 14.5 |
|
Real Estate | | 35 |
| | 105.9 |
| | 101.4 |
| | 4.5 |
|
Energy (1) | | 52 |
| | 103.5 |
| | 94.9 |
| | 8.6 |
|
HealthCare, Pharmacy | | 43 |
| | 92.2 |
| | 86.1 |
| | 6.1 |
|
Technology | | 29 |
| | 78.8 |
| | 75.3 |
| | 3.5 |
|
Transportation | | 29 |
| | 73.2 |
| | 68.8 |
| | 4.4 |
|
Utilities | | 36 |
| | 59.3 |
| | 52.1 |
| | 7.2 |
|
Food and Beverage | | 17 |
| | 41.7 |
| | 39.6 |
| | 2.1 |
|
Telecommunications | | 21 |
| | 40.7 |
| | 36.4 |
| | 4.3 |
|
All other corporates (2) | | 158 |
| | 233.0 |
| | 216.5 |
| | 16.5 |
|
Total corporate bonds | | 552 |
| | 1,321.3 |
| | 1,226.9 |
| | 94.4 |
|
Mortgage-backed securities | | |
| | |
| | |
| | |
|
U.S. Government and federally sponsored agencies | | 216 |
| | 363.6 |
| | 338.5 |
| | 25.1 |
|
Commercial (3) | | 107 |
| | 340.5 |
| | 326.6 |
| | 13.9 |
|
Other | | 25 |
| | 69.9 |
| | 69.4 |
| | 0.5 |
|
Municipal bonds (4) | | 493 |
| | 1,599.7 |
| | 1,472.9 |
| | 126.8 |
|
Government bonds | | | | | | | | |
U.S. | | 37 |
| | 566.4 |
| | 546.4 |
| | 20.0 |
|
Foreign | | 10 |
| | 47.4 |
| | 45.3 |
| | 2.1 |
|
Collateralized loan obligations (5) | | 131 |
| | 753.2 |
| | 758.2 |
| | (5.0 | ) |
Asset-backed securities | | 94 |
| | 472.3 |
| | 457.6 |
| | 14.7 |
|
Total fixed maturity securities | | 1,665 |
| | $ | 5,534.3 |
| | $ | 5,241.8 |
| | $ | 292.5 |
|
| | | | | | | | |
Equity securities | | |
| | |
| | |
| | |
|
Non-redeemable preferred stocks | | 12 |
| | $ | 50.5 |
| | | | |
Common stocks | | 91 |
| | 27.9 |
| | | | |
Closed-end fund | | 1 |
| | 21.7 |
| | | | |
Total equity securities | | 104 |
| | $ | 100.1 |
| | | | |
| | | | | | | | |
Total | | 1,769 |
| | $ | 5,634.4 |
| | | | |
________________
| |
(1) | At June 30, 2019, the fair value amount included $10.1 million which were non-investment grade. |
| |
(2) | The CorporateAll other corporates category contains 19 additional industry sectors. Gaming, broadcasting & media, leisure/entertainment, metal and Other segment includes interest expense on debt, net realized investment gainsmining and losses, corporate debt retirement costs (when applicable), certain public company expenses and other corporate-level items. The Company does not allocate the impactretail represented $133.3 million of corporate-level transactions to the operating segments, consistentfair value at June 30, 2019, with the basis for management’s evaluationremaining 14 sectors each representing less than $15.0 million. |
| |
(3) | At June 30, 2019, 100% were investment grade, with an overall credit rating of AA+, and the positions were well diversified by property type, geography and sponsor. |
| |
(4) | Holdings are geographically diversified, 54.4% are tax-exempt and 77.2% are revenue bonds tied to essential services, such as mass transit, water and sewer. The overall credit quality of the resultsmunicipal bond portfolio was AA- at June 30, 2019. |
| |
(5) | Based on fair value, 97.7% of those segments.the collateralized loan obligation securities were rated investment grade by Standard and Poor’s Global Inc. (S&P), Moody’s Investors Service, Inc. (Moody’s) and/or Fitch Ratings, Inc. (Fitch) at June 30, 2019. |
As describedAt June 30, 2019, the Company’s diversified fixed maturity securities portfolio consisted of 2,615 investment positions, issued by 1,665 entities, and totaled approximately $5.5 billion in footnote (1)fair value. This portfolio was 97.1% investment grade, based on fair value, with an average quality rating of A+. The Company’s investment guidelines target single corporate issuer concentrations to the table above, the Corporate0.5% of invested assets for AAA or AA rated securities, 0.4% of invested assets for A or BBB rated securities, 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 driver0.2% of fluctuations in the level of this segment’s net income or loss. For the nine month period ended September 30, 2017, net realized investment gains after tax were $0.8 million, compared to net realized investment gains after tax of $3.8 millioninvested assets for the prior year period.non-investment grade securities.
Return on average shareholders’The following table presents the composition and fair value of the Company’s fixed maturity and equity securities portfolios by rating category. At June 30, 2019, 96.3% of these combined portfolios were investment grade, based on net income was 4.7% and 6.3%fair value, with an overall average quality rating of A+. The Company has classified the entire fixed maturity securities portfolio as available for the trailing 12 month periods ended September 30, 2017 and 2016, respectively.
sale, which is carried at fair value.
Rating of Fixed Maturity Securities and Equity Securities (1)
|
| | | | | | | | | | | | | | |
($ in millions) | | Percent of Portfolio | | | | |
| | Fair Value | | June 30, 2019 |
| | December 31, 2018 | | June 30, 2019 | | Fair Value | | Amortized Cost |
Fixed maturity securities | | |
| | |
| | |
| | |
|
AAA | | 9.1 | % | | 12.3 | % | | $ | 680.6 |
| | $ | 671.1 |
|
AA (2) | | 44.5 |
| | 43.9 |
| | 2,429.4 |
| | 2,296.2 |
|
A | | 22.4 |
| | 22.8 |
| | 1,260.6 |
| | 1,171.5 |
|
BBB | | 21.2 |
| | 17.9 |
| | 996.4 |
| | 940.7 |
|
BB | | 1.8 |
| | 1.8 |
| | 98.2 |
| | 95.8 |
|
B | | 0.4 |
| | 0.4 |
| | 27.5 |
| | 27.4 |
|
CCC or lower | | 0.1 |
| | 0.1 |
| | 0.5 |
| | 0.5 |
|
Not rated (3) | | 0.5 |
| | 0.8 |
| | 41.1 |
| | 38.6 |
|
Total fixed maturity securities | | 100.0 | % | | 100.0 | % | | $ | 5,534.3 |
| | $ | 5,241.8 |
|
Equity securities | | |
| | |
| | |
| | |
|
AAA | | — |
| | — |
| | — |
| | |
AA | | — |
| | — |
| | — |
| | |
A | | — |
| | — |
| | — |
| | |
BBB | | 49.0 | % | | 50.4 | % | | $ | 50.5 |
| | |
BB | | — |
| | — |
| | — |
| | |
B | | — |
| | — |
| | — |
| | |
CCC or lower | | — |
| | — |
| | — |
| | |
Not rated | | 51.0 |
| | 49.6 |
| | 49.6 |
| | |
Total equity securities | | 100.0 | % | | 100.0 | % | | $ | 100.1 |
| | |
| | | | | | | | |
Total | | |
| | |
| | $ | 5,634.4 |
| | |
________________
| |
(1) | Ratings are as assigned primarily by S&P when available, with remaining ratings as assigned on an equivalent basis by Moody’s or Fitch. Ratings for publicly traded securities are determined when the securities are acquired and are updated monthly to reflect any changes in ratings. |
| |
(2) | At June 30, 2019, the AA rated fair value amount included $566.4 million of U.S. Government and federally sponsored agency securities and $572.2 million of mortgage-backed and asset-backed securities issued by U.S. Government and federally sponsored agencies. |
| |
(3) | This category primarily represents private placement and municipal securities not rated by either S&P, Moody’s or Fitch. |
Outlook for 2017
At June 30, 2019, the timefixed maturity securities portfolio had $13.0 million of this Quarterly Reportpretax gross unrealized investment losses on Form 10-Q, management estimates that 2017 full year net income before net realized$884.8 million of fair value related to 299 positions. Of the investment gains andpositions with gross unrealized losses, will be within a range of $1.45 to $1.65 per diluted share. Within Property and Casualty, this projection incorporates the elevated catastrophe losses and non-catastrophe weather-related losses during the first half of 2017, with estimates for weather-related losses for the second halfthere were three trading below 80.0% of the year returning to historic averages. The full year auto underlying combined ratio is anticipated to be similar to 2016 and the full year property combined ratio, including catastrophe losses, is anticipated to be slightly below 100%. Net income for Retirement will continue to be impacted by the prolonged low interest rate environment and the interest spread is anticipated to grade down to the low 180s. carrying value at June 30, 2019.
The Company expects to invest approximately $0.10 per diluted shareviews the unrealized investment losses of all of the fixed maturity securities at June 30, 2019 as temporary. Future changes in Retirementcircumstances related to the Company's strategic initiatives in product, distributionthese and infrastructure. Life mortality experience was more favorable than anticipated for the first halfother securities could require subsequent recognition of 2017, however, Life net income for the full year is expected to be comparable to 2016, due to a return to higher mortality levels and net investment income pressure. As a result of the continued low interest rate environment, management anticipates the Company’s overall portfolio yield to decline by approximately 10 basis points over the course of 2017, impacting each of the three operating segments. In addition to the segment-specific factors, the Company’s initiatives for customer service and infrastructure improvements, as well as enhanced programs and training for the Company’s agency force, all intended to enhance the overall customer experience and support further improvement in policy retention, sales and business cross-sell 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” in this Quarterly Report on Form 10-Q and “Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 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.OTTI.
Liquidity and Financial Resources
Off-Balance Sheet Arrangements
At SeptemberJune 30, 20172019 and 2016,2018, the Company did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or for other contractually narrow or limited purposes. As such, the Company is not exposed to any financing, liquidity, market or credit risk that could arise if the Company engaged in such relationships.
Investments
Information regarding the Company’s investment portfolio, which is comprised primarily of investment grade, fixed maturity securities, is locatedpresented in “ResultsItem 1, Note 3 of Operations -- Net Realized Investment Gains and Losses (Pretax)” and in the “Notes to Consolidated Financial Statements -- Noteand Item 2, -- Investments”.Investments Results.
Cash Flow
The short-term liquidity requirements of the Company, within a 12 month operating cycle, are for the timely payment of claims and benefits to policyholders, operating expenses, interest payments and federal income taxes. Cash flow generated from operations has been, and is expected to be, adequate to meet the Company’sCompany's operating cash needs in the next 12 months. Cash flow in excess of operational needs has been used to fund business growth,
and pay dividends to shareholders.shareholders and repurchase shares of HMEC's common stock. Long-term liquidity requirements, beyond one year, are principally for the payment of future insurance and annuity policy claims and benefits, as well as retirement of long-term debt. The following table summarizes the Company's consolidated cash flows activity for the periods indicated.
|
| | | | | | | | | | | |
($ in millions) | | Six Months Ended June 30, | | 2019-2018 |
| | 2019 | | 2018 | | Change % |
Net cash provided by operating activities | | $ | 97.8 |
| | $ | 151.3 |
| | -35.4 | % |
Net cash provided by (used in) investing activities | | 23.2 |
| | (112.4 | ) | | 120.6 | % |
Net cash used in financing activities | | (125.3 | ) | | (38.3 | ) | | N.M. |
Net increase (decrease) in cash | | (4.3 | ) | | 0.6 |
| | N.M. |
Cash at beginning of period | | 11.9 |
| | 7.6 |
| | 56.6 | % |
Cash at end of period | | $ | 7.6 |
| | $ | 8.2 |
| | -7.3 | % |
___________________
N.M. - Not meaningful.
Operating Activities
As a holding company, HMEC conducts its principal operations in the personal lines segment of the property and casualty and life insurance industries through its subsidiaries. HMEC’sHMEC's insurance subsidiaries generate cash flow from premium and investment income, generally well in excess of their immediate needs for policy obligations, operating expenses and other cash requirements. Cash provided by operating activities primarily reflects net cash generated by the insurance subsidiaries.
For the nine month periodsix months ended SeptemberJune 30, 2017,2019, net cash provided by operating activities increaseddecreased $53.5 million compared to the same period in 2016, largely2018, primarily due to a decrease in Investment income collected and an increase in Premiums collectedPolicy acquisition and Investment income collected in the current period.other operating expenses paid.
PaymentsInvesting 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 principalliquidity and other asset/liability management objectives, the Company, from time to time, will sell fixed maturity securities prior to maturity, and reinvest the proceeds into other investments with different interest rates, maturities or credit characteristics. Accordingly, the Company has classified the entire fixed maturity securities portfolio as available for sale.
During the first quarter of 2019, HMEC acquired BCG.
Financing Activities
Financing activities include primarily payment of dividends, receipt and withdrawal of funds by annuity contractholders, changes in deposit asset on reinsurance, net, issuances and repurchases of HMEC's common stock, fluctuations in book overdraft balances, and borrowings, repayments and repurchases related to debt facilities.
Horace Mann Life Insurance Company (HMLIC), one of the Company's subsidiaries, operates under funding agreements with FHLB. In January 2019, HMLIC received an additional $50.0 million from FHLB under a funding agreement and receipt of those funds has been reported in Annuity Contracts: Variable, Fixed and FHLB Funding Agreements, Deposits. Advances to HMLIC from FHLB under funding agreements totaled $675.0 million as of June 30, 2019. For the six month period ended June 30, 2019, cash inflows from annuity contract deposits, excluding the FHLB transaction, increased $17.2 million, or 8.7%, compared to the prior year period. Cash outflows from annuity contract benefits, withdrawals and net transfers to Separate Account (variable annuity) assets decreased $4.5 million, or 2.0%, compared to the prior year period.
Financing activities for the six month period ended June 30, 2019 also includes a one time cash payment of $124.1 million as part of the initial transfer under the annuity reinsurance transaction.
Capital Resources
The Company has determined the amount of capital which is needed to adequately fund and support business growth, primarily based on risk-based capital formulas including those developed by the National Association of Insurance Commissioners (NAIC). Historically, the Company’s insurance subsidiaries have generated capital in excess of such needed capital. These excess amounts have been paid to HMEC through dividends. HMEC has then utilized these dividends and its access to the capital markets to service and retire long-term debt, pay dividends to its shareholders, fund growth initiatives, repurchase shares of its common stock and parent company operating expenses are largely dependent on the ability of the insurance subsidiaries to pay cash dividends or makefor other cash payments to HMEC, including tax payments pursuant to tax sharing agreements. Payments for share repurchase programs also have this dependency.corporate purposes. If necessary, HMEC also has other potential sources of liquidity that could provide for additional funding to meet corporate obligations or pay shareholder dividends, which include a revolving line of credit, as well as issuances of various securities. The insurance subsidiaries are subject to various regulatory restrictions which limit the amount of annual dividends or other distributions, including loans or cash advances, available to HMEC without prior approval of the insurance regulatory authorities. The aggregate amount of dividends that may be paid in 20172019 from all of HMEC’sHMEC's insurance subsidiaries without prior regulatory approval is approximately $91.0$90.7 million, of which $44.9 million$54.8 was paid during the ninesix month period ended SeptemberJune 30, 2017. Although regulatory restrictions exist, dividend availability from subsidiaries has been, and is expected to be, adequate for HMEC’s capital needs. Additional information is contained in “Notes to Consolidated Financial Statements -- Note 10 -- Statutory Information and Restrictions” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.
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 in other investments with different interest rates, maturities or credit characteristics. Accordingly, the Company has classified the entire fixed maturity and equity securities portfolios as available for sale.
Financing Activities
Financing activities include primarily payment of dividends, the receipt and withdrawal of funds by annuity contractholders, issuances and repurchases of HMEC’s common stock, fluctuations in bank overdraft balances, and borrowings, repayments and repurchases related to its debt facilities.
The Company’s annuity business produced net negative cash flows in the first nine months of 2017. For the nine month period ended September 30, 2017, receipts from annuity contracts decreased $43.0 million, or 11.0%, compared to the prior year period, as described in “Results of Operations -- Insurance Premiums and Contract Charges”. In total, annuity contract benefits, withdrawals and net transfers to variable annuity accumulated cash values increased $54.6 million, or 22.7%, compared to the prior year period. During the nine month period ended September 30, 2017, financing activities included an increase of $77.9 million attributable to fixed account withdrawals due to the transfer of all the Company's 401(k) assets to a third-party provider.
Capital Resources
The Company has determined the amount of capital which is needed to adequately fund and support business growth, primarily based on risk-based capital formulas including those developed by the National Association of Insurance Commissioners (the “NAIC”). Historically, the Company’s insurance subsidiaries have generated capital in excess of such needed capital. These excess amounts have been paid to HMEC through dividends. HMEC has then utilized these dividends and its access to the capital markets to service and retire long-term debt, pay dividends to its shareholders, fund growth initiatives, repurchase shares of its common stock and for other corporate purposes.2019. Management anticipates that the Company’s sources of capital will continue to generate sufficient capital to meet the needs for business growth, debt interest payments, shareholder dividends and its share repurchase program. Additional information is contained in “Notes toItem 8, Note 10 of the Consolidated Financial Statements -- Note 10 -- Statutory Information and Restrictions” ofin the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.2018.
The total capital of the Company was $1,637.8$1,797.6 million at SeptemberJune 30, 2017,2019, including $247.4$297.9 million of long-term debt and no short-term debt outstanding.debt. Total debt represented 17.9%18.7% of total capital excluding net unrealized investment gains and losses (15.1%on fixed maturity securities (16.6% including net unrealized investment gains and losses)on fixed maturity securities) at SeptemberJune 30, 2017,2019, which was below the Company’s long-term target of 25%.
Shareholders’ equity was $1,390.4$1,499.7 million at SeptemberJune 30, 2017,2019, including a net unrealized investment gaingains on fixed maturity securities in the Company’s investment portfolio of $255.7$203.1 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 $1,600.0$1,659.4 million and $39.35,$40.29, respectively, at SeptemberJune 30, 2017.2019. Book value per share was $34.20$36.41 at SeptemberJune 30, 20172019 ($27.9131.48 excluding the net unrealized investment gain*)gains on fixed maturity securities).
Additional information regarding the net unrealized investment gaingains on fixed maturity securities in the Company’s investment portfolio at SeptemberJune 30, 20172019 is included in “ResultsItem 1, Note 3 of the Consolidated Financial Statements and in Item 2, Results of Operations -- Net Realized Investment Gains and Losses (Pretax)”.by Segment in this report.
Total shareholder dividends paid were $34.6$23.6 million for the ninesix month period ended SeptemberJune 30, 2017.2019. In March and May and September 2017,2019, the Board of Directors announcedapproved regular quarterly dividends of $0.275to $0.2875 per share.
For the ninesix month period ended SeptemberJune 30, 2017,2019, the Company repurchased 48,440did not repurchase any shares of its common stock or 0.1% of the outstanding shares at December 31, 2016, at an aggregate cost of $1.7 million, or an average price per share of $34.26 under its share repurchase program, which is further described in “Notes toItem 8, Note 9 of the Consolidated Financial Statements -- Note 9 -- Shareholders’ Equity and Common Stock Equivalents” ofin the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.2018. As of SeptemberJune 30, 2017, $27.82019, $22.8 million remained authorized for future share repurchases under the repurchase program.
The following table summarizes the Company's debt obligations.
|
| | | | | | | | |
($ in millions) | | June 30, 2019 | | December 31, 2018 |
Short-term debt: | | | | |
Bank Credit Facility, expires June 21, 2024 | | $ | — |
| | $ | — |
|
| | | | |
Long-term debt: | | | | |
4.50% Senior Notes, due December 1, 2025. Aggregate principal amount of $250 million less unaccrued discount of $0.4 million and $0.5 million (4.5% imputed rate) and unamortized debt issuance costs of $1.7 million and $1.8 million | | 247.9 |
| | 247.7 |
|
FHLB borrowing | | 50.0 |
| | 50.0 |
|
Total | | $ | 297.9 |
| | $ | 297.7 |
|
As of SeptemberJune 30, 2017,2019, the Company had outstanding $250.0 million aggregate principal amount of 4.50% Senior Notes (“Senior(Senior Notes due 2025”)2025), which will mature on December 1, 2025, issued at a discount resulting in an effective yield of 4.53%. Interest on the Senior Notes due 2025 is payable semi-annually at a rate of 4.50%. Detailed information regarding the redemption terms of the Senior Notes due 2025 is contained in the “Notes toItem 8, Note 7 of the Consolidated Financial Statements -- Note 7 -- Debt” ofin the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.2018. The Senior Notes due 2025 are traded in the open market (HMN 4.50).
As of SeptemberJune 30, 2017,2019, the Company had no balance$50.0 million outstanding underwith FHLB. For FHLB borrowings, the Board has authorized a maximum amount equal to the greater of 10% of admitted assets or 20% of surplus of the consolidated property and casualty companies. For the total $50.0 million received, $25.0 million matures on October 5, 2022 and $25.0 million matures on December 2, 2022. Interest on the borrowings accrues at an annual weighted average rate of 2.7230% as of June 30, 2019. HMIC's FHLB borrowings of $50.0 million are included in Long-term debt on the Consolidated Balance Sheet.
On June 21, 2019, the Company, as borrower, replaced its Bankcurrent line of credit with a new five-year Credit Facility.Agreement (Bank Credit Facility). The credit agreement extends the commitment termination date to June 21, 2024 from the previous termination date of June 27, 2023. The new Bank Credit Facility 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. The Company utilized the senior revolving credit facility to partially fund the acquisition of NTA. Moving forward, the Company will use the senior revolving credit facility for ongoing working capital, capital expenditures and general corporate expenditures.The unused portion of the Bank Credit Facility is subject to a variable commitment fee, which was 0.15% on an annual basis at SeptemberJune 30, 2017.2019.
As described in Note 2, on July 1, 2019, the Company completed its acquisition of NTA utilizing the senior revolving credit facility to fund a portion of the purchase price. As of August 1, 2019, the Company had $135 million outstanding under the senior revolving credit facility.
To provide additional capital management flexibility, the Company filed a “universal shelf”"universal shelf" registration statement on Form S-3 with the Securities and Exchange Commission (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 as of the date of this Quarterly Report on Form 10-Q.
On March 13, 2018, the Company filed a "shelf" registration statement on Form S-4 with the SEC which became effective on May 2, 2018. Under this registration statement, the Company may from time to time offer and issue up to 5,000,000 shares of its common stock in connection with future acquisitions of other businesses, assets or securities. Unless withdrawn by the Company, this registration statement will remain effective indefinitely. No securities associated with the registration statement have been issued as of the date of this Quarterly Report on Form 10-Q.
Financial Ratings
HMEC’s principal insurance subsidiaries are rated by S&P, Moody’s, A.M. Best Company, Inc. (“A.M. Best”)(A.M. Best) and Fitch Ratings, Inc. (“Fitch”).Fitch. These rating agencies have also assigned ratings to the Company’s long-term debt securities. The ratings that are assigned by these agencies, which are subject to change, can impact, among other things, the Company’s access to sources of capital, cost of capital, and competitive position. These ratings are not a recommendation to buy or hold any of the Company’s securities.
Assigned ratings were reviewed by all of the rating agencies in June and July 2019 in conjunction with the announcement of the Company’s financing plans to purchase NTA. A.M. Best and S&P affirmed the ratings that were in place at December 31, 2018. Moody’s and Fitch affirmed their ratings with a stable outlook, removing negative watches from their respective debt and insurance financial strength ratings placed after the announcement of NTA acquisition in December 2018. Assigned ratings as of OctoberJuly 31, 2017 were unchanged from the disclosure in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016. Assigned ratings2019 were as follows (unless otherwise indicated, the(the insurance financial strength ratings for the Company’s Property and Casualty insurance subsidiaries and the Company’s principal Life insurance subsidiary are the same):
|
| | | | | | | | |
| | Insurance Financial | | |
| | Strength Ratings (Outlook) | | Debt Ratings |
| | (Outlook) | | (Outlook) |
As of OctoberJuly 31, 20172019 | | | | |
S&P | | A | | (stable) | | BBB | | (stable) |
Moody’s | | A2 | | (stable) | | |
Horace Mann Life Insurance CompanyBaa2 | | A3 | (positive) | | N.A. | |
HMEC’s Property and Casualty subsidiaries | | A3 | (positive) | | N.A. | |
HMEC | | N.A. | | | Baa3 | (positive)(stable) |
A.M. Best | | A | | (stable) | | bbb | | (stable) |
Fitch | | A | | (stable) | | BBB | | (stable) |
N.A. – Not applicable.
Reinsurance Programs
Information regarding the reinsurance program for the Company’s Property and Casualty segment is located in “Business -- Property and Casualty Segment -- Property and Casualty Reinsurance”Item 1, Reporting Segments of the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.2018.
Information regarding the reinsurance program for the Company’s Life segment is located in “Business -- Life Segment”Item 1, Reporting Segments of the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.2018.
Effective April 1, 2019, the Company reinsured a $2.9 billion block of policy liabilities related to legacy individual annuities written in 2002 and prior to AA- S&P rated RGA Reinsurance Company, a subsidiary of Reinsurance Group of America, Incorporated (RGA). The block includes $2.2 billion of fixed annuities reinsured under coinsurance and $0.7 billion of variable annuities reinsured under modified
coinsurance. RGA’s financial obligations for the general account liabilities of the reinsured annuity contracts are secured by its assets placed in a comfort trust for HMLIC’s sole use and benefit. Upon RGA’s material breach of the reinsurance agreement, deterioration of its RBC ratio to a certain level, or certain other events, HMLIC may recapture the reinsured business.
Market Value Risk
Market value risk, the Company’s primary market risk exposure, is the risk that the Company’s invested assets will decrease in value. This decrease in value may be due to (1) a change in the yields realized on the Company’s assets and prevailing market yields for similar assets, (2) an unfavorable change in the liquidity of the investment, (3) an unfavorable change in the financial prospects of the issuer of the investment, or (4) a downgrade in the credit rating of the issuer of the investment. See also “Results of Operations -- Net Realized Investment Gains and Losses (Pretax)”.
Significant changes in interest rates expose the Company to the risk of experiencing losses or earning a reduced level of income based on the difference between the interest rates earned on the Company’s investments and the credited interest rates on the Company’s insurance and investment contract liabilities. See also “Results of Operations -- Interest Credited to Policyholders”.
The Company seeks to manage its market value risk by coordinating the projected cash inflows of assets with the projected cash outflows of liabilities. For all its assets and liabilities, the Company seeks to maintain reasonable durations, consistent with the maximization of income without sacrificing investment quality, while providing for liquidity and diversification. The investment risk associated with variable annuity deposits and the underlying mutual funds is assumed by those contractholders, and not by the Company. Certain fees that the Company earns from variable annuity deposits are based on the market value of the funds deposited.
More detailed descriptions of the Company’s exposure to market value risks and the management of those risks is presented in “Management’s Discussion and Analysis of Financial Condition and Results of Operations -- Market Value Risk” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.
Item 3:3. Quantitative and Qualitative Disclosures Aboutabout Market Risk
The information required by Item 305Market value risk, the Company’s primary market risk exposure, is the risk that the Company’s invested assets will decrease in value. This decrease in value may be due to (1) a change in the yields realized on the Company’s assets and prevailing market yields for similar assets, (2) an unfavorable change in the liquidity of Regulation S-K is containedthe investment, (3) an unfavorable change in “Management’s Discussion and Analysisthe financial prospects of Financial Condition andthe issuer of the investment, or (4) a downgrade in the credit rating of the issuer of the investment. See also Results of Operations --regarding net investment gains (losses).
Significant changes in interest rates expose the Company to the risk of experiencing losses or earning a reduced level of income based on the difference between the interest rates earned on the Company’s investments and the credited interest rates on the Company’s insurance and investment contract liabilities. See also Results of Operations regarding interest credited to policyholders.
The Company seeks to manage its market value risk by coordinating the projected cash inflows of assets with the projected cash outflows of liabilities. For all its assets and liabilities, the Company seeks to maintain reasonable durations, consistent with the maximization of income without sacrificing investment quality, while providing for liquidity and diversification. The investment risk associated with variable annuity deposits and the underlying mutual funds is assumed by those contractholders, and not by the Company. Certain fees that the Company earns from variable annuity deposits are based on the market value of the funds deposited.
More detailed descriptions of the Company’s exposure to market value risks and the management of those risks is presented in Item 7A, Quantitative and Qualitative Disclosures about Market Value Risk” contained in this QuarterlyRisk of the Company’s Annual Report on Form 10-Q.10-K for the year ended December 31, 2018.
Item 4:4. Controls and Procedures
Management’s Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
Under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, the Company conducted an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures, as such term is defined in Rule 13a-15(e) of the Securities Exchange Act of 1934 as amended (the “Exchange Act”)(Exchange Act), as of SeptemberJune 30, 20172019 pursuant to Rule 13a-15(b) of the Exchange Act. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) that is required to be included in the Company’s periodic Securities and Exchange Commission filings. No material weaknesses in the Company’s disclosure controls and procedures were identified in the evaluation and therefore, no corrective actions were taken. There were no significant changes in the Company’s internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation.
Changes in Internal Control Over Financial Reporting
There were no changes in the Company’s internal control over financial reporting that occurred during the Company’s last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II: OTHER INFORMATION
Item 1A:1A. Risk Factors
At the time of this Quarterly Report on Form 10-Q, management believes there are no material changes from the risk factors as previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016. The2018. However, the following risk factor is updated to reflect recent developments; however, in generalhas emerged as a result of transactions that occurred during the described risks are comparable to those previously disclosed.
three months ended June 30, 2019.
The DepartmentCompany is subject to the credit risk of Labor (“DOL”) fiduciary rule andits counterparties, including reinsurers who reinsure business from the possible adoption byCompany’s insurance companies.
The Company’s insurance subsidiaries may cede certain risks to third-party insurance companies through reinsurance. One of the Securities and Exchange Commission (“SEC”)Company’s insurance subsidiaries, Horace Mann Life Insurance Company (HMLIC), entered into a reinsurance agreement with RGA Reinsurance Company, a subsidiary of Reinsurance Group of America, Incorporated (RGA) to effectuate the reinsurance of a fiduciary standardblock of care could haveHMLIC’s in force fixed and variable annuities on a material adverse effect on our business, financial conditioncoinsurance 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 purposesmodified coinsurance basis. The variable portion of the prohibitedreinsured annuities is reinsured on a modified coinsurance basis and assets supporting the variable account liabilities are still held by HMLIC in its separate accounts. Because the reinsurance agreement covers a large volume of HMLIC’s in force business, the transaction rulesexposes HMLIC and in turn, the Company, to a concentration of the Employee Retirement Income Security Act (“ERISA”) and Internal Revenue Code Section 4975. Section 4975 prohibits certain kinds of compensationcredit risk with respect to transactions involvingthis counterparty. RGA’s financial obligations for the general account liabilities of the reinsured annuity contracts are secured by its assets placed in a comfort trust for HMLIC’s sole use and benefit. Upon RGA’s material breach of the reinsurance agreement, deterioration of its RBC ratio to certain level, or certain other events, HMLIC may recapture the reinsured business. However, in the event of RGA’s insolvency, HMLIC’s right to use the assets in certain accounts, including individual retirement accounts (“IRAs”).
The DOL rule was originallythe trust account may be delayed. Also if at the time of its insolvency the trust account is not funded at a level to be effective on April 10, 2017, but under a delay measure,fully discharge all its obligations, HMLIC’s claims to the fiduciary definition went into effect on June 9, 2017, with certain conditions for prohibited transaction exemption relief delayed until January 1, 2018. The DOL is continuing its examination ofextent not covered by the rule as directed by President Trump.
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:
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 changesassets 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 intrust would be those of 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.
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.
In addition, Nevada passed a fiduciary statute and other states are considering passing their own “fiduciary rules.” Individual state regulation of the “fiduciary rules,” with varying legal and compliance requirements, creates market uncertainty.general creditor.
Item 2:2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
On December 7, 2011,September 30, 2015, the Company’sCompany's Board of Directors (the “Board”) authorized a share repurchase program allowing repurchases of up to $50.0 million of Horace Mann Educators Corporation’s Common Stock, par value $0.001 (the “2011 Plan”). On September 30, 2015, the Board authorized an additionalmillion. The share repurchase program allowing repurchases of up to $50.0 million to begin following the completion of the 2011 Plan and utilization of that authorization began in January 2016. Both share repurchase programs authorizeauthorizes the repurchase of common shares in open market or privately negotiated transactions, from time to time, depending on market conditions. The current share repurchase program does not have an expiration date and may be limited or terminated at any time without notice. During the three month period ended SeptemberJune 30, 2017,2019, the Company repurchaseddid not repurchase shares of HMEC common stock as follows:stock. As of June 30, 2019, $22.8 million remained authorized for future share repurchases.
|
| | | | | | | | | | | | |
Period | |
Total Number of Shares Purchased | |
Average Price Paid Per Share | |
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Maximum Number (or Approximate Dollar Value) of Shares That May Yet Be Purchased Under The Plans or Programs |
| | | | | | | | |
July 1 - 31 | | — |
| | — |
| | — |
| | $29.5 million |
August 1 - 31 | | — |
| | — |
| | — |
| | $29.5 million |
September 1 - 30 | | 48,440 |
| | $ | 34.26 |
| | 48,440 |
| | $27.8 million |
Total | | 48,440 |
| | $ | 34.26 |
| | 48,440 |
| | $27.8 million |
Item 5:5. Other Information
The Company is not aware of any information required to be disclosed in a report on Form 8-K during the three month period ended SeptemberJune 30, 20172019 which has not been filed with the Securities and Exchange Commission.SEC.
Item 6:6. Exhibits
The following items are filed as Exhibits. Management contracts and compensatory plans are indicated by an asterisk (*).
|
| | |
Exhibit | | |
No. | | Description |
| | |
(3) Articles of incorporation and bylaws: |
| | |
3.1 | | |
| | |
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 | | |
| | |
(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. |
| | |
10.1(a) | | |
| | |
10.2* | | |
| | |
|
| | |
10.2(b)* | | |
| | |
10.2(c)* | | |
| | |
10.2(d)* | | |
| | |
10.2(e)* | | |
| | |
10.3* | | |
| | |
10.3(a)* | | |
| | |
10.3(b)* | | |
| | |
10.3(c)* | | |
| | |
10.3(d)* | | |
| | |
10.3(e)* | | |
|
| | |
10.5* | | |
| | |
10.6* | | |
| | |
10.7* | | |
| | |
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. |
| | |
10.13 | | |
| | |
|
| | |
|
|
(31) Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002: |
|
31.1 | | |
|
31.2 | | |
|
|
|
|
| | |
(32) Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002: |
|
32.1 | | |
| | |
32.2 | | |
| | |
| | |
(99) Additional exhibits: |
| | |
99.1 | | |
| | |
(101) Interactive Data File: |
| | |
101.INS | | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document |
| | |
101.SCH | | XBRL Taxonomy Extension Schema |
| | |
101.CAL | | XBRL Taxonomy Extension Calculation Linkbase |
| | |
101.DEF | | XBRL Taxonomy Extension Definition Linkbase |
| | |
101.LAB | | XBRL Taxonomy Extension Label Linkbase |
| | |
101.PRE | | XBRL Taxonomy Extension Presentation Linkbase |
| | |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
| | | |
| | | HORACE MANN EDUCATORS CORPORATION |
| | | (Registrant) |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
Date | NovemberAugust 8, 20172019 | | /s/ /s/ Marita Zuraitis |
| | | |
| | | Marita Zuraitis |
| | | President and Chief Executive Officer |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
Date | NovemberAugust 8, 20172019 | | /s/ /s/ Bret A. Conklin |
| | | |
| | | Bret A. Conklin |
| | | Executive Vice President and |
| | | Chief Financial Officer |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
Date | NovemberAugust 8, 20172019 | | /s/ /s/ Kimberly A. Johnson |
| | | |
| | | Kimberly A. Johnson |
| | | Vice President, Controller and |
| | | Principal Accounting Officer |