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 June 30, 2016, the related consolidated statements of
operations and comprehensive income (loss) for the three-month and six-month periods ended June 30, 2016 and 2015, and the related
consolidated statements of changes in shareholders’ equity and cash flows for the six-month periods ended June 30, 2016 and
2015. 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, 2015, and the related consolidated statements of operations, comprehensive loss,
changes in shareholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated February
29, 2016, we expressed an unqualified opinion on those consolidated financial statements.
/s/ KPMG LLP
KPMG LLP
Chicago, Illinois
August 5, 2016
HORACE MANN EDUCATORS CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share
data)
|
|
June 30,
|
|
December 31,
|
|
|
|
2016
|
|
2015
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
ASSETS
|
|
Investments
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities, available for sale, at fair value
|
|
|
|
|
|
|
|
|
|
|
|
(amortized cost 2016, $6,910,241; 2015, $6,785,626)
|
|
|
$
|
7,481,712
|
|
|
|
$
|
7,091,340
|
|
|
Equity securities, available for sale, at fair value
|
|
|
|
|
|
|
|
|
|
|
|
(cost 2016, $110,573; 2015, $95,722)
|
|
|
|
123,163
|
|
|
|
|
99,797
|
|
|
Short-term and other investments
|
|
|
|
466,083
|
|
|
|
|
456,893
|
|
|
Total investments
|
|
|
|
8,070,958
|
|
|
|
|
7,648,030
|
|
|
Cash
|
|
|
|
50,432
|
|
|
|
|
15,509
|
|
|
Deferred policy acquisition costs
|
|
|
|
223,028
|
|
|
|
|
253,176
|
|
|
Goodwill
|
|
|
|
47,396
|
|
|
|
|
47,396
|
|
|
Other assets
|
|
|
|
305,888
|
|
|
|
|
292,139
|
|
|
Separate Account (variable annuity) assets
|
|
|
|
1,768,600
|
|
|
|
|
1,800,722
|
|
|
Total assets
|
|
|
$
|
10,466,302
|
|
|
|
$
|
10,056,972
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
Policy liabilities
|
|
|
|
|
|
|
|
|
|
|
|
Investment contract and life policy reserves
|
|
|
$
|
5,274,167
|
|
|
|
$
|
5,126,842
|
|
|
Unpaid claims and claim expenses
|
|
|
|
344,744
|
|
|
|
|
323,720
|
|
|
Unearned premiums
|
|
|
|
233,396
|
|
|
|
|
232,841
|
|
|
Total policy liabilities
|
|
|
|
5,852,307
|
|
|
|
|
5,683,403
|
|
|
Other policyholder funds
|
|
|
|
698,714
|
|
|
|
|
692,652
|
|
|
Other liabilities
|
|
|
|
482,263
|
|
|
|
|
368,559
|
|
|
Long-term debt
|
|
|
|
247,083
|
|
|
|
|
246,975
|
|
|
Separate Account (variable annuity) liabilities
|
|
|
|
1,768,600
|
|
|
|
|
1,800,722
|
|
|
Total liabilities
|
|
|
|
9,048,967
|
|
|
|
|
8,792,311
|
|
|
Preferred stock, $0.001 par value, authorized 1,000,000 shares; none issued
|
|
|
|
-
|
|
|
|
|
-
|
|
|
Common stock, $0.001 par value, authorized 75,000,000 shares; issued, 2016, 64,811,359; 2015, 64,537,554
|
|
|
|
65
|
|
|
|
|
65
|
|
|
Additional paid-in capital
|
|
|
|
447,504
|
|
|
|
|
442,648
|
|
|
Retained earnings
|
|
|
|
1,131,122
|
|
|
|
|
1,116,277
|
|
|
Accumulated other comprehensive income (loss), net of taxes:
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gains on fixed maturities and equity securities
|
|
|
|
329,653
|
|
|
|
|
175,167
|
|
|
Net funded status of pension obligations
|
|
|
|
(11,794
|
)
|
|
|
|
(11,794
|
)
|
|
Treasury stock, at cost, 2016, 24,672,932 shares; 2015, 23,971,522 shares
|
|
|
|
(479,215
|
)
|
|
|
|
(457,702
|
)
|
|
Total shareholders’ equity
|
|
|
|
1,417,335
|
|
|
|
|
1,264,661
|
|
|
Total liabilities and shareholders’ equity
|
|
|
$
|
10,466,302
|
|
|
|
$
|
10,056,972
|
|
|
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
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
|
2016
|
|
|
|
|
2015
|
|
|
|
|
2016
|
|
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance premiums and contract charges earned
|
|
$
|
188,360
|
|
|
$
|
182,376
|
|
|
$
|
373,810
|
|
|
$
|
362,115
|
|
Net investment income
|
|
|
91,179
|
|
|
|
83,995
|
|
|
|
175,838
|
|
|
|
167,308
|
|
Net realized investment gains
|
|
|
3,080
|
|
|
|
1,413
|
|
|
|
2,926
|
|
|
|
7,481
|
|
Other income
|
|
|
939
|
|
|
|
686
|
|
|
|
2,287
|
|
|
|
1,685
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
283,558
|
|
|
|
268,470
|
|
|
|
554,861
|
|
|
|
538,589
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits, losses and expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits, claims and settlement expenses
|
|
|
148,408
|
|
|
|
132,939
|
|
|
|
267,921
|
|
|
|
246,958
|
|
Interest credited
|
|
|
47,576
|
|
|
|
45,350
|
|
|
|
94,266
|
|
|
|
89,887
|
|
Policy acquisition expenses amortized
|
|
|
24,587
|
|
|
|
24,007
|
|
|
|
48,639
|
|
|
|
47,691
|
|
Operating expenses
|
|
|
43,345
|
|
|
|
40,036
|
|
|
|
86,141
|
|
|
|
75,964
|
|
Interest expense
|
|
|
2,948
|
|
|
|
3,406
|
|
|
|
5,883
|
|
|
|
6,958
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefits, losses and expenses
|
|
|
266,864
|
|
|
|
245,738
|
|
|
|
502,850
|
|
|
|
467,458
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
16,694
|
|
|
|
22,732
|
|
|
|
52,011
|
|
|
|
71,131
|
|
Income tax expense
|
|
|
4,828
|
|
|
|
6,549
|
|
|
|
14,992
|
|
|
|
20,673
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
11,866
|
|
|
$
|
16,183
|
|
|
$
|
37,019
|
|
|
$
|
50,458
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.29
|
|
|
$
|
0.39
|
|
|
$
|
0.90
|
|
|
$
|
1.20
|
|
Diluted
|
|
$
|
0.29
|
|
|
$
|
0.38
|
|
|
$
|
0.89
|
|
|
$
|
1.19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares and equivalent shares (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
41,082
|
|
|
|
41,990
|
|
|
|
41,200
|
|
|
|
42,001
|
|
Diluted
|
|
|
41,314
|
|
|
|
42,425
|
|
|
|
41,416
|
|
|
|
42,366
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized investment gains (losses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other-than-temporary impairment losses on securities
|
|
$
|
(3,853
|
)
|
|
$
|
(14,969
|
)
|
|
$
|
(7,526
|
)
|
|
$
|
(17,258
|
)
|
Portion of losses recognized in other comprehensive income
|
|
|
(290
|
)
|
|
|
(4,300
|
)
|
|
|
(290
|
)
|
|
|
(4,300
|
)
|
Net other-than-temporary impairment losses on securities recognized in earnings
|
|
|
(3,563
|
)
|
|
|
(10,669
|
)
|
|
|
(7,236
|
)
|
|
|
(12,958
|
)
|
Realized gains, net
|
|
|
6,643
|
|
|
|
12,082
|
|
|
|
10,162
|
|
|
|
20,439
|
|
Total
|
|
$
|
3,080
|
|
|
$
|
1,413
|
|
|
$
|
2,926
|
|
|
$
|
7,481
|
|
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 (LOSS) (UNAUDITED)
(Dollars in thousands)
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
|
2016
|
|
|
|
|
2015
|
|
|
|
|
2016
|
|
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
11,866
|
|
|
$
|
16,183
|
|
|
$
|
37,019
|
|
|
$
|
50,458
|
|
Other comprehensive income (loss), net of taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in net unrealized gains and losses on fixed maturities and equity securities
|
|
|
84,996
|
|
|
|
(111,346
|
)
|
|
|
154,486
|
|
|
|
(73,768
|
)
|
Change in net funded status of pension obligations
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Other comprehensive income (loss)
|
|
|
84,996
|
|
|
|
(111,346
|
)
|
|
|
154,486
|
|
|
|
(73,768
|
)
|
Total
|
|
$
|
96,862
|
|
|
$
|
(95,163
|
)
|
|
$
|
191,505
|
|
|
$
|
(23,310
|
)
|
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)
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
|
|
2016
|
|
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par value
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
65
|
|
|
$
|
64
|
|
Options exercised, 2016, 94,225 shares; 2015, 74,233 shares
|
|
|
-
|
|
|
|
-
|
|
Conversion of common stock units, 2016, 8,538 shares; 2015, 8,293 shares
|
|
|
-
|
|
|
|
-
|
|
Conversion of restricted stock units, 2016, 171,042 shares; 2015, 182,888 shares
|
|
|
-
|
|
|
|
1
|
|
Ending balance
|
|
|
65
|
|
|
|
65
|
|
|
|
|
|
|
|
|
|
|
Additional paid-in capital
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
|
442,648
|
|
|
|
422,232
|
|
Options exercised and conversion of common stock units and restricted stock units
|
|
|
939
|
|
|
|
11,674
|
|
Share-based compensation expense
|
|
|
3,917
|
|
|
|
3,931
|
|
Ending balance
|
|
|
447,504
|
|
|
|
437,837
|
|
|
|
|
|
|
|
|
|
|
Retained earnings
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
|
1,116,277
|
|
|
|
1,065,318
|
|
Net income
|
|
|
37,019
|
|
|
|
50,458
|
|
Cash dividends, 2016, $0.53 per share; 2015, $0.50 per share
|
|
|
(22,174
|
)
|
|
|
(21,371
|
)
|
Ending balance
|
|
|
1,131,122
|
|
|
|
1,094,405
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income (loss), net of taxes
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
|
163,373
|
|
|
|
284,601
|
|
Change in net unrealized gains and losses on fixed maturities and equity securities
|
|
|
154,486
|
|
|
|
(73,768
|
)
|
Change in net funded status of pension obligations
|
|
|
-
|
|
|
|
-
|
|
Ending balance
|
|
|
317,859
|
|
|
|
210,833
|
|
|
|
|
|
|
|
|
|
|
Treasury stock, at cost
|
|
|
|
|
|
|
|
|
Beginning balance, 2016, 23,971,522 shares; 2015, 23,308,430 shares
|
|
|
(457,702
|
)
|
|
|
(435,752
|
)
|
Acquisition of shares, 2016, 701,410 shares; 2015, 23,500 shares
|
|
|
(21,513
|
)
|
|
|
(716
|
)
|
Ending balance, 2016, 24,672,932 shares; 2015, 23,331,930 shares
|
|
|
(479,215
|
)
|
|
|
(436,468
|
)
|
|
|
|
|
|
|
|
|
|
Shareholders’ equity at end of period
|
|
$
|
1,417,335
|
|
|
$
|
1,306,672
|
|
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)
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
|
|
2016
|
|
|
|
|
2015
|
|
|
Cash flows - operating activities
|
|
|
|
|
|
|
|
|
Premiums collected
|
|
$
|
367,182
|
|
|
$
|
352,825
|
|
Policyholder benefits paid
|
|
|
(268,212
|
)
|
|
|
(257,606
|
)
|
Policy acquisition and other operating expenses paid
|
|
|
(138,612
|
)
|
|
|
(138,303
|
)
|
Federal income taxes paid
|
|
|
(15,094
|
)
|
|
|
(18,143
|
)
|
Investment income collected
|
|
|
175,541
|
|
|
|
167,738
|
|
Interest expense paid
|
|
|
(5,989
|
)
|
|
|
(6,837
|
)
|
Other
|
|
|
(2,279
|
)
|
|
|
(1,364
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
112,537
|
|
|
|
98,310
|
|
|
|
|
|
|
|
|
|
|
Cash flows - investing activities
|
|
|
|
|
|
|
|
|
Fixed maturities
|
|
|
|
|
|
|
|
|
Purchases
|
|
|
(834,114
|
)
|
|
|
(707,886
|
)
|
Sales
|
|
|
257,033
|
|
|
|
246,521
|
|
Maturities, paydowns, calls and redemptions
|
|
|
475,532
|
|
|
|
287,764
|
|
Purchase of other invested assets
|
|
|
(33,809
|
)
|
|
|
(15,809
|
)
|
Net cash provided by short-term and other investments
|
|
|
7,925
|
|
|
|
35,010
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(127,433
|
)
|
|
|
(154,400
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows - financing activities
|
|
|
|
|
|
|
|
|
Dividends paid to shareholders
|
|
|
(22,174
|
)
|
|
|
(21,371
|
)
|
Principal borrowings on Bank Credit Facility
|
|
|
-
|
|
|
|
75,000
|
|
Maturity of Senior Notes due 2015
|
|
|
-
|
|
|
|
(75,000
|
)
|
Acquisition of treasury stock
|
|
|
(21,513
|
)
|
|
|
(716
|
)
|
Exercise of stock options
|
|
|
1,926
|
|
|
|
1,557
|
|
Annuity contracts: variable, fixed and FHLB funding agreements
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
237,265
|
|
|
|
282,897
|
|
Benefits, withdrawals and net transfers to Separate Account (variable annuity) assets
|
|
|
(162,575
|
)
|
|
|
(178,557
|
)
|
Life policy accounts
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
1,680
|
|
|
|
435
|
|
Withdrawals and surrenders
|
|
|
(1,995
|
)
|
|
|
(1,995
|
)
|
Change in bank overdrafts
|
|
|
17,205
|
|
|
|
8,178
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
49,819
|
|
|
|
90,428
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash
|
|
|
34,923
|
|
|
|
34,338
|
|
|
|
|
|
|
|
|
|
|
Cash at beginning of period
|
|
|
15,509
|
|
|
|
11,675
|
|
|
|
|
|
|
|
|
|
|
Cash at end of period
|
|
$
|
50,432
|
|
|
$
|
46,013
|
|
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)
June 30, 2016 and 2015
(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 June 30, 2016, the consolidated results of operations and comprehensive income (loss) for the three and
six months ended June 30, 2016 and 2015, and the consolidated changes in shareholders’ equity and cash flows for the six
months ended June 30, 2016 and 2015. 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.
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, 2015.
The results of operations
for the three and six months ended June 30, 2016 are not necessarily indicative of the results to be expected for the full year.
The Company has reclassified
the presentation of certain prior period information to conform with the 2016 presentation. See “Adopted Accounting Standards”.
Note 1 - Basis of Presentation-(Continued)
Investment Contract
and Life Policy Reserves
This table summarizes
the Company’s investment contract and life policy reserves.
|
|
June 30,
|
|
|
|
December 31,
|
|
|
|
2016
|
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
Investment contract reserves
|
|
$
|
4,204,207
|
|
|
|
$
|
4,072,102
|
|
Life policy reserves
|
|
|
1,069,960
|
|
|
|
|
1,054,740
|
|
Total
|
|
$
|
5,274,167
|
|
|
|
$
|
5,126,842
|
|
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
obligations for the period as shown in the Consolidated Statement of Changes in Shareholders’ Equity. The following tables
reconcile these components.
|
Unrealized Gains
|
|
|
|
|
|
|
|
|
|
and Losses on
|
|
|
|
|
|
|
|
|
|
Fixed Maturities
|
|
|
|
|
|
|
|
|
|
and Equity
|
|
Defined
|
|
|
|
|
|
Securities (1)(2)
|
|
Benefit Plans (1)
|
|
Total (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance, April 1, 2016
|
|
$
|
244,657
|
|
|
|
$
|
(11,794
|
)
|
|
|
$
|
232,863
|
|
Other comprehensive income (loss) before reclassifications
|
|
|
87,809
|
|
|
|
|
-
|
|
|
|
|
87,809
|
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
|
|
(2,813
|
)
|
|
|
|
-
|
|
|
|
|
(2,813
|
)
|
Net current period other comprehensive income (loss)
|
|
|
84,996
|
|
|
|
|
-
|
|
|
|
|
84,996
|
|
Ending balance, June 30, 2016
|
|
$
|
329,653
|
|
|
|
$
|
(11,794
|
)
|
|
|
$
|
317,859
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance, January 1, 2016
|
|
$
|
175,167
|
|
|
|
$
|
(11,794
|
)
|
|
|
$
|
163,373
|
|
Other comprehensive income (loss) before reclassifications
|
|
|
157,780
|
|
|
|
|
-
|
|
|
|
|
157,780
|
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
|
|
(3,294
|
)
|
|
|
|
-
|
|
|
|
|
(3,294
|
)
|
Net current period other comprehensive income (loss)
|
|
|
154,486
|
|
|
|
|
-
|
|
|
|
|
154,486
|
|
Ending balance, June 30, 2016
|
|
$
|
329,653
|
|
|
|
$
|
(11,794
|
)
|
|
|
$
|
317,859
|
|
|
(1)
|
All amounts are net of tax.
|
|
(2)
|
The pretax amounts reclassified from accumulated other comprehensive income (loss), $4,327 and
$5,067, are included in net realized investment gains and losses and the related tax expenses, $1,514 and $1,773, are included
in income tax expense in the Consolidated Statements of Operations for the three and six months ended June 30, 2016, respectively.
|
Note 1 - Basis of Presentation-(Continued)
|
Unrealized Gains
|
|
|
|
|
|
|
|
|
|
and Losses on
|
|
|
|
|
|
|
|
|
|
Fixed Maturities
|
|
|
|
|
|
|
|
|
|
and Equity
|
|
Defined
|
|
|
|
|
|
Securities (1)(2)
|
|
Benefit Plans (1)
|
|
Total (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance, April 1, 2015
|
|
$
|
335,132
|
|
|
|
$
|
(12,953
|
)
|
|
|
$
|
322,179
|
|
Other comprehensive income (loss) before reclassifications
|
|
|
(110,185
|
)
|
|
|
|
-
|
|
|
|
|
(110,185
|
)
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
|
|
(1,161
|
)
|
|
|
|
-
|
|
|
|
|
(1,161
|
)
|
Net current period other comprehensive income (loss)
|
|
|
(111,346
|
)
|
|
|
|
-
|
|
|
|
|
(111,346
|
)
|
Ending balance, June 30, 2015
|
|
$
|
223,786
|
|
|
|
$
|
(12,953
|
)
|
|
|
$
|
210,833
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance, January 1, 2015
|
|
$
|
297,554
|
|
|
|
$
|
(12,953
|
)
|
|
|
$
|
284,601
|
|
Other comprehensive income (loss) before reclassifications
|
|
|
(68,815
|
)
|
|
|
|
-
|
|
|
|
|
(68,815
|
)
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
|
|
(4,953
|
)
|
|
|
|
-
|
|
|
|
|
(4,953
|
)
|
Net current period other comprehensive income (loss)
|
|
|
(73,768
|
)
|
|
|
|
-
|
|
|
|
|
(73,768
|
)
|
Ending balance, June 30, 2015
|
|
$
|
223,786
|
|
|
|
$
|
(12,953
|
)
|
|
|
$
|
210,833
|
|
|
(1)
|
All amounts are net of tax.
|
|
(2)
|
The pretax amounts reclassified from accumulated other comprehensive income (loss), $1,786 and
$7,620, are included in net realized investment gains and losses and the related tax expenses, $625 and $2,667, are included in
income tax expense in the Consolidated Statements of Operations for the three and six months ended June 30, 2015, 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”.
Adopted Accounting
Standards
Presentation of Debt
Issuance Costs
Effective January 1,
2016, the Company adopted accounting guidance which was issued to simplify the presentation of costs incurred to issue debt securities.
The guidance requires debt issuance costs associated with specific debt securities 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. Costs
incurred related to line of credit arrangements continue to be presented as an asset in the consolidated balance sheet. Also, the
guidance does not affect the recognition and measurement of debt issuance costs. The guidance required retrospective application.
As a result of this adoption, the following items in the Company’s December 31, 2015 Consolidated Balance Sheet were each
reduced by $2,371: Other Assets, Total Assets, Long-term Debt, Total Liabilities and Total Liabilities and Shareholders’
Equity. Net income per share (basic and diluted) did not change as a result of the adopted accounting change.
Note 2 - Investments
The Company’s
investment portfolio includes free-standing derivative financial instruments (currently over the counter (“OTC”) index
call option contracts) to economically hedge risk associated with its fixed indexed annuity and indexed universal life products’
contingent liabilities. The Company’s fixed indexed annuity and indexed universal life products include embedded derivative
features that are discussed in “Note 1 — Summary of Significant Accounting Policies — Investment Contract and
Life Policy Reserves — Policy Liabilities for Fixed Indexed Annuities and Indexed Universal Life Policies” of the Company’s
Annual Report on Form 10-K for the year ended December 31, 2015. The Company’s investment portfolio included no other free-standing
derivative financial instruments (futures, forwards, swaps, option contracts or other financial instruments with similar characteristics),
and there were no other embedded derivative features related to the Company’s insurance products during the six months ended
June 30, 2016 and 2015.
Note 2 - Investments-(Continued)
Fixed Maturities
and Equity Securities
The Company’s
investment portfolio is comprised primarily of fixed maturity securities (“fixed maturities”) and also includes equity
securities. The amortized cost or cost, unrealized investment gains and losses, fair values and other-than-temporary impairments
(“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)
|
|
June 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and federally
sponsored agency obligations (2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
|
|
$
|
451,983
|
|
|
|
|
$
|
58,547
|
|
|
|
|
$
|
226
|
|
|
|
|
$
|
510,304
|
|
|
|
|
$
|
-
|
|
Other, including
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities
|
|
|
|
506,240
|
|
|
|
|
|
42,328
|
|
|
|
|
|
56
|
|
|
|
|
|
548,512
|
|
|
|
|
|
-
|
|
Municipal bonds
|
|
|
|
1,509,321
|
|
|
|
|
|
241,327
|
|
|
|
|
|
4,884
|
|
|
|
|
|
1,745,764
|
|
|
|
|
|
(1,988
|
)
|
Foreign government bonds
|
|
|
|
71,421
|
|
|
|
|
|
7,673
|
|
|
|
|
|
-
|
|
|
|
|
|
79,094
|
|
|
|
|
|
-
|
|
Corporate bonds
|
|
|
|
2,672,912
|
|
|
|
|
|
225,571
|
|
|
|
|
|
11,297
|
|
|
|
|
|
2,887,186
|
|
|
|
|
|
(290
|
)
|
Other mortgage-backed securities
|
|
|
|
1,698,364
|
|
|
|
|
|
31,510
|
|
|
|
|
|
19,022
|
|
|
|
|
|
1,710,852
|
|
|
|
|
|
1,771
|
|
Totals
|
|
|
$
|
6,910,241
|
|
|
|
|
$
|
606,956
|
|
|
|
|
$
|
35,485
|
|
|
|
|
$
|
7,481,712
|
|
|
|
|
$
|
(507
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities (3)
|
|
|
$
|
110,573
|
|
|
|
|
$
|
14,009
|
|
|
|
|
$
|
1,419
|
|
|
|
|
$
|
123,163
|
|
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and federally sponsored agency obligations (2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
|
|
$
|
461,862
|
|
|
|
|
$
|
44,413
|
|
|
|
|
$
|
1,861
|
|
|
|
|
$
|
504,414
|
|
|
|
|
$
|
-
|
|
Other, including
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities
|
|
|
|
532,373
|
|
|
|
|
|
21,153
|
|
|
|
|
|
7,415
|
|
|
|
|
|
546,111
|
|
|
|
|
|
-
|
|
Municipal bonds
|
|
|
|
1,553,603
|
|
|
|
|
|
165,680
|
|
|
|
|
|
10,340
|
|
|
|
|
|
1,708,943
|
|
|
|
|
|
(4,140
|
)
|
Foreign government bonds
|
|
|
|
67,441
|
|
|
|
|
|
6,288
|
|
|
|
|
|
112
|
|
|
|
|
|
73,617
|
|
|
|
|
|
-
|
|
Corporate bonds
|
|
|
|
2,687,376
|
|
|
|
|
|
140,873
|
|
|
|
|
|
48,834
|
|
|
|
|
|
2,779,415
|
|
|
|
|
|
-
|
|
Other mortgage-backed securities
|
|
|
|
1,482,971
|
|
|
|
|
|
16,830
|
|
|
|
|
|
20,961
|
|
|
|
|
|
1,478,840
|
|
|
|
|
|
1,382
|
|
Totals
|
|
|
$
|
6,785,626
|
|
|
|
|
$
|
395,237
|
|
|
|
|
$
|
89,523
|
|
|
|
|
$
|
7,091,340
|
|
|
|
|
$
|
(2,758
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities (3)
|
|
|
$
|
95,722
|
|
|
|
|
$
|
8,405
|
|
|
|
|
$
|
4,330
|
|
|
|
|
$
|
99,797
|
|
|
|
|
$
|
-
|
|
|
(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 $241,889 and $231,294; Federal Home Loan Mortgage Corporation (“FHLMC”) of $331,300 and $363,957; and Government
National Mortgage Association (“GNMA”) of $127,804 and $130,940 as of June 30, 2016 and December 31, 2015, respectively.
|
|
(3)
|
Includes nonredeemable (perpetual) preferred stocks, common stocks and closed-end funds.
|
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
June 30, 2016 and December 31, 2015, respectively. The Company views the decrease in value of all of the securities with unrealized
losses at June 30, 2016 — 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 management expects to recover the entire amortized 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.
|
|
|
12 Months or Less
|
|
|
|
More than 12 Months
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
Fair Value
|
|
Unrealized
Losses
|
|
|
Fair Value
|
|
Unrealized
Losses
|
|
Fair Value
|
|
Unrealized
Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and federally
sponsored agency obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
|
|
$
|
455
|
|
|
|
$
|
12
|
|
|
|
$
|
3,212
|
|
|
$
|
214
|
|
|
|
$
|
3,667
|
|
|
|
$
|
226
|
|
|
Other
|
|
|
|
8,944
|
|
|
|
|
56
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
8,944
|
|
|
|
|
56
|
|
|
Municipal bonds
|
|
|
|
8,862
|
|
|
|
|
82
|
|
|
|
|
25,788
|
|
|
|
4,802
|
|
|
|
|
34,650
|
|
|
|
|
4,884
|
|
|
Foreign government bonds
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
Corporate bonds
|
|
|
|
106,822
|
|
|
|
|
3,314
|
|
|
|
|
106,679
|
|
|
|
7,983
|
|
|
|
|
213,501
|
|
|
|
|
11,297
|
|
|
Other mortgage-backed securities
|
|
|
|
596,827
|
|
|
|
|
12,447
|
|
|
|
|
280,231
|
|
|
|
6,575
|
|
|
|
|
877,058
|
|
|
|
|
19,022
|
|
|
Total fixed maturity securities
|
|
|
|
721,910
|
|
|
|
|
15,911
|
|
|
|
|
415,910
|
|
|
|
19,574
|
|
|
|
|
1,137,820
|
|
|
|
|
35,485
|
|
|
Equity securities (1)
|
|
|
|
7,270
|
|
|
|
|
502
|
|
|
|
|
8,030
|
|
|
|
917
|
|
|
|
|
15,300
|
|
|
|
|
1,419
|
|
|
Combined totals
|
|
|
$
|
729,180
|
|
|
|
$
|
16,413
|
|
|
|
$
|
423,940
|
|
|
$
|
20,491
|
|
|
|
$
|
1,153,120
|
|
|
|
$
|
36,904
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of positions with a
gross unrealized loss
|
|
|
|
245
|
|
|
|
|
|
|
|
|
|
142
|
|
|
|
|
|
|
|
|
387
|
|
|
|
|
|
|
|
Fair value as a percentage of
total fixed maturities and
equity securities fair value
|
|
|
|
9.6
|
%
|
|
|
|
|
|
|
|
|
5.6
|
%
|
|
|
|
|
|
|
|
15.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and federally sponsored agency obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
|
|
$
|
48,097
|
|
|
|
$
|
1,748
|
|
|
|
$
|
1,595
|
|
|
$
|
113
|
|
|
|
$
|
49,692
|
|
|
|
$
|
1,861
|
|
|
Other
|
|
|
|
248,478
|
|
|
|
|
7,338
|
|
|
|
|
1,921
|
|
|
|
77
|
|
|
|
|
250,399
|
|
|
|
|
7,415
|
|
|
Municipal bonds
|
|
|
|
168,939
|
|
|
|
|
5,382
|
|
|
|
|
21,717
|
|
|
|
4,958
|
|
|
|
|
190,656
|
|
|
|
|
10,340
|
|
|
Foreign government bonds
|
|
|
|
11,867
|
|
|
|
|
112
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
11,867
|
|
|
|
|
112
|
|
|
Corporate bonds
|
|
|
|
858,647
|
|
|
|
|
37,244
|
|
|
|
|
50,340
|
|
|
|
11,590
|
|
|
|
|
908,987
|
|
|
|
|
48,834
|
|
|
Other mortgage-backed securities
|
|
|
|
929,268
|
|
|
|
|
19,165
|
|
|
|
|
140,561
|
|
|
|
1,796
|
|
|
|
|
1,069,829
|
|
|
|
|
20,961
|
|
|
Total fixed maturity securities
|
|
|
|
2,265,296
|
|
|
|
|
70,989
|
|
|
|
|
216,134
|
|
|
|
18,534
|
|
|
|
|
2,481,430
|
|
|
|
|
89,523
|
|
|
Equity securities (1)
|
|
|
|
38,764
|
|
|
|
|
3,022
|
|
|
|
|
8,379
|
|
|
|
1,308
|
|
|
|
|
47,143
|
|
|
|
|
4,330
|
|
|
Combined totals
|
|
|
$
|
2,304,060
|
|
|
|
$
|
74,011
|
|
|
|
$
|
224,513
|
|
|
$
|
19,842
|
|
|
|
$
|
2,528,573
|
|
|
|
$
|
93,853
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of positions with a gross unrealized loss
|
|
|
|
684
|
|
|
|
|
|
|
|
|
|
78
|
|
|
|
|
|
|
|
|
762
|
|
|
|
|
|
|
|
Fair
value as a percentage of total fixed maturities and equity securities fair value
|
|
|
|
32.0
|
%
|
|
|
|
|
|
|
|
|
3.1
|
%
|
|
|
|
|
|
|
|
35.1
|
%
|
|
|
|
|
|
|
|
(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 67% of the gross unrealized loss as of June 30, 2016. With respect
to fixed maturity securities involving securitized financial assets, the underlying collateral cash flows were stress tested to
determine there was no adverse change in the present value of cash flows below the amortized cost basis.
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 June 30, 2016 and 2015 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):
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
Cumulative credit loss (1)
|
|
|
|
|
|
|
|
|
Beginning of period
|
|
$
|
7,844
|
|
|
$
|
2,877
|
|
New credit losses
|
|
|
300
|
|
|
|
4,998
|
|
Increases to previously recognized credit losses
|
|
|
2,480
|
|
|
|
-
|
|
Losses related to securities sold or paid down during the period
|
|
|
-
|
|
|
|
-
|
|
End of period
|
|
$
|
10,624
|
|
|
$
|
7,875
|
|
|
(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
|
|
June 30, 2016
|
|
|
|
June 30,
|
|
December 31,
|
|
Fair
|
|
Amortized
|
|
|
|
2016
|
|
2015
|
|
Value
|
|
Cost
|
|
Estimated expected maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due in 1 year or less
|
|
|
|
3.6
|
%
|
|
|
|
3.1
|
%
|
|
|
$
|
269,865
|
|
|
|
$
|
251,555
|
|
|
Due after 1 year through 5 years
|
|
|
|
26.3
|
|
|
|
|
24.2
|
|
|
|
|
1,970,758
|
|
|
|
|
1,885,946
|
|
|
Due after 5 years through 10 years
|
|
|
|
37.9
|
|
|
|
|
39.6
|
|
|
|
|
2,828,911
|
|
|
|
|
2,609,256
|
|
|
Due after 10 years through 20 years
|
|
|
|
20.4
|
|
|
|
|
20.9
|
|
|
|
|
1,529,037
|
|
|
|
|
1,346,414
|
|
|
Due after 20 years
|
|
|
|
11.8
|
|
|
|
|
12.2
|
|
|
|
|
883,141
|
|
|
|
|
817,070
|
|
|
Total
|
|
|
|
100.0
|
%
|
|
|
|
100.0
|
%
|
|
|
$
|
7,481,712
|
|
|
|
$
|
6,910,241
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average option-adjusted duration, in years
|
|
|
|
5.8
|
|
|
|
|
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
|
|
|
Six Months Ended
|
|
|
|
|
June 30,
|
|
|
|
|
June 30,
|
|
|
|
|
|
2016
|
|
|
|
|
2015
|
|
|
|
|
2016
|
|
|
|
|
2015
|
|
|
Fixed maturity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds received
|
|
$
|
174,944
|
|
|
$
|
165,201
|
|
|
$
|
257,033
|
|
|
$
|
246,521
|
|
Gross gains realized
|
|
|
8,382
|
|
|
|
10,577
|
|
|
|
10,858
|
|
|
|
12,231
|
|
Gross losses realized
|
|
|
(948
|
)
|
|
|
(1,282
|
)
|
|
|
(1,440
|
)
|
|
|
(1,745
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds received
|
|
$
|
6,474
|
|
|
$
|
6,840
|
|
|
$
|
12,622
|
|
|
$
|
20,809
|
|
Gross gains realized
|
|
|
650
|
|
|
|
596
|
|
|
|
1,170
|
|
|
|
5,198
|
|
Gross losses realized
|
|
|
(195
|
)
|
|
|
(107
|
)
|
|
|
(841
|
)
|
|
|
(117
|
)
|
Note 2 - Investments-(Continued)
Unrealized Gains and Losses on Fixed
Maturities and Equity Securities
Net unrealized investment
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
|
|
|
Six Months Ended
|
|
|
|
|
June 30,
|
|
|
|
|
June 30,
|
|
|
|
|
|
2016
|
|
|
|
|
2015
|
|
|
|
|
2016
|
|
|
|
|
2015
|
|
|
Net unrealized investment gains (losses) on fixed maturity securities, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of period
|
|
$
|
276,381
|
|
|
$
|
381,244
|
|
|
$
|
198,714
|
|
|
$
|
336,604
|
|
Change in unrealized investment gains and losses
|
|
|
89,744
|
|
|
|
(122,709
|
)
|
|
|
168,085
|
|
|
|
(77,223
|
)
|
Reclassification of net realized investment (gains) losses to net income
|
|
|
5,331
|
|
|
|
(3,708
|
)
|
|
|
4,657
|
|
|
|
(4,554
|
)
|
End of period
|
|
$
|
371,456
|
|
|
$
|
254,827
|
|
|
$
|
371,456
|
|
|
$
|
254,827
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized investment gains (losses) on equity securities, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of period
|
|
$
|
5,030
|
|
|
$
|
3,384
|
|
|
$
|
2,649
|
|
|
$
|
6,988
|
|
Change in unrealized investment gains and losses
|
|
|
4,710
|
|
|
|
(2,532
|
)
|
|
|
6,898
|
|
|
|
(3,190
|
)
|
Reclassification of net realized investment (gains) losses to net income
|
|
|
(1,557
|
)
|
|
|
2,547
|
|
|
|
(1,364
|
)
|
|
|
(399
|
)
|
End of period
|
|
$
|
8,183
|
|
|
$
|
3,399
|
|
|
$
|
8,183
|
|
|
$
|
3,399
|
|
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 are reached.
The following table
presents the instruments that were subject to a master netting arrangement for the Company.
|
|
|
|
|
|
|
|
|
|
Net
Amounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of
Assets/
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
Liabilities
|
|
Gross
Amounts Not Offset
|
|
|
|
|
|
|
|
|
|
|
|
Amounts
|
|
Presented
|
|
in
the Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
Offset
in the
|
|
in
the
|
|
Balance
Sheets
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
Consolidated
|
|
|
|
Cash
|
|
|
|
|
|
|
|
Gross
|
|
Balance
|
|
Balance
|
|
Financial
|
|
Collateral
|
|
Net
|
|
|
|
Amounts
|
|
Sheets
|
|
Sheets
|
|
Instruments
|
|
Received
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset
derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Free-standing
derivatives
|
|
|
$
|
4,325
|
|
|
|
|
-
|
|
|
|
$
|
4,325
|
|
|
|
|
-
|
|
|
|
$
|
3,081
|
|
|
|
$
|
1,244
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset
derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Free-standing
derivatives
|
|
|
|
2,501
|
|
|
|
|
-
|
|
|
|
|
2,501
|
|
|
|
|
-
|
|
|
|
|
2,617
|
|
|
|
|
(116
|
)
|
|
Note 2 - Investments-(Continued)
Deposits
At June 30, 2016 and
December 31, 2015, fixed maturity securities with a fair value of $18,423 and $18,312, respectively, were on deposit with governmental
agencies as required by law in various states in which the insurance subsidiaries of HMEC conduct business. In addition, at June
30, 2016 and December 31, 2015, fixed maturity securities with a fair value of $621,352 and $621,077, 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 $575,000 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, 2015, 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 June 30, 2016, these Level 3 invested assets comprised 2.7% of the Company’s total investment portfolio fair value.
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at
|
|
|
|
Carrying
|
|
Fair
|
|
Reporting Date Using
|
|
|
|
Amount
|
|
Value
|
|
Level 1
|
|
Level 2
|
|
|
Level 3
|
|
June 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and federally
sponsored agency obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
|
|
$
|
510,304
|
|
|
|
$
|
510,304
|
|
|
|
$
|
-
|
|
|
|
$
|
506,474
|
|
|
|
$
|
3,830
|
|
|
Other, including
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities
|
|
|
|
548,512
|
|
|
|
|
548,512
|
|
|
|
|
13,985
|
|
|
|
|
534,527
|
|
|
|
|
-
|
|
|
Municipal bonds
|
|
|
|
1,745,764
|
|
|
|
|
1,745,764
|
|
|
|
|
-
|
|
|
|
|
1,698,117
|
|
|
|
|
47,647
|
|
|
Foreign government bonds
|
|
|
|
79,094
|
|
|
|
|
79,094
|
|
|
|
|
-
|
|
|
|
|
79,094
|
|
|
|
|
-
|
|
|
Corporate bonds
|
|
|
|
2,887,186
|
|
|
|
|
2,887,186
|
|
|
|
|
8,873
|
|
|
|
|
2,804,905
|
|
|
|
|
73,408
|
|
|
Other mortgage-backed securities
|
|
|
|
1,710,852
|
|
|
|
|
1,710,852
|
|
|
|
|
-
|
|
|
|
|
1,618,101
|
|
|
|
|
92,751
|
|
|
Total fixed maturities
|
|
|
|
7,481,712
|
|
|
|
|
7,481,712
|
|
|
|
|
22,858
|
|
|
|
|
7,241,218
|
|
|
|
|
217,636
|
|
|
Equity securities
|
|
|
|
123,163
|
|
|
|
|
123,163
|
|
|
|
|
109,339
|
|
|
|
|
13,818
|
|
|
|
|
6
|
|
|
Short-term investments
|
|
|
|
153,328
|
|
|
|
|
153,328
|
|
|
|
|
152,830
|
|
|
|
|
498
|
|
|
|
|
-
|
|
|
Other investments
|
|
|
|
15,825
|
|
|
|
|
15,825
|
|
|
|
|
-
|
|
|
|
|
15,825
|
|
|
|
|
-
|
|
|
Totals
|
|
|
|
7,774,028
|
|
|
|
|
7,774,028
|
|
|
|
|
285,027
|
|
|
|
|
7,271,359
|
|
|
|
|
217,642
|
|
|
Financial Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment contract and life policy reserves, embedded derivatives
|
|
|
|
50
|
|
|
|
|
50
|
|
|
|
|
-
|
|
|
|
|
50
|
|
|
|
|
-
|
|
|
Other policyholder funds,
embedded derivatives
|
|
|
|
47,706
|
|
|
|
|
47,706
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
47,706
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and federally sponsored agency obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
|
|
$
|
504,414
|
|
|
|
$
|
504,414
|
|
|
|
$
|
-
|
|
|
|
$
|
504,414
|
|
|
|
$
|
-
|
|
|
Other, including
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities
|
|
|
|
546,111
|
|
|
|
|
546,111
|
|
|
|
|
14,258
|
|
|
|
|
531,853
|
|
|
|
|
-
|
|
|
Municipal bonds
|
|
|
|
1,708,943
|
|
|
|
|
1,708,943
|
|
|
|
|
-
|
|
|
|
|
1,678,564
|
|
|
|
|
30,379
|
|
|
Foreign government bonds
|
|
|
|
73,617
|
|
|
|
|
73,617
|
|
|
|
|
-
|
|
|
|
|
73,617
|
|
|
|
|
-
|
|
|
Corporate bonds
|
|
|
|
2,779,415
|
|
|
|
|
2,779,415
|
|
|
|
|
10,195
|
|
|
|
|
2,701,645
|
|
|
|
|
67,575
|
|
|
Other mortgage-backed securities
|
|
|
|
1,478,840
|
|
|
|
|
1,478,840
|
|
|
|
|
-
|
|
|
|
|
1,403,374
|
|
|
|
|
75,466
|
|
|
Total fixed maturities
|
|
|
|
7,091,340
|
|
|
|
|
7,091,340
|
|
|
|
|
24,453
|
|
|
|
|
6,893,467
|
|
|
|
|
173,420
|
|
|
Equity securities
|
|
|
|
99,797
|
|
|
|
|
99,797
|
|
|
|
|
86,088
|
|
|
|
|
13,703
|
|
|
|
|
6
|
|
|
Short-term investments
|
|
|
|
174,152
|
|
|
|
|
174,152
|
|
|
|
|
169,764
|
|
|
|
|
4,388
|
|
|
|
|
-
|
|
|
Other investments
|
|
|
|
14,001
|
|
|
|
|
14,001
|
|
|
|
|
-
|
|
|
|
|
14,001
|
|
|
|
|
-
|
|
|
Totals
|
|
|
|
7,379,290
|
|
|
|
|
7,379,290
|
|
|
|
|
280,305
|
|
|
|
|
6,925,559
|
|
|
|
|
173,426
|
|
|
Financial Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment contract and life policy reserves, embedded derivatives
|
|
|
|
14
|
|
|
|
|
14
|
|
|
|
|
-
|
|
|
|
|
14
|
|
|
|
|
-
|
|
|
Other policyholder funds, embedded derivatives
|
|
|
|
39,021
|
|
|
|
|
39,021
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
39,021
|
|
|
Note 3 - Fair Value of Financial Instruments-(Continued)
The Company did not
have any transfers between Levels 1 and 2 during the six months ended June 30, 2016. 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
|
|
Mortgage-
Backed
Securities(2)
|
|
Total
Fixed
Maturities
|
|
Equity
Securities
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance, April
1, 2016
|
|
|
$
|
46,493
|
|
|
|
$
|
70,071
|
|
|
|
$
|
83,821
|
|
|
|
$
|
200,385
|
|
|
|
$
|
6
|
|
|
|
$
|
200,391
|
|
|
|
$
|
42,085
|
|
|
Transfers into Level 3 (3)
|
|
|
|
-
|
|
|
|
|
5,017
|
|
|
|
|
12,984
|
|
|
|
|
18,001
|
|
|
|
|
-
|
|
|
|
|
18,001
|
|
|
|
|
-
|
|
|
Transfers out of Level 3 (3)
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
Total gains or losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized gains (losses)
included in net income related to financial assets
|
|
|
|
-
|
|
|
|
|
(657
|
)
|
|
|
|
-
|
|
|
|
|
(657
|
)
|
|
|
|
-
|
|
|
|
|
(657
|
)
|
|
|
|
-
|
|
|
Net realized (gains)
losses included in net income related to financial liabilities
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
1,324
|
|
|
Net unrealized gains
(losses) included in other comprehensive income
|
|
|
|
1,297
|
|
|
|
|
1,393
|
|
|
|
|
229
|
|
|
|
|
2,919
|
|
|
|
|
-
|
|
|
|
|
2,919
|
|
|
|
|
-
|
|
|
Purchases
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
Issuances
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
4,993
|
|
|
Sales
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
Settlements
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
Paydowns,
maturities and distributions
|
|
|
|
(143
|
)
|
|
|
|
(2,416
|
)
|
|
|
|
(453
|
)
|
|
|
|
(3,012
|
)
|
|
|
|
-
|
|
|
|
|
(3,012
|
)
|
|
|
|
(696
|
)
|
|
Ending balance, June 30, 2016
|
|
|
$
|
47,647
|
|
|
|
$
|
73,408
|
|
|
|
$
|
96,581
|
|
|
|
$
|
217,636
|
|
|
|
$
|
6
|
|
|
|
$
|
217,642
|
|
|
|
$
|
47,706
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance, January 1, 2016
|
|
|
$
|
30,379
|
|
|
|
$
|
67,575
|
|
|
|
$
|
75,466
|
|
|
|
$
|
173,420
|
|
|
|
$
|
6
|
|
|
|
$
|
173,426
|
|
|
|
$
|
39,021
|
|
|
Transfers into Level 3 (3)
|
|
|
|
14,751
|
|
|
|
|
11,076
|
|
|
|
|
24,626
|
|
|
|
|
50,453
|
|
|
|
|
-
|
|
|
|
|
50,453
|
|
|
|
|
-
|
|
|
Transfers out of Level 3 (3)
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
Total gains or losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized gains (losses)
included in net income related to financial assets
|
|
|
|
-
|
|
|
|
|
(657
|
)
|
|
|
|
-
|
|
|
|
|
(657
|
)
|
|
|
|
-
|
|
|
|
|
(657
|
)
|
|
|
|
-
|
|
|
Net realized (gains)
losses included in net income related to financial liabilities
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
1,998
|
|
|
Net unrealized gains
(losses) included in other comprehensive income
|
|
|
|
2,781
|
|
|
|
|
1,781
|
|
|
|
|
222
|
|
|
|
|
4,784
|
|
|
|
|
-
|
|
|
|
|
4,784
|
|
|
|
|
-
|
|
|
Purchases
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
Issuances
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
8,484
|
|
|
Sales
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
Settlements
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
Paydowns,
maturities and distributions
|
|
|
|
(264
|
)
|
|
|
|
(6,367
|
)
|
|
|
|
(3,733
|
)
|
|
|
|
(10,364
|
)
|
|
|
|
-
|
|
|
|
|
(10,364
|
)
|
|
|
|
(1,797
|
)
|
|
Ending balance, June 30, 2016
|
|
|
$
|
47,647
|
|
|
|
$
|
73,408
|
|
|
|
$
|
96,581
|
|
|
|
$
|
217,636
|
|
|
|
$
|
6
|
|
|
|
$
|
217,642
|
|
|
|
$
|
47,706
|
|
|
|
(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)
|
Includes U.S. Government and federally sponsored agency obligations for mortgage-backed securities
and other mortgage-backed securities.
|
|
(3)
|
Transfers into and out of Level 3 during the three and six months ended June 30, 2016 were attributable
to changes in the availability of observable market information for individual fixed maturity securities. The Company’s policy
is to recognize transfers into and transfers out of the levels as having occurred at the end of the reporting period in which the
transfers were determined.
|
Note 3 - Fair Value of Financial Instruments-(Continued)
|
|
|
|
|
|
Financial
|
|
|
|
Financial
Assets
|
|
Liabilities(1)
|
|
|
|
Municipal
Bonds
|
|
Corporate
Bonds
|
|
Other
Mortgage-
Backed
Securities
|
|
Total
Fixed
Maturities
|
|
Equity
Securities
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance, April 1, 2015
|
|
|
$
|
13,885
|
|
|
|
$
|
72,278
|
|
|
|
$
|
72,594
|
|
|
|
$
|
158,757
|
|
|
|
$
|
6
|
|
|
|
$
|
158,763
|
|
|
|
$
|
22,040
|
|
|
Transfers into Level 3 (2)
|
|
|
|
16,326
|
|
|
|
|
3,834
|
|
|
|
|
14,719
|
|
|
|
|
34,879
|
|
|
|
|
-
|
|
|
|
|
34,879
|
|
|
|
|
-
|
|
|
Transfers out of Level 3 (2)
|
|
|
|
-
|
|
|
|
|
(1,350
|
)
|
|
|
|
-
|
|
|
|
|
(1,350
|
)
|
|
|
|
-
|
|
|
|
|
(1,350
|
)
|
|
|
|
-
|
|
|
Total gains or losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized gains (losses) included in net income related to financial assets
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
Net realized (gains) losses included in net income related to financial liabilities
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
(28
|
)
|
|
Net unrealized gains (losses) included in other comprehensive income
|
|
|
|
(485
|
)
|
|
|
|
(1,436
|
)
|
|
|
|
(438
|
)
|
|
|
|
(2,359
|
)
|
|
|
|
-
|
|
|
|
|
(2,359
|
)
|
|
|
|
-
|
|
|
Purchases
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
Issuances
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
4,948
|
|
|
Sales
|
|
|
|
-
|
|
|
|
|
(476
|
)
|
|
|
|
-
|
|
|
|
|
(476
|
)
|
|
|
|
-
|
|
|
|
|
(476
|
)
|
|
|
|
-
|
|
|
Settlements
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
Paydowns, maturities and distributions
|
|
|
|
(57
|
)
|
|
|
|
(126
|
)
|
|
|
|
(2,175
|
)
|
|
|
|
(2,358
|
)
|
|
|
|
-
|
|
|
|
|
(2,358
|
)
|
|
|
|
(241
|
)
|
|
Ending balance, June 30, 2015
|
|
|
$
|
29,669
|
|
|
|
$
|
72,724
|
|
|
|
$
|
84,700
|
|
|
|
$
|
187,093
|
|
|
|
$
|
6
|
|
|
|
$
|
187,099
|
|
|
|
$
|
26,719
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance, January 1, 2015
|
|
|
$
|
13,628
|
|
|
|
$
|
74,717
|
|
|
|
$
|
82,949
|
|
|
|
$
|
171,294
|
|
|
|
$
|
6
|
|
|
|
$
|
171,300
|
|
|
|
$
|
20,049
|
|
|
Transfers into Level 3 (2)
|
|
|
|
16,326
|
|
|
|
|
5,729
|
|
|
|
|
15,180
|
|
|
|
|
37,235
|
|
|
|
|
-
|
|
|
|
|
37,235
|
|
|
|
|
-
|
|
|
Transfers out of Level 3 (2)
|
|
|
|
-
|
|
|
|
|
(1,350
|
)
|
|
|
|
(9,664
|
)
|
|
|
|
(11,014
|
)
|
|
|
|
-
|
|
|
|
|
(11,014
|
)
|
|
|
|
-
|
|
|
Total gains or losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized gains (losses) included in net income related to financial assets
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
Net realized (gains) losses included in net income related to financial liabilities
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
(467
|
)
|
|
Net unrealized gains (losses) included in other comprehensive income
|
|
|
|
(105
|
)
|
|
|
|
(1,084
|
)
|
|
|
|
(435
|
)
|
|
|
|
(1,624
|
)
|
|
|
|
-
|
|
|
|
|
(1,624
|
)
|
|
|
|
-
|
|
|
Purchases
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
Issuances
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
7,912
|
|
|
Sales
|
|
|
|
-
|
|
|
|
|
(476
|
)
|
|
|
|
-
|
|
|
|
|
(476
|
)
|
|
|
|
-
|
|
|
|
|
(476
|
)
|
|
|
|
-
|
|
|
Settlements
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
Paydowns, maturities and distributions
|
|
|
|
(180
|
)
|
|
|
|
(4,812
|
)
|
|
|
|
(3,330
|
)
|
|
|
|
(8,322
|
)
|
|
|
|
-
|
|
|
|
|
(8,322
|
)
|
|
|
|
(775
|
)
|
|
Ending balance, June 30, 2015
|
|
|
$
|
29,669
|
|
|
|
$
|
72,724
|
|
|
|
$
|
84,700
|
|
|
|
$
|
187,093
|
|
|
|
$
|
6
|
|
|
|
$
|
187,099
|
|
|
|
$
|
26,719
|
|
|
|
(1)
|
Represents embedded derivatives, all related to the Company’s FIA products, reported in Other
Policyholder Funds in the Company’s Consolidated Balance Sheets.
|
|
(
2)
|
Transfers
into and out of Level 3 during the three and six months ended June 30, 2015 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 June 30, 2016 and
2015, 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 and six months ended June 30, 2016, realized losses of ($1,324) and ($1,998), respectively,
were included in earnings that were attributable to the changes in the fair value of Level 3 liabilities (embedded derivatives)
still held; for the three and six months ended June 30, 2015, the respective amounts were $28 and $467.
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, 2015. Generally, valuation techniques for fixed maturity
securities include spread pricing, matrix pricing and discounted cash flow methodologies; include inputs such as quoted prices
for identical or similar securities that are less liquid; and are based on lower levels of trading activity than securities classified
as Level 2. The valuation techniques and significant unobservable inputs used in the fair value measurement for equity securities
classified as Level 3 use similar valuation techniques and significant unobservable inputs as those used for fixed maturities.
The sensitivity of
the estimated fair values to changes in the significant unobservable inputs for fixed maturities and equity securities included
in Level 3 generally relates to interest rate spreads, illiquidity premiums and default rates. Significant spread widening in isolation
will adversely impact the overall valuation, while significant spread tightening will lead to substantial valuation increases.
Significant increases (decreases) in illiquidity premiums in isolation will result in substantially lower (higher) valuations.
Significant increases (decreases) in expected default rates in isolation will result in substantially lower (higher) valuations.
Financial Instruments
Not Carried at Fair Value; Disclosure Required
The Company has various
other financial assets and financial liabilities used in the normal course of business that are not carried at fair value, but
for which fair value disclosure is required. The following table presents the carrying value, fair value and fair value hierarchy
of these financial assets and financial liabilities.
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at
|
|
|
|
Carrying
|
|
Fair
|
|
|
Reporting Date Using
|
|
|
|
Amount
|
|
Value
|
|
Level
1
|
|
Level
2
|
|
Level
3
|
|
June 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
investments
|
|
|
$
|
149,784
|
|
|
|
$
|
154,287
|
|
|
|
$
|
-
|
|
|
|
$
|
-
|
|
|
|
$
|
154,287
|
|
|
Financial
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
contract and life policy reserves, fixed annuity contracts
|
|
|
|
4,204,207
|
|
|
|
|
4,078,236
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
4,078,236
|
|
|
Investment
contract and life policy
reserves, account values on life contracts
|
|
|
|
78,194
|
|
|
|
|
82,109
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
82,109
|
|
|
Other
policyholder funds
|
|
|
|
651,008
|
|
|
|
|
651,008
|
|
|
|
|
-
|
|
|
|
|
575,233
|
|
|
|
|
75,775
|
|
|
Long-term
debt
|
|
|
|
247,083
|
|
|
|
|
262,723
|
|
|
|
|
262,723
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
investments
|
|
|
$
|
148,759
|
|
|
|
$
|
153,228
|
|
|
|
$
|
-
|
|
|
|
$
|
-
|
|
|
|
$
|
153,228
|
|
|
Financial
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
contract and life policy reserves, fixed annuity contracts
|
|
|
|
4,072,102
|
|
|
|
|
4,049,840
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
4,049,840
|
|
|
Investment
contract and life policy
reserves, account values on life contracts
|
|
|
|
77,429
|
|
|
|
|
81,360
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
81,360
|
|
|
Other
policyholder funds
|
|
|
|
653,631
|
|
|
|
|
653,631
|
|
|
|
|
-
|
|
|
|
|
575,104
|
|
|
|
|
78,527
|
|
|
Long-term
debt
|
|
|
|
246,975
|
|
|
|
|
252,700
|
|
|
|
|
252,700
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 4 - Derivative Instruments
In February 2014, the
Company began offering fixed indexed annuity products (“FIA”), which are deferred fixed annuities that guarantee the
return of principal to the contractholder and credit interest based on a percentage of the gain in a specified market index. In
October 2015, the Company began offering indexed universal life products (“IUL”), which also credit interest based
on a percentage of the gain in a specified market index. When deposits are received for FIA and IUL contracts, a portion is used
to purchase derivatives consisting of call options on the applicable market indices to fund the index credits due to FIA and IUL
policyholders. For the Company, substantially all such call options are one-year options purchased to match the funding requirements
of the underlying contracts. The call options are carried at fair value with the 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. Call options are not purchased to fund the index liabilities which may arise after the next deposit anniversary
date. On the respective anniversary dates of the indexed deposits, the index used to compute the annual index credit is reset and
new one-year call options are purchased to fund the next annual index credit. The cost of these purchases is managed through the
terms of the FIA and IUL contracts, which permit changes to index return caps, participation rates and/or asset fees, subject to
guaranteed minimums on each contract’s anniversary date. By adjusting the index return caps, participation rates or asset
fees, crediting rates generally can be managed except in cases where the contractual features would prevent further modifications.
The future annual index
credits on fixed indexed annuities are treated as a “series of embedded derivatives” over the expected life of the
applicable contract with a corresponding reserve recorded. For the indexed universal life contracts, the embedded derivative represents
a single year liability for the index return.
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 and IUL products. As a result, the Company records the purchased
call options and the embedded derivatives related to the provision of a contingent return at fair value, with changes in the fair
value of the derivatives recognized immediately in the Consolidated Statements of Operations. The fair values of derivative instruments,
including derivative instruments embedded in FIA and IUL contracts, presented in the Consolidated Balance Sheets were as follows:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
Derivative instruments, included in Short-term and Other Investments
|
|
$
|
4,325
|
|
|
|
$
|
2,501
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
Fixed indexed annuities - embedded derivatives, included in Other Policyholder Funds
|
|
|
47,706
|
|
|
|
|
39,021
|
|
|
Indexed universal life - embedded derivatives, included in Investment Contract and Life Policy Reserves
|
|
|
50
|
|
|
|
|
14
|
|
|
Note 4 - Derivative Instruments-(Continued)
In general, the change
in the fair value of the embedded derivatives related to the fixed indexed annuities will not correspond to the change in fair
value of the purchased call options because the purchased call options are one-year options while the options valued in those embedded
derivatives represent the rights of the policyholder to receive index credits over the entire period the fixed indexed annuities
are expected to be in force, which typically exceeds 10 years. The changes in fair value of derivatives included in the Consolidated
Statements of Operations were as follows:
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Change in fair value of derivatives (1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized investment gains (losses)
|
|
$
|
78
|
|
|
$
|
(402
|
)
|
|
$
|
(140
|
)
|
|
$
|
(607
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value of embedded derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized investment gains (losses)
|
|
|
(1,325
|
)
|
|
|
28
|
|
|
|
(2,001
|
)
|
|
|
467
|
|
|
(1)
|
Includes the gains or losses recognized at the expiration of the option term or early termination
and the changes in fair value for open options.
|
The Company’s
strategy attempts to mitigate potential risk of loss under these agreements through a regular monitoring process, which evaluates
the program’s effectiveness. The Company is exposed to risk of loss in the event of nonperformance by the counterparties
and, accordingly, option contracts are purchased from multiple counterparties, which are evaluated for creditworthiness prior to
purchase of the contracts. All of these options have been purchased from nationally recognized financial institutions with a Standard
and Poor’s/Moody’s long-term credit rating of “BBB+”/“Baa1” 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:
|
|
June 30, 2016
|
|
|
December 31, 2015
|
|
|
|
Credit Rating (1)
|
|
Notional
|
|
Fair
|
|
|
Notional
|
|
Fair
|
|
Counterparty
|
|
S&P
|
|
Moody’s
|
|
Amount
|
|
Value
|
|
Amount
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank of America, N.A.
|
|
A
|
|
A1
|
|
$
|
38,500
|
|
|
|
$
|
1,341
|
|
|
|
$
|
17,000
|
|
|
|
$
|
5
|
|
|
Barclays Bank PLC
|
|
A-
|
|
A2
|
|
|
18,100
|
|
|
|
|
369
|
|
|
|
|
7,600
|
|
|
|
|
137
|
|
|
Citigroup Inc.
|
|
BBB+
|
|
Baa1
|
|
|
13,100
|
|
|
|
|
699
|
|
|
|
|
17,300
|
|
|
|
|
845
|
|
|
Credit Suisse International
|
|
A
|
|
A2
|
|
|
31,600
|
|
|
|
|
617
|
|
|
|
|
12,000
|
|
|
|
|
167
|
|
|
Societe Generale
|
|
A
|
|
A2
|
|
|
56,100
|
|
|
|
|
1,299
|
|
|
|
|
80,800
|
|
|
|
|
1,347
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
$
|
157,400
|
|
|
|
$
|
4,325
|
|
|
|
$
|
134,700
|
|
|
|
$
|
2,501
|
|
|
|
(1)
|
As assigned by Standard & Poor’s Corporation (“S&P”) and Moody’s
Investors Service, Inc. (“Moody’s”).
|
Note 4 - Derivative Instruments-(Continued)
As of June 30, 2016
and December 31, 2015, the Company held $3,081 and $2,617, respectively, of cash received from counterparties for derivative collateral,
which is included in Other Liabilities on the Consolidated Balance Sheets. This derivative collateral limits the Company’s
maximum amount of economic loss due to credit risk that would be incurred if parties to the call options failed completely to perform
according to the terms of the contracts to $250 per counterparty.
Note 5 - Debt
Indebtedness outstanding
was as follows:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Short-term debt:
|
|
|
|
|
|
|
|
|
|
|
Bank Credit Facility, expires July 30, 2019
|
|
$
|
-
|
|
|
|
$
|
-
|
|
|
Long-term debt:
|
|
|
|
|
|
|
|
|
|
|
4.50% Senior Notes, due December 1, 2025. Aggregate principal amount of $250,000 less unaccrued discount of $631 and $654 (4.5% imputed rate) and unamortized debt issuance costs of $2,286 and $2,371
|
|
|
247,083
|
|
|
|
|
246,975
|
|
|
The Credit Agreement
with Financial Institutions (“Bank Credit Facility”) and 4.50% Senior Notes due 2025 (“Senior Notes due 2025”)
are described in “Notes to Consolidated Financial Statements — Note 7 — Debt” of the Company’s Annual
Report on Form 10-K for the year ended December 31, 2015.
Note 6 - 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 June 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums written and contract deposits
|
|
$
|
316,798
|
|
|
|
$
|
5,921
|
|
|
|
$
|
1,002
|
|
|
|
$
|
311,879
|
|
|
Premiums and contract charges earned
|
|
|
193,396
|
|
|
|
|
5,952
|
|
|
|
|
916
|
|
|
|
|
188,360
|
|
|
Benefits, claims and settlement expenses
|
|
|
151,998
|
|
|
|
|
4,444
|
|
|
|
|
854
|
|
|
|
|
148,408
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums written and contract deposits
|
|
$
|
324,597
|
|
|
|
$
|
6,184
|
|
|
|
$
|
981
|
|
|
|
$
|
319,394
|
|
|
Premiums and contract charges earned
|
|
|
187,809
|
|
|
|
|
6,332
|
|
|
|
|
899
|
|
|
|
|
182,376
|
|
|
Benefits, claims and settlement expenses
|
|
|
140,038
|
|
|
|
|
7,793
|
|
|
|
|
694
|
|
|
|
|
132,939
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums written and contract deposits
|
|
$
|
604,790
|
|
|
|
$
|
11,689
|
|
|
|
$
|
1,947
|
|
|
|
$
|
595,048
|
|
|
Premiums and contract charges earned
|
|
|
383,629
|
|
|
|
|
11,721
|
|
|
|
|
1,902
|
|
|
|
|
373,810
|
|
|
Benefits, claims and settlement expenses
|
|
|
283,238
|
|
|
|
|
17,106
|
|
|
|
|
1,789
|
|
|
|
|
267,921
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums written and contract deposits
|
|
$
|
635,644
|
|
|
|
$
|
12,308
|
|
|
|
$
|
1,793
|
|
|
|
$
|
625,129
|
|
|
Premiums and contract charges earned
|
|
|
373,005
|
|
|
|
|
12,647
|
|
|
|
|
1,757
|
|
|
|
|
362,115
|
|
|
Benefits, claims and settlement expenses
|
|
|
255,878
|
|
|
|
|
10,363
|
|
|
|
|
1,443
|
|
|
|
|
246,958
|
|
|
Note
7 - Commitments
Investment Commitments
From time to time,
the Company has outstanding commitments to purchase investments and/or commitments to lend funds under bridge loans. Unfunded commitments
to purchase investments were $177,952 and $147,139 at June 30, 2016 and December 31, 2015, respectively.
Note
8 - Segment Information
The Company conducts
and manages its business through four segments. The three operating segments, representing the major lines of insurance business,
are: (1) property and casualty insurance, primarily personal lines automobile and homeowners products; (2) retirement annuity products,
primarily tax-qualified fixed and variable deposits; and (3) 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 also have included corporate debt
retirement costs/gains, when applicable. Summarized financial information for these segments is as follows:
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
|
2016
|
|
|
|
|
2015
|
|
|
|
|
2016
|
|
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance premiums and contract charges earned
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and casualty
|
|
$
|
153,673
|
|
|
$
|
147,657
|
|
|
$
|
305,793
|
|
|
$
|
294,406
|
|
Annuity
|
|
|
6,098
|
|
|
|
6,516
|
|
|
|
12,166
|
|
|
|
12,739
|
|
Life
|
|
|
28,589
|
|
|
|
28,203
|
|
|
|
55,851
|
|
|
|
54,970
|
|
Total
|
|
$
|
188,360
|
|
|
$
|
182,376
|
|
|
$
|
373,810
|
|
|
$
|
362,115
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and casualty
|
|
$
|
10,151
|
|
|
$
|
9,007
|
|
|
$
|
18,979
|
|
|
$
|
18,440
|
|
Annuity
|
|
|
62,727
|
|
|
|
57,183
|
|
|
|
120,776
|
|
|
|
113,575
|
|
Life
|
|
|
18,502
|
|
|
|
18,022
|
|
|
|
36,486
|
|
|
|
35,730
|
|
Corporate and other
|
|
|
14
|
|
|
|
6
|
|
|
|
29
|
|
|
|
12
|
|
Intersegment eliminations
|
|
|
(215
|
)
|
|
|
(223
|
)
|
|
|
(432
|
)
|
|
|
(449
|
)
|
Total
|
|
$
|
91,179
|
|
|
$
|
83,995
|
|
|
$
|
175,838
|
|
|
$
|
167,308
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and casualty
|
|
$
|
(4,463
|
)
|
|
$
|
3,244
|
|
|
$
|
9,332
|
|
|
$
|
20,867
|
|
Annuity
|
|
|
13,063
|
|
|
|
11,747
|
|
|
|
23,616
|
|
|
|
24,257
|
|
Life
|
|
|
4,622
|
|
|
|
3,643
|
|
|
|
8,489
|
|
|
|
7,028
|
|
Corporate and other
|
|
|
(1,356
|
)
|
|
|
(2,451
|
)
|
|
|
(4,418
|
)
|
|
|
(1,694
|
)
|
Total
|
|
$
|
11,866
|
|
|
$
|
16,183
|
|
|
$
|
37,019
|
|
|
$
|
50,458
|
|
|
|
June 30,
|
|
|
|
December
31,
|
|
|
|
2016
|
|
2015
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
Property and casualty
|
|
$
|
1,137,533
|
|
|
|
$
|
1,098,415
|
|
|
Annuity
|
|
|
7,256,608
|
|
|
|
|
7,001,411
|
|
|
Life
|
|
|
1,970,433
|
|
|
|
|
1,862,719
|
|
|
Corporate and other
|
|
|
133,248
|
|
|
|
|
131,635
|
|
|
Intersegment eliminations
|
|
|
(31,520
|
)
|
|
|
|
(37,208
|
)
|
|
Total
|
|
$
|
10,466,302
|
|
|
|
$
|
10,056,972
|
|
|
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 this Quarterly Report
on Form 10-Q and in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015. 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 2015 property and casualty direct earned premiums, the Company’s ten largest states represented
57% of the segment total. Included in this top ten group are certain states which are considered more prone to catastrophe occurrences:
California, North Carolina, Texas, South Carolina, Florida and Louisiana.
|
|
·
|
The ability of the Company to maintain
a favorable catastrophe reinsurance program considering both availability and cost; and the collectibility of reinsurance receivables.
|
|
·
|
Adverse changes in market appreciation,
interest spreads, business persistency and policyholder mortality and morbidity rates and the resulting impact on both estimated
reserves and the amortization of deferred policy acquisition costs.
|
|
·
|
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 and the U.S. Department of Labor’s recently issued
rule defining who is a “fiduciary” of a qualified retirement plan.
|
|
·
|
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
June 30, 2016, the Company’s net income of $11.8 million decreased $4.4 million compared to the prior year. The decrease
was largely due to a $3.9 million after tax increase in property and casualty catastrophe losses as well as elevated automobile
loss frequencies impacted by severe weather, which more than offset continued strong underlying property results. In total, the
property and casualty segment reported a net loss of $4.5 million, representing a decrease of $7.8 million compared to the second
quarter 2015 net income of $3.3 million. Annuity segment net income of $13.0 million for the current period increased $1.2 million
compared to the second quarter of 2015, including an increase in investment income. Unlocking of deferred policy acquisition costs
had a modest negative impact on the annuity net income comparison. Life segment net income of $4.6 million increased $1.0 million
compared to the second quarter of 2015 due to lower mortality costs in the current quarter. After tax net realized investment gains
were $1.5 million compared to after tax realized investment gains of $0.8 million a year earlier.
For the six months ended
June 30, 2016, the Company’s net income of $37.0 million decreased $13.5 million compared to the prior year. After tax net
realized investment gains were $1.1 million compared to $4.8 million a year earlier. For the property and casualty segment, net
income of $9.3 million decreased $11.6 million compared to the first half of 2015. The property and casualty combined ratio was
102.8% for the first six months of 2016, 5.8 percentage points higher than the 97.0% for the same period in 2015, primarily reflecting
continued improvement in current accident year non-catastrophe results for homeowners — reflecting the impacts of initiatives
to improve profitability — more than offset by pressure on automobile results, including higher non-catastrophe loss severity
and the second quarter increase in loss frequencies. In addition, catastrophe losses increased in the current period — representing
a $5.4 million after tax decrease to net income compared to the same period in 2015 — and the current period reflected a
reduced level of favorable prior years’ reserve development — representing a $2.4 million reduction to net income compared
to the first six months of 2015. Annuity segment net income of $23.6 million for the current period decreased $0.7 million compared
to the first six months of 2015, partially due to a $3.1 million pretax increase in operating expenses, including costs related
to the Company’s continued modernization of technology and infrastructure, as well as pressures of the interest rate environment.
The net interest margin amount increased $3.0 million pretax compared to the prior year, including an increase in gains on investment
prepayments. For the first six months of 2016 and 2015, unlocking of annuity deferred policy acquisition costs had a minimal impact.
Annuity assets under management of $6.1 billion increased 3% compared to the prior year and disciplined crediting rate management
continues. Life segment net income of $8.5 million increased $1.5 million compared to the first six months of 2015 primarily due
to a decrease in mortality losses in the current period.
Premiums written and contract
deposits decreased 5% compared to the first six months of 2015 due to a decrease in the amount of annuity deposits received in
the current period, partially offset by growth in the property and casualty and life segments. Annuity deposits received were 16%
less than the prior year, including comparison to the 2015 favorable impact of non-recurring deposits related to changes in the
Company’s employee retirement savings plans as further explained in “Results of Operations — Insurance Premiums
and Contract Charges”. Property and casualty segment premiums written increased 5% compared to the prior year, primarily
due to the favorable impacts from increases in average premium per policy for homeowners and automobile, accompanied by increases
in automobile policies in force and reductions in catastrophe reinsurance costs. Life segment insurance premiums and contract deposits
increased 4% compared to the first half of 2015.
The Company’s book
value per share was $35.31 at June 30, 2016, an increase of 11% compared to 12 months earlier. This increase reflected net income
for the trailing 12 months accompanied by a significant increase in net unrealized investment gains primarily due to lower yields
on U.S. Treasury securities. At June 30, 2016, book value per share excluding investment fair value adjustments was $27.10, representing
a 3% 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 investment contracts and life insurance
products with account values, liabilities for property and casualty claims and claim expenses, liabilities for future policy benefits,
deferred taxes and valuation of assets and liabilities related to the defined benefit pension plan.
Compared to December 31,
2015, at June 30, 2016 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, 2015, 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
|
|
Six Months Ended
|
|
|
Change From
|
|
|
|
June 30,
|
|
|
Prior Year
|
|
June 30,
|
|
|
Prior Year
|
|
|
|
2016
|
|
2015
|
|
|
Percent
|
|
Amount
|
|
2016
|
|
2015
|
|
|
Percent
|
|
Amount
|
|
Insurance premiums written and contract deposits (includes annuity and life contract deposits)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property & casualty (1)
|
|
|
$
|
159.8
|
|
|
|
$
|
152.5
|
|
|
|
|
4.8
|
%
|
|
|
$
|
7.3
|
|
|
|
$
|
306.5
|
|
|
|
$
|
293.0
|
|
|
|
|
4.6
|
%
|
|
|
$
|
13.5
|
|
|
Annuity deposits
|
|
|
|
124.7
|
|
|
|
|
140.9
|
|
|
|
|
-11.5
|
%
|
|
|
|
(16.2
|
)
|
|
|
|
237.3
|
|
|
|
|
282.9
|
|
|
|
|
-16.1
|
%
|
|
|
|
(45.6
|
)
|
|
Life
|
|
|
|
27.3
|
|
|
|
|
26.0
|
|
|
|
|
5.0
|
%
|
|
|
|
1.3
|
|
|
|
|
51.2
|
|
|
|
|
49.2
|
|
|
|
|
4.1
|
%
|
|
|
|
2.0
|
|
|
Total
|
|
|
$
|
311.8
|
|
|
|
$
|
319.4
|
|
|
|
|
-2.4
|
%
|
|
|
$
|
(7.6
|
)
|
|
|
$
|
595.0
|
|
|
|
$
|
625.1
|
|
|
|
|
-4.8
|
%
|
|
|
$
|
(30.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance premiums and contract charges earned (excludes annuity and life contract deposits)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property & casualty (1)
|
|
|
$
|
153.7
|
|
|
|
$
|
147.7
|
|
|
|
|
4.1
|
%
|
|
|
$
|
6.0
|
|
|
|
$
|
305.8
|
|
|
|
$
|
294.4
|
|
|
|
|
3.9
|
%
|
|
|
$
|
11.4
|
|
|
Annuity
|
|
|
|
6.1
|
|
|
|
|
6.5
|
|
|
|
|
-6.2
|
%
|
|
|
|
(0.4
|
)
|
|
|
|
12.2
|
|
|
|
|
12.7
|
|
|
|
|
-3.9
|
%
|
|
|
|
(0.5
|
)
|
|
Life
|
|
|
|
28.5
|
|
|
|
|
28.2
|
|
|
|
|
1.1
|
%
|
|
|
|
0.3
|
|
|
|
|
55.8
|
|
|
|
|
55.0
|
|
|
|
|
1.5
|
%
|
|
|
|
0.8
|
|
|
Total
|
|
|
$
|
188.3
|
|
|
|
$
|
182.4
|
|
|
|
|
3.2
|
%
|
|
|
$
|
5.9
|
|
|
|
$
|
373.8
|
|
|
|
$
|
362.1
|
|
|
|
|
3.2
|
%
|
|
|
$
|
11.7
|
|
|
|
(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)
|
|
June 30,
|
|
December 31,
|
|
June 30,
|
|
|
2016
|
|
2015
|
|
2015
|
Property and casualty (voluntary)
|
|
|
|
|
|
|
|
|
|
|
|
|
Automobile
|
|
|
486,475
|
|
|
|
486,850
|
|
|
|
482,563
|
|
Property
|
|
|
222,341
|
|
|
|
224,531
|
|
|
|
226,391
|
|
Total
|
|
|
708,816
|
|
|
|
711,381
|
|
|
|
708,954
|
|
Annuity
|
|
|
214,192
|
|
|
|
211,071
|
|
|
|
206,055
|
|
Life
|
|
|
201,276
|
|
|
|
201,789
|
|
|
|
200,654
|
|
For the three months ended
June 30, 2016, the Company’s premiums written and contract deposits of $311.8 million decreased $7.6 million, or 2.4%, compared
to the prior year, due to a decline in the annuity segment partially offset by growth in the property and casualty and life segments.
For the first six months
of 2016, the Company’s premiums written and contract deposits of $595.0 million decreased $30.1 million, or 4.8%, compared
to the prior year, also due to a decline in the annuity segment partially offset by growth in the property and casualty and life
segments. In 2015, changes in the Company’s employee retirement savings plans resulted in non-recurring deposits received
in the first half of 2015 — see additional explanation below. The Company’s premiums and contract charges earned increased
$5.9 million, or 3.2%, compared to the second quarter of 2015 and increased $11.7 million, or 3.2%, compared to the six months
ended June 30, 2015, primarily due to increases in average premium per policy for both homeowners and automobile.
Total property and casualty
premiums written increased 4.6%, or $13.5 million, in the first six months of 2016, compared to the prior year. Average written
premium per policy for both automobile and homeowners increased compared to the prior year and the number of automobile policies
in force also increased compared to 12 months earlier; the impacts of these items were partially offset by a reduced level of homeowners
policies in force in the current period. For 2016, 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 six months of 2016 were consistent with those plans at 7% for automobile and 6% for homeowners.
Based on policies in force,
the current year voluntary automobile 12 month retention rate for new and renewal policies was 84.0% compared to 84.9% at June
30, 2015, with the anticipated decrease due to recent rate and underwriting actions. The property 12 month new and renewal policy
retention rate was 88.4% at June 30, 2016 compared to 87.6% at June 30, 2015. The 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
modestly offset by underwriting profitability programs, particularly for voluntary automobile business.
Automobile premiums written
increased 5.6%, or $11.0 million, compared to the first half of 2015. In the first six months of 2016, the voluntary 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 increase in policies in force compared to a year earlier. The number of educator policies increased more than
the total policy count over the 12 month period and represented approximately 85% of the voluntary automobile policies in force
at June 30, 2016, December 31, 2015 and June 30, 2015.
Homeowners premiums written
increased 2.5%, or $2.4 million, compared to the first half of 2015. While the number of homeowners policies in force has declined,
the average written premium per policy and average earned premium per policy increased approximately 4% and 3%, respectively, in
the first half of 2016 compared to a year earlier. In addition, reduced catastrophe reinsurance costs benefited the current period
premiums written by approximately $0.6 million. The number of educator policies represented approximately 82% of the homeowners
policies in force at June 30, 2016, compared to approximately 81% at both December 31, 2015 and June 30, 2015, and has reflected
more moderate declines than the overall homeowner policies in force count. 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. By June 30, 2015, the Company completed a non-renewal program to further address homeowners profitability and
hurricane exposure issues in Florida. While this program impacted the overall policy in force count and premiums in the short-term,
it reduced risk exposure concentration, reduced overall catastrophe reinsurance costs and is expected to improve homeowners longer-term
underwriting results. The Company continues to write policies for tenants in Florida. The Company also authorized its agents to
write certain third-party vendors’ homeowners policies in Florida.
For the six months ended
June 30, 2016, total annuity deposits received decreased 16.1%, or $45.6 million, compared to the prior year, primarily due to
changes in the Company’s employee retirement savings plans which resulted in non-recurring deposits received in the first
half of 2015. The current period decrease reflected an 18.6% decrease in recurring deposit receipts and a 14.1% decrease in single
premium and rollover deposit receipts. Excluding the 2015 non-recurring item, the remaining current period decrease was primarily
due to a decrease in the amount of other single premium and rollover deposits received in 2016.
In addition to external
contractholder deposits, annuity new recurring deposits include contributions and transfers by Horace Mann’s employees into
the Company’s 401(k) group annuity contract. The majority of the 401(k) related increase in 2015 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 11 — Pension Plans and Other Postretirement Benefits” in the Company’s Annual
Report on Form 10-K for the year ended December 31, 2015. Note that deposits into the Company’s employee 401(k) group annuity
contract are not reported as “sales”.
In the first six months
of 2016, new deposits to fixed accounts of $157.4 million decreased 16.1%, or $30.2 million, and new deposits to variable accounts
of $79.9 million decreased 16.2%, or $15.4 million, compared to the prior year, including the impact of the 2015 non-recurring
employee retirement savings plans item described above.
Total annuity accumulated
value on deposit of $6.1 billion at June 30, 2016 increased 2.6% compared to a year earlier, reflecting the increase from new deposits
received as well as favorable retention. Accumulated value retention for the variable annuity option was 94.6% and 94.0% for the
12 month periods ended June 30, 2016 and 2015, respectively; fixed annuity retention was 94.8% and 94.7% for the respective periods.
Variable annuity accumulated
balances of $1.8 billion at June 30, 2016 decreased 7.2% compared to June 30, 2015, reflecting a negative impact from financial
market performance over the 12 months and net balances transferred from the variable account option to the guaranteed interest
rate fixed account option partially offset by net positive cash flows. Compared to the first six months of 2015, annuity segment
contract charges earned decreased 3.9%, or $0.5 million.
Life segment premiums and
contract deposits for the first six months of 2016 increased 4.1%, or $2.0 million, compared to the prior year, including the favorable
impact of new ordinary life business growth. The ordinary life insurance in force lapse ratio was 4.1% for the 12 months ended
both June 30, 2016 and 2015.
Sales
For the first six months
of 2016, property and casualty new annualized sales premiums increased 9.9% compared to the first half of 2015, as 10.9%, or $4.2
million, growth in new automobile sales was accompanied by growth in homeowners sales of 5.1%, or $0.4 million, compared to the
prior year.
While the first half of
2016 annuity new business levels were lower than in the prior year period, 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. Annuity sales by Horace Mann’s agency force decreased 12.8%, or $19.9 million compared to the first half
of 2015, with the decline primarily due to the impact in 2015 of non-recurring, non 401(k) rollover deposits from the Company’s
employee retirement savings plans. Sales from the independent agent distribution channel, which represent approximately 11% of
total annuity sales in the current period and are largely single premium and rollover annuity deposits, decreased approximately
13% compared to a year earlier. As a result, total Horace Mann annuity sales from the combined distribution channels decreased
12.9% compared to the six months ended June 30, 2015. Overall, the Company’s new recurring deposit business (measured on
an annualized basis at the time of sale, compared to the reporting of new contract deposits which are recorded when cash is received)
decreased 3.9% compared to the first half of 2015, and single premium and rollover deposits decreased 14.1% compared to the prior
year. In February 2014, the Company expanded its annuity product portfolio by introducing a fixed indexed annuity contract. This
new product continues to be well received by the Company’s customers and represented approximately one-third of total annuity
sales for the first six months of both 2016 and 2015, largely single premium and rollover deposits. Previously, the Company offered
indexed annuity products underwritten by third-party vendors.
The Company’s introduction
of new educator-focused portfolios of term and whole life products in recent years, including a single premium whole life product,
as well as the October 2015 introduction of the Company’s Indexed Universal Life product have contributed to an increase
in sales of proprietary life products. For the six months ended June 30, 2016, sales of Horace Mann’s proprietary life insurance
products totaled $7.1 million, representing an increase of 47.9%, or $2.3 million, compared to the prior year, including an increase
of $1.7 million for single premium sales.
Distribution
At June 30, 2016, there
was a combined total of 683 Exclusive Agencies and Employee Agents, compared to 735 at December 31, 2015 and 703 at June 30, 2015.
The Company continues to expect higher quality standards for agents and agencies to focus on improving both customer experiences
and agent productivity in their respective territories. Growth in new automobile sales and life sales reflects improvement in average
agency productivity. The dedicated sales force is supported by the Company’s Customer Contact Center which provides a means
for educators to begin their experience directly with the Company, if that is their preference. The Customer Contact Center is
also able to assist educators in territories which are not currently served by an Exclusive Agency.
As mentioned above, the
Company also utilizes a nationwide network of Independent Agents who comprise an additional distribution channel for the Company’s
403(b) tax-qualified annuity products. The Independent Agent distribution channel included 522 authorized agents at June 30, 2016.
During the first six months of 2016, this channel generated $16.1 million in annualized new annuity sales for the Company compared
to $18.6 million for the first half of 2015, with the new business primarily comprised of single and rollover deposit business
in both periods.
Net Investment Income
For the three months ended
June 30, 2016, pretax investment income of $91.1 million increased 8.5%, or $7.1 million, (8.0%, or $4.5 million, after tax) compared
to the same period in the prior year. Pretax investment income of $175.8 million for the six months ended June 30, 2016 increased
5.1%, or $8.5 million, (4.5%, or $5.1 million, after tax) compared to the first half of 2015. The increase primarily reflected
growth in the size of the average investment portfolio on an amortized cost basis and continued managed performance in the fixed
maturity portfolios considering the low interest rate environment, partially offset by a decline in the average portfolio yield.
In addition, net investment income in the three and six months ended June 30, 2016 benefited from an increase in gains on investment
prepayments. Average invested assets increased 6.3% over the 12 months ended June 30, 2016. The average pretax yield on the investment
portfolio was 5.14% (3.43% after tax) for the first six months of 2016, compared to the pretax yield of 5.20% (3.49% after tax)
a year earlier. During the first six months of 2016, management continued to identify and purchase investments, including a modest
level of alternative investments, with attractive risk-adjusted yields without venturing into asset classes or individual securities
that would be inconsistent with the Company’s overall conservative investment guidelines.
Net Realized Investment Gains and Losses
(Pretax)
For the three months ended
June 30, 2016, net realized investment gains were $3.1 million compared to net realized investment gains of $1.4 million in the
same period in the prior year. For the six months, net realized investment gains were $2.9 million in 2016 compared to net realized
investment gains of $7.5 million in the prior year. The net gains and losses in both periods were realized primarily from ongoing
investment portfolio management activity and, when determined, the recording of impairment write-down charges.
For the first half of 2016,
the Company’s net realized investment gains of $2.9 million included $14.6 million of gross gains realized on security sales
and calls partially offset by $4.5 million of realized losses primarily on securities that were disposed of during the six months
and $7.2 million of impairment charges recorded largely on Puerto Rico and energy sector fixed maturity securities, as well as
some equity securities.
For the first half of 2015,
the Company’s net realized investment gains of $7.5 million included $23.6 million of gross gains realized on security sales
and calls partially offset by $3.1 million of realized losses on securities that were disposed of during the six months and $13.0
million of impairment charges recorded largely on Puerto Rico and energy sector fixed maturity securities and one unrelated equity
security. Of those impairment charges, $10.7 million was recorded in the second quarter of 2015.
The Company, from time
to time, sells securities subsequent to the balance sheet date that were considered temporarily impaired at the balance sheet date.
Such sales are due to issuer specific events occurring subsequent to the balance sheet date that result in a change in the Company’s
intent to sell an invested asset.
Fixed Maturity Securities
and Equity Securities Portfolios
The table below presents
the Company’s fixed maturity securities and equity securities portfolios by major asset class, including the ten largest
sectors of the Company’s corporate bond holdings (based on fair value). Compared to December 31, 2015, credit spreads were
slightly tighter across most asset classes at June 30, 2016 and U.S. Treasury rates decreased, which resulted in an increase in
net unrealized gains for virtually all classes of the Company’s fixed maturity securities holdings.
|
|
June 30, 2016
|
|
|
|
|
|
|
|
|
|
|
Amortized
|
|
Pretax Net
|
|
|
Number of
|
|
Fair
|
|
Cost or
|
|
Unrealized
|
|
|
Issuers
|
|
Value
|
|
Cost
|
|
Gain (Loss)
|
|
Fixed maturity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Banking and Finance
|
|
|
96
|
|
|
|
$
|
708.8
|
|
|
|
$
|
665.8
|
|
|
|
$
|
43.0
|
|
|
Insurance
|
|
|
50
|
|
|
|
|
239.9
|
|
|
|
|
215.5
|
|
|
|
|
24.4
|
|
|
Real estate
|
|
|
38
|
|
|
|
|
215.0
|
|
|
|
|
200.6
|
|
|
|
|
14.4
|
|
|
Energy (1)
|
|
|
47
|
|
|
|
|
192.3
|
|
|
|
|
177.7
|
|
|
|
|
14.6
|
|
|
Utilities
|
|
|
39
|
|
|
|
|
175.2
|
|
|
|
|
149.5
|
|
|
|
|
25.7
|
|
|
Healthcare
|
|
|
37
|
|
|
|
|
174.2
|
|
|
|
|
159.3
|
|
|
|
|
14.9
|
|
|
Technology
|
|
|
27
|
|
|
|
|
168.5
|
|
|
|
|
159.4
|
|
|
|
|
9.1
|
|
|
Transportation
|
|
|
25
|
|
|
|
|
160.2
|
|
|
|
|
151.0
|
|
|
|
|
9.2
|
|
|
Telecommunications
|
|
|
22
|
|
|
|
|
146.2
|
|
|
|
|
134.6
|
|
|
|
|
11.6
|
|
|
Broadcasting and Media
|
|
|
26
|
|
|
|
|
94.3
|
|
|
|
|
84.3
|
|
|
|
|
10.0
|
|
|
All Other Corporates (2)
|
|
|
168
|
|
|
|
|
612.5
|
|
|
|
|
575.1
|
|
|
|
|
37.4
|
|
|
Total corporate bonds
|
|
|
575
|
|
|
|
|
2,887.1
|
|
|
|
|
2,672.8
|
|
|
|
|
214.3
|
|
|
Mortgage-backed securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and federally sponsored agencies
|
|
|
374
|
|
|
|
|
510.3
|
|
|
|
|
452.0
|
|
|
|
|
58.3
|
|
|
Commercial (3)
|
|
|
100
|
|
|
|
|
418.7
|
|
|
|
|
405.1
|
|
|
|
|
13.6
|
|
|
Other
|
|
|
26
|
|
|
|
|
52.6
|
|
|
|
|
50.1
|
|
|
|
|
2.5
|
|
|
Municipal bonds (4)
|
|
|
535
|
|
|
|
|
1,745.8
|
|
|
|
|
1,509.4
|
|
|
|
|
236.4
|
|
|
Government bonds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
|
9
|
|
|
|
|
548.5
|
|
|
|
|
506.2
|
|
|
|
|
42.3
|
|
|
Foreign
|
|
|
14
|
|
|
|
|
79.1
|
|
|
|
|
71.4
|
|
|
|
|
7.7
|
|
|
Collateralized debt obligations (5)
|
|
|
109
|
|
|
|
|
657.9
|
|
|
|
|
661.3
|
|
|
|
|
(3.4
|
)
|
|
Asset-backed securities
|
|
|
98
|
|
|
|
|
581.7
|
|
|
|
|
581.9
|
|
|
|
|
(0.2
|
)
|
|
Total fixed maturity securities
|
|
|
1,840
|
|
|
|
$
|
7,481.7
|
|
|
|
$
|
6,910.2
|
|
|
|
$
|
571.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-redeemable preferred stocks
|
|
|
11
|
|
|
|
$
|
32.3
|
|
|
|
$
|
31.3
|
|
|
|
$
|
1.0
|
|
|
Common stocks
|
|
|
168
|
|
|
|
|
69.7
|
|
|
|
|
59.3
|
|
|
|
|
10.4
|
|
|
Closed-end fund
|
|
|
1
|
|
|
|
|
21.2
|
|
|
|
|
20.0
|
|
|
|
|
1.2
|
|
|
Total equity securities
|
|
|
180
|
|
|
|
$
|
123.2
|
|
|
|
$
|
110.6
|
|
|
|
$
|
12.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2,020
|
|
|
|
$
|
7,604.9
|
|
|
|
$
|
7,020.8
|
|
|
|
$
|
584.1
|
|
|
|
(1)
|
At June 30, 2016, $18.0 million were non-investment grade.
|
|
(2)
|
The All Other Corporates category contains
18 additional industry classifications. Consumer products, food and beverage, natural gas, metal and mining, gaming and retail
represented $427.5 million of fair value at June 30, 2016, with the remaining 12 classifications each representing less than $37
million.
|
|
(3)
|
At June 30, 2016, 99.9% were investment grade, with an overall credit rating of AA, and the positions
were well diversified by property type, geography and sponsor.
|
|
(4)
|
Holdings are geographically diversified, approximately 40% are tax-exempt and 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 June 30, 2016.
|
|
(5)
|
Based on fair value, 97% 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 June 30, 2016.
|
At June 30, 2016, the Company’s
diversified fixed maturity securities portfolio consisted of 2,353 investment positions, issued by 1,840 entities, and totaled
approximately $7.5 billion in fair value. This portfolio was 96.3% 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 June 30, 2016, 95.1% 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
|
|
June 30, 2016
|
|
|
|
December 31,
|
|
|
June 30,
|
|
Fair
|
|
Amortized
|
|
|
|
2015
|
|
|
2016
|
|
Value
|
|
Cost or Cost
|
|
Fixed maturity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AAA
|
|
|
7.0
|
%
|
|
|
|
7.6
|
%
|
|
|
$
|
566.7
|
|
|
|
$
|
539.6
|
|
|
AA (2)
|
|
|
36.1
|
|
|
|
|
36.3
|
|
|
|
|
2,717.3
|
|
|
|
|
2,465.1
|
|
|
A
|
|
|
23.9
|
|
|
|
|
23.4
|
|
|
|
|
1,750.9
|
|
|
|
|
1,595.6
|
|
|
BBB
|
|
|
29.5
|
|
|
|
|
29.0
|
|
|
|
|
2,167.4
|
|
|
|
|
2,024.7
|
|
|
BB
|
|
|
2.1
|
|
|
|
|
2.1
|
|
|
|
|
161.0
|
|
|
|
|
161.2
|
|
|
B
|
|
|
0.9
|
|
|
|
|
0.9
|
|
|
|
|
70.1
|
|
|
|
|
74.8
|
|
|
CCC or lower
|
|
|
0.1
|
|
|
|
|
0.2
|
|
|
|
|
12.4
|
|
|
|
|
14.5
|
|
|
Not rated (3)
|
|
|
0.4
|
|
|
|
|
0.5
|
|
|
|
|
35.9
|
|
|
|
|
34.7
|
|
|
Total fixed maturity securities
|
|
|
100.0
|
%
|
|
|
|
100.0
|
%
|
|
|
$
|
7,481.7
|
|
|
|
$
|
6,910.2
|
|
|
Equity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AAA
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
AA
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
A
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
BBB
|
|
|
35.2
|
%
|
|
|
|
26.2
|
%
|
|
|
$
|
32.3
|
|
|
|
$
|
31.3
|
|
|
BB
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
B
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
CCC or lower
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
Not rated
|
|
|
64.8
|
|
|
|
|
73.8
|
|
|
|
|
90.9
|
|
|
|
|
79.3
|
|
|
Total equity securities
|
|
|
100.0
|
%
|
|
|
|
100.0
|
%
|
|
|
$
|
123.2
|
|
|
|
$
|
110.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7,604.9
|
|
|
|
$
|
7,020.8
|
|
|
|
(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 June 30, 2016, the AA rated fair value amount included $548.5 million of U.S. Government and
federally sponsored agency securities and $578.6 million of mortgage- and asset-backed securities issued by U.S. Government and
federally sponsored agencies.
|
|
(3)
|
This category primarily represents private placement and municipal securities not rated by either
S&P or Moody’s.
|
At June 30, 2016, the fixed
maturity securities and equity securities portfolios had a combined $36.9 million pretax of gross unrealized losses on $1,153.1
million fair value related to 387 positions. Of the investment positions (fixed maturity securities and equity securities) with
gross unrealized losses, 21 were trading below 80% of book value at June 30, 2016 and were not considered other-than-temporarily
impaired. These positions had fair value of $24.3 million, representing 0.3% of the Company’s total investment portfolio
at fair value, and had a gross unrealized loss of $9.9 million.
The Company views the unrealized
losses of all of the securities at June 30, 2016 as temporary. 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
|
|
Six Months Ended
|
|
Change From
|
|
|
June 30,
|
|
Prior Year
|
|
June 30,
|
|
Prior Year
|
|
|
2016
|
|
2015
|
|
Percent
|
|
Amount
|
|
2016
|
|
2015
|
|
Percent
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and casualty
|
|
$
|
129.8
|
|
|
$
|
113.5
|
|
|
|
14.4
|
%
|
|
$
|
16.3
|
|
|
$
|
231.0
|
|
|
$
|
208.7
|
|
|
|
10.7
|
%
|
|
$
|
22.3
|
|
Annuity
|
|
|
0.8
|
|
|
|
0.6
|
|
|
|
33.3
|
%
|
|
|
0.2
|
|
|
|
1.7
|
|
|
|
0.9
|
|
|
|
88.9
|
%
|
|
|
0.8
|
|
Life
|
|
|
17.8
|
|
|
|
18.9
|
|
|
|
-5.8
|
%
|
|
|
(1.1
|
)
|
|
|
35.2
|
|
|
|
37.4
|
|
|
|
-5.9
|
%
|
|
|
(2.2
|
)
|
Total
|
|
$
|
148.4
|
|
|
$
|
133.0
|
|
|
|
11.6
|
%
|
|
$
|
15.4
|
|
|
$
|
267.9
|
|
|
$
|
247.0
|
|
|
|
8.5
|
%
|
|
$
|
20.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and casualty catastrophe losses, included above (1)
|
|
$
|
27.3
|
|
|
$
|
21.3
|
|
|
|
28.2
|
%
|
|
$
|
6.0
|
|
|
$
|
40.0
|
|
|
$
|
31.8
|
|
|
|
25.8
|
%
|
|
$
|
8.2
|
|
|
(1)
|
See footnote (1) to the table below.
|
Property and Casualty Claims and Claim Expenses
(“losses”)
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
June 30,
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
|
Incurred claims and claim expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Claims occurring in the current year
|
|
$
|
131.4
|
|
|
$
|
116.7
|
|
|
$
|
234.6
|
|
|
$
|
215.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decreased in estimated reserves for claims occurring in prior years (2)
|
|
|
(1.6
|
)
|
|
|
(3.2
|
)
|
|
|
(3.6
|
)
|
|
|
(7.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total claims
and claim expenses incurred
|
|
$
|
129.8
|
|
|
$
|
113.5
|
|
|
$
|
231.0
|
|
|
$
|
208.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and casualty loss ratio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
84.4
|
%
|
|
|
76.9
|
%
|
|
|
75.5
|
%
|
|
|
70.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of catastrophe costs, included above (1)
|
|
|
17.7
|
%
|
|
|
14.5
|
%
|
|
|
13.1
|
%
|
|
|
10.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of prior years’ reserve development, included above (2)
|
|
|
-1.0
|
%
|
|
|
-2.2
|
%
|
|
|
-1.2
|
%
|
|
|
-2.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Property and casualty catastrophe losses were incurred as follows:
|
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31
|
|
$
|
12.7
|
|
|
$
|
10.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30
|
|
|
27.3
|
|
|
|
21.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total year-to-date
|
|
$
|
40.0
|
|
|
$
|
31.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2)
|
Shows the amounts by which the Company decreased its reserves in each of the periods indicated
for claims occurring in previous years to reflect subsequent information on such claims and changes in their projected final settlement
costs.
|
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31
|
|
$
|
(2.0
|
)
|
|
$
|
(4.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30
|
|
|
(1.6
|
)
|
|
|
(3.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total year-to-date
|
|
$
|
(3.6
|
)
|
|
$
|
(7.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended
June 30, 2016, the Company’s benefits, claims and settlement expenses increased $15.4 million, or 11.6%, compared to the
prior year due to the increase in the property and casualty segment. Catastrophe losses increased $6.0 million compared to the
second quarter of 2015, including severe weather in Texas and the Midwest in the current period. Non-catastrophe weather also contributed
to increases in property and casualty current accident year loss frequencies — specifically, in automobile, which were partially
offset by a reduction in homeowners current accident year non-catastrophe losses. Included in the second quarter 2016 property
and casualty segment amount was approximately $3.5 million of unfavorable development of first quarter 2016 automobile weather-related
losses. For the life segment, life mortality costs were $1.1 million lower than
the second quarter of 2015. Variability in the
Company’s life mortality experience is not unexpected considering the moderate size of Horace Mann’s life insurance
in force.
For the six months ended
June 30, 2016, the Company’s benefits, claims and settlement expenses increased $20.9 million, or 8.5%, compared to the prior
year primarily reflecting increases in property and casualty current accident year loss severity and frequency— specifically,
in automobile — and catastrophe costs, partially offset by a reduction in homeowners current accident year non-catastrophe
losses and a $2.2 million decrease in life mortality costs.
For the first half of 2016,
the favorable development of prior years’ property and casualty reserves of $3.6 million was the result of actual and remaining
projected losses for prior years being below the level anticipated in the immediately preceding December 31 loss reserve estimate
and was primarily the result of favorable severity trends in homeowners loss emergence for accident years 2014 and prior.
For the first half of 2015,
the favorable development of prior years’ property and casualty reserves of $7.2 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 six months ended
June 30, 2016, the automobile loss ratio of 78.4% increased by 6.9 percentage points compared to the prior year, including the
favorable impact of rate actions taken in recent years offset by (1) the impacts of higher current accident year non-catastrophe
losses for 2016 primarily driven by loss severity but accompanied by a second quarter increase in loss frequencies and (2) development
of prior years’ reserves that had a 1.4 percentage point less favorable impact in the current year. The homeowners loss ratio
of 69.6% for the six months ended June 30, 2016 decreased 1.1 percentage points compared to a year earlier, including favorable
current accident year non-catastrophe experience as well as a 0.2 percentage point decrease due to a higher amount of favorable
development of prior years’ reserves recorded in 2016. Catastrophe costs represented 34.2 percentage points of the homeowners
loss ratio for the current six months compared to 29.7 percentage points for the prior year period.
Interest Credited to
Policyholders
|
|
Three Months Ended
|
|
Change From
|
|
Six Months Ended
|
|
Change From
|
|
|
June 30,
|
|
Prior Year
|
|
June 30,
|
|
Prior Year
|
|
|
2016
|
|
2015
|
|
Percent
|
|
Amount
|
|
2016
|
|
2015
|
|
Percent
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annuity
|
|
$
|
36.4
|
|
|
$
|
34.4
|
|
|
|
5.8
|
%
|
|
$
|
2.0
|
|
|
$
|
72.0
|
|
|
$
|
67.9
|
|
|
|
6.0
|
%
|
|
$
|
4.1
|
|
Life
|
|
|
11.2
|
|
|
|
11.0
|
|
|
|
1.8
|
%
|
|
|
0.2
|
|
|
|
22.3
|
|
|
|
22.0
|
|
|
|
1.4
|
%
|
|
|
0.3
|
|
Total
|
|
$
|
47.6
|
|
|
$
|
45.4
|
|
|
|
4.8
|
%
|
|
$
|
2.2
|
|
|
$
|
94.3
|
|
|
$
|
89.9
|
|
|
|
4.9
|
%
|
|
$
|
4.4
|
|
For the three and six months
ended June 30, 2016, interest credited increased approximately 5% compared to the same periods in 2015. Compared to the first six
months of 2015, the current year increase in annuity segment interest credited reflected a 7.6% increase in average accumulated
fixed deposits, partially offset by a 1 basis point decline in the average annual interest rate credited to 3.56%. Life insurance
interest credited increased slightly as a result of the growth in reserves for life insurance products with account values.
The net interest spread
on fixed annuity assets under management 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
six months ended June 30, 2016 and 2015, were 185 basis points and 190 basis points, respectively. The interest spread decreased
due to pressures of the low interest rate environment, partially offset by a continuation of disciplined crediting rate management
and an increase in gains on investment prepayments.
As of June 30, 2016, fixed
annuity account values totaled $4.3 billion, including $4.1 billion of deferred annuities. As shown in the table below, for approximately
86%, or $3.5 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 6 basis points and 14 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
June 30, 2016 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.
|
|
June 30, 2016
|
|
|
|
|
|
|
|
|
Deferred Annuities at
|
|
|
|
Total Deferred Annuities
|
|
Minimum Guaranteed Rate
|
|
|
|
|
|
|
|
|
Percent of
|
|
|
|
|
|
|
|
|
|
Percent
|
|
Accumulated
|
|
Total Deferred
|
|
|
Percent
|
|
Accumulated
|
|
|
|
of Total
|
|
Value (“AV”)
|
|
Annuities AV
|
|
|
of Total
|
|
Value
|
|
Minimum guaranteed interest rates:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 2%
|
|
|
22.5
|
%
|
|
|
$
|
921.5
|
|
|
|
|
41.8
|
%
|
|
|
|
11.0
|
%
|
|
|
$
|
385.3
|
|
|
Equal to 2% but less than 3%
|
|
|
7.5
|
|
|
|
|
306.9
|
|
|
|
|
82.8
|
%
|
|
|
|
7.3
|
|
|
|
|
254.2
|
|
|
Equal to 3% but less than 4%
|
|
|
14.5
|
|
|
|
|
593.0
|
|
|
|
|
99.3
|
%
|
|
|
|
16.8
|
|
|
|
|
588.7
|
|
|
Equal to 4% but less than 5%
|
|
|
54.1
|
|
|
|
|
2,216.2
|
|
|
|
|
100.0
|
%
|
|
|
|
63.3
|
|
|
|
|
2,216.2
|
|
|
5% or higher
|
|
|
1.4
|
|
|
|
|
56.4
|
|
|
|
|
100.0
|
%
|
|
|
|
1.6
|
|
|
|
|
56.4
|
|
|
Total
|
|
|
100.0
|
%
|
|
|
$
|
4,094.0
|
|
|
|
|
85.5
|
%
|
|
|
|
100.0
|
%
|
|
|
$
|
3,500.8
|
|
|
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, 2015, and other factors discussed herein.
Policy Acquisition Expenses
Amortized
Amortized policy acquisition
expenses were $24.5 million for the three months ended June 30, 2016 compared to $24.0 million for the same period in 2015. At
June 30, 2016, annuity segment unlocking resulted in a $0.5 million increase in amortization compared to a $0.1 million increase
in amortization in the prior year. For the life segment, unlocking resulted in an immaterial change in amortization at both June
30, 2016 and 2015.
Amortized policy acquisition
expenses were $48.6 million for the first six months of 2016 compared to $47.7 million for the same period in 2015. The increase
was largely attributable to the annuity segment including the impact of the unlocking of deferred policy acquisition costs (“unlocking”).
In addition, increases in the annuity and property and casualty segments in the first half of 2016 reflected the growth in premiums
and related commissions for each segment. At June 30, 2016, annuity segment unlocking resulted in a $0.7 million increase in amortization
largely due to financial market performance — compared to no impact on amortization in the prior year. For the life segment,
unlocking resulted in an immaterial change in amortization at both June 30, 2016 and 2015.
Operating Expenses
For the three months ended
June 30, 2016, operating expenses of $43.3 million increased $3.3 million, or 8.2%, compared to the second quarter of 2015.
For the first six months
of 2016, operating expenses of $86.1 million increased $10.2 million, or 13.4%, compared to the same period in the prior year.
In 2015, year to date expenses reflected a reduction in incentive compensation expense (recorded in the first quarter) with the
majority of the cost reduction benefiting the property and casualty segment. 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 27.3% for the six months ended June 30, 2016 increased 1.2 percentage points compared to the prior year expense
ratio of 26.1%, consistent with management’s expectations for the current period. The 2015 incentive compensation expense
reduction reduced the expense ratio for the six months by 0.7 percentage points.
Income Tax Expense
The effective income tax
rate on the Company’s pretax income, including net realized investment gains and losses, was 28.8% and 29.0% for the six
months ended June 30, 2016 and 2015, respectively. Income from investments in tax-advantaged securities reduced the effective income
tax rates 6.9 and 6.8 percentage points for the six months ended June 30, 2016 and 2015, 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 June 30, 2016, the Company’s
federal income tax returns for years prior to 2012 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
June 30, 2016, the Company’s net income of $11.8 million represented a decrease of $4.4 million compared to the prior year.
For the six months ended June 30, 2016, the Company’s net income of $37.0 million represented a decrease of $13.5 million
as improvements in current accident year non-catastrophe results for homeowners and a reduced level of life mortality losses were
more than offset by a higher level of catastrophe losses, pressure on automobile current accident year loss experience, and a $3.7
million reduction in realized investment gains compared to the prior year. Additional detail is included in the “Executive
Summary” at the beginning of this MD&A.
Net income (loss) by segment
and net income per share were as follows:
|
|
Three Months Ended
|
|
Change From
|
|
Six Months Ended
|
|
Change From
|
|
|
June 30,
|
|
Prior Year
|
|
June 30,
|
|
Prior Year
|
|
|
2016
|
|
2015
|
|
Percent
|
|
Amount
|
|
2016
|
|
2015
|
|
Percent
|
|
Amount
|
Analysis of net income (loss) by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and casualty
|
|
$
|
(4.5
|
)
|
|
$
|
3.3
|
|
|
|
N.M.
|
|
|
$
|
(7.8
|
)
|
|
$
|
9.3
|
|
|
$
|
20.9
|
|
|
|
-55.5
|
%
|
|
$
|
(11.6
|
)
|
Annuity
|
|
|
13.0
|
|
|
|
11.8
|
|
|
|
10.2
|
%
|
|
|
1.2
|
|
|
|
23.6
|
|
|
|
24.3
|
|
|
|
-2.9
|
%
|
|
|
(0.7
|
)
|
Life
|
|
|
4.6
|
|
|
|
3.6
|
|
|
|
27.8
|
%
|
|
|
1.0
|
|
|
|
8.5
|
|
|
|
7.0
|
|
|
|
21.4
|
%
|
|
|
1.5
|
|
Corporate and other (1)
|
|
|
(1.3
|
)
|
|
|
(2.5
|
)
|
|
|
-48.0
|
%
|
|
|
1.2
|
|
|
|
(4.4
|
)
|
|
|
(1.7
|
)
|
|
|
158.8
|
%
|
|
|
(2.7
|
)
|
Net income
|
|
$
|
11.8
|
|
|
$
|
16.2
|
|
|
|
-27.2
|
%
|
|
$
|
(4.4
|
)
|
|
$
|
37.0
|
|
|
$
|
50.5
|
|
|
|
-26.7
|
%
|
|
$
|
(13.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of catastrophe costs, after tax, included above
|
|
$
|
(17.7
|
)
|
|
$
|
(13.8
|
)
|
|
|
28.3
|
%
|
|
$
|
(3.9
|
)
|
|
$
|
(26.0
|
)
|
|
$
|
(20.6
|
)
|
|
|
26.2
|
%
|
|
$
|
(5.4
|
)
|
Effect of realized investment gains (losses), after tax, included above
|
|
$
|
1.5
|
|
|
$
|
0.8
|
|
|
|
87.5
|
%
|
|
$
|
0.7
|
|
|
$
|
1.1
|
|
|
$
|
4.8
|
|
|
|
-77.1
|
%
|
|
$
|
(3.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share
|
|
$
|
0.29
|
|
|
$
|
0.38
|
|
|
|
-23.7
|
%
|
|
$
|
(0.09
|
)
|
|
$
|
0.89
|
|
|
$
|
1.19
|
|
|
|
-25.2
|
%
|
|
$
|
(0.30
|
)
|
Weighted average number of shares and equivalent shares (in millions)
|
|
|
41.3
|
|
|
|
42.4
|
|
|
|
-2.6
|
%
|
|
|
(1.1
|
)
|
|
|
41.4
|
|
|
|
42.4
|
|
|
|
-2.4
|
%
|
|
|
(1.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and casualty combined ratio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
111.6
|
%
|
|
|
103.7
|
%
|
|
|
N.M.
|
|
|
|
7.9
|
%
|
|
|
102.8
|
%
|
|
|
97.0
|
%
|
|
|
N.M.
|
|
|
|
5.8
|
%
|
Effect of catastrophe costs, included above
|
|
|
17.7
|
%
|
|
|
14.5
|
%
|
|
|
N.M.
|
|
|
|
3.2
|
%
|
|
|
13.1
|
%
|
|
|
10.7
|
%
|
|
|
N.M.
|
|
|
|
2.4
|
%
|
Effect of prior years’ reserve development, included above
|
|
|
-1.0
|
%
|
|
|
-2.2
|
%
|
|
|
N.M.
|
|
|
|
1.2
|
%
|
|
|
-1.2
|
%
|
|
|
-2.4
|
%
|
|
|
N.M.
|
|
|
|
1.2
|
%
|
N.M. - Not meaningful.
|
(1)
|
The corporate and other segment includes interest expense on debt, realized investment gains and
losses, corporate debt retirement costs (when applicable), 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. For the six months ended June 30, 2016, net realized investment gains after tax were $1.1
million, compared to net realized investment gains of $4.8 million a year earlier. In addition, the current period reflected a
$1.1 million pretax reduction in debt interest expense as a result of the refinancing transactions completed in 2015.
Return on average shareholders’
equity based on net income was 6.0% and 8.0% for the trailing 12 months ended June 30, 2016 and 2015, respectively.
Outlook for 2016
At the time of this Quarterly
Report on Form 10-Q, management estimates that 2016 full year net income before realized investment gains and losses will be within
a range of $1.80 to $2.00 per diluted share. This projection incorporates the Company’s results for the first six months
of 2016, which were impacted by a higher than anticipated level of weather-related catastrophe and non-catastrophe losses for the
property and casualty segment. For full year 2016, the Company now anticipates its underlying property and casualty combined ratio
to be similar to the result for full year 2015, as continued pressure from current accident year automobile loss frequency and
severity, a lower amount of property and casualty favorable prior years’ reserve development and a modest increase in segment
specific infrastructure expenses largely offset improvements in the property line. Catastrophe losses for the last six months of
2016 are estimated to be similar to historical averages. Net income for the annuity and life segments combined is anticipated to
be comparable to full year 2015, reflecting investment interest rate pressure and additional expenses — compared to 2015
and as described below — related to the Company’s continued modernization of technology and infrastructure, as well
as costs incurred to address regulatory changes. As a result of the continued low interest rate environment, management expects
the Company’s overall portfolio yield to decline by approximately 10 basis points over the course of full year 2016, impacting
each of the three business segments. Net income for the annuity segment will continue to be impacted by the prolonged interest
rate environment and the 2015 net interest spread of 184 basis points is anticipated to slowly grade down through the course of
2016. Though life mortality experience was more favorable than anticipated for the first half of 2016, mortality costs continue
to be consistent with the Company’s actuarial models and life segment net income is expected to be comparable to 2015, due
to investment interest rate pressure and the increase in expenses. In addition to the segment-specific factors, the Company’s
initiatives for customer service and infrastructure improvements, as well as enhanced training and education for the Company’s
agency force, all intended to enhance the overall customer experience and support further improvement in policy retention and business
cross-sale ratios, will continue and result in a moderate increase in expense levels compared to 2015.
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, 2015 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 June 30, 2016 and 2015,
the Company did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred
to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance
sheet arrangements or for other contractually narrow or limited purposes. As such, the Company is not exposed to any financing,
liquidity, market or credit risk that could arise if the Company engaged in such relationships.
Investments
Information regarding the
Company’s investment portfolio, which is comprised primarily of investment grade, fixed income securities, is located in
“Results of Operations — Net Realized Investment Gains and Losses (Pretax)” 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 six months of 2016, net cash provided
by operating activities increased compared to the same period in 2015, largely due to an increase in investment income collected,
as well as the increase in premiums collected in the current period exceeding the increase in claims and policyholder benefits
paid in the current period. In addition, current period federal income tax payments were less than the prior year.
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 2016 from all of HMEC’s insurance subsidiaries without
prior regulatory approval is approximately $90 million, of which $40.6 million was paid during the six months ended June 30, 2016.
Although regulatory restrictions exist, dividend availability from subsidiaries has been, and is expected to be, adequate for HMEC’s
capital needs. Additional information is contained in “Notes to Consolidated Financial Statements — Note 10 —
Statutory Information and Restrictions” of the Company’s Annual Report on Form 10-K for the year ended December 31,
2015.
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 six months of 2016. For the six months ended June 30, 2016, receipts from
annuity contracts decreased $45.6 million, or 16.1%, 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 decreased $16.0 million, or 9.0%, 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 10 — Statutory Information and Restrictions”
of the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.
The total capital of the
Company was $1,664.4 million at June 30, 2016, including $247.1 million of long-term debt. Total debt represented 18.5% of total
capital excluding unrealized investment gains and losses (14.8% including unrealized investment gains and losses) at June 30, 2016,
which was below the Company’s long-term target of 25%. Note that this information regarding long-term debt reflects the Company’s
January 1, 2016 adoption of new accounting guidance regarding the presentation of debt issuance costs as discussed in “Notes
to Consolidated Financial Statements — Note 1 — Adopted Accounting Standards”.
Shareholders’ equity
was $1,417.3 million at June 30, 2016, including a net unrealized gain in the Company’s investment portfolio of $329.7 million
after taxes and the related impact of deferred policy acquisition costs associated with investment contracts and life insurance
products with account values. The market value of the Company’s common stock and the market value per share were $1,356.3
million and $33.79, respectively, at June 30, 2016. Book value per share was $35.31 at June 30, 2016 ($27.10 excluding investment
fair value adjustments).
Additional information
regarding the net unrealized gain in the Company’s investment portfolio at June 30, 2016 is included in “Results of
Operations — Net Realized Investment Gains and Losses (Pretax)”.
Total shareholder dividends
were $22.2 million for the six months ended June 30, 2016. In March and May 2016, the Board of Directors announced regular quarterly
dividends of $0.265 per share.
During the first six months
of 2016, the Company repurchased 701,410 shares of its common stock, or 1.7% of the outstanding shares on December 31, 2015, at
an aggregate cost of $21.5 million, or an average price per share of $30.65 under its share repurchase program, which is further
described in “Notes to Consolidated Financial Statements — Note 9 — Shareholders’ Equity and Common Stock
Equivalents” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2015. The repurchase of shares
was funded through use of cash. As of June 30, 2016, $29.5 million remained authorized for future share repurchases under the 2015
repurchase program. Utilization of the remaining authorization under the 2011 program was completed in January 2016.
As of June 30, 2016, the
Company had outstanding $250.0 million aggregate principal amount of 4.50% Senior Notes (“Senior Notes due 2025”),
which will mature on December 1, 2025, issued at a discount resulting in an effective yield of 4.53%. Interest on the Senior Notes
due 2025 is payable semi-annually at a rate of 4.50%. Detailed information regarding the redemption terms of the Senior Notes due
2025 is contained in the “Notes to Consolidated Financial Statements — Note 7 — Debt” of the Company’s
Annual Report on Form 10-K for the year ended December 31, 2015. The Senior Notes due 2025 are traded in the open market (HMN 4.50).
As of June 30, 2016, the
Company had no balance 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. The unused portion of the Bank Credit Facility is subject
to a variable commitment fee, which was 0.15% on an annual basis at June 30, 2016.
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. The Senior Notes due 2025, described
above, were issued utilizing this registration statement. No other securities associated with the registration statement have been
issued as of the date of this Quarterly Report on Form 10-Q.
Financial
Ratings
HMEC’s principal
insurance subsidiaries are rated by S&P, Moody’s, A.M. Best Company, Inc. (“A.M. Best”) 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. These ratings are not a recommendation to buy or hold
any of the Company’s securities.
With the exception of the
ratings by A.M. Best, assigned ratings as of July 31, 2016 were unchanged from the disclosure in the Company’s Annual Report
on Form 10-K for the year ended December 31, 2015. In March 2016, A.M. Best upgraded the insurance financial strength rating of
the Company’s property and casualty subsidiaries to “A (Excellent)” from “A- (Excellent)”. 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
|
|
Debt Ratings
|
|
(Outlook)
|
|
(Outlook)
|
As of July 31, 2016
|
|
|
|
S&P
|
A
|
(stable)
|
|
BBB
|
(stable)
|
Moody’s
|
|
|
|
|
|
Horace Mann Life Insurance Company
|
A3
|
(positive)
|
|
N.A.
|
|
HMEC’s property and casualty subsidiaries
|
A3
|
(stable)
|
|
N.A.
|
|
HMEC
|
N.A.
|
|
|
Baa3
|
(positive)
|
A.M. Best
|
A
|
(stable)
|
|
bbb
|
(stable)
|
Fitch
|
A
|
(stable)
|
|
BBB
|
(stable)
|
N.A. – Not applicable.
Reinsurance Programs
Information regarding the
reinsurance program for the Company’s property and casualty segment is located in “Business — Property and Casualty
Segment — Property and Casualty Reinsurance” of the Company’s Annual Report on Form 10-K for the year ended December
31, 2015.
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, 2015.
Market Value Risk
Market value risk, the
Company’s primary market risk exposure, is the risk that the Company’s invested assets will decrease in value. This
decrease in value may be due to (1) a change in the yields realized on the Company’s assets and prevailing market yields
for similar assets, (2) an unfavorable change in the liquidity of the investment, (3) an unfavorable change in the financial prospects
of the issuer of the investment, or (4) a downgrade in the credit rating of the issuer of the investment. See also “Results
of Operations — Net Realized Investment Gains and Losses (Pretax)”.
Significant changes in
interest rates expose the Company to the risk of experiencing losses or earning a reduced level of income based on the difference
between the interest rates earned on the Company’s investments and the credited interest rates on the Company’s insurance
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, 2015.
Recent Accounting Changes
Measurement of Credit
Losses on Financial Instruments
In June 2016, the Financial
Accounting Standards Board (“FASB”) issued guidance to improve financial reporting by requiring timelier recording
of credit losses on loans and other financial instruments, including reinsurance receivables, held by companies. The new guidance
replaces the incurred loss impairment methodology and requires an organization to measure and recognize all current expected credit
losses (“CECL”) for financial assets held at the reporting date based on historical experience, current conditions,
and reasonable and supportable forecasts. Companies will need to utilize forward-looking information to better inform their credit
loss estimates. Companies will continue to use judgment to determine which loss estimation method is appropriate for their circumstances.
Credit losses related to available for sale debt securities — which represent over 90% of Horace Mann’s total investment
portfolio — will be recorded through an allowance for credit losses with this allowance having a limit equal to the amount
by which fair value is below amortized cost. The guidance also requires enhanced qualitative and quantitative disclosures to provide
additional information about the amounts recorded in the financial statements. For public business entities that are SEC filers,
the guidance is effective for annual reporting periods beginning after December 15, 2019, including interim periods within those
years, using a modified-retrospective approach. Early application is permitted for annual reporting periods, and interim periods
within those years, beginning after December 15, 2018. Management is evaluating the
impact this guidance will have on the results
of operations and financial position of the Company.
Employee Share-based
Payment Accounting
In March 2016, the FASB
issued guidance to simplify and improve the accounting for employee share-based payment transactions. Under the new guidance, several
aspects of the accounting for share-based payment transactions are changed including: (1) the entire tax impact of the difference
between the company’s share-based payment deduction for tax purposes and the compensation cost recognized in the financial
statements (“excess tax benefits”) will be recorded in the income statement (the additional paid-in capital pool is
eliminated) and classified with other income tax cash flows as an operating activity in the statement of cash flows; (2) election
of an accounting policy regarding forfeitures, either retaining the current GAAP approach of estimating forfeitures or accounting
for forfeitures when they occur; (3) companies may withhold up to the maximum individual statutory tax rate without triggering
classification of the award as a liability; (4) cash paid to satisfy the statutory income tax withholding obligation is to be classified
as a financing activity in the statement of cash flows; and (5) certain additional aspects which apply only to nonpublic entities.
There are different approaches specified for transition to the new guidance encompassing prospective, retrospective and modified
retrospective (cumulative-effect adjustment) approaches. The guidance is effective for annual reporting periods beginning after
December 15, 2016, including interim periods within those years. Early application is permitted; however, all components of the
guidance must be implemented at the same time. Management is evaluating the impact this guidance will have on the results of operations
and financial position of the Company.
Accounting for Leases
In February 2016, the FASB
issued accounting and disclosure guidance to improve financial reporting and comparability among organizations about leasing transactions.
Under the new guidance, for leases with lease terms of more than 12 months, a lessee will be required to recognize assets and liabilities
on the balance sheet for the rights and obligations created by those leases. Consistent with current accounting guidance, the recognition,
measurement and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification
as a finance or an operating lease. However, while current guidance requires only capital leases to be recognized on the balance
sheet, the new guidance will require both operating and capital leases to be recognized on the balance sheet. In transition to
the new guidance, companies are required to recognize and measure leases at the beginning of the earliest period presented using
a modified retrospective approach. The guidance is effective for annual reporting periods beginning after December 15, 2018, including
interim periods within those years. Early application is permitted. Management is evaluating the impact this guidance will have
on the results of operations and financial position of the Company.
Recognition and Measurement
of Financial Assets and Liabilities
In January 2016, the FASB
issued accounting guidance to improve certain aspects of the recognition, measurement, presentation and disclosure of financial
instruments. Among other things, this guidance requires public entities to measure equity investments (except those accounted for
under the equity method of accounting or those that result in consolidation of the investee) at fair value with changes in fair
value recognized in net income and to perform a qualitative assessment to identify impairment for equity investments without readily
determinable fair values. Companies are required to apply this guidance by means of a cumulative-effect adjustment to the balance
sheet as of the beginning of the year of adoption and, for the guidance related to equity securities without readily determinable
fair values, companies are required to apply a prospective approach to equity investments that exist as of the date of adoption.
The guidance is effective for annual reporting periods beginning after December 15, 2017, including interim periods within those
years. Early application is permitted. Management is evaluating the impact this guidance will have on the results of operations
and financial position of the Company.
Disclosures About Short-Duration
Insurance Contracts
In May 2015, the FASB issued
accounting guidance which will require expanded disclosure regarding claims on short-duration insurance contracts, which will apply
to the contracts in the Company’s property and casualty segment. Disclosures are to include additional information about
an entity’s initial claim estimates and subsequent adjustments to those estimates, methodologies and judgments in estimating
claims, and the timing, frequency and severity of claims. The guidance requiring these additional disclosures is effective for
annual periods beginning after December 15, 2015, and for interim periods within annual periods beginning after December 31, 2016.
The adoption of this accounting guidance will not have an 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; in
August 2015, the effective date was deferred for one year. 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, 2017,
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.