REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
The Board of Directors and Shareholders
Horace Mann Educators Corporation:
We have reviewed the consolidated balance sheet of Horace
Mann Educators Corporation and subsidiaries (the Company) as of March 31, 2017, and the related consolidated statements of operations,
comprehensive income, changes in shareholders’ equity, and cash flows for the three-month periods ended March 31, 2017 and
2016. 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, 2016, 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 March 1, 2017,
we expressed an unqualified opinion on those consolidated financial statements.
/s/ KPMG LLP
|
|
KPMG LLP
|
|
|
|
Chicago, Illinois
|
|
May 9, 2017
|
|
HORACE MANN EDUCATORS CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(Unaudited)
|
|
|
|
|
ASSETS
|
Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities, available for sale, at fair value
(amortized cost 2017, $7,173,235; 2016, $7,152,127)
|
|
|
$
|
7,510,750
|
|
|
|
|
$
|
7,456,708
|
|
|
Equity securities, available for sale, at fair value
(cost 2017, $143,203; 2016, $134,013)
|
|
|
|
156,975
|
|
|
|
|
|
141,649
|
|
|
Short-term and other investments
|
|
|
|
456,560
|
|
|
|
|
|
401,015
|
|
|
Total investments
|
|
|
|
8,124,285
|
|
|
|
|
|
7,999,372
|
|
|
Cash
|
|
|
|
6,593
|
|
|
|
|
|
16,670
|
|
|
Deferred policy acquisition costs
|
|
|
|
265,612
|
|
|
|
|
|
267,580
|
|
|
Goodwill
|
|
|
|
47,396
|
|
|
|
|
|
47,396
|
|
|
Other assets
|
|
|
|
324,155
|
|
|
|
|
|
321,874
|
|
|
Separate Account (variable annuity) assets
|
|
|
|
2,011,464
|
|
|
|
|
|
1,923,932
|
|
|
Total assets
|
|
|
$
|
10,779,505
|
|
|
|
|
$
|
10,576,824
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
Policy liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment contract and life policy reserves
|
|
|
$
|
5,502,992
|
|
|
|
|
$
|
5,447,969
|
|
|
Unpaid claims and claim expenses
|
|
|
|
340,033
|
|
|
|
|
|
329,888
|
|
|
Unearned premiums
|
|
|
|
240,816
|
|
|
|
|
|
246,274
|
|
|
Total policy liabilities
|
|
|
|
6,083,841
|
|
|
|
|
|
6,024,131
|
|
|
Other policyholder funds
|
|
|
|
711,395
|
|
|
|
|
|
708,950
|
|
|
Other liabilities
|
|
|
|
403,714
|
|
|
|
|
|
378,620
|
|
|
Long-term debt
|
|
|
|
247,273
|
|
|
|
|
|
247,209
|
|
|
Separate Account (variable annuity) liabilities
|
|
|
|
2,011,464
|
|
|
|
|
|
1,923,932
|
|
|
Total liabilities
|
|
|
|
9,457,687
|
|
|
|
|
|
9,282,842
|
|
|
Preferred stock, $0.001 par value, authorized
1,000,000 shares; none issued
|
|
|
|
-
|
|
|
|
|
|
-
|
|
|
Common stock, $0.001 par value, authorized 75,000,000 shares;
issued, 2017, 65,215,048; 2016, 64,917,683
|
|
|
|
65
|
|
|
|
|
|
65
|
|
|
Additional paid-in capital
|
|
|
|
454,982
|
|
|
|
|
|
453,479
|
|
|
Retained earnings
|
|
|
|
1,159,532
|
|
|
|
|
|
1,155,732
|
|
|
Accumulated other comprehensive income (loss), net of taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized investment gains on fixed
maturity
and equity securities
|
|
|
|
198,271
|
|
|
|
|
|
175,738
|
|
|
Net funded status of benefit plans
|
|
|
|
(11,817
|
)
|
|
|
|
|
(11,817
|
)
|
|
Treasury stock, at cost, 2017, 24,672,932 shares;
2016, 24,672,932 shares
|
|
|
|
(479,215
|
)
|
|
|
|
|
(479,215
|
)
|
|
Total shareholders’ equity
|
|
|
|
1,321,818
|
|
|
|
|
|
1,293,982
|
|
|
Total liabilities and shareholders’ equity
|
|
|
$
|
10,779,505
|
|
|
|
|
$
|
10,576,824
|
|
|
See accompanying Notes to Consolidated Financial Statements.
See accompanying Report of Independent Registered Public
Accounting Firm.
HORACE MANN EDUCATORS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(Dollars in thousands, except per share data)
|
|
Three Months Ended
|
|
|
|
|
March 31,
|
|
|
|
|
|
2017
|
|
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
Insurance premiums and contract charges earned
|
|
$
|
195,722
|
|
|
$
|
185,450
|
|
Net investment income
|
|
|
90,711
|
|
|
|
84,659
|
|
Net realized investment losses
|
|
|
(242
|
)
|
|
|
(154
|
)
|
Other income
|
|
|
1,113
|
|
|
|
1,348
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
287,304
|
|
|
|
271,303
|
|
|
|
|
|
|
|
|
|
|
Benefits, losses and expenses
|
|
|
|
|
|
|
|
|
Benefits, claims and settlement expenses
|
|
|
144,096
|
|
|
|
119,513
|
|
Interest credited
|
|
|
48,774
|
|
|
|
46,690
|
|
Policy acquisition expenses amortized
|
|
|
24,886
|
|
|
|
24,052
|
|
Operating expenses
|
|
|
48,756
|
|
|
|
42,796
|
|
Interest expense
|
|
|
2,956
|
|
|
|
2,935
|
|
|
|
|
|
|
|
|
|
|
Total benefits, losses and expenses
|
|
|
269,468
|
|
|
|
235,986
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
17,836
|
|
|
|
35,317
|
|
Income tax expense
|
|
|
2,518
|
|
|
|
10,164
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
15,318
|
|
|
$
|
25,153
|
|
|
|
|
|
|
|
|
|
|
Net income per share
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.37
|
|
|
$
|
0.61
|
|
Diluted
|
|
$
|
0.37
|
|
|
$
|
0.61
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares
and equivalent shares (in thousands)
|
|
|
|
|
|
|
|
|
Basic
|
|
|
41,135
|
|
|
|
41,297
|
|
Diluted
|
|
|
41,342
|
|
|
|
41,492
|
|
|
|
|
|
|
|
|
|
|
Net realized investment gains (losses)
|
|
|
|
|
|
|
|
|
Total other-than-temporary impairment
losses on securities
|
|
$
|
(2,797
|
)
|
|
$
|
(3,673
|
)
|
Portion of losses recognized in other
comprehensive income
|
|
|
-
|
|
|
|
-
|
|
Net other-than-temporary impairment losses
on securities recognized in earnings
|
|
|
(2,797
|
)
|
|
|
(3,673
|
)
|
Realized gains, net
|
|
|
2,555
|
|
|
|
3,519
|
|
Total
|
|
$
|
(242
|
)
|
|
$
|
(154
|
)
|
See accompanying Notes to Consolidated Financial Statements.
See accompanying Report of Independent Registered Public
Accounting Firm.
HORACE MANN EDUCATORS CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(Dollars in thousands)
|
|
Three Months Ended
|
|
|
|
|
March 31,
|
|
|
|
|
|
2017
|
|
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
15,318
|
|
|
$
|
25,153
|
|
Other comprehensive income, net of taxes:
|
|
|
|
|
|
|
|
|
Change in net unrealized investment gains
and losses on fixed maturity and equity securities
|
|
|
22,533
|
|
|
|
69,490
|
|
Change in net funded status of benefit plans
|
|
|
-
|
|
|
|
-
|
|
Other comprehensive income
|
|
|
22,533
|
|
|
|
69,490
|
|
Total
|
|
$
|
37,851
|
|
|
$
|
94,643
|
|
See accompanying Notes to Consolidated Financial Statements.
See accompanying Report of Independent Registered Public
Accounting Firm.
HORACE MANN EDUCATORS CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’
EQUITY (UNAUDITED)
(Dollars in thousands, except per share data)
|
|
Three Months Ended
|
|
|
|
|
March 31,
|
|
|
|
|
|
2017
|
|
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par value
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
65
|
|
|
$
|
65
|
|
Options exercised, 2017, 33,764 shares; 2016, 84,850 shares
|
|
|
-
|
|
|
|
-
|
|
Conversion of common stock units,
2017, 15,981 shares; 2016, 8,538 shares
|
|
|
-
|
|
|
|
-
|
|
Conversion of restricted stock units,
2017, 247,620 shares; 2016, 165,794 shares
|
|
|
-
|
|
|
|
-
|
|
Ending balance
|
|
|
65
|
|
|
|
65
|
|
|
|
|
|
|
|
|
|
|
Additional paid-in capital
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
|
453,479
|
|
|
|
442,648
|
|
Options exercised and conversion of common stock
units and restricted stock units
|
|
|
(750
|
)
|
|
|
353
|
|
Share-based compensation expense
|
|
|
2,253
|
|
|
|
1,910
|
|
Ending balance
|
|
|
454,982
|
|
|
|
444,911
|
|
|
|
|
|
|
|
|
|
|
Retained earnings
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
|
1,155,732
|
|
|
|
1,116,277
|
|
Net income
|
|
|
15,318
|
|
|
|
25,153
|
|
Cash dividends, 2017, $0.275 per share;
2016, $0.265 per share
|
|
|
(11,518
|
)
|
|
|
(11,114
|
)
|
Ending balance
|
|
|
1,159,532
|
|
|
|
1,130,316
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income (loss), net of taxes
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
|
163,921
|
|
|
|
163,373
|
|
Change in net unrealized investment gains and losses
on
fixed maturity and equity securities
|
|
|
22,533
|
|
|
|
69,490
|
|
Change in net funded status of benefit plans
|
|
|
-
|
|
|
|
-
|
|
Ending balance
|
|
|
186,454
|
|
|
|
232,863
|
|
|
|
|
|
|
|
|
|
|
Treasury stock, at cost
|
|
|
|
|
|
|
|
|
Beginning balance, 2017, 24,672,932 shares;
2016, 23,971,522 shares
|
|
|
(479,215
|
)
|
|
|
(457,702
|
)
|
Acquisition of shares, 2017, 0 shares;
2016, 474,277 shares
|
|
|
-
|
|
|
|
(14,466
|
)
|
Ending balance, 2017, 24,672,932 shares;
2016, 24,445,799 shares
|
|
|
(479,215
|
)
|
|
|
(472,168
|
)
|
|
|
|
|
|
|
|
|
|
Shareholders’ equity at end of period
|
|
$
|
1,321,818
|
|
|
$
|
1,335,987
|
|
See accompanying Notes to Consolidated Financial Statements.
See accompanying Report of Independent Registered Public
Accounting Firm.
HORACE MANN EDUCATORS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollars in thousands)
|
|
Three Months Ended
|
|
|
|
|
March 31,
|
|
|
|
|
|
2017
|
|
|
|
|
2016
|
|
|
Cash flows - operating activities
|
|
|
|
|
|
|
|
|
Premiums collected
|
|
$
|
172,588
|
|
|
$
|
177,535
|
|
Policyholder benefits paid
|
|
|
(127,823
|
)
|
|
|
(116,941
|
)
|
Policy acquisition and other operating expenses paid
|
|
|
(74,763
|
)
|
|
|
(71,024
|
)
|
Federal income taxes recovered
|
|
|
11
|
|
|
|
-
|
|
Investment income collected
|
|
|
91,840
|
|
|
|
82,586
|
|
Interest expense paid
|
|
|
(63
|
)
|
|
|
(57
|
)
|
Other
|
|
|
11,008
|
|
|
|
8,258
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
72,798
|
|
|
|
80,357
|
|
|
|
|
|
|
|
|
|
|
Cash flows - investing activities
|
|
|
|
|
|
|
|
|
Fixed maturities
|
|
|
|
|
|
|
|
|
Purchases
|
|
|
(318,629
|
)
|
|
|
(317,878
|
)
|
Sales
|
|
|
110,872
|
|
|
|
82,090
|
|
Maturities, paydowns, calls and redemptions
|
|
|
190,068
|
|
|
|
241,233
|
|
Purchase of other invested assets
|
|
|
(24,177
|
)
|
|
|
(10,260
|
)
|
Net cash provided by (used in) short-term and other investments
|
|
|
(42,419
|
)
|
|
|
(41,403
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(84,285
|
)
|
|
|
(46,218
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows - financing activities
|
|
|
|
|
|
|
|
|
Dividends paid to shareholders
|
|
|
(11,518
|
)
|
|
|
(11,114
|
)
|
Acquisition of treasury stock
|
|
|
-
|
|
|
|
(14,466
|
)
|
Proceeds from exercise of stock options
|
|
|
723
|
|
|
|
1,727
|
|
Withholding tax payments on RSUs tendered
|
|
|
(2,532
|
)
|
|
|
(3,231
|
)
|
Annuity contracts: variable, fixed and FHLB funding agreements
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
117,311
|
|
|
|
112,564
|
|
Benefits, withdrawals and net transfers to
Separate Account (variable annuity) assets
|
|
|
(99,757
|
)
|
|
|
(85,411
|
)
|
Life policy accounts
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
1,183
|
|
|
|
489
|
|
Withdrawals and surrenders
|
|
|
(1,066
|
)
|
|
|
(926
|
)
|
Change in bank overdrafts
|
|
|
(2,934
|
)
|
|
|
1,174
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
1,410
|
|
|
|
806
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash
|
|
|
(10,077
|
)
|
|
|
34,945
|
|
|
|
|
|
|
|
|
|
|
Cash at beginning of period
|
|
|
16,670
|
|
|
|
15,509
|
|
|
|
|
|
|
|
|
|
|
Cash at end of period
|
|
$
|
6,593
|
|
|
$
|
50,454
|
|
See accompanying Notes to Consolidated Financial Statements.
See accompanying Report of Independent Registered Public
Accounting Firm.
HORACE MANN EDUCATORS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2017 and 2016
(Dollars in thousands, except per share data)
Note 1 - Basis of Presentation
The accompanying unaudited consolidated
financial statements of Horace Mann Educators Corporation (“HMEC”; and together with its subsidiaries, the “Company”
or “Horace Mann”) have been prepared in accordance with United States (“U.S.”) generally accepted accounting
principles (“GAAP”) and with the rules and regulations of the Securities and Exchange Commission (“SEC”),
specifically Regulation S-X and the instructions to Form 10-Q. Certain information and note disclosures which are normally included
in annual financial statements prepared in accordance with GAAP but are not required for interim reporting purposes have been omitted.
The Company believes that these consolidated financial statements contain all adjustments (consisting of normal recurring accruals)
which are, in the opinion of management, necessary to present fairly the Company’s consolidated financial position as of
March 31, 2017, the consolidated results of operations, comprehensive income, changes in shareholders’ equity and cash flows
for the three months ended March 31, 2017 and 2016. 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, 2016.
The results of operations for the
three months ended March 31, 2017 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 to the 2017 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.
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment contract reserves
|
|
|
$
|
4,408,288
|
|
|
|
|
$
|
4,360,456
|
|
|
Life policy reserves
|
|
|
|
1,094,704
|
|
|
|
|
|
1,087,513
|
|
|
Total
|
|
|
$
|
5,502,992
|
|
|
|
|
$
|
5,447,969
|
|
|
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 investment gains and losses on fixed maturity and equity securities and the after tax change in net funded status of benefit
plans for the period as shown in the Consolidated Statement of Changes in Shareholders’ Equity. The following tables reconcile
these components.
|
Net Unrealized
|
|
|
|
|
|
|
|
|
|
Investment
|
|
|
|
|
|
|
|
|
|
Gains and
|
|
|
|
|
|
|
|
|
|
Losses on
|
|
|
|
|
|
|
|
|
|
Fixed Maturity
|
|
|
|
|
|
|
|
|
|
and Equity
|
|
|
|
|
|
|
|
|
|
Securities (1)(2)
|
|
Benefit Plans (1)
|
|
Total (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance, January 1, 2017
|
|
$
|
175,738
|
|
|
|
$
|
(11,817
|
)
|
|
|
$
|
163,921
|
|
Other comprehensive income (loss)
before reclassifications
|
|
|
22,330
|
|
|
|
|
-
|
|
|
|
|
22,330
|
|
Amounts reclassified from accumulated
other comprehensive income (loss)
|
|
|
203
|
|
|
|
|
-
|
|
|
|
|
203
|
|
Net current period other
comprehensive income
|
|
|
22,533
|
|
|
|
|
-
|
|
|
|
|
22,533
|
|
Ending balance, March 31, 2017
|
|
$
|
198,271
|
|
|
|
$
|
(11,817
|
)
|
|
|
$
|
186,454
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance, January 1, 2016
|
|
$
|
175,167
|
|
|
|
$
|
(11,794
|
)
|
|
|
$
|
163,373
|
|
Other comprehensive income (loss)
before reclassifications
|
|
|
69,971
|
|
|
|
|
-
|
|
|
|
|
69,971
|
|
Amounts reclassified from accumulated
other comprehensive income (loss)
|
|
|
(481
|
)
|
|
|
|
-
|
|
|
|
|
(481
|
)
|
Net current period other
comprehensive income
|
|
|
69,490
|
|
|
|
|
-
|
|
|
|
|
69,490
|
|
Ending balance, March 31, 2016
|
|
$
|
244,657
|
|
|
|
$
|
(11,794
|
)
|
|
|
$
|
232,863
|
|
|
(1)
|
All amounts are net of tax.
|
|
(2)
|
The pretax amounts reclassified from accumulated other comprehensive income (loss), $(313) and $740, are included in net realized
investment gains and losses and the related income tax expenses, $(110) and $259, are included in income tax expense in the Consolidated
Statements of Operations for the three months ended March 31, 2017 and 2016, respectively.
|
Note 1 - Basis of Presentation-(Continued)
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 -- Net Unrealized Investment Gains and Losses on Fixed Maturity and Equity Securities”.
Adopted Accounting Standards
Employee Share-based Payment Accounting
Effective January 1,
2017, the Company adopted new accounting guidance for employee share-based payments which simplifies several aspects of
the accounting for share-based payment transactions, including the income tax consequences, classification of awards as
either equity or liabilities, and classification on the statement of cash flows. The recognition and classification of the
excess tax benefit provisions were applied prospectively in the results of operations. This adoption resulted in additional
excess tax benefits of $2,450 which reduced the current provision for income taxes in the results of operations. The
statutory tax withholding classification, which are cash payments made to taxing authorities for withheld taxes funded
through tendered shares, were applied retrospectively and the Company reclassified the statutory tax withholding requirements
in the statement of cash flows from Other in operating activities to Withholding tax payments on RSUs tendered in financing
activities. This statutory withholding reclassification resulted in $2,532 and $3,231 being included in financing activities
for the three months ended March 31, 2017 and 2016, respectively. There were no cumulative effect adjustments upon adoption
of the new accounting guidance.
Pending Accounting Standards
Revenue Recognition
In May 2014, the Financial Accounting
Standards Board (“FASB”) issued accounting guidance to provide a single comprehensive model in accounting for revenue
arising from contracts with customers. The guidance applies to all contracts with customers; however, insurance contracts are specifically
excluded from this updated guidance. The guidance is effective for annual reporting periods beginning after December 15, 2017,
including interim periods within those years. Early adoption is permitted only for annual reporting periods beginning after December
15, 2016. The Company plans to adopt the guidance as of January 1, 2018. Management believes the adoption of this accounting guidance
will not have a material effect on the results of operations or financial position, and related disclosures, of the Company.
Note 1 - Basis of Presentation-(Continued)
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. The guidance will not have an impact on the Company’s financial position and management is evaluating
the impact that this guidance will have on the Company’s results of operations.
Statement of Cash Flows --
Classification
In August 2016, the FASB issued
guidance to reduce diversity in practice in the statement of cash flows between operating, investing and financing activities related
to the classification of cash receipts and cash payments for eight specific issues. The FASB acknowledged that current GAAP either
is unclear or does not include specific guidance on these eight cash flow classification issues: (1) debt prepayment or extinguishment
costs; (2) settlement of zero-coupon bonds (pertains to issuers); (3) contingent consideration payments made after a business combination;
(4) proceeds from the settlement of insurance claims (pertains to claimants); (5) proceeds from the settlement of corporate-owned
life insurance policies; (6) distributions received from equity method investees; (7) beneficial interests in securitization transactions
(pertains to transferors) and (8) separately identifiable cash flows and application of the predominance principle. For public
business entities, the guidance is effective for annual reporting periods beginning after December 15, 2017, including interim
periods within those years, using a retrospective approach. The guidance allows prospective adoption for individual issues if it
is impracticable to apply the amendments retrospectively for those issues. Early application is permitted. Management believes
the adoption of this accounting guidance will not have a material effect on the classifications in the Company’s consolidated
statement of cash flows. The adoption of this accounting guidance will not have any effect on the results of operations or financial
position of the Company.
Note 1 - Basis of Presentation-(Continued)
Accounting for Leases
In February 2016, the FASB issued
accounting and disclosure guidance to improve financial reporting and comparability among organizations about leasing transactions.
Under the new guidance, for leases with lease terms of more than 12 months, a lessee will be required to recognize assets and liabilities
on the balance sheet for the rights and obligations created by those leases. Consistent with current accounting guidance, the recognition,
measurement and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification
as a finance or an operating lease. However, while current guidance requires only capital leases to be recognized on the balance
sheet, the new guidance will require both operating and capital leases to be recognized on the balance sheet. In transition to
the new guidance, companies are required to recognize and measure leases at the beginning of the earliest period presented using
a modified retrospective approach. The guidance is effective for annual reporting periods beginning after December 15, 2018, including
interim periods within those years. Early application is permitted. Management is evaluating the impact this guidance will have
on the results of operations and financial position of the Company.
Measurement of Credit Losses on
Financial Instruments
In June 2016, the FASB issued guidance
to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments, including
reinsurance receivables, held by companies. The new guidance replaces the incurred loss impairment methodology and requires an
organization to measure and recognize all current expected credit losses (“CECL”) for financial assets held at the
reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Companies will need
to utilize forward-looking information to better inform their credit loss estimates. Companies will continue to use judgment to
determine which loss estimation method is appropriate for their circumstances. Credit losses related to available for sale debt
securities -- which represent over 90% of Horace Mann’s total investment portfolio -- will be recorded through
an allowance for credit losses with this allowance having a limit equal to the amount by which fair value is below amortized cost.
The guidance also requires enhanced qualitative and quantitative disclosures to provide additional information about the amounts
recorded in the financial statements. For public business entities that are SEC filers, the guidance is effective for annual reporting
periods beginning after December 15, 2019, including interim periods within those years, using a modified-retrospective approach.
Early application is permitted for annual reporting periods, and interim periods within those years, beginning after December 15,
2018. Management is evaluating the impact this guidance will have on the results of operations and financial position of the Company.
Note 1 - Basis of Presentation-(Continued)
Simplifying the Test for Goodwill
Impairment
In January 2017, the FASB issued
guidance to simplify the accounting for goodwill impairment. The guidance removes Step 2 of the goodwill impairment test, which
requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s
carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. All other goodwill impairment guidance will
remain largely unchanged. Entities will continue to have the option to perform a qualitative assessment to determine if a quantitative
impairment test is necessary. The same one-step impairment test will be applied to goodwill at all reporting units, even those
with zero or negative carrying amounts. Entities will be required to disclose the amount of goodwill for reporting units with zero
or negative carrying amounts. Public business entities should adopt the guidance prospectively for its annual or any interim goodwill
impairment tests in fiscal years beginning after December 15, 2019. Early application is permitted. Management believes the adoption
of this accounting guidance will not have a material effect on how it tests goodwill for impairment.
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
(“FIA”) and indexed universal life (“IUL”) products’ contingent liabilities. The
Company’s FIA and IUL products include embedded derivative features that are discussed in “Note 1 -- Summary of
Significant Accounting Policies -- Investment Contract and Life Policy Reserves -- Reserves for Fixed Indexed Annuities and
Indexed Universal Life Policies” of the Company’s Annual Report on Form 10-K for the year ended December 31,
2016. The Company’s investment portfolio included no other free-standing derivative financial instruments (futures,
forwards, swaps, option contracts or other financial instruments with similar characteristics), and there were no other
embedded derivative features related to the Company’s investment or insurance products during the three months ended
March 31, 2017 and 2016.
Note 2 - Investments-(Continued)
Fixed Maturity and Equity Securities
The Company’s investment
portfolio is comprised primarily of fixed maturity securities and also includes equity securities. The amortized cost or cost, unrealized investment gains and losses, fair values and other-than-temporary impairment (“OTTI”) included in accumulated
other comprehensive income (“AOCI”) of all fixed maturity and equity securities in the portfolio were as follows:
|
|
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
|
|
|
|
|
|
Amortized
|
|
|
Investment
|
|
|
Investment
|
|
|
Fair
|
|
|
OTTI in
|
|
|
Cost
or Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
AOCI (1)
|
March 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and federally
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
sponsored agency obligations (2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
|
|
$
|
581,346
|
|
|
|
|
$
|
33,904
|
|
|
|
|
$
|
5,443
|
|
|
|
|
$
|
609,807
|
|
|
|
|
$
|
-
|
|
Other, including
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities
|
|
|
|
520,718
|
|
|
|
|
|
19,809
|
|
|
|
|
|
9,219
|
|
|
|
|
|
531,308
|
|
|
|
|
|
-
|
|
Municipal bonds
|
|
|
|
1,647,314
|
|
|
|
|
|
148,319
|
|
|
|
|
|
18,206
|
|
|
|
|
|
1,777,427
|
|
|
|
|
|
-
|
|
Foreign government bonds
|
|
|
|
93,845
|
|
|
|
|
|
5,897
|
|
|
|
|
|
56
|
|
|
|
|
|
99,686
|
|
|
|
|
|
-
|
|
Corporate bonds
|
|
|
|
2,683,746
|
|
|
|
|
|
162,602
|
|
|
|
|
|
9,175
|
|
|
|
|
|
2,837,173
|
|
|
|
|
|
-
|
|
Other mortgage-backed securities
|
|
|
|
1,646,266
|
|
|
|
|
|
21,755
|
|
|
|
|
|
12,672
|
|
|
|
|
|
1,655,349
|
|
|
|
|
|
1,538
|
|
Totals
|
|
|
$
|
7,173,235
|
|
|
|
|
$
|
392,286
|
|
|
|
|
$
|
54,771
|
|
|
|
|
$
|
7,510,750
|
|
|
|
|
$
|
1,538
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities (3)
|
|
|
$
|
143,203
|
|
|
|
|
$
|
15,743
|
|
|
|
|
$
|
1,971
|
|
|
|
|
$
|
156,975
|
|
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and federally
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
sponsored agency obligations (2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
|
|
$
|
587,355
|
|
|
|
|
$
|
34,256
|
|
|
|
|
$
|
6,720
|
|
|
|
|
$
|
614,891
|
|
|
|
|
$
|
-
|
|
Other, including
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities
|
|
|
|
458,745
|
|
|
|
|
|
18,518
|
|
|
|
|
|
10,120
|
|
|
|
|
|
467,143
|
|
|
|
|
|
-
|
|
Municipal bonds
|
|
|
|
1,648,252
|
|
|
|
|
|
143,733
|
|
|
|
|
|
22,588
|
|
|
|
|
|
1,769,397
|
|
|
|
|
|
-
|
|
Foreign government bonds
|
|
|
|
93,864
|
|
|
|
|
|
5,102
|
|
|
|
|
|
297
|
|
|
|
|
|
98,669
|
|
|
|
|
|
-
|
|
Corporate bonds
|
|
|
|
2,672,818
|
|
|
|
|
|
152,229
|
|
|
|
|
|
14,826
|
|
|
|
|
|
2,810,221
|
|
|
|
|
|
-
|
|
Other mortgage-backed securities
|
|
|
|
1,691,093
|
|
|
|
|
|
21,153
|
|
|
|
|
|
15,859
|
|
|
|
|
|
1,696,387
|
|
|
|
|
|
1,618
|
|
Totals
|
|
|
$
|
7,152,127
|
|
|
|
|
$
|
374,991
|
|
|
|
|
$
|
70,410
|
|
|
|
|
$
|
7,456,708
|
|
|
|
|
$
|
1,618
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities (3)
|
|
|
$
|
134,013
|
|
|
|
|
$
|
13,210
|
|
|
|
|
$
|
5,574
|
|
|
|
|
$
|
141,649
|
|
|
|
|
$
|
-
|
|
|
(1)
|
Related to securities for which an unrealized loss was bifurcated to distinguish the credit-related
portion and the portion driven by other market factors. Represents the amount of OTTI losses in AOCI which was not included in
earnings; amounts also include net unrealized investment gains and losses on such impaired securities relating to changes in the
fair value of those securities subsequent to the impairment measurement date.
|
|
(2)
|
Fair value includes securities issued by Federal National Mortgage Association (“FNMA”)
of $283,039 and $272,668; Federal Home Loan Mortgage Corporation (“FHLMC”) of $373,017 and $378,683; and Government
National Mortgage Association (“GNMA”) of $112,065 and $115,627 as of March 31, 2017 and December 31, 2016, 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 maturity and equity securities in an unrealized loss position at March 31, 2017
and December 31, 2016, respectively. The Company views the decrease in value of all of the securities with unrealized losses at
March 31, 2017 -- 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government
and federally
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
sponsored agency
obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed
securities
|
|
|
$
|
169,786
|
|
|
|
$
|
5,035
|
|
|
|
$
|
3,381
|
|
|
|
$
|
408
|
|
|
|
$
|
173,167
|
|
|
|
$
|
5,443
|
|
Other
|
|
|
|
262,517
|
|
|
|
|
9,219
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
262,517
|
|
|
|
|
9,219
|
|
Municipal bonds
|
|
|
|
325,610
|
|
|
|
|
14,754
|
|
|
|
|
10,082
|
|
|
|
|
3,452
|
|
|
|
|
335,692
|
|
|
|
|
18,206
|
|
Foreign government
bonds
|
|
|
|
1,444
|
|
|
|
|
56
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
1,444
|
|
|
|
|
56
|
|
Corporate bonds
|
|
|
|
285,724
|
|
|
|
|
6,492
|
|
|
|
|
37,490
|
|
|
|
|
2,683
|
|
|
|
|
323,214
|
|
|
|
|
9,175
|
|
Other
mortgage-backed securities
|
|
|
|
444,102
|
|
|
|
|
9,060
|
|
|
|
|
188,904
|
|
|
|
|
3,612
|
|
|
|
|
633,006
|
|
|
|
|
12,672
|
|
Total fixed
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
maturity
securities
|
|
|
|
1,489,183
|
|
|
|
|
44,616
|
|
|
|
|
239,857
|
|
|
|
|
10,155
|
|
|
|
|
1,729,040
|
|
|
|
|
54,771
|
|
Equity
securities (1)
|
|
|
|
37,554
|
|
|
|
|
1,013
|
|
|
|
|
8,068
|
|
|
|
|
958
|
|
|
|
|
45,622
|
|
|
|
|
1,971
|
|
Combined
totals
|
|
|
$
|
1,526,737
|
|
|
|
$
|
45,629
|
|
|
|
$
|
247,925
|
|
|
|
$
|
11,113
|
|
|
|
$
|
1,774,662
|
|
|
|
$
|
56,742
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of positions
with a
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
gross
unrealized loss
|
|
|
|
560
|
|
|
|
|
|
|
|
|
|
91
|
|
|
|
|
|
|
|
|
|
651
|
|
|
|
|
|
|
Fair value as a percentage of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
total fixed maturity
and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
equity securities
fair value
|
|
|
|
19.9
|
%
|
|
|
|
|
|
|
|
|
3.2
|
%
|
|
|
|
|
|
|
|
|
23.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government
and federally
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
sponsored agency
obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed
securities
|
|
|
$
|
186,439
|
|
|
|
$
|
6,176
|
|
|
|
$
|
3,235
|
|
|
|
$
|
544
|
|
|
|
$
|
189,674
|
|
|
|
$
|
6,720
|
|
Other
|
|
|
|
219,372
|
|
|
|
|
10,120
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
219,372
|
|
|
|
|
10,120
|
|
Municipal bonds
|
|
|
|
408,163
|
|
|
|
|
19,006
|
|
|
|
|
9,928
|
|
|
|
|
3,582
|
|
|
|
|
418,091
|
|
|
|
|
22,588
|
|
Foreign government
bonds
|
|
|
|
24,182
|
|
|
|
|
297
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
24,182
|
|
|
|
|
297
|
|
Corporate bonds
|
|
|
|
459,402
|
|
|
|
|
11,056
|
|
|
|
|
57,261
|
|
|
|
|
3,770
|
|
|
|
|
516,663
|
|
|
|
|
14,826
|
|
Other
mortgage-backed securities
|
|
|
|
640,691
|
|
|
|
|
10,470
|
|
|
|
|
229,106
|
|
|
|
|
5,389
|
|
|
|
|
869,797
|
|
|
|
|
15,859
|
|
Total fixed
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
maturity
securities
|
|
|
|
1,938,249
|
|
|
|
|
57,125
|
|
|
|
|
299,530
|
|
|
|
|
13,285
|
|
|
|
|
2,237,779
|
|
|
|
|
70,410
|
|
Equity
securities (1)
|
|
|
|
56,676
|
|
|
|
|
4,567
|
|
|
|
|
7,956
|
|
|
|
|
1,007
|
|
|
|
|
64,632
|
|
|
|
|
5,574
|
|
Combined
totals
|
|
|
$
|
1,994,925
|
|
|
|
$
|
61,692
|
|
|
|
$
|
307,486
|
|
|
|
$
|
14,292
|
|
|
|
$
|
2,302,411
|
|
|
|
$
|
75,984
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of positions
with a
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
gross
unrealized loss
|
|
|
|
629
|
|
|
|
|
|
|
|
|
|
102
|
|
|
|
|
|
|
|
|
|
731
|
|
|
|
|
|
|
Fair value as a percentage of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
total fixed maturity
and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
equity securities
fair value
|
|
|
|
26.3
|
%
|
|
|
|
|
|
|
|
|
4.0
|
%
|
|
|
|
|
|
|
|
|
30.3
|
%
|
|
|
|
|
|
|
(1)
|
Includes nonredeemable (perpetual) preferred stocks, common
stocks and closed-end funds.
|
Note 2 - Investments-(Continued)
Fixed maturity and equity securities
with an investment grade rating represented 90% of the gross unrealized losses as of March 31, 2017. 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 OTTI losses on fixed maturity securities held as
of March 31, 2017 and 2016 that the Company did not intend to sell as of those dates, and it was not more likely than not that
the Company would be required to sell the securities before the anticipated recovery of the amortized cost bases, for which the
non-credit portions of OTTI losses were recognized in other comprehensive income:
|
|
|
Three Months Ended
|
|
|
|
|
March 31,
|
|
|
|
|
|
2017
|
|
|
|
2016
|
|
Cumulative credit loss (1)
|
|
|
|
|
|
|
|
|
|
|
Beginning of period
|
|
|
$
|
13,703
|
|
|
|
$
|
7,844
|
|
New credit losses
|
|
|
|
-
|
|
|
|
|
1,824
|
|
Increases to previously recognized credit losses
|
|
|
|
726
|
|
|
|
|
-
|
|
Gains related to securities sold or paid down during the period
|
|
|
|
(2
|
)
|
|
|
|
-
|
|
End of period
|
|
|
$
|
14,427
|
|
|
|
$
|
9,668
|
|
|
(1)
|
The cumulative credit loss amounts exclude OTTI losses
on securities held as of the periods indicated that the Company intended to sell or it was more likely than not that the Company
would be required to sell the security before the recovery of the amortized cost basis.
|
Note 2 - Investments-(Continued)
Maturities/Sales of Fixed Maturity
and Equity Securities
The following table presents the
distribution of the Company’s fixed maturity securities portfolio by estimated expected maturity. Estimated expected maturities
differ from contractual maturities, reflecting assumptions regarding borrowers’ utilization of the right to call or prepay
obligations with or without call or prepayment penalties. For structured securities, including mortgage-backed securities and other
asset-backed securities, estimated expected maturities consider broker-dealer survey prepayment assumptions and are verified for
consistency with the interest rate and economic environments.
|
|
Percent
of Total Fair Value
|
|
March 31, 2017
|
|
|
|
March 31,
|
|
December 31,
|
|
Fair
|
|
|
Amortized
|
|
|
|
2017
|
|
2016
|
|
Value
|
|
|
Cost
|
|
Estimated expected maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due in 1 year or less
|
|
|
|
3.8
|
%
|
|
|
|
3.9
|
%
|
|
|
$
|
284,164
|
|
|
|
$
|
271,394
|
|
|
Due after 1 year through 5 years
|
|
|
|
28.1
|
|
|
|
|
28.7
|
|
|
|
|
2,109,683
|
|
|
|
|
2,014,879
|
|
|
Due after 5 years through 10 years
|
|
|
|
34.1
|
|
|
|
|
35.2
|
|
|
|
|
2,562,229
|
|
|
|
|
2,447,089
|
|
|
Due after 10 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
through 20 years
|
|
|
|
21.1
|
|
|
|
|
19.5
|
|
|
|
|
1,582,732
|
|
|
|
|
1,511,608
|
|
|
Due after 20 years
|
|
|
|
12.9
|
|
|
|
|
12.7
|
|
|
|
|
971,942
|
|
|
|
|
928,265
|
|
|
Total
|
|
|
|
100.0
|
%
|
|
|
|
100.0
|
%
|
|
|
$
|
7,510,750
|
|
|
|
$
|
7,173,235
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average option-adjusted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
duration, in years
|
|
|
|
6.0
|
|
|
|
|
5.9
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds received from sales of
fixed maturity and equity securities, each determined using the specific identification method, and gross gains and gross losses
realized as a result of those sales for each period were:
|
|
|
Three Months Ended
|
|
|
|
|
March 31,
|
|
|
|
|
2017
|
|
|
|
2016
|
|
Fixed maturity securities
|
|
|
|
|
|
|
|
|
|
|
Proceeds received
|
|
|
$
|
110,872
|
|
|
|
$
|
82,090
|
|
Gross gains realized
|
|
|
|
2,489
|
|
|
|
|
2,476
|
|
Gross losses realized
|
|
|
|
(881
|
)
|
|
|
|
(492
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
|
|
|
|
|
|
|
|
|
Proceeds received
|
|
|
$
|
5,489
|
|
|
|
$
|
6,147
|
|
Gross gains realized
|
|
|
|
1,048
|
|
|
|
|
520
|
|
Gross losses realized
|
|
|
|
(192
|
)
|
|
|
|
(646
|
)
|
Note 2 - Investments-(Continued)
Net Unrealized Investment Gains and Losses on Fixed
Maturity and Equity Securities
Net unrealized investment gains
and losses are computed as the difference between fair value and amortized cost for fixed maturity securities or cost for equity
securities. The following table reconciles the net unrealized investment gains and losses, net of tax, included in accumulated
other comprehensive income (loss), before the impact on deferred policy acquisition costs:
|
|
|
Three Months Ended
|
|
|
|
|
|
March 31,
|
|
|
|
|
|
2017
|
|
|
|
|
2016
|
|
|
Net unrealized investment gains and losses
|
|
|
|
|
|
|
|
|
on fixed maturity securities, net of tax
|
|
|
|
|
|
|
|
|
Beginning of period
|
|
$
|
197,978
|
|
|
$
|
198,714
|
|
Change in net unrealized investment
|
|
|
|
|
|
|
|
|
gains and losses
|
|
|
21,891
|
|
|
|
78,341
|
|
Reclassification of net realized
|
|
|
|
|
|
|
|
|
investment gains to net income
|
|
|
(484
|
)
|
|
|
(674
|
)
|
End of period
|
|
$
|
219,385
|
|
|
$
|
276,381
|
|
|
|
|
|
|
|
|
|
|
Net unrealized investment gains and losses
|
|
|
|
|
|
|
|
|
on equity securities, net of tax
|
|
|
|
|
|
|
|
|
Beginning of period
|
|
$
|
4,963
|
|
|
$
|
2,649
|
|
Change in net unrealized investment
|
|
|
|
|
|
|
|
|
gains and losses
|
|
|
3,302
|
|
|
|
2,188
|
|
Reclassification of net realized
|
|
|
|
|
|
|
|
|
investment losses to net income
|
|
|
687
|
|
|
|
193
|
|
End of period
|
|
$
|
8,952
|
|
|
$
|
5,030
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Free-standing derivatives
|
|
|
$
|
9,932
|
|
|
|
$
|
-
|
|
|
|
$
|
9,932
|
|
|
|
$
|
-
|
|
|
|
$
|
10,449
|
|
|
|
$
|
(517
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Free-standing derivatives
|
|
|
|
8,694
|
|
|
|
|
-
|
|
|
|
|
8,694
|
|
|
|
|
-
|
|
|
|
|
8,824
|
|
|
|
|
(130
|
)
|
Note 2 - Investments-(Continued)
Deposits
At March 31, 2017 and December
31, 2016, fixed maturity securities with a fair value of $18,089 and $18,119, respectively, were on deposit with governmental agencies
as required by law in various states in which the insurance subsidiaries of HMEC conduct business. In addition, at March 31, 2017
and December 31, 2016, fixed maturity securities with a fair value of $621,544 and $620,489, 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 maturity securities 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, 2016, specifically in “Note 3
-- Fair Value of Financial Instruments”.
Note 3 - Fair Value of Financial Instruments-(Continued)
Financial Instruments Measured
and Carried at Fair Value
The following table presents the
Company’s fair value hierarchy for those assets and liabilities measured and carried at fair value on a recurring basis.
At March 31, 2017, Level 3 invested assets comprised 3.1% of the Company’s total investment portfolio fair value.
|
|
|
|
|
Fair Value Measurements at
|
|
|
Carrying
|
|
Fair
|
|
Reporting Date Using
|
|
|
Amount
|
|
Value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
March 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and federally
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
sponsored agency obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
|
$
|
609,807
|
|
|
$
|
609,807
|
|
|
$
|
-
|
|
|
$
|
605,863
|
|
|
$
|
3,944
|
|
Other, including
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities
|
|
|
531,308
|
|
|
|
531,308
|
|
|
|
13,619
|
|
|
|
517,689
|
|
|
|
-
|
|
Municipal bonds
|
|
|
1,777,427
|
|
|
|
1,777,427
|
|
|
|
-
|
|
|
|
1,723,965
|
|
|
|
53,462
|
|
Foreign government bonds
|
|
|
99,686
|
|
|
|
99,686
|
|
|
|
-
|
|
|
|
99,686
|
|
|
|
-
|
|
Corporate bonds
|
|
|
2,837,173
|
|
|
|
2,837,173
|
|
|
|
14,173
|
|
|
|
2,740,505
|
|
|
|
82,495
|
|
Other mortgage-backed securities
|
|
|
1,655,349
|
|
|
|
1,655,349
|
|
|
|
-
|
|
|
|
1,546,499
|
|
|
|
108,850
|
|
Total fixed maturity securities
|
|
|
7,510,750
|
|
|
|
7,510,750
|
|
|
|
27,792
|
|
|
|
7,234,207
|
|
|
|
248,751
|
|
Equity securities
|
|
|
156,975
|
|
|
|
156,975
|
|
|
|
102,573
|
|
|
|
54,396
|
|
|
|
6
|
|
Short-term investments
|
|
|
81,064
|
|
|
|
81,064
|
|
|
|
79,859
|
|
|
|
1,205
|
|
|
|
-
|
|
Other investments
|
|
|
21,432
|
|
|
|
21,432
|
|
|
|
-
|
|
|
|
21,432
|
|
|
|
-
|
|
Totals
|
|
$
|
7,770,221
|
|
|
$
|
7,770,221
|
|
|
$
|
210,224
|
|
|
$
|
7,311,240
|
|
|
$
|
248,757
|
|
Financial Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment contract and life policy
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
reserves, embedded derivatives
|
|
$
|
236
|
|
|
$
|
236
|
|
|
$
|
-
|
|
|
$
|
236
|
|
|
$
|
-
|
|
Other policyholder funds,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
embedded derivatives
|
|
|
64,261
|
|
|
|
64,261
|
|
|
|
-
|
|
|
|
-
|
|
|
|
64,261
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and federally
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
sponsored agency obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
|
$
|
614,891
|
|
|
$
|
614,891
|
|
|
$
|
-
|
|
|
$
|
611,476
|
|
|
$
|
3,415
|
|
Other, including
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities
|
|
|
467,143
|
|
|
|
467,143
|
|
|
|
13,631
|
|
|
|
453,512
|
|
|
|
-
|
|
Municipal bonds
|
|
|
1,769,397
|
|
|
|
1,769,397
|
|
|
|
-
|
|
|
|
1,722,900
|
|
|
|
46,497
|
|
Foreign government bonds
|
|
|
98,669
|
|
|
|
98,669
|
|
|
|
-
|
|
|
|
98,669
|
|
|
|
-
|
|
Corporate bonds
|
|
|
2,810,221
|
|
|
|
2,810,221
|
|
|
|
13,532
|
|
|
|
2,736,498
|
|
|
|
60,191
|
|
Other mortgage-backed securities
|
|
|
1,696,387
|
|
|
|
1,696,387
|
|
|
|
-
|
|
|
|
1,595,143
|
|
|
|
101,244
|
|
Total fixed maturity securities
|
|
|
7,456,708
|
|
|
|
7,456,708
|
|
|
|
27,163
|
|
|
|
7,218,198
|
|
|
|
211,347
|
|
Equity securities
|
|
|
141,649
|
|
|
|
141,649
|
|
|
|
98,632
|
|
|
|
43,011
|
|
|
|
6
|
|
Short-term investments
|
|
|
44,918
|
|
|
|
44,918
|
|
|
|
44,167
|
|
|
|
-
|
|
|
|
751
|
|
Other investments
|
|
|
20,194
|
|
|
|
20,194
|
|
|
|
-
|
|
|
|
20,194
|
|
|
|
-
|
|
Totals
|
|
$
|
7,663,469
|
|
|
$
|
7,663,469
|
|
|
$
|
169,962
|
|
|
$
|
7,281,403
|
|
|
$
|
212,104
|
|
Financial Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment contract and life policy
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
reserves, embedded derivatives
|
|
$
|
158
|
|
|
$
|
158
|
|
|
$
|
-
|
|
|
$
|
158
|
|
|
$
|
-
|
|
Other policyholder funds,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
embedded derivatives
|
|
|
59,393
|
|
|
|
59,393
|
|
|
|
-
|
|
|
|
-
|
|
|
|
59,393
|
|
Note 3 - Fair Value of Financial Instruments-(Continued)
During the three months ended March
31, 2017, an equity security was transferred into Level 1 from Level 2 as a result of increased liquidity in the market and a sustained
increase in the market activity for this asset. The following table presents reconciliations for the periods indicated for all
Level 3 assets and liabilities measured at fair value on a recurring basis.
|
|
|
|
|
|
Financial
|
|
|
|
|
Financial
Assets
|
|
|
Liabilities(1)
|
|
|
|
Municipal
Bonds
|
|
Corporate
Bonds
|
|
|
Other
Mortgage-
Backed
Securities (2)
|
|
Total
Fixed
Maturity
Securities
|
|
Equity
Securities
|
|
Short-term
Investments
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance, January 1, 2017
|
|
|
$
|
46,497
|
|
|
|
$
|
60,191
|
|
|
|
|
$
|
104,659
|
|
|
|
$
|
211,347
|
|
|
|
$
|
6
|
|
|
|
$
|
751
|
|
|
|
$
|
212,104
|
|
|
|
$
|
59,393
|
|
Transfers into Level 3 (3)
|
|
|
|
5,214
|
|
|
|
|
29,918
|
|
|
|
|
|
15,039
|
|
|
|
|
50,171
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
50,171
|
|
|
|
|
-
|
|
Transfers out of Level 3 (3)
|
|
|
|
-
|
|
|
|
|
(6,110
|
)
|
|
|
|
|
-
|
|
|
|
|
(6,110
|
)
|
|
|
|
-
|
|
|
|
|
(751
|
)
|
|
|
|
(6,861
|
)
|
|
|
|
-
|
|
Total gains or losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized investment gains
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(losses) included in net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
income related to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
financial assets
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
Net realized (gains) losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
included in net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
related to financial liabilities
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
2,308
|
|
Net unrealized investment gains
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(losses) included in other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
comprehensive income
|
|
|
|
1,871
|
|
|
|
|
96
|
|
|
|
|
|
(771
|
)
|
|
|
|
1,196
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
1,196
|
|
|
|
|
-
|
|
Purchases
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
Issuances
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
3,389
|
|
Sales
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
Settlements
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
Paydowns, maturities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and distributions
|
|
|
|
(120
|
)
|
|
|
|
(1,600
|
)
|
|
|
|
|
(6,133
|
)
|
|
|
|
(7,853
|
)
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
(7,853
|
)
|
|
|
|
(829
|
)
|
Ending balance, March 31, 2017
|
|
|
$
|
53,462
|
|
|
|
$
|
82,495
|
|
|
|
|
$
|
112,794
|
|
|
|
$
|
248,751
|
|
|
|
$
|
6
|
|
|
|
$
|
-
|
|
|
|
$
|
248,757
|
|
|
|
$
|
64,261
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
6,059
|
|
|
|
|
|
11,642
|
|
|
|
|
32,452
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
32,452
|
|
|
|
|
-
|
|
Transfers out of Level 3 (3)
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
Total gains or losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized investment gains
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(losses) included in net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
income related to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
financial assets
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
Net realized (gains) losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
included in net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
related to financial liabilities
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
674
|
|
Net unrealized investment gains
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(losses) included in other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
comprehensive income
|
|
|
|
1,484
|
|
|
|
|
388
|
|
|
|
|
|
(7
|
)
|
|
|
|
1,865
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
1,865
|
|
|
|
|
-
|
|
Purchases
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
Issuances
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
3,491
|
|
Sales
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
Settlements
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
Paydowns, maturities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and distributions
|
|
|
|
(121
|
)
|
|
|
|
(3,951
|
)
|
|
|
|
|
(3,280
|
)
|
|
|
|
(7,352
|
)
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
(7,352
|
)
|
|
|
|
(1,101
|
)
|
Ending balance, March 31, 2016
|
|
|
$
|
46,493
|
|
|
|
$
|
70,071
|
|
|
|
|
$
|
83,821
|
|
|
|
$
|
200,385
|
|
|
|
$
|
6
|
|
|
|
$
|
-
|
|
|
|
$
|
200,391
|
|
|
|
$
|
42,085
|
|
|
(1)
|
Represents embedded derivatives, all related to the Company’s FIA products,
reported in Other policyholder funds in the Company’s Consolidated Balance Sheets.
|
|
(2)
|
Includes U.S. Government and federally sponsored agency
obligations for mortgage-backed securities and other mortgage-backed securities.
|
|
(
3)
|
Transfers into
and out of Level 3 during the three months ended March 31, 2017 and 2016 were attributable to changes in the availability of
observable market information for individual fixed maturity securities and short-term investments. The Company’s policy
is to recognize transfers into and transfers out of the levels as having occurred at the end of the reporting period in which
the transfers were determined.
|
At March 31, 2017 and 2016, there
were no net realized investment gains or losses included in earnings that were attributable to changes in the fair value of Level
3 assets still held. For the three months ended March 31, 2017 and 2016, net realized losses of $2,308 and $674, respectively,
were included in earnings that were attributable to the changes in the fair value of Level 3 liabilities (embedded derivatives)
still held.
Note 3 - Fair Value of Financial Instruments-(Continued)
The valuation techniques and significant
unobservable inputs used in the fair value measurement for financial assets classified as Level 3 are subject to the control processes
as described in “Note 3 -- Fair Value of Financial Instruments -- Investments” in the Company’s Annual
Report on Form 10-K for the year ended December 31, 2016. Generally, valuation techniques for fixed maturity securities include
spread pricing, matrix pricing and discounted cash flow methodologies; include inputs such as quoted prices for identical or similar
securities that are less liquid; and are based on lower levels of trading activity than securities classified as Level 2. The valuation
techniques and significant unobservable inputs used in the fair value measurement for equity securities classified as Level 3 use
similar valuation techniques and significant unobservable inputs as those used for fixed maturity securities.
The sensitivity of the estimated
fair values to changes in the significant unobservable inputs for fixed maturity and equity securities included in Level 3 generally
relates to interest rate spreads, illiquidity premiums and default rates. Significant spread widening in isolation will adversely
impact the overall valuation, while significant spread tightening will lead to substantial valuation increases. Significant increases
(decreases) in illiquidity premiums in isolation will result in substantially lower (higher) valuations. Significant increases
(decreases) in expected default rates in isolation will result in substantially lower (higher) valuations.
Financial Instruments Not Carried
at Fair Value; Disclosure Required
The Company has various other financial
assets and financial liabilities used in the normal course of business that are not carried at fair value, but for which fair value
disclosure is required. The following table presents the carrying value, fair value and fair value hierarchy of these financial
assets and financial liabilities.
|
|
|
|
|
|
Fair Value Measurements at
|
|
|
Carrying
|
|
Fair
|
|
Reporting Date Using
|
|
|
Amount
|
|
Value
|
|
Level
1
|
|
Level
2
|
|
Level
3
|
March 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other investments
|
|
|
$
|
151,537
|
|
|
|
$
|
156,089
|
|
|
|
$
|
-
|
|
|
|
$
|
-
|
|
|
|
$
|
156,089
|
|
Financial Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment contract and life policy
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
reserves, fixed annuity contracts
|
|
|
|
4,408,288
|
|
|
|
|
4,317,991
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
4,317,991
|
|
Investment contract and life policy
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
reserves, account values on life contracts
|
|
|
|
80,484
|
|
|
|
|
85,945
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
85,945
|
|
Other policyholder funds
|
|
|
|
647,134
|
|
|
|
|
647,134
|
|
|
|
|
-
|
|
|
|
|
575,342
|
|
|
|
|
71,792
|
|
Long-term debt
|
|
|
|
247,273
|
|
|
|
|
259,698
|
|
|
|
|
259,698
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other investments
|
|
|
$
|
151,965
|
|
|
|
$
|
156,536
|
|
|
|
$
|
-
|
|
|
|
$
|
-
|
|
|
|
$
|
156,536
|
|
Financial Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment contract and life policy
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
reserves, fixed annuity contracts
|
|
|
|
4,360,456
|
|
|
|
|
4,280,528
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
4,280,528
|
|
Investment contract and life policy
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
reserves, account values on life contracts
|
|
|
|
79,591
|
|
|
|
|
85,066
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
85,066
|
|
Other policyholder funds
|
|
|
|
649,557
|
|
|
|
|
649,557
|
|
|
|
|
-
|
|
|
|
|
575,253
|
|
|
|
|
74,304
|
|
Long-term debt
|
|
|
|
247,209
|
|
|
|
|
248,191
|
|
|
|
|
248,191
|
|
|
|
|
-
|
|
|
|
|
-
|
|
Note 4 - Derivative Instruments
In February 2014, the Company
began offering FIA products, which are deferred fixed annuities that guarantee the return of principal to the contractholder
and credit interest based on a percentage of the gain in a specified market index. In October 2015, the Company began
offering IUL products, which also credit interest based on a percentage of the gain in a specified market index. When
deposits are received for FIA and IUL contracts, a portion is used to purchase derivatives consisting of OTC call options on
the applicable market indices to fund the index credits due to FIA and IUL policyholders. For the Company, substantially all
of such call options are one-year options purchased to match the funding requirements of the underlying contracts. The
call options are carried at fair value with changes in fair value included in Net realized investment gains and losses, 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 FIA contracts are treated as a “series of embedded derivatives” over the expected life of the applicable contract
with a corresponding reserve recorded. For the IUL contracts, the embedded derivative represents a single year liability for the
index return.
The Company carries all derivative
instruments as assets or 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:
|
|
March
31,
|
|
December
31,
|
|
|
2017
|
|
2016
|
Assets
|
|
|
|
|
|
|
|
|
|
|
Derivative instruments, included in Short-term
|
|
|
|
|
|
|
|
|
|
|
and other investments
|
|
|
$
|
9,932
|
|
|
|
$
|
8,694
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
FIA - embedded derivatives,
|
|
|
|
|
|
|
|
|
|
|
included in Other policyholder funds
|
|
|
|
64,261
|
|
|
|
|
59,393
|
|
IUL - embedded derivatives,
|
|
|
|
|
|
|
|
|
|
|
included in Investment contract and life policy reserves
|
|
|
|
236
|
|
|
|
|
158
|
|
Note 4 - Derivative Instruments-(Continued)
In general, the change in the
fair value of the embedded derivatives related to FIA contracts will not correspond to the change in fair value of the purchased
call options because the purchased call options are one-year options while the options valued in those embedded derivatives represent
the rights of the policyholder to receive index credits over the entire period the FIA contracts are expected to be in force,
which typically exceeds 10 years. The changes in fair value of derivatives included in the Consolidated Statements of Operations
were as follows:
|
|
Three Months Ended
|
|
|
March 31,
|
|
|
2017
|
|
2016
|
Change in fair value of derivatives (1):
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
Net realized investment gains (losses)
|
|
|
$
|
2,437
|
|
|
|
$
|
(218
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value of embedded derivatives:
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
Net realized investment losses
|
|
|
|
(2,366
|
)
|
|
|
|
(676
|
)
|
|
(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:
|
|
March
31, 2017
|
|
December
31, 2016
|
|
|
Credit
Rating (1)
|
|
Notional
|
|
Fair
|
|
Notional
|
|
Fair
|
Counterparty
|
|
S&P
|
|
Moody’s
|
|
Amount
|
|
Value
|
|
Amount
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank of America, N.A.
|
|
A+
|
|
A1
|
|
|
$
|
25,200
|
|
|
|
$
|
601
|
|
|
|
$
|
38,500
|
|
|
|
$
|
1,934
|
|
Barclays Bank PLC
|
|
A-
|
|
A1
|
|
|
|
80,900
|
|
|
|
|
2,332
|
|
|
|
|
66,800
|
|
|
|
|
1,543
|
|
Citigroup Inc.
|
|
BBB+
|
|
Baa1
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
Credit Suisse International
|
|
A
|
|
A1
|
|
|
|
57,700
|
|
|
|
|
5,164
|
|
|
|
|
65,200
|
|
|
|
|
4,281
|
|
Societe Generale
|
|
A
|
|
A2
|
|
|
|
40,200
|
|
|
|
|
1,835
|
|
|
|
|
15,600
|
|
|
|
|
936
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
$
|
204,000
|
|
|
|
$
|
9,932
|
|
|
|
$
|
186,100
|
|
|
|
$
|
8,694
|
|
|
(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 March 31, 2017 and December
31, 2016, the Company held $10,449 and $8,824, 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 - Property and Casualty Unpaid Claims and Claim Expenses
The following table is a summary
reconciliation of the beginning and ending Property and Casualty unpaid claims and claim expense reserves for the periods indicated.
The table presents reserves on both gross and net (after reinsurance) bases. The total net Property and Casualty insurance claims
and claim expense incurred amounts are reflected in the Consolidated Statements of Operations. The end of the period gross reserve
(before reinsurance) balances and the reinsurance recoverable balances are reflected on a gross basis in the Consolidated Balance
Sheets.
|
|
March 31,
|
|
March 31,
|
|
|
2017
|
|
2016
|
Property and Casualty segment
|
|
|
|
|
|
|
|
|
|
|
Gross reserves, beginning of year (1)
|
|
|
$
|
307,757
|
|
|
|
$
|
301,569
|
|
Less: reinsurance recoverables
|
|
|
|
61,199
|
|
|
|
|
50,332
|
|
Net reserves, beginning of year (2)
|
|
|
|
246,558
|
|
|
|
|
251,237
|
|
Incurred claims and claim expenses:
|
|
|
|
|
|
|
|
|
|
|
Claims occurring in the current year
|
|
|
|
123,204
|
|
|
|
|
103,206
|
|
Decrease in estimated reserves for
|
|
|
|
|
|
|
|
|
|
|
claims occurring in prior years (3)
|
|
|
|
(1,000
|
)
|
|
|
|
(2,000
|
)
|
Total claims and claim expenses incurred (4)
|
|
|
|
122,204
|
|
|
|
|
101,206
|
|
Claims and claim expense payments
|
|
|
|
|
|
|
|
|
|
|
for claims occurring during:
|
|
|
|
|
|
|
|
|
|
|
Current year
|
|
|
|
52,380
|
|
|
|
|
39,081
|
|
Prior years
|
|
|
|
62,013
|
|
|
|
|
54,515
|
|
Total claims and claim expense payments
|
|
|
|
114,393
|
|
|
|
|
93,596
|
|
Net reserves, end of year (2)
|
|
|
|
254,369
|
|
|
|
|
258,847
|
|
Plus: reinsurance recoverables
|
|
|
|
61,804
|
|
|
|
|
60,429
|
|
Gross reserves, end of year (1)
|
|
|
$
|
316,173
|
|
|
|
$
|
319,276
|
|
|
(1)
|
Unpaid claims and claim expenses as reported in the Consolidated Balance Sheets also include reserves
for the Life and Retirement segments of $23,860 and $24,993 as of March 31, 2017 and 2016, respectively, in addition to Property
and Casualty segment reserves.
|
|
(2)
|
Reserves net of anticipated reinsurance recoverables.
|
|
(3)
|
Shows the amounts by which the Company decreased its reserves in each of the periods indicated
for claims occurring in previous periods to reflect subsequent information on such claims and changes in their projected final
settlement costs.
|
|
(4)
|
Benefits, claims and settlement expenses as reported in the Consolidated Statements of Operations
also include amounts for the Life and Retirement segments of $21,892 and $18,307 as of March 31, 2017 and 2016, respectively, in
addition to the Property and Casualty segment amounts.
|
Note 5 - Property and Casualty Unpaid Claims and Claim Expenses-(continued)
Net favorable development of total
reserves for Property and Casualty claims occurring in prior years was $1,000 and $2,000 for the three month periods ended March
31, 2017 and 2016, respectively. The favorable development for both of the three month periods ended March 31, 2017 and 2016 was
predominantly the result of favorable severity trends in homeowners loss emergence for accident years 2014 and prior.
Note 6 - Debt
Indebtedness outstanding was as
follows:
|
|
March 31,
|
|
December 31,
|
|
|
|
2017
|
|
2016
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
$589 and $603 (4.5% imputed rate) and unamortized
|
|
|
|
|
|
|
|
|
|
|
|
debt issuance costs of $2,138 and $2,188
|
|
|
|
247,273
|
|
|
|
|
247,209
|
|
|
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, 2016.
Note 7 - Reinsurance
The Company recognizes the cost
of reinsurance premiums over the contract periods for such premiums in proportion to the insurance protection provided. Amounts
recoverable from reinsurers for unpaid claims and claim settlement expenses, including estimated amounts for unsettled claims,
claims incurred but not yet reported and policy benefits, are estimated in a manner consistent with the insurance liability associated
with the policy. The effects of reinsurance on premiums written and contract deposits; premiums and contract charges earned; and
benefits, claims and settlement expenses were as follows:
|
|
|
|
|
|
Ceded to
|
|
|
Assumed
|
|
|
|
|
|
|
|
Gross
|
|
|
Other
|
|
|
from Other
|
|
|
Net
|
|
|
|
Amount
|
|
|
Companies
|
|
|
Companies
|
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums written and contract deposits
|
|
$
|
301,512
|
|
|
|
|
$
|
5,510
|
|
|
|
|
$
|
730
|
|
|
|
$
|
296,732
|
|
|
Premiums and contract charges earned
|
|
|
200,455
|
|
|
|
|
|
5,534
|
|
|
|
|
|
801
|
|
|
|
|
195,722
|
|
|
Benefits, claims and settlement expenses
|
|
|
147,271
|
|
|
|
|
|
3,883
|
|
|
|
|
|
708
|
|
|
|
|
144,096
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums written and contract deposits
|
|
$
|
287,992
|
|
|
|
|
$
|
5,768
|
|
|
|
|
$
|
945
|
|
|
|
$
|
283,169
|
|
|
Premiums and contract charges earned
|
|
|
190,233
|
|
|
|
|
|
5,769
|
|
|
|
|
|
986
|
|
|
|
|
185,450
|
|
|
Benefits, claims and settlement expenses
|
|
|
131,240
|
|
|
|
|
|
12,662
|
|
|
|
|
|
935
|
|
|
|
|
119,513
|
|
|
Note 8 - 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 $140,516 and $135,054 at March 31, 2017 and December 31, 2016, respectively.
Note 9 - Segment
Information
The Company conducts and manages
its business through four segments. The three operating segments, representing the major lines of insurance business, are: Property
and Casualty segment, primarily personal lines automobile and homeowners products; Retirement segment, primarily tax-qualified
fixed and variable annuities; and Life segment, life insurance. The Company does not allocate the impact of corporate-level transactions
to these operating segments, consistent with the basis for management’s evaluation of the results of those segments, but
classifies those items in the fourth segment, Corporate and Other. In addition to ongoing transactions such as corporate debt service,
net realized investment gains and losses 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
|
|
|
|
|
|
March 31,
|
|
|
|
|
|
2017
|
|
|
|
|
2016
|
|
|
Insurance premiums and contract charges earned
|
|
|
|
|
|
|
|
|
Property and Casualty
|
|
$
|
158,318
|
|
|
$
|
152,120
|
|
Retirement
|
|
|
6,601
|
|
|
|
6,068
|
|
Life
|
|
|
30,803
|
|
|
|
27,262
|
|
Total
|
|
$
|
195,722
|
|
|
$
|
185,450
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
|
|
|
|
|
|
Property and Casualty
|
|
$
|
9,177
|
|
|
$
|
8,828
|
|
Retirement
|
|
|
63,442
|
|
|
|
58,049
|
|
Life
|
|
|
18,288
|
|
|
|
17,984
|
|
Corporate and Other
|
|
|
12
|
|
|
|
15
|
|
Intersegment eliminations
|
|
|
(208
|
)
|
|
|
(217
|
)
|
Total
|
|
$
|
90,711
|
|
|
$
|
84,659
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
|
|
|
|
|
|
Property and Casualty
|
|
$
|
2,735
|
|
|
$
|
13,795
|
|
Retirement
|
|
|
11,530
|
|
|
|
10,553
|
|
Life
|
|
|
3,885
|
|
|
|
3,867
|
|
Corporate and Other
|
|
|
(2,832
|
)
|
|
|
(3,062
|
)
|
Total
|
|
$
|
15,318
|
|
|
$
|
25,153
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
December
31,
|
|
|
2017
|
|
2016
|
Assets
|
|
|
|
|
|
|
|
|
Property and Casualty
|
|
$
|
1,117,764
|
|
|
$
|
1,110,958
|
|
Retirement
|
|
|
7,622,077
|
|
|
|
7,449,777
|
|
Life
|
|
|
1,941,372
|
|
|
|
1,912,771
|
|
Corporate and Other
|
|
|
126,745
|
|
|
|
140,104
|
|
Intersegment eliminations
|
|
|
(28,453
|
)
|
|
|
(36,786
|
)
|
Total
|
|
$
|
10,779,505
|
|
|
$
|
10,576,824
|
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (“MD&A”)
(Dollars in millions, except per share data)
Measures within this MD&A that
are not based on accounting principles generally accepted in the United States (“non-GAAP”) are marked by an asterisk
(“*”). An explanation of these measures is contained in the Glossary of Selected Terms included as an exhibit to this
Quarterly Report on Form 10-Q.
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, 2016. That discussion includes
factors such as:
|
·
|
The impact that a prolonged economic recession may have on the Company’s investment portfolio;
volume of new business for automobile, homeowners, retirement and life products; policy renewal rates; and additional annuity contract
deposit receipts.
|
|
·
|
Fluctuations in the fair value of securities in the
Company’s investment portfolio and the related after tax effect on the Company’s shareholders’ equity and total
capital through either realized or unrealized investment losses.
|
|
·
|
Prevailing low interest rate levels, including the
impact of interest rates on (1) the Company’s ability to maintain appropriate interest rate spreads over minimum fixed rates
guaranteed in the Company’s annuity and life products, (2) the book yield of the Company’s investment portfolio, (3)
unrealized gains and losses in the Company’s investment portfolio and the related after tax effect on the Company’s
shareholders’ equity and total capital, (4) amortization of deferred policy acquisition costs and (5) capital levels of the
Company’s life insurance subsidiaries.
|
|
·
|
The frequency and severity of events such as hurricanes,
storms, earthquakes and wildfires, and the ability of the Company to provide accurate estimates of ultimate claim costs in its
consolidated financial statements.
|
|
·
|
The Company’s risk exposure to catastrophe-prone
areas. Based on full year 2016 Property and Casualty direct earned premiums, the Company’s ten largest states represented
57% of the segment total. Included in this top ten group are certain states which are considered more prone to catastrophe occurrences:
California, North Carolina, Texas, South Carolina, Florida and Louisiana.
|
|
·
|
The ability of the Company to maintain a favorable
catastrophe reinsurance program considering both availability and cost; and the collectibility of reinsurance receivables.
|
|
·
|
Adverse changes in market appreciation, interest spreads,
business persistency and policyholder mortality and morbidity rates and the resulting impact on both estimated reserves and the
amortization of deferred policy acquisition costs.
|
|
·
|
The Company’s ability to refinance outstanding
indebtedness or repurchase shares of the Company’s common stock.
|
|
·
|
The Company’s ability to (1) develop and expand
its marketing operations, including agents and other points of distribution, (2) maintain and secure access to educators, school
administrators, principals and school business officials; and (3) profitably expand its Property and Casualty business in highly
competitive environments.
|
|
·
|
The effects of economic forces and other issues affecting
the educator market including, but not limited to, federal, state and local budget deficits and cut-backs and adverse changes in
state and local tax revenues. The effects of these forces can include, among others, teacher layoffs and early retirements, as
well as individual concerns regarding employment and economic uncertainty.
|
|
·
|
Changes in federal and state laws and regulations,
which affect the relative tax and other advantages of the Company’s life and annuity products to customers, including, but
not limited to, changes in IRS regulations governing Section 403(b) plans.
|
|
·
|
Changes in public employee retirement programs as a
result of federal and/or state level pension reform initiatives.
|
|
·
|
Changes in federal and state laws and regulations,
which affect the relative tax advantage of certain investments or which affect the ability of debt issuers to declare bankruptcy
or restructure debt.
|
|
·
|
The Company’s ability to effectively implement
new or enhanced information technology systems and applications.
|
|
·
|
Changes in Cybersecurity regulations as a result of
state level requirements.
|
Executive Summary
Horace Mann Educators Corporation
(“HMEC”; 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, annuities
and life insurance in the U.S. The Company markets its products primarily to K-12 teachers, administrators and other employees
of public schools and their families.
For the three months ended March
31, 2017, the Company’s net income of $15.3 million decreased $9.9 million compared to a year ago reflecting a record level
of catastrophic losses in the quarter, as well as elevated non-catastrophic weather-related losses.
Property and Casualty segment net
income of $2.7 million was $11.1 million lower compared to a year ago with a combined ratio of 105.5%, reflecting a record level
of catastrophe losses in the quarter, as well as elevated non-catastrophe weather-related losses. Catastrophe losses of $17.2 million
pretax were $4.5 million higher than the first quarter of 2016, representing 2.5 points of the combined ratio increase. Prior years’
reserves continue to develop favorably; however, the favorable development in the current quarter was $1.0 million pretax lower
than the amount a year ago, representing 0.7 points of the combined ratio increase.
On an underlying basis, the auto
loss ratio of 76.7% was in line with the prior period result on a developed basis, and was in line with full year 2016 results
despite the elevated level of weather losses in the first quarter of 2017. The Company remains confident that it is on the right
track for 1 point of underlying auto combined ratio improvement for the full year 2017. For property, the increase in the underlying
loss ratio from 35.9% for the first quarter of 2016 to 46.9% for the first quarter of 2017 was largely related to the impact of
higher non-catastrophe weather-related losses.
Retirement segment net income of
$11.5 million increased $0.9 million, or 9%, compared to a year ago which was primarily due to a $3.4 million pretax increase in
net interest margin offset by a $2.6 million pretax increase in operating expenses including costs related to the Company’s
continued infrastructure and strategic investments. The annualized net interest spread on fixed annuity assets was 183 basis points
for the first quarters of 2017 and 2016, which reflects the continued low interest rate environment. Total Retirement assets under
management of $6.6 billion increased 9% from a year ago, and total cash value persistency remained strong at approximately 95%.
Life segment net income was $3.9
million for the first quarter of 2017 and comparable to a year ago. In the current quarter, Life segment insurance premiums and
contract deposits of $26.5 million increased 11%, or $2.6 million, compared to the prior year period. Life sales of $4.7 million
increased $1.7 million, or 57%, compared to the prior year period, primarily due to an increase in single premium sales. Life persistency
of 96% was comparable to 12 months earlier.
Premiums written and contract deposits*
increased $13.5 million, or 4.8%, compared to a year ago. Property and Casualty premiums written increased $6.2 million, or 4.2%,
primarily attributable to rate increases in average premium per policy for homeowners and automobile. Life premiums and contract
deposits increased $2.6 million, or 10.9%, compared to a year ago. Annuity deposits received for Retirement increased $4.7 million,
or 4.2%, and was attributable to $2.2 million of single premium and $2.5 million of recurring deposits received in 2017.
The Company’s book value
per share was $32.60 at March 31, 2017, an increase of 1.4% compared to December 31, 2016 and a decrease of 1.5% compared to a
year ago.
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, 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, 2016,
at March 31, 2017, there were no material changes to accounting policies for 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, 2016, discussion of accounting policies, including certain sensitivity
information, was presented in “Management’s Discussion and Analysis of Financial Condition and Results of Operations
-- Critical Accounting Policies” in that Form 10-K.
Results of Operations
Insurance Premiums and Contract
Charges
|
|
Three
Months Ended
|
|
Change
From
|
|
|
March
31,
|
|
Prior
Year
|
|
|
|
|
2017
|
|
|
|
2016
|
|
|
|
Percent
|
|
Amount
|
Insurance premiums written and contract deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(includes annuity and life contract deposits)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property & Casualty
|
|
|
|
$
|
152.9
|
|
|
|
$
|
146.7
|
|
|
|
|
|
4.2
|
%
|
|
|
|
$
|
6.2
|
|
Retirement (annuity)
|
|
|
|
|
117.3
|
|
|
|
|
112.6
|
|
|
|
|
|
4.2
|
%
|
|
|
|
|
4.7
|
|
Life
|
|
|
|
|
26.5
|
|
|
|
|
23.9
|
|
|
|
|
|
10.9
|
%
|
|
|
|
|
2.6
|
|
Total
|
|
|
|
$
|
296.7
|
|
|
|
$
|
283.2
|
|
|
|
|
|
4.8
|
%
|
|
|
|
$
|
13.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance premiums and contract charges earned
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(excludes annuity and life contract deposits)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property & Casualty
|
|
|
|
$
|
158.3
|
|
|
|
$
|
152.1
|
|
|
|
|
|
4.1
|
%
|
|
|
|
$
|
6.2
|
|
Retirement (annuity)
|
|
|
|
|
6.6
|
|
|
|
|
6.1
|
|
|
|
|
|
8.2
|
%
|
|
|
|
|
0.5
|
|
Life
|
|
|
|
|
30.8
|
|
|
|
|
27.3
|
|
|
|
|
|
12.8
|
%
|
|
|
|
|
3.5
|
|
Total
|
|
|
|
$
|
195.7
|
|
|
|
$
|
185.5
|
|
|
|
|
|
5.5
|
%
|
|
|
|
$
|
10.2
|
|
Number of Policies and Contracts in Force
(actual counts)
|
|
|
March 31,
|
|
|
December 31,
|
|
|
March 31,
|
|
|
|
|
2017
|
|
|
|
|
2016
|
|
|
|
|
2016
|
|
Property and Casualty
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Automobile
|
|
|
|
483,683
|
|
|
|
|
484,915
|
|
|
|
|
486,682
|
|
Property
|
|
|
|
219,017
|
|
|
|
|
220,137
|
|
|
|
|
223,653
|
|
Total
|
|
|
|
702,700
|
|
|
|
|
705,052
|
|
|
|
|
710,335
|
|
Retirement
|
|
|
|
220,284
|
|
|
|
|
219,105
|
|
|
|
|
212,397
|
|
Life
|
|
|
|
197,900
|
|
|
|
|
197,937
|
|
|
|
|
201,480
|
|
For the first three months of 2017,
the Company’s premiums written and contract deposits* of $296.7 million increased $13.5 million, or 4.8%. The Company’s
premiums and contract charges earned increased $10.2 million, or 5.5%, compared to the prior year, primarily due to increases in
average premium per policy for both homeowners and automobile.
Total Property and Casualty premiums
written* increased 4.2%, or $6.2 million, in the first three months of 2017, compared to the prior year, primarily due to increases
in average written premium per policy for both homeowners and automobile. For 2017, the Company’s full year rate plan anticipates
high-single digit average rate increases for automobile and mid-single digit average rate increases for homeowners (including states
with no rate actions for both automobile and homeowners); average approved rate changes during the first three months of 2017 were
consistent with those plans at 9.0% for automobile and 4.4% for homeowners.
Based on policies in force, the
current year automobile 12 month retention rate for new and renewal policies was 83.0% compared to 84.5% at March 31, 2016, with
the decrease due to recent rate and underwriting actions. The current year homeowner 12 month retention rate for new and renewal
policies was 87.5% at March 31, 2017 compared to 88.4% at March 31, 2016 with the decrease due to recent rate and underwriting
actions.
Automobile premiums written* increased
5.5%, or $5.7 million, compared to the first quarter of 2016. In the first quarter of 2017, the average written premium per policy
and average earned premium per policy increased approximately 5% and 6%, respectively, compared to a year earlier. The number of
educator policies represented approximately 85% of the automobile policies in force at March 31, 2017, December 31, 2016 and March
31, 2016.
Homeowners premiums written* increased
1.2%, or $0.5 million, compared to the first quarter of 2016. While the number of homeowners policies in force has declined, the
average written premium per policy and average earned premium per policy increased approximately 2% and 4%, respectively, in the
first quarter of 2017 compared to a year earlier. The number of educator policies represented approximately 82% of the homeowners
policies in force at March 31, 2017, December 31, 2016 and March 31, 2016, 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 three months ended March
31, 2017, total annuity deposits* received by Retirement increased 4.2%, or $4.7 million, compared to the prior year period. For
the first quarter of 2017, the increase reflected a 4.9% increase in recurring deposit receipts and a 3.6% increase in single premium
and rollover deposit receipts.
In the first three months of 2017,
new deposits to fixed accounts of $71.9 million decreased 3.7%, or $2.8 million, and new deposits to variable accounts of $45.4
million increased 19.8%, or $7.5 million, compared to the prior year.
Total annuity accumulated value
on deposit of $6.6 billion at March 31, 2017 increased 9% 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 94.7% and 94.5% for the
12 month periods ended March 31, 2017 and 2016, respectively; fixed annuity retention was 94.4% and 94.9% for the respective periods.
Variable annuity accumulated balances
of $2.0 billion at March 31, 2017 increased 13.8% compared to March 31, 2016, as positive impacts of deposits and favorable financial
market performance offset withdrawals and net transfers to the guaranteed interest rate fixed account option. Compared to the first
quarter of 2016, Retirement contract charges earned increased 8.2%, or $0.5 million.
Life premiums and contract deposits*
for the first three months of 2017 increased 10.9%, or $2.6 million, compared to the prior year period. The ordinary life insurance
in force lapse ratio was 4.5% for the 12 months ended March 31, 2017 compared to 4.2% for the 12 months ended March 31, 2016.
Sales*
For the first three months of 2017,
Property and Casualty new annualized sales premiums increased 8.6% compared to the first quarter of 2016, as 9.2%, or $1.9 million,
growth in new automobile sales was accompanied by growth in homeowners sales of 5.3%, or $0.2 million, compared to the prior year
period.
During the first quarter 2017,
the Retirement segment’s 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 Exclusive
Distributors increased 7.5% compared to the first quarter of 2016. Sales from the Independent Agent distribution channel, which
represent approximately 8.8% of total annuity sales in the current period and are largely single premium and rollover annuity deposits,
decreased approximately 21.4% compared to a year earlier. As a result, total Horace Mann annuity sales from the combined distribution
channels increased 4.2%, or $4.7 million, compared to the first quarter of 2016. It should be noted that historically, reported
annuity sales for HM products were determined based on annualized new recurring deposits as well as single deposits/rollovers.
Effective January 1, 2017, reported annuity sales are now determined based on total recurring deposits as well as single deposits/rollovers.
All historical annuity sales information presented has been revised to conform to the new reporting methodology.
The Company’s introduction
of new educator-focused portfolios of term and whole life products in recent years, including a single premium whole life product,
as well as the October 2015 introduction of the Company’s Indexed Universal Life (“IUL”) product have contributed
to an increase in sales of proprietary life products. For the current quarter, sales of Horace Mann’s proprietary life insurance
products totaled $4.7 million, representing an increase of 56.7%, or $1.7 million, compared to the prior year quarter, including
an increase of $1.8 million for single premium sales.
Distribution
At March 31, 2017, there was a
combined total of 697 Exclusive Distributors, compared to 683 at December 31, 2016 and 711 at March 31, 2016. The Company continues
to expect higher quality standards for Exclusive Distributors 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 Exclusive Distributor
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 Exclusive Distributors.
As mentioned above, the Company
also utilizes a nationwide network of Independent Agents who comprise an additional distribution channel for the Company’s
403(b) tax-qualified annuity products. The Independent Agent distribution channel included 273 authorized agents at March 31, 2017.
During the three months ended March 31, 2017, this channel generated $10.3 million in annuity sales for the Company
compared to $13.1 million for the first quarter of 2016, with the new business primarily comprised of single and rollover deposit
business in both periods.
Net Investment Income
For the three months ended March
31, 2017, pretax net investment income of $90.7 million increased 7.1%, or $6.0 million, (6.9%, or $3.9 million, after tax) compared
to the prior year period. In addition to reflecting higher asset balances in the Retirement segment, investment results reflected
an increase in investment prepayment activity and favorable returns on alternative investments, partially offset by the impact
of the current low interest rate environment. Average invested assets increased 5.4% over the 12 months ended March 31, 2017. The
average pretax yield on the total investment portfolio was 5.1% (3.4% after tax) for the first quarter of 2017, compared to the
average pretax yield of 5.0% (3.3% after tax) a year earlier. During the first quarter of 2017, management continued to identify
and purchase investments, including a modest level of alternative investments, with attractive risk-adjusted yields without venturing
into asset classes or individual securities that would be inconsistent with the Company’s overall conservative investment
guidelines.
Net Realized Investment Gains and Losses (Pretax)
For the first three months of 2017,
net realized investment losses were $0.2 million and comparable to a year ago. The net losses in both periods were realized primarily
from ongoing investment portfolio management activity and, when determined, the recognition of other-than-temporary impairment
(“OTTI”).
For the first three months of 2017,
the Company’s net realized investment losses of $0.2 million included $5.0 million of gross gains realized on security sales
partially offset by $2.4 million of gross realized losses primarily on disposal of securities and expiration of call options during
the quarter and $2.8 million of OTTI charges recorded on certain equity and fixed maturity securities.
For the first three months of 2016,
the Company’s net realized investment losses of $0.2 million included $5.6 million of gross gains realized on security sales
and calls partially offset by $2.1 million of realized losses primarily on securities that were disposed of during the quarter
and $3.7 million of OTTI charges recorded largely on Puerto Rico and energy sector fixed maturity securities.
The Company, from time to time,
sells securities subsequent to the balance sheet date that were considered temporarily impaired at the balance sheet date. Such
sales are due to issuer specific events occurring subsequent to the balance sheet date that result in a change in the Company’s
intent to sell an invested asset.
Fixed Maturity and Equity Securities
Portfolios
The table below presents the Company’s
fixed maturity and equity securities portfolios by major asset class, including the ten largest sectors of the Company’s
corporate bond holdings (based on fair value). Compared to December 31, 2016, credit spreads were tighter across most asset classes
and U.S. Treasury rates declined, which resulted in net unrealized investment gains to be higher in the Company’s fixed maturity
securities holdings at March 31, 2017.
|
|
March 31, 2017
|
|
|
|
|
|
|
|
|
|
Pretax Net
|
|
|
|
|
|
|
Amortized
|
|
Unrealized
|
|
|
Number of
|
|
Fair
|
|
Cost or
|
|
Investment
|
|
|
Issuers
|
|
Value
|
|
Cost
|
|
Gain (Loss)
|
Fixed maturity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Banking and Finance
|
|
|
98
|
|
|
|
$
|
707.7
|
|
|
|
$
|
676.4
|
|
|
|
$
|
31.3
|
|
Insurance
|
|
|
54
|
|
|
|
|
272.6
|
|
|
|
|
248.2
|
|
|
|
|
24.4
|
|
Energy (1)
|
|
|
47
|
|
|
|
|
224.8
|
|
|
|
|
212.0
|
|
|
|
|
12.8
|
|
Technology
|
|
|
32
|
|
|
|
|
172.8
|
|
|
|
|
168.2
|
|
|
|
|
4.6
|
|
Healthcare, Pharmacy
|
|
|
42
|
|
|
|
|
168.5
|
|
|
|
|
160.6
|
|
|
|
|
7.9
|
|
Real estate
|
|
|
37
|
|
|
|
|
165.2
|
|
|
|
|
158.2
|
|
|
|
|
7.0
|
|
Utilities
|
|
|
39
|
|
|
|
|
159.0
|
|
|
|
|
140.9
|
|
|
|
|
18.1
|
|
Transportation
|
|
|
24
|
|
|
|
|
158.4
|
|
|
|
|
151.8
|
|
|
|
|
6.6
|
|
Telecommunications
|
|
|
27
|
|
|
|
|
126.2
|
|
|
|
|
118.5
|
|
|
|
|
7.7
|
|
Natural gas
|
|
|
20
|
|
|
|
|
91.3
|
|
|
|
|
85.9
|
|
|
|
|
5.4
|
|
All other corporates (2)
|
|
|
197
|
|
|
|
|
590.7
|
|
|
|
|
563.1
|
|
|
|
|
27.6
|
|
Total corporate bonds
|
|
|
617
|
|
|
|
|
2,837.2
|
|
|
|
|
2,683.8
|
|
|
|
|
153.4
|
|
Mortgage-backed securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and federally
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
sponsored agencies
|
|
|
355
|
|
|
|
|
430.0
|
|
|
|
|
400.5
|
|
|
|
|
29.5
|
|
Commercial (3)
|
|
|
127
|
|
|
|
|
528.4
|
|
|
|
|
531.1
|
|
|
|
|
(2.7
|
)
|
Other
|
|
|
31
|
|
|
|
|
75.4
|
|
|
|
|
74.4
|
|
|
|
|
1.0
|
|
Municipal bonds (4)
|
|
|
601
|
|
|
|
|
1,777.4
|
|
|
|
|
1,647.3
|
|
|
|
|
130.1
|
|
Government bonds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
|
11
|
|
|
|
|
531.3
|
|
|
|
|
520.7
|
|
|
|
|
10.6
|
|
Foreign
|
|
|
17
|
|
|
|
|
99.7
|
|
|
|
|
93.9
|
|
|
|
|
5.8
|
|
Collateralized debt obligations (5)
|
|
|
102
|
|
|
|
|
583.2
|
|
|
|
|
577.4
|
|
|
|
|
5.8
|
|
Asset-backed securities
|
|
|
109
|
|
|
|
|
648.1
|
|
|
|
|
644.1
|
|
|
|
|
4.0
|
|
Total fixed maturity securities
|
|
|
1,970
|
|
|
|
$
|
7,510.7
|
|
|
|
$
|
7,173.2
|
|
|
|
$
|
337.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-redeemable preferred stocks
|
|
|
14
|
|
|
|
$
|
62.6
|
|
|
|
$
|
62.8
|
|
|
|
$
|
(0.2
|
)
|
Common stocks
|
|
|
180
|
|
|
|
|
74.3
|
|
|
|
|
60.4
|
|
|
|
|
13.9
|
|
Closed-end fund
|
|
|
1
|
|
|
|
|
20.1
|
|
|
|
|
20.0
|
|
|
|
|
0.1
|
|
Total equity securities
|
|
|
195
|
|
|
|
$
|
157.0
|
|
|
|
$
|
143.2
|
|
|
|
$
|
13.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2,165
|
|
|
|
$
|
7,667.7
|
|
|
|
$
|
7,316.4
|
|
|
|
$
|
351.3
|
|
|
(1)
|
At March 31, 2017, the fair value amount included $11.8 million which were non-investment grade.
|
|
(2)
|
The All other corporates category contains 19 additional
industry sectors. Food and beverage, broadcasting and media, consumer products, gaming, lodging and dining, retail and
metal and mining represented $426.6 million of fair value at March 31, 2017, with the remaining 13 sectors each representing
less than $32.3 million.
|
|
(3)
|
At March 31, 2017, 100% were investment grade, with an overall credit rating of AA, and the positions
were well diversified by property type, geography and sponsor.
|
|
(4)
|
Holdings are geographically diversified, approximately 40% are tax-exempt and 78% are revenue bonds
tied to essential services, such as mass transit, water and sewer. The overall credit quality of the municipal bond portfolio was
AA- at March 31, 2017.
|
|
(5)
|
Based on fair value, 96% of the collateralized debt obligation securities were rated investment
grade by Standard and Poor’s Corporation (“S&P”) and/or Moody’s Investors Service, Inc. (“Moody’s”)
at March 31, 2017.
|
At March 31, 2017, the Company’s
diversified fixed maturity securities portfolio consisted of 2,547 investment positions, issued by 1,970 entities, and totaled
approximately $7.5 billion in fair value. This portfolio was 95.9% investment grade, based on fair value, with an average quality
rating of A. The Company’s investment guidelines target single corporate issuer concentrations to 0.5% of invested
assets for “AA” or “AAA” rated securities, 0.35% of invested assets for “A” or “BBB”
rated securities, and 0.2% of invested assets for non-investment grade securities.
The following table presents the
composition and value of the Company’s fixed maturity and equity securities portfolios by rating category. At March 31, 2017,
94.8% of these combined portfolios were investment grade, based on fair value, with an overall average quality rating of A. The
Company has classified the entire fixed maturity and equity securities portfolios as available for sale, which are carried at fair
value.
Rating of Fixed Maturity and Equity Securities (1)
(Dollars in millions)
|
|
Percent of Portfolio
|
|
|
|
|
|
|
|
Fair Value
|
|
March 31, 2017
|
|
|
December 31,
|
|
March 31,
|
|
Fair
|
|
Amortized
|
|
|
2016
|
|
2017
|
|
Value
|
|
Cost or Cost
|
Fixed maturity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AAA
|
|
|
8.3
|
%
|
|
|
8.6
|
%
|
|
|
$
|
645.0
|
|
|
|
$
|
630.2
|
|
AA (2)
|
|
|
35.5
|
|
|
|
35.2
|
|
|
|
|
2,642.5
|
|
|
|
|
2,520.1
|
|
A
|
|
|
23.6
|
|
|
|
23.8
|
|
|
|
|
1,786.0
|
|
|
|
|
1,686.5
|
|
BBB
|
|
|
28.4
|
|
|
|
28.3
|
|
|
|
|
2,124.0
|
|
|
|
|
2,029.2
|
|
BB
|
|
|
2.4
|
|
|
|
2.4
|
|
|
|
|
176.6
|
|
|
|
|
173.5
|
|
B
|
|
|
1.0
|
|
|
|
0.9
|
|
|
|
|
70.6
|
|
|
|
|
73.3
|
|
CCC or lower
|
|
|
0.2
|
|
|
|
0.1
|
|
|
|
|
9.8
|
|
|
|
|
9.9
|
|
Not rated (3)
|
|
|
0.6
|
|
|
|
0.7
|
|
|
|
|
56.2
|
|
|
|
|
50.5
|
|
Total fixed maturity securities
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
$
|
7,510.7
|
|
|
|
$
|
7,173.2
|
|
Equity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AAA
|
|
|
-
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
AA
|
|
|
-
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
A
|
|
|
-
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
BBB
|
|
|
35.3
|
%
|
|
|
39.7
|
%
|
|
|
$
|
62.4
|
|
|
|
$
|
62.7
|
|
BB
|
|
|
-
|
|
|
|
-
|
|
|
|
|
*
|
|
|
|
|
*
|
|
B
|
|
|
-
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
CCC or lower
|
|
|
-
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
Not rated
|
|
|
64.7
|
|
|
|
60.3
|
|
|
|
|
94.6
|
|
|
|
|
80.5
|
|
Total equity securities
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
$
|
157.0
|
|
|
|
$
|
143.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
$
|
7,667.7
|
|
|
|
$
|
7,316.4
|
|
|
*
|
Less than $0.1 million.
|
|
(1)
|
Ratings are as assigned primarily by S&P when available, with remaining ratings as assigned on an equivalent basis by Moody’s.
Ratings for publicly traded securities are determined when the securities are acquired and are updated monthly to reflect any changes
in ratings.
|
|
(2)
|
At March 31, 2017, the AA rated fair value amount included $519.5 million of U.S. Government and federally sponsored agency
securities and $517.4 million of mortgage- and asset-backed securities issued by U.S. Government and federally sponsored agencies.
|
|
(3)
|
This category primarily represents private placement and municipal securities not rated by either S&P or Moody’s.
|
At March 31, 2017, the fixed maturity
and equity securities portfolios had a combined $56.7 million pretax of gross unrealized investment losses on $1,775 million fair
value related to 651 positions. Of the investment positions (fixed maturity and equity securities) with gross unrealized investment
losses, 9 were trading below 80% of the carrying value at March 31, 2017 and were not considered other-than-temporarily impaired.
These positions had fair value of $12.5 million, representing 0.2% of the Company’s total investment portfolio at fair value,
and had a gross unrealized investment loss of $4.4 million.
The Company views the gross unrealized
investment losses of all of the securities at March 31, 2017 as temporary. Future changes in circumstances related to these and
other securities could require subsequent recognition of OTTI.
Benefits, Claims and Settlement Expenses
|
|
Three Months Ended
|
|
Change From
|
|
|
March 31,
|
|
Prior Year
|
|
|
2017
|
|
2016
|
|
Percent
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and casualty
|
|
|
$
|
122.2
|
|
|
|
$
|
101.2
|
|
|
|
20.8
|
%
|
|
|
$
|
21.0
|
|
Annuity
|
|
|
|
1.1
|
|
|
|
|
0.9
|
|
|
|
22.2
|
%
|
|
|
|
0.2
|
|
Life
|
|
|
|
20.8
|
|
|
|
|
17.4
|
|
|
|
19.5
|
%
|
|
|
|
3.4
|
|
Total
|
|
|
$
|
144.1
|
|
|
|
$
|
119.5
|
|
|
|
20.6
|
%
|
|
|
$
|
24.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and casualty catastrophe losses, included above
|
|
|
$
|
17.2
|
|
|
|
$
|
12.7
|
|
|
|
35.4
|
%
|
|
|
$
|
4.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and Casualty Claims
and Claim Expenses (“losses”)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
|
|
|
|
Incurred claims and claim expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Claims occurring in the current year
|
|
|
$
|
123.2
|
|
|
|
$
|
103.2
|
|
|
|
|
|
|
|
|
|
|
Decrease in estimated reserves for claims
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
occurring in prior years
|
|
|
|
(1.0
|
)
|
|
|
|
(2.0
|
)
|
|
|
|
|
|
|
|
|
|
Total claims and claim expenses incurred
|
|
|
$
|
122.2
|
|
|
|
$
|
101.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and casualty loss ratio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
77.2
|
%
|
|
|
|
66.5
|
%
|
|
|
|
|
|
|
|
|
|
Effect of catastrophe costs, included above
|
|
|
|
10.8
|
%
|
|
|
|
8.3
|
%
|
|
|
|
|
|
|
|
|
|
Effect of prior years’ reserve development, included above
|
|
|
|
-0.6
|
%
|
|
|
|
-1.3
|
%
|
|
|
|
|
|
|
|
|
|
For the three months ended
March 31, 2017, the Company’s benefits, claims and settlement expenses increased $24.6 million, or 20.6%, compared to
the prior year period primarily reflecting increases in Property and Casualty catastrophe costs and current accident year
loss frequency -- specifically, in automobile and a $3.4 million increase in life mortality costs.
The current period favorable development
of prior years’ Property and Casualty reserves of $1.0 million was the result of actual and remaining projected losses for
prior years being below the level anticipated in the immediately preceding December 31 loss reserve estimate. At March 31, 2017,
the favorable development was predominantly the result of favorable severity trends in the homeowners loss emergence for accident
years 2014 and prior.
For the three months ended March
31, 2017, the automobile loss ratio of 78.3% increased by 6.4 percentage points compared to the prior year period, including (1)
the impact of catastrophe costs that resulted in a 0.9 percentage point increase and (2) the impacts of higher current accident
year non-catastrophe losses for 2017 primarily driven by an increase in loss frequencies. The homeowners loss ratio of 74.9% for
the three months ended March 31, 2017 increased 19.2 percentage points compared to a year earlier, including current accident year
catastrophe and non-catastrophe weather-related experience as well as development of prior years’ reserves that had a 2.0
percentage point less favorable impact in the current year. Catastrophe costs represented 29.9 percentage points of the homeowners
loss ratio for the current period compared to 23.7 percentage points for the prior year period.
Interest Credited to Policyholders
|
|
|
Three Months Ended
|
|
Change From
|
|
|
|
March 31,
|
|
Prior Year
|
|
|
|
2017
|
|
|
2016
|
|
Percent
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement (annuity)
|
|
|
|
$37.5
|
|
|
|
|
$35.6
|
|
|
|
5.3
|
%
|
|
|
$
|
1.9
|
|
Life
|
|
|
|
11.3
|
|
|
|
|
11.1
|
|
|
|
1.8
|
%
|
|
|
|
0.2
|
|
Total
|
|
|
|
$48.8
|
|
|
|
|
$46.7
|
|
|
|
4.5
|
%
|
|
|
$
|
2.1
|
|
Compared to the first three months
of 2016, the current period increase in Retirement segment interest credited reflected a 7.0% increase in average accumulated fixed
deposits, at an average crediting rate of 3.5%. 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 both the
three months ended March 31, 2017 and 2016, were 183 basis points.
As of March 31, 2017, fixed annuity
account values totaled $4.6 billion, including $4.3 billion of deferred annuities. As shown in the table below, for approximately
87%, or $3.7 billion of the deferred annuity account values, the credited interest rate was equal to the minimum guaranteed rate.
Due to limitations on the Company’s ability to further lower interest crediting rates, coupled with the expectation for continued
low reinvestment interest rates, management anticipates fixed annuity spread compression in future periods. The majority of assets
backing the net interest spread on fixed annuity business is invested in fixed maturity securities.
The Company actively manages its
interest rate risk exposure, considering a variety of factors, including earned interest rates, credited interest rates and the
relationship between the expected durations of assets and liabilities. Management estimates that over the next 12 months approximately
$543 million of the Retirement segment and Life segment combined investment portfolio and related investable cash flows will be
reinvested at current market rates. As interest rates remain at low levels, borrowers may prepay or redeem the securities with
greater frequency in order to borrow at lower market rates, which could increase investable cash flows and exacerbate the reinvestment
risk
.
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 Retirement segment net investment income
by approximately $2.1 million in year one and $6.3 million in year two,
further reducing the net interest spread by approximately
4 basis points and 13 basis points in the respective periods, compared to the current period annualized net interest spread. The
Company could also consider potential changes in rates credited to policyholders, tempered by any restrictions on the ability to
adjust policyholder rates due to minimum guaranteed crediting rates.
The expectation for future net
interest spreads is also an important component in the amortization of deferred policy acquisition costs. In terms of the sensitivity
of this amortization to the net interest spread, based on deferred policy acquisition costs as of March 31, 2017 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 $0.30 million and $0.40 million. This result may change depending on the magnitude and direction of any actual
deviations but represents a range of reasonably likely experience for the noted assumption.
Additional information regarding
the interest crediting rates and balances equal to the minimum guaranteed rate for deferred annuity account values is shown below.
|
|
March 31, 2017
|
|
|
|
|
|
|
|
Deferred Annuities at
|
|
|
Total Deferred Annuities
|
|
Minimum Guaranteed Rate
|
|
|
|
|
|
|
|
Percent of
|
|
|
|
|
|
|
|
Percent
|
|
Accumulated
|
|
Total Deferred
|
|
Percent
|
|
Accumulated
|
|
|
of Total
|
|
Value (“AV”)
|
|
Annuities AV
|
|
of Total
|
|
Value
|
Minimum guaranteed interest rates:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 2%
|
|
|
23.8
|
%
|
|
|
$
|
1,027.1
|
|
|
|
49.2
|
%
|
|
|
13.5
|
%
|
|
|
$
|
505.0
|
|
Equal to 2% but less than 3%
|
|
|
7.1
|
|
|
|
|
308.5
|
|
|
|
82.9
|
%
|
|
|
6.8
|
|
|
|
|
255.7
|
|
Equal to 3% but less than 4%
|
|
|
14.1
|
|
|
|
|
610.1
|
|
|
|
99.8
|
%
|
|
|
16.3
|
|
|
|
|
609.0
|
|
Equal to 4% but less than 5%
|
|
|
53.7
|
|
|
|
|
2,316.5
|
|
|
|
100.0
|
%
|
|
|
61.9
|
|
|
|
|
2,316.4
|
|
5% or higher
|
|
|
1.3
|
|
|
|
|
55.0
|
|
|
|
100.0
|
%
|
|
|
1.5
|
|
|
|
|
55.0
|
|
Total
|
|
|
100.0
|
%
|
|
|
$
|
4,317.2
|
|
|
|
86.7
|
%
|
|
|
100.0
|
%
|
|
|
$
|
3,741.1
|
|
The Company will continue to be
disciplined in executing strategies to mitigate the negative impact on profitability of a sustained low interest rate environment.
However, the success of these strategies may be affected by the factors discussed in “Item 1A. Risk Factors” in the
Company’s Annual Report on Form 10-K for the year ended December 31, 2016, and other factors discussed herein.
Policy Acquisition Expenses
Amortized
Amortized policy acquisition expenses
were $24.9 million for the first three months of 2017 compared to $24.1 million for the same period in 2016. The increase was largely
attributable to increased written premium in the Property and Casualty segment. For the Retirement and Life segments, the unlocking
of deferred policy acquisition costs (“unlocking”) resulted in an immaterial change in amortization for the three months
ended March 31, 2017 and 2016, respectively.
Operating Expenses
For the first three months of 2017,
operating expenses of $48.7 million increased $5.9 million, or 13.8%, compared to the same period in 2016. The first quarter 2017
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 28.3% for the three months ended March 31, 2017 increased 1 point compared to the prior year expense ratio
of 27.3%, reflecting additional costs related to the Company’s continued infrastructure investments.
Income Tax Expense
The effective income tax rate on
the Company’s pretax income, including net realized investment gains and losses, was 14.0% and 28.6% for the three months
ended March 31, 2017 and 2016, respectively. Income from investments in tax-advantaged securities reduced the effective income
tax rates 7.8% and 6.8% for the three months ended March 31, 2017 and 2016, respectively. Further, the adoption of a new accounting
standard for employee share-based payments on January 1, 2017 reduced the effective income tax rate by 13% for the quarter ending
March 31, 2017. The new accounting standard requires that the entire excess tax benefit/deficiency from employee share-based payments
be recognized in the income statement rather than allocating the excess tax benefit/deficiency between the equity section of the
balance sheet and the income statement.
The Company records liabilities
for uncertain tax filing positions where it is more likely than not that the position will not be sustainable upon audit by taxing
authorities. These liabilities are reevaluated routinely and are adjusted appropriately based on changes in facts or law. The Company
has no unrecorded liabilities from uncertain tax filing positions.
At March 31, 2017, the Company’s
federal income tax returns for years prior to 2013 are no longer subject to examination by the IRS. Management does not anticipate
any assessments for tax years that remain subject to examination to have a material effect on the Company’s financial position
or results of operations.
Net Income
For the three months ended March
31, 2017, the Company’s net income of $15.3 million decreased $9.9 million compared to the prior year period reflecting a
record level of catastrophe losses in the current quarter, as well as elevated non-catastrophe weather-related losses. Additional
detail is included in the “Executive Summary” at the beginning of this MD&A.
Net income (loss) by segment and
net income per share were as follows:
|
|
Three Months Ended
|
|
Change From
|
|
|
March 31,
|
|
Prior
Year
|
|
|
|
2017
|
|
|
2016
|
|
|
Percent
|
|
Amount
|
Analysis of net income (loss) by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
and Casualty
|
|
|
$
|
2.7
|
|
|
|
$
|
13.8
|
|
|
|
|
-80.4
|
%
|
|
|
$
|
(11.1
|
)
|
Retirement
|
|
|
|
11.5
|
|
|
|
|
10.6
|
|
|
|
|
8.5
|
%
|
|
|
|
0.9
|
|
Life
|
|
|
|
3.9
|
|
|
|
|
3.9
|
|
|
|
|
N.M.
|
|
|
|
|
-
|
|
Corporate
and Other (1)
|
|
|
|
(2.8
|
)
|
|
|
|
(3.1
|
)
|
|
|
|
-9.7
|
%
|
|
|
|
0.3
|
|
Net
income
|
|
|
$
|
15.3
|
|
|
|
$
|
25.2
|
|
|
|
|
-39.3
|
%
|
|
|
$
|
(9.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of catastrophe costs,
after tax, included above
|
|
|
$
|
(11.1
|
)
|
|
|
$
|
(8.3
|
)
|
|
|
|
33.7
|
%
|
|
|
$
|
(2.8
|
)
|
Effect of net realized investment gains
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(losses),
after tax, included above
|
|
|
$
|
(0.1
|
)
|
|
|
$
|
(0.4
|
)
|
|
|
|
-75.0
|
%
|
|
|
$
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share
|
|
|
$
|
0.37
|
|
|
|
$
|
0.61
|
|
|
|
|
-39.3
|
%
|
|
|
$
|
(0.24
|
)
|
Weighted average number of shares and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
equivalent shares (in millions)
|
|
|
|
41.3
|
|
|
|
|
41.5
|
|
|
|
|
-0.5
|
%
|
|
|
|
(0.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and casualty combined ratio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
105.5
|
%
|
|
|
|
93.8
|
%
|
|
|
|
N.M.
|
|
|
|
|
11.7
|
%
|
Effect of catastrophe costs,
included above
|
|
|
|
10.8
|
%
|
|
|
|
8.3
|
%
|
|
|
|
N.M.
|
|
|
|
|
2.5
|
%
|
Effect of prior years’
reserve development, included above
|
|
|
|
-0.6
|
%
|
|
|
|
-1.3
|
%
|
|
|
|
N.M.
|
|
|
|
|
0.7
|
%
|
N.M. - Not meaningful.
|
(1)
|
The Corporate and Other segment includes interest expense on debt, net 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, net realized investment
gains and losses may vary notably between reporting periods and are often the driver of fluctuations in the level of this segment’s
net income or loss. For the three months ended March 31, 2017, net realized investment losses after tax were $0.1 million, compared
to net realized investment losses after tax of $0.4 million a year earlier.
Return on average shareholders’
equity based on net income was 5.4% and 6.4% for the trailing 12 months ended March 31, 2017 and 2016, respectively.
Outlook for 2017
At the time of this Quarterly Report
on Form 10-Q, management estimates that 2017 full year net income before net realized investment gains and losses will be within
a range of $1.95 to $2.15 per diluted share. This projection incorporates the Company’s results for 2016 and anticipates
continued improvement in the Company’s underlying automobile combined ratio, modeled catastrophe losses as well as modestly
lower earnings in the Retirement and Life segments reflecting lower net interest spreads, and approximately $0.10 cents of continued
strategic investing in our Retirement business that we expect will accelerate growth momentum related to the Company’s continued
modernization of technology and infrastructure. As a result of the continued low interest rate environment, management expects
the Company’s overall portfolio yield to decline by approximately 10 basis points over the course of 2017, impacting each
of the three business segments. Within the Property and Casualty segment, both approved and planned premium rate increases, as
well as underwriting initiatives, are expected to improve profitability margins for the automobile line compared to 2016. The property
line is anticipated to produce solid profitability, although at a reduced level that assumes non-catastrophe weather related losses
return to a more normalized level than the comparison to 2016; and, catastrophe losses are estimated to be lower than the 2016
level. Net income for the Retirement segment will continue to be impacted by the prolonged interest rate environment and the 2016
net interest spread of 193 basis points is anticipated to grade down to the low 180s through the course of 2017. Assuming mortality
costs consistent with the Company’s actuarial models, Life segment net income is expected to decrease compared to 2016, due
to net investment income pressure and the increase in expenses. In addition to the segment-specific factors, the Company’s
initiatives for customer service and infrastructure improvements, as well as enhanced training and education for the Company’s
agency force, all intended to enhance the overall customer experience and support further improvement in policy retention and business
cross-sale ratios, will continue and result in a moderate increase in expense levels compared to 2016.
As described in “Critical
Accounting Policies”, certain of the Company’s significant accounting measurements require the use of estimates and
assumptions. As additional information becomes available, adjustments may be required. Those adjustments are charged or credited
to income for the period in which the adjustments are made and may impact actual results compared to management’s estimate
above. Additionally, see “Forward-looking Information” in this Quarterly Report on Form 10-Q and “Item 1A. Risk
Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 concerning other important
factors that could impact actual results. Management believes that a projection of net income including net realized investment
gains and losses is not appropriate on a forward-looking basis because it is not possible to provide a valid forecast of net realized
investment gains and losses, which can vary substantially from one period to another and may have a significant impact on net income.
Liquidity and Financial Resources
Off-Balance Sheet Arrangements
At March 31, 2017 and 2016, the
Company did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred
to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance
sheet arrangements or for other contractually narrow or limited purposes. As such, the Company is not exposed to any financing,
liquidity, market or credit risk that could arise if the Company engaged in such relationships.
Investments
Information regarding the Company’s
investment portfolio, which is comprised primarily of investment grade, fixed maturity securities, is 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 and pay dividends to shareholders. Long-term liquidity requirements, beyond one year, are principally for
the payment of future insurance and annuity policy claims and benefits, as well as retirement of long-term debt.
Operating Activities
As a holding company, HMEC conducts
its principal operations in the personal lines segment of the property and casualty and life insurance industries through its subsidiaries.
HMEC’s insurance subsidiaries generate cash flow from premium and investment income, generally well in excess of their immediate
needs for policy obligations, operating expenses and other cash requirements. Cash provided by operating activities primarily reflects
net cash generated by the insurance subsidiaries. For the first three months of 2017, net cash provided by operating activities
decreased compared to the same period in 2016, largely due to an increase in Policyholder benefits paid in the current quarter,
partially offset by an increase in Investment income collected in the current quarter.
Payments of principal and
interest on debt, dividends to shareholders and parent company operating expenses are largely dependent on the ability of the
insurance subsidiaries to pay cash dividends or make other cash payments to HMEC, including tax payments pursuant to tax
sharing agreements. Payments for share repurchase programs also have this dependency. If necessary, HMEC also has other
potential sources of liquidity that could provide for additional funding to meet corporate obligations or pay shareholder
dividends, which include a revolving line of credit, as well as issuances of various securities. The insurance subsidiaries
are subject to various regulatory restrictions which limit the amount of annual dividends or other distributions, including
loans or cash advances, available to HMEC without prior approval of the insurance regulatory authorities. The aggregate
amount of
dividends that may be paid in 2017 from all of HMEC’s
insurance subsidiaries without prior regulatory approval is approximately $91 million, of which $12.0 million was paid during the
three months ended March 31, 2017. Although regulatory restrictions exist, dividend availability from subsidiaries has been, and
is expected to be, adequate for HMEC’s capital needs. Additional information is contained in “Notes to Consolidated
Financial Statements -- Note 10 -- Statutory Information and Restrictions” of the Company’s Annual Report
on Form 10-K for the year ended December 31, 2016.
Investing Activities
HMEC’s insurance subsidiaries
maintain significant investments in fixed maturity securities to meet future contractual obligations to policyholders. In conjunction
with its management of liquidity and other asset/liability management objectives, the Company, from time to time, will sell fixed
maturity securities prior to maturity, as well as equity securities, and reinvest the proceeds in other investments with different
interest rates, maturities or credit characteristics. Accordingly, the Company has classified the entire fixed maturity and equity
securities portfolios as “available for sale”.
Financing Activities
Financing activities include primarily
payment of dividends, the receipt and withdrawal of funds by annuity contractholders, issuances and repurchases of HMEC’s
common stock, fluctuations in bank overdraft balances, and borrowings, repayments and repurchases related to its debt facilities.
The Company’s annuity business
produced net positive cash flows in the first three months of 2017. For the three months ended March 31, 2017, receipts from annuity
contracts increased $4.7 million, or 4.2%, 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 transfers to variable
annuity accumulated cash values decreased $14.3 million, or 16.8%, compared to the prior year period.
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, 2016.
The total capital of the Company
was $1,569.1 million at March 31, 2017, including $247.3 million of long-term debt and no short-term debt outstanding. Total debt
represented 18.0% of total capital excluding net unrealized investment gains and losses (15.8% including net unrealized investment
gains and losses) at March 31, 2017, which was below the Company’s long-term target of 25%.
Shareholders’ equity was
$1,321.8 million at March 31, 2017, including a net unrealized investment gain in the Company’s investment portfolio of $198.3
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 $1,664.3
million and $41.05, respectively, at March 31, 2017. Book value per share was $32.60 at March 31, 2017 ($27.71 excluding the net
unrealized investment gain*).
Additional information regarding
the net unrealized investment gain in the Company’s investment portfolio at March 31, 2017 is included in “Results
of Operations -- Net Realized Investment Gains and Losses (Pretax)”.
Total shareholder dividends were
$11.5 million for the three months ended March 31, 2017. In March 2017, the Board of Directors announced regular quarterly dividends
of $0.275 per share.
During the first three months of
2017, the Company did not repurchase shares of its common stock, 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, 2016. As of March 31, 2017, $29.5 million remained
authorized for future share repurchases under the 2015 repurchase program.
As of March 31, 2017, 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, 2016. The Senior Notes due 2025 are traded in the open market (HMN 4.50).
As of March 31, 2017, 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 March 31, 2017.
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.
Assigned ratings as of April 30,
2017 were unchanged from the disclosure in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.
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 April 30, 2017
|
|
|
|
|
S&P
|
|
A
|
(stable)
|
|
BBB
|
(stable)
|
Moody’s
|
|
|
|
|
|
|
Horace Mann Life Insurance Company
|
|
A3
|
(positive)
|
|
N.A.
|
|
HMEC’s Property and Casualty subsidiaries
|
|
A3
|
(positive)
|
|
N.A.
|
|
HMEC
|
|
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, 2016.
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, 2016.
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, 2016.