UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 orOR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 20192020
ORor
☐TRANSITION REPORT PURSUANT TO SECTION 13 orOR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission file number 1-10890
HORACE MANN EDUCATORS CORPORATION
(Exact name of registrant as specified in its charter)
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Delaware | 37-0911756 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
1 Horace Mann Plaza, Springfield, Illinois 62715-0001
(Address of principal executive offices, including Zipoffices) (Zip Code)
Registrant’s Telephone Number, Including Area Code:telephone number, including area code: 217-789-2500
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Securities registered pursuant to Section 12(b) of the Act: |
Title of each class | | Trading Symbol | | Name of each exchange on which registered |
Common Stock, $0.001 par value | | HMN | | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
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Large accelerated filer | ☑ | | Accelerated filer | ☐ |
Non-accelerated filer | ☐ | | Smaller reporting company | ☐ |
| | | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) Yes ☐ No ☑
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Securities registered pursuant to Section 12(b) of the Act: |
Title of each class | | Trading Symbol | | Name of each exchange
on which registered
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Common Stock, $0.001 par value | | HMN | | New York Stock Exchange |
As of July 31, 2019,2020, the registrant had 41,198,16741,344,546 common shares, of Common Stock,$0.001 par value, $0.001 per share, outstanding.
HORACE MANN EDUCATORS CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 20192020
INDEXTABLE OF CONTENTS
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Item 2. | | |
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Item 3. | | |
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Item 4. | | |
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Item 1A. | | |
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Item 2. | | |
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Item 5. | | |
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Item 6. | | |
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PART I: FINANCIAL INFORMATION
Item 1.IConsolidated Financial Statements
Item 1. Financial Statements (Unaudited)
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Report of Independent Registered Public Accounting Firm��
To the Shareholders and Board of Directors
Horace Mann Educators Corporation:
Results of Review of Interim Financial Information
We have reviewed the consolidated balance sheet of Horace Mann Educators Corporation and subsidiaries (the Company) as of June 30, 2019,2020, the related consolidated statements of operations, comprehensive income (loss) and changes in shareholders' equity for the three-month and six-month periods ended June 30, 20192020 and 2018,2019, and cash flows for the six-month periodsperiod ended June 30, 20192020 and 2018,2019, and the related notes (collectively, the consolidated interim financial information). Based on our reviews, we are not aware of any material modifications that should be made to the consolidated interim financial information for it to be in conformity with U.S. generally accepted accounting principles.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheet of the Company as of December 31, 2018,2019, and the related consolidated statements of operations, comprehensive income (loss), changes in shareholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated March 1, 2019,February 28, 2020, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2018,2019, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
Basis for Review Results
This consolidated interim financial information is the responsibility of the Company’s management. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our reviews in accordance with the standards of the PCAOB. A review of consolidated interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
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/s/ KPMG LLP |
KPMG LLP |
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Chicago, Illinois | |
August 8, 20197, 2020 | |
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Horace Mann Educators Corporation | 1 | Quarterly Report on Form 10-Q |
HORACE MANN EDUCATORS CORPORATION
CONSOLIDATED BALANCE SHEETS
($ in thousands, except share data)
| | | | June 30, 2019 | | December 31, 2018 | | June 30, 2020 | | December 31, 2019 |
| | (Unaudited) | | | | (Unaudited) | | |
ASSETS | Investments | | | | | | | | |
Fixed maturity securities, available for sale, at fair value (amortized cost 2019, $5,241,755; 2018, $7,373,911) | | $ | 5,534,270 |
| | $ | 7,515,318 |
| |
Equity securities, at fair value | | 100,143 |
| | 111,750 |
| |
Fixed maturity securities, available for sale, at fair value (amortized cost 2020, $5,604,405; 2019, $5,456,980) | | | $ | 6,021,983 |
| | $ | 5,791,676 |
|
Equity securities at fair value | | | 90,338 |
| | 101,864 |
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Limited partnership interests | | 351,515 |
| | 328,516 |
| | 392,192 |
| | 383,717 |
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Short-term and other investments | | 433,688 |
| | 295,093 |
| | 376,297 |
| | 361,976 |
|
Total investments | | 6,419,616 |
| | 8,250,677 |
| | 6,880,810 |
| | 6,639,233 |
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Cash | | 7,616 |
| | 11,906 |
| | 82,390 |
| | 25,508 |
|
Deferred policy acquisition costs | | 279,041 |
| | 298,742 |
| | 257,129 |
| | 276,668 |
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Deposit asset on reinsurance | | 2,315,330 |
| | — |
| | 2,373,267 |
| | 2,346,166 |
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Intangible assets, net | | | 169,845 |
| | 177,217 |
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Goodwill | | 29,458 |
| | 47,396 |
| | 49,079 |
| | 49,079 |
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Other assets | | 417,460 |
| | 422,047 |
| | 442,284 |
| | 474,364 |
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Separate Account (variable annuity) assets | | 2,310,886 |
| | 2,001,128 |
| | 2,316,900 |
| | 2,490,469 |
|
Total assets | | $ | 11,779,407 |
| | $ | 11,031,896 |
| | $ | 12,571,704 |
| | $ | 12,478,704 |
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LIABILITIES AND SHAREHOLDERS’ EQUITY | Policy liabilities | | | | | | | | |
Investment contract and life policy reserves | | $ | 5,776,769 |
| | $ | 5,711,193 |
| |
Investment contract and policy reserves | | | $ | 6,320,577 |
| | $ | 6,234,452 |
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Unpaid claims and claim expenses | | 398,339 |
| | 396,714 |
| | 444,558 |
| | 442,854 |
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Unearned premiums | | 270,163 |
| | 276,225 |
| | 266,406 |
| | 279,163 |
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Total policy liabilities | | 6,445,271 |
| | 6,384,132 |
| | 7,031,541 |
| | 6,956,469 |
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Other policyholder funds | | 821,880 |
| | 767,988 |
| | 741,859 |
| | 647,283 |
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Other liabilities | | 403,812 |
| | 290,358 |
| | 404,421 |
| | 384,173 |
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Short-term debt | | | 135,000 |
| | 135,000 |
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Long-term debt | | 297,881 |
| | 297,740 |
| | 302,172 |
| | 298,025 |
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Separate Account (variable annuity) liabilities | | 2,310,886 |
| | 2,001,128 |
| | 2,316,900 |
| | 2,490,469 |
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Total liabilities | | 10,279,730 |
| | 9,741,346 |
| | 10,931,893 |
| | 10,911,419 |
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Preferred stock, $0.001 par value, authorized 1,000,000 shares; none issued | | — |
| | — |
| | — |
| | — |
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Common stock, $0.001 par value, authorized 75,000,000 shares; issued, 2019, 66,036,205; 2018, 65,820,369 | | 66 |
| | 66 |
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Common stock, $0.001 par value, authorized 75,000,000 shares; issued, 2020, 66,218,003; 2019, 66,088,808 | | | 66 |
| | 66 |
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Additional paid-in capital | | 476,353 |
| | 475,109 |
| | 483,754 |
| | 480,962 |
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Retained earnings | | 1,318,329 |
| | 1,216,582 |
| | 1,375,737 |
| | 1,352,539 |
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Accumulated other comprehensive income (loss), net of tax: | | | | |
| | | | |
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Net unrealized investment gains on fixed maturity securities | | 203,077 |
| | 96,941 |
| | 279,129 |
| | 230,448 |
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Net funded status of benefit plans | | (12,185 | ) | | (12,185 | ) | | (10,767 | ) | | (10,767 | ) |
Treasury stock, at cost, 2019, 24,850,484 shares; 2018, 24,850,484 shares | | (485,963 | ) | | (485,963 | ) | |
Treasury stock, at cost, 2020, 24,902,579 shares; 2019, 24,850,484 shares | | | (488,108 | ) | | (485,963 | ) |
Total shareholders’ equity | | 1,499,677 |
| | 1,290,550 |
| | 1,639,811 |
| | 1,567,285 |
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Total liabilities and shareholders’ equity | | $ | 11,779,407 |
| | $ | 11,031,896 |
| | $ | 12,571,704 |
| | $ | 12,478,704 |
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See Notes to Consolidated Financial Statements.
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Horace Mann Educators Corporation | 2 | Quarterly Report on Form 10-Q |
HORACE MANN EDUCATORS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
($ in thousands, except per share data)
| | | | Three Months Ended June 30, | | Six Months Ended June 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2019 | | 2018 | | 2019 | | 2018 | | 2020 | | 2019 | | 2020 | | 2019 |
Revenues | | |
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Insurance premiums and contract charges earned | | $ | 208,096 |
| | $ | 205,610 |
| | $ | 417,881 |
| | $ | 408,608 |
| | $ | 225,431 |
| | $ | 208,096 |
| | $ | 461,696 |
| | $ | 417,881 |
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Net investment income | | 93,458 |
| | 97,101 |
| | 186,258 |
| | 188,965 |
| | 80,410 |
| | 93,458 |
| | 162,685 |
| | 186,258 |
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Net investment gains (losses) | | 146,333 |
| | 735 |
| | 153,750 |
| | (919 | ) | | 3,162 |
| | 146,333 |
| | (15,302 | ) | | 153,750 |
|
Other income | | 3,591 |
| | 2,811 |
| | 6,802 |
| | 5,092 |
| | 5,926 |
| | 6,223 |
| | 13,095 |
| | 12,097 |
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Total revenues | | 451,478 |
| | 306,257 |
| | 764,691 |
| | 601,746 |
| | 314,929 |
| | 454,110 |
| | 622,174 |
| | 769,986 |
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Benefits, losses and expenses | | | | | | | | | | | | | | | | |
Benefits, claims and settlement expenses | | 152,692 |
| | 168,278 |
| | 292,076 |
| | 311,840 |
| | 143,010 |
| | 152,692 |
| | 281,670 |
| | 292,076 |
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Interest credited | | 53,594 |
| | 51,071 |
| | 106,516 |
| | 101,105 |
| | 50,674 |
| | 53,594 |
| | 102,219 |
| | 106,516 |
|
DAC amortization expense | | 31,648 |
| | 26,586 |
| | 56,621 |
| | 53,291 |
| |
Operating expenses | | 55,252 |
| | 50,218 |
| | 109,305 |
| | 98,387 |
| | 55,775 |
| | 57,343 |
| | 116,437 |
| | 113,518 |
|
DAC unlocking and amortization expense | | | 20,426 |
| | 31,648 |
| | 50,401 |
| | 56,621 |
|
Intangible asset amortization expense | | | 3,686 |
| | 541 |
| | 7,372 |
| | 1,082 |
|
Interest expense | | 3,312 |
| | 3,291 |
| | 6,615 |
| | 6,464 |
| | 3,941 |
| | 3,312 |
| | 8,169 |
| | 6,615 |
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Other expense | | 28,025 |
| | — |
| | 28,025 |
| | — |
| |
Other expense - goodwill impairment | | | — |
| | 28,025 |
| | — |
| | 28,025 |
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Total benefits, losses and expenses | | 324,523 |
| | 299,444 |
| | 599,158 |
| | 571,087 |
| | 277,512 |
| | 327,155 |
| | 566,268 |
| | 604,453 |
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Income before income taxes | | 126,955 |
| | 6,813 |
| | 165,533 |
| | 30,659 |
| | 37,417 |
| | 126,955 |
| | 55,906 |
| | 165,533 |
|
Income tax expense | | 33,133 |
| | 896 |
| | 39,545 |
| | 4,587 |
| | 6,839 |
| | 33,133 |
| | 6,856 |
| | 39,545 |
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Net income | | $ | 93,822 |
| | $ | 5,917 |
| | $ | 125,988 |
| | $ | 26,072 |
| | $ | 30,578 |
| | $ | 93,822 |
| | $ | 49,050 |
| | $ | 125,988 |
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Net income per share | | | | | | | | | | | | | | | | |
Basic | | $ | 2.25 |
| | $ | 0.14 |
| | $ | 3.02 |
| | $ | 0.63 |
| | $ | 0.73 |
| | $ | 2.25 |
| | $ | 1.17 |
| | $ | 3.02 |
|
Diluted | | $ | 2.24 |
| | $ | 0.14 |
| | $ | 3.01 |
| | $ | 0.63 |
| | $ | 0.73 |
| | $ | 2.24 |
| | $ | 1.17 |
| | $ | 3.01 |
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Weighted average number of shares and equivalent shares | | | | | | | | | | | | | | | | |
Basic | | 41,762 |
| | 41,600 |
| | 41,685 |
| | 41,531 |
| | 41,879 |
| | 41,762 |
| | 41,856 |
| | 41,685 |
|
Diluted | | 41,921 |
| | 41,735 |
| | 41,851 |
| | 41,659 |
| | 41,996 |
| | 41,921 |
| | 42,008 |
| | 41,851 |
|
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Net investment gains (losses) | | | | | | | | | | | | | | | | |
Total other-than-temporary impairment losses on securities | | $ | (34 | ) | | $ | (1,177 | ) | | $ | (271 | ) | | $ | (1,287 | ) | | $ | (523 | ) | | $ | (34 | ) | | $ | (4,215 | ) | | $ | (271 | ) |
Portion of losses recognized in other comprehensive income (loss) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Net other-than-temporary impairment losses on securities recognized in earnings | | (34 | ) | | (1,177 | ) | | (271 | ) | | (1,287 | ) | | (523 | ) | | (34 | ) | | (4,215 | ) | | (271 | ) |
Sales and other, net | | 142,067 |
| | 1,789 |
| | 146,905 |
| | 3,992 |
| | 352 |
| | 142,067 |
| | 4,909 |
| | 146,905 |
|
Change in fair value - equity securities | | 3,441 |
| | (1,156 | ) | | 6,948 |
| | (6,342 | ) | | 6,600 |
| | 3,441 |
| | (7,886 | ) | | 6,948 |
|
Change in fair value and gains realized on settlements - derivative instruments | | 859 |
| | 1,279 |
| | 168 |
| | 2,718 |
| |
Change in fair value and gains (losses) realized on settlements - derivatives | | | (3,267 | ) | | 859 |
| | (8,110 | ) | | 168 |
|
Total | | $ | 146,333 |
| | $ | 735 |
| | $ | 153,750 |
| | $ | (919 | ) | | $ | 3,162 |
| | $ | 146,333 |
| | $ | (15,302 | ) | | $ | 153,750 |
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See Notes to Consolidated Financial Statements.
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Horace Mann Educators Corporation | 3 | Quarterly Report on Form 10-Q |
HORACE MANN EDUCATORS CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
($ in thousands)
| | | | Three Months Ended June 30, | | Six Months Ended June 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2019 | | 2018 | | 2019 | | 2018 | | 2020 | | 2019 | | 2020 | | 2019 |
Comprehensive income (loss) | | |
| | |
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Net income | | $ | 93,822 |
| | $ | 5,917 |
| | $ | 125,988 |
| | $ | 26,072 |
| | $ | 30,578 |
| | $ | 93,822 |
| | $ | 49,050 |
| | $ | 125,988 |
|
Other comprehensive income (loss), net of tax: | | |
| | |
| | | | | | |
| | |
| | | | |
Change in net unrealized investment gains (losses) on fixed maturity securities | | (7,762 | ) | | (52,444 | ) | | 106,136 |
| | (159,540 | ) | | 142,450 |
| | (7,762 | ) | | 48,681 |
| | 106,136 |
|
Change in net funded status of benefit plans | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Cumulative effect of change in accounting principle | | — |
| | — |
| | — |
| | (15,041 | ) | |
Other comprehensive income (loss) | | (7,762 | ) | | (52,444 | ) | | 106,136 |
| | (174,581 | ) | | 142,450 |
| | (7,762 | ) | | 48,681 |
| | 106,136 |
|
Total | | $ | 86,060 |
| | $ | (46,527 | ) | | $ | 232,124 |
| | $ | (148,509 | ) | | $ | 173,028 |
| | $ | 86,060 |
| | $ | 97,731 |
| | $ | 232,124 |
|
See Notes to Consolidated Financial Statements.
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Horace Mann Educators Corporation | 4 | Quarterly Report on Form 10-Q |
HORACE MANN EDUCATORS CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)
($ in thousands, except per share data)
| | | | Three Months Ended June 30, | | Six Months Ended June 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2019 | | 2018 | | 2019 | | 2018 | | 2020 | | 2019 | | 2020 | | 2019 |
Common stock, $0.001 par value | | | | | | | | | | | | | | | | |
Beginning balance | | $ | 66 |
| | $ | 66 |
| | $ | 66 |
| | $ | 65 |
| | $ | 66 |
| | $ | 66 |
| | $ | 66 |
| | $ | 66 |
|
Options exercised | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Conversion of common stock units | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Conversion of restricted stock units | | — |
| | — |
| | — |
| | 1 |
| | — |
| | — |
| | — |
| | — |
|
Ending balance | | 66 |
| | 66 |
| | 66 |
| | 66 |
| | 66 |
| | 66 |
| | 66 |
| | 66 |
|
| | | | | | | | | | | | | | | | |
Additional paid-in capital | | | | | | | | | | | | | | | | |
Beginning balance | | 474,336 |
| | 466,277 |
| | 475,109 |
| | 464,246 |
| | 481,917 |
| | 474,336 |
| | 480,962 |
| | 475,109 |
|
Options exercised and conversion of common stock units and restricted stock units | | 344 |
| | 2,384 |
| | (1,761 | ) | | 2,259 |
| | 447 |
| | 344 |
| | 268 |
| | (1,761 | ) |
Share-based compensation expense | | 1,673 |
| | 1,991 |
| | 3,005 |
| | 4,147 |
| | 1,390 |
| | 1,673 |
| | 2,524 |
| | 3,005 |
|
Ending balance | | 476,353 |
| | 470,652 |
| | 476,353 |
| | 470,652 |
| | 483,754 |
| | 476,353 |
| | 483,754 |
| | 476,353 |
|
| | | | | | | | | | | | | | | | |
Retained earnings | | | | | | | | | | | | | | | | |
Beginning balance | | 1,236,621 |
| | 1,254,394 |
| | 1,216,582 |
| | 1,231,177 |
| | 1,357,833 |
| | 1,236,621 |
| | 1,352,539 |
| | 1,216,582 |
|
Net income | | 93,822 |
| | 5,917 |
| | 125,988 |
| | 26,072 |
| | 30,578 |
| | 93,822 |
| | 49,050 |
| | 125,988 |
|
Dividends, 2019, $0.2875, $0.5750 per share; 2018, $0.2850, $0.5700 per share | | (12,114 | ) | | (12,006 | ) | | (24,241 | ) | | (23,985 | ) | |
Dividends, 2020, $0.30, $0.60 per share; 2019, $0.2875, $0.5750 per share | | | (12,674 | ) | | (12,114 | ) | | (25,343 | ) | | (24,241 | ) |
Cumulative effect of change in accounting principle | | — |
| | — |
| | — |
| | 15,041 |
| | — |
| | — |
| | (509 | ) | | — |
|
Ending balance | | 1,318,329 |
| | 1,248,305 |
| | 1,318,329 |
| | 1,248,305 |
| | 1,375,737 |
| | 1,318,329 |
| | 1,375,737 |
| | 1,318,329 |
|
| | | | | | | | | | | | | | | | |
Accumulated other comprehensive income (loss), net of tax: | | | | | | | | | | | | | | | | |
Beginning balance | | 198,654 |
| | 164,823 |
| | 84,756 |
| | 286,960 |
| | 125,912 |
| | 198,654 |
| | 219,681 |
| | 84,756 |
|
Change in net unrealized investment gains on fixed maturity securities | | (7,762 | ) | | (52,444 | ) | | 106,136 |
| | (159,540 | ) | |
Change in net unrealized investment gains (losses) on fixed maturity securities | | | 142,450 |
| | (7,762 | ) | | 48,681 |
| | 106,136 |
|
Change in net funded status of benefit plans | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Cumulative effect of change in accounting principle | | — |
| | — |
| | — |
| | (15,041 | ) | |
Ending balance | | 190,892 |
| | 112,379 |
| | 190,892 |
| | 112,379 |
| | 268,362 |
| | 190,892 |
| | 268,362 |
| | 190,892 |
|
| | | | | | | | | | | | | | | | |
Treasury stock, at cost | | | | | | | | | | | | | | | | |
Beginning balance | | (485,963 | ) | | (480,881 | ) | | (485,963 | ) | | (480,875 | ) | | (488,108 | ) | | (485,963 | ) | | (485,963 | ) | | (485,963 | ) |
Acquisition of shares | | — |
| | (80 | ) | | — |
| | (86 | ) | | — |
| | — |
| | (2,145 | ) | | — |
|
Ending balance | | (485,963 | ) | | (480,961 | ) | | (485,963 | ) | | (480,961 | ) | | (488,108 | ) | | (485,963 | ) | | (488,108 | ) | | (485,963 | ) |
| | | | | | | | | |
Shareholders’ equity at end of period | | $ | 1,499,677 |
| | $ | 1,350,441 |
| | $ | 1,499,677 |
| | $ | 1,350,441 |
| |
Shareholders' equity at end of period | | | $ | 1,639,811 |
| | $ | 1,499,677 |
| | $ | 1,639,811 |
| | $ | 1,499,677 |
|
See Notes to Consolidated Financial Statements.
|
| | |
Horace Mann Educators Corporation | 5 | Quarterly Report on Form 10-Q |
HORACE MANN EDUCATORS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
($ in thousands)
|
| | | | | | | | |
| | Six Months Ended June 30, |
| | 2019 | | 2018 |
Cash flows - operating activities | | | | |
Premiums collected | | $ | 396,887 |
| | $ | 392,103 |
|
Policyholder benefits paid | | (275,437 | ) | | (272,769 | ) |
Policy acquisition and other operating expenses paid | | (161,863 | ) | | (141,620 | ) |
Income taxes paid | | (78 | ) | | (7,393 | ) |
Investment income collected | | 139,210 |
| | 184,749 |
|
Interest expense paid | | (6,440 | ) | | (6,190 | ) |
Other | | 5,557 |
| | 2,429 |
|
Net cash provided by operating activities | | 97,836 |
| | 151,309 |
|
| | | | |
Cash flows - investing activities | | |
| | |
|
Fixed maturity securities | | |
| | |
|
Purchases | | (644,104 | ) | | (551,984 | ) |
Sales | | 501,739 |
| | 190,023 |
|
Maturities, paydowns, calls and redemptions | | 342,998 |
| | 383,090 |
|
Equity securities | | | | |
Purchases | | (5,282 | ) | | (6,028 | ) |
Sales and repayments | | 17,122 |
| | 5,783 |
|
Limited partnership interests | | | | |
Purchases | | (29,357 | ) | | (33,031 | ) |
Sales | | 15,029 |
| | 9,457 |
|
Change in short-term and other investments, net | | (156,748 | ) | | (109,711 | ) |
Acquisition of business, net of cash acquired | | (18,198 | ) | | — |
|
Net cash provided by (used in) investing activities | | 23,199 |
| | (112,401 | ) |
| | | | |
Cash flows - financing activities | | |
| | |
|
Dividends paid to shareholders | | (23,630 | ) | | (23,320 | ) |
Acquisition of treasury stock | | — |
| | (86 | ) |
Proceeds from exercise of stock options | | 722 |
| | 2,460 |
|
Withholding tax payments on RSUs tendered | | (3,366 | ) | | (2,155 | ) |
Annuity contracts: variable, fixed and FHLB funding agreements | | |
| | |
|
Deposits | | 266,310 |
| | 199,074 |
|
Benefits, withdrawals and net transfers to Separate Account (variable annuity) assets | | (214,243 | ) | | (218,694 | ) |
Life policy accounts | | | | |
|
Deposits | | 4,638 |
| | 3,163 |
|
Withdrawals and surrenders | | (1,733 | ) | | (2,525 | ) |
Change in deposit asset on reinsurance, net | | (134,682 | ) | | — |
|
Change in book overdrafts | | (19,341 | ) | | 3,795 |
|
Net cash used in financing activities | | (125,325 | ) | | (38,288 | ) |
| | | | |
Net increase (decrease) in cash | | (4,290 | ) | | 620 |
|
| | | | |
Cash at beginning of period | | 11,906 |
| | 7,627 |
|
| | | | |
Cash at end of period | | $ | 7,616 |
| | $ | 8,247 |
|
|
| | | | | | | | |
| | Six Months Ended June 30, |
| | 2020 | | 2019 |
Cash flows - operating activities | | | | |
Net income | | $ | 49,050 |
| | $ | 125,988 |
|
Adjustments to reconcile net income to net cash provided by operating activities | | | | |
Net investment (gains) losses | | 15,302 |
| | (153,750 | ) |
Amortization of premiums and accretion of discounts on fixed maturity securities, net | | 2,837 |
| | (348 | ) |
Depreciation and intangible asset amortization | | 11,655 |
| | 4,433 |
|
Share-based compensation expense | | 2,786 |
| | 3,451 |
|
Other expense - goodwill impairment | | — |
| | 28,025 |
|
Changes in: | | | | |
Accrued investment income | | (568 | ) | | 20,277 |
|
Insurance liabilities | | 38,416 |
| | (51,018 | ) |
Premium receivables | | 2,063 |
| | 3,541 |
|
Deferred policy acquisitions | | 1,507 |
| | 3,766 |
|
Reinsurance recoverables | | (2,860 | ) | | 20,718 |
|
Income tax liabilities | | 7,215 |
| | 39,466 |
|
Other operating assets and liabilities | | 16,683 |
| | 61,029 |
|
Other | | 21,503 |
| | (7,742 | ) |
Net cash provided by operating activities | | 165,589 |
| | 97,836 |
|
Cash flows - investing activities | | |
| | |
|
Fixed maturity securities | | |
| | |
|
Purchases | | (818,151 | ) | | (644,104 | ) |
Sales | | 294,162 |
| | 501,739 |
|
Maturities, paydowns, calls and redemptions | | 372,412 |
| | 342,998 |
|
Equity securities | | | | |
Purchases | | (11,752 | ) | | (5,282 | ) |
Sales and repayments | | 12,059 |
| | 17,122 |
|
Limited partnership interests | | | | |
Purchases | | (30,310 | ) | | (29,357 | ) |
Sales | | 5,666 |
| | 15,029 |
|
Change in short-term and other investments, net | | (19,058 | ) | | (156,748 | ) |
Acquisition of business, net of cash acquired | | — |
| | (18,198 | ) |
Net cash provided by (used in) investing activities | | (194,972 | ) | | 23,199 |
|
Cash flows - financing activities | | |
| | |
|
Dividends paid to shareholders | | (24,777 | ) | | (23,630 | ) |
FHLB borrowings | | 4,000 |
| | — |
|
Acquisition of treasury stock | | (2,145 | ) | | — |
|
Proceeds from exercise of stock options | | 899 |
| | 722 |
|
Withholding tax payments on RSUs tendered | | (1,517 | ) | | (3,366 | ) |
Annuity contracts: variable, fixed and FHLB funding agreements | | |
| | |
|
Deposits | | 325,019 |
| | 266,310 |
|
Benefits, withdrawals and net transfers to Separate Account (variable annuity) assets | | (196,972 | ) | | (214,243 | ) |
Life policy accounts | | | | |
|
Deposits | | 4,580 |
| | 4,638 |
|
Withdrawals and surrenders | | (2,126 | ) | | (1,733 | ) |
Change in deposit asset on reinsurance | | (19,894 | ) | | (134,682 | ) |
Change in book overdrafts | | (802 | ) | | (19,341 | ) |
Net cash provided by (used in) financing activities | | 86,265 |
| | (125,325 | ) |
Net increase (decrease) in cash | | 56,882 |
| | (4,290 | ) |
Cash at beginning of period | | 25,508 |
| | 11,906 |
|
Cash at end of period | | $ | 82,390 |
| | $ | 7,616 |
|
See Notes to Consolidated Financial Statements.
|
| | |
Horace Mann Educators Corporation | 6 | Quarterly Report on Form 10-Q |
HORACE MANN EDUCATORS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNEJune 30, 20192020 and 2018
($ in thousands, except per share data and unless noted otherwise)2019
NoteNOTE 1 - Basis of Presentation and Significant Accounting Policies
Business
The accompanying unaudited consolidated financial statements of Horace Mann Educators Corporation (HMEC;is a holding company for insurance subsidiaries that market and together with its subsidiaries,underwrite personal lines of property and casualty insurance products (primarily personal lines of automobile and property insurance), supplemental insurance products (primarily heart, cancer, accident and limited short-term supplemental disability coverages), retirement products (primarily tax-qualified annuities) and life insurance, primarily to K-12 teachers, administrators and other employees of public schools and their families (collectively, HMEC, the Company or Horace Mann).
On July 1, 2019, the Company acquired NTA Life Enterprises, LLC (NTA). As a result, the Company’s reporting segments were changed effective in the third quarter of 2019. A newly created Supplemental segment was added to report on the personal lines of supplemental insurance products that are marketed and underwritten by NTA.
Basis of Presentation
The accompanying Consolidated Financial Statements have been prepared in conformity with accounting principles generally accepted in the U.S.United States of America (GAAP) and with the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and disclosures normally included in annual financial statements prepared in conformity with GAAP, but are not required for interim reporting purposes, have been omitted. These Consolidated Financial Statements and Notes should be read in conjunction with the Consolidated Financial Statements and Notes thereto included in Part II - Item 8 of the Company's Annual Report on Form 10-K for the year ended December 31, 2019. The Company believes that these consolidatedresults of operations for the three and six months ended June 30, 2020 are not necessarily indicative of the results to be expected for the full year.
The accompanying Consolidated Financial Statements and Notes are unaudited. These financial statements containreflect all adjustments (consisting(generally consisting only of normal recurring accruals) which are, in the opinion of management, necessary to present fairlyfor the Company’sfair presentation of the consolidated financial position, as of June 30, 2019, the consolidated results of operations comprehensive income (loss), changes in shareholders’ equity and cash flows for the six monthinterim periods. The Company's significant accounting policies are summarized in Part II - Item 8, Note 1 of the Company's Annual Report on Form 10-K for the year ended December 31, 2019.
Effective for the year ended December 31, 2019, the Company decided to change the approach it uses for presentation in its Consolidated Statements of Cash Flows from the direct method to the indirect method as management considers presentation under the indirect method as more comparable to the method used by others in the insurance industry. Accordingly, the Company has recast all prior periods ended June 30, 2019presented in the Consolidated Statements of Cash Flows to conform to the current year’s presentation.
The Company has reclassified the presentation of certain prior period information to conform to the current year's presentation.
Consolidation
All intercompany transactions and 2018. balances between HMEC and its subsidiaries and affiliates have been eliminated.
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from thosethese estimates.
The subsidiaries of HMEC market and underwrite personal lines of property and casualty insurance products (primarily personal lines of automobile and property insurance), retirement products (primarily tax-qualified annuities) and life insurance, primarily to K-12 teachers, administrators and other employees of public schools and their families. HMEC’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, 2018.
The results of operations for the three and six month periods ended June 30, 2019 are not necessarily indicative of the results to be expected for the full year.
Investment Contract and Life Policy Reserves |
| | |
Horace Mann Educators Corporation | 7 | Quarterly Report on Form 10-Q |
The following table summarizes investment contract and life policy reserves.
|
| | | | | | | | |
($ in thousands) | | June 30, 2019 | | December 31, 2018 |
Investment contract reserves | | $ | 4,605,272 |
| | $ | 4,555,856 |
|
Life policy reserves | | 1,171,497 |
| | 1,155,337 |
|
Total | | $ | 5,776,769 |
| | $ | 5,711,193 |
|
NoteNOTE 1 - Basis of Presentation (Continued)and Significant Accounting Policies (continued)
Accumulated Other Comprehensive Income (Loss)
Accumulated other comprehensive income (loss) (AOCI) represents the accumulated change in shareholders’ equity from transactions and other events and circumstances from non-shareholder sources. For the Company, AOCI includes the after tax change in net unrealized investment gains (losses) onThe most significant accounting estimates include valuation of hard-to-value fixed maturity securities (including evaluation of other-than-temporary impairments), evaluation of goodwill and the after tax change in net funded statusintangible assets for impairment, valuation of benefit planssupplemental, annuity and life deferred policy acquisition costs, valuation of liabilities for the periods as shown in the Consolidated Statementsproperty and casualty unpaid claims and claim expenses, valuation of Changes in Shareholders’ Equity. The following tables reconcile these components.certain investment contracts and policy reserves and valuation of assets acquired and liabilities assumed under purchase accounting.
|
| | | | | | | | | | | | |
($ in thousands) | | Net Unrealized Investment Gains (Losses) on Fixed Maturity Securities (1)(2) | | Net Funded Status of Benefit Plans (1) | | Total (1) |
Beginning balance, April 1, 2019 | | $ | 210,839 |
| | $ | (12,185 | ) | | $ | 198,654 |
|
Other comprehensive income (loss) before reclassifications | | 107,163 |
| | — |
| | 107,163 |
|
Amounts reclassified from AOCI | | (114,925 | ) | | — |
| | (114,925 | ) |
Net current period other comprehensive income (loss) | | (7,762 | ) | | — |
| | (7,762 | ) |
Ending balance, June 30, 2019 | | $ | 203,077 |
| | $ | (12,185 | ) | | $ | 190,892 |
|
| | | | | | |
Beginning balance, January 1, 2019 | | $ | 96,941 |
| | $ | (12,185 | ) | | $ | 84,756 |
|
Other comprehensive income (loss) before reclassifications | | 227,466 |
| | — |
| | 227,466 |
|
Amounts reclassified from AOCI | | (121,330 | ) | | — |
| | (121,330 | ) |
Net current period other comprehensive income (loss) | | 106,136 |
| | — |
| | 106,136 |
|
Ending balance, June 30, 2019 | | $ | 203,077 |
| | $ | (12,185 | ) | | $ | 190,892 |
|
________________
| |
(1)
| All amounts are net of tax. |
| |
(2)
| The pretax amounts reclassified from AOCI, $145,474 thousand and $153,582 thousand, are included in net investment gains (losses) and the related income tax expenses, $30,549 thousand and $32,252 thousand, are included in income tax expense in the Consolidated Statements of Operations for the three and six month periods ended June 30, 2019, respectively. |
Note 1 - BasisAdoption of Presentation (Continued)
|
| | | | | | | | | | | | |
($ in thousands) | | Net Unrealized Investment Gains (Losses) on Fixed Maturity Securities (1)(2) | | Net Funded Status of Benefit Plans (1) | | Total (1)(3) |
Beginning balance, April 1, 2018, | | $ | 178,040 |
| | $ | (13,217 | ) | | $ | 164,823 |
|
Other comprehensive income (loss) before reclassifications | | (52,873 | ) | | — |
| | (52,873 | ) |
Amounts reclassified from AOCI | | 429 |
| | — |
| | 429 |
|
Net current period other comprehensive income (loss) | | (52,444 | ) | | — |
| | (52,444 | ) |
Ending balance, June 30, 2018 | | $ | 125,596 |
| | $ | (13,217 | ) | | $ | 112,379 |
|
| | | | | | |
Beginning balance, January 1, 2018 | | $ | 300,177 |
| | $ | (13,217 | ) | | $ | 286,960 |
|
Other comprehensive income (loss) before reclassifications | | (162,412 | ) | | — |
| | (162,412 | ) |
Amounts reclassified from AOCI | | 2,872 |
| | — |
| | 2,872 |
|
Cumulative effect of change in accounting principle (3) | | (15,041 | ) | | — |
| | (15,041 | ) |
Net current period other comprehensive income (loss) | | (174,581 | ) | | — |
| | (174,581 | ) |
Ending balance, June 30, 2018 | | $ | 125,596 |
| | $ | (13,217 | ) | | $ | 112,379 |
|
________________
| |
(1)
| All amounts are net of tax. |
| |
(2)
| The pretax amounts reclassified from AOCI, $(544) thousand and $(3,636) thousand, are included in Net investment gains (losses) and the related income tax expenses, $(115) thousand and $(764) thousand, are included in Income tax expense in the Consolidated Statements of Operations for the three and six month periods ended June 30, 2018, respectively.
|
| |
(3)
| The Company adopted guidance on January 1, 2018 that resulted in reclassifying $15,041 thousand of after tax net unrealized gains on equity securities from AOCI to Retained earnings. |
Comparative information for elements that are not required to be reclassified in their entirety to net income in the same reporting period is disclosed in Note 3.
AdoptedNew Accounting Standards
Accounting for Leases
Effective for the quarter ended March 31, 2019, the Company adopted guidance for leases and elected to utilize a cumulative-effect adjustment to the opening balance of retained earnings. Accordingly, the Company’s reporting for the comparative periods prior to adoption 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 is the corresponding lease liability adjusted for qualifying accrued lease payments. The lease liability and ROU asset are reported in Other liabilities and Other assets on the Consolidated Balance Sheets. The impact of these changes at adoption had no impact on net income or shareholders' equity.
Simplifying the Test for Goodwill Impairment
Effective for the quarter ended June 30, 2019, the Company adopted guidance to simplify the accounting for goodwill impairment. Adoption of this guidance removed Step 2 of the goodwill impairment test, which required a hypothetical purchase price allocation. Goodwill impairment is now the amount by which a reporting unit's carrying value exceeds its fair value, not to exceed the carrying amount of goodwill.
Note 1 - Basis of Presentation (Continued)
Pending Accounting Standards
Measurement of Credit Losses on Financial Instruments
In June 2016, the FASBFinancial Accounting Standards Board (FASB) issued guidance to improvewhich revises the credit loss recognition criteria for certain financial reporting by requiring timelier recording of credit losses on loans and other financial instruments,assets measured at amortized cost, including reinsurance receivables, held by companies.recoverables. The new guidance replaces the existing incurred loss impairment methodologyrecognition model with an expected loss recognition model. The objective of the expected credit loss model is for financial instruments other than available for sale debt securities and requires an organizationa reporting entity to measure and recognize all currentits estimate of expected credit losses (CECL) for affected financial assets heldin a valuation allowance that when deducted from the amortized cost basis of the related financial assets results in a net carrying value at the amount expected to be collected. A reporting date based on historical experience,entity must consider all relevant information available when estimating expected credit losses, including details about past events, current conditions, and reasonable and supportable forecasts. Companies will need to utilize forward-looking information to better estimate their credit losses. Companies will continue to use judgment to determine which loss estimation method is appropriate for their circumstances. Anyforecasts over the life of an asset. Financial assets may be evaluated individually or on a pooled basis when they share similar risk characteristics. The measurement of credit losses related tofor available for sale debt securities will be recorded through an allowance formeasured at fair value is not affected except that credit losses with this allowance having a limit equalrecognized are limited to the amount by which fair value is below amortized cost.cost and the carrying value adjustment is recognized through a valuation allowance which may change over time but once recorded cannot subsequently be reduced to an amount below zero. The guidance also requires enhanced qualitative and quantitative disclosures to provide additional information about the amounts recorded in the financial statements.
This guidance is effective for annual and interim reporting periods beginning after December 15, 2019. Early adoption is permitted2019, and for most affected instruments must be adopted using a modified retrospective approach, with a cumulative effect adjustment recorded to beginning after December 15, 2018. Upon adoption,retained earnings.
The Company’s implementation activities are complete and the impacts related to the Company’s commercial mortgage loan portfolio, agent advances, reinsurance recoverables and off-balance-sheet credit exposures for unfunded commercial mortgage loan commitments. The Company adopted the new guidance will be applied using the modified-retrospective approach, by whichon January 1, 2020 and recognized a cumulative-effectcumulative effect adjustment will be made tothat decreased retained earnings asby $0.5 million.
Future Adoption of the beginning of the first reporting period in which the guidance is effective. The guidance will have the most impact on the Company’s available for sale fixed maturity securities portfolio. However, as the Company’s fixed maturity securities portfolio is weighted towards higher rated bonds (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.
New Accounting Standards
Accounting for Long-Duration Insurance Contracts
In August 2018, the FASB issued accounting and disclosure guidance that contains targeted improvements to the accounting for long-duration insurance contracts. Under the new guidance, the cash flow assumptions used to measure the liability for future policy benefits for traditional insurance contracts will be required to be updated at least annually with changes recognized as a benefit expense (i.e., assumptions will no longer be locked-in). Insurance entities will be required to use a standard discount rate to measure the liabilities that will be equivalent to the yield from a high-quality bond. The new guidance also changes the amortization of deferred acquisition costs (DAC) to be on a constant-level basis over the expected term of the related contracts with no interest accruing on the DAC balance. The new guidance also introduces a new category of contract features associated with deposit type contracts referred to as market risk benefits (MRBs). Contract features meeting the definition of a MRB will be measured at fair value. New disclosures will be required for long-duration insurance contracts in order to provide better transparency into the exposure of insurance entities and the drivers of their results. For public business entities, the guidance is effective for annual reporting periods beginning after December 15, 2020,2021, including interim periods within those years. With regards to the liability for future policy benefits and DAC, the guidance applies to contracts in force as of the beginning of the earliest period presented and may be applied retrospectively. With regards to MRBs, the guidance is to be applied retrospectively at the beginning of the earliest period presented. Early adoption is permitted. Management is currently evaluating the impact this guidance will have on the results of operations and financial position of the Company.
Accounting Policies
The following accounting policy has been updated to reflect the Company's adoption of Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments as described above.
The Company conducts a periodic review to identify and evaluate invested assets that may have credit impairments.
|
| | |
Horace Mann Educators Corporation | 8 | Quarterly Report on Form 10-Q |
Note 2NOTE 1 - AcquisitionsBasis of Presentation and Significant Accounting Policies (continued)
Credit Impairments of Fixed Maturity Securities
Some of the factors considered in assessing impairment of fixed maturity securities due to credit-related factors include: (1) the extent to which the fair value has been less than amortized cost; (2) the financial condition, near-term and long-term prospects for the issuer, including the relevant industry conditions and trends, and implications of rating agency actions and offering prices; (3) the likelihood of the recoverability of principal and interest; and (4) whether it is more likely than not that the Company will be required to sell the investment prior to an anticipated recovery in value.
Beginning on January 1, 2020, credit losses are recognized through an allowance account. See Note 1 - Adoption of New Accounting Standards - Measurement of Credit Losses on Financial Instruments for additional information.
For fixed maturity securities that the Company does not intend to sell or for which it is more likely than not that the Company would not be required to sell before an anticipated recovery in value, the Company separates the credit loss component of the impairment from the amount related to all other factors and reports the credit loss component in net investment gains (losses). The impairment related to all other factors (non-credit factors) is reported in other comprehensive income (OCI). The allowance is adjusted for any additional credit losses and subsequent recoveries. Upon recognizing a credit loss, the cost basis is not adjusted.
For fixed maturity securities where the Company records a credit loss, a determination is made as to the cause of the impairment and whether the Company expects a recovery in the value. For fixed maturity securities where the Company expects a recovery in value, the constant effective yield method is utilized, and the investment is amortized to par.
For fixed maturity securities the Company intends to sell or for which it is more likely than not that the Company will be required to sell before an anticipated recovery in value, the full amount of the impairment is included in net investment gains (losses). The new cost basis of the investment is the previous amortized cost basis less the impairment recognized in net investment gains (losses). The new cost basis is not adjusted for any subsequent recoveries in fair value.
The Company reports investment income accrued separately from fixed maturity securities, available for sale, and Benefit Consultants Group, Inc. (BCG) entered into a Stock Purchase Agreement under whichhas elected not to measure an allowance for credit losses for investment income accrued. Investment income accrued is written off through net investment gains (losses) at the time the issuer of the fixed maturity security defaults or is expected to default on payments.
Uncollectible available for sale fixed maturity securities are written off when the Company acquired alldetermines that no additional payments of the outstanding capital stock of BCG with a transaction valued at $25 million. The acquisition was approved by the Company’s Boardprincipal or interest will be received.
Subsequent Event
PG&E Corporation and closedPacific Gas and Electric Company (together, PG&E) emerged from bankruptcy on January 2, 2019. The acquisition of BCG gave rise to recognition of intangible assets of $16.2 million and goodwill of $10.1 million as a result of the 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, 2019,2020, the Company completed its acquisitiondate the Debtors' and Shareholder Proponents' Joint Chapter 11 Plan 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 of the transaction was $425 million which includes $20 million representing NTA’s share of "adjusted earnings" (as determined inReorganization Dated June 19, 2020 (the Plan) became effective. In accordance with the terms of the Agreement)Plan, PG&E funded a trust from July 1,which the Company and other subrogation claimants will receive payments related to the 2018 California Camp Fire in the third quarter of 2020. The Company expects to July 1, 2019. Asrecognize in the third quarter of 2020 a resultsubrogation benefit related to these claims of approximately $4.8 million pretax, net of expenses and amounts that would inure to the benefit of the acquisition, NTA becameCompany's reinsurers, and the return of $3.5 million pretax of reinsurance reinstatement premiums for a wholly owned subsidiarytotal of the Company. NTA provides supplemental insurance products, including heart and cancer, to the education market. NTA's results will be reported in a newly created operating segment titled "Supplemental".$8.3 million.
|
| | |
Horace Mann Educators Corporation | 9 | Quarterly Report on Form 10-Q |
Note 3NOTE 2 - Investments
Net Investment Income
The components of net investment income for the following periods were:
|
| | | | | | | | | | | | | | | | |
($ in thousands) | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
Fixed maturity securities | | $ | 58,861 |
| | $ | 83,561 |
| | $ | 118,307 |
| | $ | 167,877 |
|
Equity securities | | 1,182 |
| | 1,392 |
| | 2,390 |
| | 2,590 |
|
Limited partnership interests | | (3,485 | ) | | 9,449 |
| | (6,184 | ) | | 15,900 |
|
Short-term and other investments | | 2,784 |
| | (21,451 | ) | | 5,641 |
| | (18,063 | ) |
Investment expenses | | (2,886 | ) | | (2,688 | ) | | (5,111 | ) | | (5,241 | ) |
Net investment income - investment portfolio | | 56,456 |
| | 70,263 |
| | 115,043 |
| | 163,063 |
|
Investment income - deposit asset on reinsurance | | 23,954 |
| | 23,195 |
| | 47,642 |
| | 23,195 |
|
Total net investment income | | $ | 80,410 |
| | $ | 93,458 |
| | $ | 162,685 |
| | $ | 186,258 |
|
Net Investment Gains (Losses)
Net investment gains (losses) for the following periods were:
|
| | | | | | | | | | | | | | | | |
($ in thousands) | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
Fixed maturity securities | | $ | (642 | ) | | $ | 141,548 |
| | $ | 460 |
| | $ | 141,749 |
|
Equity securities | | 7,071 |
| | 3,926 |
| | (7,652 | ) | | 11,833 |
|
Short-term investments and other | | (3,267 | ) | | 859 |
| | (8,110 | ) | | 168 |
|
Net investment gains (losses) | | $ | 3,162 |
| | $ | 146,333 |
| | $ | (15,302 | ) | | $ | 153,750 |
|
The Company, from time to time, sells invested assets subsequent to the reporting date that were considered temporarily impaired at the reporting date. Such sales are due to issuer specific events occurring subsequent to the reporting date that result in a change in the Company's intent or ability to hold an invested asset. The types of events that may result in a sale include significant changes in the economic facts and circumstances related to the invested asset, significant unforeseen changes in liquidity needs, or changes in the Company's investment strategy.
Net Investment Gains (Losses) by Transaction Type
The following table reconciles net investment gains (losses) pretax by transaction type:
|
| | | | | | | | | | | | | | | | |
($ in thousands) | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
Credit impairment write-downs | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Change in intent write-downs | | (523 | ) | | (34 | ) | | (4,215 | ) | | (271 | ) |
Net other-than-temporary impairment losses on securities recognized in earnings | | (523 | ) | | (34 | ) | | (4,215 | ) | | (271 | ) |
Sales and other, net | | 352 |
| | 142,067 |
| | 4,909 |
| | 146,905 |
|
Change in fair value - equity securities | | 6,600 |
| | 3,441 |
| | (7,886 | ) | | 6,948 |
|
Change in fair value and gains (losses) realized on settlements - derivatives | | (3,267 | ) | | 859 |
| | (8,110 | ) | | 168 |
|
Net investment gains (losses) | | $ | 3,162 |
| | $ | 146,333 |
| | $ | (15,302 | ) | | $ | 153,750 |
|
|
| | |
Horace Mann Educators Corporation | 10 | Quarterly Report on Form 10-Q |
NOTE 2 - Investments (continued)
Fixed Maturity Securities
The Company’sCompany's investment portfolio is comprised primarily of fixed maturity securities. Amortized cost, net unrealized investment gains (losses) and fair values of all fixed maturity securities in the portfolio were as follows:
|
| | | | | | | | | | | | | | | | |
($ in thousands) | | Amortized Cost | | Unrealized Gains | | Unrealized Losses | | Fair Value |
June 30, 2019 | | | | | | | | |
Fixed maturity securities | | | | | | | | |
U.S. Government and federally sponsored agency obligations: (1) | | | | | | | | |
Mortgage-backed securities | | $ | 550,059 |
| | $ | 37,900 |
| | $ | 1,201 |
| | $ | 586,758 |
|
Other, including U.S. Treasury securities | | 546,396 |
| | 20,574 |
| | 533 |
| | 566,437 |
|
Municipal bonds | | 1,472,794 |
| | 127,700 |
| | 801 |
| | 1,599,693 |
|
Foreign government bonds | | 45,303 |
| | 2,064 |
| | — |
| | 47,367 |
|
Corporate bonds | | 1,226,962 |
| | 96,535 |
| | 2,211 |
| | 1,321,286 |
|
Other mortgage-backed securities | | 1,400,241 |
| | 20,786 |
| | 8,298 |
| | 1,412,729 |
|
Totals | | $ | 5,241,755 |
| | $ | 305,559 |
| | $ | 13,044 |
| | $ | 5,534,270 |
|
| | | | | | | | |
December 31, 2018 | | | | | | | | |
Fixed maturity securities | | | | | | | | |
U.S. Government and federally sponsored agency obligations: (1) | | | | | | | | |
Mortgage-backed securities | | $ | 778,038 |
| | $ | 22,724 |
| | $ | 13,321 |
| | $ | 787,441 |
|
Other, including U.S. Treasury securities | | 835,096 |
| | 16,127 |
| | 17,681 |
| | 833,542 |
|
Municipal bonds | | 1,884,313 |
| | 133,150 |
| | 13,494 |
| | 2,003,969 |
|
Foreign government bonds | | 83,343 |
| | 2,321 |
| | 760 |
| | 84,904 |
|
Corporate bonds | | 2,054,105 |
| | 64,296 |
| | 38,891 |
| | 2,079,510 |
|
Other mortgage-backed securities | | 1,739,016 |
| | 10,467 |
| | 23,531 |
| | 1,725,952 |
|
Totals | | $ | 7,373,911 |
| | $ | 249,085 |
| | $ | 107,678 |
| | $ | 7,515,318 |
|
________________ |
| | | | | | | | | | | | | | | | |
($ in thousands) | | Amortized Cost | | Unrealized Gains | | Unrealized Losses | | Fair Value |
June 30, 2020 | | | | | | | | |
Fixed maturity securities | | | | | | | | |
U.S. Government and federally sponsored agency obligations: (1) | | | | | | | | |
Mortgage-backed securities | | $ | 635,342 |
| | $ | 83,843 |
| | $ | 211 |
| | $ | 718,974 |
|
Other, including U.S. Treasury securities | | 333,428 |
| | 41,453 |
| | — |
| | 374,881 |
|
Municipal bonds | | 1,633,297 |
| | 174,211 |
| | 1,958 |
| | 1,805,550 |
|
Foreign government bonds | | 39,643 |
| | 3,907 |
| | — |
| | 43,550 |
|
Corporate bonds | | 1,705,963 |
| | 169,498 |
| | 13,021 |
| | 1,862,440 |
|
Other asset-backed securities | | 1,256,732 |
| | 16,978 |
| | 57,122 |
| | 1,216,588 |
|
Totals | | $ | 5,604,405 |
| | $ | 489,890 |
| | $ | 72,312 |
| | $ | 6,021,983 |
|
| | | | | | | | |
December 31, 2019 | | | | | | | | |
Fixed maturity securities | | | | | | | | |
U.S. Government and federally sponsored agency obligations: (1) | | | | | | | | |
Mortgage-backed securities | | $ | 684,543 |
| | $ | 41,263 |
| | $ | 1,487 |
| | $ | 724,319 |
|
Other, including U.S. Treasury securities | | 436,665 |
| | 22,824 |
| | 621 |
| | 458,868 |
|
Municipal bonds | | 1,545,787 |
| | 141,996 |
| | 1,580 |
| | 1,686,203 |
|
Foreign government bonds | | 42,801 |
| | 2,569 |
| | — |
| | 45,370 |
|
Corporate bonds | | 1,464,444 |
| | 118,775 |
| | 1,795 |
| | 1,581,424 |
|
Other asset-backed securities | | 1,282,740 |
| | 20,883 |
| | 8,131 |
| | 1,295,492 |
|
Totals | | $ | 5,456,980 |
| | $ | 348,310 |
| | $ | 13,614 |
| | $ | 5,791,676 |
|
| |
(1) | Fair value includes securities issued by Federal National Mortgage Association (FNMA) of $370,182 thousand$392.6 million and $441,308 thousand;$405.1 million; Federal Home Loan Mortgage Corporation (FHLMC) of $256,531 thousand$312.9 million and $417,308 thousand;$283.1 million; and Government National Mortgage Association (GNMA) of $79,141 thousand$145.6 million and $96,466 thousand$147.4 million as of June 30, 20192020 and December 31, 2018,2019, respectively. |
|
| | |
Horace Mann Educators Corporation | 11 | Quarterly Report on Form 10-Q |
Note 3NOTE 2 - Investments (Continued)(continued)
The following table presents the fair value and gross unrealized losses offor fixed maturity securities in an unrealized loss position at June 30, 20192020 and December 31, 2018,2019, respectively. The Company views the decrease in fair value of all of the fixed maturity securities with unrealized losses at June 30, 2019 --2020 — which was driven largely by increasing interest rates, spread widening, financial market illiquidity and/or market volatility from the date of acquisition --— as temporary. For fixed maturity securities, management doesAs of June 30, 2020, the Company has not havemade the intentdecision to sell the securities and it is not more likely than not the Company will be required to sell thefixed maturity securities with unrealized losses before thean anticipated recovery of their amortized cost bases, and management expects to recover the entire amortized cost bases of the fixed maturity securities.in value. Therefore, it was determined that the unrealized losses on the securities presented in the table below were not other-than-temporarily impaired as of June 30, 2019.2020.
| | ($ in thousands) | | 12 Months or Less | | More than 12 Months | | Total | | 12 Months or Less | | More than 12 Months | | Total |
| | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses |
June 30, 2019 | | | | | | | | | | | | | |
June 30, 2020 | | | | | | | | | | | | | |
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 |
| | $ | 8,344 |
| | $ | 130 |
| | $ | 933 |
| | $ | 81 |
| | $ | 9,277 |
| | $ | 211 |
|
Other | | 11,463 |
| | 32 |
| | 37,575 |
| | 501 |
| | 49,038 |
| | 533 |
| | 37 |
| | — |
| | — |
| | — |
| | 37 |
| | — |
|
Municipal bonds | | 16,900 |
| | 93 |
| | 34,031 |
| | 708 |
| | 50,931 |
| | 801 |
| | 81,279 |
| | 1,958 |
| | — |
| | — |
| | 81,279 |
| | 1,958 |
|
Foreign government bonds | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Corporate bonds | | 27,858 |
| | 518 |
| | 32,997 |
| | 1,693 |
| | 60,855 |
| | 2,211 |
| | 209,868 |
| | 12,127 |
| | 6,060 |
| | 894 |
| | 215,928 |
| | 13,021 |
|
Other mortgage-backed securities | | 391,170 |
| | 3,895 |
| | 277,694 |
| | 4,403 |
| | 668,864 |
| | 8,298 |
| |
Other asset-backed securities | | | 448,358 |
| | 38,339 |
| | 387,453 |
| | 18,783 |
| | 835,811 |
| | 57,122 |
|
Total | | $ | 457,895 |
| | $ | 4,565 |
| | $ | 426,861 |
| | $ | 8,479 |
| | $ | 884,756 |
| | $ | 13,044 |
| | $ | 747,886 |
| | $ | 52,554 |
| | $ | 394,446 |
| | $ | 19,758 |
| | $ | 1,142,332 |
| | $ | 72,312 |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
Number of positions with a gross unrealized loss | | 143 |
| | | | 156 |
| | | | 299 |
| | | | 594 |
| | | | 109 |
| | | | 703 |
| | |
Fair value as a percentage of total fixed maturity securities fair value | | 8.3 | % | | | | 7.7 | % | | | | 16.0 | % | | | |
Fair value as a percentage of total fixed maturity securities at fair value | | | 12.4 | % | | | | 6.6 | % | | | | 19.0 | % | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2018 | | | | | | | | | | | | | |
December 31, 2019 | | | | | | | | | | | | | |
Fixed maturity securities | | | | | | | | | | | | | | | | | | | | | | | | |
U.S. Government and federally sponsored agency obligations: | | | | | | | | | | | | | | | | | | | | | | | | |
Mortgage-backed securities | | $ | 193,447 |
| | $ | 5,026 |
| | $ | 157,295 |
| | $ | 8,295 |
| | $ | 350,742 |
| | $ | 13,321 |
| | $ | 72,422 |
| | $ | 1,282 |
| | $ | 2,620 |
| | $ | 205 |
| | $ | 75,042 |
| | $ | 1,487 |
|
Other | | 263,497 |
| | 6,746 |
| | 246,213 |
| | 10,935 |
| | 509,710 |
| | 17,681 |
| | 38,341 |
| | 619 |
| | 1,527 |
| | 2 |
| | 39,868 |
| | 621 |
|
Municipal bonds | | 291,869 |
| | 7,603 |
| | 95,297 |
| | 5,891 |
| | 387,166 |
| | 13,494 |
| | 91,195 |
| | 977 |
| | 9,160 |
| | 603 |
| | 100,355 |
| | 1,580 |
|
Foreign government bonds | | 16,250 |
| | 760 |
| | — |
| | — |
| | 16,250 |
| | 760 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Corporate bonds | | 818,519 |
| | 27,429 |
| | 99,171 |
| | 11,462 |
| | 917,690 |
| | 38,891 |
| | 58,198 |
| | 886 |
| | 16,622 |
| | 909 |
| | 74,820 |
| | 1,795 |
|
Other mortgage-backed securities | | 913,858 |
| | 16,076 |
| | 291,442 |
| | 7,455 |
| | 1,205,300 |
| | 23,531 |
| |
Other asset-backed securities | | | 218,710 |
| | 1,970 |
| | 442,791 |
| | 6,161 |
| | 661,501 |
| | 8,131 |
|
Total | | $ | 2,497,440 |
| | $ | 63,640 |
| | $ | 889,418 |
| | $ | 44,038 |
| | $ | 3,386,858 |
| | $ | 107,678 |
| | $ | 478,866 |
| | $ | 5,734 |
| | $ | 472,720 |
| | $ | 7,880 |
| | $ | 951,586 |
| | $ | 13,614 |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
Number of positions with a gross unrealized loss | | 1,052 |
| | | | 359 |
| | | | 1,411 |
| | | | 330 |
| | | | 137 |
| | | | 467 |
| | |
Fair value as a percentage of total fixed maturity securities fair value | | 33.2 | % | | | | 11.8 | % | | | | 45.0 | % | | | |
Fair value as a percentage of total fixed maturity securities at fair value | | | 8.3 | % | | | | 8.2 | % | | | | 16.5 | % | | |
Fixed maturity securities with an investment grade rating represented 84.0%84.5% of the gross unrealized losses as of June 30, 2019.2020. With respect to fixed maturity securities involving securitized financial assets, the underlying collateral cash flows were stress tested to determine there was no adverse change in the present value of cash flows below theirthe amortized cost bases.basis.
|
| | |
Horace Mann Educators Corporation | 12 | Quarterly Report on Form 10-Q |
Note 3NOTE 2 - Investments (Continued)(continued)
Credit Losses
The following table summarizes the cumulative amounts related to the Company's credit loss component of other-than-temporary impairment (OTTI) losses on fixed maturity securities held as of June 30, 2020 and 2019 that the Company did not intend to sell as of those dates, and it was not more likely than not that the Company would be required to sell the securities before an anticipated recovery in value, for which the non-credit portions of OTTI losses were recognized in OCI:
|
| | | | | | | | |
($ in thousands) | | Six Months Ended June 30, |
| | 2020 | | 2019 |
Cumulative credit loss (1) | | | | |
Beginning of period | | $ | 1,529 |
| | $ | 1,529 |
|
New credit losses | | 184 |
| | — |
|
Increases to previously recognized credit losses | | — |
| | — |
|
Losses related to securities sold or paid down during the period | | (103 | ) | | — |
|
| | $ | 1,610 |
| | $ | 1,529 |
|
| |
(1) | The cumulative credit loss amounts exclude OTTI losses on securities held as of the periods indicated that the Company intended to sell or it was more likely than not that the Company would be required to sell the security before an anticipated recovery of value. |
For the three and six months ended June 30, 2020, there was no allowance recognized for current expected credit losses with respect to fixed maturity securities classified as available for sale.
Maturities of Fixed Maturity Securities
The following table presents the distribution of the Company’s fixed maturity securities portfolio by estimated expected maturity. Estimated expected maturities differ from contractual maturities, reflecting assumptions regarding borrowers' utilization of the right to call or prepay obligations with or without call or prepayment penalties. For structured securities, including mortgage-backed securities and other mortgage-backed securities, estimated expected maturities consider broker-dealer survey prepayment assumptions and are verified for consistency with the interest rate and economic environments.
|
| | | | | | | | | | | | | | |
($ in thousands) | | Percent of Total Fair Value | | June 30, 2020 |
| | June 30, 2020 | | December 31, 2019 | | Fair Value | | Amortized Cost |
Estimated expected maturity: | | | | | | | | |
Due in 1 year or less | | 4.0 | % | | 3.6 | % | | $ | 240,942 |
| | $ | 240,701 |
|
Due after 1 year through 5 years | | 27.9 | % | | 27.4 | % | | 1,680,037 |
| | 1,650,193 |
|
Due after 5 years through 10 years | | 30.1 | % | | 29.6 | % | | 1,814,204 |
| | 1,680,118 |
|
Due after 10 years through 20 years | | 24.7 | % | | 26.1 | % | | 1,487,294 |
| | 1,314,841 |
|
Due after 20 years | | 13.3 | % | | 13.3 | % | | 799,506 |
| | 718,552 |
|
Total | | 100.0 | % | | 100.0 | % | | $ | 6,021,983 |
| | $ | 5,604,405 |
|
| | | | | | | | |
Average option-adjusted duration, in years | | 6.2 |
| | 6.0 |
| | | | |
|
| | |
Horace Mann Educators Corporation | 13 | Quarterly Report on Form 10-Q |
NOTE 2 - Investments (continued)
Sales of Fixed Maturity and Equity Securities
Proceeds received from sales of fixed maturity and equity securities, each determined using the specific identification method, and gross gains and gross losses realized as a result of those sales for each period were:
|
| | | | | | | | | | | | | | | | |
($ in thousands) | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2020 | | 2019 (1) | | 2020 | | 2019 (1) |
Fixed maturity securities | | | | | | | | |
Proceeds received | | $ | 196,004 |
| | $ | 442,015 |
| | $ | 294,162 |
| | $ | 501,739 |
|
Gross gains realized | | 5,506 |
| | 147,774 |
| | 10,285 |
| | 148,316 |
|
Gross losses realized | | (5,625 | ) | | (5,976 | ) | | (5,893 | ) | | (6,081 | ) |
| | | | | | | | |
Equity securities | | | | | | | | |
Proceeds received | | $ | 10,602 |
| | $ | 1,633 |
| | $ | 12,059 |
| | $ | 17,122 |
|
Gross gains realized | | 1,721 |
| | 389 |
| | 2,040 |
| | 5,134 |
|
Gross losses realized | | (1,249 | ) | | (166 | ) | | (1,805 | ) | | (510 | ) |
| |
(1) | Gross gains realized presented above include a $135.3 million realized investment gain associated with a transfer of investments to a reinsurer as consideration paid during the second quarter of 2019 in connection with the reinsurance of a $2.9 billion block of in force fixed and variable annuity business. See Note 5 for further information. |
Net Unrealized Investment Gains (Losses) on Fixed Maturity Securities
The following table reconciles net unrealized investment gains (losses) on fixed maturity securities, net of tax, included in accumulated other comprehensive income (AOCI), before the impact of DAC:
|
| | | | | | | | | | | | | | | | |
($ in thousands) | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
Net unrealized investment gains (losses) on fixed maturity securities, net of tax | | | | | | | | |
Beginning of period | | $ | 149,876 |
| | $ | 245,319 |
| | $ | 264,410 |
| | $ | 111,712 |
|
Change in net unrealized investment gains (losses) on fixed maturity securities | | 174,932 |
| | 100,693 |
| | 71,159 |
| | 240,705 |
|
Reclassification of net investment (gains) losses on securities to net income | | 5,079 |
| | (114,925 | ) | | (5,682 | ) | | (121,330 | ) |
End of period | | $ | 329,887 |
| | $ | 231,087 |
| | $ | 329,887 |
| | $ | 231,087 |
|
Limited Partnership Interests
As of June 30, 20192020 and December 31, 2018,2019, the carrying value of equity method limited partnershipspartnership interests totaled $351,515 thousand$392.2 million and $328,516 thousand,$383.7 million, respectively. Principal factors influencing carrying value appreciation or decline include operating performance, comparable public company earnings multiples, capitalization rates and the economic environment. The Company recognizes an impairment loss for equity method limited partnershipspartnership interests when evidence demonstrates that the loss is other than temporary. Evidence of a loss in value that is other than temporary may include the absence of an ability to recover the carrying amount of the investment or the inability of the investee to sustain a level of earnings that would justify the carrying amount of the investment.
Credit Losses
The following table summarizes the cumulative amounts related to the Company’s credit loss component of other-than-temporary impairment (OTTI) losses on fixed maturity securities held as of June 30, 2019 and 2018 that the Company did not intend to sell as of those dates, and it was not more likely than not that the Company would be required to sell the securities before the anticipated recovery of the amortized cost bases, for which the non-credit portions of OTTI losses were recognized in OCI:
|
| | | | | | | | |
($ in thousands) | | Six Months Ended June 30, |
| | 2019 | | 2018 |
Cumulative credit loss (1) | | | | |
Beginning of period | | $ | 1,529 |
| | $ | 3,825 |
|
New credit losses | | — |
| | — |
|
Increases to previously recognized credit losses | | — |
| | 246 |
|
Losses related to securities sold or paid down during the period | | — |
| | — |
|
End of period | | $ | 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. |
Maturities of Fixed Maturity Securities
The following table presents the distribution of the Company’s fixed maturity securities portfolio by estimated expected maturity. Estimated expected maturities differ from contractual maturities, reflecting assumptions regarding borrowers’ utilization of the right to call or prepay obligations with or without call or prepayment penalties. For structured securities, including mortgage-backed securities and other asset-backed securities, estimated expected maturities consider broker-dealer survey prepayment assumptions and are verified for consistency with the interest rate and economic environments.
|
| | | | | | | | | | | | | | |
($ in thousands) | | Percent of Total Fair Value | | June 30, 2019 |
| | June 30, 2019 | | December 31, 2018 | | Fair Value | | Amortized Cost |
Estimated expected maturity: | | | | | | | | |
Due in 1 year or less | | 4.7 | % | | 4.8 | % | | $ | 258,331 |
| | $ | 252,586 |
|
Due after 1 year through 5 years | | 26.7 | % | | 22.8 | % | | 1,478,291 |
| | 1,439,296 |
|
Due after 5 years through 10 years | | 29.6 | % | | 32.8 | % | | 1,638,887 |
| | 1,555,825 |
|
Due after 10 years through 20 years | | 25.6 | % | | 26.5 | % | | 1,414,857 |
| | 1,316,715 |
|
Due after 20 years | | 13.4 | % | | 13.1 | % | | 743,904 |
| | 677,333 |
|
Total | | 100.0 | % | | 100.0 | % | | $ | 5,534,270 |
| | $ | 5,241,755 |
|
| | | | | | | | |
Average option-adjusted duration, in years | | 5.6 |
| | 5.9 |
| | | | |
Note 3 - Investments (Continued)
Sales of Fixed Maturity and Equity Securities
Proceeds received from sales of fixed maturity and equity securities, each determined using the specific identification method, and gross gains and gross losses realized as a result of those sales for each period were:
|
| | | | | | | | | | | | | | | | |
($ in thousands) | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2019 (1) | | 2018 | | 2019 (1) | | 2018 |
Fixed maturity securities | | | | | | | | |
Proceeds received | | $ | 442,015 |
| | $ | 100,129 |
| | $ | 501,739 |
| | $ | 190,023 |
|
Gross gains realized | | 147,774 |
| | 2,352 |
| | 148,316 |
| | 4,022 |
|
Gross losses realized | | (5,976 | ) | | (1,584 | ) | | (6,081 | ) | | (1,637 | ) |
| | | | | | | | |
Equity securities | | | | | | | | |
Proceeds received | | $ | 1,633 |
| | $ | 3,735 |
| | $ | 17,122 |
| | $ | 5,783 |
|
Gross gains realized | | 389 |
| | 977 |
| | 5,134 |
| | 1,593 |
|
Gross losses realized | | (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 (Losses) on Fixed Maturity Securities
The following table reconciles net unrealized investment gains (losses) on fixed maturity securities, net of tax, included in AOCI, before the impact of DAC:
|
| | | | | | | | | | | | | | | | |
($ in thousands) | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
Net unrealized investment gains (losses) on fixed maturity securities, net of tax | | | | | | | | |
Beginning of period | | $ | 245,319 |
| | $ | 206,293 |
| | $ | 111,712 |
| | $ | 286,176 |
|
Change in net unrealized investment gains (losses) on fixed maturity securities | | 100,693 |
| | (61,724 | ) | | 240,705 |
| | (129,009 | ) |
Reclassification of net investment (gains) losses on securities to net income | | (114,925 | ) | | 429 |
| | (121,330 | ) | | 2,872 |
|
Cumulative effect of change in accounting principle (1) | | — |
| | — |
| | — |
| | (15,041 | ) |
End of period | | $ | 231,087 |
| | $ | 144,998 |
| | $ | 231,087 |
| | $ | 144,998 |
|
________________
| |
(1)
| Effective January 1, 2018, with the adoption of new accounting guidance for recognition and measurement of financial instruments, available for sale equity securities were reclassified to equity securities at fair value and the related net unrealized gains were reclassified from AOCI to Retained earnings. |
Offsetting of Assets and Liabilities
The Company’s derivative instruments (call options)Company's derivatives are subject to enforceable master netting arrangements. Collateral support agreements associated with each master netting arrangement provide that the Company will receive or pledge financial collateral in the event minimum thresholds have been reached.
|
| | |
Horace Mann Educators Corporation | 14 | Quarterly Report on Form 10-Q |
NOTE 2 - Investments (continued)
The following table presents instruments that were subject to a master netting arrangement for the Company.
| | ($ in thousands) | | | | Gross Amounts Offset in the | | Net Amounts of Assets/ Liabilities Presented in the | | Gross Amounts Not Offset in the Consolidated Balance Sheets | | | | | | Gross Amounts Offset in the Consolidated Balance Sheets | | Net Amounts of Assets/ Liabilities Presented in the Consolidated Balance Sheets
| | Gross Amounts Not Offset in the Consolidated Balance Sheets | | |
| | Gross Amounts | | Consolidated Balance Sheets | | Consolidated Balance Sheets | | Financial Instruments | | Cash Collateral Received | | Net Amount | | Gross Amounts | | Financial Instruments | | Cash Collateral Received | | Net Amount |
June 30, 2019 | | | | | | | | | | | | | |
June 30, 2020 | | | | | | | | | | | | | |
Asset derivatives: | | | | | | | | | | | | | | | | | | | | | | | | |
Free-standing derivatives | | $ | 8,753 |
| | $ | — |
| | $ | 8,753 |
| | $ | — |
| | $ | 8,663 |
| | $ | 90 |
| | $ | 7,276 |
| | $ | — |
| | $ | 7,276 |
| | $ | 4,340 |
| | $ | 2,600 |
| | $ | 336 |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2018 | | | | | | | | | | | | | |
December 31, 2019 | | | | | | | | | | | | | |
Asset derivatives: | | | | | | | | | | | | | | | | | | | | | | | | |
Free-standing derivatives | | $ | 2,647 |
| | $ | — |
| | $ | 2,647 |
| | $ | — |
| | $ | 1,868 |
| | $ | 779 |
| | 13,239 |
| | — |
| | 13,239 |
| | 7,687 |
| | 6,640 |
| | (1,088 | ) |
Note 3 - Investments (Continued)
Deposits
At June 30, 20192020 and December 31, 2018,2019, fixed maturity securities with a fair value of $18,073 thousand$26.9 million and $17,695 thousand,$26.0 million, respectively, were on deposit with governmental agencies as required by law in various states in which the insurance subsidiaries of HMEC conduct business. In addition, at June 30, 20192020 and December 31, 2018,2019, fixed maturity securities with a fair value of $787,421 thousand$701.9 million and $740,016 thousand,$594.2 million, respectively, were on deposit with the Federal Home Loan Bank of Chicago (FHLB) as collateral for amounts subject to funding agreements, advances and borrowings which were equal to $725,000 thousand$644.5 million at June 30, 20192020 and $675,000 thousand$545.0 million at December 31, 2018.2019. The deposited securities are included in Fixed maturity securities on the Company’s Consolidated Balance Sheets.
Note 4NOTE 3 - Fair Value of Financial Instruments
The Company is required under GAAP to disclose estimated fair values for certain financial and nonfinancial assets and liabilities. Fair values of the Company’s insurance contracts other than annuity contracts (which are investment contracts) are not required to be disclosed. However, the estimated fair values of liabilities under all insurance contracts are taken into consideration in the Company’s overall management of interest rate risk through the matching of investment maturities with amounts due under insurance contracts.
Information regarding the three-level hierarchy presented below and the valuation methodologies utilized by the Company to estimate fair values at each reporting date is included in Part II - Item 8, Note 34 of the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.2019.
|
| | |
Horace Mann Educators Corporation | 15 | Quarterly Report on Form 10-Q |
Note 4NOTE 3 - Fair Value of Financial Instruments (Continued)(continued)
Financial Instruments Measured and Carried at Fair Value
on a Recurring Basis
The following table presents the Company’sCompany's fair value hierarchy for those assets and liabilities measured and carried at fair value on a recurring basis. During the six months ended June 30, 2020 and 2019, there were no transfers between Level 1 and Level 2. At June 30, 2019,2020, Level 3 invested assets comprised 4.0%6.3% of the Company’s total investment portfolio at fair value.
| | ($ in thousands) | | | | Fair Value Measurements at | | | | Fair Value Measurements at |
| | Carrying | | Fair | | Reporting Date Using | | Carrying | | Fair | | Reporting Date Using |
| | Amount | | Value | | Level 1 | | Level 2 | | Level 3 | | Amount | | Value | | Level 1 | | Level 2 | | Level 3 |
June 30, 2019 | | | | | | | | | | | |
June 30, 2020 | | | | | | | | | | | |
Financial Assets | | | | | | | | | | | | | | | | | | | | |
Investments | | | | | | | | | | | | | | | | | | | | |
Fixed maturity securities | | | | | | | | | | | | | | | | | | | | |
U.S. Government and federally sponsored agency obligations: | | | | | | | | | | | | | | | | | | | | |
Mortgage-backed securities | | $ | 586,758 |
| | $ | 586,758 |
| | $ | — |
| | $ | 584,070 |
| | $ | 2,688 |
| | $ | 718,974 |
| | $ | 718,974 |
| | $ | — |
| | $ | 694,513 |
| | $ | 24,461 |
|
Other, including U.S. Treasury securities | | 566,437 |
| | 566,437 |
| | 16,288 |
| | 550,149 |
| | — |
| | 374,881 |
| | 374,881 |
| | 18,520 |
| | 356,361 |
| | — |
|
Municipal bonds | | 1,599,693 |
| | 1,599,693 |
| | — |
| | 1,552,709 |
| | 46,984 |
| | 1,805,550 |
| | 1,805,550 |
| | — |
| | 1,732,379 |
| | 73,171 |
|
Foreign government bonds | | 47,367 |
| | 47,367 |
| | — |
| | 47,367 |
| | — |
| | 43,550 |
| | 43,550 |
| | — |
| | 43,550 |
| | — |
|
Corporate bonds | | 1,321,286 |
| | 1,321,286 |
| | 13,997 |
| | 1,228,067 |
| | 79,222 |
| | 1,862,440 |
| | 1,862,440 |
| | 12,773 |
| | 1,723,375 |
| | 126,292 |
|
Other mortgage-backed securities | | 1,412,729 |
| | 1,412,729 |
| | — |
| | 1,286,979 |
| | 125,750 |
| |
Other asset-backed securities | | | 1,216,588 |
| | 1,216,588 |
| | — |
| | 1,040,903 |
| | 175,685 |
|
Total fixed maturity securities | | 5,534,270 |
| | 5,534,270 |
| | 30,285 |
| | 5,249,341 |
| | 254,644 |
| | 6,021,983 |
| | 6,021,983 |
| | 31,293 |
| | 5,591,081 |
| | 399,609 |
|
Equity securities | | 100,143 |
| | 100,143 |
| | 57,530 |
| | 42,544 |
| | 69 |
| | 90,338 |
| | 90,338 |
| | 35,269 |
| | 54,954 |
| | 115 |
|
Short-term investments | | 247,872 |
| | 247,872 |
| | 246,872 |
| | 1,000 |
| | — |
| | 182,670 |
| | 182,670 |
| | 179,651 |
| | 3,019 |
| | — |
|
Other investments | | 24,503 |
| | 24,503 |
| | — |
| | 24,503 |
| | — |
| | 23,604 |
| | 23,604 |
| | — |
| | 23,604 |
| | — |
|
Totals | | $ | 5,906,788 |
| | $ | 5,906,788 |
| | $ | 334,687 |
| | $ | 5,317,388 |
| | $ | 254,713 |
| | $ | 6,318,595 |
| | $ | 6,318,595 |
| | $ | 246,213 |
| | $ | 5,672,658 |
| | $ | 399,724 |
|
Separate Account (variable annuity) assets (1) | | $ | 2,310,886 |
| | $ | 2,310,886 |
| | $ | 2,310,886 |
| | $ | — |
| | $ | — |
| | $ | 2,316,900 |
| | $ | 2,316,900 |
| | $ | 2,316,900 |
| | $ | — |
| | $ | — |
|
Financial Liabilities | | | | | | | | | | | | | | | | | | | | |
Investment contract and life policy reserves, embedded derivatives | | $ | 940 |
| | $ | 940 |
| | $ | — |
| | $ | 940 |
| | $ | — |
| |
Investment contract and policy reserves, embedded derivatives | | | $ | 1,113 |
| | $ | 1,113 |
| | $ | — |
| | $ | 1,113 |
| | $ | — |
|
Other policyholder funds, embedded derivatives | | $ | 85,961 |
| | $ | 85,961 |
| | $ | — |
| | $ | — |
| | $ | 85,961 |
| | $ | 93,619 |
| | $ | 93,619 |
| | $ | — |
| | $ | — |
| | $ | 93,619 |
|
| | | | | | | | | | | | | | | | | | | | |
December 31, 2018 | | | | | | | | | | | |
December 31, 2019 | | | | | | | | | | | |
Financial Assets | | | | | | | | | | | | | | | | | | | | |
Investments | | | | | | | | | | | | | | | | | | | | |
Fixed maturity securities | | | | | | | | | | | | | | | | | | | | |
U.S. Government and federally sponsored agency obligations: | | | | | | | | | | | | | | | | | | | | |
Mortgage-backed securities | | $ | 787,441 |
| | $ | 787,441 |
| | $ | — |
| | $ | 784,224 |
| | $ | 3,217 |
| | $ | 724,319 |
| | $ | 724,319 |
| | $ | — |
| | $ | 711,004 |
| | $ | 13,315 |
|
Other, including U.S. Treasury securities | | 833,542 |
| | 833,542 |
| | 13,291 |
| | 820,251 |
| | — |
| | 458,868 |
| | 458,868 |
| | 17,699 |
| | 441,169 |
| | — |
|
Municipal bonds | | 2,003,969 |
| | 2,003,969 |
| | — |
| | 1,956,438 |
| | 47,531 |
| | 1,686,203 |
| | 1,686,203 |
| | — |
| | 1,641,912 |
| | 44,291 |
|
Foreign government bonds | | 84,904 |
| | 84,904 |
| | — |
| | 84,904 |
| | — |
| | 45,370 |
| | 45,370 |
| | — |
| | 45,370 |
| | — |
|
Corporate bonds | | 2,079,510 |
| | 2,079,510 |
| | 12,281 |
| | 1,986,487 |
| | 80,742 |
| | 1,581,424 |
| | 1,581,424 |
| | 14,470 |
| | 1,463,002 |
| | 103,952 |
|
Other mortgage-backed securities | | 1,725,952 |
| | 1,725,952 |
| | — |
| | 1,608,958 |
| | 116,994 |
| |
Other asset-backed securities | | | 1,295,492 |
| | 1,295,492 |
| | — |
| | 1,161,979 |
| | 133,513 |
|
Total fixed maturity securities | | 7,515,318 |
| | 7,515,318 |
| | 25,572 |
| | 7,241,262 |
| | 248,484 |
| | 5,791,676 |
| | 5,791,676 |
| | 32,169 |
| | 5,464,436 |
| | 295,071 |
|
Equity securities | | 111,750 |
| | 111,750 |
| | 64,330 |
| | 47,415 |
| | 5 |
| | 101,864 |
| | 101,864 |
| | 49,834 |
| | 51,923 |
| | 107 |
|
Short-term investments | | 122,222 |
| | 122,222 |
| | 117,296 |
| | 4,926 |
| | — |
| | 172,667 |
| | 172,667 |
| | 172,667 |
| | — |
| | — |
|
Other investments | | 16,147 |
| | 16,147 |
| | — |
| | 16,147 |
| | — |
| | 25,997 |
| | 25,997 |
| | — |
| | 25,997 |
| | — |
|
Totals | | $ | 7,765,437 |
| | $ | 7,765,437 |
| | $ | 207,198 |
| | $ | 7,309,750 |
| | $ | 248,489 |
| | $ | 6,092,204 |
| | $ | 6,092,204 |
| | $ | 254,670 |
| | $ | 5,542,356 |
| | $ | 295,178 |
|
Separate Account (variable annuity) assets (1) | | $ | 2,001,128 |
| | $ | 2,001,128 |
| | $ | 2,001,128 |
| | $ | — |
| | $ | — |
| | $ | 2,490,469 |
| | $ | 2,490,469 |
| | $ | 2,490,469 |
| | $ | — |
| | $ | — |
|
Financial Liabilities | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Investment contract and life policy reserves, embedded derivatives | | $ | 248 |
| | $ | 248 |
| | $ | — |
| | $ | 248 |
| | $ | — |
| |
Investment contract and policy reserves, embedded derivatives | | | $ | 1,314 |
| | $ | 1,314 |
| | $ | — |
| | $ | 1,314 |
| | $ | — |
|
Other policyholder funds, embedded derivatives | | $ | 78,700 |
| | $ | 78,700 |
| | $ | — |
| | $ | — |
| | $ | 78,700 |
| | $ | 93,733 |
| | $ | 93,733 |
| | $ | — |
| | $ | — |
| | $ | 93,733 |
|
________________
(1) Separate Account (variable annuity) liabilities are equal to the estimated fair value of the Separate Account (variable annuity) assets.
|
| | |
Horace Mann Educators Corporation | 16 | Quarterly Report on Form 10-Q |
Note 4NOTE 3 - Fair Value of Financial Instruments (Continued)(continued)
During the six month periods ended June 30, 2019 and 2018, there were no transfers betweenChanges in Level 1 and Level 2. 3 Fair Value Measurements
The following table presents reconciliations for the periods indicatedreconciliation for all Level 3 assets and liabilities measured at fair value on a recurring basis.basis using significant unobservable inputs (Level 3) was as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
($ in thousands) | | Financial Assets | | Financial Liabilities(1) |
| | Municipal Bonds | | Corporate Bonds | | Other Mortgage- Backed Securities (2) | | Total Fixed Maturity Securities | | Equity Securities | | Total | | |
Beginning balance, April 1, 2019 | | $ | 47,756 |
| | $ | 82,482 |
| | $ | 135,790 |
| | $ | 266,028 |
| | $ | 5 |
| | $ | 266,033 |
| | $ | 84,629 |
|
Transfers into Level 3 (3) | | — |
| | 2,808 |
| | — |
| | 2,808 |
| | 64 |
| | 2,872 |
| | — |
|
Transfers out of Level 3 (3) | | — |
| | (4,876 | ) | | — |
| | (4,876 | ) | | — |
| | (4,876 | ) | | — |
|
Total gains or losses | | | | | | | | | | | | | | |
Net investment gains (losses) included in net income related to financial assets | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Net realized (gains) losses included in net income related to financial liabilities | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 371 |
|
Net unrealized investment gains (losses) included in OCI | | (537 | ) | | 1,961 |
| | 2,807 |
| | 4,231 |
| | — |
| | 4,231 |
| | — |
|
Purchases | | — |
| | 1,566 |
| | — |
| | 1,566 |
| | — |
| | 1,566 |
| | — |
|
Issuances | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 2,431 |
|
Sales | | — |
| | — |
| | (607 | ) | | (607 | ) | | — |
| | (607 | ) | | — |
|
Settlements | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Paydowns, maturities and distributions | | (235 | ) | | (4,719 | ) | | (9,552 | ) | | (14,506 | ) | | — |
| | (14,506 | ) | | (1,470 | ) |
Ending balance, June 30, 2019 | | $ | 46,984 |
| | $ | 79,222 |
| | $ | 128,438 |
| | $ | 254,644 |
| | $ | 69 |
| | $ | 254,713 |
| | $ | 85,961 |
|
| | | | | | | | | | | | | | |
Beginning balance, January 1, 2019 | | $ | 47,531 |
| | $ | 80,742 |
| | $ | 120,211 |
| | $ | 248,484 |
| | $ | 5 |
| | $ | 248,489 |
| | $ | 78,700 |
|
Transfers into Level 3 (3) | | — |
| | 5,882 |
| | 21,934 |
| | 27,816 |
| | 64 |
| | 27,880 |
| | — |
|
Transfers out of Level 3 (3) | | — |
| | (4,876 | ) | | — |
| | (4,876 | ) | | — |
| | (4,876 | ) | | — |
|
Total gains or losses | | | | | | | | | | | | | | |
Net investment gains (losses) included in net income related to financial assets | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Net realized (gains) losses included in net income related to financial liabilities | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 4,705 |
|
Net unrealized investment gains (losses) included in OCI | | (193 | ) | | 4,510 |
| | 2,655 |
| | 6,972 |
| | — |
| | 6,972 |
| | — |
|
Purchases | | — |
| | 1,566 |
| | — |
| | 1,566 |
| | — |
| | 1,566 |
| | — |
|
Issuances | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 5,449 |
|
Sales | | — |
| | — |
| | (607 | ) | | (607 | ) | | — |
| | (607 | ) | | — |
|
Settlements | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Paydowns, maturities and distributions | | (354 | ) | | (8,602 | ) | | (15,755 | ) | | (24,711 | ) | | — |
| | (24,711 | ) | | (2,893 | ) |
Ending balance, June 30, 2019 | | $ | 46,984 |
| | $ | 79,222 |
| | $ | 128,438 |
| | $ | 254,644 |
| | $ | 69 |
| | $ | 254,713 |
| | $ | 85,961 |
|
________________ |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
($ 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, 2020 | | $ | 104,892 |
| | $ | 111,693 |
| | $ | 140,527 |
| | $ | 357,112 |
| | $ | 83 |
| | $ | 357,195 |
| | $ | 87,506 |
|
Transfers into Level 3 (3) | | 10,726 |
| | 13,970 |
| | 64,239 |
| | 88,935 |
| | — |
| | 88,935 |
| | — |
|
Transfers out of Level 3 (3) | | (45,917 | ) | | (4,166 | ) | | (3,438 | ) | | (53,521 | ) | | — |
| | (53,521 | ) | | — |
|
Total gains or losses | | | | | | | | | | | | | | |
Net investment gains (losses) included in net income related to financial assets | | — |
| | — |
| | — |
| | — |
| | 32 |
| | 32 |
| | — |
|
Net realized (gains) losses included in net income related to financial liabilities | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 5,966 |
|
Net unrealized investment gains (losses) included in OCI | | 3,838 |
| | 5,308 |
| | 3,261 |
| | 12,407 |
| | — |
| | 12,407 |
| | — |
|
Purchases | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Issuances | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 2,513 |
|
Sales | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Settlements | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Paydowns, maturities and distributions | | (368 | ) | | (513 | ) | | (4,443 | ) | | (5,324 | ) | | — |
| | (5,324 | ) | | (2,366 | ) |
Ending balance, June 30, 2020 | | $ | 73,171 |
| | $ | 126,292 |
| | $ | 200,146 |
| | $ | 399,609 |
| | $ | 115 |
| | $ | 399,724 |
| | $ | 93,619 |
|
| | | | | | | | | | | | | | |
Beginning balance, January 1, 2020 | | $ | 44,291 |
| | $ | 103,952 |
| | $ | 146,828 |
| | $ | 295,071 |
| | $ | 107 |
| | $ | 295,178 |
| | $ | 93,733 |
|
Transfers into Level 3 (3) | | 74,477 |
| | 32,803 |
| | 86,714 |
| | 193,994 |
| | — |
| | 193,994 |
| | — |
|
Transfers out of Level 3 (3) | | (45,917 | ) | | (14,188 | ) | | (6,385 | ) | | (66,490 | ) | | — |
| | (66,490 | ) | | — |
|
Total gains or losses | | | | | | | | | | | | | | |
Net investment gains (losses) included in net income related to financial assets | | — |
| | — |
| | — |
| | — |
| | 8 |
| | 8 |
| | — |
|
Net realized (gains) losses included in net income related to financial liabilities | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 924 |
|
Net unrealized investment gains (losses) included in OCI | | 812 |
| | (173 | ) | | (21,101 | ) | | (20,462 | ) | | — |
| | (20,462 | ) | | — |
|
Purchases | | — |
| | 6,875 |
| | 1,890 |
| | 8,765 |
| | — |
| | 8,765 |
| | — |
|
Issuances | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 3,867 |
|
Sales | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Settlements | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Paydowns, maturities and distributions | | (492 | ) | | (2,977 | ) | | (7,800 | ) | | (11,269 | ) | | — |
| | (11,269 | ) | | (4,905 | ) |
Ending balance, June 30, 2020 | | $ | 73,171 |
| | $ | 126,292 |
| | $ | 200,146 |
| | $ | 399,609 |
| | $ | 115 |
| | $ | 399,724 |
| | $ | 93,619 |
|
| |
(1) | Represents embedded derivatives, all related to the Company's fixed indexed annuity products, reported in Other policyholder funds in the Company’sCompany's Consolidated Balance Sheets. |
| |
(2) | Includes U.S. Government and federally sponsored agency obligations for mortgage-backed securities and other mortgage-backed securities. |
| |
(3) | Transfers into and out of Level 3 during the three and six months ended June 30, 2020 were attributable to changes in the availability of observable market information for individual fixed maturity securities. The Company's policy is to recognize transfers into and transfers out of the levels as having occurred at the end of the reporting period in which the transfers were determined. |
|
| | |
Horace Mann Educators Corporation | 17 | Quarterly Report on Form 10-Q |
NOTE 3 - Fair Value of Financial Instruments (continued)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
($ in thousands) | | Financial Assets | | Financial Liabilities(1) |
| | Municipal Bonds | | Corporate Bonds | | Other Mortgage- Backed Securities (2) | | Total Fixed Maturity Securities | | Equity Securities | | Total | | |
Beginning balance, April 1, 2019 | | $ | 47,756 |
| | $ | 82,482 |
| | $ | 135,790 |
| | $ | 266,028 |
| | $ | 5 |
| | $ | 266,033 |
| | $ | 84,629 |
|
Transfers into Level 3 (3) | | — |
| | 2,808 |
| | — |
| | 2,808 |
| | 64 |
| | 2,872 |
| | — |
|
Transfers out of Level 3 (3) | | — |
| | (4,876 | ) | | — |
| | (4,876 | ) | | — |
| | (4,876 | ) | | — |
|
Total gains or losses | | | | | | | | | | | | | | |
Net investment gains (losses) included in net income related to financial assets | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Net realized (gains) losses included in net income related to financial liabilities | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 371 |
|
Net unrealized investment gains (losses) included in OCI | | (537 | ) | | 1,961 |
| | 2,807 |
| | 4,231 |
| | — |
| | 4,231 |
| | — |
|
Purchases | | — |
| | 1,566 |
| | — |
| | 1,566 |
| | — |
| | 1,566 |
| | — |
|
Issuances | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 2,431 |
|
Sales | | — |
| | — |
| | (607 | ) | | (607 | ) | | — |
| | (607 | ) | | — |
|
Settlements | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Paydowns, maturities and distributions | | (235 | ) | | (4,719 | ) | | (9,552 | ) | | (14,506 | ) | | — |
| | (14,506 | ) | | (1,470 | ) |
Ending balance, June 30, 2019 | | $ | 46,984 |
| | $ | 79,222 |
| | $ | 128,438 |
| | $ | 254,644 |
| | $ | 69 |
| | $ | 254,713 |
| | $ | 85,961 |
|
| | | | | | | | | | | | | | |
Beginning balance, January 1, 2019 | | $ | 47,531 |
| | $ | 80,742 |
| | $ | 120,211 |
| | $ | 248,484 |
| | $ | 5 |
| | $ | 248,489 |
| | $ | 78,700 |
|
Transfers into Level 3 (3) | | — |
| | 5,882 |
| | 21,934 |
| | 27,816 |
| | 64 |
| | 27,880 |
| | — |
|
Transfers out of Level 3 (3) | | — |
| | (4,876 | ) | | — |
| | (4,876 | ) | | — |
| | (4,876 | ) | | — |
|
Total gains or losses | | | | | | | | | | | | | | |
Net investment gains (losses) included in net income related to financial assets | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Net realized (gains) losses included in net income related to financial liabilities | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 4,705 |
|
Net unrealized investment gains (losses) included in OCI | | (193 | ) | | 4,510 |
| | 2,655 |
| | 6,972 |
| | — |
| | 6,972 |
| | — |
|
Purchases | | — |
| | 1,566 |
| | — |
| | 1,566 |
| | — |
| | 1,566 |
| | — |
|
Issuances | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 5,449 |
|
Sales | | — |
| | — |
| | (607 | ) | | (607 | ) | | — |
| | (607 | ) | | — |
|
Settlements | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Paydowns, maturities and distributions | | (354 | ) | | (8,602 | ) | | (15,755 | ) | | (24,711 | ) | | — |
| | (24,711 | ) | | (2,893 | ) |
Ending balance, June 30, 2019 | | $ | 46,984 |
| | $ | 79,222 |
| | $ | 128,438 |
| | $ | 254,644 |
| | $ | 69 |
| | $ | 254,713 |
| | $ | 85,961 |
|
| |
(1) | Represents embedded derivatives, all related to the Company's fixed indexed annuity products, reported in Other policyholder funds in the Company's Consolidated Balance Sheets. |
| |
(2) | Includes U.S. Government and federally sponsored agency obligations for mortgage-backed securities and other mortgage-backed securities. |
| |
(3) | Transfers into and out of Level 3 during the three and six month periodsmonths ended June 30, 2019 were attributable to changes in the availability of observable market information for individual fixed maturity securities. The Company’s policy is to recognize transfers into and transfers out of the levels as having occurred at the end of the reporting period in which the transfers were determined. |
Note 4 - Fair Value of Financial Instruments (Continued)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
($ in thousands) | | Financial Assets | | Financial Liabilities(1) |
| | Municipal Bonds | | Corporate Bonds | | Other Mortgage- Backed Securities (2) | | Total Fixed Maturity Securities | | Equity Securities | | Total | | |
Beginning balance, 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’sCompany's policy is to recognize transfers into and transfers out of the levels as having occurred at the end of the reporting period in which the transfers were determined. |
For the six month periodmonths ended June 30, 2020 and June 30, 2019, the Company had no0 net losses on Level 3 securities. For the three and six month periodmonths ended June 30, 2018, the Company had a realized net loss on two Level 3 securities of $243 thousand. For the three and six month periods ended June 30, 2019,2020, net investment losses of $371 thousand$6.0 million and $4,705 thousand$0.9 million were included in earnings that were attributable to the changes in the fair value of Level 3 liabilities (embedded derivatives) still held; for the three and six month periodsmonths ended June 30, 2018,2019, the respective gain amountsnet investment losses were $1,291 thousand$0.4 million and $3,513 thousand.$4.7 million.
|
| | |
Horace Mann Educators Corporation | 18 | Quarterly Report on Form 10-Q |
Note 4NOTE 3 - Fair Value of Financial Instruments (Continued)(continued)
Quantitative Information about Level 3 Fair Value Measurements
The following table provides quantitative information about the significant unobservable inputs for recurring fair value measurements categorized within Level 3.
|
| | | | | | | | | | |
($ in thousands) |
Financial Assets | | Fair Value at June 30, 2020 | | Valuation Technique(s) | | Unobservable Inputs | | Range (Weighted Average) and Single Point Best Estimate (1) |
Municipal bonds | | $ | 73,171 |
| | discounted cash flow | | I spread (2) | | 578 bps |
Corporate bonds | | 126,292 |
| | discounted cash flow | | N spread (3) | | 762 bps |
| | | | discounted cash flow | | T spread (4) | | 378 bps |
| | | | discounted cash flow | | I spread (2) | | 495 bps |
| | | | market comparable | | EV / TTM EBITDA (x) (5) | | 5.11x |
Other asset-backed securities | | 175,685 |
| | discounted cash flow | | constant prepayment rate | | 20.0% |
| | | | vendor price | | haircut | | 3.0% |
| | | | market comparable | | EV / TTM EBITDA (x) (5) | | 5.11x |
| | | | discounted cash flow | | N spread (3) | | 732 bps |
| | | | discounted cash flow | | PDI interest margin (6) | | 7.13% |
| | | | discounted cash flow | | SBL interest margin (7) | | 4.50% |
Government mortgage-backed securities | | 24,461 |
| | vendor price | | haircut | | 3.0% |
| | | | discounted cash flow | | N spread (3) | | 109 bps |
| | | | discounted cash flow | | constant prepayment yield | | 100 bps |
| | | | discounted cash flow | | constant default rate | | 0 |
Equity securities | | 115 |
| | Black Scholes | | equity value | | low - $43.27; high - $44.53 |
|
| | | | | | | | | | |
($ in thousands) |
Financial Liabilities | | Fair Value at June 30, 2020 | | Valuation Technique(s) | | Unobservable Inputs | | Range (Weighted Average) and Single Point Best Estimate (1) |
Derivatives embedded in fixed indexed annuity products | | $ | 93,619 |
| | discounted cash flow | | lapse rate | | 5.25% |
| | | | | | mortality multiplier (8) | | 61.00% |
| | | | | | option budget | | 1.00% - 2.50% |
| | | | | | non-performance adjustment (9) | | 5.00% |
| |
(1) | When a range of unobservable inputs is not readily available, the Company uses a single point best estimate. |
| |
(2) | "I spread" is the interpolated weighted average life point on the "on the run" (OTR) point of the curve. |
| |
(3) | "N spread" is the interpolated weighted average life point on the swap curve. |
| |
(4) | "T spread" is a specific point on the OTR curve. |
| |
(5) | This represents the enterprise value (EV) for trailing twelve months (TTM) of EBITDA plus multiplier. |
| |
(6) | "PDI" stands for private debt investment. |
| |
(7) | "SBL" stands for broadly syndicated loans. |
| |
(8) | Mortality multiplier is applied to the Annuity 2000 table. |
| |
(9) | Determined as a percentage of a risk-free rate. |
The valuation techniques and significant unobservable inputs used in the fair value measurement for financial assets and liabilities classified as Level 3 are subject to the control processes as described in Part II - Item 8, Note 34 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.2019. Generally, valuation techniques for fixed maturity securities include spread pricing, matrix pricing and discounted cash flow methodologies; include inputs such as quoted prices for identical or similar securities that are less liquid; and are based on lower levels of trading activity than securities classified as Level 2. The valuation techniques and significant unobservable inputs used in the fair value measurement for equity securities classified as Level 3 use similar valuation techniques and significant unobservable inputs as those used for fixed maturity securities.
|
| | |
Horace Mann Educators Corporation | 19 | Quarterly Report on Form 10-Q |
NOTE 3 - Fair Value of Financial Instruments (continued)
The sensitivity of the estimated fair values to changes in the significant unobservable inputs for fixed maturity and equity securities included in Level 3 generally relate to interest rate spreads, illiquidity premiumsinclude: benchmark yield, liquidity premium, estimated cash flows, prepayment and default rates.speeds, spreads, weighted average life, and credit rating. Significant spread widening in isolation will adversely impact the overall valuation, while significant spread tightening will lead to substantial valuation increases. Significant increases (decreases) in illiquidity premiums in isolation will result in substantially lower (higher) valuations. Significant increases (decreases) in expected default rates in isolation will result in substantially lower (higher) valuations.
Financial Instruments Not Carried at Fair Value; Disclosure Required
The Company has various other financial assets and financial liabilities used in the normal course of business that are not carried at fair value, but for which fair value disclosure is required. These financial assets and financial liabilities are further described in Part II - Item 8, Note 4 in the Company's Annual Report on Form 10-K for the year ended December 31, 2019. The following table presents the carrying value, fair value and fair value hierarchy of these financial assets and financial liabilities.
| | ($ in thousands) | | | | Fair Value Measurements at | | | | Fair Value Measurements at |
| | Carrying | | Fair | | Reporting Date Using | | Carrying | | Fair | | Reporting Date Using |
| | Amount | | Value | | Level 1 | | Level 2 | | Level 3 | | Amount | | Value | | Level 1 | | Level 2 | | Level 3 |
June 30, 2019 | | | | | | | | | | | |
June 30, 2020 | | | | | | | | | | | |
Financial Assets | | | | | | | | | | | | | | | | | | | | |
Investments | | | | | | | | | | | | | | | | | | | | |
Other investments | | $ | 161,313 |
| | $ | 166,023 |
| | $ | — |
| | $ | — |
| | $ | 166,023 |
| | $ | 168,541 |
| | $ | 172,364 |
| | $ | — |
| | $ | — |
| | $ | 172,364 |
|
Deposit asset on reinsurance | | | 2,373,267 |
| | 2,846,176 |
| | — |
| | — |
| | 2,846,176 |
|
Financial Liabilities | | | | | | | | | | | | | | | | | | | | |
Investment contract and life policy reserves, fixed annuity contracts | | 4,605,272 |
| | 4,529,317 |
| | — |
| | — |
| | 4,529,317 |
| |
Investment contract and life policy reserves, account values on life contracts | | 90,239 |
| | 93,366 |
| | — |
| | — |
| | 93,366 |
| |
Investment contract and policy reserves, fixed annuity contracts | | | 4,742,272 |
| | 4,651,533 |
| | — |
| | — |
| | 4,651,533 |
|
Investment contract and policy reserves, account values on life contracts | | | 95,885 |
| | 100,673 |
| | — |
| | — |
| | 100,673 |
|
Other policyholder funds | | 735,919 |
| | 735,919 |
| | — |
| | 676,460 |
| | 59,459 |
| | 648,240 |
| | 648,240 |
| | — |
| | 590,693 |
| | 57,547 |
|
Short-term debt | | | 135,000 |
| | 135,000 |
| | — |
| | — |
| | 135,000 |
|
Long-term debt | | 297,881 |
| | 315,938 |
| | — |
| | 315,938 |
| | — |
| | 302,172 |
| | 332,385 |
| | — |
| | 332,385 |
| | — |
|
| | | | | | | | | | | | | | | | | | | | |
December 31, 2018 | | | | | | | | | | | |
December 31, 2019 | | | | | | | | | | | |
Financial Assets | | | | | | | | | | | | | | | | | | | | |
Investments | | | | | | | | | | | | | | | | | | | | |
Other investments | | $ | 156,725 |
| | $ | 161,449 |
| | $ | — |
| | $ | — |
| | $ | 161,449 |
| | $ | 163,312 |
| | $ | 167,185 |
| | $ | — |
| | $ | — |
| | $ | 167,185 |
|
Deposit asset on reinsurance | | | 2,346,166 |
| | 2,634,012 |
| | — |
| | — |
| | 2,634,012 |
|
Financial Liabilities | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Investment contract and life policy reserves, fixed annuity contracts | | 4,555,849 |
| | 4,478,338 |
| | — |
| | — |
| | 4,478,338 |
| |
Investment contract and life policy reserves, account values on life contracts | | 87,229 |
| | 90,402 |
| | — |
| | — |
| | 90,402 |
| |
Investment contract and policy reserves, fixed annuity contracts | | | 4,675,774 |
| | 4,609,880 |
| | — |
| | — |
| | 4,609,880 |
|
Investment contract and policy reserves, account values on life contracts | | | 93,465 |
| | 98,332 |
| | — |
| | — |
| | 98,332 |
|
Other policyholder funds | | 689,287 |
| | 689,287 |
| | — |
| | 626,325 |
| | 62,962 |
| | 553,550 |
| | 553,550 |
| | — |
| | 495,812 |
| | 57,738 |
|
Short-term debt | | | 135,000 |
| | 135,000 |
| | — |
| | — |
| | 135,000 |
|
Long-term debt | | 297,740 |
| | 291,938 |
| | — |
| | 291,938 |
| | — |
| | 298,025 |
| | 322,678 |
| | — |
| | 322,678 |
| | — |
|
|
| | |
Horace Mann Educators Corporation | 20 | Quarterly Report on Form 10-Q |
Note 5NOTE 4 - Derivative InstrumentsDerivatives
The Company offers fixed indexed annuity (FIA) products, which are deferred fixed annuities that guarantee the return of principal to the contractholder and credit interest based on a percentage of the gain in a specified market index. The Company also offers indexed universal life (IUL) products which credit interest based on a percentage of the gain in a specified market index. When deposits are received for FIA and IUL contracts, a portion is used to purchase derivatives consisting of call options on the applicable market indices to fund the index credits due to FIA and IUL policyholders. For the Company, substantially all such call options are one-year options purchased to match the funding requirements of the underlying contracts. The call options are carried at fair value with changes in fair value included in Net investment gains (losses), a component of revenues, in the Consolidated Statements of Operations.
The change in fair value of derivatives includes the gains or losses recognized at the expiration of the option term or early termination and the changes in fair value for open positions. Call options are not purchased to fund the index liabilities which may arise after the next deposit anniversary date. On the respective anniversary dates of the indexed deposits, the index used to computedetermine the annual index credit is reset and new one-year call options are purchased to fund the next annual index credit. The cost of these purchases is managed through the terms of the FIA and IUL contracts, which permit changes to index return caps, participation rates and/or asset fees, subject to guaranteed minimums on each contract’scontract's anniversary date. By adjusting the index return caps, participation rates or asset fees, crediting rates generally can be managed except in cases where the contractual features would prevent further modifications.
The future annual index credits on FIA are accounted for as a "series of embedded derivatives" over the expected life of the applicable contract with a corresponding reserve recorded. For IUL, the embedded derivative represents a single year liability for the index return.
The Company carries all derivative instrumentsderivatives at fair value in the Consolidated Balance Sheets. The Company elected to not use hedge accounting for derivative transactions related to the FIA and IUL products. As a result, the Company recognizes the purchased call options and the embedded derivatives related to the provision of a contingent return at fair value, with changes in the fair value recognized immediately as Net investment gains (losses) in the Consolidated Statements of Operations. The fair values of derivative instruments,derivatives, including derivative instrumentsderivatives embedded in FIA and IUL contracts, are presented in the Consolidated Balance Sheets as follows:
| | ($ in thousands) | | June 30, 2019 | | December 31, 2018 | | June 30, 2020 | | December 31, 2019 |
Assets | | | | | | | | |
Derivative instruments, included in Short-term and other investments | | $ | 8,753 |
| | $ | 2,647 |
| |
Derivatives, included in Short-term and other investments | | | $ | 7,276 |
| | $ | 13,239 |
|
| | | | | | | | |
Liabilities | | | | | | | | |
FIA - embedded derivatives, included in Other policyholder funds | | $ | 85,961 |
| | $ | 78,700 |
| | 93,619 |
| | 93,733 |
|
IUL - embedded derivatives, included in Investment contract and life policy reserves | | 940 |
| | 248 |
| |
IUL - embedded derivatives, included in Investment contract and policy reserves | | | 1,113 |
| | 1,314 |
|
Note 5 - Derivative Instruments (Continued)
In general, the change in the fair value of the embedded derivatives related to FIA will not correspond to the change in fair value of the purchased call options because the purchased call options are one-year options while the options valued in the embedded derivatives represent the rights of the policyholder to receive index credits over the entire period the FIA contracts are expected to be in force, which typically exceeds 10 years. The changes in fair value of derivatives included in the Consolidated Statements of Operations were as follows:
|
| | | | | | | | | | | | | | | | |
($ in thousands) | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
Change in fair value of derivatives:(1) | | | | | | | | |
Revenues | | | | | | | | |
Net investment gains (losses) | | $ | 1,375 |
| | $ | (2 | ) | | $ | 5,429 |
| | $ | (851 | ) |
| | | | | | | | |
Change in fair value of embedded derivatives: | | | | | | | | |
Revenues | | | | | | | | |
Net investment gains (losses) | | $ | (516 | ) | | $ | 1,281 |
| | $ | (5,261 | ) | | $ | 3,569 |
|
________________ |
| | | | | | | | | | | | | | | | |
($ in thousands) | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
Change in fair value of derivatives: (1) | | | | | | | | |
Net investment gains (losses) | | $ | 3,210 |
| | $ | 1,375 |
| | $ | (7,790 | ) | | $ | 5,429 |
|
| | | | | | | | |
Change in fair value of embedded derivatives: | | | | | | | | |
Net investment gains (losses) | | (6,477 | ) | | (516 | ) | | (320 | ) | | (5,261 | ) |
| |
(1) | Includes the gains or losses recognized at the expiration of the option term or early termination and the changes in fair value for open options. |
|
| | |
Horace Mann Educators Corporation | 21 | Quarterly Report on Form 10-Q |
NOTE 4 - Derivatives (continued)
The Company’sCompany's strategy attempts to mitigate potential risk of loss under these agreements through a regular monitoring process, which evaluates the program’sprogram's effectiveness. The Company is exposed to risk of loss in the event of nonperformance by the counterparties and, accordingly, option contracts are purchased from multiple counterparties, which are evaluated for creditworthiness prior to purchase of the contracts. All of these options have been purchased from nationally recognized financial institutions with a Standard and Poor’sPoor's Global Inc. (S&P)/Moody's Investors Service, Inc. (Moody's) long-term credit rating of "BBB+/A1"A3" or higher at the time of purchase and the maximum credit exposure to any single counterparty is subject to concentration limits. The Company also obtains credit support agreements that allow it to request the counterparty to provide collateral when the fair value of the exposure to the counterparty exceeds specified amounts.
The notional amount and fair value of call options by counterparty and each counterparty’scounterparty's long-term credit ratings were as follows:
| | ($ in thousands) | | June 30, 2019 | | December 31, 2018 | | June 30, 2020 | | December 31, 2019 |
| | Credit Rating | | Notional | | Fair | | Notional | | Fair | | Credit Rating | | Notional | | Fair | | Notional | | Fair |
Counterparty | | S&P | | Moody's | | Amount | | Value | | Amount | | Value | | S&P | | Moody's | | Amount | | Value | | Amount | | Value |
Bank of America, N.A. | | A+ | | Aa2 | | $ | 156,800 |
| | $ | 3,560 |
| | $ | 144,500 |
| | $ | 870 |
| | A+ | | Aa2 | | $ | 185,100 |
| | $ | 5,090 |
| | $ | 174,900 |
| | $ | 8,523 |
|
Barclays Bank PLC | | A | | A2 | | 72,500 |
| | 1,696 |
| | 28,500 |
| | 247 |
| | A | | A1 | | 108,500 |
| | 1,747 |
| | 115,300 |
| | 3,347 |
|
Citigroup Inc. | | BBB+ | | A3 | | — |
| | — |
| | — |
| | — |
| | BBB+ | | A3 | | — |
| | — |
| | — |
| | — |
|
Credit Suisse International | | A+ | | A1 | | 16,100 |
| | 295 |
| | 16,100 |
| | 55 |
| | A+ | | A1 | | — |
| | — |
| | — |
| | — |
|
Societe Generale | | A | | | | 55,000 |
| | 3,202 |
| | 89,100 |
| | 1,475 |
| | A | | A1 | | 18,400 |
| | 439 |
| | 27,800 |
| | 1,369 |
|
| | | | | | | | | |
Total | | $ | 300,400 |
| | $ | 8,753 |
| | $ | 278,200 |
| | $ | 2,647 |
| | | $ | 312,000 |
| | $ | 7,276 |
| | $ | 318,000 |
| | $ | 13,239 |
|
As of June 30, 20192020 and December 31, 2018,2019, the Company held $8,663 thousand$6.9 million and $1,868 thousand,$14.3 million, respectively, of cash and financial instruments received from counterparties for derivative collateral, which is included in Other liabilities on the Consolidated Balance Sheets. This derivative collateral limits the Company’s maximum amount of economic loss due to credit risk that would be incurred if parties to the call options failed completely to perform according to the terms of the contracts to $250 thousand$0.3 million per counterparty.
Note 6NOTE 5 - Deposit Asset on Reinsurance
In the second quarter of 2019, the Company reinsured a $2.9 billion block of in force fixed and variable annuity business with a minimum crediting rate of 4.5%. This represented approximately 50% of the Company’s in force fixed annuity account balances. The arrangement contains investment guidelines and a trust to help meet the Company’s risk management objectives.
The annuity reinsurance transaction was effective April 1, 2019. Under the agreement, approximately $2.2 billion of fixed annuity reserves were reinsured on a coinsurance basis for consideration of approximately $2.3 billion which resulted in recognition of an after tax realized investment gain of $106.9 million. The separate account assets and liabilities of approximately $0.7 billion were reinsured on a modified coinsurance basis and thus, remain on the Company’sCompany's consolidated financial statements, but the related results of operations are fully reinsured.
The Company determined that the reinsurance agreement does not expose the reinsurer to a reasonable possibility of a significant loss from insurance risk. Therefore, the Company recognizes the reinsurance agreement using the deposit method of accounting. The assets transferred to the reinsurer as consideration paid is reported as a Deposit asset on reinsurance. As amounts are received or paid, consistent with the underlying reinsured contracts, the Deposit asset on reinsurance is adjusted. The Deposit asset on reinsurance is accreted to the estimated ultimate cash flows using the interest method and the adjustment is reported as Net investment income.income in the Consolidated Statements of Operations.
|
| | |
Horace Mann Educators Corporation | 22 | Quarterly Report on Form 10-Q |
NOTE 6 - Goodwill and Intangible Assets, net
The Company conducts impairment testing for goodwill at least annually, or more often if events, changes or circumstances indicate that the carrying amount may not be recoverable. See Part II - Item 8, Note 1 in the Company's Annual Report on Form 10-K for the year ended December 31, 2019 for further description of impairment testing.
There were no changes in the carrying amount of goodwill by reporting unit for the three and six months ended June 30, 2020. The carrying amount of goodwill by reporting unit as of June 30, 2020 was as follows:
|
| | | | |
($ in thousands) | | June 30, 2020 |
Property and Casualty | | $ | 9,460 |
|
Supplemental | | 19,621 |
|
Retirement | | 10,087 |
|
Life | | 9,911 |
|
Total | | $ | 49,079 |
|
As of June 30, 2020, the outstanding amounts of definite-lived intangible assets subject to amortization are attributable to the acquisitions of BCG and NTA during 2019. The acquisition of Benefit Consultants Group, Inc. (BCG) resulted in initial recognition of definite-lived intangible assets subject to amortization in the amount of $14.1 million and the acquisition of NTA resulted in initial recognition of definite-lived intangible assets subject to amortization in the amount of $160.4 million. As of June 30, 2020 the outstanding amounts of definite-lived intangible assets subject to amortization were as follows:
|
| | | | | | |
($ in thousands) | | Weighted Average | | |
| | Useful Life (in Years) | | |
At inception: | | | | |
Value of business acquired | | 30 | | $ | 94,419 |
|
Value of distribution acquired | | 17 | | 53,996 |
|
Value of agency relationships | | 14 | | 16,981 |
|
Value of customer relationships | | 10 | | 9,080 |
|
Total | | 23 | | 174,476 |
|
Accumulated amortization: | | | | |
Value of business acquired | | | | (7,393 | ) |
Value of distribution acquired | | | | (3,527 | ) |
Value of agency relationships | | | | (2,774 | ) |
Value of customer relationships | | | | (2,468 | ) |
Total | | | | (16,162 | ) |
Net intangible assets subject to amortization: | | | | $ | 158,314 |
|
In regards to the definite-lived intangible assets in the table above, the value of business acquired intangible asset represents the present value of the expected underwriting profit within policies that were in force on the date of acquisition. The value of distribution acquired intangible asset represents the present value of future business to be written by the existing agency force. The value of agency relationships intangible asset represents the present value of the commission overrides retained by NTA. The value of customer relationships intangible asset represents the present value of the expected profits from existing BCG customers in force at the date of acquisition. All of the aforementioned definite-lived intangible assets were valued using the income approach.
|
| | |
Horace Mann Educators Corporation | 23 | Quarterly Report on Form 10-Q |
NOTE 6 - Goodwill and Intangible Assets, net (continued)
Estimated future amortization of the Company's definite-lived intangible assets were as follows:
|
| | | | |
($ in thousands) | | |
Year Ending December 31, | | |
2020 (excluding the six months ended June 30, 2020) | | $ | 7,116 |
|
2021 | | 13,411 |
|
2022 | | 12,433 |
|
2023 | | 11,577 |
|
2024 | | 10,805 |
|
Thereafter | | 102,972 |
|
Total | | $ | 158,314 |
|
The value of business acquired intangible asset is being amortized by product based on the present value of future premiums to be received. The value of distribution acquired intangible asset is being amortized on a straight-line basis. The value of agency relationships intangible asset is being amortized based on the present value of future premiums to be received. The value of customer relationships intangible asset is being amortized based on the present value of future profits to be received.
Indefinite-lived intangible assets (not subject to amortization) as of June 30, 2020 were as follows:
|
| | | | |
($ in thousands) | | |
Trade names | | $ | 8,645 |
|
State licenses | | 2,886 |
|
Total | | $ | 11,531 |
|
The trade names intangible asset represents the present value of future savings accruing NTA and BCG by virtue of not having to pay royalties for the use of the trade names, valued using the relief from royalty method. The state licenses intangible asset represents the regulatory licenses held by NTA that were valued using the cost approach.
|
| | |
Horace Mann Educators Corporation | 24 | Quarterly Report on Form 10-Q |
NOTE 7 - 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 a gross and net (after reinsurance) bases.basis. The total net Property and Casualty insurance claims and claim expense incurred amounts are reflected in the Consolidated Statements of Operations. The end of the period gross reserve (before reinsurance) balances and the reinsurance recoverable balances are reflected on a gross basis in the Consolidated Balance Sheets.
|
| | | | | | | | | | | | | | | | |
($ in thousands) | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
Property and Casualty | | |
| | |
| | | | |
Beginning gross reserves (1) | | $ | 359,701 |
| | $ | 331,255 |
| | $ | 367,180 |
| | $ | 319,182 |
|
Less: reinsurance recoverables | | 78,328 |
| | 62,917 |
| | 89,725 |
| | 57,409 |
|
Net reserves, beginning of period (2) | | 281,373 |
| | 268,338 |
| | 277,455 |
| | 261,773 |
|
Incurred claims and claim expenses: | | |
| | |
| | | | |
Claims occurring in the current period | | 134,411 |
| | 147,005 |
| | 253,178 |
| | 267,993 |
|
Decrease in estimated reserves for claims occurring in prior periods (3) | | (2,000 | ) | | — |
| | (4,000 | ) | | (300 | ) |
Total claims and claim expenses incurred (4) | | 132,411 |
| | 147,005 |
| | 249,178 |
| | 267,693 |
|
Claims and claim expense payments for claims occurring during: | | |
| | |
| | | | |
Current period | | 83,755 |
| | 80,403 |
| | 129,469 |
| | 127,451 |
|
Prior periods | | 39,512 |
| | 45,006 |
| | 106,647 |
| | 112,081 |
|
Total claims and claim expense payments | | 123,267 |
| | 125,409 |
| | 236,116 |
| | 239,532 |
|
Net reserves, end of period (2) | | 290,517 |
| | 289,934 |
| | 290,517 |
| | 289,934 |
|
Plus: reinsurance recoverables | | 77,345 |
| | 62,883 |
| | 77,345 |
| | 62,883 |
|
Ending gross reserves (1) | | $ | 367,862 |
| | $ | 352,817 |
| | $ | 367,862 |
| | $ | 352,817 |
|
________________ |
| | | | | | | | | | | | | | | | |
($ in thousands) | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
Property and Casualty | | |
| | |
| | | | |
Beginning gross reserves (1) | | $ | 382,248 |
| | $ | 359,701 |
| | $ | 386,976 |
| | $ | 367,180 |
|
Less: reinsurance recoverables | | 119,045 |
| | 78,328 |
| | 120,506 |
| | 89,725 |
|
Net reserves, beginning of period (2) | | 263,203 |
| | 281,373 |
| | 266,470 |
| | 277,455 |
|
Incurred claims and claim expenses: | | |
| | |
| | | | |
Claims occurring in the current period | | 109,167 |
| | 134,411 |
| | 214,621 |
| | 253,178 |
|
Decrease in estimated reserves for claims occurring in prior periods (3) | | (1,000 | ) | | (2,000 | ) | | (2,000 | ) | | (4,000 | ) |
Total claims and claim expenses incurred (4) | | 108,167 |
| | 132,411 |
| | 212,621 |
| | 249,178 |
|
Claims and claim expense payments for claims occurring during: | | |
| | |
| | | | |
Current period | | 61,420 |
| | 83,755 |
| | 104,883 |
| | 129,469 |
|
Prior periods | | 37,542 |
| | 39,512 |
| | 101,800 |
| | 106,647 |
|
Total claims and claim expense payments | | 98,962 |
| | 123,267 |
| | 206,683 |
| | 236,116 |
|
Net reserves, end of period (2) | | 272,408 |
| | 290,517 |
| | 272,408 |
| | 290,517 |
|
Plus: reinsurance recoverables | | 116,083 |
| | 77,345 |
| | 116,083 |
| | 77,345 |
|
Ending gross reserves (1) | | $ | 388,491 |
| | $ | 367,862 |
| | $ | 388,491 |
| | $ | 367,862 |
|
| |
(1) | Unpaid claims and claim expenses as reported in the Consolidated Balance Sheets also include reserves for Supplemental, Life and Retirement of $30,477 thousand$56.1 million and $27,016 thousand$30.5 million as of June 30, 20192020 and 2018,2019, respectively, in addition to Property and Casualty reserves. |
| |
(2) | Reserves net of anticipated reinsurance recoverables. |
| |
(3) | Shows the amounts by which the Company decreased its reserves in each of the periods indicated for claims occurring in previous periods to reflect subsequent information on such claims and changes in their projected final settlement costs. |
| |
(4) | Benefits, claims and settlement expenses as reported in the Consolidated Statements of Operations also include amounts for Supplemental, Life and Retirement of $20,281 thousand$34.8 million and $42,898 thousand$69.1 million for the three and six month periods months ended June 30, 2019,2020, respectively, in addition to Property and Casualty amounts. Benefits, claims and settlement expenses for Life and Retirement were $21,273 thousand$20.3 million and $44,147 thousand $42.9 millionfor thethree and six month periods months ended June 30, 2018,2019, respectively. |
Net favorable development of total reserves for Property and Casualty claims occurring in prior years was $4.0$2.0 million and $0.3$4.0 million for the six month periodsmonths ended June 30, 20192020 and 2018,2019, respectively. The favorable development for the six month periodmonths ended June 30, 2020 was the result of favorable loss trends in auto and homeowners loss emergence for accident years 2019 and prior. The favorable development for the six months ended June 30, 2019 was the result of favorable loss trends in auto and homeowners loss emergence for accident years 2018 and prior. The favorable development for the six month period ended June 30, 2018 was predominately the result of favorable loss trends in homeowners emergence for accident years 2017 and prior.
|
| | |
Horace Mann Educators Corporation | 25 | Quarterly Report on Form 10-Q |
Indebtedness outstanding was as follows:
|
| | | | | | | | |
($ in thousands) | | 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 $250,000 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 4.50% Senior Notes due 2025 (Senior Notes due 2025) and the FHLB borrowing are described in Note 7 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.
Credit Agreement with Financial Institutions (Bank Credit Facility)
On June 21, 2019, the Company, as borrower, replaced its current line of credit with a new five-year Credit Agreement (Bank Credit Facility). The new Bank Credit Facility increased the amount available on this senior revolving credit facility to $225 million from $150 million. PNC Capital Markets, LLC and JPMorgan Chase Bank, N.A. served as joint leads on the new agreement, with The Northern Trust Company, U.S. Bank National Association, KeyBank National Association, Comerica Bank and Illinois National Bank participating in the syndicate. Terms and conditions of the new Bank Credit Facility are substantially consistent with the prior agreement, with an interest rate based on LIBOR plus 115 basis points.
On July 1, 2019, the Company utilized the senior revolving credit facility to partially fund the acquisition of NTA. As of August 1, 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 (1) | | Assumed from Other Companies | | Net Amount | | Gross Amount | | Ceded to Other Companies (1) | | Assumed from Other Companies | | Net Amount |
Three months ended June 30, 2020 | | | |
| | |
| | |
| | |
|
Premiums written and contract deposits (2) | | | $ | 332,379 |
| | $ | 6,379 |
| | $ | 3,169 |
| | $ | 329,169 |
|
Premiums and contract charges earned | | | 230,635 |
| | 8,307 |
| | 3,103 |
| | 225,431 |
|
Benefits, claims and settlement expenses | | | 143,285 |
| | 2,407 |
| | 2,132 |
| | 143,010 |
|
| | | | | | | | | |
Three months ended June 30, 2019 | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Premiums written and contract deposits (2) | | $ | 314,897 |
| | $ | 6,028 |
| | $ | 2,822 |
| | $ | 311,691 |
| | $ | 314,897 |
| | $ | 6,028 |
| | $ | 2,822 |
| | $ | 311,691 |
|
Premiums and contract charges earned | | 213,415 |
| | 8,155 |
| | 2,836 |
| | 208,096 |
| | 213,415 |
| | 8,155 |
| | 2,836 |
| | 208,096 |
|
Benefits, claims and settlement expenses | | 153,436 |
| | 2,797 |
| | 2,053 |
| | 152,692 |
| | 153,436 |
| | 2,797 |
| | 2,053 |
| | 152,692 |
|
| | | | | | | | | | | | | | | | |
Three months ended June 30, 2018 | | |
| | |
| | |
| | |
| |
Six months ended June 30, 2020 | | | | | | | | | |
Premiums written and contract deposits (2) | | $ | 305,864 |
| | $ | 5,483 |
| | $ | 1,341 |
| | $ | 301,722 |
| | $ | 666,110 |
| | $ | 12,689 |
| | $ | 4,506 |
| | $ | 657,927 |
|
Premiums and contract charges earned | | 209,892 |
| | 5,505 |
| | 1,223 |
| | 205,610 |
| | 473,805 |
| | 16,684 |
| | 4,575 |
| | 461,696 |
|
Benefits, claims and settlement expenses | | 170,459 |
| | 3,330 |
| | 1,149 |
| | 168,278 |
| | 282,817 |
| | 4,391 |
| | 3,244 |
| | 281,670 |
|
| | | | | | | | | | | | | | | | |
Six months ended June 30, 2019 | | | | | | | | | | | | | | | | |
Premiums written and contract deposits (2) | | $ | 613,990 |
| | $ | 11,876 |
| | $ | 4,971 |
| | $ | 607,085 |
| | $ | 613,990 |
| | $ | 11,876 |
| | $ | 4,971 |
| | $ | 607,085 |
|
Premiums and contract charges earned | | 426,671 |
| | 13,977 |
| | 5,187 |
| | 417,881 |
| | 426,671 |
| | 13,977 |
| | 5,187 |
| | 417,881 |
|
Benefits, claims and settlement expenses | | 295,488 |
| | 7,089 |
| | 3,677 |
| | 292,076 |
| | 295,488 |
| | 7,089 |
| | 3,677 |
| | 292,076 |
|
| | | | | | | | | |
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 | | 417,629 |
| | 11,033 |
| | 2,012 |
| | 408,608 |
| |
Benefits, claims and settlement expenses | | 322,427 |
| | 12,344 |
| | 1,757 |
| | 311,840 |
| |
________________
| |
(1) | Excludes the annuity reinsurance agreementtransaction accounted for underusing the deposit method that is discussed in Note 6.5. |
| |
(2) | This measure is not based on accounting principles generally accepted in the U.S.United States of America (non-GAAP). An explanation of this non-GAAP measure is contained in the Glossary of Selected Terms included as an exhibit in the Company's reports filed with the SEC. |
Note 10NOTE 9 - Commitments
Investment Commitments
From time to time, the Company has outstanding commitments to purchasefund investments and/orin limited partnership interests, commercial mortgage loans and bank loans. Such unfunded commitments to lend funds under bridge loans. Unfunded commitments to purchase investments were $157.4$358.9 million and $145.4$306.2 million at June 30, 20192020 and December 31, 2018,2019, respectively.
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Horace Mann Educators Corporation | 26 | Quarterly Report on Form 10-Q |
Note 11NOTE 10 - Segment Information
The Company conducts and manages its business through four5 segments. See Note 1 for a description of the Company's reporting segments that changed effective in the third quarter of 2019. The three4 operating segments, representing the major lines of insurance business, are: Property and Casualty primarily(primarily personal lines automobile and property insurance products;products), the newly created Supplemental (primarily heart, cancer, accident and limited short-term supplemental disability insurance coverages), Retirement primarily(primarily tax-qualified fixed and variable annuities;annuities) and Life life insurance.(life insurance). The Company does not allocate the impact of corporate-level transactions to these operating segments, consistent with the basis for management’smanagement's evaluation of the results of those segments, but classifies those items in the fourthfifth segment, Corporate and Other. In addition to ongoing transactions such as corporate debt service, net investment gains (losses) and certain public company expenses, such items also have included corporate debt retirement costs, when applicable. Summarized financial information for these segments is as follows:
| | ($ in thousands) | | Three Months Ended June 30, | | Six Months Ended June 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2019 | | 2018 | | 2019 | | 2018 | | 2020 | | 2019 | | 2020 | | 2019 |
Insurance premiums and contract charges earned | | | | | | | | | | | | | | | | |
Property and Casualty | | $ | 171,303 |
| | $ | 167,333 |
| | $ | 342,143 |
| | $ | 332,791 |
| | $ | 156,212 |
| | $ | 171,303 |
| | $ | 322,686 |
| | $ | 342,143 |
|
Supplemental | | | 33,302 |
| | N/A |
| | 66,292 |
| | N/A |
|
Retirement | | 6,931 |
| | 7,825 |
| | 15,509 |
| | 15,893 |
| | 6,717 |
| | 6,931 |
| | 14,097 |
| | 15,509 |
|
Life | | 29,862 |
| | 30,452 |
| | 60,229 |
| | 59,924 |
| | 29,200 |
| | 29,862 |
| | 58,621 |
| | 60,229 |
|
Total | | $ | 208,096 |
| | $ | 205,610 |
| | $ | 417,881 |
| | $ | 408,608 |
| | $ | 225,431 |
| | $ | 208,096 |
| | $ | 461,696 |
| | $ | 417,881 |
|
| | | | | | | | | | | | | | | | |
Net investment income | | | | | | | | | | | | | | | | |
Property and Casualty | | $ | 12,643 |
| | $ | 10,300 |
| | $ | 22,861 |
| | $ | 19,816 |
| | $ | 6,325 |
| | $ | 12,643 |
| | $ | 16,618 |
| | $ | 22,861 |
|
Supplemental | | | 4,035 |
| | N/A |
| | 7,555 |
| | N/A |
|
Retirement | | 62,684 |
| | 67,787 |
| | 127,423 |
| | 131,956 |
| | 55,044 |
| | 62,684 |
| | 108,569 |
| | 127,423 |
|
Life | | 18,324 |
| | 19,166 |
| | 36,376 |
| | 37,506 |
| | 15,630 |
| | 18,324 |
| | 31,188 |
| | 36,376 |
|
Corporate and Other | | (14 | ) | | 42 |
| | (37 | ) | | 78 |
| | (58 | ) | | (14 | ) | | (112 | ) | | (37 | ) |
Intersegment eliminations | | (179 | ) | | (194 | ) | | (365 | ) | | (391 | ) | | (566 | ) | | (179 | ) | | (1,133 | ) | | (365 | ) |
Total | | $ | 93,458 |
| | $ | 97,101 |
| | $ | 186,258 |
| | $ | 188,965 |
| | $ | 80,410 |
| | $ | 93,458 |
| | $ | 162,685 |
| | $ | 186,258 |
|
| | | | | | | | | | | | | | | | |
Net income (loss) | | | | | | | | | | | | | | | | |
Property and Casualty | | $ | 5,101 |
| | $ | (10,896 | ) | | $ | 20,153 |
| | $ | (1,174 | ) | | $ | 11,289 |
| | $ | 5,101 |
| | $ | 37,859 |
| | $ | 20,153 |
|
Supplemental | | | 9,479 |
| | N/A |
| | 20,016 |
| | N/A |
|
Retirement | | (25,045 | ) | | 14,141 |
| | (12,894 | ) | | 25,562 |
| | 9,733 |
| | (25,045 | ) | | 8,786 |
| | (12,894 | ) |
Life | | 5,239 |
| | 5,879 |
| | 8,516 |
| | 9,666 |
| | 1,922 |
| | 5,239 |
| | 2,563 |
| | 8,516 |
|
Corporate and Other | | 108,527 |
| | (3,207 | ) | | 110,213 |
| | (7,982 | ) | | (1,845 | ) | | 108,527 |
| | (20,174 | ) | | 110,213 |
|
Total | | $ | 93,822 |
| | $ | 5,917 |
| | $ | 125,988 |
| | $ | 26,072 |
| | $ | 30,578 |
| | $ | 93,822 |
| | $ | 49,050 |
| | $ | 125,988 |
|
| | ($ in thousands) | | June 30, 2019 | | December 31, 2018 | | June 30, 2020 | | December 31, 2019 |
Assets | | | | | | | | |
Property and Casualty | | $ | 1,281,344 |
| | $ | 1,236,362 |
| | $ | 1,283,328 |
| | $ | 1,327,099 |
|
Supplemental | | | 810,122 |
| | 747,602 |
|
Retirement | | 8,493,089 |
| | 7,866,969 |
| | 8,317,079 |
| | 8,330,127 |
|
Life | | 1,911,569 |
| | 1,821,351 |
| | 2,048,910 |
| | 1,964,993 |
|
Corporate and Other | | 145,022 |
| | 149,014 |
| | 168,108 |
| | 172,955 |
|
Intersegment eliminations | | (51,617 | ) | | (41,800 | ) | | (55,843 | ) | | (64,072 | ) |
Total | | $ | 11,779,407 |
| | $ | 11,031,896 |
| | $ | 12,571,704 |
| | $ | 12,478,704 |
|
N/A - The acquisition of NTA closed on July 1, 2019.
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Horace Mann Educators Corporation | 27 | Quarterly Report on Form 10-Q |
Note 12NOTE 11 - Operating Leases
Accumulated Other Comprehensive Income (Loss)
AOCI represents the accumulated change in shareholders’ equity from transactions and other events and circumstances from non-shareholder sources. For the Company, AOCI includes the after tax change in net unrealized investment gains (losses) on fixed maturity securities and the after tax change in net funded status of benefit plans for the periods as shown in the Consolidated Statements of Changes in Shareholders’ Equity. The 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:following table reconciles these components.
|
| | | | | | | | |
($ 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 |
|
|
| | | | | | | | | | | | |
($ in thousands) | | Net Unrealized Investment Gains (Losses) on Securities (1)(2) | | Net Funded Status of Benefit Plans (1) | | Total (1) |
Beginning balance, April 1, 2020 | | $ | 136,679 |
| | $ | (10,767 | ) | | $ | 125,912 |
|
Other comprehensive income (loss) before reclassifications | | 147,529 |
| | — |
| | 147,529 |
|
Amounts reclassified from AOCI | | (5,079 | ) | | — |
| | (5,079 | ) |
Net current period other comprehensive income (loss) | | 142,450 |
| | — |
| | 142,450 |
|
Ending balance, June 30, 2020 | | $ | 279,129 |
| | $ | (10,767 | ) | | $ | 268,362 |
|
| | | | | | |
Beginning balance, January 1, 2020 | | $ | 230,448 |
| | $ | (10,767 | ) | | $ | 219,681 |
|
Other comprehensive income (loss) before reclassifications | | 42,999 |
| | — |
| | 42,999 |
|
Amounts reclassified from AOCI | | 5,682 |
| | — |
| | 5,682 |
|
Net current period other comprehensive income (loss) | | 48,681 |
| | — |
| | 48,681 |
|
Ending balance, June 30, 2020 | | $ | 279,129 |
| | $ | (10,767 | ) | | $ | 268,362 |
|
| |
(1) | All amounts are net of tax. |
| |
(2) | The pretax amounts reclassified from AOCI, $6.4 million and $(7.2) million, are included in Net investment gains (losses) and the related income tax expenses, $1.4 million and $(1.5) million, are included in income tax expense in the Consolidated Statements of Operations for the three and six month periods ended June 30, 2020, respectively. |
|
| | | | | | | | | | | | |
($ in thousands) | | Net Unrealized Investment Gains (Losses) on Securities (1)(2) | | Net Funded Status of Benefit Plans (1) | | Total (1) |
Beginning balance, April 1, 2019 | | $ | 210,839 |
| | $ | (12,185 | ) | | $ | 198,654 |
|
Other comprehensive income (loss) before reclassifications | | 107,163 |
| | — |
| | 107,163 |
|
Amounts reclassified from AOCI | | (114,925 | ) | | — |
| | (114,925 | ) |
Net current period other comprehensive income (loss) | | (7,762 | ) | | — |
| | (7,762 | ) |
Ending balance, June 30, 2019 | | $ | 203,077 |
| | $ | (12,185 | ) | | $ | 190,892 |
|
| | | | | | |
Beginning balance, January 1, 2019 | | $ | 96,941 |
| | $ | (12,185 | ) | | $ | 84,756 |
|
Other comprehensive income (loss) before reclassifications | | 227,466 |
| | — |
| | 227,466 |
|
Amounts reclassified from AOCI | | (121,330 | ) | | — |
| | (121,330 | ) |
Net current period other comprehensive income (loss) | | 106,136 |
| | — |
| | 106,136 |
|
Ending balance, June 30, 2019 | | $ | 203,077 |
| | $ | (12,185 | ) | | $ | 190,892 |
|
(1) All amounts are net of tax.
| |
(2) | The pretax amounts reclassified from AOCI, $145.5 million and $153.6 million, are included in Net investment gains (losses) and the related income tax expenses, $30.5 million and $32.3 million, are included in Income tax expense in the Consolidated Statements of Operations for the three and six month periods ended June 30, 2019, respectively. |
Comparative information for elements that are not required to be reclassified in their entirety to net income in the same reporting period is disclosed in Note 2.
Supplemental cash flow information related to operating leases was as follows:
|
| | | | | | | | |
($ 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 |
|
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Horace Mann Educators Corporation | 28 | Quarterly Report on Form 10-Q |
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 13NOTE 12 - Supplemental Disclosure of Consolidated Cash and Cash Flow Information
|
| | | | | | | | |
($ in thousands) | | June 30, | | December 31, |
| | 2020 | | 2019 |
Cash | | $ | 81,709 |
| | $ | 25,206 |
|
Restricted cash | | 681 |
| | 302 |
|
Total cash and restricted cash shown in the Consolidated Balance Sheets and Consolidated Statements of Cash Flows | | $ | 82,390 |
| | $ | 25,508 |
|
|
| | | | | | | | |
($ in thousands) | | Six Months Ended June 30, |
| | 2020 | | 2019 |
Cash paid (recovered) during the six months for: | | | | |
Interest | | $ | 8,247 |
| | $ | 6,440 |
|
Income taxes | | (617 | ) | | 78 |
|
Non-cash investing activities include $2.1 billion of investments and policy loans transferred to a reinsurer as consideration paid during the second quarter of 2019 in connection with the Company’sCompany's reinsurance of a $2.9 billion block of in force fixed and variable annuity business. See Note 65 for further information.
Non-cash investing activities in respect to modifications or exchanges of fixed maturity securities wasas well as paid-in-kind activity for policy loans were insignificant for the three and six months ended June 30, 2020 and 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 descriptionITEM 2.IManagement's Discussion and Analysis of impairment testing.
The annuity reinsurance transaction described in Note 6 triggered the requirement to evaluate the goodwill associated with the annuity businessFinancial Condition and Results of the Retirement segment. For the evaluation, the fair value of the Retirement segment was measured using a discounted cash flow method. The carrying value exceeded the fair value, resulting in a $28,025 thousand non-cash impairment charge during the quarter ended June 30, 2019 which represented the entire balance of the goodwill associated with the annuity business of the Retirement segment. The impairment charge was reported as Other expense in the Consolidated Statement of Operations.
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONSOperations (MD&A)
(Dollars$ in millions, except per share data)
Measures within this MD&A that are not based on accounting principles generally accepted in the U.S.United States of America (non-GAAP) are marked with an asterisk (*) the first time they are presented within this Part I - Item 2. An explanation of these measures is contained in the Glossary of Selected Terms included as Exhibit 99.1 to this Quarterly Report on Form 10-Q and are reconciled to the most directly comparable measures prepared in accordance with accounting principles generally accepted in the U.S.United States of America (GAAP) in the Appendix to the Company's Second Quarter 20192020 Investor Supplement.
Increases or decreases in this MD&A that are not meaningful are marked "N.M.".
Forward-looking Information
Statements made in the following discussion that are not historical in nature are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995 and are subject to known and unknown risks, uncertainties and other factors. Horace Mann Educators Corporation (HMEC;(referred to in Part I - Items 2 - 4 and together with its subsidiaries,Part II of this report as "we", "our", "us", the Company"Company", "Horace Mann" or Horace Mann)"HMEC") is an insurance holding company. Horace Mann isWe are not under any obligation to (and expressly disclaimsdisclaim any such obligation to) update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. It is important to note that the Company’sour actual results could differ materially from those projected in forward-looking statements due to a number of risks and uncertainties inherent in the Company’sour business. See Part II - Item 1A in this Quarterly Report on Form 10-Q andas well as in the Company’sPart I - Item 1A in our Annual Report on Form 10-K for the year ended December 31, 20182019 for additional information regarding risks and uncertainties.
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Horace Mann Educators Corporation | 29 | Quarterly Report on Form 10-Q |
Introduction
The purpose of this MD&A is to provide an understanding of the Company’sour consolidated results of operations and financial condition. This MD&A should be read in conjunction with the Consolidated Financial Statements and Notes thereto contained in Part I - Item 1 of this report.
HMEC is an insurance holding company. Throughcompany, and through its subsidiaries, HMECit markets and underwrites personal lines of property and casualty insurance, supplemental insurance products, retirement products, including annuities, and life insurance in the U.S. The Company markets itsUnited States of America (U.S.). We market our products primarily to K-12 teachers, administrators and other employees of public schools and their families.
This MD&A begins with the Company’scovers our consolidated financial highlights followed by consolidated results of operations, an outlook for future performance, details about critical accounting estimates, and the results of operations by segment.segment and investment results.
Coronavirus Disease (COVID-19) Considerations
Beginning in March 2020, the global pandemic associated with the novel coronavirus COVID-19 and related economic conditions introduced unprecedented challenges for our country. Those challenges are ongoing. We relied on our previously developed Corporate Pandemic Plan to address preparation, prevention and response measures specific to COVID-19 while allowing flexibility to quickly react to evolving circumstances and implement varying actions accordingly.
As discussed in the Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2020, we successfully transitioned the organization, through our employees and agents, from one that relied on in-person experience to one that has become primarily virtual. While the current environment continues to present challenges, our operations are being conducted successfully and we continue to support our agents and serve our customers in an effective manner.
As of the end of June 2020, we had approximately 85% of our employees working remotely. We anticipate another 15% of our workforce will return to the offices by the end of August 2020. The return to office plans are being guided by data from the Center for Disease Control. We currently anticipate limiting office occupancy to no more than 50% of pre-COVID-19 levels to enable effective social distancing for some time. We are also implementing other prevention strategies to reduce the transmission of COVID-19, such as requiring face masks in common office areas.
Taking into account the predominantly virtual work environment, we have implemented additional cybersecurity measures including increasing security and network monitoring to proactively identify and prevent potential security threats and vulnerabilities. We also are identifying and assessing critical third-party vendors and ensuring their ability to continue to perform as anticipated.
Horace Mann markets primarily to K-12 teachers, administrators and other employees of public schools and their families and we estimate that 80% of our customer base are educators or other individuals employed by public school systems. In our experience, educators generally remain employed during periods of economic disruption. That largely remained true through the end of the recently completed 2019-2020 school year, as educators were typically asked to teach remotely when areas of the country took steps to minimize the spread of COVID-19 in their communities.
We continue to work with our network of exclusive agents to make sure they are making use of the tools that allow them to virtually reach current and potential educator customers. Our plans for this fall’s return to school includes a variety of new and modified forums to give teachers access to the financial solutions we provide. However, growth in new sales has slowed since the pandemic began, particularly sales generated from in-person events at schools. This may be exacerbated if public school systems face budget constraints in the fall due to the economic impacts of the pandemic and/or continue to restrict all "in school" access.
For further discussion regarding the current period and potential future impacts of COVID-19 and related economic conditions on us, see "Outlook for 2020" and other content within this MD&A as well as Part II—Item 1A.
In addition, over the past several years, we proactively de-risked our portfolio in anticipation of a recession and believe we are well positioned for the current dislocation in the markets. Although we have experienced the
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Horace Mann Educators Corporation | 30 | Quarterly Report on Form 10-Q |
impacts of market volatility on our fixed maturity security and limited partnership interest valuations in the second quarter of 2020, the investment portfolio is well diversified, is 95.3% investment grade-rated and has an average rating of A+. The annuity reinsurance agreement, entered into in the second quarter of 2019, which reinsured a $2.2 billion block of in force fixed annuities with a minimum crediting rate of 4.5%, helps mitigate the risk of not being able to generate spreads on the annuity business that meet our return targets. We believe our capital and reserves are adequate to address any unusual loss patterns resulting from COVID-19.
Amid rapidly changing dynamics, we are continuing to evaluate all aspects of our operations and making necessary adjustments to manage our business. Ultimately, the extent of the impact will depend on how long it takes for the economy to return to some degree of normality. To date, these steps have been effective and maintained business continuity. Based on assumptions that presume a return to a normal operating environment within six months, capital and liquidity are expected to remain at or near target levels. We believe we are financially strong despite the potential impact of the COVID-19 pandemic and continued to produce solid operating results in the second quarter of 2020.
Consolidated Financial Highlights
(All comparisons vs. same periods in 2019, unless noted otherwise)
|
| | | | | | | | | | | | | | | | | | | | | | |
($ 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 |
| | | | | | | | | | | | | | | | | | | | | | |
($ in millions) | | Three Months Ended June 30, | | 2020-2019 | | Six Months Ended June 30, | | 2020-2019 |
| | 2020 | | 2019 | | Change % | | 2020 | | 2019 | | Change % |
Total revenues | | $ | 314.9 |
| | $ | 454.1 |
| | -30.7 | % | | $ | 622.2 |
| | $ | 770.0 |
| | -19.2 | % |
Net income | | 30.5 |
| | 93.8 |
| | -67.5 | % | | 49.0 |
| | 126.0 |
| | -61.1 | % |
Per diluted share: | | | | | | | | | | | | |
Net income | | 0.73 |
| | 2.24 |
| | -67.4 | % | | 1.17 |
| | 3.01 |
| | -61.1 | % |
Net investment gains (losses), after tax | | 0.06 |
| | 2.74 |
| | N.M. |
| | (0.28 | ) | | 2.88 |
| | N.M. |
|
Book value per share | | | | | | | | $ | 39.69 |
| | $ | 36.41 |
| | 9.0 | % |
Net income return on equity - last twelve months | | | | | | | | 6.9 | % | | 8.6 | % | |
|
|
Net income return on equity - annualized | | | | | | | | 6.1 | % | | 18.1 | % | |
|
|
For the three and six month periodsmonths ended June 30, 2019, the Company's2020, net income increased $87.9decreased $63.3 million and $99.9$77.0 million, respectively, compared to the prior year periodsrespectively. The decrease was primarily due to recognition of a $106.9 million after tax realized investment gain in the three month period ended June 30, 2019. The gain was associatedsecond quarter of 2019 with respect to the transfer of investments as consideration in connection with the annuity reinsurance of approximately 50% of the Company's fixed annuity account balances effective April 1, 2019. The impact from the realized investmenttransaction. That gain was partially offset by a $28.0 million goodwill impairment charge. See Item 1, Note 6more favorable results from Property and Note 14Casualty as well as the inclusion of results from the Consolidated Financial Statements for more information regarding the annuity reinsurance transaction and the goodwill impairment charge.
Net income (loss) by segment is as follows:
|
| | | | | | | | | | | | | | | | | | | | | | |
($ 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 loss for the Retirementnewly added Supplemental 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.current periods.
The aforementioned $106.9 million after tax realized investment gain recognized in the three month period ended June 30, 2019 associated with the annuity reinsurance transaction is reported in the results for the Corporate and Other segment. |
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Horace Mann Educators Corporation | 31 | Quarterly Report on Form 10-Q |
Consolidated Results of Operations
(All comparisons vs. same periods in 2019, unless noted otherwise)
|
| | | | | | | | | | | | | | | | | | | | | | |
($ 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.
|
| | | | | | | | | | | | | | | | | | | | | | |
($ in millions) | | Three Months Ended June 30, | | 2020-2019 | | Six Months Ended June 30, | | 2020-2019 |
| | 2020 | | 2019 | | Change % | | 2020 | | 2019 | | Change % |
Insurance premiums and contract charges earned | | $ | 225.4 |
| | $ | 208.1 |
| | 8.3 | % | | $ | 461.7 |
| | $ | 417.9 |
| | 10.5 | % |
Net investment income | | 80.4 |
| | 93.5 |
| | -14.0 | % | | 162.7 |
| | 186.3 |
| | -12.7 | % |
Net investment gains (losses) | | 3.2 |
| | 146.3 |
| | N.M. |
| | (15.3 | ) | | 153.7 |
| | N.M. |
|
Other income | | 5.9 |
| | 6.2 |
| | -4.8 | % | | 13.1 |
| | 12.1 |
| | 8.3 | % |
Total revenues | | 314.9 |
| | 454.1 |
| | -30.7 | % | | 622.2 |
| | 770.0 |
| | -19.2 | % |
| | | | | | | | | | | | |
Benefits, claims and settlement expenses | | 143.0 |
| | 152.7 |
| | -6.4 | % | | 281.7 |
| | 292.1 |
| | -3.6 | % |
Interest credited | | 50.7 |
| | 53.6 |
| | -5.4 | % | | 102.2 |
| | 106.5 |
| | -4.0 | % |
Operating expenses | | 55.7 |
| | 57.3 |
| | -2.8 | % | | 116.4 |
| | 113.5 |
| | 2.6 | % |
DAC unlocking and amortization expense | | 20.4 |
| | 31.6 |
| | -35.4 | % | | 50.4 |
| | 56.6 |
| | -11.0 | % |
Intangible asset amortization expense | | 3.7 |
| | 0.6 |
| | N.M. |
| | 7.4 |
| | 1.1 |
| | N.M. |
|
Interest expense | | 4.0 |
| | 3.3 |
| | 21.2 | % | | 8.2 |
| | 6.6 |
| | 24.2 | % |
Other expense - goodwill impairment | | — |
| | 28.0 |
| | N.M. |
| | — |
| | 28.0 |
| | N.M. |
|
Total benefits, losses and expenses | | 277.5 |
| | 327.1 |
| | -15.2 | % | | 566.3 |
| | 604.4 |
| | -6.3 | % |
| | | | | | | | | | | | |
Income before income taxes | | 37.4 |
| | 127.0 |
| | -70.6 | % | | 55.9 |
| | 165.6 |
| | -66.2 | % |
Income tax expense | | 6.9 |
| | 33.2 |
| | -79.2 | % | | 6.9 |
| | 39.6 |
| | -82.6 | % |
Net income | | $ | 30.5 |
| | $ | 93.8 |
| | -67.5 | % | | $ | 49.0 |
| | $ | 126.0 |
| | -61.1 | % |
Insurance Premiums and Contract Charges Earned
For the three and six month periodsmonths ended June 30, 2019,2020, insurance premiums and contract charges earned increased $2.5$17.3 million and $9.3$43.8 million, respectively, compared to the prior year periods, primarily due to increases in averagethe addition of earned premiums from Supplemental. These were partially offset by lower premiums earned by Property and Casualty, including recognition of $9.8 million of automobile premium per policy for both automobile and property.
credits to our policyholders related to reduced driving activity due to COVID-19.
Net Investment Income
Excluding accreted net investment income on the deposit asset on reinsurance, net investment income for the three and six month periodsmonths ended June 30, 2019 declined2020, net investment income decreased $13.8 million and $48.0 million, respectively, primarily becausedue to a $2.1 billion reduction in invested assets decreased 22.2% from December 31, 2018 due to assetsinvestments transferred under the annuity reinsurance transaction in the second quarter of 2019 as well as lower than expected new money rates and prepayments that were partially offset by stronger returns on alternativelimited partnership investments. Investment yields continue to be impacted by the low interest rate environment of recent years. AnnualizedThe annualized investment yield on the investment portfolio yield is presented in the following table:excluding limited partnership interests* was as follows:
|
| | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
Pretax yield | | 5.1% | | 5.3% | | 5.1% | | 5.1% |
After tax yield | | 4.1% | | 4.2% | | 4.1% | | 4.1% |
|
| | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
Investment yield, excluding limited partnership interests, pretax - annualized* | | 4.4% | | 4.7% | | 4.4% | | 4.8% |
Investment yield, excluding limited partnership interests, after tax - annualized* | | 3.5% | | 3.8% | | 3.6% | | 3.8% |
During the three and six month periodmonths ended June 30, 2019, management2020, we continued to identify and purchase investments, including a modest level of alternative investments,limited partnership interests, with attractive risk-adjusted yields relative to market conditions without venturing into asset classes or individual securities that would be inconsistent with the Company'sour overall conservative investment guidelines.
|
| | |
Horace Mann Educators Corporation | 32 | Quarterly Report on Form 10-Q |
Net Investment Gains (Losses) - Pretax
For the three and six month periodsmonths ended June 30, 2019,2020, net investment gains increased $145.6decreased $143.1 million and $154.7$169.0 million, respectively, compared to the prior year periodsprimarily as a result of a realized investment gain of $135.3 million recognized during the three month period ended June 30,second quarter of 2019 in connection with the transfer of investments related to the aforementioned annuity reinsurance transaction. The breakdown of net investment gains (losses) by transaction type is shown in the following table:were as follows:
| | ($ in millions) | | Three Months Ended June 30, | | Six Months Ended June 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2019 | | 2018 | | 2019 | | 2018 | | 2020 | | 2019 | | 2020 | | 2019 |
OTTI losses recognized in earnings | | $ | — |
| | $ | (1.2 | ) | | $ | (0.3 | ) | | $ | (1.3 | ) | |
Net other-than-temporary impairment losses on securities recognized in earnings | | | $ | (0.5 | ) | | $ | — |
| | $ | (4.2 | ) | | $ | (0.3 | ) |
Sales and other, net | | 142.1 |
| | 1.8 |
| | 146.9 |
| | 4.0 |
| | 0.4 |
| | 142.1 |
| | 4.9 |
| | 146.9 |
|
Change in fair value - equity securities | | 3.4 |
| | (1.2 | ) | | 6.9 |
| | (6.4 | ) | | 6.6 |
| | 3.4 |
| | (7.9 | ) | | 6.9 |
|
Change in fair value and gains (losses) realized on settlements - derivative instruments | | 0.8 |
| | 1.3 |
| | 0.2 |
| | 2.7 |
| |
Change in fair value and gains (losses) realized on settlements - derivatives | | | (3.3 | ) | | 0.8 |
| | (8.1 | ) | | 0.2 |
|
Net investment gains (losses) | | $ | 146.3 |
| | $ | 0.7 |
| | $ | 153.7 |
| | $ | (1.0 | ) | | $ | 3.2 |
| | $ | 146.3 |
| | $ | (15.3 | ) | | $ | 153.7 |
|
The Company, fromFrom time to time, sellswe may sell securities subsequent to the reporting date that were considered temporarily impaired at the reporting date. Such sales are due to issuer specific events occurring subsequent to the reporting date that result in a change in the Company'sour intent to sell an invested asset.
Other Income
For the three and six month periodsmonths ended June 30, 2019,2020, other income increased comparedwas comparable to the prior year periods primarily due to inclusion of BCG brokerage fees.
periods.
Benefits, Claims and Settlement Expenses
For the three and six months ended June 30, 2020, benefits, claims and settlement expenses decreased $9.7 million and $10.4 million, respectively, driven primarily by improved automobile loss experience partially offset by higher catastrophe losses and the addition of benefits, claims and settlement expenses from the Supplemental segment. The improved automobile loss experience is a result of lower frequency of losses related to reduced driving activity due to COVID-19.
Interest Credited
For the three and six month periodsmonths ended June 30, 2019, benefits, claims and settlement expenses2020, interest credited decreased $15.6$2.9 million and $19.8$4.3 million, respectively, compared to the prior year periods, driven primarily 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 ona lower level of Federal Home Loan Bank (FHLB) funding agreements as well as a 2.3% increase in average accumulated fixed deposits.agreements. Under the deposit method of accounting, the interest credited on the annuity reinsured block continues to be reported. The average deferred annuity credited rate, excluding the reinsured block was 2.5% at June 30, 2019, excluding the reinsured block,2020 and 3.6% at June 30, 2018.2019, respectively.
DAC Amortization Expense
Operating Expenses
For the three month periodmonths ended June 30, 2020, operating expenses decreased $1.6 million, primarily due to the inclusion of $9.8 million of operating expenses from Supplemental operations that was more than offset by expense reduction initiatives that began in 2019 as well as a lower level of expenses realized in 2020 due to COVID-19. For the six months ended June 30, 2020, operating expenses increased $2.9 million, primarily due to the inclusion of $19.6 million of operating expenses from Supplemental operations offset by expense reduction initiatives that began 2019 as well as a lower level of expenses realized in 2020 due to COVID-19.
Deferred Acquisition Costs (DAC) Unlocking and Amortization Expense
For the three months ended June 30, 2020, DAC unlocking and amortization expense increased $5.1decreased $11.2 million primarily due to $4.6 million of favorable DAC unlocking in Retirement for the current quarter (primarily market performance) compared to $5.6 million of unfavorable DAC unlocking in the prior year periodquarter primarily due to $5.1 million of accelerated amortization of the DAC asset associated with the reinsured annuity block. For the six month periodmonths ended June 30, 2019,2020, DAC unlocking and amortization increased $3.4expense decreased $6.2 million compared to the prior year periodprimarily due to the aforementioned DAC accelerated amortization partially offset by $3.2 million of favorable DAC unlockingthat occurred in Retirement due to market performance.the prior year period. For Life, DAC unlocking resulted in an immaterial change to amortization for the three and six month periodsmonths ended June 30, 2019.2020.
Operating Expenses
|
| | |
Horace Mann Educators Corporation | 33 | Quarterly Report on Form 10-Q |
Intangible Asset Amortization Expense
For the three and six month periodsmonths ended June 30, 2019, increases in operating expenses were consistent with management's expectations as the current periods include $2.82020, intangible asset amortization expense increased $3.1 million and $5.6$6.3 million, respectively, of expenses pertaining to BCG and the prior year periods benefited from a $2.2 million legal expense recovery.
The Property and Casualty expense ratio of 26.9% for the six month period ended June 30, 2019 was 0.5 points above the prior year period primarily due to the legal expense recovery noted above.
acquisition of NTA Life Enterprises, LLC (NTA) in 2019.
Interest Expense
For the three and six month periodsmonths ended June 30, 2019,2020, interest expense was comparableincreased $0.7 million and $1.6 million, respectively, as we utilized our senior revolving credit facility in the third quarter of 2019 to June 30, 2018.
partially fund the acquisition of NTA on July 1, 2019.
Other Expense
- Goodwill Impairment
For the three and six month periods ended June 30, 2019, other expense represents the aforementionedrepresented a goodwill impairment charge in Retirement.
Retirement resulting from the annuity reinsurance transaction.
Income Tax Expense
The effective income tax rate on the Company'sour pretax income, including net investment gains (losses), was 23.9%12.3% and 15.0%23.9% for the six month periodsmonths ended June 30, 20192020 and 2018,2019, respectively. Income from investments in tax-advantaged securities reduced the effective income tax rates by 1.45.3 and 4.81.4 percentage points for the six month periodsmonths ended June 30, 20192020 and 2018,2019, respectively. The goodwill impairment charge in the Retirement segment increased the effective income tax rate by 3.5 percentage points at June 30, 2019.
On March 27, 2020, H.R. 748, the Coronavirus Aid, Relief, and Economic Security Act, “the CARES Act”, was signed into legislation. The CARES Act includes tax provisions relevant to businesses, and some of the significant changes include allowance of a five year carryback of net operating losses for 2018-2020 and the suspension of the 80% limitation of taxable income for net operating loss carryforwards for 2018-2020. The effects of the CARES Act are reflected in our income tax expense calculations as of March 31, 2020. Accounting Standards Codification Topic 740: Income Taxes requires that the impact of the CARES Act be recognized in the period in which the law was enacted. As a result, total income tax expense for the six months ended June 30, 2020 includes a benefit of $2.8 million (that reduced the effective income tax rate by 5.0 percentage points) to reflect a net operating loss carryback to taxable years for which the corporate rate was 35% as compared to the current corporate rate of 21%.
The Company recordsWe record liabilities for uncertain tax filing positions where it is more likely than not that the position will not be sustainable upon audit by taxing authorities. These liabilities are reevaluated routinely and are adjusted appropriately based on changes in facts or law. The Company hasWe have no unrecorded liabilities from uncertain tax filing positions.
At June 30, 2019, the Company's2020, our federal income tax returns for years prior to 2014 are no longer subject to examination by the IRS. Management doesInternal Revenue Service. We do not anticipate any assessments for tax years that remain subject to examination to have a material effect on the Company'sour financial position or results of operations.
Outlook for 20192020
The following discussion provides outlook information for our results of operations and capital position.
The impacts of COVID-19 and related economic conditions on our results continue to be highly uncertain and outside our control. The scope, duration and magnitude of the direct and indirect effects of COVID-19 continue to evolve in ways that are difficult or impossible to anticipate. In addition, because the unprecedented COVID-19 environment has only impacted our insurance operations for slightly more than three months, we do not believe its impact on our results for the first half of 2020 will be indicative of our results for the remainder of 2020. For additional information on the risks posed by COVID-19, see “Our business may be adversely affected by the recent COVID-19 outbreak” included in Part II - Item 1A in this Quarterly Report on Form 10-Q.
At the time of issuance of this Quarterly Report on Form 10-Q, management estimateswe estimate that 20192020 full year core earnings*net income will be within a range of $2.05$2.80 to $2.25$3.00 per diluted share generating a core returnbased on equity*analysis of between 7.0% and 7.5%. This projection also reflectsCOVID-19 scenarios. The increase in the range from the Outlook for 2020 we discussed in the Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2020 anticipates an overall effective tax rate of between 16% and 18%.
Withinincrease in the Property and Casualty planned premium rate increases,segment results as well as continued underwriting initiatives,discussed below.
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Horace Mann Educators Corporation | 34 | Quarterly Report on Form 10-Q |
Property and Casualty
Net written premiums for 2020 are expected to improvebe below 2019 levels due to the underlyingrecognition of $9.8 million of COVID-19 related premium credits in the second quarter and lower levels of new business due to the pandemic. Retention remains stable. We expect rate increases will continue to average in the low-single digits across the automobile loss ratio* by about 3.0 to 3.5 points and the underlying property loss ratio* 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.books. The expense ratio is expected to be consistentflat with the 2019 expense ratio of 26.9 points.
We experienced a lower level of automobile loss frequency resulting from temporary changes in policyholder driving patterns due to COVID-19 during the second quarter. Frequency was most favorably impacted in the month of April, with May and June levels rising sequentially. We anticipate frequency will continue to moderate as miles driven move back to near historic levels, but we project it will be lower than 2019 levels for the remainder of the year with an offsetting increase in severity. A 10% drop in automobile frequency represents approximately $2 million in pretax earnings per month, excluding the potential for higher severity.
In connection with the emergence of PG&E Corporation and Pacific Gas and Electric Company (together, PG&E) from bankruptcy on July 1, 2020, in the third quarter of 2020, we expect to recognize favorable prior year reserve development of approximately $4.8 million, pretax and net of reinsurance, along with the return of reinsurance reinstatement premiums of approximately $3.5 million, for a total of $8.3 million, related to the 2018 Camp Fire in California. The 2018 California Camp Fire generated gross losses of $150.0 million, and, net losses after reinsurance of $37.9 million pretax in 2018. See Part I - Item I, Note 1 in this Quarterly Report on Form 10-Q for further discussion regarding the PG&E subrogation claims.
As a result, the Property and Casualty full-year combined ratio is expected to remain around 27%.
Net income for Retirement will decrease as a resultbe 91% to 93%, including catastrophe losses of approximately 10 points, reflecting the recent annuity reinsurance transaction and redeploymenthigher level of capital tocatastrophes in the new Supplemental segment. Netsecond quarter. We anticipate net investment income for Retirement will declinebelow our previous guidance due to the lower investment levelsthan anticipated returns on limited partnership interests. Income for Property 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 RetirementCasualty is now anticipated to be in the range of $25$70 million to $27$75 million, reflecting the strong six-month results with the catastrophe losses assumption adjusted for the full year 2019.unusually high second quarter catastrophe losses.
Supplemental
LifeSupplemental is anticipated to generate a pretax profit margin in the low to mid 20% range and net investment income should continue to benefit from portfolio repositioning. As a result, we continue to anticipate net income between $31 million and $33 million. New sales are being negatively impacted by school closings due to COVID-19, delaying the growth of this segment.
Retirement
Retirement net investment income is reflecting further spread compression with rates on new investments below the average portfolio earned rate, lower than anticipated returns on limited partnership interests, as well as the impact of lower invested assets as a result of the annuity reinsurance transaction and use of capital to purchase NTA. Market volatility may continue to impact DAC amortization and asset-based fees. The impact of lower net investment income is anticipated to decline 15% over prior year due to the decrease in net investment income noted above accompaniedbe partially offset by a modest increase in mortality costs.
Netreduced level of operating expenses. As a result, we continue to expect net income for the new Supplemental segment is anticipatedRetirement to be in the range of $22 million to $24 million.
Life
We continue to expect Life to generate net income between $10 million and $12 million, reflecting a reduced level of net investment income with mortality costs continuing to $14 million for the second half of 2019, partially offset by additional interest expense of $2 million in Corporate and Other.
meet expectations.
As described in Critical Accounting Estimates, certain of the Company'sour significant accounting measurements require the use of estimates and assumptions. As additional information becomes available, adjustments may be required. Those adjustments are charged or credited to income for the period in which the adjustments are made and may impact actual results compared to management'sour estimates above. Additionally, see Forward-looking Information and Part II - Item 1A in this Quarterly Report on Form 10-Q andas well as Part I - Items 1 and 1A of the Company'sin our Annual Report on Form 10-K for the year ended December 31, 20182019 concerning other important factors that could impact actual results. Management believesWe believe that a projection of net income is not appropriate on a forward-looking basis because it is not possible to provide a valid forecast of net investment gains (losses), which can vary substantially from one period to another and may have a significant impact on net income.
|
| | |
Horace Mann Educators Corporation | 35 | Quarterly Report on Form 10-Q |
Critical Accounting Estimates
The preparation of consolidated financial statements in conformity with GAAP requires the Company's managementus to make estimates and assumptions based on information available at the time the consolidated financial statements are prepared. These estimates and assumptions affect the reported amounts of the Company'sour consolidated assets, liabilities, shareholders' equity and net income and cash flows.income. Certain accounting estimates are particularly sensitive because of their significance to the Company'sour consolidated financial statements and because of the possibility that subsequent events and available information may differ markedly from management's judgments at the time the consolidated financial statements were prepared. Management hasWe have discussed with the Audit Committee the quality, not just the acceptability, of the Company'sour accounting principles as applied in itsour financial reporting. The discussions generally included such matters as the consistency of the Company'sour accounting policies and their application, and the clarity and completeness of the Company'sour consolidated financial statements, which include related disclosures. ForInformation regarding our accounting policies pertaining to these topics is located in the Company, areas mostNotes to the Consolidated Financial Statements contained in Part II - Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2019.
We have identified the following accounting estimates as critical in that they involve a higher degree of judgment and are subject to a significant management judgments include:
degree of variability:
Valuation of hard-to-value fixed maturity securities, including evaluation of other-than-temporary impairments
Evaluation of goodwill and intangible assets for impairment
Valuation of life and annuity deferred policy acquisition costs
Valuation of liabilities for property and casualty unpaid claims and claim expenses
Valuation of investment contract and life policy reserves
Valuation of assets acquired and liabilities assumed under purchase accounting
Compared to December 31, 2018,2019, at June 30, 2019,2020, there were no material changes to accounting policies for areas most subject to significant management judgments identified above. In addition to disclosures in the Notes to Consolidated Financial Statements in the Company’sour Annual Report on Form 10-K for the year ended December 31, 2018,2019, discussion of accounting policies, including certain sensitivity information, was presented in Management’sManagement's Discussion and Analysis of Financial Condition and Results of Operations -- Critical Accounting Estimates in that Form 10-K.
Results of Operations by Segment
Consolidated financial results primarily reflect the operating results of threeour four operating segments as well as the corporate and other line. These reporting segments are defined based on financial information management useswe use to evaluate performance and to determine the allocation of assets.
resources (see Part I - Item I, Note 1 of the Consolidated Financial Statements in this report for a description of changes to our reporting segments).
Property and Casualty
Supplemental
Retirement
Life
Corporate and Other
The calculationsdetermination of segment data are described in more detail in Part I - Item 1, Note 1410 of the Consolidated Financial Statements in the Company's Annual Report on Form 10-K for the year ended December 31, 2018.this report. The following sections provide analysis and discussion of the results of operations for each of the reporting segments as well as investment results.
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Horace Mann Educators Corporation | 36 | Quarterly Report on Form 10-Q |
Property and Casualty
(All comparisons vs. same periods in 2019, unless noted otherwise)
For the three and six months ended June 30, 2020, net income reflected the following factors:
Written premiums* reduced by $9.8 million of COVID-19 related premium credits
18.0 points and 11.4 points of reduction in the Property and Casualty underlying loss ratio*, respectively
Catastrophe losses increased by 9.3 points and 3.9 points, respectively
A one-time tax benefit of $2.8 million in the first quarter of 2020 as a result of the CARES Act
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Horace Mann Educators Corporation | 37 | Quarterly Report on Form 10-Q |
The following table provides certain financial information for the Property and Casualty segment for the periods indicated.
|
| | | | | | | | | | | | | | | | | | | | | | |
($ in millions, unless otherwise indicated) | | Three Months Ended June 30, | | 2019-2018 | | Six Months Ended June 30, | | 2019-2018 |
| | 2019 | | 2018 | | Change % | | 2019 | | 2018 | | Change % |
Financial Data: | | | | | | | | |
| | |
| | |
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 | % |
___________________
N.M. - Not meaningful. |
| | | | | | | | | | | | | | | | | | | | | | |
($ in millions, unless otherwise indicated) | | Three Months Ended June 30, | | 2020-2019 | | Six Months Ended June 30, | | 2020-2019 |
| | 2020 | | 2019 | | Change % | | 2020 | | 2019 | | Change % |
Financial Data: | | | | | | | | | | | | |
Written premiums*: | | | | | | | | | | | | |
Automobile | | $ | 96.7 |
| | $ | 114.6 |
| | -15.6 | % | | $ | 206.1 |
| | $ | 231.4 |
| | -10.9 | % |
Property and other | | 59.4 |
| | 59.7 |
| | -0.5 | % | | 103.6 |
| | 104.6 |
| | -1.0 | % |
Total premiums written | | 156.1 |
| | 174.3 |
| | -10.4 | % | | 309.7 |
| | 336.0 |
| | -7.8 | % |
Change in unearned insurance premiums | | 0.1 |
| | (3.0 | ) | | 103.3 | % | | 13.0 |
| | 6.1 |
| | 113.1 | % |
Total insurance premiums earned | | 156.2 |
| | 171.3 |
| | -8.8 | % | | 322.7 |
| | 342.1 |
| | -5.7 | % |
Incurred claims and claims expenses: | | | | | | | | | | | | |
Claims occurring in the current year | | 109.2 |
| | 134.4 |
| | -18.8 | % | | 214.6 |
| | 253.2 |
| | -15.2 | % |
Prior years' reserve development | | 1.0 |
| | 2.0 |
| | -50.0 | % | | 2.0 |
| | 4.0 |
| | -50.0 | % |
Total claims and claim expenses incurred | | 108.2 |
| | 132.4 |
| | -18.3 | % | | 212.6 |
| | 249.2 |
| | -14.7 | % |
Operating expenses, including DAC amortization | | 40.9 |
| | 45.4 |
| | -9.9 | % | | 84.1 |
| | 91.9 |
| | -8.5 | % |
Underwriting gain (loss) | | 7.1 |
| | (6.5 | ) | | 209.2 | % | | 26.0 |
| | 1.0 |
| | N.M. |
|
Net investment income | | 6.3 |
| | 12.7 |
| | -50.4 | % | | 16.6 |
| | 22.9 |
| | -27.5 | % |
Income before income taxes | | 14.1 |
| | 6.6 |
| | 113.6 | % | | 43.9 |
| | 24.4 |
| | 79.9 | % |
Net income/core earnings* | | 11.3 |
| | 5.1 |
| | 121.6 | % | | 37.9 |
| | 20.1 |
| | 88.6 | % |
| | | | | | | | | | | | |
Operating Statistics: | | | | | | | | | | | | |
Automobile | | | | | | | | | | | | |
Loss and loss adjustment expense ratio | | 53.2 | % | | 73.8 | % | | -20.6 | pts | | 59.8 | % | | 72.3 | % | | -12.5 | pts |
Expense ratio | | 27.1 | % | | 26.6 | % | | 0.5 | pts | | 26.5 | % | | 26.9 | % | | -0.4 | pts |
Combined ratio: | | 80.3 | % | | 100.4 | % | | -20.1 | pts | | 86.3 | % | | 99.2 | % | | -12.9 | pts |
Prior years' reserve development | | — | % | | -0.9 | % | | 0.9 | pts | | -0.5 | % | | -0.9 | % | | 0.4 | pts |
Catastrophes | | 3.1 | % | | 1.9 | % | | 1.2 | pts | | 1.5 | % | | 1.3 | % | | 0.2 | pts |
Underlying combined ratio* | | 77.2 | % | | 99.4 | % | | -22.2 | pts | | 85.3 | % | | 98.8 | % | | -13.5 | pts |
Property | | | | | | | | | | | | |
Loss and loss adjustment expense ratio | | 99.1 | % | | 84.8 | % | | 14.3 | pts | | 77.8 | % | | 73.9 | % | | 3.9 | pts |
Expense ratio | | 24.8 | % | | 26.6 | % | | -1.8 | pts | | 25.5 | % | | 27.1 | % | | -1.6 | pts |
Combined ratio: | | 123.9 | % | | 111.4 | % | | 12.5 | pts | | 103.3 | % | | 101.0 | % | | 2.3 | pts |
Prior years' reserve development | | -1.8 | % | | -1.8 | % | | — |
| | -0.9 | % | | -1.9 | % | | 1.0 | pts |
Catastrophes | | 57.9 | % | | 36.8 | % | | 21.1 | pts | | 36.8 | % | | 27.6 | % | | 9.2 | pts |
Underlying combined ratio* | | 67.8 | % | | 76.4 | % | | -8.6 | pts | | 67.4 | % | | 75.3 | % | | -7.9 | pts |
| | | | | | | | | | | | |
Risks in force (in thousands) | | | | | | | | | | | | |
Automobile (1) | | | | | | | | 418 |
| | 448 |
| | -6.7 | % |
Property | | | | | | | | 191 |
| | 198 |
| | -3.5 | % |
Total | | | | | | | | 609 |
| | 646 |
| | -5.7 | % |
(1)June 30, 2019 includes Includes assumed policiesrisks in force of 4.
For the three and six month periods ended June 30, 2019, core earnings* increased $16.0 million and $21.3 million, respectively, compared to the prior year periods. These reflect 7.1 points of improvement in the Property and Casualty combined ratio year to date due to improved underwriting results, lower catastrophe losses and favorable prior years' reserve development.
On a reported basis, the 12.9 points of improvement in the automobile combined ratio for the six month periodmonths ended June 30, 20192020 was mainly attributedattributable to 5.2 points of improvementa 13.1 point reduction in the automobile underlying loss ratio* reflecting lower frequency as well as the ongoing benefit of profitability initiatives. We experienced a lower level of automobile loss frequency resulting from temporary changes in policyholder driving patterns due to rate actions combinedCOVID-19. Frequency was most favorably impacted in the month of April, with continued stabilizationMay and June levels rising sequentially, resulting in auto loss trends.an average decline in frequency for the quarter of approximately 40%. The reported property combined ratio improvedincreased 2.3 points for the six month periodmonths ended June 30, 2019, reflecting an improvement2020 due to a 9.3 point increase in
|
| | |
Horace Mann Educators Corporation | 38 | Quarterly Report on Form 10-Q |
catastrophe losses. During the six months ended June 30, 2020, the underlying property loss ratio of 5.1ratio* improved 6.3 points, as well as a 2.7 point improvement due toreflecting lower catastrophenon-catastrophe weather-related losses.
Rate actions were the primary factor for the slight increase in total premiums written* forFor the three and six month periodsmonths ended June 30, 2019 compared2020, total written premiums* decreased $18.2 million and $26.3 million, respectively, primarily due to a $9.8 million reduction in automobile written premiums* during the prior year periods.second quarter of 2020 due to COVID-19 related credits equal to 15% of two months of automobile premiums. In addition, total written premiums declined due to lower automobile risks in force and a lower level of rate increases being implemented in 2020. For 2019, the Company's2020, our full year rate plan anticipates low-single digit average rate increases (including states with no rate actions) for both automobile and property; average approved rate changes during the first six months of 20192020 were 5.3%0.9% for automobile and 4.6%1.1% for property. Growth in sales* has slowed as a result of the COVID-19 pandemic.
Automobile premiums written* was comparable toFor the three and six month periodsmonths ended June 30, 2018. In2020, automobile written premiums* decreased $17.9 million and $25.3 million, respectively, significantly due to the aforementioned COVID-19 related credits. While the number of automobile risks in force has declined, the average written premium per risk and average earned premium per risk increased 2.5% and 3.6%, respectively, in the first six months of 2019, the average written premium per policy and average earned premium per policy increased 5.8% and 6.2%, respectively, compared to the prior year period. For automobile, the number of educator policies has been stable relative to overall automobile policies as educators represented 85.3%, 85.4% and 85.4% of the automobile policies in force as of June 30, 2019, December 31, 2018 and June 30, 2018, respectively.2020. Based on policiesrisks in force, the automobile 12 month retention rate for new and renewal policiesrisks was 81.3% compared81.6% which was comparable to 82.6% ata year ago. The number of educator risks has been stable relative to overall automobile risks as educators represented 85.4%, 85.5% and 85.5% of the automobile risks in force as of June 30, 2020, December 31, 2019 and June 30, 2019, and 2018, respectively, with the decrease due to recent rate and underwriting actions.respectively.
Property and other premiums written* increased slightly compared toFor the three and six month periodsmonths ended June 30, 2018.2020, property and other written premiums* decreased slightly. While the number of property policiesrisks in force has declined, the average written premium per policyrisk and average earned premium per policyrisk increased 5.2%4.6% and 4.3%5.6%, respectively, in the first six months of 2020. Based on risks in force, the property 12 month retention rate for new and renewal risks decreased to 87.5% from 87.7% at June 30, 2020 and 2019, compared to the prior year period. For property, therespectively. The number of educator policiesrisks has been stable relative to overall property policiesrisks as educators represented 82.5%82.2%, 82.4%82.5% and 82.4%82.3% of the property policiesrisks in force as of June 30, 2019,2020, December 31, 2018,2019 and June 30, 2018, respectively. The property 12 month new and renewal policy retention rate was 87.7% and 88.0% at June 30, 2019, and 2018, respectively.
The Company continuesWe continue to evaluate and implement actions to further mitigate itsour risk exposure in catastrophe-prone areas of the country. Such actions could include, but are not limited to, non-renewal of property policies, restricted agent geographic placement, limitations on agent new business sales, further tightening of underwriting standards and increased utilization of third-party vendor products.
|
| | |
Horace Mann Educators Corporation | 39 | Quarterly Report on Form 10-Q |
Supplemental
The following table provides certain information for Supplemental for the periods indicated.
|
| | | | | | | | | | | | | | | | |
($ in millions, unless otherwise indicated) | | Three Months Ended June 30, | | 2020-2019 | | Six Months Ended June 30, | | 2020-2019 |
| | 2020 | | 2019 | | Change % | | 2020 | | 2019 | | Change % |
Financial Data: | | | | | | | | | | | | |
Insurance premiums and contract deposits* | | $ | 33.7 |
| | N/A | | N/A | | $ | 66.3 |
| | N/A | | N/A |
Insurance premiums and contract charges earned | | 33.3 |
| | N/A | | N/A | | 66.3 |
| | N/A | | N/A |
Net investment income | | 4.0 |
| | N/A | | N/A | | 7.5 |
| | N/A | | N/A |
Benefits and settlement expenses | | 12.5 |
| | N/A | | N/A | | 23.0 |
| | N/A | | N/A |
Operating expenses (includes DAC unlocking and amortization expense) | | 10.1 |
| | N/A | | N/A | | 20.2 |
| | N/A | | N/A |
Intangible asset amortization expense | | 3.2 |
| | N/A | | N/A | | 6.4 |
| | N/A | | N/A |
Income before income taxes | | 12.1 |
| | N/A | | N/A | | 25.5 |
| | N/A | | N/A |
Net income / core earnings* | | 9.5 |
| | N/A | | N/A | | 20.0 |
| | N/A | | N/A |
| | | | | | | | | | | | |
Operating Statistics: | | | | | | | | | | | | |
Supplemental insurance in force (thousands) | | | | | | | | 298 |
| | N/A | | N/A |
Benefits ratio (1) | | 37.5 | % | | N/A | | N/A | | 34.7 | % | | N/A | | N/A |
Operating expense ratio (2) | | 26.6 | % | | N/A | | N/A | | 26.9 | % | | N/A | | N/A |
Pretax profit margin (2) | | 31.9 | % | | N/A | | N/A | | 34.0 | % | | N/A | | N/A |
Persistency | | | | | | | | 89.3 | % | | N/A | | N/A |
N/A - The acquisition of NTA closed on July 1, 2019.
(1) Benefits ratio measured to earned premium.
(2) Operating expense ratio and pretax profit margin measured to total revenues.
For the three and six months ended June 30, 2020, Supplemental sales* were $0.7 million and $4.4 million, respectively, reflecting significantly lower sales volume primarily due to the COVID-19 pandemic as sales are dependent on in-person events at schools. Persistency remains steady at 89.3%.
For the three and six months ended June 30, 2020, Supplemental contributed $9.5 million and $20.0 million, respectively, to net income, reflecting favorable trends in reserves and some short-term benefit from changes in policyholder behavior due to the COVID-19 pandemic. The non-cash impact from amortization of intangible assets recognized in connection with the purchase accounting of NTA reduced pretax net income by $3.2 million and $6.4 million for the three and six months ended June 30, 2020.
|
| | |
Horace Mann Educators Corporation | 40 | Quarterly Report on Form 10-Q |
Retirement
(All comparisons vs. same periods in 2019, unless noted otherwise)
For the three and six months ended June 30, 2020, net income increased $34.7 million and $21.6 million, respectively, reflecting the following factors:
prior period results include a $28.0 million pretax goodwill impairment charge related to the annuity reinsurance transaction in the second quarter of 2019
$5.6 million pretax of unfavorable DAC unlocking in the prior year quarter primarily due to accelerated amortization of the DAC asset associated with the reinsured annuity block, compared to $4.6 million of favorable DAC unlocking in the current year quarter due to equity market recovery
lower levels of net investment income in 2020, reflecting lower invested asset levels resulting from the prior year annuity reinsurance transaction and use of capital to purchase NTA as well as lower returns on limited partnership interests
|
| | |
Horace Mann Educators Corporation | 41 | Quarterly Report on Form 10-Q |
The following table provides certain information for the Retirement segment for the periods indicated.
|
| | | | | | | | | | | | | | | | | | | | | | | |
($ in millions, unless otherwise indicated) | | Three Months Ended June 30, | | 2019-2018 | | Six Months Ended June 30, | | 2019-2018 |
| | 2019 | | 2018 | | Change % | | 2019 | | 2018 | | Change % |
Financial Data: | | | | | | | | |
| | |
| | |
Contract charges earned | | $ | 6.9 |
| | $ | 7.9 |
| | -12.7 | % | | $ | 15.5 |
| | $ | 15.9 |
| | -2.5 | % |
Net investment income | | 62.7 |
| | 67.8 |
| | -7.5 | % | | 127.4 |
| | 132.0 |
| | -3.5 | % |
Interest credited | | 42.3 |
| | 39.9 |
| | 6.0 | % | | 84.0 |
| | 78.6 |
| | 6.9 | % |
Net interest margin without net investment gains (losses) | | 21.5 |
| | 27.9 |
| | -22.9 | % | | 44.5 |
| | 53.4 |
| | -16.7 | % |
Net interest margin - Reinsured block | | (1.1 | ) | | — |
| | N.M. | | (1.1 | ) | | — |
| | N.M. |
Mortality loss and other reserve charges | | 1.2 |
| | 1.4 |
| | -14.3 | % | | 1.8 |
| — |
| 3.3 |
| | -45.5 | % |
DAC amortization expense, excluding unlocking | | 4.3 |
| | 4.8 |
| | -10.4 | % | | 9.2 |
| | 9.6 |
| | -4.2 | % |
DAC unlocking | | 5.6 |
| | 0.2 |
| | N.M. | | 3.6 |
| | 0.4 |
| | N.M. |
Operating expenses | | 15.4 |
| | 13.9 |
| | 10.8 | % | | 31.3 |
| | 28.3 |
| | 10.6 | % |
Other expense - goodwill impairment | | 28.0 |
| | — |
| | N.M. | | 28.0 |
| | — |
| | N.M. |
Income (loss) before income taxes | | (24.8 | ) | | 17.2 |
| | N.M. | | (10.2 | ) | | 31.2 |
| | -132.7 | % |
Net income (loss) | | (25.0 | ) | | 14.1 |
| | N.M. | | (12.8 | ) | | 25.5 |
| | N.M. |
Core earnings* | | 3.0 |
| | 14.1 |
| | -78.7 | % | | 15.2 |
| | 25.5 |
| | -40.4 | % |
Operating Statistics: | | | | | | | | | | | | |
Annuity sales deposits | | | | | | | | | | | | |
Variable | | $ | 54.1 |
| | $ | 50.7 |
| | 6.7 | % | | $ | 102.9 |
| | $ | 97.5 |
| | 5.5 | % |
Fixed | | 54.9 |
| | 49.5 |
| | 10.9 | % | | 113.4 |
| | 101.5 |
| | 11.7 | % |
Total | | 109.0 |
| | 100.2 |
| | 8.8 | % | | 216.3 |
| | 199.0 |
| | 8.7 | % |
Single | | 55.8 |
| | 46.9 |
| | 19.0 | % | | 111.7 |
| | 95.5 |
| | 17.0 | % |
Recurring | | 53.2 |
| | 53.3 |
| | -0.2 | % | | 104.6 |
| | 103.5 |
| | 1.1 | % |
Total | | 109.0 |
| | 100.2 |
| | 8.8 | % | | 216.3 |
| | 199.0 |
| | 8.7 | % |
Assets under administration (AUA) | | | | | | | | | | | | |
Annuity assets under management (1) | | | | | |
|
| | 4,170.3 |
| | 6,851.7 |
| | -39.1 | % |
Broker and advisory assets under administration (2) | | | | | |
|
| | 2,236.0 |
| | 300.5 |
| | N.M. |
Recordkeeping assets under administration (2) | | | | | |
|
| | 1,395.1 |
| | — |
| | N.M. |
Total | |
|
| |
|
| |
|
| | 7,801.4 |
| | 7,152.2 |
| | 9.1 | % |
Persistency | | | | | | | | | | | | |
Variable annuities | | | | | |
|
| | 94.3 | % | | 94.6 | % | | -0.3 | pts |
Fixed annuities | | | | | |
|
| | 93.9 | % | | 94.4 | % | | -0.5 | pts |
Total | | | | | |
|
| | 94.0 | % | | 94.5 | % | | -0.5 | pts |
Annuity contracts in force | | | | | |
|
| | 227 |
| | 224 |
| | 1.3 | % |
Fixed spread - YTD annualized (basis points) | | | | | |
|
| | 175 |
| | 181 |
| | -6bps |
|
___________________
N.M. - Not meaningful. |
| | | | | | | | | | | | | | | | | | | | | | |
($ in millions, unless otherwise indicated) | | Three Months Ended June 30, | | 2020-2019 | | Six Months Ended June 30, | | 2020-2019 |
| | 2020 | | 2019 | | Change % | | 2020 | | 2019 | | Change % |
Financial Data: | | | | | | | | | | | | |
Contract charges earned | | $ | 6.7 |
| | $ | 6.9 |
| | -2.9 | % | | $ | 14.1 |
| | $ | 15.5 |
| | -9.0 | % |
Net investment income | | 55.1 |
| | 62.7 |
| | -12.1 | % | | 108.6 |
| | 127.4 |
| | -14.8 | % |
Interest credited | | 39.4 |
| | 42.3 |
| | -6.9 | % | | 79.7 |
| | 84.0 |
| | -5.1 | % |
Net interest margin without net investment gains (losses) | | 16.7 |
| | 21.5 |
| | -22.3 | % | | 30.8 |
| | 44.5 |
| | -30.8 | % |
Net interest margin - reinsured block | | (1.0 | ) | | (1.1 | ) | | 9.1 | % | | (1.9 | ) | | (1.1 | ) | | -72.7 | % |
Mortality loss and other reserve charges | | 1.2 |
| | 1.2 |
| | — | % | | 2.8 |
| | 1.8 |
| | 55.6 | % |
Operating expenses | | 13.9 |
| | 17.4 |
| | -20.1 | % | | 30.1 |
| | 35.5 |
| | -15.2 | % |
DAC and intangible asset amortization expense, excluding DAC unlocking | | 4.8 |
| | 4.9 |
| | -2.0 | % | | 10.0 |
| | 10.3 |
| | -2.9 | % |
DAC unlocking | | (4.6 | ) | | 5.6 |
| | -182.1 | % | | (0.6 | ) | | 3.6 |
| | -116.7 | % |
Income (loss) before income taxes | | 11.2 |
| | (24.8 | ) | | N.M. |
| | 10.1 |
| | (10.2 | ) | | N.M. |
|
Net income (loss) | | 9.7 |
| | (25.0 | ) | | N.M. |
| | 8.8 |
| | (12.8 | ) | | N.M. |
|
Core earnings | | 9.7 |
| | 3.0 |
| | 223.3 | % | | 8.8 |
| | 15.2 |
| | -42.1 | % |
Operating Statistics: | | | | | | | | | | | | |
Annuity contract deposits* | | | | | | | | | | | | |
Variable | | $ | 52.3 |
| | $ | 54.1 |
| | -3.3 | % | | $ | 110.1 |
| | $ | 102.9 |
| | 7.0 | % |
Fixed | | 59.5 |
| | 54.9 |
| | 8.4 | % | | 119.4 |
| | 113.4 |
| | 5.3 | % |
Total | | 111.8 |
| | 109.0 |
| | 2.6 | % | | 229.5 |
| | 216.3 |
| | 6.1 | % |
Single | | 55.9 |
| | 55.8 |
| | 0.2 | % | | 118.1 |
| | 111.7 |
| | 5.7 | % |
Recurring | | 55.9 |
| | 53.2 |
| | 5.1 | % | | 111.4 |
| | 104.6 |
| | 6.5 | % |
Total | | 111.8 |
| | 109.0 |
| | 2.6 | % | | 229.5 |
| | 216.3 |
| | 6.1 | % |
Assets under administration (AUA) | | | | | | | | | | | | |
Annuity assets under management (1) | | | | | |
|
| | 4,324.3 |
| | 4,170.3 |
| | 3.7 | % |
Broker and advisory assets under administration | | | | | |
|
| | 2,168.0 |
| | 2,236.1 |
| | -3.0 | % |
Recordkeeping assets under administration | | | | | |
|
| | 1,460.5 |
| | 1,395.1 |
| | 4.7 | % |
Total | |
|
| |
|
| |
|
| | 7,952.8 |
| | 7,801.5 |
| | 1.9 | % |
Persistency | | | | | | | | | | | | |
Variable annuities | | | | | |
|
| | 94.9 | % | | 94.3 | % | | 0.6 | pts |
Fixed annuities | | | | | |
|
| | 94.2 | % | | 93.9 | % | | 0.3 | pts |
Total | | | | | |
|
| | 94.5 | % | | 94.0 | % | | 0.5 | pts |
Annuity contracts in force (thousands) | | | | | |
|
| | 230 |
| | 227 |
| | 1.3 | % |
Fixed spread - YTD annualized (basis points) | | | | | |
|
| | 168 |
| | 175 |
| | -7bps |
|
| |
(1) | AmountAmounts reported as of June 30, 2020 and June 30, 2019 excludesexclude $627.6 million and $691.6 million, respectively, of assets under management held under modified coinsurance reinsurance.reinsurance |
(2) 2019 includes the results of BCG acquired on January 2, 2019.
For the three and six month periodsmonths ended June 30, 2019, core earnings* decreased $11.12020, total annuity contract deposits* increased $2.8 million and $10.3$13.2 million, respectively. Variable annuity and fixed annuity deposits increased $7.2 million and $6.0 million, respectively, as compared tofor the prior year periods reflecting lower net investment income and accelerated amortization of the DAC asset associated with the reinsured block partially offset by favorable benefits expense from mortality. The current periods also include higher operating expenses from the inclusion of BCG.
As a result of the annuity reinsurance transaction, the Company impaired goodwill associated with the annuity business of the Retirement segment and recorded a non-cash impairment charge of $28.0 million during the quartersix months ended June 30, 2019.
For2020 reflecting the three and six month periods ended June 30, 2019, contract deposits increased compared to the prior year periods, reflecting increasesvalue educators see in single deposits. Variable annuity deposits increased by $3.4 million and $5.4 million for the three and six month periods ended June 30, 2019. Fixed annuity deposits increased by $5.4 million and $11.9 million for the current periods.
our Retirement savings vehicles.
At June 30, 2019,2020, annuity assets under management decreased by $2.7 billion comparedwere $154.0 million above a year ago primarily due to June 30, 2018 driven by the annuity reinsurance transaction.positive net inflows. Variable assets under management, excluding reinsurance,amounts held under the modified coinsurance agreement, increased by $115.0$70.0 million primarily due to market performance.positive net inflows. The year to date annualized net interest spread on fixed annuities, excluding reinsurance, decreased 67 basis points.
The Company |
| | |
Horace Mann Educators Corporation | 42 | Quarterly Report on Form 10-Q |
We actively manages itsmanage our interest rate risk exposure, considering a variety of factors, including earned interest rates, credited interest rates and the relationship between the expected durations of assets and liabilities. Management estimatesWe estimate that over the next 12 months approximately $336.0$528.1 million of the Retirement and Life combined investment portfolio and related investable cash flows will be reinvested at current market rates. As interest rates remain at low levels, borrowers may prepay or redeem the securities with greater frequency in order to borrow at lower market rates, which could increase investable cash flows and exacerbate the reinvestment risk.
risk.
As a general guideline, for a 100 basis point decline in the average reinvestment rate and based on the Company'sour existing policies and investment portfolio, the impact from investing in that lower interest rate environment could further reduce Retirement net investment income by approximately $1.3$2.0 million in year one and $3.8$6.1 million in year two, further reducing the annualized net interest spread on fixed annuities by approximately 48 basis points and 1321 basis points in the respective periods, compared to the current period annualized net interest spread. The Companyspread on fixed annuities. We could also consider potential changes in rates credited to policyholders, tempered by any restrictions on the ability to adjust policyholder rates due to minimum guaranteed crediting rates.
The expectation for future annualized net interest spreads on fixed annuities is also an important component in the amortization of DAC. In terms of the sensitivity of this amortization to the annualized net interest spread on fixed annuities, based on DAC as of June 30, 20192020 and assuming all other assumptions are met, a 10 basis point deviation in the current year targeted annualized net interest rate spread on fixed annuities assumption would impact amortization between $0.3 million and $0.4 million. This result may change depending on the magnitude and direction of any actual deviations but represents a range of reasonably likely experience for the noted assumption.
The annuity reinsurance agreement entered into in the second quarter of 2019, which reinsured the $2.2 billion block of in force fixed annuities with a minimum crediting rate of 4.5%, mitigateshelps mitigate the risk of not being able to generate appropriate spreads on the annuity business. Information regarding the interest crediting rates and balances equal to the minimum guaranteed rate for deferred annuity account values excluding the reinsured block is shown below.
| | ($ in millions) | | June 30, 2019 | | June 30, 2020 |
| | | | | | Deferred Annuities at | | | | | | Deferred Annuities at |
| | Total Deferred Annuities | | Minimum Guaranteed Rate | | Total Deferred Annuities | | Minimum Guaranteed Rate |
| | Percent of Total | | Accumulated Value (AV) | | Percent of Total Deferred Annuities AV | | Percent of Total | | Accumulated Value | | Percent of Total | | Accumulated Value (AV) | | Percent of Total Deferred Annuities AV | | Percent of Total | | Accumulated Value |
Minimum guaranteed interest rates: | | | | | | | | | | | | | | | | | | | | |
Less than 2% | | 52.0 | % | | $ | 1,216.2 |
| | 46.9 | % | | 34.7 | % | | $ | 570.9 |
| | 53.7 | % | | $ | 1,299.3 |
| | 49.4 | % | | 37.5 | % | | $ | 642.1 |
|
Equal to 2% but less than 3% | | 12.5 | % | | 293.0 |
| | 82.8 | % | | 14.8 | % | | 242.7 |
| | 11.8 | % | | 286.2 |
| | 83.4 | % | | 13.9 | % | | 238.8 |
|
Equal to 3% but less than 4% | | 26.0 | % | | 607.5 |
| | 99.9 | % | | 36.9 | % | | 607.0 |
| | 25.3 | % | | 612.8 |
| | 99.9 | % | | 35.7 | % | | 612.4 |
|
Equal to 4% but less than 5% | | 7.3 | % | | 171.1 |
| | 100.0 | % | | 10.4 | % | | 171.1 |
| | 7.1 | % | | 170.5 |
| | 100.0 | % | | 9.9 | % | | 170.5 |
|
5% or higher | | 2.2 | % | | 52.0 |
| | 100.0 | % | | 3.2 | % | | 52.0 |
| | 2.1 | % | | 50.5 |
| | 100.0 | % | | 3.0 | % | | 50.5 |
|
Total | | 100.0 | % | | $ | 2,339.8 |
| | 70.2 | % | | 100.0 | % | | $ | 1,643.7 |
| | 100.0 | % | | $ | 2,419.3 |
| | 70.9 | % | | 100.0 | % | | $ | 1,714.3 |
|
The CompanyWe will continue to be disciplined in executing strategies to mitigate the negative impact on profitability of a sustained low interest rate environment. However, the success of these strategies may be affected by the factors discussed in Part I - Item 1A in our Annual Report on Form 10-K for the year ended December 31, 2019 and other factors withinin this report.
|
| | |
Horace Mann Educators Corporation | 43 | Quarterly Report on Form 10-Q |
Life
(All comparisons vs. same periods in 2019, unless noted otherwise)
For the three and six months ended June 30, 2020, net income and core earnings* decreased $3.3 million and $6.0 million, respectively, reflecting lower net investment income and higher mortality costs. Claims related to COVID-19 total less than $1.0 million with average face values averaging about $30 thousand.
For the three and six months ended June 30, 2020, insurance premiums and contract deposits* decreased $0.8 million and $2.4 million, respectively, primarily due to a decline in sales* of single premiums. The ordinary life insurance in force lapse ratio was 4.2% for the 12 months ended June 30, 2020 compared to 4.5% for the 12 months ended June 30, 2019.
The following table provides certain information for the Life segment for the periods indicated.
| | ($ in millions, unless otherwise indicated) | | Three Months Ended June 30, | | 2019-2018 | | Six Months Ended June 30, | | 2019-2018 | | Three Months Ended June 30, | | 2020-2019 | | Six Months Ended June 30, | | 2020-2019 |
| | 2019 | | 2018 | | Change % | | 2019 | | 2018 | | Change % | | 2020 | | 2019 | | Change % | | 2020 | | 2019 | | Change % |
Financial Data: | | | | | | | | | | | | | | | | | | | | | | | | |
Insurance premiums and contract deposits | | $ | 28.4 |
| | $ | 28.5 |
| | -0.4 | % | | $ | 54.8 |
| | $ | 54.3 |
| | 0.9 | % | |
Insurance premiums and contract deposits* | | | $ | 27.6 |
| | $ | 28.4 |
| | -2.8 | % | | $ | 52.4 |
| | $ | 54.8 |
| | -4.4 | % |
Insurance premiums and contract charges earned | | 29.9 |
| | 30.4 |
| | -1.6 | % | | 60.3 |
| | 59.9 |
| | 0.7 | % | | 29.2 |
| | 29.9 |
| | -2.3 | % | | 58.6 |
| | 60.3 |
| | -2.8 | % |
Net investment income | | 18.3 |
| | 19.2 |
| | -4.7 | % | | 36.4 |
| | 37.5 |
| | -2.9 | % | | 15.6 |
| | 18.3 |
| | -14.8 | % | | 31.2 |
| | 36.4 |
| | -14.3 | % |
Benefits and settlement expenses | | 19.1 |
| | 19.9 |
| | -4.0 | % | | 41.1 |
| | 40.9 |
| | 0.5 | % | | 21.1 |
| | 19.1 |
| | 10.5 | % | | 43.3 |
| | 41.1 |
| | 5.4 | % |
Interest credited | | 11.3 |
| | 11.2 |
| | 0.9 | % | | 22.5 |
| | 22.5 |
| | — | % | | 11.3 |
| | 11.3 |
| | — | % | | 22.5 |
| | 22.5 |
| | — | % |
Operating expenses | | | 8.3 |
| | 9.2 |
| | -9.8 | % | | 17.4 |
| | 18.6 |
| | -6.5 | % |
DAC amortization expense, excluding unlocking | | 2.1 |
| | 1.9 |
| | 10.5 | % | | 4.1 |
| | 3.7 |
| | 10.8 | % | | 2.0 |
| | 2.1 |
| | -4.8 | % | | 3.9 |
| | 4.1 |
| | -4.9 | % |
DAC unlocking | | (0.1 | ) | | — |
| | N.M. | | (0.1 | ) | | 0.1 |
| | N.M. | | (0.2 | ) | | (0.1 | ) | | N.M. |
| | (0.3 | ) | | (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 | % | | 2.3 |
| | 6.7 |
| | -65.7 | % | | 3.0 |
| | 10.7 |
| | -72.0 | % |
Net income /core earnings* | | 5.2 |
| | 5.9 |
| | -11.9 | % | | 8.5 |
| | 9.7 |
| | -12.4 | % | |
Net income / core earnings* | | | 1.9 |
| | 5.2 |
| | -63.5 | % | | 2.5 |
| | 8.5 |
| | -70.6 | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
Operating Statistics: | | | | | | | | | | | | | | | | | | | | | | | | |
Life insurance in force | | | | | | | | $ | 18,598 |
| | $ | 17,862 |
| | 4.1 | % | | | | | | | | $ | 19,565 |
| | $ | 18,598 |
| | 5.2 | % |
Number of policies in force (in thousands) | | | | | | | | 199 |
| | 198 |
| | 0.5 | % | |
Number of policies in force (thousands) | | | | | | | | | 201 |
| | 199 |
| | 1.0 | % |
Average face amount in force (in dollars) | | | | | | | | $ | 93,506 |
| | $ | 90,282 |
| | 3.6 | % | | | | | | | | $ | 97,306 |
| | $ | 93,506 |
| | 4.1 | % |
Lapse ratio (ordinary life insurance in force) | | | | | | | | 4.5 | % | | 4.9 | % | | -0.4 | pts | | | | | | | | 4.2 | % | | 4.5 | % | | -0.3 | pts |
Mortality costs | | | | | | | | $ | 18.0 |
| | $ | 17.2 |
| | 4.7 | % | | | | | | | | $ | 19.3 |
| | $ | 18.0 |
| | 7.2 | % |
|
| | |
Horace Mann Educators Corporation | 44 | Quarterly Report on Form 10-Q |
Corporate and Other
(All comparisons vs. same periods in 2019, unless noted otherwise)
The following table provides certain financial information for Corporate and Other for the periods indicated.
|
| | | | | | | | | | | | | | | | | | | | | | |
($ in millions) | | Three Months Ended June 30, | | 2020-2019 | | Six Months Ended June 30, | | 2020-2019 |
| | 2020 | | 2019 | | Change % | | 2020 | | 2019 | | Change % |
Interest expense | | $ | 3.9 |
| | $ | 2.9 |
| | 34.5 | % | | $ | 7.9 |
| | $ | 5.9 |
| | 33.9 | % |
Net investment gains (losses) pretax | | 3.2 |
| | 146.3 |
| | N.M. |
| | (15.3 | ) | | 153.7 |
| | N.M. |
|
Tax on net investment gains (losses) | | 0.7 |
| | 31.6 |
| | N.M. |
| | (3.3 | ) | | 33.2 |
| | N.M. |
|
Net investment gains (losses) after tax | | 2.5 |
| | 114.7 |
| | N.M. |
| | (12.0 | ) | | 120.5 |
| | N.M. |
|
Net income (loss) | | (1.9 | ) | | 108.5 |
| | -101.8 | % | | (20.2 | ) | | 110.2 |
| | -118.3 | % |
Core earnings (loss)* | | (4.4 | ) | | (6.2 | ) | | 29.0 | % | | (8.2 | ) | | (10.3 | ) | | 20.4 | % |
For the three and six month periodsmonths ended June 30, 2019, core earnings*2020, net income decreased compared to the prior year periods, largelyprimarily due to lower netrecognition of a $106.9 million after tax realized investment income partially offset by lower mortality costsgain in the second quarter of 2019.2019 with respect to the transfer of investments as consideration in connection with the annuity reinsurance transaction.
Investment Results
(All comparisons vs. same periods in 2019, unless noted otherwise)
|
| | | | | | | | | | | | | | | | | | | | | | |
($ in millions) | | Three Months Ended June 30, | | 2020-2019 | | Six Months Ended June 30, | | 2020-2019 |
| | 2020 | | 2019 | | Change % | | 2020 | | 2019 | | Change % |
Net investment income - Investment portfolio | | $ | 56.5 |
| | $ | 70.3 |
| | -19.6 | % | | $ | 115.1 |
| | $ | 163.1 |
| | -29.4 | % |
Investment income - Deposit asset on reinsurance | | 23.9 |
| | 23.2 |
| | 3.0 | % | | 47.6 |
| | 23.2 |
| | 105.2 | % |
Total net investment income | | 80.4 |
| | 93.5 |
| | -14.0 | % | | 162.7 |
| | 186.3 |
| | -12.7 | % |
Pretax net investment gains (losses) | | 3.2 |
| | 146.3 |
| | N.M. |
| | (15.3 | ) | | 153.7 |
| | N.M. |
|
Pretax net unrealized investment gains on fixed maturity securities | |
| | | |
| | 417.6 |
| | 292.5 |
| | 42.8 | % |
Life premiums and contract deposits*Excluding accreted investment income on the deposit asset on reinsurance, for the three and six month periods ended June 30, 2019 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 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 three and six month periods ended June 30, 2019, core earnings* decreased compared to the prior year periods, driven by $3.1 and $4.0 million, respectively, of pretax acquisition costs associated with BCG and NTA.
Investment Results
|
| | | | | | | | | | | | | | | | | | | | | | |
($ 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, 2019,2020, net investment income from the investment portfoliodecreased $13.8 million and $48.0 million, respectively. The decline was lower than the prior year periods primarily becausedue to a $2.1 billion reduction in invested assets decreased 22.2% from December 31, 2018 due to assetsinvestments transferred under the annuity reinsurance transaction in the second quarter of 2019 as well as lower than expected new money rates and prepayments that were somewhat offset by stronger returns on alternative investments.
limited partnership interests.
For the three and six month periodsmonths ended June 30, 2019,2020, the pretax net investment gains were drivenloss was primarily by a $135.3 million pretax realized investment gain relateddue to the transfer of assets as a result of the annuity reinsurance transaction and the change in fair value of equity securities.securities as well as options that we use to hedge our fixed indexed annuity (FIA) and indexed universal life (IUL) products somewhat offset by gains in the related derivatives embedded in FIA. Pretax net investment gains for the three and six months ended June 30, 2019 reflect a realized investment gain of $135.3 million recognized during the second quarter of 2019 in connection with the transfer of investments related to the annuity reinsurance transaction. Pretax net unrealized investment gains on fixed maturity securities were up $109.0$125.1 million compared to priora year ago, reflecting a decline in the 10-year U.S. Treasury yield of 85135 basis points and tightening investment-gradethat more than offset wider credit spreads offset by the impact of the aforementioned $135.3 million pretax realizedfor investment gain related to the annuity reinsurance transaction.grade securities.
|
| | |
Horace Mann Educators Corporation | 45 | Quarterly Report on Form 10-Q |
Fixed Maturity and Equity Securities Portfolios
The table below presents the Company’sour fixed maturity and equity securities portfolios by major asset class, including the 10 largest sectors of the Company’sour corporate bond holdings (based on fair value).
|
| | | | | | | | | | | | | | | |
($ in millions) | | 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 |
| | | | |
________________ |
| | | | | | | | | | | | | | | |
($ in millions) | | June 30, 2020 |
| | Number of Issuers | | Fair Value | | Amortized Cost or Cost | | Pretax Net Unrealized Gain (Loss) |
Fixed maturity securities | | | | | | | | |
Corporate bonds | | | | | | | | |
Banking & Finance | | 134 |
| | $ | 476.8 |
| | $ | 436.0 |
| | $ | 40.8 |
|
Insurance | | 49 |
| | 193.9 |
| | 174.1 |
| | 19.8 |
|
HealthCare,Pharmacy | | 69 |
| | 132.0 |
| | 119.2 |
| | 12.8 |
|
Energy (1) | | 68 |
| | 127.2 |
| | 114.4 |
| | 12.8 |
|
Real Estate | | 34 |
| | 120.0 |
| | 113.0 |
| | 7.0 |
|
Transportation | | 38 |
| | 94.5 |
| | 92.0 |
| | 2.5 |
|
Technology | | 37 |
| | 87.8 |
| | 81.5 |
| | 6.3 |
|
Utilities | | 55 |
| | 85.5 |
| | 74.6 |
| | 10.9 |
|
Food and Beverage | | 31 |
| | 76.6 |
| | 66.7 |
| | 9.9 |
|
Broadcasting & Media | | 25 |
| | 61.1 |
| | 52.3 |
| | 8.8 |
|
All other corporates (2) | | 306 |
| | 407.0 |
| | 382.2 |
| | 24.8 |
|
Total corporate bonds | | 846 |
| | 1,862.4 |
| | 1,706.0 |
| | 156.4 |
|
Mortgage-backed securities | | | | | | | | |
U.S. Government and federally sponsored agencies | | 270 |
| | 503.1 |
| | 448.7 |
| | 54.4 |
|
Commercial (3) | | 125 |
| | 348.7 |
| | 319.6 |
| | 29.1 |
|
Other | | 42 |
| | 63.4 |
| | 63.7 |
| | (0.3 | ) |
Municipal bonds (4) | | 597 |
| | 1,805.6 |
| | 1,633.3 |
| | 172.3 |
|
Government bonds | | | | | | | | |
U.S. | | 34 |
| | 374.9 |
| | 333.4 |
| | 41.5 |
|
Foreign | | 7 |
| | 43.6 |
| | 39.7 |
| | 3.9 |
|
Collateralized loan obligations (5) | | 136 |
| | 633.3 |
| | 655.4 |
| | (22.1 | ) |
Asset-backed securities | | 106 |
| | 387.0 |
| | 404.6 |
| | (17.6 | ) |
Total fixed maturity securities | | 2,163 |
| | $ | 6,022.0 |
| | $ | 5,604.4 |
| | $ | 417.6 |
|
| | | | | | | | |
Equity securities | | | | | | | | |
Non-redeemable preferred stocks | | 16 |
| | $ | 62.8 |
| | | | |
Common stocks | | 95 |
| | 6.5 |
| | | | |
Closed-end fund | | 1 |
| | 21.0 |
| | | | |
Total equity securities | | 112 |
| | $ | 90.3 |
| | | | |
| | | | | | | | |
Total | | 2,275 |
| | $ | 6,112.3 |
| | | | |
| |
(1) | At June 30, 2019,2020, the fair value amount included $10.1$8.6 million which were non-investment grade. |
| |
(2) | The All other corporates category contains 19 additional industry sectors. Gaming, broadcastingTelecom, Retail, Consumer Products, Metal & media, leisure/entertainment, metalMining and mining and retailMisc. represented $133.3$222.4 million of fair value at June 30, 2019,2020, with the remaining 14 sectors each representing less than $15.0$32.2 million. |
| |
(3) | At June 30, 2019,2020, 100% were investment grade, with an overall credit rating of AA+, and the positions were well diversified by property type, geography and sponsor. |
| |
(4) | Holdings are geographically diversified, 54.4%52.5% are tax-exempt and 77.2%76.8% are revenue bonds tied to essential services, such as mass transit, water and sewer. The overall credit quality of the municipal bond portfolio was AA- at June 30, 2019.2020. |
| |
(5) | Based on fair value, 97.7%95.8% of the collateralized loan obligation securities were rated investment grade by Standard and Poor’sPoor's Global Inc. (S&P), Moody’sMoody's Investors Service, Inc. (Moody’s)(Moody's) and/or Fitch Ratings, Inc. (Fitch) at June 30, 2019.2020. |
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Horace Mann Educators Corporation | 46 | Quarterly Report on Form 10-Q |
At June 30, 2019, the Company’s2020, our diversified fixed maturity securities portfolio consisted of 2,6153,393 investment positions, issued by 1,6652,163 entities, and totaled approximately $5.5$6.0 billion in fair value. This portfolio was 97.1%92.8% investment grade, based on fair value, with an average quality rating of A+. The Company’sOur investment guidelines target single corporate issuer concentrations to 0.5% of invested assets for AAA or AA rated securities, 0.4%0.35% of invested assets for A or BBB rated securities, and 0.2% of invested assets$5.0 million for non-investment grade securities.
Fixed Maturity Securities - COVID-19 Related Impacts
In late 2016, we determined the economy was approaching later stages of the credit cycle and began to upgrade portfolio quality. Over the past three years, recessionary expectations were extended due to the fiscal stimulus, which lengthened the credit cycle. In 2019, management determined that it had achieved its investment initiatives and the portfolio was well positioned for any dislocation in the markets.
That proactive effort to improve portfolio quality resulted in a significant reduction in BBB-rated corporate credit, high yield and below-investment-grade structured securities. During this same period, purchases focused on government agency and agency mortgage-backed securities and high quality corporate bonds and municipal securities. Today, that proactive flight to quality has the investment portfolio in all insurance subsidiaries well positioned for market disruptions with ample liquidity.
Further, we believe the investment portfolio is well positioned to withstand an extended period of elevated investment market volatility, and has relatively modest exposure to asset sectors that it expects to be most impacted by the public health response to COVID-19. While we expect other segments of the economy to be disrupted, we believe these effects will be most acute in these sectors. Exposure to these sectors totals 6.8% of the investment portfolio, and as of June 30, 2020, informed by extensive stress testing and portfolio review, management continues to hold the following securities in the sectors that have experienced more pronounced price dislocation due to their perceived exposure to COVID-19 related impacts:
|
| | | | | | | | | | | | | | | | | |
($ in millions) | | June 30, 2020 |
| | Number of Issuers | | Fair Value | | Amortized Cost or Cost | | Pretax Net Unrealized Investment Gains (Losses) | | Credit Quality |
Fixed maturity securities (1) | | | | | | | | | | |
Travel and leisure | | 48 |
| | $ | 107.3 |
| | $ | 106.4 |
| | $ | 0.9 |
| | BBB+ |
Energy-related | | 83 |
| | 150.6 |
| | 135.3 |
| | 15.3 |
| | BBB+ |
Retail | | 22 |
| | 66.5 |
| | 62.8 |
| | 3.7 |
| | A- |
Aircraft | | 55 |
| | 145.7 |
| | 175.2 |
| | (29.5 | ) | | A- |
Total fixed maturity securities | | 208 |
| | $ | 470.1 |
| | $ | 479.7 |
| | $ | (9.6 | ) | | BBB+ |
| |
(1) | Below investment grade securities included in this population account for $55.7 million of amortized cost, $52.8 million of fair value, and $2.9 million of net unrealized investment losses. There are 90 issuers with an average rating of BB-. The majority of these securities are concentrated in the energy sector. |
|
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Horace Mann Educators Corporation | 47 | Quarterly Report on Form 10-Q |
Rating of Fixed Maturity Securities and Equity Securities (1)
The following table presents the composition and fair value of the Company’sour fixed maturity and equity securities portfolios by rating category. At June 30, 2019, 96.3%2020, 92.5% of these combined portfolios were investment grade, based on fair value, with an overall average quality rating of A+. The Company hasWe have classified the entire fixed maturity securities portfolio as available for sale, which is carried at fair value.
Rating of Fixed Maturity Securities and Equity Securities (1)
|
| | | | | | | | | | | | | | |
($ in millions) | | Percent of Portfolio | | | | |
| | Fair Value | | 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 |
| | |
________________ |
| | | | | | | | | | | | | | |
($ in millions) | | Percent of Portfolio | | | | |
| | Fair Value | | June 30, 2020 |
| | December 31, 2019 | | June 30, 2020 | | Fair Value | | Amortized Cost |
Fixed maturity securities | | | | | | | | |
AAA | | 11.5 | % | | 11.6 | % | | $ | 698.5 |
| | $ | 685.2 |
|
AA (2) | | 42.7 |
| | 41.0 |
| | 2,468.4 |
| | 2,232.1 |
|
A | | 23.3 |
| | 20.5 |
| | 1,235.7 |
| | 1,148.0 |
|
BBB | | 18.9 |
| | 19.7 |
| | 1,188.7 |
| | 1,112.1 |
|
BB | | 1.7 |
| | 2.1 |
| | 123.8 |
| | 124.5 |
|
B | | 0.4 |
| | 0.9 |
| | 54.1 |
| | 55.4 |
|
CCC or lower | | — |
| | 0.1 |
| | 3.0 |
| | 3.6 |
|
Not rated (3) | | 1.5 |
| | 4.1 |
| | 249.8 |
| | 243.5 |
|
Total fixed maturity securities | | 100.0 | % | | 100.0 | % | | $ | 6,022.0 |
| | $ | 5,604.4 |
|
Equity securities | | | | | | | | |
AAA | | — | % | | — | % | | $ | — |
| | |
AA | | — |
| | — |
| | — |
| | |
A | | — |
| | 0.6 |
| | 0.5 |
| | |
BBB | | 59.3 |
| | 68.1 |
| | 61.5 |
| | |
BB | | — |
| | 0.9 |
| | 0.8 |
| | |
B | | — |
| | — |
| | — |
| | |
CCC or lower | | — |
| | — |
| | — |
| | |
Not rated | | 40.7 |
| | 30.4 |
| | 27.5 |
| | |
Total equity securities | | 100.0 | % | | 100.0 | % | | $ | 90.3 |
| | |
| | | | | | | | |
Total | | | | | | $ | 6,112.3 |
| | |
| |
(1) | Ratings are as assigned primarily by S&P when available, with remaining ratings as assigned on an equivalent basis by Moody’sMoody's or Fitch. Ratings for publicly traded securities are determined when the securities are acquired and are updated monthly to reflect any changes in ratings. |
| |
(2) | At June 30, 2019,2020, the AA rated fair value amount included $566.4$374.9 million of U.S. Government and federally sponsored agency securities and $572.2$706.0 million of mortgage-backed and asset-backed securities issued by U.S. Government and federally sponsored agencies. |
| |
(3) | This category primarily represents private placement and municipal securities not rated by either S&P, Moody’sMoody's or Fitch. |
At June 30, 2019,2020, the fixed maturity securities portfolio had $13.0$72.3 million of pretax gross unrealized investment losses on $884.8$1,142.3 million of fair value related to 299703 positions. Of the investment positions with gross unrealized losses, there were three32 trading below 80.0% of the carrying value at June 30, 2019.2020.
The Company viewsWe view the unrealized investment losses of all of theour fixed maturity securities at June 30, 20192020 as temporary. Future changes in circumstances related to these and other securities could require subsequent recognition of OTTI.
other-than-temporary impairment (OTTI).
Liquidity and Financial Resources
Off-Balance Sheet Arrangements
At June 30, 2020 and 2019, and 2018, the Companywe did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or for other contractually narrow or limited purposes. As such, the Company iswe are not exposed to any financing, liquidity, market or credit risk that could arise if the Companywe engaged in such relationships.
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Horace Mann Educators Corporation | 48 | Quarterly Report on Form 10-Q |
Investments
Information regarding the Company’sour investment portfolio, which is comprised primarily of investment grade fixed maturity securities, is presented in Part I - Item 1, Note 32 of the Consolidated Financial Statements andas well as Part I - Item 2 - Investments Results.
Results in this report.
Cash Flow
TheOur short-term liquidity requirements, of the Company, within a 12 month operating cycle, are for the timely payment of claims and benefits to policyholders, operating expenses, interest payments and federal income taxes. Cash flow generated from operations has been, and is expected to be, adequate to meet the Company'sour operating cash needs in the next 12 months. Cash flow in excess of operational needs has been used to fund business growth, pay dividends to shareholders and repurchase shares of HMEC'sour common stock. Long-term liquidity requirements, beyond one year, are principally for the payment of future insurance and annuity policy claims and benefits, as well as retirement of long-term debt. The following table summarizes the Company'sour consolidated cash flows activity for the periods indicated.
|
| | | | | | | | | | | |
($ in millions) | | 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.
|
| | | | | | | | | | | |
($ in millions) | | Six Months Ended June 30, | | 2020-2019 |
| | 2020 | | 2019 | | Change % |
Net cash provided by operating activities | | $ | 165.6 |
| | $ | 97.8 |
| | 69.3 | % |
Net cash provided by (used in) investing activities | | (195.0 | ) | | 23.2 |
| | N.M. |
|
Net cash provided by (used in) financing activities | | 86.3 |
| | (125.3 | ) | | 168.9 | % |
Net increase (decrease) in cash | | 56.9 |
| | (4.3 | ) | | N.M. |
|
Cash at beginning of period | | 25.5 |
| | 11.9 |
| | 114.3 | % |
Cash at end of period | | $ | 82.4 |
| | $ | 7.6 |
| | N.M. |
|
Operating Activities
As a holding company, HMEC conducts itswe conduct our principal operations in the personal lines segment of the property and casualty and life insurance industries through itsour subsidiaries. HMEC'sOur insurance subsidiaries generate cash flow from premium and investment income, generally well in excess of their immediate needs for policy obligations, operating expenses and other cash requirements. Cash provided by operating activities primarily reflects net cash generated by the insurance subsidiaries.
For the six months ended June 30, 2019,2020, net cash provided by operating activities decreased $53.5increased $67.8 million, compared to the same period in 2018, primarily due to a decreaselower claims paid on insurance policies in Investmentthe current year partially offset by lower investment income collected and an increase in Policy acquisition and other operating expenses paid.
the current year as a result of a $2.1 billion reduction of invested assets from investments transferred under the annuity reinsurance transaction in the second quarter of 2019.
Investing Activities
HMEC'sOur insurance subsidiaries maintain significant investments in fixed maturity securities to meet future contractual obligations to policyholders. In conjunction with itsour management of liquidity and other asset/liability management objectives, the Company,we, from time to time, will sell fixed maturity securities prior to maturity, and reinvest the proceeds into other investments with different interest rates, maturities or credit characteristics. Accordingly, the Company haswe have classified the entire fixed maturity securities portfolio as available for sale.
During the first quarter of 2019, HMEC acquired BCG.
Financing Activities
Financing activities include primarily payment of dividends, receipt and withdrawal of funds by annuity contractholders, changes in the deposit asset on reinsurance, net, issuances and repurchases of HMEC'sour common stock, fluctuations in book overdraft balances, and borrowings, repayments and repurchases related to debt facilities.
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| | |
Horace Mann Educators Corporation | 49 | Quarterly Report on Form 10-Q |
Horace Mann Life Insurance Company (HMLIC), one and NTA (both subsidiaries of the Company's subsidiaries, operatesHMEC) operate under funding agreements with FHLB. In JanuaryFor the six months ended June 30, 2020, HMLIC and NTA collectively received $95.5 million from FHLB under funding agreements and for the six months ended June 30, 2019, HMLIC received an additional $50.0 million from FHLB under a funding agreement and receiptagreement. Receipt of thosethese funds has beenare reported in Annuity Contracts: Variable, Fixed and FHLB Funding Agreements, Deposits.Deposits in the Consolidated Statements of Cash Flows. Advances to HMLIC and NTA from FHLB under funding agreements totaled $675.0$590.5 million as of June 30, 2019.2020. For the six month periodmonths ended June 30, 2019,2020, cash inflows from annuity contract deposits excluding(excluding the $95.5 million received from FHLB transaction,in the current year and the $50.0 million received from FHLB in the prior year) increased $17.2$13.2 million, or 8.7%6.1%, compared to the prior year period. Cash outflows from annuity contract benefits, withdrawals and net transfers to Separate Account (variable annuity) assets decreased $4.5$17.3 million, or 2.0%8.1%, 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 hasWe have determined the amount of capital which is needed to adequately fund and support business growth, primarily based on risk-based capital formulas including those developed by the National Association of Insurance Commissioners (NAIC).Commissioners. Historically, the Company’sour insurance subsidiaries have generated capital in excess of such needed capital. These excess amounts have been paid to HMECus through dividends. HMEC hasWe have then utilized these dividends and itsour access to the capital markets to fund growth initiatives, service and retire long-term debt, pay dividends to itsour shareholders, fund growth initiatives, repurchase shares of itsour common stock and for other corporate purposes. If necessary, HMECwe also hashave other potential sources of liquidity that could provide for additional funding to meet corporate obligations or pay shareholder dividends, which include a revolving line of credit, as well as issuances of various securities. The insurance subsidiaries are subject to various regulatory restrictions which limit the amount of annual dividends or other distributions, including loans or cash advances, available to HMECus without prior approval of the insurance regulatory authorities. The aggregate amount of dividends that may be paid in 20192020 from all of HMEC'sour insurance subsidiaries without prior regulatory approval is $90.7$105.3 million, excluding the impact and timing of prior dividends, of which $54.8$103.0 million was paid during the six month periodmonths ended June 30, 2019. Management anticipates2020. We anticipate that the Company’sour sources of capital will continue to generate sufficient capital to meet the needs for business growth, debt interest payments, shareholder dividends and itsour share repurchase program. Additional information is contained in Part II - Item 8, Note 1014 of the Consolidated Financial Statements in the Company’sour Annual Report on Form 10-K for the year ended December 31, 2018.2019.
The totalTotal capital of the Company was $1,797.6$2,077.0 million at June 30, 2019,2020, including $297.9$437.2 million of short-term and long-term debt. Total debt represented 18.7%21.0% of total capital including net unrealized investment gains on fixed maturity securities (24.3% excluding net unrealized investment gains on fixed maturity securities (16.6% including net unrealized investment gains on fixed maturity securities)securities*) at June 30, 2019,2020, which was below the Company’sour long-term target of 25%.
Shareholders’Shareholders' equity was $1,499.7$1,639.8 million at June 30, 2019,2020, including net unrealized investment gains on fixed maturity securities in the Company’sour investment portfolio of $203.1$279.1 million after taxes and the related impact of DAC associated with investment contracts and life insurance products with account values. The market value of the Company’sour common stock and the market value per share were $1,659.4$1,517.5 million and $40.29,$36.73, respectively, at June 30, 2019.2020. Book value per share was $36.41$39.69 at June 30, 20192020 ($31.4832.93 excluding net unrealized investment gains on fixed maturity securities)securities*).
Additional information regarding net unrealized investment gains on fixed maturity securities in the Company’sour investment portfolio at June 30, 20192020 is included in Part I - Item 1, Note 32 of the Consolidated Financial Statements andas well as in Part I - Item 2 - Investment Results of Operations by Segment in this report.
Total shareholder dividends paid were $23.6$24.8 million for the six month periodmonths ended June 30, 2019.2020. In March and May 2019,2020, the Board of Directors (Board) approved regular quarterly dividends to $0.2875of $0.30 per share.
For the six month periodmonths ended June 30, 2019, the Company did not repurchase any2020, we repurchased 52,095 shares of itsour common stock at an average price per share of $41.17 under itsour share repurchase program, which is further described in Part II - Item 8, Note 913 of the Consolidated Financial Statements in the Company’sour Annual Report on Form 10-K for the year ended December 31, 2018.2019. As of June 30, 2019, $22.82020, $20.6 million remained authorized for future share repurchases under the share repurchase program.
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| | |
Horace Mann Educators Corporation | 50 | Quarterly Report on Form 10-Q |
The following table summarizes the Company'sour debt obligations.
|
| | | | | | | | |
($ in millions) | | 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 |
|
|
| | | | | | | | | | | | |
($ in millions) | | Effective Interest Rates | | Final Maturity | | | | |
| | | | June 30, 2020 | | December 31, 2019 |
Short-term debt | | | | | | | | |
Bank Credit Facility | | Variable | | 2024 | | $ | 135.0 |
| | $ | 135.0 |
|
Long-term debt (1) | | | | | | | | |
4.50% Senior Notes, Aggregate principal amount of $250,000 less unaccrued discount of $395 and $426 and unamortized debt issuance costs of $1,433 and $1,549 | | 4.50% | | 2025 | | 248.2 |
| | 248.0 |
|
Federal Home Loan Bank borrowing | | 0.52% | | 2022 | | 54.0 |
| | 50.0 |
|
Total | | | | | | $ | 437.2 |
| | $ | 433.0 |
|
(1) We designate debt obligations as "long-term" based on maturity date at issuance.
As of June 30, 2019, the Company2020, we had outstanding $250.0 million aggregate principal amount of 4.50% Senior Notes (Senior Notes due 2025)Notes), which will mature on December 1, 2025, issued at a discount resulting in an effective yield of 4.53%. Interest on the Senior Notes due 2025 is payable semi-annually at a rate of 4.50%. Detailed information regarding the redemption terms of the Senior Notes due 2025 is contained in the Part II - Item 8, Note 710 of the Consolidated Financial Statements in the Company’sour Annual Report on Form 10-K for the year ended December 31, 2018.2019. The Senior Notes due 2025 are traded in the open market (HMN 4.50).
As of June 30, 2019, the Company2020, we had $50.0$54.0 million of borrowings outstanding with FHLB. For FHLB borrowings, theThe Board has authorized a maximum amount equal to the greater15% of 10% ofnet aggregate admitted assets or 20% of surplusless separate account assets of the consolidated property and casualty companies.insurance subsidiaries for FHLB borrowings. For the total $50.0$54.0 million received, $4.0 million matures on May 17, 2021, $25.0 million matures on October 5, 2022 and $25.0 million matures on December 2, 2022. Interest on the borrowings accruesaccrue at an annual weighted average rate of 2.7230%0.52% as of June 30, 2019. HMIC's2020. The $54.0 million of FHLB borrowings of $50.0 million are included inis reported as Long-term debt onin the Consolidated Balance Sheet.Sheets.
As of June 30, 2020, we had $135.0 million of short-term debt outstanding under our Bank Credit Facility. On June 21, 2019, the Company,we, as borrower, replaced itsour current line of credit with a new five-year Credit Agreement (Bank Credit Facility). The credit agreement extends the commitment termination date to June 21, 2024 from the previous termination date of June 27, 2023. The new Bank Credit Facility increased the amount available on this senior revolving credit facility to $225.0 million from $150.0 million. PNC Capital Markets, LLC and JPMorgan Chase Bank, N.A. served as joint leads on the new agreement, with The Northern Trust Company, U.S. Bank National Association, KeyBank National Association, Comerica Bank and Illinois National Bank participating in the syndicate. Terms and conditions of the new Bank Credit Facility are substantially consistent with the prior agreement, with an interest rate based on LIBOR plus 115 basis points. The Company
On July 1, 2019, we utilized the senior revolving credit facility to partially fund the acquisition of NTA. Moving forward,As of June 30, 2020, the Company will useamount outstanding on the senior revolving credit facility for ongoing working capital, capital expenditures and general corporate expenditures.was $135.0 million. The $90.0 million unused portion of the Bank Credit Facility is available for use and subject to a variable commitment fee, which was 0.15% on an annual basis at June 30, 2019.
As described in Note 2, on July 1, 2019, the Company completed its acquisition of NTA utilizing the senior revolving credit facility to fund a portion of the purchase price. As of August 1, 2019, the Company had $135 million outstanding under the senior revolving credit facility.
2020.
To provide additional capital management flexibility, the Companywe filed a "universal shelf" registration statement on Form S-3 with the Securities and Exchange Commission (SEC) on March 13, 2018. The registration statement, which registered the offer and sale by the Company from time to time of an indeterminate amount of various securities, which may include debt securities, common stock, preferred
stock, depositary shares, warrants, delayed delivery contracts and/or units that include any of these securities, was automatically effective on March 13, 2018. Unless withdrawn by the Companyus earlier, this registration statement will remain effective through March 13, 2021. No securities associated with the registration statement have been issued asat the time of the dateissuance of this Quarterly Report on Form 10-Q.
On March 13, 2018, the Companywe filed a "shelf" registration statement on Form S-4 with the SEC which became effective on May 2, 2018. Under this registration statement, the Companywe may from time to time offer and issue up to 5,000,000 shares of itsour common stock in connection with future acquisitions of other businesses, assets or securities. Unless withdrawn by the Company,us, this registration statement will remain effective indefinitely. No securities associated with the registration statement have been issued asat the time of the dateissuance of this Quarterly Report on Form 10-Q.
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| | |
Horace Mann Educators Corporation | 51 | Quarterly Report on Form 10-Q |
COVID-19 Liquidity and Capital Resources Considerations
The various impacts of the COVID-19 pandemic on the U.S. economy, our operations and our investment portfolio have been material. Nonetheless we believe that the liquidity available to our holding company and its operating subsidiaries remains adequate and we do not foresee a need to suspend ordinary dividends or seek additional sources of capital at this time. Our current forecast assumes a return to a normal operating environment within six months, and as such, capital and liquidity are expected to remain at or near target levels during that period.
Financial Ratings
HMEC’sOur principal insurance subsidiaries are rated by S&P, Moody’s,Moody's, A.M. Best Company, Inc. (A.M. Best) and Fitch. These rating agencies have also assigned ratings to the Company’s long-term debt securities.our Senior Notes. The ratings that are assigned by these agencies, which are subject to change, can impact, among other things, the Company’sour access to sources of capital, cost of capital, and competitive position. These ratings are not a recommendation to buy or hold any of the Company’sour securities.
Assigned ratings were reviewed by all ofAll four agencies currently have assigned 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 andsame insurance financial strength ratings placed after the announcement of NTA acquisition in December 2018.to our Property and Casualty and Life insurance subsidiaries. Only A.M. Best currently rates our Supplemental segment's subsidiaries. Assigned ratings and respective affirmation/review dates as of July 31, 20192020 were as follows (the insurance financial strength ratings for the Company’s Property and Casualty insurance subsidiaries and the Company’s principal Life insurance subsidiary are the same):follows:
|
| | | | | | | | | | |
| | Insurance Financial | | | | Affirmed/ |
| | Strength Ratings (Outlook) | | Debt Ratings (Outlook) | | Reviewed |
As of July 31, 2019A.M. Best | | | | | | | | | | 7/2/2020 |
HMEC (parent company) | | N.A. | | | | bbb | | (stable) | | |
HMEC's Life | | A | | (stable) | | N.A. | | | | |
HMEC's Property and Casualty subsidiaries | | A | | (stable) | | N.A. | | | | |
HMEC's Supplemental subsidiaries | | A- | | (stable) | | N.A. | | | | |
Fitch | | A | | (stable) | | BBB | | (stable) | | 6/2/2020 |
Moody's | | A2 | | (stable) | | Baa2 | | (stable) | | 7/2/2019 |
S&P | | A | | (stable) | | BBB | | (stable) |
Moody’s | | A2 | | (stable) | | Baa2 | | (stable) |
A.M. Best | | A | | (stable) | | bbb | | (stable) |
Fitch | | A | | (stable) | | BBB | | (stable)2/19/2020 |
Reinsurance Programs
Information regarding the reinsurance programprograms for the Company’sour Property and Casualty, segmentSupplemental and Life segments is located in Part II - Item 1, Reporting Segments8, Note 9 of the Company’sConsolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2018.
Information regarding the reinsurance program for the Company’s Life segment is located in Item 1, Reporting Segments of the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.
2019.
Effective April 1, 2019, the Companywe reinsured a block of approximately $2.9 billion block of individual annuity policy liabilities related to legacy individual annuities written in 2002 and prior to AA- S&P rated RGA Reinsurance Company, a subsidiary of Reinsurance Group of America, Incorporated (RGA). The block includes $2.2 billion of fixed annuities reinsured under coinsurance and $0.7 billion of variable annuities reinsured under modified
coinsurance. RGA’sRGA's financial obligations for the general account liabilities of the reinsured annuity contracts are secured by its assets placed in a comfort trust for HMLIC’sour sole use and benefit. Upon RGA’sRGA's material breach of the reinsurance agreement, deterioration of its RBCrisk-based capital ratio to a certain level, or certain other events, HMLICwe may recapture the reinsured business.
ItemITEM 3.IQuantitative and Qualitative Disclosures about Market Risk
Market value risk, the Company’sour primary market risk exposure, is the risk that the Company’sour invested assets will decrease in value. This decrease in value may be due to (1) a change in the yields realized on the Company’sour assets and prevailing market yields for similar assets, (2) an unfavorable change in the liquidity of thean investment, (3) an unfavorable change in the financial prospects of the issuer of thean investment, or (4) a downgrade in the credit rating of the issuer of thean investment. See alsoAlso see Consolidated Results of Operations in Part I - Item 2 of this report regarding net investment gains (losses).
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Horace Mann Educators Corporation | 52 | Quarterly Report on Form 10-Q |
Significant changes in interest rates expose the Companyus to the risk of experiencing losses or earning a reduced level of income based on the difference between the interest rates earned on the Company’sour investments and the credited interest rates on the Company’sour insurance and investment contract liabilities. See alsoAlso see Consolidated Results of Operations in Part I - Item 2 of this report regarding interest credited to policyholders.
The Company seeksWe seek to manage itsour market value risk by coordinating the projected cash inflows of assets with the projected cash outflows of liabilities. For all itsof our assets and liabilities, the Company seekswe seek to maintain reasonable durations, consistent with the maximization of income without sacrificing investment quality, while providing for liquidity and diversification. The investment risk associated with variable annuity deposits and the underlying mutual funds is assumed by those contractholders, and not by the Company.us. Certain fees that the Company earnswe earn from variable annuity deposits are based on the market value of the funds deposited.
More detailed descriptions of the Company’sour exposure to market value risks and the management of those risks is presentedcontained in Part II - Item 7A Quantitative and Qualitative Disclosures about Market Risk of the Company’sour Annual Report on Form 10-K for the year ended December 31, 2018.
2019.
ItemITEM 4.IControls and Procedures
Management’sManagement's Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
Under the supervision and with the participation of the Company’sour management, including the Company’s Chief Executive Officerour chief executive officer and Chief Financial Officer, the Companychief financial officer, we conducted an evaluation of the effectiveness of the design and operation of the Company’sour disclosure controls and procedures, as such term is defined in Rule 13a-15(e) of the Securities Exchange Act of 1934 as amended (Exchange Act), as of June 30, 2019 pursuant to Rule 13a-15(b) of the Exchange Act.2020. Based on this evaluation, the Chief Executive Officerchief executive officer and Chief Financial Officerchief financial officer concluded that the Company’sour disclosure controls and procedures are effective in timely alerting them to material information relating to the Companyus (including itsour consolidated subsidiaries) that is required to be included in the Company’sour periodic Securities and Exchange CommissionSEC filings. No material weaknesses in the Company’sour disclosure controls and procedures were identified in the evaluation and therefore, no corrective actions were taken. There were no significant changes in the Company’sour internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation.
Changes in Internal Control Over Financial Reporting
ThereExcept as noted below, there were no changes in the Company’sour internal control over financial reporting that occurred during the Company’s last fiscal quarterperiod covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, the Company’sour internal control over financial reporting.
On July 1, 2019, we completed our acquisition of NTA. We are in the process of integrating NTA and our controls over financial reporting. As a result of these integration activities, certain controls will be evaluated and may be changed. Therefore, we have elected to exclude NTA from our assessment of internal control over financial reporting as of June 30, 2020.
Concurrent with the NTA acquisition, changes were made to the relevant business processes in order to monitor and maintain appropriate controls over financial reporting.
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Horace Mann Educators Corporation | 53 | Quarterly Report on Form 10-Q |
PART II: OTHER INFORMATION
ItemITEM 1A.IRisk Factors
At the time of issuance of this Quarterly Report on Form 10-Q, management believeswe believe there are no material changes from the risk factors as previously disclosed in the Company’sPart I - Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2018.2019. However, the following risk factor has emerged as a result of transactionsevents that occurred duringsubsequent to year end.
Our business may be adversely affected by the three months ended June 30, 2019.
recent COVID-19 outbreak.
The Company is subjectglobal pandemic caused by the novel coronavirus (COVID-19) was initially reported in December and has developed into a worldwide crisis over the subsequent months, causing significant human suffering and widespread economic damage. By early 2020, COVID-19 spread across the world and efforts to contain the disease intensified. The affects of the outbreak on the U.S. economy, our customers, our agents, our employees, our investments and our communities, as well as any preventative or protective actions that we, our employees and agency force, our third-party service providers and suppliers, or governments may take to mitigate the impact of COVID-19 could have an adverse effect on our ability to conduct business and on our financial condition and results of operations. Impacts to our business could be widespread and material impacts may result, including but not limited to, the credit riskfollowing:
employees contracting COVID-19;
reductions in our operating effectiveness as our employees work from home;
sustained lack of its counterparties, including reinsurers who reinsure business fromaccess to schools and teachers that could materially impact our sales and premium volumes;
public school systems facing budget constraints due to the Company’s insurance companies.
The Company’s insurance subsidiaries may cede certain risks to third-party insurance companies through reinsurance. Oneeconomic impacts of the Company’spandemic that could result in educator layoffs;
unprecedented volatility in financial markets that could materially affect our investment portfolio valuations and returns as well as our ability to generate targeted spreads on the indexed products;
regulatory mandates and/or legislative changes, including premium grace periods and premium credits;
changes in frequency and/or severity of claims;
increased credit risk;
business disruption for insurance subsidiaries, Horace Mann Life Insurance Company (HMLIC), entered into a reinsurance agreement with RGA Reinsurance Company, a subsidiaryagents who market and sell our insurance products; and
business disruptions to third parties at which we outsource certain business functions to or on which we rely for technology.
Any resulting impact on our business, financial condition, and results of Reinsurance Group of America, Incorporated (RGA)operations due to effectuate the reinsurance of a block of HMLIC’s in force fixed and variable annuities on a coinsurance and modified coinsurance basis. The variable portion offoregoing cannot be reasonably estimated at this time, although the reinsured annuities is reinsured on a modified coinsurance basis and assets supporting the variable account liabilities are still held by HMLIC in its separate accounts. Because the reinsurance agreement covers a large volume of HMLIC’s in force business, the transaction exposes HMLIC and in turn, the Company, to a concentration of credit risk with respect to this counterparty. RGA’s financial obligations for the general account liabilities of the reinsured annuity contracts are secured by its assets placed in a comfort trust for HMLIC’s sole use and benefit. Upon RGA’s material breach of the reinsurance agreement, deterioration of its RBC ratio to certain level, or certain other events, HMLIC may recapture the reinsured business. However, in the event of RGA’s insolvency, HMLIC’s right to use the assets in the trust accountresults may be delayed. Also if atfelt for a significant period of time. The full extent to which COVID-19 could affect the timeglobal economy, the financial markets and our business, its financial condition and its results of its insolvency the trust account is not funded at a level to fully discharge all its obligations, HMLIC’s claims to the extent not covered by the assets in the trust wouldoperations will depend on future developments and factors that cannot be those of a general creditor.
predicted.
ItemITEM 2.IUnregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
On September 30, 2015, the Company's Board of Directors authorized a share repurchase program allowing repurchases of up to $50.0 million.million of our common stock, par value $0.001 (Program). The share repurchase programProgram authorizes the repurchase of our common sharesstock in open market or privately negotiated transactions, from time to time, depending on market
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Horace Mann Educators Corporation | 54 | Quarterly Report on Form 10-Q |
conditions. The share repurchase programProgram does not have an expiration date and may be limited or terminated at any time without notice. During the three month periodmonths ended June 30, 2019, the Company2020, we did not repurchase shares of HMECour common stock. As of June 30, 2019, $22.82020, $20.6 million remained authorized for future share repurchases.
ItemITEM 5.IOther Information
The Company isWe are not aware of any information required to be disclosed in a reportCurrent Report on Form 8-K during the three month periodmonths ended June 30, 20192020 which has not been filed with the SEC.
ItemITEM 6.IExhibits
The following items are filed as Exhibits. Management contracts and compensatory plans are indicated by an asterisk (*).
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Exhibit | | |
No. | | Description |
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(3) Articles of incorporation and bylaws: |
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3.1 | | |
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3.2 | | |
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(4) Instruments defining the rights of security holders, including indentures: |
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4.1 | | |
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4.1(a) | | |
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4.2 | | |
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4.3 | | |
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(10) Material contracts: |
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10.1 | | |
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10.1(a) | | |
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Horace Mann Educators Corporation | 55 | Quarterly Report on Form 10-Q |
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10.2(a)* | | |
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10.2(b)* | | |
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10.2(c)* | | |
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10.2(d)* | | |
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10.2(e)* | | |
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10.3* | | |
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10.3(a)* | | |
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10.3(b)* | | |
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10.3(c)* | �� | |
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10.3(d)* | | |
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10.3(e)* | | |
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Horace Mann Educators Corporation | 56 | Quarterly Report on Form 10-Q |
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10.3(g)* | | |
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10.4* | | |
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10.5* | | |
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10.6* | | |
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10.7* | | |
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10.8* | | |
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10.9* | | |
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10.9(a)* | | |
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10.10* | | |
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10.10(a)* | | |
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10.11* | | |
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10.11(a)* | | |
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10.11(b)* | | |
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10.12 | | Stock Purchase Agreement Among Horace Mann Educators Corporation, and Robert Paglione, Paglione Family Irrevocable Trust F/B/O Adam Paglione, Paglione Family Irrevocable Trust F/B/O Lisa and Jorge Arroyo, Beau Adams and Benefit Consultants Group, Inc. dated as of October 30, 2018, incorporated by reference to Exhibit 10.12 to HMEC's Annual Report on Form 10-K for the year ended December 31, 2018, filed with the SEC on March 1, 2019. |
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10.13 | | |
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10.14 | | |
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Horace Mann Educators Corporation | 57 | Quarterly Report on Form 10-Q |
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(31) Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002: |
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31.1 | | |
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31.2 | | |
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(32) Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002: |
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32.1 | | |
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32.2 | | |
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(99) Additional exhibits: |
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99.1 | | |
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(101) Interactive Data File: |
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101.INS | | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document |
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101.SCH | | XBRL Taxonomy Extension Schema |
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101.CAL | | XBRL Taxonomy Extension Calculation Linkbase |
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101.DEF | | XBRL Taxonomy Extension Definition Linkbase |
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101.LAB | | XBRL Taxonomy Extension Label Linkbase |
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101.PRE | | XBRL Taxonomy Extension Presentation Linkbase |
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Horace Mann Educators Corporation | 58 | Quarterly Report on Form 10-Q |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| | | HORACE MANN EDUCATORS CORPORATION |
| | | (Registrant) |
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Date | August 8, 20197, 2020 | | /s//s/ Marita Zuraitis |
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| | | Marita Zuraitis |
| | | President and Chief Executive Officer |
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Date | August 8, 20197, 2020 | | /s//s/ Bret A. Conklin |
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| | | Bret A. Conklin |
| | | Executive Vice President and |
| | | Chief Financial Officer |
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Date | August 8, 20197, 2020 | | /s//s/ Kimberly A. Johnson |
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| | | Kimberly A. Johnson |
| | | Senior Vice President, Controller and |
| | | Principal Accounting Officer |
57 |
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Horace Mann Educators Corporation | 59 | Quarterly Report on Form 10-Q |