UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
| [x] | QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES |
EXCHANGE ACT OF 1934
For the quarterly period ended March 31,
2015
OR
| [ ] | TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES |
EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission file number 1-10890
HORACE MANN EDUCATORS CORPORATION
(Exact name of registrant as specified in its
charter)
Delaware |
37-0911756 |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
|
1 Horace Mann Plaza, Springfield, Illinois 62715-0001 |
(Address of principal executive offices, including Zip Code) |
|
Registrant’s Telephone Number, Including Area Code: 217-789-2500 |
|
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No |
|
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes X No |
|
Indicate by check mark the registrant’s filer status, as such terms are defined in Rule 12b-2 of the Act. |
Large accelerated filer X |
Accelerated filer |
Non-accelerated filer |
Smaller reporting company |
|
Indicate by check mark whether the registrant is a shell company as defined in Rule 12b-2 of the Act. Yes No X |
|
As of April 30, 2015, 41,141,003 shares of Common Stock, par value $0.001 per share, were outstanding, net of 23,331,930 shares of treasury stock. |
HORACE MANN EDUCATORS CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2015
INDEX
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
The Board of Directors and Shareholders
Horace Mann Educators Corporation:
We have reviewed the consolidated balance sheet
of Horace Mann Educators Corporation and subsidiaries (the Company) as of March 31, 2015, and the related consolidated statements
of operations, comprehensive income, changes in shareholders’ equity and cash flows for the three-month periods ended March
31, 2015 and 2014. These consolidated financial statements are the responsibility of the Company’s management.
We conducted our review in accordance with the
standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists
principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters.
It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any
material modifications that should be made to the consolidated financial statements referred to above for them to be in conformity
with U.S. generally accepted accounting principles.
We have previously audited, in accordance with
the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Horace Mann Educators
Corporation and subsidiaries as of December 31, 2014, and the related consolidated statements of operations, comprehensive income,
changes in shareholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated March
2, 2015, we expressed an unqualified opinion on those consolidated financial statements.
/s/ KPMG LLP
KPMG LLP
Chicago, Illinois
May 8, 2015
HORACE MANN EDUCATORS CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
| |
March 31, | |
December 31, | |
| |
2015 | |
2014 | |
| |
(Unaudited) | |
|
| |
ASSETS | |
| | | |
|
| |
| |
Investments | |
| | | |
|
| |
| |
Fixed maturities, available for sale, at fair value | |
| | | |
|
| |
| |
(amortized cost 2015, $6,479,270; 2014, $6,375,237) | |
$ | 7,065,799 | | |
|
$ | 6,893,090 |
| |
Equity securities, available for sale, at fair value | |
| | | |
|
| |
| |
(cost 2015, $99,860; 2014, $99,904) | |
| 105,066 | | |
|
| 110,655 |
| |
Short-term and other investments | |
| 450,347 | | |
|
| 399,722 |
| |
Total investments | |
| 7,621,212 | | |
|
| 7,403,467 |
| |
Cash | |
| 43,931 | | |
|
| 11,675 |
| |
Deferred policy acquisition costs | |
| 211,522 | | |
|
| 215,082 |
| |
Goodwill | |
| 47,396 | | |
|
| 47,396 |
| |
Other assets | |
| 285,118 | | |
|
| 277,350 |
| |
Separate Account (variable annuity) assets | |
| 1,865,240 | | |
|
| 1,813,557 |
| |
Total assets | |
$ | 10,074,419 | | |
|
$ | 9,768,527 |
| |
| |
| | | |
|
| |
| |
LIABILITIES AND SHAREHOLDERS’ EQUITY | |
| | | |
|
| |
| |
Policy liabilities | |
| | | |
|
| |
| |
Fixed annuity contract liabilities | |
$ | 3,847,694 | | |
|
$ | 3,774,457 |
| |
Interest-sensitive life contract liabilities | |
| 794,600 | | |
|
| 792,039 |
| |
Unpaid claims and claim expenses | |
| 340,103 | | |
|
| 325,784 |
| |
Future policy benefits | |
| 239,225 | | |
|
| 235,775 |
| |
Unearned premiums | |
| 217,066 | | |
|
| 223,413 |
| |
Total policy liabilities | |
| 5,438,688 | | |
|
| 5,351,468 |
| |
Other policyholder funds | |
| 607,622 | | |
|
| 606,738 |
| |
Other liabilities | |
| 515,143 | | |
|
| 422,362 |
| |
Short-term debt | |
| 38,000 | | |
|
| 38,000 |
| |
Long-term debt, current and noncurrent | |
| 199,955 | | |
|
| 199,939 |
| |
Separate Account (variable annuity) liabilities | |
| 1,865,240 | | |
|
| 1,813,557 |
| |
Total liabilities | |
| 8,664,648 | | |
|
| 8,432,064 |
| |
Preferred stock, $0.001 par value, authorized | |
| | | |
|
| |
| |
1,000,000 shares; none issued | |
| - | | |
|
| - |
| |
Common stock, $0.001 par value, authorized 75,000,000 shares; | |
| | | |
|
| |
| |
issued, 2015, 64,454,178; 2014, 64,245,048 | |
| 64 | | |
|
| 64 |
| |
Additional paid-in capital | |
| 435,079 | | |
|
| 422,232 |
| |
Retained earnings | |
| 1,088,917 | | |
|
| 1,065,318 |
| |
Accumulated other comprehensive income (loss), net of taxes: | |
| | | |
|
| |
| |
Net unrealized gains on fixed maturities | |
| | | |
|
| |
| |
and equity securities | |
| 335,132 | | |
|
| 297,554 |
| |
Net funded status of pension and other postretirement | |
| | | |
|
| |
| |
benefit obligations | |
| (12,953 | ) | |
|
| (12,953 |
) | |
Treasury stock, at cost, 2015, 23,331,930 shares; | |
| | | |
|
| |
| |
2014, 23,308,430 shares | |
| (436,468 | ) | |
|
| (435,752 |
) | |
Total shareholders’ equity | |
| 1,409,771 | | |
|
| 1,336,463 |
| |
Total liabilities and shareholders’ equity | |
$ | 10,074,419 | | |
|
$ | 9,768,527 |
| |
See accompanying Notes to Consolidated Financial
Statements.
See accompanying Report of Independent Registered
Public Accounting Firm.
HORACE MANN EDUCATORS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(Dollars in thousands, except per share data)
| |
Three Months Ended | |
| |
March 31, | |
| |
2015 | | |
2014 | |
| |
| | |
| |
Revenues | |
| | | |
| | |
Insurance premiums and contract charges earned | |
$ | 179,739 | | |
$ | 175,403 | |
Net investment income | |
| 83,313 | | |
| 83,044 | |
Net realized investment gains | |
| 6,068 | | |
| 1,699 | |
Other income | |
| 999 | | |
| 1,119 | |
| |
| | | |
| | |
Total revenues | |
| 270,119 | | |
| 261,265 | |
| |
| | | |
| | |
Benefits, losses and expenses | |
| | | |
| | |
Benefits, claims and settlement expenses | |
| 114,019 | | |
| 111,988 | |
Interest credited | |
| 44,537 | | |
| 43,087 | |
Policy acquisition expenses amortized | |
| 23,684 | | |
| 23,033 | |
Operating expenses | |
| 35,928 | | |
| 39,947 | |
Interest expense | |
| 3,552 | | |
| 3,546 | |
| |
| | | |
| | |
Total benefits, losses and expenses | |
| 221,720 | | |
| 221,601 | |
| |
| | | |
| | |
Income before income taxes | |
| 48,399 | | |
| 39,664 | |
Income tax expense | |
| 14,124 | | |
| 11,298 | |
| |
| | | |
| | |
Net income | |
$ | 34,275 | | |
$ | 28,366 | |
| |
| | | |
| | |
Net income per share | |
| | | |
| | |
Basic | |
$ | 0.82 | | |
$ | 0.69 | |
Diluted | |
$ | 0.81 | | |
$ | 0.67 | |
| |
| | | |
| | |
Weighted average number of shares | |
| | | |
| | |
and equivalent shares (in thousands) | |
| | | |
| | |
Basic | |
| 41,950 | | |
| 41,180 | |
Diluted | |
| 42,300 | | |
| 42,259 | |
| |
| | | |
| | |
Net realized investment gains (losses) | |
| | | |
| | |
Total other-than-temporary impairment losses on securities | |
$ | (2,289 | ) | |
$ | - | |
Portion of losses recognized in other comprehensive income | |
| - | | |
| - | |
Net other-than-temporary impairment losses on | |
| | | |
| | |
securities recognized in earnings | |
| (2,289 | ) | |
| - | |
Realized gains, net | |
| 8,357 | | |
| 1,699 | |
Total | |
$ | 6,068 | | |
$ | 1,699 | |
See accompanying Notes to Consolidated Financial
Statements.
See accompanying Report of Independent Registered
Public Accounting Firm.
HORACE MANN EDUCATORS CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
(Dollars in thousands)
| |
Three Months Ended | |
| |
March 31, | |
| |
2015 | | |
2014 | |
| |
| | |
| |
Comprehensive income | |
| | | |
| | |
Net income | |
$ | 34,275 | | |
$ | 28,366 | |
Other comprehensive income, net of taxes: | |
| | | |
| | |
Change in net unrealized gains and losses | |
| | | |
| | |
on fixed maturities and equity securities | |
| 37,578 | | |
| 77,408 | |
Change in net funded status of pension and other | |
| | | |
| | |
postretirement benefit obligations | |
| - | | |
| - | |
Other comprehensive income | |
| 37,578 | | |
| 77,408 | |
Total | |
$ | 71,853 | | |
$ | 105,774 | |
See accompanying Notes to Consolidated Financial
Statements.
See accompanying Report of Independent Registered
Public Accounting Firm.
HORACE MANN EDUCATORS CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’
EQUITY (UNAUDITED)
(Dollars in thousands, except per share data)
| |
Three Months Ended | |
| |
March 31, | |
| |
2015 | | |
2014 | |
| |
| | |
| |
Common stock, $0.001 par value | |
| | | |
| | |
Beginning balance | |
$ | 64 | | |
$ | 64 | |
Options exercised, 2015, 43,298 shares; | |
| | | |
| | |
2014, 196,840 shares | |
| - | | |
| - | |
Conversion of common stock units, | |
| | | |
| | |
2015, 8,293 shares; 2014, 10,834 shares | |
| - | | |
| - | |
Conversion of restricted stock units, | |
| | | |
| | |
2015, 157,539 shares; 2014, 65,730 shares | |
| - | | |
| - | |
Ending balance | |
| 64 | | |
| 64 | |
| |
| | | |
| | |
Additional paid-in capital | |
| | | |
| | |
Beginning balance | |
| 422,232 | | |
| 407,056 | |
Options exercised and conversion of common stock | |
| | | |
| | |
units and restricted stock units | |
| 10,882 | | |
| 6,065 | |
Share-based compensation expense | |
| 1,965 | | |
| 340 | |
Ending balance | |
| 435,079 | | |
| 413,461 | |
| |
| | | |
| | |
Retained earnings | |
| | | |
| | |
Beginning balance | |
| 1,065,318 | | |
| 1,000,312 | |
Net income | |
| 34,275 | | |
| 28,366 | |
Cash dividends, 2015, $0.25 per share; 2014, $0.23 per share | |
| (10,676 | ) | |
| (9,784 | ) |
Ending balance | |
| 1,088,917 | | |
| 1,018,894 | |
| |
| | | |
| | |
Accumulated other comprehensive income (loss), net of taxes | |
| | | |
| | |
Beginning balance | |
| 284,601 | | |
| 122,214 | |
Change in net unrealized gains and losses on | |
| | | |
| | |
fixed maturities and equity securities | |
| 37,578 | | |
| 77,408 | |
Change in net funded status of pension and | |
| | | |
| | |
other postretirement benefit obligations | |
| - | | |
| - | |
Ending balance | |
| 322,179 | | |
| 199,622 | |
| |
| | | |
| | |
Treasury stock, at cost | |
| | | |
| | |
Beginning balance, 2015, 23,308,430 shares; | |
| | | |
| | |
2014, 23,117,554 shares | |
| (435,752 | ) | |
| (430,341 | ) |
Acquisition of shares, 2015, 23,500 shares; | |
| | | |
| | |
2014, 136,976 shares | |
| (716 | ) | |
| (3,867 | ) |
Ending balance, 2015, 23,331,930 shares; | |
| | | |
| | |
2014, 23,254,530 shares | |
| (436,468 | ) | |
| (434,208 | ) |
| |
| | | |
| | |
Shareholders’ equity at end of period | |
$ | 1,409,771 | | |
$ | 1,197,833 | |
See accompanying Notes to Consolidated Financial
Statements.
See accompanying Report of Independent Registered
Public Accounting Firm.
HORACE MANN EDUCATORS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollars in thousands)
| |
Three Months Ended | |
| |
March 31, | |
| |
2015 | | |
2014 | |
Cash flows - operating activities | |
| | | |
| | |
Premiums collected | |
$ | 168,558 | | |
$ | 167,568 | |
Policyholder benefits paid | |
| (112,404 | ) | |
| (114,113 | ) |
Policy acquisition and other operating expenses paid | |
| (73,560 | ) | |
| (76,090 | ) |
Investment income collected | |
| 82,486 | | |
| 77,459 | |
Interest expense paid | |
| (165 | ) | |
| (275 | ) |
Other | |
| 2,387 | | |
| (1,464 | ) |
| |
| | | |
| | |
Net cash provided by operating activities | |
| 67,302 | | |
| 53,085 | |
| |
| | | |
| | |
Cash flows - investing activities | |
| | | |
| | |
Fixed maturities | |
| | | |
| | |
Purchases | |
| (284,293 | ) | |
| (321,571 | ) |
Sales | |
| 81,320 | | |
| 52,940 | |
Maturities, paydowns, calls and redemptions | |
| 166,847 | | |
| 66,605 | |
Purchase of other invested assets | |
| (12,472 | ) | |
| - | |
Net cash provided by (used in) short-term and other investments | |
| (32,073 | ) | |
| 130,778 | |
| |
| | | |
| | |
Net cash used in investing activities | |
| (80,671 | ) | |
| (71,248 | ) |
| |
| | | |
| | |
Cash flows - financing activities | |
| | | |
| | |
Dividends paid to shareholders | |
| (10,676 | ) | |
| (9,784 | ) |
Acquisition of treasury stock | |
| (716 | ) | |
| (3,867 | ) |
Exercise of stock options | |
| 884 | | |
| 3,746 | |
Annuity contracts: variable, fixed and FHLB funding agreements | |
| | | |
| | |
Deposits | |
| 141,962 | | |
| 100,305 | |
Benefits, withdrawals and net transfers to | |
| | | |
| | |
Separate Account (variable annuity) assets | |
| (91,449 | ) | |
| (78,746 | ) |
Life policy accounts | |
| | | |
| | |
Deposits | |
| 122 | | |
| 106 | |
Withdrawals and surrenders | |
| (1,044 | ) | |
| (983 | ) |
Cash received related to repurchase agreements | |
| - | | |
| 23,384 | |
Change in bank overdrafts | |
| 6,542 | | |
| 728 | |
| |
| | | |
| | |
Net cash provided by financing activities | |
| 45,625 | | |
| 34,889 | |
| |
| | | |
| | |
Net increase in cash | |
| 32,256 | | |
| 16,726 | |
| |
| | | |
| | |
Cash at beginning of period | |
| 11,675 | | |
| 18,189 | |
| |
| | | |
| | |
Cash at end of period | |
$ | 43,931 | | |
$ | 34,915 | |
See accompanying Notes to Consolidated Financial
Statements.
See accompanying
Report of Independent Registered Public Accounting Firm.
HORACE MANN EDUCATORS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
March 31, 2015 and 2014
(Dollars in thousands, except per share data)
Note 1 - Basis of Presentation
The accompanying unaudited
consolidated financial statements of Horace Mann Educators Corporation (“HMEC”; and together with its subsidiaries,
the “Company” or “Horace Mann”) have been prepared in accordance with United States (“U.S.”)
generally accepted accounting principles (“GAAP”) and with the rules and regulations of the Securities and Exchange
Commission (“SEC”), specifically Regulation S-X and the instructions to Form 10-Q. Certain information and note disclosures
which are normally included in annual financial statements prepared in accordance with GAAP but are not required for interim reporting
purposes have been omitted. The Company believes that these consolidated financial statements contain all adjustments (consisting
of normal recurring accruals) which are, in the opinion of management, necessary to present fairly the Company’s consolidated
financial position as of March 31, 2015 and the consolidated results of operations, comprehensive income, changes in shareholders’
equity and cash flows for the three months ended March 31, 2015 and 2014. The preparation of consolidated financial statements
in conformity with GAAP requires management to make estimates and assumptions that affect (1) the reported amounts of assets and
liabilities, (2) disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and (3)
the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
The subsidiaries of HMEC
market and underwrite personal lines of property and casualty (primarily personal lines automobile and homeowners) insurance, retirement
annuities (primarily tax-qualified products) 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.
The Company has evaluated
subsequent events through the date these consolidated financial statements were issued.
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, 2014.
The results of operations
for the three months ended March 31, 2015 are not necessarily indicative of the results to be expected for the full year.
In the three months ended
March 31, 2015, the Company recorded a reduction in incentive compensation expense due to an immaterial out-of-period correction
of an error related to the valuation of restricted stock units. The $3,012 after tax adjustment increased net income for each of
the segments as follows: property and casualty, $2,056; annuity, $519; and life, $437.
Note 1 - Basis of Presentation-(Continued)
Accumulated Other Comprehensive
Income (Loss)
Accumulated other comprehensive
income (loss) represents the accumulated change in shareholders’ equity from transactions and other events and circumstances
from non-shareholder sources. For the Company, accumulated other comprehensive income (loss) includes the after tax change in net
unrealized gains and losses on fixed maturities and equity securities and the after tax change in net funded status of pension
and other postretirement benefit obligations for the period as shown in the Consolidated Statement of Changes in Shareholders’
Equity. The following table reconciles these components.
|
| Unrealized Gains |
| |
| |
|
| and Losses on |
| |
| |
|
| Fixed Maturities |
| |
| |
|
|
and Equity |
| Defined |
| |
|
| Securities (1)(2) |
| Benefit Plans (1) |
| Total (1) |
|
| | |
| |
| |
| |
| |
Beginning balance, January 1, 2015 |
| |
$ | 297,554 | |
| |
$ | (12,953 | ) |
| |
$ | 284,601 | |
Other comprehensive income (loss) |
| |
| | |
| |
| | |
| |
| | |
before reclassifications |
| |
| 41,370 | |
| |
| - | |
| |
| 41,370 | |
Amounts reclassified from accumulated |
| |
| | |
| |
| | |
| |
| | |
other comprehensive income (loss) |
| |
| (3,792 | ) |
| |
| - | |
| |
| (3,792 | ) |
Net current period other |
| |
| | |
| |
| | |
| |
| | |
comprehensive income (loss) |
| |
| 37,578 | |
| |
| - | |
| |
| 37,578 | |
Ending balance, March 31, 2015 |
| |
$ | 335,132 | |
| |
$ | (12,953 | ) |
| |
$ | 322,179 | |
|
| |
| | |
| |
| | |
| |
| | |
Beginning balance, January 1, 2014 |
| |
$ | 133,990 | |
| |
$ | (11,776 | ) |
| |
$ | 122,214 | |
Other comprehensive income (loss) |
| |
| | |
| |
| | |
| |
| | |
before reclassifications |
| |
| 78,512 | |
| |
| - | |
| |
| 78,512 | |
Amounts reclassified from accumulated |
| |
| | |
| |
| | |
| |
| | |
other comprehensive income (loss) |
| |
| (1,104 | ) |
| |
| - | |
| |
| (1,104 | ) |
Net current period other |
| |
| | |
| |
| | |
| |
| | |
comprehensive income (loss) |
| |
| 77,408 | |
| |
| - | |
| |
| 77,408 | |
Ending balance, March 31, 2014 |
| |
$ | 211,398 | |
| |
$ | (11,776 | ) |
| |
$ | 199,622 | |
| (1) | All amounts are net of tax. |
| (2) | The pretax amounts reclassified from accumulated other comprehensive income (loss), $5,834 and
$1,699, are included in net realized investment gains and losses and the related tax expenses, $2,042 and $595, are included in
income tax expense in the Consolidated Statements of Operations for the three months ended March 31, 2015 and 2014, respectively. |
Comparative information
for elements that are not required to be reclassified in their entirety to net income in the same reporting period is located in
“Note 2 — Investments — Unrealized Gains and Losses on Fixed Maturities and Equity Securities”.
Note 2 - Investments
The Company’s investment
portfolio includes free-standing derivative financial instruments (currently over the counter (“OTC”) index options
contracts) to economically hedge risk associated with its fixed indexed annuity product’s contingent liabilities. The Company’s
fixed indexed annuity product includes embedded derivative features that are discussed in “Note 1 — Summary of Significant
Accounting Policies — Policy Liabilities for Fixed Indexed Annuities” of the Company’s Annual Report on Form
10-K for the year ended December 31, 2014. The Company's investment portfolio includes no other free-standing derivative financial
instruments (futures, forwards, swaps, option contracts or other financial instruments with similar characteristics), and there
were no other embedded derivative features related to the Company’s insurance products during the three months ended March
31, 2015 and 2014.
Note 2 - Investments-(Continued)
Fixed Maturities and
Equity Securities
The Company’s investment
portfolio is comprised primarily of fixed maturity securities (“fixed maturities”) and equity securities. The amortized
cost or cost, unrealized investment gains and losses, fair values and other-than-temporary impairment (“OTTI”) included
in accumulated other comprehensive income (loss) (“AOCI”) of all fixed maturities and equity securities in the portfolio
were as follows:
| |
Amortized | | |
Unrealized | | |
Unrealized | | |
Fair | | |
OTTI in | |
| |
Cost/Cost | | |
Gains | | |
Losses | | |
Value | | |
AOCI (1) | |
March 31, 2015 | |
| | | |
| | | |
| | | |
| | | |
| | |
Fixed maturity securities | |
| | | |
| | | |
| | | |
| | | |
| | |
U.S. Government and federally sponsored agency obligations (2): | |
| | | |
| | | |
| | | |
| | | |
| | |
Mortgage-backed securities | |
$ | 481,801 | | |
$ | 59,872 | | |
$ | 313 | | |
$ | 541,360 | | |
$ | - | |
Other, including | |
| | | |
| | | |
| | | |
| | | |
| | |
U.S. Treasury securities | |
| 544,912 | | |
| 32,538 | | |
| 981 | | |
| 576,469 | | |
| - | |
Municipal bonds | |
| 1,489,255 | | |
| 201,160 | | |
| 5,329 | | |
| 1,685,086 | | |
| - | |
Foreign government bonds | |
| 57,042 | | |
| 8,069 | | |
| 30 | | |
| 65,081 | | |
| - | |
Corporate bonds | |
| 2,582,763 | | |
| 266,816 | | |
| 8,517 | | |
| 2,841,062 | | |
| - | |
Other mortgage-backed securities | |
| 1,323,497 | | |
| 35,303 | | |
| 2,059 | | |
| 1,356,741 | | |
| 2,879 | |
Totals | |
$ | 6,479,270 | | |
$ | 603,758 | | |
$ | 17,229 | | |
$ | 7,065,799 | | |
$ | 2,879 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Equity securities (3) | |
$ | 99,860 | | |
$ | 10,205 | | |
$ | 4,999 | | |
$ | 105,066 | | |
$ | - | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
December 31, 2014 | |
| | | |
| | | |
| | | |
| | | |
| | |
Fixed maturity securities | |
| | | |
| | | |
| | | |
| | | |
| | |
U.S. Government and federally sponsored agency obligations (2): | |
| | | |
| | | |
| | | |
| | | |
| | |
Mortgage-backed securities | |
$ | 484,561 | | |
$ | 52,555 | | |
$ | 1,390 | | |
$ | 535,726 | | |
$ | - | |
Other, including | |
| | | |
| | | |
| | | |
| | | |
| | |
U.S. Treasury securities | |
| 512,596 | | |
| 28,652 | | |
| 3,049 | | |
| 538,199 | | |
| - | |
Municipal bonds | |
| 1,462,717 | | |
| 189,533 | | |
| 4,428 | | |
| 1,647,822 | | |
| - | |
Foreign government bonds | |
| 52,552 | | |
| 6,984 | | |
| - | | |
| 59,536 | | |
| - | |
Corporate bonds | |
| 2,608,633 | | |
| 237,372 | | |
| 11,256 | | |
| 2,834,749 | | |
| - | |
Other mortgage-backed securities | |
| 1,254,178 | | |
| 28,772 | | |
| 5,892 | | |
| 1,277,058 | | |
| 2,879 | |
Totals | |
$ | 6,375,237 | | |
$ | 543,868 | | |
$ | 26,015 | | |
$ | 6,893,090 | | |
$ | 2,879 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Equity securities (3) | |
$ | 99,904 | | |
$ | 14,159 | | |
$ | 3,408 | | |
$ | 110,655 | | |
$ | - | |
(1) |
Related to securities for which an unrealized loss was bifurcated to distinguish the credit related portion and the portion driven by other market factors. Represents the amount of other-than-temporary impairment losses in AOCI which was not included in earnings; amounts also include unrealized gains/(losses) on such impaired securities relating to changes in the fair value of those securities subsequent to the impairment measurement date. |
(2) |
Fair value includes securities issued by Federal National Mortgage Association (“FNMA”) of $265,066 and $302,222; Federal Home Loan Mortgage Corporation (“FHLMC”) of $444,117 and $432,432; and Government National Mortgage Association (“GNMA”) of $137,856 and $137,867 as of March 31, 2015 and December 31, 2014, respectively. |
(3) |
Includes nonredeemable (perpetual) preferred stocks, common stocks and closed-end funds. |
Compared to December 31,
2014, the increase in net unrealized gains at March 31, 2015 was due to lower yields on U.S. Treasury securities and slightly narrower
credit spreads across most asset classes, the combination of which resulted in an increase in net unrealized gains for virtually
all classes of the Company’s fixed maturity securities holdings.
Note 2 - Investments-(Continued)
The following table presents
the fair value and gross unrealized losses of fixed maturities and equity securities in an unrealized loss position at March 31,
2015 and December 31, 2014, respectively. The Company views the decrease in value of all of the securities with unrealized losses
at March 31, 2015 — which was driven largely by changes in interest rates, spread widening, financial market illiquidity
and/or market volatility from the date of acquisition — as temporary. For fixed maturity securities, management does not
have the intent to sell the securities and it is not more likely than not the Company will be required to sell the securities before
the anticipated recovery of the amortized cost bases, and the present value of future cash flows exceeds the amortized cost bases.
In addition, management expects to recover the entire cost bases of the fixed maturity securities. For equity securities, the Company
has the ability and intent to hold the securities for the recovery of cost and recovery of cost is expected within a reasonable
period of time. Therefore, no impairment of these securities was recorded at March 31, 2015.
| |
12 Months or Less | |
More than 12 Months | |
Total |
| |
| |
Gross | |
| |
Gross | |
| |
Gross |
| |
Fair Value | |
Unrealized
Losses
| |
Fair Value | |
Unrealized
Losses
| |
Fair Value | |
Unrealized
Losses
|
March 31, 2015 | |
| | | |
|
| | | |
|
| | | |
|
| | | |
|
| | | |
|
| | |
Fixed maturity securities | |
| | | |
|
| | | |
|
| | | |
|
| | | |
|
| | | |
|
| | |
U.S. Government and federally | |
| | | |
|
| | | |
|
| | | |
|
| | | |
|
| | | |
|
| | |
sponsored agency obligations: | |
| | | |
|
| | | |
|
| | | |
|
| | | |
|
| | | |
|
| | |
Mortgage-backed securities | |
$ | 13,144 | | |
|
$ | 160 | | |
|
$ | 1,629 | | |
|
$ | 153 | | |
|
$ | 14,773 | | |
|
$ | 313 | |
Other | |
| 111,579 | | |
|
| 935 | | |
|
| 1,952 | | |
|
| 46 | | |
|
| 113,531 | | |
|
| 981 | |
Municipal bonds | |
| 39,258 | | |
|
| 622 | | |
|
| 24,774 | | |
|
| 4,707 | | |
|
| 64,032 | | |
|
| 5,329 | |
Foreign government bonds | |
| 3,970 | | |
|
| 30 | | |
|
| - | | |
|
| - | | |
|
| 3,970 | | |
|
| 30 | |
Corporate bonds | |
| 112,988 | | |
|
| 5,166 | | |
|
| 38,711 | | |
|
| 3,351 | | |
|
| 151,699 | | |
|
| 8,517 | |
Other mortgage-backed
securities | |
| 248,866 | | |
|
| 1,540 | | |
|
| 35,547 | | |
|
| 519 | | |
|
| 284,413 | | |
|
| 2,059 | |
Total fixed | |
| | | |
|
| | | |
|
| | | |
|
| | | |
|
| | | |
|
| | |
maturity securities | |
| 529,805 | | |
|
| 8,453 | | |
|
| 102,613 | | |
|
| 8,776 | | |
|
| 632,418 | | |
|
| 17,229 | |
Equity securities (1) | |
| 21,718 | | |
|
| 4,354 | | |
|
| 6,830 | | |
|
| 645 | | |
|
| 28,548 | | |
|
| 4,999 | |
Combined totals | |
$ | 551,523 | | |
|
$ | 12,807 | | |
|
$ | 109,443 | | |
|
$ | 9,421 | | |
|
$ | 660,966 | | |
|
$ | 22,228 | |
| |
| | | |
|
| | | |
|
| | | |
|
| | | |
|
| | | |
|
| | |
Number of positions with a | |
| | | |
|
| | | |
|
| | | |
|
| | | |
|
| | | |
|
| | |
gross unrealized loss | |
| 203 | | |
|
| | | |
|
| 48 | | |
|
| | | |
|
| 251 | | |
|
| | |
Fair value as a percentage of | |
| | | |
|
| | | |
|
| | | |
|
| | | |
|
| | | |
|
| | |
total fixed maturities and | |
| | | |
|
| | | |
|
| | | |
|
| | | |
|
| | | |
|
| | |
equity securities fair value | |
| 7.7 | % | |
|
| | | |
|
| 1.5 | % | |
|
| | | |
|
| 9.2 | % | |
|
| | |
| |
| | | |
|
| | | |
|
| | | |
|
| | | |
|
| | | |
|
| | |
December 31, 2014 | |
| | | |
|
| | | |
|
| | | |
|
| | | |
|
| | | |
|
| | |
Fixed maturity securities | |
| | | |
|
| | | |
|
| | | |
|
| | | |
|
| | | |
|
| | |
U.S. Government and federally | |
| | | |
|
| | | |
|
| | | |
|
| | | |
|
| | | |
|
| | |
sponsored agency obligations: | |
| | | |
|
| | | |
|
| | | |
|
| | | |
|
| | | |
|
| | |
Mortgage-backed securities | |
$ | 2 | | |
|
$ | - | | |
|
$ | 39,809 | | |
|
$ | 1,390 | | |
|
$ | 39,811 | | |
|
$ | 1,390 | |
Other | |
| 10,317 | | |
|
| 34 | | |
|
| 117,615 | | |
|
| 3,015 | | |
|
| 127,932 | | |
|
| 3,049 | |
Municipal bonds | |
| 31,821 | | |
|
| 200 | | |
|
| 59,715 | | |
|
| 4,228 | | |
|
| 91,536 | | |
|
| 4,428 | |
Foreign government bonds | |
| - | | |
|
| - | | |
|
| - | | |
|
| - | | |
|
| - | | |
|
| - | |
Corporate bonds | |
| 213,612 | | |
|
| 6,883 | | |
|
| 76,099 | | |
|
| 4,373 | | |
|
| 289,711 | | |
|
| 11,256 | |
Other mortgage-backed
securities | |
| 477,877 | | |
|
| 4,797 | | |
|
| 88,663 | | |
|
| 1,095 | | |
|
| 566,540 | | |
|
| 5,892 | |
Total fixed | |
| | | |
|
| | | |
|
| | | |
|
| | | |
|
| | | |
|
| | |
maturity securities | |
| 733,629 | | |
|
| 11,914 | | |
|
| 381,901 | | |
|
| 14,101 | | |
|
| 1,115,530 | | |
|
| 26,015 | |
Equity securities (1) | |
| 12,955 | | |
|
| 2,568 | | |
|
| 6,635 | | |
|
| 840 | | |
|
| 19,590 | | |
|
| 3,408 | |
Combined totals | |
$ | 746,584 | | |
|
$ | 14,482 | | |
|
$ | 388,536 | | |
|
$ | 14,941 | | |
|
$ | 1,135,120 | | |
|
$ | 29,423 | |
| |
| | | |
|
| | | |
|
| | | |
|
| | | |
|
| | | |
|
| | |
Number of positions with a | |
| | | |
|
| | | |
|
| | | |
|
| | | |
|
| | | |
|
| | |
gross unrealized loss | |
| 234 | | |
|
| | | |
|
| 112 | | |
|
| | | |
|
| 346 | | |
|
| | |
Fair value as a percentage of | |
| | | |
|
| | | |
|
| | | |
|
| | | |
|
| | | |
|
| | |
total fixed maturities and | |
| | | |
|
| | | |
|
| | | |
|
| | | |
|
| | | |
|
| | |
equity securities fair value | |
| 10.7 | % | |
|
| | | |
|
| 5.5 | % | |
|
| | | |
|
| 16.2 | % | |
|
| | |
| (1) | Includes nonredeemable (perpetual) preferred stocks, common stocks and closed-end funds. |
Note 2 - Investments-(Continued)
Fixed maturities and equity
securities with an investment grade rating represented 41% of the gross unrealized loss as of March 31, 2015. With respect to fixed
income securities involving securitized financial assets, the underlying collateral cash flows were stress tested to determine
there was no adverse change in the present value of cash flows below the amortized cost basis.
Credit Losses
The following table summarizes
the cumulative amounts related to the Company’s credit loss component of the other-than-temporary impairment losses on fixed
maturity securities held as of March 31, 2015 and 2014 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 the other-than-temporary impairment losses were recognized in other comprehensive
income (loss):
| |
Three Months Ended | |
| |
March 31, | |
| |
2015 | | |
2014 | |
Cumulative credit loss (1) | |
| | | |
| | |
Beginning of period | |
$ | 2,877 | | |
$ | 4,097 | |
New credit losses | |
| - | | |
| - | |
Losses related to securities sold or paid down during the period | |
| - | | |
| - | |
End of period | |
$ | 2,877 | | |
$ | 4,097 | |
| (1) | The cumulative credit loss amounts exclude other-than-temporary impairment losses on securities held
as of the periods indicated that the Company intended to sell or it was more likely than not that the Company would be required
to sell the security before the recovery of the amortized cost basis. |
Note 2 - Investments-(Continued)
Maturities/Sales of
Fixed Maturities and Equity 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.
| |
Percent of Total Fair Value |
| |
March 31, 2015 | |
| |
March 31, |
| |
December 31, |
| |
Fair | | |
Amortized | |
| |
2015 |
| |
2014 |
| |
Value | | |
Cost | |
Estimated expected maturity: | |
| | |
| |
| | |
| |
| | | |
| | |
Due in 1 year or less | |
| 4.0 | % |
| |
| 4.0 | % |
| |
$ | 285,424 | | |
$ | 261,731 | |
Due after 1 year through 5 years | |
| 23.8 | |
| |
| 23.4 | |
| |
| 1,682,730 | | |
| 1,543,047 | |
Due after 5 years through 10 years | |
| 39.6 | |
| |
| 40.1 | |
| |
| 2,797,801 | | |
| 2,565,557 | |
Due after 10 years | |
| | |
| |
| | |
| |
| | | |
| | |
through 20 years | |
| 20.2 | |
| |
| 20.1 | |
| |
| 1,426,306 | | |
| 1,307,909 | |
Due after 20 years | |
| 12.4 | |
| |
| 12.4 | |
| |
| 873,538 | | |
| 801,026 | |
Total | |
| 100.0 | % |
| |
| 100.0 | % |
| |
$ | 7,065,799 | | |
$ | 6,479,270 | |
| |
| | |
| |
| | |
| |
| | | |
| | |
Average option-adjusted duration, in years | |
| 5.7 | |
| |
| 5.8 | |
| |
| | | |
| | |
Proceeds received from
sales of fixed maturities 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:
| |
Three Months Ended | |
| |
March
31, | |
| |
2015 | | |
2014 | |
Fixed maturity securities | |
| | | |
| | |
Proceeds received | |
$ | 81,320 | | |
$ | 52,940 | |
Gross gains realized | |
| 1,654 | | |
| 1,527 | |
Gross losses realized | |
| (463 | ) | |
| (675 | ) |
| |
| | | |
| | |
Equity securities | |
| | | |
| | |
Proceeds received | |
$ | 13,969 | | |
$ | 3,648 | |
Gross gains realized | |
| 4,602 | | |
| 479 | |
Gross losses realized | |
| (10 | ) | |
| (117 | ) |
Note 2 - Investments-(Continued)
Unrealized Gains and Losses on Fixed Maturities and Equity
Securities
Net unrealized gains and losses are
computed as the difference between fair value and amortized cost for fixed maturities or cost for equity securities. The following
table reconciles the net unrealized investment gains and losses, net of tax, included in accumulated other comprehensive income
(loss), before the impact on deferred policy acquisition costs:
| |
Three Months Ended | |
| |
March
31, | |
| |
2015 | | |
2014 | |
Net unrealized investment gains (losses) | |
| | | |
| | |
on fixed maturity securities, net of tax | |
| | | |
| | |
Beginning of period | |
$ | 336,604 | | |
$ | 146,489 | |
Change in unrealized investment gains and losses | |
| 45,486 | | |
| 93,225 | |
Reclassification of net realized investment (gains) | |
| | | |
| | |
losses to net income | |
| (846 | ) | |
| (860 | ) |
End of period | |
$ | 381,244 | | |
$ | 238,854 | |
| |
| | | |
| | |
Net unrealized investment gains (losses) | |
| | | |
| | |
on equity securities, net of tax | |
| | | |
| | |
Beginning of period | |
$ | 6,988 | | |
$ | 4,618 | |
Change in unrealized investment gains and losses | |
| (658 | ) | |
| 1,313 | |
Reclassification of net realized investment (gains) | |
| | | |
| | |
losses to net income | |
| (2,946 | ) | |
| (236 | ) |
End of period | |
$ | 3,384 | | |
$ | 5,695 | |
Offsetting of Assets and Liabilities
The Company’s derivative instruments
(call options) are subject to enforceable master netting arrangements. Collateral support agreements associated with each master
netting arrangement provide that the Company will receive or pledge financial collateral in the event minimum thresholds have been
reached.
The following table presents the instruments
that were subject to a master netting arrangement for the Company.
| |
| | |
| | |
Net Amounts | | |
| | |
| | |
| |
| |
| | |
| | |
of Assets/ | | |
| | |
| | |
| |
| |
| | |
Gross | | |
Liabilities | | |
Gross Amounts Not Offset | | |
| |
| |
| | |
Amounts | | |
Presented | | |
in the Consolidated | | |
| |
| |
| | |
Offset in the | | |
in the | | |
Balance Sheet | | |
| |
| |
| | |
Consolidated | | |
Consolidated | | |
| | |
Cash | | |
| |
| |
Gross | | |
Balance | | |
Balance | | |
Financial | | |
Collateral | | |
Net | |
| |
Amounts | | |
Sheet | | |
Sheet | | |
Instruments | | |
Received | | |
Amount | |
March 31, 2015 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Asset derivatives: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Free-standing derivatives | |
| $2,412 | | |
| $ - | | |
| $2,412 | | |
| $ - | | |
| $2,177 | | |
| $235 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
December 31, 2014 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Asset derivatives: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Free-standing derivatives | |
| 2,458 | | |
| - | | |
| 2,458 | | |
| - | | |
| 1,955 | | |
| 503 | |
Note 2 - Investments-(Continued)
Deposits
At March 31, 2015 and December 31,
2014, securities with a fair value of $18,512 and $18,361, 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 March 31, 2015 and December
31, 2014, securities with a fair value of $539,787 and $539,235, respectively, were on deposit with the Federal Home Loan Bank
of Chicago (“FHLB”) as collateral for amounts subject to funding agreements which were equal to $500,000 at both of
the respective dates. The deposited securities are included in fixed maturities on the Company’s Consolidated Balance Sheets.
Note 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 are not required to be disclosed. However, the estimated fair values of liabilities
under all insurance contracts are taken into consideration in the Company’s overall management of interest rate risk through
the matching of investment maturities with amounts due under insurance contracts.
Information regarding the three-level
hierarchy presented below and the valuation methodologies utilized by the Company to estimate fair values at a point in time is
included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014, specifically in “Note 3
— Fair Value of Financial Instruments”.
Note 3 - Fair Value of Financial Instruments-(Continued)
Financial Instruments Measured and
Carried at Fair Value
The following table presents the Company’s
fair value hierarchy for those assets and liabilities measured and carried at fair value on a recurring basis. At March 31, 2015,
these Level 3 invested assets comprised 2.1% of the Company’s total investment portfolio fair value.
| |
| | |
| | |
Fair Value Measurements at | |
| |
Carrying | | |
Fair | | |
Reporting Date Using | |
| |
Amount | | |
Value | | |
Level
1 | | |
Level
2 | | |
Level
3 | |
March 31, 2015 | |
| | | |
| | | |
| | | |
| | | |
| | |
Financial Assets | |
| | | |
| | | |
| | | |
| | | |
| | |
Investments | |
| | | |
| | | |
| | | |
| | | |
| | |
Fixed maturities | |
| | | |
| | | |
| | | |
| | | |
| | |
U.S. Government and federally | |
| | | |
| | | |
| | | |
| | | |
| | |
sponsored agency obligations: | |
| | | |
| | | |
| | | |
| | | |
| | |
Mortgage-backed securities | |
$ | 541,360 | | |
$ | 541,360 | | |
$ | - | | |
$ | 541,360 | | |
$ | - | |
Other, including | |
| | | |
| | | |
| | | |
| | | |
| | |
U.S. Treasury securities | |
| 576,469 | | |
| 576,469 | | |
| 17,995 | | |
| 558,474 | | |
| - | |
Municipal bonds | |
| 1,685,086 | | |
| 1,685,086 | | |
| - | | |
| 1,671,201 | | |
| 13,885 | |
Foreign government bonds | |
| 65,081 | | |
| 65,081 | | |
| - | | |
| 65,081 | | |
| - | |
Corporate bonds | |
| 2,841,062 | | |
| 2,841,062 | | |
| 10,369 | | |
| 2,758,415 | | |
| 72,278 | |
Other mortgage-backed securities | |
| 1,356,741 | | |
| 1,356,741 | | |
| - | | |
| 1,284,147 | | |
| 72,594 | |
Total fixed maturities | |
| 7,065,799 | | |
| 7,065,799 | | |
| 28,364 | | |
| 6,878,678 | | |
| 158,757 | |
Equity securities | |
| 105,066 | | |
| 105,066 | | |
| 90,347 | | |
| 14,713 | | |
| 6 | |
Short-term investments | |
| 181,004 | | |
| 181,004 | | |
| 181,004 | | |
| - | | |
| - | |
Other investments | |
| 12,412 | | |
| 12,412 | | |
| - | | |
| 12,412 | | |
| - | |
Totals | |
| 7,364,281 | | |
| 7,364,281 | | |
| 299,715 | | |
| 6,905,803 | | |
| 158,763 | |
Separate Account | |
| | | |
| | | |
| | | |
| | | |
| | |
(variable annuity) assets (1) | |
| 1,865,240 | | |
| 1,865,240 | | |
| 1,865,240 | | |
| - | | |
| - | |
Financial Liabilities | |
| | | |
| | | |
| | | |
| | | |
| | |
Other policyholder funds, | |
| | | |
| | | |
| | | |
| | | |
| | |
embedded derivatives | |
| 22,040 | | |
| 22,040 | | |
| - | | |
| - | | |
| 22,040 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
December 31, 2014 | |
| | | |
| | | |
| | | |
| | | |
| | |
Financial Assets | |
| | | |
| | | |
| | | |
| | | |
| | |
Investments | |
| | | |
| | | |
| | | |
| | | |
| | |
Fixed maturities | |
| | | |
| | | |
| | | |
| | | |
| | |
U.S. Government and federally | |
| | | |
| | | |
| | | |
| | | |
| | |
sponsored agency obligations: | |
| | | |
| | | |
| | | |
| | | |
| | |
Mortgage-backed securities | |
$ | 535,726 | | |
$ | 535,726 | | |
$ | - | | |
$ | 535,726 | | |
$ | - | |
Other, including | |
| | | |
| | | |
| | | |
| | | |
| | |
U.S. Treasury securities | |
| 538,199 | | |
| 538,199 | | |
| 17,857 | | |
| 520,342 | | |
| - | |
Municipal bonds | |
| 1,647,822 | | |
| 1,647,822 | | |
| - | | |
| 1,634,194 | | |
| 13,628 | |
Foreign government bonds | |
| 59,536 | | |
| 59,536 | | |
| - | | |
| 59,536 | | |
| - | |
Corporate bonds | |
| 2,834,749 | | |
| 2,834,749 | | |
| 10,524 | | |
| 2,749,508 | | |
| 74,717 | |
Other mortgage-backed securities | |
| 1,277,058 | | |
| 1,277,058 | | |
| - | | |
| 1,194,109 | | |
| 82,949 | |
Total fixed maturities | |
| 6,893,090 | | |
| 6,893,090 | | |
| 28,381 | | |
| 6,693,415 | | |
| 171,294 | |
Equity securities | |
| 110,655 | | |
| 110,655 | | |
| 92,140 | | |
| 18,509 | | |
| 6 | |
Short-term investments | |
| 142,039 | | |
| 142,039 | | |
| 142,039 | | |
| - | | |
| - | |
Other investments | |
| 12,458 | | |
| 12,458 | | |
| - | | |
| 12,458 | | |
| - | |
Totals | |
| 7,158,242 | | |
| 7,158,242 | | |
| 262,560 | | |
| 6,724,382 | | |
| 171,300 | |
Separate Account | |
| | | |
| | | |
| | | |
| | | |
| | |
(variable annuity) assets (1) | |
| 1,813,557 | | |
| 1,813,557 | | |
| 1,813,557 | | |
| - | | |
| - | |
Financial Liabilities | |
| | | |
| | | |
| | | |
| | | |
| | |
Other policyholder funds, | |
| | | |
| | | |
| | | |
| | | |
| | |
embedded derivatives | |
| 20,049 | | |
| 20,049 | | |
| - | | |
| - | | |
| 20,049 | |
| (1) | Separate Account (variable annuity) liabilities are set equal to Separate Account (variable annuity) assets. |
Note 3 - Fair Value of Financial Instruments-(Continued)
The Company did not have any transfers
between Levels 1 and 2 during the three months ended March 31, 2015. The following table presents reconciliations for the periods
indicated for all Level 3 assets and liabilities measured at fair value on a recurring basis.
| |
|
| | |
Financial |
| |
|
Financial Assets | | |
Liabilities(1) |
| |
Municipal
Bonds
| |
Corporate
Bonds
| |
Other
Mortgage-
Backed
Securities
| |
Total
Fixed
Maturities
| |
Equity
Securities
| |
Total | | |
| |
| |
|
| | |
|
| | |
|
| | |
|
| | |
|
| | |
| | |
| |
Beginning balance, January 1, 2015 | |
|
$ | 13,628 | | |
|
$ | 74,717 | | |
|
$ | 82,949 | | |
|
$ | 171,294 | | |
|
$ | 6 | | |
$ | 171,300 | | |
$ | 20,049 | |
Transfers into Level 3 (2) | |
|
| - | | |
|
| 1,895 | | |
|
| 461 | | |
|
| 2,356 | | |
|
| - | | |
| 2,356 | | |
| - | |
Transfers out of Level 3 (2) | |
|
| - | | |
|
| - | | |
|
| (9,664 | ) | |
|
| (9,664 | ) | |
|
| - | | |
| (9,664 | ) | |
| - | |
Total gains or losses | |
|
| | | |
|
| | | |
|
| | | |
|
| | | |
|
| | | |
| | | |
| | |
Net realized gains (losses) | |
|
| | | |
|
| | | |
|
| | | |
|
| | | |
|
| | | |
| | | |
| | |
included in net income | |
|
| - | | |
|
| - | | |
|
| - | | |
|
| - | | |
|
| - | | |
| - | | |
| (439 | ) |
Net unrealized gains (losses) | |
|
| | | |
|
| | | |
|
| | | |
|
| | | |
|
| | | |
| | | |
| | |
included in other | |
|
| | | |
|
| | | |
|
| | | |
|
| | | |
|
| | | |
| | | |
| | |
comprehensive income | |
|
| 380 | | |
|
| 352 | | |
|
| 3 | | |
|
| 735 | | |
|
| - | | |
| 735 | | |
| - | |
Purchases | |
|
| - | | |
|
| - | | |
|
| - | | |
|
| - | | |
|
| - | | |
| - | | |
| - | |
Issuances | |
|
| - | | |
|
| - | | |
|
| - | | |
|
| - | | |
|
| - | | |
| - | | |
| 2,964 | |
Sales | |
|
| - | | |
|
| - | | |
|
| - | | |
|
| - | | |
|
| - | | |
| - | | |
| - | |
Settlements | |
|
| - | | |
|
| - | | |
|
| - | | |
|
| - | | |
|
| - | | |
| - | | |
| - | |
Paydowns, maturities | |
|
| | | |
|
| | | |
|
| | | |
|
| | | |
|
| | | |
| | | |
| | |
and distributions | |
|
| (123 | ) | |
|
| (4,686 | ) | |
|
| (1,155 | ) | |
|
| (5,964 | ) | |
|
| - | | |
| (5,964 | ) | |
| (534 | ) |
Ending balance, March 31, 2015 | |
|
$ | 13,885 | | |
|
$ | 72,278 | | |
|
$ | 72,594 | | |
|
$ | 158,757 | | |
|
$ | 6 | | |
$ | 158,763 | | |
$ | 22,040 | |
| |
|
| | | |
|
| | | |
|
| | | |
|
| | | |
|
| | | |
| | | |
| | |
Beginning balance, January 1, 2014 | |
|
$ | 2,694 | | |
|
$ | 60,826 | | |
|
$ | 46,009 | | |
|
$ | 109,529 | | |
|
$ | 6 | | |
$ | 109,535 | | |
$ | - | |
Transfers into Level 3 (2) | |
|
| 10,055 | | |
|
| - | | |
|
| 7,109 | | |
|
| 17,164 | | |
|
| - | | |
| 17,164 | | |
| - | |
Transfers out of Level 3 (2) | |
|
| - | | |
|
| - | | |
|
| (519 | ) | |
|
| (519 | ) | |
|
| - | | |
| (519 | ) | |
| - | |
Total gains or losses | |
|
| | | |
|
| | | |
|
| | | |
|
| | | |
|
| | | |
| | | |
| | |
Net realized gains (losses) | |
|
| | | |
|
| | | |
|
| | | |
|
| | | |
|
| | | |
| | | |
| | |
included in net income | |
|
| - | | |
|
| - | | |
|
| - | | |
|
| - | | |
|
| - | | |
| - | | |
| 12 | |
Net unrealized gains (losses) | |
|
| | | |
|
| | | |
|
| | | |
|
| | | |
|
| | | |
| | | |
| | |
included in other | |
|
| | | |
|
| | | |
|
| | | |
|
| | | |
|
| | | |
| | | |
| | |
comprehensive income | |
|
| 98 | | |
|
| 1,014 | | |
|
| 184 | | |
|
| 1,296 | | |
|
| - | | |
| 1,296 | | |
| - | |
Purchases | |
|
| - | | |
|
| - | | |
|
| - | | |
|
| - | | |
|
| - | | |
| - | | |
| - | |
Issuances | |
|
| - | | |
|
| - | | |
|
| - | | |
|
| - | | |
|
| - | | |
| - | | |
| 2,735 | |
Sales | |
|
| - | | |
|
| - | | |
|
| - | | |
|
| - | | |
|
| - | | |
| - | | |
| - | |
Settlements | |
|
| - | | |
|
| - | | |
|
| - | | |
|
| - | | |
|
| - | | |
| - | | |
| - | |
Paydowns, maturities | |
|
| | | |
|
| | | |
|
| | | |
|
| | | |
|
| | | |
| | | |
| | |
and distributions | |
|
| (68 | ) | |
|
| (1,636 | ) | |
|
| (232 | ) | |
|
| (1,936 | ) | |
|
| - | | |
| (1,936 | ) | |
| - | |
Ending balance, March 31, 2014 | |
|
$ | 12,779 | | |
|
$ | 60,204 | | |
|
$ | 52,551 | | |
|
$ | 125,534 | | |
|
$ | 6 | | |
$ | 125,540 | | |
$ | 2,747 | |
| (1) | Represents embedded derivatives, all related to the Company’s fixed indexed annuity (“FIA”) products, reported
in Other Policyholder Funds in the Company’s Consolidated Balance Sheets. |
| (2) | Transfers into and out of Level 3 during
the three months ended March 31, 2015 and 2014 were attributable to changes in the availability of observable market information
for individual fixed maturity securities. The Company’s policy is to recognize transfers into and transfers out of the levels
as having occurred at the end of the reporting period in which the transfers were determined. |
At March 31, 2015 and 2014, there were
no realized gains or losses included in earnings that were attributable to changes in the fair value of Level 3 assets still held.
For the three months ended March 31, 2015 and 2014, realized gains/(losses) of $439 and $(12), respectively, were included in earnings
that were attributable to the changes in the fair value of Level 3 liabilities (embedded derivatives) still held.
Note 3 - Fair Value of Financial Instruments-(Continued)
The valuation techniques and significant
unobservable inputs used in the fair value measurement for financial assets classified as Level 3 are subject to the control processes
as described in “Note 3 — Fair Value of Financial Instruments — Investments” in the Company’s Annual
Report on Form 10-K for the year ended December 31, 2014. Generally, valuation 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 fixed maturities.
The sensitivity of the estimated fair
values to changes in the significant unobservable inputs for fixed maturities and equity securities included in Level 3 generally
relate to interest rate spreads, illiquidity premiums and default rates. Significant spread widening in isolation will adversely
impact the overall valuation, while significant spread tightening will lead to substantial valuation increases. Significant increases
(decreases) in illiquidity premiums in isolation will result in substantially lower (higher) valuations. Significant increases
(decreases) in expected default rates in isolation will result in substantially lower (higher) valuations.
Financial Instruments Not Carried
at Fair Value; Disclosure Required
The Company has various other financial
assets and financial liabilities used in the normal course of business that are not carried at fair value, but for which fair value
disclosure is required. The following table presents the carrying value, fair value and fair value hierarchy of these financial
assets and financial liabilities.
| |
| | |
| | |
Fair Value Measurements at | |
| |
Carrying | | |
Fair | | |
Reporting Date Using | |
| |
Amount | | |
Value | | |
Level
1 | | |
Level
2 | | |
Level
3 | |
March 31, 2015 | |
| | | |
| | | |
| | | |
| | | |
| | |
Financial Assets | |
| | | |
| | | |
| | | |
| | | |
| | |
Investments | |
| | | |
| | | |
| | | |
| | | |
| | |
Other investments | |
$ | 145,574 | | |
$ | 149,965 | | |
$ | - | | |
$ | - | | |
$ | 149,965 | |
Financial Liabilities | |
| | | |
| | | |
| | | |
| | | |
| | |
Fixed annuity contract liabilities | |
| 3,847,694 | | |
| 3,762,743 | | |
| - | | |
| - | | |
| 3,762,743 | |
Policyholder account balances on | |
| | | |
| | | |
| | | |
| | | |
| | |
interest-sensitive life contracts | |
| 77,051 | | |
| 81,079 | | |
| - | | |
| - | | |
| 81,079 | |
Other policyholder funds | |
| 585,582 | | |
| 585,582 | | |
| - | | |
| 500,111 | | |
| 85,471 | |
Short-term debt | |
| 38,000 | | |
| 38,000 | | |
| - | | |
| 38,000 | | |
| - | |
Long-term debt | |
| 199,955 | | |
| 207,315 | | |
| 207,315 | | |
| - | | |
| - | |
Other liabilities, repurchase | |
| | | |
| | | |
| | | |
| | | |
| | |
agreement obligations | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
December 31, 2014 | |
| | | |
| | | |
| | | |
| | | |
| | |
Financial Assets | |
| | | |
| | | |
| | | |
| | | |
| | |
Investments | |
| | | |
| | | |
| | | |
| | | |
| | |
Other investments | |
$ | 145,409 | | |
$ | 149,792 | | |
$ | - | | |
$ | - | | |
$ | 149,792 | |
Financial Liabilities | |
| | | |
| | | |
| | | |
| | | |
| | |
Fixed annuity contract liabilities | |
| 3,774,457 | | |
| 3,691,123 | | |
| - | | |
| - | | |
| 3,691,123 | |
Policyholder account balances on | |
| | | |
| | | |
| | | |
| | | |
| | |
interest-sensitive life contracts | |
| 77,415 | | |
| 81,461 | | |
| - | | |
| - | | |
| 81,461 | |
Other policyholder funds | |
| 586,689 | | |
| 586,689 | | |
| - | | |
| 500,080 | | |
| 86,609 | |
Short-term debt | |
| 38,000 | | |
| 38,000 | | |
| - | | |
| 38,000 | | |
| - | |
Long-term debt | |
| 199,939 | | |
| 209,495 | | |
| 209,495 | | |
| - | | |
| - | |
Other liabilities, repurchase | |
| | | |
| | | |
| | | |
| | | |
| | |
agreement obligations | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
Note 4 - Debt
Indebtedness outstanding was as follows:
| |
March 31, | |
December 31, |
| |
2015 | |
2014 |
Short-term debt: | |
|
| | | |
|
| | |
Bank Credit Facility, expires July 30, 2019 | |
|
$ | 38,000 | | |
|
$ | 38,000 | |
Long-term debt, current and noncurrent (1): | |
|
| | | |
|
| | |
6.05% Senior Notes, due June 15, 2015. Aggregate | |
|
| | | |
|
| | |
principal amount of $75,000 less unaccrued discount | |
|
| | | |
|
| | |
of $5 and $11 (6.1% imputed rate) | |
|
| 74,995 | | |
|
| 74,989 | |
6.85% Senior Notes, due April 15, 2016. Aggregate | |
|
| | | |
|
| | |
principal amount of $125,000 less unaccrued discount | |
|
| | | |
|
| | |
of $40 and $50 (6.9% imputed rate) | |
|
| 124,960 | | |
|
| 124,950 | |
Total | |
|
$ | 237,955 | | |
|
$ | 237,939 | |
| (1) | The Company designates debt obligations as “long-term” based on maturity date at issuance. |
The Credit Agreement with Financial
Institutions (“Bank Credit Facility”), 6.05% Senior Notes due 2015 (“Senior Notes due 2015”) and 6.85%
Senior Notes due 2016 (“Senior Notes due 2016”) are described in “Notes to Consolidated Financial Statements
— Note 5 — Debt” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.
Universal Shelf Registration
To provide additional capital management
flexibility, the Company filed a “universal shelf” registration on Form S-3 with the SEC on March 12, 2015. The registration
statement, which registered the offer and sale by the Company from time to time of an indeterminate amount of various securities,
which may include debt securities, common stock, preferred stock, depositary shares, warrants, delayed delivery contracts and/or
units that include any of these securities, was automatically effective on March 12, 2015. Unless withdrawn by the Company earlier,
this registration statement will remain effective through March 12, 2018. No securities associated with the registration statement
have been issued as of the date of this Quarterly Report on Form 10-Q. In addition to the Form S-3 entry to the capital markets,
HMEC met the requirements of a “well-known seasoned issuer”, as defined by the SEC, as of December 31, 2014.
Note 5 - Reinsurance
The Company recognizes the cost of
reinsurance premiums over the contract periods for such premiums in proportion to the insurance protection provided. Amounts recoverable
from reinsurers for unpaid claims and claim settlement expenses, including estimated amounts for unsettled claims, claims incurred
but not yet reported and policy benefits, are estimated in a manner consistent with the insurance liability associated with the
policy. The effects of reinsurance on premiums written and contract deposits; premiums and contract charges earned; and benefits,
claims and settlement expenses were as follows:
| |
|
| |
Ceded to | |
Assumed | |
|
| |
Gross |
| |
Other | |
from Other | |
Net |
| |
Amount |
| |
Companies | |
Companies | |
Amount |
| |
|
| |
| |
|
| | |
|
| | |
|
| |
Three months ended March 31, 2015 | |
|
| | |
| |
|
| | | |
|
| | | |
|
| | |
Premiums written and contract deposits | |
|
$ | 311,047 | |
| |
|
$ | 6,124 | | |
|
$ | 812 | | |
|
$ | 305,735 | |
Premiums and contract charges earned | |
|
| 185,196 | |
| |
|
| 6,315 | | |
|
| 858 | | |
|
| 179,739 | |
Benefits, claims and settlement expenses | |
|
| 115,840 | |
| |
|
| 2,570 | | |
|
| 749 | | |
|
| 114,019 | |
| |
|
| | |
| |
|
| | | |
|
| | | |
|
| | |
Three months ended March 31, 2014 | |
|
| | |
| |
|
| | | |
|
| | | |
|
| | |
Premiums written and contract deposits | |
|
$ | 266,437 | |
| |
|
$ | 6,631 | | |
|
$ | 469 | | |
|
$ | 260,275 | |
Premiums and contract charges earned | |
|
| 181,733 | |
| |
|
| 6,893 | | |
|
| 563 | | |
|
| 175,403 | |
Benefits, claims and settlement expenses | |
|
| 114,877 | |
| |
|
| 3,445 | | |
|
| 556 | | |
|
| 111,988 | |
Note 6 - Commitments
Investment Commitments
From time to time, the Company has
outstanding commitments to purchase investments and/or commitments to lend funds under bridge loans. Unfunded commitments were
as follows:
| |
March 31, |
| |
December 31, |
| |
2015 |
| |
2014 |
Outstanding commitments to: | |
|
| | |
| |
|
| | |
Purchase investments | |
|
$ | 29,856 | |
| |
|
$ | 39,689 | |
Lend funds under bridge loans | |
|
| 10,381 | |
| |
|
| 10,567 | |
Total | |
|
$ | 40,237 | |
| |
|
$ | 50,256 | |
Note 7 - Segment Information
The Company conducts and manages its
business through four segments. The three operating segments, representing the major lines of insurance business, are: property
and casualty insurance, primarily personal lines automobile and homeowners products; retirement annuity products, primarily tax-qualified
fixed and variable deposits; and life insurance. The Company does not allocate the impact of corporate-level transactions to the
insurance segments, consistent with the basis for management’s evaluation of the results of those segments, but classifies
those items in the fourth segment, corporate and other. In addition to ongoing transactions such as corporate debt service, realized
investment gains and losses and certain public company expenses, such items have also included corporate debt retirement costs/gains,
when applicable. Summarized financial information for these segments is as follows:
| |
Three Months Ended | |
| |
March 31, | |
| |
2015 | | |
2014 | |
| |
| | |
| |
Insurance premiums and contract charges earned | |
| | | |
| | |
Property and casualty | |
$ | 146,749 | | |
$ | 143,892 | |
Annuity | |
| 6,223 | | |
| 5,924 | |
Life | |
| 26,767 | | |
| 25,587 | |
Total | |
$ | 179,739 | | |
$ | 175,403 | |
| |
| | | |
| | |
Net investment income | |
| | | |
| | |
Property and casualty | |
$ | 9,433 | | |
$ | 9,285 | |
Annuity | |
| 56,392 | | |
| 55,857 | |
Life | |
| 17,708 | | |
| 18,134 | |
Corporate and other | |
| 6 | | |
| 2 | |
Intersegment eliminations | |
| (226 | ) | |
| (234 | ) |
Total | |
$ | 83,313 | | |
$ | 83,044 | |
| |
| | | |
| | |
Net income (loss) | |
| | | |
| | |
Property and casualty | |
$ | 17,623 | | |
$ | 14,027 | |
Annuity | |
| 12,510 | | |
| 12,239 | |
Life | |
| 3,385 | | |
| 3,882 | |
Corporate and other | |
| 757 | | |
| (1,782 | ) |
Total | |
$ | 34,275 | | |
$ | 28,366 | |
| |
March 31, | | |
December 31, |
| |
2015 | | |
2014 |
Assets | |
| | | |
|
| | |
Property and casualty | |
$ | 1,144,361 | | |
|
$ | 1,107,962 | |
Annuity | |
| 6,898,018 | | |
|
| 6,683,473 | |
Life | |
| 1,918,822 | | |
|
| 1,858,150 | |
Corporate and other | |
| 140,578 | | |
|
| 155,678 | |
Intersegment eliminations | |
| (27,360 | ) | |
|
| (36,736 | ) |
Total | |
$ | 10,074,419 | | |
|
$ | 9,768,527 | |
NOTE 8 - Derivative Instruments
In February 2014, the Company began
offering 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. When fixed indexed annuity
deposits are received, a portion of the deposit is used to purchase derivatives consisting of call options on the applicable market
indices to fund the index credits due to fixed indexed annuity contractholders. For the Company, substantially all such call options
are one-year options purchased to match the funding requirements of the underlying contracts. The call options are carried at fair
value with the change in fair value included in Net Realized 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. On the respective anniversary dates of the
indexed deposits, the index used to compute the annual index credit is reset and new one-year call options are purchased to fund
the next annual index credit. The cost of these purchases is managed through the terms of the fixed indexed annuities, which permit
changes to index return caps, participation rates and/or asset fees, subject to guaranteed minimums on each contract’s anniversary
date. By adjusting the index return caps, participation rates or asset fees, crediting rates generally can be managed except in
cases where the contractual features would prevent further modifications.
The Company carries all derivative
instruments as assets or liabilities in the Consolidated Balance Sheets at fair value. The Company elected to not use hedge accounting
for derivative transactions related to the FIA products. As a result, the Company records the purchased call options and the embedded
derivative related to the provision of a contingent return at fair value, with changes in the fair value of the derivatives recognized
immediately in the Consolidated Statements of Operations. The fair values of derivative instruments, including derivative instruments
embedded in fixed indexed annuity contracts, presented in the Consolidated Balance Sheets were as follows:
| |
March 31, |
| |
December 31, |
| |
2015 |
| |
2014 |
Assets | |
|
| | |
| |
|
| | |
Derivative instruments, included in Short-term | |
|
| | |
| |
|
| | |
and Other Investments | |
|
$ | 2,412 | |
| |
|
$ | 2,458 | |
| |
|
| | |
| |
|
| | |
Liabilities | |
|
| | |
| |
|
| | |
Fixed indexed annuities - embedded derivatives, | |
|
| | |
| |
|
| | |
included in Other Policyholder Funds | |
|
| 22,040 | |
| |
|
| 20,049 | |
The changes in fair value of derivatives
included in the Consolidated Statements of Operations were as follows:
| |
Three Months Ended |
| |
March 31, |
| |
2015 | |
2014 |
Change in fair value of derivatives (1): | |
|
| | |
|
| |
Revenues | |
|
| | | |
|
| | |
Net realized investment gains (losses) | |
|
$ | (205 | ) | |
|
$ | 14 | |
| |
|
| | | |
|
| | |
Change in fair value of embedded derivatives: | |
|
| | | |
|
| | |
Revenues | |
|
| | | |
|
| | |
Net realized investment gains (losses) | |
|
| 439 | | |
|
| (12 | ) |
| (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. |
NOTE 8 - Derivative Instruments-(Continued)
The Company’s strategy attempts
to mitigate any potential risk of loss under these agreements through a regular monitoring process, which evaluates the program's
effectiveness. The Company is exposed to risk of loss in the event of nonperformance by the counterparties and, accordingly, option
contracts are purchased from multiple counterparties, which are evaluated for creditworthiness prior to purchase of the contracts.
All of these options have been purchased from nationally recognized financial institutions with a Standard and Poor's/Moody’s
long-term credit rating of “A-”/“A3” or higher at the time of purchase and the maximum credit exposure
to any single counterparty is subject to concentration limits. The Company also obtains credit support agreements that allow it
to request the counterparty to provide collateral when the fair value of the exposure to the counterparty exceeds specified amounts.
The notional amount and fair value
of call options by counterparty and each counterparty's long-term credit ratings were as follows:
| |
March
31, 2015 | |
December 31, 2014 |
| |
Credit
Rating (1) | |
Notional | |
Fair | |
Notional | |
| Fair |
Counterparty | |
S&P | |
Moody’s | |
Amount | |
Value | |
Amount | |
| Value |
| |
| |
| |
|
| | |
|
| | |
|
| |
| |
| |
Bank of America, N.A. | |
A | |
A2 | |
|
$ | 7,800 | | |
|
$ | 203 | | |
|
$ | 8,700 | |
| |
$ | 439 | |
Barclays Bank PLC | |
A | |
A2 | |
|
| 5,000 | | |
|
| 73 | | |
|
| 5,000 | |
| |
| 70 | |
Credit Suisse International | |
A | |
A1 | |
|
| 31,200 | | |
|
| 1,090 | | |
|
| 27,500 | |
| |
| 1,193 | |
Societe Generale | |
A | |
A2 | |
|
| 38,400 | | |
|
| 1,046 | | |
|
| 25,400 | |
| |
| 756 | |
| |
| |
| |
|
| | | |
|
| | | |
|
| | |
| |
| | |
Total | |
| |
| |
|
$ | 82,400 | | |
|
$ | 2,412 | | |
|
$ | 66,600 | |
| |
$ | 2,458 | |
| (1) | As assigned by Standard & Poor’s Corporation (“S&P”) and Moody’s Investors Service, Inc. (“Moody’s”). |
As of March 31, 2015 and December 31,
2014, the Company held $2,177 and $1,955, respectively, of cash received from counterparties for derivative collateral, which is
included in Other Liabilities on the Consolidated Balance Sheets. This derivative collateral limited 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 $235 and $503 at March 31, 2015 and December 31, 2014, respectively.
The future annual index credits on fixed indexed annuities are treated as a "series
of embedded derivatives" over the expected life of the applicable contract. Call options are not purchased to fund the index
liabilities which may arise after the next annuity deposit anniversary date. Call options and the related forward embedded options
in the annuity contracts are carried at fair value.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(“MD&A”)
(Dollars in millions, except per share
data)
Forward-looking Information
Statements made in
the following discussion that are not historical in nature are forward-looking within the meaning of the Private Securities Litigation
Reform Act of 1995 and are subject to known and unknown risks, uncertainties and other factors. Horace Mann is not under any obligation
to (and expressly disclaims any such obligation to) update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise. It is important to note that the Company's actual results could differ materially from
those projected in forward-looking statements due to a number of risks and uncertainties inherent in the Company's business. For
additional information regarding risks and uncertainties, see “Item 1A. Risk Factors” in the Company’s Annual
Report on Form 10-K for the year ended December 31, 2014. That discussion includes factors such as:
| · | The impact that a prolonged economic recession may have on the Company’s investment portfolio;
volume of new business for automobile, homeowners, annuity and life products; policy renewal rates; and additional annuity contract
deposit receipts. |
| · | Fluctuations in the fair value of securities
in the Company's investment portfolio and the related after tax effect on the Company's shareholders' equity and total capital
through either realized or unrealized investment losses. |
| · | Prevailing low interest rate levels, including
the impact of interest rates on (1) the Company's ability to maintain appropriate interest rate spreads over minimum fixed rates
guaranteed in the Company's annuity and life products, (2) the book yield of the Company's investment portfolio, (3) unrealized
gains and losses in the Company's investment portfolio and the related after tax effect on the Company's shareholders' equity and
total capital, (4) amortization of deferred policy acquisition costs and (5) capital levels of the Company’s life insurance
subsidiaries. |
| · | The frequency and severity of events such
as hurricanes, storms, earthquakes and wildfires, and the ability of the Company to provide accurate estimates of ultimate claim
costs in its consolidated financial statements. |
| · | The Company’s risk exposure to catastrophe-prone
areas. Based on full year 2014 property and casualty direct earned premiums, the Company’s ten largest states represented
58% of the segment total. Included in this top ten group are certain states which are considered more prone to catastrophe occurrences:
California, North Carolina, Texas, Florida, South Carolina and Louisiana. |
| · | The ability of the Company to maintain
a favorable catastrophe reinsurance program considering both availability and cost; and the collectibility of reinsurance receivables. |
| · | Adverse changes in market appreciation,
interest spreads, business persistency and policyholder mortality and morbidity rates and the resulting impact on both estimated
reserves and the amortization of deferred policy acquisition costs. |
| · | Adverse results from the assessment of
the Company’s goodwill asset requiring write off of the impaired portion. |
| · | The Company's ability to refinance outstanding
indebtedness or repurchase shares of the Company’s common stock. |
| · | The Company's ability to (1) develop and
expand its marketing operations, including agents and other points of distribution, and (2) maintain and secure access to educators,
school administrators, principals and school business officials. |
| · | The effects of economic forces and other
issues affecting the educator market including, but not limited to, federal, state and local budget deficits and cut-backs and
adverse changes in state and local tax revenues. The effects of these forces can include, among others, teacher layoffs and early
retirements, as well as individual concerns regarding employment and economic uncertainty. |
| · | The Company's ability to profitably expand
its property and casualty business in highly competitive environments. |
| · | Changes in federal and state laws and regulations,
which affect the relative tax and other advantages of the Company’s life and annuity products to customers, including, but
not limited to, changes in IRS regulations governing Section 403(b) plans. |
| · | Changes in public employee retirement programs
as a result of federal and/or state level pension reform initiatives. |
| · | Changes in federal and state laws and regulations,
which affect the relative tax advantage of certain investments or which affect the ability of debt issuers to declare bankruptcy
or restructure debt. |
| · | The Company's ability to effectively implement
new or enhanced information technology systems and applications. |
Executive Summary
Horace Mann Educators
Corporation (“HMEC”; and together with its subsidiaries, the “Company” or “Horace Mann”) is
an insurance holding company. Through its subsidiaries, HMEC markets and underwrites personal lines of property and casualty insurance,
retirement annuities and life insurance in the U.S. The Company markets its products primarily to K-12 teachers, administrators
and other employees of public schools and their families.
For the three months
ended March 31, 2015, the Company’s net income of $34.3 million increased $5.9 million compared to the prior year, led by
improvements in the property and casualty segment, accompanied by an increase in realized investment gains. After tax net realized
investment gains of $4.0 million were $2.9 million higher than a year earlier. For the property and casualty segment, net income
of $17.6 million increased $3.6 million compared to the first quarter of 2014. The property and casualty combined ratio was 90.4%
for the first quarter of 2015, a 3.3 percentage point improvement compared to 93.7% for the same period in 2014, reflecting continued
improvement in current accident year non-catastrophe results for both automobile and homeowners — driven by improvements
in frequency and severity loss trends. Catastrophe losses increased in the current period, representing a $2.7 million after tax
decrease to net income compared to the first three months of 2014. Annuity segment net income of $12.5 million for the current
period increased $0.2 million compared to the first three months of 2014, despite the pressures of the interest rate environment
reflected in the 3% decrease in the net interest margin. Assets under management increased and disciplined crediting rate management
continues. For the first three months of 2015 and 2014, unlocking of deferred policy acquisition costs had an immaterial impact
on net income. Life segment net income of $3.4 million decreased $0.5 million compared to the first three months of 2014 primarily
due to a higher level of mortality losses in the current period. In the first quarter of 2015, the Company recorded a reduction
in incentive compensation expense due to the correction of an immaterial out-of-period adjustment. The majority of the cost reduction
benefitted the property and casualty segment, increasing that segment’s net income by
approximately $2 million and decreasing
the combined ratio by approximately 2 percentage points. The benefit to the annuity and life segments was approximately $0.5 million
after tax for each segment. See also “Notes to Consolidated Financial Statements — Note 1 — Basis of Presentation”.
Premiums written and
contract deposits increased 17% compared to the first three months of 2014 primarily due to an increase in the amount of annuity
deposits received in the current period, as well as the favorable premium impact from increases in average premium per policy for
both homeowners and automobile. Annuity deposits received were 42% greater than the prior year, including amounts related to the
Company’s 401(k) group annuity contract as further explained in “Results of Operations — Insurance Premiums and
Contract Charges”. Excluding this item, consolidated and annuity segment growth were 9% and 20%, respectively. Property and
casualty segment premiums written increased 2% compared to the prior year. Life segment insurance premiums and contract deposits
also increased 2% compared to the first quarter of 2014.
The Company’s
book value per share was $34.28 at March 31, 2015, an increase of 16% compared to 12 months earlier. This increase reflected net
income for the trailing 12 months and an increase in net unrealized investment gains due to lower yields on intermediate and long
maturity U.S. Treasury securities and narrower credit spreads across most asset classes, the combination of which resulted in an
increase in net unrealized gains for the Company’s holdings of fixed income and equity securities. At March 31, 2015, book
value per share excluding investment fair value adjustments was $26.13, representing an 8% increase compared to 12 months earlier.
Critical Accounting Policies
The preparation of
consolidated financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires
the Company's management to make estimates and assumptions based on information available at the time the consolidated financial
statements are prepared. These estimates and assumptions affect the reported amounts of the Company's consolidated assets, liabilities,
shareholders' equity and net income. Certain accounting estimates are particularly sensitive because of their significance to the
Company's consolidated financial statements and because of the possibility that subsequent events and available information may
differ markedly from management's judgments at the time the consolidated financial statements were prepared. Management has discussed
with the Audit Committee the quality, not just the acceptability, of the Company's accounting principles as applied in its financial
reporting. The discussions generally included such matters as the consistency of the Company's accounting policies and their application,
and the clarity and completeness of the Company's consolidated financial statements, which include related disclosures. For the
Company, the areas most subject to significant management judgments include: fair value measurements, other-than-temporary impairment
of investments, goodwill, deferred policy acquisition costs for annuity and interest-sensitive life products, liabilities for property
and casualty claims and claim expenses, liabilities for future policy benefits, deferred taxes and valuation of assets and liabilities
related to the defined benefit pension plan.
Compared to December
31, 2014, at March 31, 2015 there were no material changes to the accounting policies for the areas most subject to significant
management judgments identified above. In addition to disclosures in “Notes to Consolidated Financial Statements” in
the Company’s Annual Report on Form 10-K for the year ended December 31, 2014,
discussion of accounting policies, including
certain sensitivity information, was presented in “Management’s Discussion and Analysis of Financial Condition and
Results of Operations — Critical Accounting Policies” in that Form 10-K.
Results of Operations
Insurance Premiums
and Contract Charges
| |
Three Months Ended | |
Change From |
| |
March 31, | |
Prior Year |
| |
2015 |
| 2014 | |
Percent |
| Amount |
Insurance premiums written and contract deposits (includes annuity and life contract deposits) | |
|
| | |
| |
| | | |
|
| | |
| |
| | |
Property & casualty (1) | |
|
$ | 140.5 | |
| |
$ | 137.2 | | |
|
| 2.4 | % |
| |
$ | 3.3 | |
Annuity deposits | |
|
| 142.0 | |
| |
| 100.3 | | |
|
| 41.6 | % |
| |
| 41.7 | |
Life | |
|
| 23.2 | |
| |
| 22.8 | | |
|
| 1.8 | % |
| |
| 0.4 | |
Total | |
|
$ | 305.7 | |
| |
$ | 260.3 | | |
|
| 17.4 | % |
| |
$ | 45.4 | |
| |
|
| | |
| |
| | | |
|
| | |
| |
| | |
Insurance premiums and contract charges earned (excludes annuity and life contract deposits) | |
|
| | |
| |
| | | |
|
| | |
| |
| | |
Property & casualty (1) | |
|
$ | 146.7 | |
| |
$ | 143.9 | | |
|
| 1.9 | % |
| |
$ | 2.8 | |
Annuity | |
|
| 6.2 | |
| |
| 5.9 | | |
|
| 5.1 | % |
| |
| 0.3 | |
Life | |
|
| 26.8 | |
| |
| 25.6 | | |
|
| 4.7 | % |
| |
| 1.2 | |
Total | |
|
$ | 179.7 | |
| |
$ | 175.4 | | |
|
| 2.5 | % |
| |
$ | 4.3 | |
| (1) | Includes voluntary business
and an immaterial amount of involuntary business. Voluntary business represents policies sold through the Company's marketing
organization and issued under the Company's underwriting guidelines. Involuntary business consists of allocations of business
from state mandatory insurance facilities and assigned risk business. |
Number of Policies and Contracts in Force
(actual counts)
| |
March 31, | |
December 31, |
| |
March 31, |
| |
2015 | |
2014 |
| |
2014 |
Property and casualty (voluntary) | |
|
| | |
| |
|
| | |
| |
|
| | |
Automobile | |
|
| 480,428 | |
| |
|
| 480,702 | |
| |
|
| 479,657 | |
Property | |
|
| 227,773 | |
| |
|
| 229,072 | |
| |
|
| 234,102 | |
Total | |
|
| 708,201 | |
| |
|
| 709,774 | |
| |
|
| 713,759 | |
Annuity | |
|
| 204,143 | |
| |
|
| 202,572 | |
| |
|
| 195,598 | |
Life | |
|
| 200,915 | |
| |
|
| 200,867 | |
| |
|
| 200,422 | |
For the first three
months of 2015, the Company’s premiums written and contract deposits of $305.7 million increased $45.4 million, or 17.4%,
compared to the prior year, reflecting growth in each of the Company’s three segments, led by the annuity segment. Current
period changes in the Company’s employee retirement savings plans led to $22.0 million of the $45.4 million increase; consolidated
and annuity segment growth were 9.0% and 19.6%, respectively, excluding this item. The Company’s premiums and contract charges
earned increased $4.3 million, or 2.5%, compared to the prior year, primarily due to increases in average premium per policy for
both homeowners and automobile.
Total property and
casualty premiums written increased 2.4%, or $3.3 million, in the first three months of 2015, compared to the prior year. Average
written premium per policy for both automobile and homeowners increased compared to the prior year, with the impact partially offset
by a reduced level of homeowners policies in force in the current period. For 2015, the Company’s full year rate plan anticipates
mid-single digit average rate increases (including states with no rate actions) for both automobile and homeowners; average approved
rate changes during the first three months of 2015 were consistent with those plans at 4% for automobile and 5% for homeowners.
Based on policies in
force, the current year voluntary automobile 12 month retention rate for new and renewal policies was 84.9% compared to 84.6% at
March 31, 2014. The property 12 month new and renewal policy retention rate was 87.7% at March 31, 2015 compared to 88.9% at March
31, 2014. Although the property retention rate is modestly lower than 12 months earlier, the 2015 retention rates have been favorably
impacted by the Company’s focus on expanding the number of multiline customers and customer utilization of automatic payment
plans, particularly for voluntary automobile business.
Voluntary automobile
premiums written increased 3.6%, or $3.4 million, compared to the first quarter of 2014. In the first quarter of 2015, the average
written premium per policy and average earned premium per policy each increased approximately 3% compared to a year earlier, which
was augmented by the modest increase in policies in force. The number of educator policies increased more than the total policy
count over the period and represented approximately 85% of the voluntary automobile policies in force at March 31, 2015 and 84%
at both December 31, 2014 and March 31, 2014.
Homeowners premiums
written decreased 1.0%, or $0.4 million, compared to the first quarter of 2014. The average written premium per policy and average
earned premium per policy increased approximately 3% and 5%, respectively, in the first quarter of 2015 compared to a year earlier.
In addition, reduced catastrophe reinsurance costs benefitted the current period by approximately $0.5 million. The number of educator
policies declined less than the total homeowners policy count and represented approximately 81% of the homeowners policies in force
at March 31, 2015, compared to approximately 80% and 79% at December 31, 2014 and March 31, 2014, respectively. The number of educator
policies and total policies has been, and may continue to be, impacted by the Company’s risk mitigation programs, including
actions in catastrophe-prone coastal areas, involving policies of both educators and non-educators.
The Company continues
to evaluate and implement actions to further mitigate its risk exposure in hurricane-prone areas, as well as other areas of the
country. Such actions could include, but are not limited to, non-renewal of homeowners policies, restricted agent geographic placement,
limitations on agent new business sales, further tightening of underwriting standards and increased utilization of third-party
vendor products. In 2014 the Company initiated a program to further address homeowners profitability and hurricane exposure issues
in Florida. The Company identified for non-renewal about 4,800 policies, approximately 95% of its December 31, 2013 Florida book
of property business, starting with June 2014 policy effective dates. As of March 31, 2015, approximately 4,200 of the policies
in the non-renewal program had been terminated, with the remainder expected to terminate in the second quarter of 2015. While this
program is impacting the overall policy in force count and premiums in the short-term, it is expected to reduce risk exposure concentration,
reduce overall catastrophe reinsurance costs and improve homeowners longer-term underwriting
results. The Company continues to write
policies for tenants in Florida. The Company also has authorized its agents to write certain third-party vendors’ homeowners
policies in Florida.
For the three months
ended March 31, 2015, total annuity deposits received increased 41.6%, or $41.7 million, compared to the prior year, including
a 54.6% increase in recurring deposit receipts and a 30.9% increase in single premium and rollover deposit receipts. In addition
to external contractholder deposits, annuity new deposits include contributions and transfers by Horace Mann’s employees
into the Company’s 401(k) group annuity contract. And, included in the current period increase is $22.0 million attributable
to changes in the Company’s employee retirement saving plans, representing 22.0 percentage points of the first quarter increase.
The majority of the $22.0 million 401(k) related increase was due to employees’ elections to rollover amounts from a previously
terminated, fully funded defined contribution plan third-party investment vehicle into their 401(k) accounts. The Company’s
employee retirement savings plans are described in “Notes to Consolidated Financial Statements — Note 9 — Pension
Plans and Other Postretirement Benefits” in the Company’s Annual Report on Form 10-K for the year ended December 31,
2014. Note that deposits into the Company’s employee 401(k) group annuity contract are not reported as “sales”.
As further described
in “Sales” below, the Company’s fixed indexed annuity contract contributed to the favorable result in 2015. In
the first three months of 2015, new deposits to fixed accounts of $94.9 million increased 40.0%, or $27.1 million, and new deposits
to variable accounts of $47.1 million increased 44.9%, or $14.6 million, compared to the prior year.
Total annuity accumulated
value on deposit of $5.8 billion at March 31, 2015 increased 7.7% compared to a year earlier, reflecting the increase from new
deposits received as well as favorable retention and financial market performance. Accumulated value retention for the variable
annuity option was 93.9% and 94.1% for the 12 month periods ended March 31, 2015 and 2014, respectively; fixed annuity retention
was 94.5% and 95.1% for the respective periods.
Variable annuity accumulated
balances of $1.9 billion at March 31, 2015 increased 6.9% compared to March 31, 2014, reflecting favorable financial market performance
over the 12 months (driven primarily by equity securities) partially offset by net balances transferred from the variable account
option to the guaranteed interest rate fixed account option. Annuity segment contract charges earned increased 5.1%, or $0.3 million,
compared to the first three months of 2014.
Life segment premiums
and contract deposits for the first three months of 2015 increased 1.8%, or $0.4 million, compared to the prior year, primarily
due to the favorable impact of new business growth. The ordinary life insurance in force lapse ratio was 4.0% for the 12 months
ended March 31, 2015 compared to 4.2% for the 12 months ended March 31, 2014.
Sales
For the first three
months of 2015, property and casualty new annualized sales premiums increased 5.8% compared to the first quarter of 2014, as 7.0%
growth in new automobile sales was accompanied by homeowners sales which were equal to the prior year. The level of homeowners
sales reflected continued risk mitigation initiatives disclosed above.
For sales by Horace
Mann’s agency force, the Company’s annuity new business levels continued to benefit from agent training and marketing
programs, which focus on retirement planning, and build on the positive results produced in recent years resulting in a 34.8% increase
compared to the first quarter of 2014. Sales from the independent agent distribution channel, which represent approximately 10%
of total annuity sales and are largely single premium and rollover annuity deposits, decreased 3.2% compared to a year earlier.
As a result, total Horace Mann annuity sales from the combined distribution channels increased 29.3% compared to the three months
ended March 31, 2014, led by sales of the Company’s fixed indexed annuity product as described below. Overall, the Company’s
new recurring deposit business (measured on an annualized basis at the time of sale, compared to the reporting of new contract
deposits which are recorded when cash is received) increased 18.2% compared to the first quarter of 2014, and single premium and
rollover deposits increased 31.0% compared to the prior year. In February 2014, the Company expanded its annuity product portfolio
by introducing a fixed indexed annuity contract. This new product has been well received by the Company’s customers and represented
approximately one-third of total annuity sales for the first three months of 2015, largely single premium and rollover deposits.
Previously, the Company had entered into third-party vendor agreements to offer an indexed annuity product underwritten by the
third parties.
The Company’s
introduction of new educator-focused portfolios of term and whole life products in recent years, including a single premium whole
life product, has contributed to the increase in sales of proprietary life products. For the current period, sales of Horace Mann’s
proprietary life insurance products totaled $1.9 million, representing an increase of 11.8%, compared to the prior year.
Distribution System
At March 31, 2015,
there was a combined total of 729 Exclusive Agencies and Employee Agents, compared to 755 at December 31, 2014 and 722 at March
31, 2014. The Company continues to expect higher quality standards for agents and agencies focused on improving both customer experiences
and agent productivity. The dedicated sales force is supported by the Company’s Customer Contact Center.
As mentioned above,
the Company also utilizes a nationwide network of Independent Agents who comprise an additional distribution channel for the Company’s
403(b) tax-qualified annuity products. The Independent Agent distribution channel included 443 authorized agents at March 31, 2015.
During the first three months of 2015, this channel generated $9.0 million in annualized new annuity sales for the Company compared
to $9.3 million for the first quarter of 2014, with the new business primarily comprised of single and rollover deposit business
in both periods.
Net Investment Income
For the three
months ended March 31, 2015, pretax investment income of $83.3 million increased 0.4%, or $0.3 million, (0.4%, or $0.2
million, after tax) compared to the prior year. The slight increase reflected growth in the size of the average investment
portfolio on an amortized cost basis and continued strong performance in the fixed maturity and alternative investment
portfolios, nearly offset by a decline in the average portfolio yield. Average invested assets increased 6.1% over the 12
months ended March 31, 2015. The average pretax yield on the investment portfolio was 5.16% (3.47% after tax) for the first
three months of 2015, compared to the pretax yield of 5.47% (3.67% after tax) a year earlier. During the first three months
of 2015, management continued to identify and secure investments, including a modest level of alternative investments, with
attractive risk-adjusted yields without venturing into asset classes or individual securities that would be inconsistent with
the Company’s overall conservative investment guidelines.
Net Realized Investment Gains and Losses
For the first three
months of 2015, net realized investment gains (pretax) were $6.1 million compared to realized investment gains of $1.7 million
in the prior year’s first quarter. The net gains and losses in both periods were realized primarily from ongoing investment
portfolio management activity.
For the first quarter
of 2015, the Company’s net realized investment gains of $6.1 million included $8.9 million of gross gains realized on security
sales and calls partially offset by $0.5 million of realized losses on securities that were disposed of during the quarter and
$2.3 million of impairment charges recorded largely on energy sector securities.
In the first quarter
of 2014, the Company’s net realized investment gains of $1.7 million included $2.6 million of gross gains realized on security
sales and calls partially offset by $0.9 million of realized losses on securities that were disposed of during the quarter, primarily
municipal securities.
The Company, from time
to time, sells securities subsequent to the balance sheet date that were considered temporarily impaired at the balance sheet date.
Such sales are due to issuer-specific events occurring subsequent to the balance sheet date that result in a change in the Company’s
intent to sell an invested asset.
Fixed Maturity Securities
and Equity Securities Portfolios
The table below presents
the Company’s fixed maturity securities and equity securities portfolios by major asset class, including the ten largest
sectors of the Company’s corporate bond holdings (based on fair value). Compared to December 31, 2014, yields on intermediate
and long maturity U.S. Treasury securities decreased and credit spreads were narrower across most asset classes during the first
three months of 2015, the combination of which resulted in an increase in net unrealized gains for virtually all classes of the
Company’s fixed maturity securities holdings.
| |
March 31, 2015 |
| |
|
| | |
|
| | |
Amortized | |
Pretax Net |
| |
Number of | |
Fair | |
Cost or | |
Unrealized |
| |
Issuers | |
Value | |
Cost | |
Gain (Loss) |
Fixed maturity securities | |
|
| | | |
|
| | | |
|
| | | |
|
| | |
Corporate bonds | |
|
| | | |
|
| | | |
|
| | | |
|
| | |
Banking and Finance | |
|
| 82 | | |
|
$ | 537.4 | | |
|
$ | 490.4 | | |
|
$ | 47.0 | |
Energy | |
|
| 69 | | |
|
| 279.8 | | |
|
| 253.5 | | |
|
| 26.3 | |
Insurance | |
|
| 46 | | |
|
| 244.1 | | |
|
| 210.2 | | |
|
| 33.9 | |
Utilities | |
|
| 37 | | |
|
| 203.9 | | |
|
| 172.0 | | |
|
| 31.9 | |
Real estate | |
|
| 36 | | |
|
| 182.7 | | |
|
| 169.4 | | |
|
| 13.3 | |
Technology | |
|
| 35 | | |
|
| 166.4 | | |
|
| 158.0 | | |
|
| 8.4 | |
Transportation | |
|
| 28 | | |
|
| 158.9 | | |
|
| 147.4 | | |
|
| 11.5 | |
Telecommunications | |
|
| 25 | | |
|
| 144.0 | | |
|
| 132.6 | | |
|
| 11.4 | |
Broadcasting and Media | |
|
| 32 | | |
|
| 135.4 | | |
|
| 117.5 | | |
|
| 17.9 | |
Metal and Mining | |
|
| 18 | | |
|
| 121.1 | | |
|
| 116.8 | | |
|
| 4.3 | |
All Other Corporates (1) | |
|
| 198 | | |
|
| 667.4 | | |
|
| 615.0 | | |
|
| 52.4 | |
Total corporate bonds | |
|
| 606 | | |
|
| 2,841.1 | | |
|
| 2,582.8 | | |
|
| 258.3 | |
Mortgage-backed securities | |
|
| | | |
|
| | | |
|
| | | |
|
| | |
U.S. Government and federally sponsored agencies | |
|
| 380 | | |
|
| 541.3 | | |
|
| 481.7 | | |
|
| 59.6 | |
Commercial (2) | |
|
| 53 | | |
|
| 187.8 | | |
|
| 180.9 | | |
|
| 6.9 | |
Other | |
|
| 23 | | |
|
| 41.4 | | |
|
| 38.0 | | |
|
| 3.4 | |
Municipal bonds (3) | |
|
| 526 | | |
|
| 1,685.1 | | |
|
| 1,489.3 | | |
|
| 195.8 | |
Government bonds | |
|
| | | |
|
| | | |
|
| | | |
|
| | |
U.S. | |
|
| 9 | | |
|
| 576.5 | | |
|
| 544.9 | | |
|
| 31.6 | |
Foreign | |
|
| 10 | | |
|
| 65.1 | | |
|
| 57.1 | | |
|
| 8.0 | |
Collateralized debt obligations (4) | |
|
| 97 | | |
|
| 555.1 | | |
|
| 550.1 | | |
|
| 5.0 | |
Asset-backed securities | |
|
| 101 | | |
|
| 572.4 | | |
|
| 554.5 | | |
|
| 17.9 | |
Total fixed maturity securities | |
|
| 1,805 | | |
|
$ | 7,065.8 | | |
|
$ | 6,479.3 | | |
|
$ | 586.5 | |
| |
|
| | | |
|
| | | |
|
| | | |
|
| | |
Equity securities | |
|
| | | |
|
| | | |
|
| | | |
|
| | |
Non-redeemable preferred stocks | |
|
| 11 | | |
|
$ | 18.5 | | |
|
$ | 18.7 | | |
|
$ | (0.2 | ) |
Common stocks | |
|
| 159 | | |
|
| 66.3 | | |
|
| 61.2 | | |
|
| 5.1 | |
Closed-end fund | |
|
| 1 | | |
|
| 20.3 | | |
|
| 20.0 | | |
|
| 0.3 | |
Total equity securities | |
|
| 171 | | |
|
$ | 105.1 | | |
|
$ | 99.9 | | |
|
$ | 5.2 | |
| |
|
| | | |
|
| | | |
|
| | | |
|
| | |
Total | |
|
| 1,976 | | |
|
$ | 7,170.9 | | |
|
$ | 6,579.2 | | |
|
$ | 591.7 | |
| (1) | The All Other Corporates category contains 19 additional industry classifications.
Health care, consumer products, food and beverage, retail, natural gas, and gaming represented $476.7 million of fair value at
March 31, 2015, with the remaining 13 classifications each representing less than $33 million. |
| (2) | At March 31, 2015, 100% were investment grade, with an overall credit rating of AA, and the positions were well diversified
by property type, geography and sponsor. |
| (3) | Holdings are geographically diversified, approximately 49% are tax-exempt and 80% 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 March 31, 2015. |
| (4) | Based on fair value, 96.8% of the collateralized debt obligation securities were rated investment grade by Standard and Poor’s
Corporation (“S&P”) and/or Moody’s Investors Service, Inc. (“Moody’s”) at March 31, 2015. |
At March 31, 2015,
the Company’s diversified fixed maturity securities portfolio consisted of 2,251 investment positions, issued by 1,805 entities,
and totaled approximately $7.1 billion in fair value. This portfolio was 96.2% investment grade, based on fair value, with an average
quality rating of A. The Company’s investment guidelines generally limit single corporate issuer concentrations to 0.5% of
invested assets for “AA” or “AAA” rated securities, 0.35% of invested assets for “A” or “BBB”
rated securities, and 0.2% of invested assets for non-investment grade securities.
The following table
presents the composition and value of the Company’s fixed maturity securities and equity securities portfolios by rating
category. At March 31, 2015, 95.3% of these combined portfolios were investment grade, based on fair value, with an overall average
quality rating of A. The Company has classified the entire fixed maturity securities and equity securities portfolios as available
for sale, which are carried at fair value.
Rating of Fixed Maturity Securities and
Equity Securities (1)
(Dollars
in millions)
| |
Percent of Portfolio | |
|
| |
Fair Value | |
March 31, 2015 |
| |
December 31, | |
March 31, | |
Fair | |
Amortized |
| |
2014 | |
2015 | |
Value | |
Cost or Cost |
Fixed maturity securities | |
|
| | | |
|
| | | |
|
| | | |
|
| | |
AAA | |
|
| 6.8 | % | |
|
| 7.0 | % | |
|
$ | 492.4 | | |
|
$ | 469.7 | |
AA (2) | |
|
| 36.5 | | |
|
| 36.1 | | |
|
| 2,551.1 | | |
|
| 2,322.3 | |
A | |
|
| 24.5 | | |
|
| 25.7 | | |
|
| 1,816.8 | | |
|
| 1,638.7 | |
BBB | |
|
| 28.5 | | |
|
| 27.4 | | |
|
| 1,937.2 | | |
|
| 1,778.7 | |
BB | |
|
| 1.9 | | |
|
| 1.9 | | |
|
| 133.3 | | |
|
| 132.9 | |
B | |
|
| 1.4 | | |
|
| 1.6 | | |
|
| 111.9 | | |
|
| 114.1 | |
CCC or lower | |
|
| 0.1 | | |
|
| - | | |
|
| 3.6 | | |
|
| 3.6 | |
Not rated (3) | |
|
| 0.3 | | |
|
| 0.3 | | |
|
| 19.5 | | |
|
| 19.3 | |
Total fixed maturity securities | |
|
| 100.0 | % | |
|
| 100.0 | % | |
|
$ | 7,065.8 | | |
|
$ | 6,479.3 | |
Equity securities | |
|
| | | |
|
| | | |
|
| | | |
|
| | |
AAA | |
|
| - | | |
|
| - | | |
|
| - | | |
|
| - | |
AA | |
|
| 3.7 | % | |
|
| - | | |
|
| - | | |
|
| - | |
A | |
|
| - | | |
|
| - | | |
|
| - | | |
|
| - | |
BBB | |
|
| 33.2 | | |
|
| 35.5 | % | |
|
$ | 37.3 | | |
|
$ | 37.2 | |
BB | |
|
| 1.4 | | |
|
| 1.4 | | |
|
| 1.5 | | |
|
| 1.5 | |
B | |
|
| - | | |
|
| - | | |
|
| - | | |
|
| - | |
CCC or lower | |
|
| - | | |
|
| - | | |
|
| - | | |
|
| - | |
Not rated (4) | |
|
| 61.7 | | |
|
| 63.1 | | |
|
| 66.3 | | |
|
| 61.2 | |
Total equity securities | |
|
| 100.0 | % | |
|
| 100.0 | % | |
|
$ | 105.1 | | |
|
$ | 99.9 | |
| |
|
| | | |
|
| | | |
|
| | | |
|
| | |
Total | |
|
| | | |
|
| | | |
|
$ | 7,170.9 | | |
|
$ | 6,579.2 | |
| (1) | Ratings are as assigned primarily by S&P when available, with remaining ratings as assigned on an equivalent basis by Moody's.
Ratings for publicly traded securities are determined when the securities are acquired and are updated monthly to reflect any changes
in ratings. |
| (2) | At March 31, 2015, the AA rated fair value amount included $576.5 million of U.S. Government and federally sponsored agency
securities and $541.4 million of mortgage- and asset-backed securities issued by U.S. Government and federally sponsored agencies. |
| (3) | This category represents private placement securities not rated by either S&P or Moody's. |
| (4) | This category represents common stocks that are not rated by either S&P or Moody’s. |
At March 31, 2015, the
fixed maturity securities and equity securities portfolios had a combined $22.2 million pretax of gross unrealized losses on $661.0
million fair value related to 251 positions. Of the investment positions (fixed maturity securities and equity securities) with
gross unrealized losses, 12 were trading below 80% of book value at March 31, 2015 and were not considered other-than-temporarily
impaired. These positions had fair value of $25.2 million, representing 0.3% of the Company’s total investment portfolio
at fair value, and had a gross unrealized loss of $11.3 million.
The Company views the unrealized
losses of all of the securities at March 31, 2015 as temporary. Therefore, no impairment of these securities was recorded at March
31, 2015. Future changes in circumstances related to these and other securities could require subsequent recognition of other-than-temporary
impairment losses.
Benefits, Claims and Settlement Expenses
| |
Three Months Ended | | |
Change From | |
| |
March 31, | | |
Prior Year | |
| |
2015 | |
2014 | | |
Percent | | |
Amount | |
| |
|
| | |
|
|
| | |
|
| | |
|
|
| |
Property and casualty | |
|
$ | 95.2 | | |
|
$ | 95.0 |
| | |
|
| 0.2% |
| | |
|
$ | 0.2 |
| |
Annuity | |
|
| 0.3 | | |
|
| 0.4 |
| | |
|
| -25.0% |
| | |
|
| (0.1 |
) | |
Life | |
|
| 18.5 | | |
|
| 16.6 |
| | |
|
| 11.4% |
| | |
|
| 1.9 |
| |
Total | |
|
$ | 114.0 | | |
|
$ | 112.0 |
| | |
|
| 1.8% |
| | |
|
$ | 2.0 |
| |
| |
|
| | | |
|
| |
| | |
|
| |
| | |
|
| |
| |
Property and casualty catastrophe losses, included above | |
|
$ | 10.5 | | |
|
$ | 6.3 |
| | |
|
| 66.7% |
| | |
|
$ | 4.2 |
| |
Property and Casualty Claims and Claim Expenses
(“losses”)
| |
Three Months Ended | |
| |
March 31, | |
| |
2015 | | |
2014 | |
Incurred claims and claim expenses: | |
|
| |
| | |
|
| |
| |
Claims occurring in the current year | |
|
$ | 99.2 |
| | |
|
$ | 99.0 |
| |
Decrease in estimated reserves for claims occurring in prior years | |
|
| (4.0 |
) | | |
|
| (4.0 |
) | |
Total claims and claim expenses incurred | |
|
$ | 95.2 |
| | |
|
$ | 95.0 |
| |
| |
|
| |
| | |
|
| |
| |
Property and casualty loss ratio: | |
|
| |
| | |
|
| |
| |
Total | |
|
| 64.9 |
% | | |
|
| 66.0 |
% | |
Effect of catastrophe costs, included above | |
|
| 7.1 |
% | | |
|
| 4.4 |
% | |
Effect of prior years’ reserve development, included above | |
|
| -2.7 |
% | | |
|
| -2.8 |
% | |
For the three months ended
March 31, 2015, the Company’s benefits, claims and settlement expenses increased $2.0 million, or 1.8%, compared to the prior
year primarily reflecting an increase in life mortality costs. Variability in the Company’s life mortality experience is
not unexpected considering the size of Horace Mann’s life insurance in force. In the first quarter of 2015, the Company’s
total property and casualty non-catastrophe current accident year loss ratio of 60.5% improved compared to the 64.4% in the prior
year due to improvements in both frequency and severity.
The current period favorable
development of prior years’ property and casualty reserves of $4.0 million was the result of actual and remaining projected
losses for prior years being below the level anticipated in the December 31, 2014 loss reserve estimate and was primarily for accident
years 2013 and prior and predominantly the result of favorable severity trends in both automobile and homeowners loss emergence.
For the three months ended
March 31, 2015, the automobile loss ratio of 67.7% decreased by 0.2 percentage points compared to the prior year, including (1)
the favorable impacts of lower current accident year non-catastrophe losses for 2015 and rate actions taken in recent years partially
offset by (2) development of prior years’ reserves that had a 1.9 percentage point less favorable impact in the current year.
The homeowners loss ratio of 59.3% for the three months ended March 31, 2015 decreased 3.1 percentage points compared to a year
earlier, including a 3.6 percentage point decrease due to favorable development of prior years’ reserves recorded in 2015.
Catastrophe costs represented 20.7 percentage points of the homeowners loss ratio for the current period compared to 12.5 percentage
points for the prior year period.
Interest Credited to
Policyholders
| |
Three Months Ended | | |
Change From | |
| |
March 31, | | |
Prior Year | |
| |
2015 | | |
2014 | | |
Percent | | |
Amount | |
| |
| | |
| | |
| | |
| |
Annuity | |
|
$ | 33.5 |
| | |
|
$ | 32.3 |
| | |
| 3.7 |
% | | |
|
$ | 1.2 |
| |
Life | |
|
| 11.0 |
| | |
|
| 10.8 |
| | |
| 1.9 |
% | | |
|
| 0.2 |
| |
Total | |
|
$ | 44.5 |
| | |
|
$ | 43.1 |
| | |
| 3.2 |
% | | |
|
$ | 1.4 |
| |
Compared to the first three
months of 2014, the current period increase in annuity segment interest credited reflected a 7.8% increase in average accumulated
fixed deposits, partially offset by a 9 basis point decline in the average annual interest rate credited to 3.58%. Life insurance
interest credited increased slightly as a result of the growth in interest-sensitive life insurance reserves.
The net interest spread
on fixed annuity assets under management measures the difference between the rate of income earned on the underlying invested assets
and the rate of interest which policyholders are credited on their account values. The annualized net interest spreads for the
three months ended March 31, 2015 and 2014 were 194 basis points and 214 basis points, respectively. While the current period net
interest spread continued to reflect solid investment portfolio performance and disciplined crediting rate management, it decreased
due to pressures of the low interest rate environment.
As of March 31, 2015, fixed
annuity account values totaled $4.0 billion, including $3.7 billion of deferred annuities. As shown in the table below, for approximately
86%, or $3.2 billion of the deferred annuity account values, the credited interest rate was equal to the minimum guaranteed rate.
Due to limitations on the Company’s ability to further lower interest crediting rates, coupled with the expectation for continued
low reinvestment interest rates, management anticipates fixed annuity spread compression in future periods. The majority of assets
backing the net interest spread on fixed annuity business is invested in fixed-income securities. The Company actively manages
its interest rate risk exposure, considering a variety of factors, including earned interest rates, credited interest rates and
the relationship between the expected durations of assets and liabilities. Management estimates that over the
next 12 months approximately
$600 million of the annuity segment and life segment combined investment portfolio and related investable cash flows will be reinvested
at current market rates. As interest rates remain at low levels, borrowers may prepay or redeem the securities with greater frequency
in order to borrow at lower market rates, which could increase investable cash flows and exacerbate the reinvestment risk. As
a general guideline, for a 100 basis point decline in the average reinvestment rate and based on the Company’s existing policies
and investment portfolio, the impact from investing in that lower interest rate environment could further reduce annuity segment
net investment income by approximately $2.3 million in year one and $6.8 million in year two, further reducing the net interest
spread by approximately 5 basis points and 15 basis points in the respective periods, compared to the current period annualized
net interest spread. The Company could also consider potential changes in rates credited to policyholders, tempered by any restrictions
on the ability to adjust policyholder rates due to minimum guaranteed crediting rates.
The expectation for future
net interest spreads is also an important component in the amortization of annuity deferred policy acquisition costs. In terms
of the sensitivity of this amortization to the net interest spread, based on capitalized annuity policy acquisition costs as of
March 31, 2015 and assuming all other assumptions are met, a 10 basis point deviation in the current year targeted interest rate
spread assumption would impact amortization between $0.25 million and $0.35 million. This result may change depending on the magnitude
and direction of any actual deviations but represents a range of reasonably likely experience for the noted assumption.
Additional information
regarding the interest crediting rates and balances equal to the minimum guaranteed rate for deferred annuity account values is
shown below.
| |
March 31, 2015 | |
| |
| | |
Deferred Annuities at | |
| |
Total Deferred Annuities | | |
Minimum Guaranteed Rate | |
| |
|
| |
| | |
Percent of | |
| |
| |
| |
Percent |
| |
Accumulated | | |
Total Deferred | |
Percent | |
Accumulated | |
| |
of Total |
| |
Value (“AV”) | | |
Annuities AV | |
of Total | |
Value | |
Minimum guaranteed interest rates: | |
|
| | |
| |
|
| |
| | |
|
| | |
| |
|
| | |
| |
|
| |
| |
Less than 2% | |
|
| 19.8 | % |
| |
|
$ | 734.8 |
| | |
|
| 38.1 | % |
| |
|
| 8.7 | % |
| |
|
$ | 279.7 |
| |
Equal to 2% but less than 3% | |
|
| 8.2 | |
| |
|
| 306.5 |
| | |
|
| 81.3 | % |
| |
|
| 7.8 | |
| |
|
| 249.2 |
| |
Equal to 3% but less than 4% | |
|
| 15.2 | |
| |
|
| 564.5 |
| | |
|
| 99.0 | % |
| |
|
| 17.5 | |
| |
|
| 558.8 |
| |
Equal to 4% but less than 5% | |
|
| 55.3 | |
| |
|
| 2,053.8 |
| | |
|
| 100.0 | % |
| |
|
| 64.2 | |
| |
|
| 2,053.7 |
| |
5% or higher | |
|
| 1.5 | |
| |
|
| 56.5 |
| | |
|
| 100.0 | % |
| |
|
| 1.8 | |
| |
|
| 56.5 |
| |
Total | |
|
| 100.0 | % |
| |
|
$ | 3,716.1 |
| | |
|
| 86.1 | % |
| |
|
| 100.0 | % |
| |
|
$ | 3,197.9 |
| |
The Company will continue
to be disciplined in executing strategies to mitigate the negative impact on profitability of a sustained low interest rate environment.
However, the success of these strategies may be affected by the factors discussed in “Item 1A. Risk Factors” in the
Company’s Annual Report on Form 10-K for the year ended December 31, 2014, and other factors discussed herein.
Policy Acquisition Expenses
Amortized
Amortized policy acquisition
expenses were $23.7 million for the first three months of 2015 compared to $23.0 million for the same period in 2014 with the increase
largely attributable to the property and casualty segment reflecting the recent growth in premiums and related commissions. At
both March 31, 2015 and 2014, the unlocking of annuity and life deferred policy acquisition costs resulted in an immaterial impact
on amortization.
Operating Expenses
For the first three months
of 2015, operating expenses of $35.9 million decreased $4.0 million, or 10.0%, compared to the same period in the prior year. The
current period expenses reflected a reduction in incentive compensation expense with the majority of the cost reduction benefitting
the property and casualty segment. See also “Note 1 — Basis of Presentation”. Excluding this item, the current
period expense level was consistent with management’s expectations as the Company makes expenditures related to customer
service and infrastructure improvements, which are intended to enhance the overall customer experience and support favorable policy
retention and business cross-sale ratios.
The property and casualty
expense ratio of 25.5% for the three months ended March 31, 2015 decreased 2.2 percentage points compared to the prior year expense
ratio of 27.7%, consistent with management’s expectations for the current period excluding the 1.5 percentage point impact
of the current period incentive compensation expense reduction.
Income Tax Expense
The effective income tax
rate on the Company’s pretax income, including net realized investment gains and losses, was 29.1% and 28.5% for the three
months ended March 31, 2015 and 2014, respectively. Income from investments in tax-advantaged securities reduced the effective
income tax rate 6.7 and 7.1 percentage points for the three months ended March 31, 2015 and 2014, respectively.
The Company records liabilities
for uncertain tax filing positions where it is more likely than not that the position will not be sustainable upon audit by taxing
authorities. These liabilities are reevaluated routinely and are adjusted appropriately based on changes in facts or law. The Company
has no unrecorded liabilities from uncertain tax filing positions.
At March 31, 2015, the
Company’s federal income tax returns for years prior to 2011 are no longer subject to examination by the IRS. Management
does not anticipate any assessments for tax years that remain subject to examination to have a material effect on the Company’s
financial position or results of operations.
Net Income
For the three months ended
March 31, 2015, the Company’s net income of $34.3 million represented an increase of $5.9 million compared to the prior year
driven by improvement in insurance results. In addition, the increase included a $2.9 million increase in after tax net realized
investment gains. Additional detail is included in the “Executive Summary” at the beginning of this MD&A.
Net income (loss) by segment
and net income per share were as follows:
| |
Three Months Ended | |
Change From |
|
| |
March 31, | |
Prior Year |
|
| |
2015 |
| 2014 | |
Percent | |
Amount |
|
Analysis of net income (loss) by segment: | |
| |
| |
| |
|
| |
|
|
Property and casualty | |
|
$ | 17.6 |
| |
| |
$ | 14.0 | |
| |
| 25.7 | % |
| |
|
$ | 3.6 | |
|
Annuity | |
|
| 12.5 |
| |
| |
| 12.3 | |
| |
| 1.6 | % |
| |
|
| 0.2 | |
|
Life | |
|
| 3.4 |
| |
| |
| 3.9 | |
| |
| -12.8 | % |
| |
|
| (0.5 | ) |
|
Corporate and other (1) | |
|
| 0.8 |
| |
| |
| (1.8 | ) |
| |
| N.M. | |
| |
|
| 2.6 | |
|
Net income | |
|
$ | 34.3 |
| |
| |
$ | 28.4 | |
| |
| 20.8 | % |
| |
|
$ | 5.9 | |
|
| |
|
| |
| |
| |
| | |
| |
| | |
| |
|
| | |
|
Effect of catastrophe costs, after tax, included above | |
|
$ | (6.8 |
) | |
| |
$ | (4.1 | ) |
| |
| 65.9 | % |
| |
|
$ | (2.7 | ) |
|
Effect of realized investment gains, after tax, included above | |
|
$ | 4.0 |
| |
| |
$ | 1.1 | |
| |
| N.M. | |
| |
|
$ | 2.9 | |
|
| |
|
| |
| |
| |
| | |
| |
| | |
| |
|
| | |
|
Diluted: | |
|
| |
| |
| |
| | |
| |
| | |
| |
|
| | |
|
Net income per share | |
|
$ | 0.81 |
| |
| |
$ | 0.67 | |
| |
| 20.9 | % |
| |
|
$ | 0.14 | |
|
Weighted average number of shares and equivalent shares (in millions) | |
|
| 42.3 |
| |
| |
| 42.3 | |
| |
| - | |
| |
|
| - | |
|
| |
|
| |
| |
| |
| | |
| |
| | |
| |
|
| | |
|
Property and casualty combined ratio: | |
|
| |
| |
| |
| | |
| |
| | |
| |
|
| | |
|
Total | |
|
| 90.4 |
% | |
| |
| 93.7 | % |
| |
| N.M. | |
| |
|
| -3.3 | % |
|
Effect of catastrophe costs, included above | |
|
| 7.1 |
% | |
| |
| 4.4 | % |
| |
| N.M. | |
| |
|
| 2.7 | % |
|
Effect of prior years’ reserve development, included above | |
|
| -2.7 |
% | |
| |
| -2.8 | % |
| |
| N.M. | |
| |
|
| 0.1 | % |
|
N.M. – Not meaningful.
| (1) | The corporate and other segment includes interest expense on debt, realized investment gains and
losses, certain public company expenses and other corporate-level items. The Company does not allocate the impact of corporate-level
transactions to the insurance segments, consistent with the basis for management’s evaluation of the results of those segments. |
As described in footnote
(1) to the table above, the corporate and other segment reflects corporate-level transactions. Of those transactions, realized
investment gains and losses may vary notably between reporting periods and are often the driver of fluctuations in the level of
this segment’s net income or loss, as was the case for the periods shown above.
Return on average shareholders’
equity based on net income was 8.4% and 9.8% for the trailing 12 months ended March 31, 2015 and 2014, respectively.
Outlook for 2015
At the time of this Quarterly
Report on Form 10-Q, management estimates that 2015 full year net income before realized investment gains and losses will be within
a range of $2.15 to $2.35 per diluted share. This projection incorporates the Company’s results for 2014 and anticipates
continued modest improvement in the underlying property and casualty combined ratio, somewhat offset by a lower amount of favorable
prior years’ reserve development, investment interest rate pressure and continued strategic investments in the Company’s
operations through infrastructure and technology initiatives. Management anticipates interest rates to remain low in 2015 and,
compared to 2014, expects the Company’s overall portfolio yield to decline by approximately 20 basis points over the course
of 2015, impacting each of the three business segments. Property and casualty segment written premium is anticipated to increase,
primarily as a result of planned rate actions but also reflecting continued growth in automobile new business. In addition to automobile
and property rate actions and an assumption of a more modest level of favorable prior years’ reserve development, the 2015
projection reflects continued underwriting actions, reinsurance cost savings, an assumption that non-catastrophe weather-related
losses will be lower than in 2014 and an anticipated expense ratio that is comparable to 2014, despite continued infrastructure
and technology initiatives. Excluding the impact of the unlocking of deferred policy acquisition costs, 2015 annuity segment net
income is anticipated to be slightly lower than full year 2014, as growth in assets under management and the anticipated positive
spread contribution of new business are expected to nearly offset the anticipated decline in the overall net interest spread. For
the life segment, net income is anticipated to be modestly lower than 2014 with the assumptions that mortality will be consistent
with modeled levels, net investment income will experience pressure as a result of reinvestment rate assumptions and expenses will
increase $1 million to $2 million related to the Company’s multi-year infrastructure and technology investments.
As described in “Critical
Accounting Policies”, certain of the Company’s significant accounting measurements require the use of estimates and
assumptions. As additional information becomes available, adjustments may be required. Those adjustments are charged or credited
to income for the period in which the adjustments are made and may impact actual results compared to management’s estimate
above. Additionally, see “Forward-looking Information” in this Quarterly Report on Form 10-Q and “Item 1A. Risk
Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 concerning other important
factors that could impact actual results. Management believes that a projection of net income including realized investment gains
and losses is not appropriate on a forward-looking basis because it is not possible to provide a valid forecast of realized investment
gains and losses, which can vary substantially from one period to another and may have a significant impact on net income.
Liquidity and Financial Resources
Off-Balance Sheet Arrangements
At March 31, 2015 and 2014,
the Company did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred
to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance
sheet arrangements or for other contractually narrow or limited purposes. As such, the Company is not exposed to any financing,
liquidity, market or credit risk that could arise if the Company had engaged in such relationships.
Investments
Information regarding the
Company’s investment portfolio, which is comprised primarily of investment grade, fixed income securities, is located in
“Results of Operations — Net Realized Investment Gains and Losses” and in the “Notes to Consolidated Financial
Statements — Note 2 — Investments”.
Cash Flow
The short-term liquidity
requirements of the Company, within a 12 month operating cycle, are for the timely payment of claims and benefits to policyholders,
operating expenses, interest payments and federal income taxes. Cash flow generated from operations has been, and is expected to
be, adequate to meet the Company’s operating cash needs in the next 12 months. Cash flow in excess of operational needs has
been used to fund business growth, retire short-term debt, pay dividends to shareholders and repurchase shares of HMEC’s
common stock. Long-term liquidity requirements, beyond one year, are principally for the payment of future insurance and annuity
policy claims and benefits, as well as retirement of long-term debt.
Operating Activities
As a holding company, HMEC
conducts its principal operations in the personal lines segment of the property and casualty and life insurance industries through
its subsidiaries. HMEC’s insurance subsidiaries generate cash flow from premium and investment income, generally well in
excess of their immediate needs for policy obligations, operating expenses and other cash requirements. Cash provided by operating
activities primarily reflects net cash generated by the insurance subsidiaries. For the first three months of 2015, net cash provided
by operating activities increased compared to the same period in 2014, largely due to an increase in investment income received
in the current period.
Payment of principal and
interest on debt, dividends to shareholders and parent company operating expenses is largely dependent on the ability of the insurance
subsidiaries to pay cash dividends or make other cash payments to HMEC, including tax payments pursuant to tax sharing agreements.
Payments for share repurchase programs also have this dependency. If necessary, HMEC also has other potential sources of liquidity
that could provide for additional funding to meet corporate obligations or pay shareholder dividends, which include a revolving
line of credit, as well as issuances of various securities. The insurance subsidiaries are subject to various regulatory restrictions
which limit the amount of annual dividends or other distributions, including loans or cash advances, available to HMEC without
prior approval of the insurance regulatory authorities. The aggregate amount of dividends that may be paid in 2015 from all of
HMEC’s insurance subsidiaries without prior regulatory approval is approximately $90 million, of which $13 million was paid
during the three months ended March 31, 2015. Although regulatory restrictions exist, dividend availability from subsidiaries has
been, and is expected to be, adequate for HMEC’s capital needs. Additional information is contained in “Notes to Consolidated
Financial Statements — Note 8 — Statutory Information and Restrictions” of the Company’s Annual Report
on Form 10-K for the year ended December 31, 2014.
Investing Activities
HMEC’s insurance
subsidiaries maintain significant investments in fixed maturity securities to meet future contractual obligations to policyholders.
In conjunction with its management of liquidity and other asset/liability management objectives, the Company, from time to time,
will sell fixed maturity securities prior to maturity, as well as equity securities, and reinvest the proceeds in other investments
with different interest rates, maturities or credit characteristics. Accordingly, the Company has classified the entire fixed maturity
securities and equity securities portfolios as “available for sale”.
Financing Activities
Financing activities include
primarily payment of dividends, the receipt and withdrawal of funds by annuity contractholders, issuances and repurchases of HMEC’s
common stock, fluctuations in bank overdraft balances, and borrowings, repayments and repurchases related to its debt facilities.
The Company’s annuity
business produced net positive cash flows in the first three months of 2015. For the three months ended March 31, 2015, receipts
from annuity contracts increased $41.7 million, or 41.6%, compared to the same period in the prior year, as described in “Results
of Operations — Insurance Premiums and Contract Charges”. In total, annuity contract benefits, withdrawals and net
of transfers from variable annuity accumulated cash values increased $12.7 million, or 16.1%, compared to the prior year.
Capital Resources
The Company has determined
the amount of capital which is needed to adequately fund and support business growth, primarily based on risk-based capital formulas
including those developed by the National Association of Insurance Commissioners (the “NAIC”). Historically, the Company’s
insurance subsidiaries have generated capital in excess of such needed capital. These excess amounts have been paid to HMEC through
dividends. HMEC has then utilized these dividends and its access to the capital markets to service and retire long-term debt, pay
dividends to its shareholders, fund growth initiatives, repurchase shares of its common stock and for other corporate purposes.
Management anticipates that the Company’s sources of capital will continue to generate sufficient capital to meet the needs
for business growth, debt interest payments, shareholder dividends and its share repurchase program. Additional information is
contained in “Notes to Consolidated Financial Statements — Note 8 — Statutory Information and Restrictions”
of the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.
The total capital of the
Company was $1,647.8 million at March 31, 2015, including $200.0 million of long-term debt, current and non-current, and $38.0
million of short-term debt outstanding. Total debt represented 18.1% of total capital excluding unrealized investment gains and
losses (14.4% including unrealized investment gains and losses) at March 31, 2015, which was below the Company’s long-term
target of 25%.
Shareholders’ equity
was $1,409.8 million at March 31, 2015, including a net unrealized gain in the Company’s investment portfolio of $335.1 million
after taxes and the related impact of deferred policy acquisition costs associated with annuity and interest-sensitive life policies.
The market value of the Company’s common stock and the market value per share were $1,406.4 million and $34.20, respectively,
at March 31, 2015. Book value per share was $34.28 at March 31, 2015 ($26.13 excluding investment fair value adjustments).
Additional information
regarding the net unrealized gain in the Company’s investment portfolio at March 31, 2015 is included in “Results of
Operations — Net Realized Investment Gains and Losses”.
Total shareholder dividends
were $10.7 million for the three months ended March 31, 2015. In March 2015, the Board of Directors announced regular quarterly
dividends of $0.25 per share.
During the first three
months of 2015, the Company repurchased 23,500 shares of its common stock, or less than 0.1 percent of the outstanding shares on
December 31, 2014, at an aggregate cost of $0.7 million, or an average price per share of $30.44 under its $50.0 million share
repurchase program, which is further described in “Notes to Consolidated Financial Statements — Note 6 — Shareholders’
Equity and Common Stock Equivalents” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.
The repurchase of shares was financed through use of cash. As of March 31, 2015, $22.2 million remained authorized for future share
repurchases.
As of March 31, 2015, the
Company had outstanding $75.0 million aggregate principal amount of 6.05% Senior Notes (“Senior Notes due 2015”), which
will mature on June 15, 2015, issued at a discount resulting in an effective yield of 6.098%. Interest on the Senior Notes due
2015 is payable semi-annually at a rate of 6.05%. In addition to its access to the capital markets to refinance this indebtedness,
as disclosed below, the Company’s Bank Credit Facility had unused capacity as of March 31, 2015. Detailed information regarding
the redemption terms of the Senior Notes due 2015 is contained in the “Notes to Consolidated Financial Statements —
Note 5 — Debt” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2014. The Senior Notes
due 2015 are traded in the open market (HMN 6.05).
As of March 31, 2015, the
Company had outstanding $125.0 million aggregate principal amount of 6.85% Senior Notes (“Senior Notes due 2016”),
which will mature on April 15, 2016, issued at a discount resulting in an effective yield of 6.893%. Interest on the Senior Notes
due 2016 is payable semi-annually at a rate of 6.85%. Detailed information regarding the redemption terms of the Senior Notes due
2016 is contained in the “Notes to Consolidated Financial Statements — Note 5 — Debt” of the Company’s
Annual Report on Form 10-K for the year ended December 31, 2014. The Senior Notes due 2016 are traded in the open market (HMN 6.85).
As of March 31, 2015, the
Company had $38.0 million outstanding under its Bank Credit Facility. The Bank Credit Facility provides for unsecured borrowings
of up to $150.0 million and expires on July 30, 2019. Interest accrues at varying spreads relative to prime or Eurodollar base
rates and is payable monthly or quarterly depending on the applicable base rate (Eurodollar base rate plus 1.15%, which totaled
1.33%, as of March 31, 2015). The unused portion of the Bank Credit Facility is subject to a variable commitment fee, which was
0.15% on an annual basis at March 31, 2015. During the three months ended March 31, 2015, there was no change in the amount outstanding
under the Company’s Bank Credit Facility.
To provide additional capital
management flexibility, the Company filed a “universal shelf” registration on Form S-3 with the SEC on March 12, 2015.
The registration statement, which registers 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 declared effective on March 12, 2015. Unless withdrawn by the Company earlier,
this registration statement will remain effective through March 12, 2018. No securities associated with the registration statement
have been issued as of the date of this Quarterly Report on Form 10-Q. In addition to this Form S-3 entry to the capital markets,
HMEC met the requirements of a “well-known seasoned issuer”, as defined by the SEC, as of December 31, 2014.
Financial
Ratings
HMEC’s principal
insurance subsidiaries are rated by S&P, Moody’s, A.M. Best Company, Inc. (“A.M. Best”) and Fitch Ratings,
Inc. (“Fitch”). These rating agencies have also assigned ratings to the Company’s long-term debt securities.
The ratings that are assigned by these agencies, which are subject to change, can impact, among other things, the Company’s
access to sources of capital, cost of capital, and competitive position.
Assigned ratings as of
April 30, 2015 were unchanged from the disclosure in the Company’s Annual Report on Form 10-K for the year ended December
31, 2014. In February 2015, A.M. Best affirmed the ratings and ratings outlook as shown below, after having revised the ratings
outlook for the Company’s property and casualty insurance subsidiaries to “positive” from “stable”
in February 2014. Assigned ratings were as follows (unless otherwise indicated, the insurance financial strength ratings for the
Company’s property and casualty insurance subsidiaries and the Company’s principal life insurance subsidiary are the
same):
|
Insurance Financial
Strength Ratings
(Outlook) |
|
Debt Ratings
(Outlook) |
|
As of April 30, 2015 |
|
|
|
|
|
|
S&P |
A |
(stable) |
|
BBB |
(stable) |
|
Moody’s |
A3 |
(stable) |
|
Baa3 |
(stable) |
|
A.M. Best |
|
|
|
|
|
|
Horace Mann Life Insurance Company |
A |
(stable) |
|
N.A. |
|
|
HMEC’s property and casualty subsidiaries |
A- |
(positive) |
|
N.A. |
|
|
HMEC |
N.A. |
|
|
bbb
|
(stable) |
|
Fitch |
A |
(stable) |
|
BBB |
(stable) |
|
N.A. –
Not applicable.
Reinsurance Programs
Information regarding the
reinsurance program for the Company’s property and casualty segment is located in “Business — Property and Casualty
Segment — Property and Casualty Reinsurance” of the Company’s Annual Report on Form 10-K for the year ended December
31, 2014. All components of the Company’s property and casualty reinsurance program remain consistent with the Form 10-K
disclosure, with the exception of the Florida Hurricane and Catastrophe Fund (“FHCF”) coverage. Subsequent to the March
2, 2015 SEC filing of the Company’s recent Form 10-K, information received from the FHCF indicated that the Company’s
maximum for the 2014-2015 contract period had been revised to $15.0 million from $15.1 million, based on the FHCF’s financial
resources, with no change in the retention, for the Company’s predominant insurance subsidiary for property and casualty
business written in Florida. The FHCF contract is a one-year contract, which began on June 1, 2014.
Information regarding the
reinsurance program for the Company’s life segment is located in “Business — Life Segment” of the Company’s
Annual Report on Form 10-K for the year ended December 31, 2014.
Market Value Risk
Market value risk, the
Company’s primary market risk exposure, is the risk that the Company’s invested assets will decrease in value. This
decrease in value may be due to (1) a change in the yields realized on the Company’s assets and prevailing market yields
for similar assets, (2) an unfavorable change in the liquidity of the investment, (3) an unfavorable change in the financial prospects
of the issuer of the investment, or (4) a downgrade in the credit rating of the issuer of the investment. See also “Results
of Operations — Net Realized Investment Gains and Losses”.
Significant changes in
interest rates expose the Company to the risk of experiencing losses or earning a reduced level of income based on the difference
between the interest rates earned on the Company’s investments and the credited interest rates on the Company’s insurance
liabilities. See also “Results of Operations — Interest Credited to Policyholders”.
The Company seeks to manage
its market value risk by coordinating the projected cash inflows of assets with the projected cash outflows of liabilities. For
all its assets and liabilities, the Company seeks to maintain reasonable durations, consistent with the maximization of income
without sacrificing investment quality, while providing for liquidity and diversification. The investment risk associated with
variable annuity deposits and the underlying mutual funds is assumed by those contractholders, and not by the Company. Certain
fees that the Company earns from variable annuity deposits are based on the market value of the funds deposited.
More detailed descriptions
of the Company’s exposure to market value risks and the management of those risks is presented in “Management’s
Discussion and Analysis of Financial Condition and Results of Operations — Market Value Risk” of the Company’s
Annual Report on Form 10-K for the year ended December 31, 2014.
Recent Accounting Changes
Debt Issuance Costs
In April 2015, the Financial
Accounting Standards Board (“FASB”) issued accounting guidance which requires debt issuance costs to be presented in
the balance sheet as a direct deduction from the carrying value of the associated debt liability, consistent with the presentation
of a debt discount. The guidance does not affect the recognition and measurement of debt issuance costs and it is intended to reduce
complexity for financial statement preparers. The guidance is effective for annual reporting periods beginning after December 15,
2015, including interim periods within those years, and requires retrospective application. Early application is permitted. Management
believes the adoption of this accounting guidance will not have a material effect on the results of operations or financial position
of the Company.
Revenue Recognition
In May 2014, the FASB issued
accounting guidance to provide a single comprehensive model in accounting for revenue arising from contracts with customers. The
guidance applies to all contracts with customers; however, insurance contracts are specifically excluded. The guidance is effective
for annual reporting periods beginning after December 15, 2016, including interim periods within those years. Early application
is not permitted. Management believes the adoption of this accounting guidance will not have a material effect on the results of
operations or financial position of the Company.
| Item 3: | Quantitative and Qualitative Disclosures About Market
Risk |
The information required
by Item 305 of Regulation S-K is contained in “Management’s Discussion and Analysis of Financial Condition and Results
of Operations — Market Value Risk” contained in this Quarterly Report on Form 10-Q.
| Item 4: | Controls and Procedures |
Management’s Conclusion Regarding the
Effectiveness of Disclosure Controls and Procedures
Under the supervision and
with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial
Officer, the Company conducted an evaluation of the effectiveness of the design and operation of the Company’s disclosure
controls and procedures, as such term is defined in Rule 13a-15(e) of the Securities Exchange Act of 1934 as amended (the “Exchange
Act”), as of March 31, 2015 pursuant to Rule 13a-15(b) of the Exchange Act. Based on this evaluation, the Chief Executive
Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in timely
alerting them to material information relating to the Company (including its consolidated subsidiaries) that is required to be
included in the Company’s periodic Securities and Exchange Commission filings. No material weaknesses in the Company’s
disclosure controls and procedures were identified in the evaluation and therefore, no corrective actions were taken. There were
no significant changes in the Company’s internal controls or in other factors that could significantly affect these controls
subsequent to the date of their evaluation.
Changes in Internal Control Over Financial Reporting
There were no changes in
the Company’s internal control over financial reporting that occurred during the Company’s last fiscal quarter that
have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II: OTHER INFORMATION
Item 1A: Risk Factors
At the time of this Quarterly
Report on Form 10-Q, management believes there are no material changes from the risk factors as previously disclosed in the Company’s
Annual Report on Form 10-K for the year ended December 31, 2014.
| Item 2: | Unregistered Sales of Equity Securities and Use of
Proceeds |
Issuer Purchases of Equity Securities
As previously disclosed
in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011, on December 7, 2011 the Company’s
Board of Directors authorized a share repurchase program allowing repurchases of up to $50.0 million of Horace Mann Educators Corporation’s
Common Stock, par value $0.001. The share repurchase program authorizes the opportunistic repurchase of common shares in open market
or privately negotiated transactions, from time to time, depending on market conditions. The share repurchase program does not
have an expiration date and may be limited or terminated at any time without notice. During the three months ended March 31, 2015,
the Company repurchased shares of HMEC common stock as follows:
Issuer Purchases of Equity Securities
Period | |
Total Number
of Shares Purchased | |
Average Price Paid
Per Share | |
Total Number of
Shares Purchased as Part of Publicly
Announced Plans or Programs | |
Maximum Number
(or Approximate Dollar Value) of Shares
That May Yet Be Purchased Under The
Plans or Programs |
| |
| |
| |
| |
|
January 1 - 31 | |
| 22,000 | | |
| $30.44 | | |
| 22,000 | | |
| $22.3 million | |
February 1 - 28 | |
| 1,500 | | |
| $30.49 | | |
| 1,500 | | |
| $22.2 million | |
March 1 - 31 | |
| - | | |
| - | | |
| - | | |
| $22.2 million | |
Total | |
| 23,500 | | |
| $30.44 | | |
| 23,500 | | |
| $22.2 million | |
The Company is not aware
of any information required to be disclosed in a report on Form 8-K during the three months ended March 31, 2015 which has not
been filed with the SEC.
The following items are
filed as Exhibits. Management contracts and compensatory plans are indicated by an asterisk (*).
| (3) | Articles of incorporation and bylaws: |
| 3.1 | Restated Certificate of Incorporation of HMEC, filed with the Delaware Secretary of State on June
24, 2003, incorporated by reference to Exhibit 3.1 to HMEC's Quarterly Report on Form 10-Q for the quarter ended June 30, 2003,
filed with the Securities and Exchange Commission (the “SEC”) on August 14, 2003. |
| 3.2 | Form of Certificate for shares of Common Stock, $0.001 par value per share, of HMEC, incorporated
by reference to Exhibit 4.5 to HMEC's Registration Statement on Form S-3 (Registration No. 33-53118) filed with the SEC on October
9, 1992. |
| 3.3 | Bylaws of HMEC, incorporated by reference to Exhibit 3.2 to HMEC’s Quarterly Report on Form
10-Q for the quarter ended June 30, 2003, filed with the SEC on August 14, 2003. |
| (4) | Instruments defining the rights of security holders,
including indentures: |
| 4.1 | Indenture, dated as of June 9, 2005, between HMEC and The Bank of New York Mellon Trust Company,
N.A., as trustee (formerly JPMorgan Chase Bank, N.A. was trustee), incorporated by reference to Exhibit 4.1 to HMEC's Current Report
on Form 8-K dated June 6, 2005, filed with the SEC on June 9, 2005. |
| 4.1(a) | First Supplemental Indenture, dated as of June 9, 2005, between HMEC and The Bank of New York Mellon
Trust Company, N.A., as trustee (formerly JPMorgan Chase Bank, N.A. was trustee), incorporated by reference to Exhibit 4.2 to HMEC’s
Current Report on Form 8-K dated June 6, 2005, filed with the SEC on June 9, 2005. |
| 4.1(b) | Form of HMEC 6.05% Senior Notes due 2015 (included in Exhibit 4.1(a)). |
| 4.1(c) | Second Supplemental Indenture, dated as of April 21, 2006, between HMEC and The Bank of New York
Mellon Trust Company, N.A., as trustee (formerly JPMorgan Chase Bank, N.A. was trustee), incorporated by reference to Exhibit 4.3
to HMEC’s Current Report on Form 8-K dated April 18, 2006, filed with the SEC on April 21, 2006. |
| 4.1(d) | Form of HMEC 6.85% Senior Notes due April 15, 2016 (included in Exhibit 4.1(c)). |
| 4.2 | Certificate of Designations for HMEC Series A Cumulative Convertible Preferred Stock, incorporated
by reference to Exhibit 4.3 to HMEC’s Annual Report on Form 10-K for the year ended December 31, 2005, filed with the SEC
on March 16, 2006. |
| 10.1 | Amended and Restated Credit Agreement dated as of July 30, 2014 among HMEC, certain financial institutions
named therein and JPMorgan Chase Bank, N.A., as administrative agent, incorporated by reference to Exhibit 10.1 to HMEC's Quarterly
Report on Form 10-Q for the quarter ended June 30, 2014, filed with the SEC on August 8, 2014. |
| 10.2* | Horace Mann Educators Corporation Amended and Restated 2002 Incentive Compensation Plan (“2002
Incentive Compensation Plan”), incorporated by reference to Exhibit 10.2 to HMEC's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2005, filed with the SEC on August 9, 2005. |
| 10.2(a)* | Revised Specimen Employee Stock Option Agreement under the 2002 Incentive Compensation Plan, incorporated
by reference to Exhibit 10.6(b) to HMEC’s Annual Report on Form 10-K for the year ended December 31, 2008, filed with the
SEC on March 2, 2009. |
| 10.2(b)* | Specimen Employee Restricted Stock Unit Agreement under the 2002 Incentive Compensation Plan, incorporated
by reference to Exhibit 10.6(d) to HMEC’s Annual Report on Form 10-K for the year ended December 31, 2005, filed with the
SEC on March 16, 2006. |
| 10.2(c)* | Revised Specimen Employee Restricted Stock Unit Agreement under the 2002 Incentive Compensation
Plan, incorporated by reference to Exhibit 10.6(f) to HMEC’s Annual Report on Form 10-K for the year ended December 31, 2008,
filed with the SEC on March 2, 2009. |
| 10.2(d)* | Specimen Non-employee Director Restricted Stock Unit Agreement under the 2002 Incentive Compensation
Plan, incorporated by reference to Exhibit 10.6(e) to HMEC’s Annual Report on Form 10-K for the year ended December 31, 2005,
filed with the SEC on March 16, 2006. |
| 10.2(e)* | Revised Specimen Non-employee Director Restricted Stock Unit Agreement under the 2002 Incentive
Compensation Plan, incorporated by reference to Exhibit 10.6(h) to HMEC’s Annual Report on Form 10-K for the year ended December
31, 2008, filed with the SEC on March 2, 2009. |
| 10.3* | HMEC 2010 Comprehensive Executive Compensation Plan, incorporated by reference to Exhibit 1 (beginning
on page E-1) to HMEC’s Proxy Statement, filed with the SEC on April 9, 2010. |
| 10.3(a)* | Amendment No. 1 to the HMEC 2010 Comprehensive Executive Compensation Plan, incorporated by reference
to Exhibit 1 (beginning on page E-1) to HMEC’s Proxy Statement, filed with the SEC on April 9, 2012. |
| 10.3(b)* | Specimen Incentive Stock Option Agreement for Section 16 Officers under the HMEC 2010 Comprehensive
Executive Compensation Plan, incorporated by reference to Exhibit 10.7(a) to HMEC's Quarterly Report on Form 10-Q for the quarter
ended June 30, 2011, filed with the SEC on August 9, 2011. |
| 10.3(c)* | Specimen Incentive Stock Option Agreement for Non-Section 16 Officers under the HMEC 2010 Comprehensive
Executive Compensation Plan, incorporated by reference to Exhibit 10.7(b) to HMEC's Quarterly Report on Form 10-Q for the quarter
ended June 30, 2011, filed with the SEC on August 9, 2011. |
| 10.3(d)* | Specimen Employee Service-Vested Restricted Stock Units Agreement under the HMEC 2010 Comprehensive
Executive Compensation Plan, incorporated by reference to Exhibit 10.7(c) to HMEC's Quarterly Report on Form 10-Q for the quarter
ended June 30, 2011, filed with the SEC on August 9, 2011. |
| 10.3(e)* | Specimen Employee Performance-Based Restricted Stock Units Agreement under the HMEC 2010 Comprehensive
Executive Compensation Plan, incorporated by reference to Exhibit 10.7(d) to HMEC's Quarterly Report on Form 10-Q for the quarter
ended June 30, 2011, filed with the SEC on August 9, 2011. |
| 10.3(f)* | Specimen Non-Employee Director Restricted Stock Unit Agreement under the HMEC 2010 Comprehensive
Executive Compensation Plan, incorporated by reference to Exhibit 10.17(a) to HMEC’s Current Report on Form 8-K dated May
27, 2010, filed with the SEC on June 2, 2010. |
| 10.4* | Horace Mann Supplemental Employee Retirement Plan, 2002 Restatement, incorporated by reference
to Exhibit 10.1 to HMEC's Quarterly Report on Form 10-Q for the quarter ended March 31, 2002, filed with the SEC on May 15, 2002. |
| 10.5* | Horace Mann Executive Supplemental Employee Retirement Plan, 2002 Restatement, incorporated by
reference to Exhibit 10.2 to HMEC's Quarterly Report on Form 10-Q for the quarter ended March 31, 2002, filed with the SEC on May
15, 2002. |
| 10.6* | Amended and Restated Horace Mann Nonqualified Supplemental Money Purchase Pension Plan, incorporated
by reference to Exhibit 10.9 to HMEC’s Annual Report on Form 10-K for the year ended December 31, 2008, filed with the SEC
on March 2, 2009. |
| 10.7* | Summary of HMEC Non-Employee Director Compensation, incorporated by reference to Exhibit 10.11
to HMEC's Quarterly Report on Form 10-Q for the quarter ended June 30, 2014, filed with the SEC on August 8, 2014. |
| 10.8* | Summary of HMEC Named Executive Officer Annualized Salaries. |
| 10.9* | Form of Severance Agreement between HMEC, Horace Mann Service Corporation (“HMSC”)
and certain officers of HMEC and/or HMSC, incorporated by reference to Exhibit 10.13 to HMEC’s Annual Report on Form 10-K
for the year ended December 31, 2012, filed with the SEC on February 28, 2013. |
| 10.9(a)* | Revised Schedule to Severance Agreements between HMEC, HMSC and certain officers of HMEC and/or
HMSC, incorporated by reference to Exhibit 10.13(a) to HMEC's Quarterly Report on Form 10-Q for the quarter ended June 30, 2014,
filed with the SEC on August 8, 2014. |
| 10.10* | HMSC Executive Change in Control Plan, incorporated by reference to Exhibit 10.15 to HMEC’s
Current Report on Form 8-K dated February 15, 2012, filed with the SEC on February 22, 2012. |
| 10.10(a)* | HMSC Executive Change in Control Plan Schedule A Plan Participants. |
| 10.11* | HMSC Executive Severance Plan, incorporated by reference to Exhibit 10.16 to HMEC’s Current
Report on Form 8-K dated March 7, 2012, filed with the SEC on March 13, 2012. |
| 10.11(a)* | First Amendment to the HMSC Executive Severance Plan, incorporated by reference to Exhibit 10.16(a)
to HMEC's Quarterly Report on Form 10-Q for the quarter ended June 30, 2012, filed with the SEC on August 9, 2012. |
| 10.11(b)* | HMSC Executive Severance Plan Schedule A Participants. |
| 10.12* | Letter of Employment between HMSC and Marita Zuraitis effective May 13, 2013, incorporated by reference
to Exhibit 10.18 to HMEC's Quarterly Report on Form 10-Q for the quarter ended June 30, 2013, filed with the SEC on August 8, 2013. |
| (11) | Statement regarding computation of per share earnings. |
| (15) | KPMG LLP letter regarding unaudited interim financial information. |
| (31) | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| 31.1 | Certification by Marita Zuraitis, Chief Executive Officer of HMEC. |
| 31.2 | Certification by Dwayne D. Hallman, Chief Financial Officer of HMEC. |
| (32) | Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| 32.1 | Certification by Marita Zuraitis, Chief Executive Officer of HMEC. |
| 32.2 | Certification by Dwayne D. Hallman, Chief Financial Officer of HMEC. |
| 99.1 | Glossary of Selected Terms. |
| (101) | Interactive Data File |
| 101.INS | XBRL Instance Document |
| 101.SCH | XBRL Taxonomy Extension Schema |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase
|
SIGNATURES
Pursuant to the requirements of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
HORACE MANN EDUCATORS CORPORATION |
|
|
|
(Registrant) |
|
|
|
|
Date |
May 8, 2015 |
|
/s/ Marita Zuraitis |
|
|
|
|
|
|
|
Marita Zuraitis |
|
|
|
President and Chief Executive Officer |
|
|
|
|
Date |
May 8, 2015 |
|
/s/ Dwayne D. Hallman |
|
|
|
|
|
|
|
Dwayne D. Hallman |
|
|
|
Executive Vice President |
|
|
|
and Chief Financial Officer |
|
|
|
|
Date |
May 8, 2015 |
|
/s/ Bret A. Conklin |
|
|
|
|
|
|
|
Bret A. Conklin |
|
|
|
Senior Vice President |
|
|
|
and Controller |
HORACE MANN EDUCATORS CORPORATION
EXHIBITS
To
FORM 10-Q
For the Quarter Ended March 31, 2015
VOLUME 1 OF 1
The following items are
filed as Exhibits to Horace Mann Educators Corporation’s Quarterly Report on Form 10-Q for the quarterly period ended March
31, 2015. Management contracts and compensatory plans are indicated by an asterisk (*).
EXHIBIT INDEX
Exhibit |
|
|
No. |
|
Description |
|
|
|
(3) |
Articles of incorporation and bylaws: |
|
|
|
|
3.1 |
Restated Certificate of Incorporation of HMEC, filed with the Delaware Secretary of State on June 24, 2003, incorporated by reference to Exhibit 3.1 to HMEC's Quarterly Report on Form 10-Q for the quarter ended June 30, 2003, filed with the Securities and Exchange Commission (the “SEC”) on August 14, 2003. |
|
|
|
|
3.2 |
Form of Certificate for shares of Common Stock, $0.001 par value per share, of HMEC, incorporated by reference to Exhibit 4.5 to HMEC's Registration Statement on Form S-3 (Registration No. 33-53118) filed with the SEC on October 9, 1992. |
|
|
|
|
3.3 |
Bylaws of HMEC, incorporated by reference to Exhibit 3.2 to HMEC’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2003, filed with the SEC on August 14, 2003. |
|
|
|
(4) |
Instruments defining the rights of security holders, including indentures: |
|
|
|
|
4.1 |
Indenture, dated as of June 9, 2005, between HMEC and The Bank of New York Mellon Trust Company, N.A., as trustee (formerly JPMorgan Chase Bank, N.A. was trustee), incorporated by reference to Exhibit 4.1 to HMEC's Current Report on Form 8-K dated June 6, 2005, filed with the SEC on June 9, 2005. |
|
|
|
|
4.1(a) |
First Supplemental Indenture, dated as of June 9, 2005, between HMEC and The Bank of New York Mellon Trust Company, N.A., as trustee (formerly JPMorgan Chase Bank, N.A. was trustee), incorporated by reference to Exhibit 4.2 to HMEC’s Current Report on Form 8-K dated June 6, 2005, filed with the SEC on June 9, 2005. |
|
|
|
|
4.1(b) |
Form of HMEC 6.05% Senior Notes due 2015 (included in Exhibit 4.1(a)). |
|
|
|
|
4.1(c) |
Second Supplemental Indenture, dated as of April 21, 2006, between HMEC and The Bank of New York Mellon Trust Company, N.A., as trustee (formerly JPMorgan Chase Bank, N.A. was trustee), incorporated by reference to Exhibit 4.3 to HMEC’s Current Report on Form 8-K dated April 18, 2006, filed with the SEC on April 21, 2006. |
|
|
|
|
4.1(d) |
Form of HMEC 6.85% Senior Notes due April 15, 2016 (included in Exhibit 4.1(c)). |
Exhibit |
|
|
No. |
|
Description |
|
|
|
|
4.2 |
Certificate of Designations for HMEC Series A Cumulative Convertible Preferred Stock, incorporated by reference to Exhibit 4.3 to HMEC’s Annual Report on Form 10-K for the year ended December 31, 2005, filed with the SEC on March 16, 2006. |
|
|
|
(10) |
Material contracts: |
|
|
|
|
10.1 |
Amended and Restated Credit Agreement dated as of July 30, 2014 among HMEC, certain financial institutions named therein and JPMorgan Chase Bank, N.A., as administrative agent, incorporated by reference to Exhibit 10.1 to HMEC's Quarterly Report on Form 10-Q for the quarter ended June 30, 2014, filed with the SEC on August 8, 2014. |
|
|
|
|
10.2* |
Horace Mann Educators Corporation Amended and Restated 2002 Incentive Compensation Plan (“2002 Incentive Compensation Plan”), incorporated by reference to Exhibit 10.2 to HMEC's Quarterly Report on Form 10-Q for the quarter ended June 30, 2005, filed with the SEC on August 9, 2005. |
|
|
|
|
10.2(a)* |
Revised Specimen Employee Stock Option Agreement under the 2002 Incentive Compensation Plan, incorporated by reference to Exhibit 10.6(b) to HMEC’s Annual Report on Form 10-K for the year ended December 31, 2008, filed with the SEC on March 2, 2009. |
|
|
|
|
10.2(b)* |
Specimen Employee Restricted Stock Unit Agreement under the 2002 Incentive Compensation Plan, incorporated by reference to Exhibit 10.6(d) to HMEC’s Annual Report on Form 10-K for the year ended December 31, 2005, filed with the SEC on March 16, 2006. |
|
|
|
|
10.2(c)* |
Revised Specimen Employee Restricted Stock Unit Agreement under the 2002 Incentive Compensation Plan, incorporated by reference to Exhibit 10.6(f) to HMEC’s Annual Report on Form 10-K for the year ended December 31, 2008, filed with the SEC on March 2, 2009. |
|
|
|
|
10.2(d)* |
Specimen Non-employee Director Restricted Stock Unit Agreement under the 2002 Incentive Compensation Plan, incorporated by reference to Exhibit 10.6(e) to HMEC’s Annual Report on Form 10-K for the year ended December 31, 2005, filed with the SEC on March 16, 2006. |
|
|
|
|
10.2(e)* |
Revised Specimen Non-employee Director Restricted Stock Unit Agreement under the 2002 Incentive Compensation Plan, incorporated by reference to Exhibit 10.6(h) to HMEC’s Annual Report on Form 10-K for the year ended December 31, 2008, filed with the SEC on March 2, 2009. |
|
|
|
|
10.3* |
HMEC 2010 Comprehensive Executive Compensation Plan, incorporated by reference to Exhibit 1 (beginning on page E-1) to HMEC’s Proxy Statement, filed with the SEC on April 9, 2010. |
Exhibit |
|
|
No. |
|
Description |
|
|
|
|
10.3(a)* |
Amendment No. 1 to the HMEC 2010 Comprehensive Executive Compensation Plan, incorporated by reference to Exhibit 1 (beginning on page E-1) to HMEC’s Proxy Statement, filed with the SEC on April 9, 2012. |
|
|
|
|
10.3(b)* |
Specimen Incentive Stock Option Agreement for Section 16 Officers under the HMEC 2010 Comprehensive Executive Compensation Plan, incorporated by reference to Exhibit 10.7(a) to HMEC's Quarterly Report on Form 10-Q for the quarter ended June 30, 2011, filed with the SEC on August 9, 2011. |
|
|
|
|
10.3(c)* |
Specimen Incentive Stock Option Agreement for Non-Section 16 Officers under the HMEC 2010 Comprehensive Executive Compensation Plan, incorporated by reference to Exhibit 10.7(b) to HMEC's Quarterly Report on Form 10-Q for the quarter ended June 30, 2011, filed with the SEC on August 9, 2011. |
|
|
|
|
10.3(d)* |
Specimen Employee Service-Vested Restricted Stock Units Agreement under the HMEC 2010 Comprehensive Executive Compensation Plan, incorporated by reference to Exhibit 10.7(c) to HMEC's Quarterly Report on Form 10-Q for the quarter ended June 30, 2011, filed with the SEC on August 9, 2011. |
|
|
|
|
10.3(e)* |
Specimen Employee Performance-Based Restricted Stock Units Agreement under the HMEC 2010 Comprehensive Executive Compensation Plan, incorporated by reference to Exhibit 10.7(d) to HMEC's Quarterly Report on Form 10-Q for the quarter ended June 30, 2011, filed with the SEC on August 9, 2011. |
|
|
|
|
10.3(f)* |
Specimen Non-Employee Director Restricted Stock Unit Agreement under the HMEC 2010 Comprehensive Executive Compensation Plan, incorporated by reference to Exhibit 10.17(a) to HMEC’s Current Report on Form 8-K dated May 27, 2010, filed with the SEC on June 2, 2010. |
|
|
|
|
10.4* |
Horace Mann Supplemental Employee Retirement Plan, 2002 Restatement, incorporated by reference to Exhibit 10.1 to HMEC's Quarterly Report on Form 10-Q for the quarter ended March 31, 2002, filed with the SEC on May 15, 2002. |
|
|
|
|
10.5* |
Horace Mann Executive Supplemental Employee Retirement Plan, 2002 Restatement, incorporated by reference to Exhibit 10.2 to HMEC's Quarterly Report on Form 10-Q for the quarter ended March 31, 2002, filed with the SEC on May 15, 2002. |
|
|
|
|
10.6* |
Amended and Restated Horace Mann Nonqualified Supplemental Money Purchase Pension Plan, incorporated by reference to Exhibit 10.9 to HMEC’s Annual Report on Form 10-K for the year ended December 31, 2008, filed with the SEC on March 2, 2009. |
Exhibit |
|
|
No. |
|
Description |
|
|
|
|
10.7* |
Summary of HMEC Non-Employee Director Compensation, incorporated by reference to Exhibit 10.11 to HMEC's Quarterly Report on Form 10-Q for the quarter ended June 30, 2014, filed with the SEC on August 8, 2014. |
|
|
|
|
10.8* |
Summary of HMEC Named Executive Officer Annualized Salaries. |
|
|
|
|
10.9* |
Form of Severance Agreement between HMEC, Horace Mann Service Corporation (“HMSC”) and certain officers of HMEC and/or HMSC, incorporated by reference to Exhibit 10.13 to HMEC’s Annual Report on Form 10-K for the year ended December 31, 2012, filed with the SEC on February 28, 2013. |
|
|
|
|
10.9(a)* |
Revised Schedule to Severance Agreements between HMEC, HMSC and certain officers of HMEC and/or HMSC, incorporated by reference to Exhibit 10.13(a) to HMEC's Quarterly Report on Form 10-Q for the quarter ended June 30, 2014, filed with the SEC on August 8, 2014. |
|
|
|
|
10.10* |
HMSC Executive Change in Control Plan, incorporated by reference to Exhibit 10.15 to HMEC’s Current Report on Form 8-K dated February 15, 2012, filed with the SEC on February 22, 2012. |
|
|
|
|
10.10(a)* |
HMSC Executive Change in Control Plan Schedule A Plan Participants. |
|
|
|
|
10.11* |
HMSC Executive Severance Plan, incorporated by reference to Exhibit 10.16 to HMEC’s Current Report on Form 8-K dated March 7, 2012, filed with the SEC on March 13, 2012. |
|
|
|
|
10.11(a)* |
First Amendment to the HMSC Executive Severance Plan, incorporated by reference to Exhibit 10.16(a) to HMEC's Quarterly Report on Form 10-Q for the quarter ended June 30, 2012, filed with the SEC on August 9, 2012. |
|
|
|
|
10.11(b)* |
HMSC Executive Severance Plan Schedule A Participants. |
|
|
|
|
10.12* |
Letter of Employment between HMSC and Marita Zuraitis effective May 13, 2013, incorporated by reference to Exhibit 10.18 to HMEC's Quarterly Report on Form 10-Q for the quarter ended June 30, 2013, filed with the SEC on August 8, 2013. |
(11) |
Statement regarding computation of per share earnings. |
|
|
(15) |
KPMG LLP letter regarding unaudited interim financial information. |
|
|
(31) |
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
31.1 |
Certification by Marita Zuraitis, Chief Executive Officer of HMEC. |
|
|
|
|
31.2 |
Certification by Dwayne D. Hallman, Chief Financial Officer of HMEC. |
Exhibit |
|
|
No. |
|
Description |
|
|
|
(32) |
Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
|
32.1 |
Certification by Marita Zuraitis, Chief Executive Officer of HMEC. |
|
|
|
|
32.2 |
Certification by Dwayne D. Hallman, Chief Financial Officer of HMEC. |
|
|
|
(99) |
Additional exhibits |
|
|
|
|
99.1 |
Glossary of Selected Terms. |
|
|
|
(101) |
Interactive Data File |
|
|
|
|
101.INS |
XBRL Instance Document |
|
|
|
|
101.SCH |
XBRL Taxonomy Extension Schema |
|
|
|
|
101.CAL |
XBRL Taxonomy Extension Calculation Linkbase |
|
|
|
|
101.DEF |
XBRL Taxonomy Extension Definition Linkbase |
|
|
|
|
101.LAB |
XBRL Taxonomy Extension Label Linkbase |
|
|
|
|
101.PRE |
XBRL Taxonomy Extension Presentation Linkbase |
Exhibit 10.8
Summary of Horace Mann Educators Corporation
Named Executive Officer Annualized Salaries
The table below summarizes
the annualized salaries of Horace Mann Educators Corporation's (the "Company") Chief Executive Officer, the Chief Financial
Officer and the other three highest compensated Executive Officers, as defined in the Company's Proxy Statement for the 2015 Annual
Meeting of Shareholders (collectively the "Named Executive Officers"). These salaries may be changed at any time at the
discretion of the Compensation Committee and/or Board of Directors of the Company. These are base salaries and do not include short-term
and long-term incentive compensation amounts, the Company's contributions to defined contribution plans and the Company's contributions
to other employee benefit programs on behalf of these individuals.
Named Executive Officer |
Annualized Salary |
Marita Zuraitis |
|
President and Chief Executive Officer |
$750,000 |
Dwayne D. Hallman |
|
Executive Vice President and Chief Financial Officer |
$444,000 |
Stephen P. Cardinal |
|
Executive Vice President and Chief Marketing Officer |
$429,000 |
Matthew P. Sharpe |
|
Executive Vice President, Annuity & Life |
$400,000 |
John P. McCarthy |
|
Senior Vice President and Chief Human Resources Officer |
$300,000 |
Last revision date:
March 1, 2015
Exhibit 10.10(a)
HORACE MANN SERVICE CORPORATION
EXECUTIVE CHANGE IN CONTROL PLAN
SCHEDULE A PARTICIPANTS
Note: The effective date of entry shall be subject to Section 4.2(a).
NAME OR TITLE |
EFFECTIVE DATE
OF
PARTICIPATION* |
|
|
TIER I PARTICIPANTS |
President and CEO |
May 16, 2013 |
|
|
TIER II PARTICIPANTS |
EVP and CFO |
** |
EVP and CMO |
December 10, 2014 |
EVP, Annuity, Life, Group |
February 15, 2012 |
|
|
TIER III PARTICIPANTS |
SVP and CHRO |
June 4, 2014 |
* Subject to acceptance within 30 days of effective date of participation
** Subject to Section 4.2(b) of the Plan
Last updated: March 4, 2015
Exhibit 10.11(b)
HORACE MANN
SERVICE CORPORATION
EXECUTIVE
SEVERANCE PLAN
SCHEDULE
A PARTICIPANTS
NAME OR TITLE |
EFFECTIVE DATE
OF
PARTICIPATION* |
|
TIER I PARTICIPANTS |
President and CEO |
September 17, 2013 |
|
|
TIER II PARTICIPANTS |
EVP and CFO |
June 1, 2012** |
EVP and CMO |
June 1, 2012 |
EVP, Annuity, Life, Group |
March 15, 2012 |
|
|
TIER III PARTICIPANTS |
SVP and CHRO |
June 4, 2014 |
* Subject to acceptance within 30 days of the effective date of
participation
** Designates an individual who,
as of the Effective Date of Participation, is covered by a Severance Agreement, as defined in Section 4.3(c)(i) of the Plan.
Last updated: March 4, 2015
Exhibit
11
Horace Mann Educators Corporation
Computation of Net Income per Share (Unaudited)
For the Three Months Ended March 31, 2015
and 2014
(Amounts in thousands, except per share data)
| |
Three Months Ended | |
| |
March
31, | |
| |
2015 |
| | |
2014 | |
| |
|
| | |
| |
Basic: | |
| |
| | |
| | |
| |
| |
| | |
| | |
Net income | |
$ | 34,275 |
| | |
$ | 28,366 | |
Weighted average number of common shares during the period | |
| 41,950 |
| | |
| 41,180 | |
| |
| |
| | |
| | |
Net income per share – basic | |
$ | 0.82 |
| | |
$ | 0.69 | |
| |
| |
| | |
| | |
Diluted: | |
| |
| | |
| | |
| |
| |
| | |
| | |
Net income | |
$ | 34,275 |
| | |
$ | 28,366 | |
Weighted average number of common shares during the period | |
| 41,950 |
| | |
| 41,180 | |
Weighted average number of common equivalent shares to reflect the dilutive effect of common stock equivalent securities: | |
| |
| | |
| | |
Stock options | |
| 144 |
| | |
| 218 | |
Common stock units related to deferred compensation for employees | |
| 58 |
| | |
| 113 | |
Restricted common stock units related to incentive compensation | |
| 148 |
| | |
| 748 | |
Total common and common equivalent shares adjusted to calculate diluted earnings per share | |
| 42,300 |
| | |
| 42,259 | |
| |
| |
| | |
| | |
Net income per share – diluted | |
$ | 0.81 |
| | |
$ | 0.67 | |
Exhibit
15
Horace Mann Educators Corporation
Springfield, Illinois
Re: Registration
Statements on Form S-3 (No. 333-202697) and Form S-8 (No. 33-47066, No. 33-45152, No. 333-16473, No. 333-74686, No. 333-98917,
No. 333-171384 and No. 333-185231)
With respect to the subject registration statements,
we acknowledge our awareness of the use therein of our report dated May 8, 2015 related to our review of interim financial information.
Pursuant to Rule 436 under the Securities Act
of 1933 (the “Act”), such report is not considered part of a registration statement prepared or certified by an independent
registered public accounting firm, or a report prepared or certified by an independent registered public accounting firm within
the meaning of Sections 7 and 11 of the Act.
/s/ KPMG LLP
KPMG LLP
Chicago, Illinois
May 8, 2015
Exhibit 31.1
Chief Executive Officer Certification
pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
I, Marita
Zuraitis, certify that:
1. I have reviewed this Quarterly
Report on Form 10-Q for the period ended March 31, 2015 of Horace Mann Educators Corporation;
2. Based
on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect
to the period covered by this report;
3. Based
on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented
in this report;
4. The
registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange
Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
| a) | Designed such disclosure controls
and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared; |
| b) | Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| c) | Evaluated the effectiveness
of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| d) | Disclosed
in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s
most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal
control over financial reporting; and |
5. The
registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors:
| a) | All significant deficiencies
and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to
adversely affect the registrant’s ability to record, process, summarize and report financial information; and
|
| b) | Any fraud, whether or not
material, that involves management or other employees who have a significant role in the registrant’s internal control over
financial reporting. |
/s/ Marita Zuraitis |
|
Marita Zuraitis, Chief Executive Officer |
|
Horace Mann Educators Corporation |
|
Exhibit 31.2
Chief Financial Officer Certification
pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
I, Dwayne D. Hallman, certify that:
1. I have reviewed this Quarterly
Report on Form 10-Q for the period ended March 31, 2015 of Horace Mann Educators Corporation;
2. Based
on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to
the period covered by this report;
3. Based
on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented
in this report;
4. The
registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange
Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
| a) | Designed such disclosure controls
and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared; |
| b) | Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| c) | Evaluated the effectiveness
of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| d) | Disclosed
in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s
most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal
control over financial reporting; and |
5. The
registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors:
| a) | All significant deficiencies
and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to
adversely affect the registrant’s ability to record, process, summarize and report financial information; and
|
| b) | Any fraud, whether or not
material, that involves management or other employees who have a significant role in the registrant’s internal control over
financial reporting. |
/s/ Dwayne D. Hallman |
|
Dwayne D. Hallman, Chief Financial Officer |
|
Horace Mann Educators Corporation |
|
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF
2002
In connection with the Quarterly Report
of Horace Mann Educators Corporation (the “Company”) on Form 10-Q for the period ended March 31, 2015 as filed with
the Securities and Exchange Commission on the date hereof (the “Report”), I, Marita Zuraitis, Chief Executive Officer
of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
that:
| (1) | The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange
Act of 1934; and |
| (2) | The information contained in the Report fairly presents, in all material respects, the financial
condition and results of operations of the Company. |
/s/ Marita Zuraitis |
|
Marita Zuraitis |
|
Chief Executive Officer |
|
A signed original of this written statement
required by Section 906 has been provided to Horace
Mann Educators Corporation and will be retained
by Horace Mann Educators Corporation
and furnished to the Securities and Exchange
Commission or its staff upon request.
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF
2002
In connection with the Quarterly Report
of Horace Mann Educators Corporation (the “Company”) on Form 10-Q for the period ended March 31, 2015 as filed with
the Securities and Exchange Commission on the date hereof (the “Report”), I, Dwayne D. Hallman, Chief Financial Officer
of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
that:
| (1) | The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange
Act of 1934; and |
| (2) | The information contained in the Report fairly presents, in all material respects, the financial
condition and results of operations of the Company. |
/s/ Dwayne D. Hallman |
|
Dwayne D. Hallman |
|
Chief Financial Officer |
|
A signed original of this written statement
required by Section 906 has been provided to Horace
Mann Educators Corporation and will be retained
by Horace Mann Educators Corporation
and furnished to the Securities and Exchange
Commission or its staff upon request.
Exhibit 99.1
Glossary of Selected Terms
The following measures
are used by the Company's management to evaluate performance against historical results and establish targets on a consolidated
basis. A number of these measures are components of net income or the balance sheet but, in some cases, may be considered non-GAAP
financial measures under applicable SEC rules because they are not displayed as separate line items in the Consolidated Statement
of Operations or Consolidated Balance Sheet, and in some cases, there is inclusion or exclusion of certain items not ordinarily
included or excluded in a GAAP financial measure. In the opinion of the Company's management, a discussion of these measures is
meaningful to provide investors with an understanding of the significant factors that comprise the Company's periodic results of
operations and financial condition.
Agent - A licensed representative
of an insurer in marketing insurance products.
| · | Exclusive Agency - A local Horace
Mann agency created and owned by an independent contractor who has signed an Exclusive Agent agreement with the Company (an “Exclusive
Agent”). That agreement states that only the Company's products and limited additional third-party vendor products authorized
by the Company will be marketed by the agency. An independent contractor may sign multiple Exclusive Agent agreements with the
Company and manage more than one Exclusive Agency. |
| · | Employee Agents - Agents who have
employee status with the Company and by contract market only the Company's products and limited additional third-party vendor products
authorized by the Company. |
| · | Independent Agents - Non-exclusive
independent contractors who are under contract with the Company to market the Company's annuity products but who are not restricted
to writing only the Company's products and products authorized by the Company. |
Book value per share excluding the fair
value adjustment for investments - The result of dividing total shareholders' equity excluding after tax net unrealized gains
and losses on fixed maturities and equity securities, including the related effect on certain deferred policy acquisition costs
and value of acquired insurance in force, by ending shares outstanding. Book value per share is the most directly comparable GAAP
measure. Management believes it is useful to consider the trend in book value per share excluding unrealized net investment gains
and losses in conjunction with book value per share to identify and analyze the change in net worth. Management also believes the
non-GAAP measure is useful to investors because it eliminates the effect of items that can fluctuate significantly from period
to period and are generally driven by economic developments, primarily financial market conditions, the magnitude and timing of
which are generally not influenced by the Company’s underlying insurance operations.
Catastrophe costs - The sum
of catastrophe losses and property and casualty catastrophe reinsurance reinstatement premiums.
Catastrophe losses - In categorizing
property and casualty claims as being from a catastrophe, the Company utilizes the designations of the Property Claim Services,
a subsidiary of Insurance Services Office, Inc., and additionally beginning in 2007, includes losses from all such events that
meet the definition of covered loss in the Company’s primary catastrophe excess of loss reinsurance contract, and reports
loss and loss adjustment expense amounts net of reinsurance recoverables. A catastrophe is a severe loss resulting from natural
and man-made events within a particular territory, including risks such as hurricane, fire, earthquake, windstorm, explosion, terrorism
and other similar events, that causes $25 million or more in insured property and casualty losses for the industry and affects
a significant number of property and casualty insurers and policyholders. Each catastrophe has unique characteristics. Catastrophes
are not predictable as to timing or amount of loss in advance. Their effects are not included in earnings or claim and claim adjustment
expense reserves prior to occurrence. In the opinion of the Company's management, a discussion of the impact of catastrophes is
meaningful for investors to understand the variability in periodic earnings.
Insurance premiums written and contract
deposits - Premiums written represent (1) the amount charged for policies issued during a fiscal period for property and casualty
business, such amounts may be earned and included in financial results over future fiscal periods, and (2) the amount charged for
policies in force during a fiscal period for traditional life and group life business. Amounts are reported net of reinsurance,
unless otherwise specified. Contract deposits include amounts received from customers on deposit-type contracts, such as annuities
and interest-sensitive life policy accounts, including deposit amounts and any related contract or policy fees. Management utilizes
this non-GAAP measure, which is based on statutory accounting principles, in analyzing and evaluating the business growth of its
operating segments. Insurance premiums and contract charges earned is the most directly comparable GAAP measure.
Net Reserves - Property and casualty
unpaid claim and claim expense reserves net of anticipated reinsurance recoverables.
Operating income or Net income
before realized investment gains and losses - Net income adjusted to exclude after tax realized investment gains and losses.
Net income is the most directly comparable GAAP measure. Management believes the measure provides investors with a valuable measure
of the Company’s ongoing performance because it reveals trends in the business that may be obscured by the net effect of
realized investment gains and losses. Realized investment gains and losses may vary significantly between periods and are generally
driven by business decisions and external economic developments that are unrelated to the insurance underwriting process. Operating
income is used by management along with other components of net income to assess their performance and adjusted measures of operating
income and operating income per diluted share are used in incentive compensation programs. Management believes that a projection
of net income including after tax realized investment gains and losses is not appropriate on a forward-looking basis because it
is not possible to provide a valid forecast of realized investment gains and losses, which can vary substantially from one period
to another and may have a significant impact on net income.
Prior Years' Reserve Development
- A measure which the Company reports for its property and casualty segment which identifies the increase or decrease in net incurred
claim and claim adjustment expense reserves at successive valuation dates for claims which occurred in previous calendar years.
In the opinion of the Company's management, a discussion of prior years' loss reserve development is useful to investors as it
allows them to assess the impact on current period earnings of incurred claims experience from the current calendar year and previous
calendar years.
Property and casualty operating statistics
- Operating measures utilized by the Company and the insurance industry regarding the relative profitability of property and casualty
underwriting results.
| · | Loss Ratio or Loss and Loss Adjustment Expense Ratio
- The ratio of (1) the sum of net incurred losses and loss adjustment expenses to (2) net earned premiums. |
| · | Expense Ratio - The ratio of (1) the sum of operating expenses
and the amortization of policy acquisition costs to (2) net earned premiums. |
| · | Combined Ratio - The sum of the Loss Ratio and the Expense Ratio.
A Combined Ratio less than 100% generally indicates profitable underwriting prior to the consideration of investment income. |
| · | Combined Ratio Excluding Catastrophes and Prior Years' Reserve Development
or Underlying Combined Ratio - The sum of the Loss Ratio and the Expense Ratio adjusted to remove the effect of catastrophe
costs and prior years' reserve development. The Combined Ratio is the most directly comparable GAAP measure. Management believes
this ratio provides a valuable measure of the Company’s underlying underwriting performance that may be obscured by the effects
of catastrophe costs and prior years’ reserve development, the amounts of which may be significant and may vary significantly
between periods. |
Return on equity - The ratio of
(1) trailing 12 month net income to (2) the average of ending shareholders' equity for the current quarter end and the
preceding four quarter ends.
Sales or Annualized New Sales
- Sales represent the amount of new business sold during the period and exclude renewal of policies sold in previous periods.
Sales are measured by the Company as premiums and deposits to be collected over the 12 months following the sale of a new policy
for annuity, life, automobile and homeowners business, as well as increases in contributions to annuity and certain life business,
and this time period may extend into the following calendar year. In addition, the Company discloses new policy count (units) information
for automobile and homeowners business. Sales data pertains to Horace Mann products and excludes authorized products sold by Employee
Agents, Exclusive Agents, and their licensed staff which are underwritten by third-party vendors. Sales should not be viewed as
a substitute for any financial measure determined in accordance with GAAP, including "sales" as it relates to non-insurance
companies, and the Company's definition of sales might differ from that used by other companies. The Company utilizes sales information
as a performance measure that indicates the productivity of its agency force. Sales are also a leading indicator of future revenue
trends.
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