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, 2016, and the related consolidated statements
of operations, comprehensive income, changes in shareholders’ equity, and cash flows for the three-month periods ended March
31, 2016 and 2015. These consolidated financial statements are the responsibility of the Company’s management.
We conducted our review in accordance with
the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists
principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters.
It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of
any material modifications that should be made to the consolidated financial statements referred to above for them to be in conformity
with U.S. generally accepted accounting principles.
We have previously audited, in accordance
with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Horace Mann
Educators Corporation and subsidiaries as of December 31, 2015, and the related consolidated statements of operations, comprehensive
loss, changes in shareholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated
February 29, 2016, we expressed an unqualified opinion on those consolidated financial statements.
/s/ KPMG LLP
|
|
KPMG LLP
|
|
|
|
Chicago, Illinois
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|
May 6, 2016
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|
HORACE MANN EDUCATORS CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share
data)
|
|
March 31,
|
|
December 31,
|
|
|
|
2016
|
|
2015
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
ASSETS
|
|
Investments
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities, available for sale, at fair value
(amortized
cost 2016, $6,791,301; 2015, $6,785,626)
|
|
|
$
|
7,216,502
|
|
|
|
$
|
7,091,340
|
|
|
Equity securities, available for sale, at fair value
(cost 2016, $96,305;
2015, $95,722)
|
|
|
|
104,044
|
|
|
|
|
99,797
|
|
|
Short-term and other investments
|
|
|
|
504,071
|
|
|
|
|
456,893
|
|
|
Total investments
|
|
|
|
7,824,617
|
|
|
|
|
7,648,030
|
|
|
Cash
|
|
|
|
50,454
|
|
|
|
|
15,509
|
|
|
Deferred policy acquisition costs
|
|
|
|
239,187
|
|
|
|
|
253,176
|
|
|
Goodwill
|
|
|
|
47,396
|
|
|
|
|
47,396
|
|
|
Other assets
|
|
|
|
301,867
|
|
|
|
|
292,139
|
|
|
Separate Account (variable annuity) assets
|
|
|
|
1,767,866
|
|
|
|
|
1,800,722
|
|
|
Total assets
|
|
|
$
|
10,231,387
|
|
|
|
$
|
10,056,972
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
Policy liabilities
|
|
|
|
|
|
|
|
|
|
|
|
Investment contract and life policy reserves
|
|
|
$
|
5,189,528
|
|
|
|
$
|
5,126,842
|
|
|
Unpaid claims and claim expenses
|
|
|
|
344,269
|
|
|
|
|
323,720
|
|
|
Unearned premiums
|
|
|
|
227,304
|
|
|
|
|
232,841
|
|
|
Total policy liabilities
|
|
|
|
5,761,101
|
|
|
|
|
5,683,403
|
|
|
Other policyholder funds
|
|
|
|
693,920
|
|
|
|
|
692,652
|
|
|
Other liabilities
|
|
|
|
425,491
|
|
|
|
|
368,559
|
|
|
Long-term debt
|
|
|
|
247,022
|
|
|
|
|
246,975
|
|
|
Separate Account (variable annuity) liabilities
|
|
|
|
1,767,866
|
|
|
|
|
1,800,722
|
|
|
Total liabilities
|
|
|
|
8,895,400
|
|
|
|
|
8,792,311
|
|
|
Preferred stock, $0.001 par value, authorized 1,000,000 shares; none
issued
|
|
|
|
-
|
|
|
|
|
-
|
|
|
Common stock, $0.001 par value, authorized 75,000,000 shares; issued, 2016,
64,796,736; 2015, 64,537,554
|
|
|
|
65
|
|
|
|
|
65
|
|
|
Additional paid-in capital
|
|
|
|
444,911
|
|
|
|
|
442,648
|
|
|
Retained earnings
|
|
|
|
1,130,316
|
|
|
|
|
1,116,277
|
|
|
Accumulated other comprehensive income (loss), net of taxes:
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gains on fixed maturities and equity securities
|
|
|
|
244,657
|
|
|
|
|
175,167
|
|
|
Net funded status of pension obligations
|
|
|
|
(11,794
|
)
|
|
|
|
(11,794
|
)
|
|
Treasury stock, at cost, 2016, 24,445,799 shares; 2015, 23,971,522
shares
|
|
|
|
(472,168
|
)
|
|
|
|
(457,702
|
)
|
|
Total shareholders’ equity
|
|
|
|
1,335,987
|
|
|
|
|
1,264,661
|
|
|
Total liabilities and shareholders’ equity
|
|
|
$
|
10,231,387
|
|
|
|
$
|
10,056,972
|
|
|
See accompanying Notes to Consolidated Financial
Statements.
See accompanying Report of Independent Registered
Public Accounting Firm.
HORACE MANN EDUCATORS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(Dollars in thousands, except per share
data)
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
|
2016
|
|
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
Insurance premiums and contract charges earned
|
|
$
|
185,450
|
|
|
$
|
179,739
|
|
Net investment income
|
|
|
84,659
|
|
|
|
83,313
|
|
Net realized investment gains (losses)
|
|
|
(154
|
)
|
|
|
6,068
|
|
Other income
|
|
|
1,348
|
|
|
|
999
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
271,303
|
|
|
|
270,119
|
|
|
|
|
|
|
|
|
|
|
Benefits, losses and expenses
|
|
|
|
|
|
|
|
|
Benefits, claims and settlement expenses
|
|
|
119,513
|
|
|
|
114,019
|
|
Interest credited
|
|
|
46,690
|
|
|
|
44,537
|
|
Policy acquisition expenses amortized
|
|
|
24,052
|
|
|
|
23,684
|
|
Operating expenses
|
|
|
42,796
|
|
|
|
35,928
|
|
Interest expense
|
|
|
2,935
|
|
|
|
3,552
|
|
|
|
|
|
|
|
|
|
|
Total benefits, losses and expenses
|
|
|
235,986
|
|
|
|
221,720
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
35,317
|
|
|
|
48,399
|
|
Income tax expense
|
|
|
10,164
|
|
|
|
14,124
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
25,153
|
|
|
$
|
34,275
|
|
|
|
|
|
|
|
|
|
|
Net income per share
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.61
|
|
|
$
|
0.82
|
|
Diluted
|
|
$
|
0.61
|
|
|
$
|
0.81
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares and equivalent shares (in thousands)
|
|
|
|
|
|
|
|
|
Basic
|
|
|
41,297
|
|
|
|
41,950
|
|
Diluted
|
|
|
41,492
|
|
|
|
42,300
|
|
|
|
|
|
|
|
|
|
|
Net realized investment gains (losses)
|
|
|
|
|
|
|
|
|
Total other-than-temporary impairment losses on securities
|
|
$
|
(3,673
|
)
|
|
$
|
(2,289
|
)
|
Portion of losses recognized in other comprehensive income
|
|
|
-
|
|
|
|
-
|
|
Net other-than-temporary impairment losses on securities recognized in
earnings
|
|
|
(3,673
|
)
|
|
|
(2,289
|
)
|
Realized gains, net
|
|
|
3,519
|
|
|
|
8,357
|
|
Total
|
|
$
|
(154
|
)
|
|
$
|
6,068
|
|
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,
|
|
|
|
|
2016
|
|
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
25,153
|
|
|
$
|
34,275
|
|
Other comprehensive income, net of taxes:
|
|
|
|
|
|
|
|
|
Change in net unrealized gains and losses on fixed maturities and equity
securities
|
|
|
69,490
|
|
|
|
37,578
|
|
Change in net funded status of pension obligations
|
|
|
-
|
|
|
|
-
|
|
Other comprehensive income
|
|
|
69,490
|
|
|
|
37,578
|
|
Total
|
|
$
|
94,643
|
|
|
$
|
71,853
|
|
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,
|
|
|
|
|
2016
|
|
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par value
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
65
|
|
|
$
|
64
|
|
Options exercised, 2016, 84,850 shares; 2015, 43,298 shares
|
|
|
-
|
|
|
|
-
|
|
Conversion of common stock units, 2016, 8,538 shares; 2015, 8,293 shares
|
|
|
-
|
|
|
|
-
|
|
Conversion of restricted stock units, 2016,
165,794 shares; 2015, 157,539 shares
|
|
|
-
|
|
|
|
-
|
|
Ending balance
|
|
|
65
|
|
|
|
64
|
|
|
|
|
|
|
|
|
|
|
Additional paid-in capital
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
|
442,648
|
|
|
|
422,232
|
|
Options exercised and
conversion of common stock units and restricted stock units
|
|
|
353
|
|
|
|
10,882
|
|
Share-based compensation expense
|
|
|
1,910
|
|
|
|
1,965
|
|
Ending balance
|
|
|
444,911
|
|
|
|
435,079
|
|
|
|
|
|
|
|
|
|
|
Retained earnings
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
|
1,116,277
|
|
|
|
1,065,318
|
|
Net income
|
|
|
25,153
|
|
|
|
34,275
|
|
Cash dividends, 2016, $0.265 per share; 2015,
$0.250 per share
|
|
|
(11,114
|
)
|
|
|
(10,676
|
)
|
Ending balance
|
|
|
1,130,316
|
|
|
|
1,088,917
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income (loss), net of taxes
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
|
163,373
|
|
|
|
284,601
|
|
Change in net unrealized gains and losses on fixed
maturities and equity securities
|
|
|
69,490
|
|
|
|
37,578
|
|
Change in net funded status of pension obligations
|
|
|
-
|
|
|
|
-
|
|
Ending balance
|
|
|
232,863
|
|
|
|
322,179
|
|
|
|
|
|
|
|
|
|
|
Treasury stock, at cost
|
|
|
|
|
|
|
|
|
Beginning balance, 2016, 23,971,522 shares; 2015, 23,308,430
shares
|
|
|
(457,702
|
)
|
|
|
(435,752
|
)
|
Acquisition of shares, 2016, 474,277 shares; 2015, 23,500 shares
|
|
|
(14,466
|
)
|
|
|
(716
|
)
|
Ending balance, 2016, 24,445,799 shares; 2015, 23,331,930 shares
|
|
|
(472,168
|
)
|
|
|
(436,468
|
)
|
|
|
|
|
|
|
|
|
|
Shareholders’ equity at end of period
|
|
$
|
1,335,987
|
|
|
$
|
1,409,771
|
|
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,
|
|
|
|
|
2016
|
|
|
|
|
2015
|
|
|
Cash flows - operating activities
|
|
|
|
|
|
|
|
|
Premiums collected
|
|
$
|
177,535
|
|
|
$
|
168,558
|
|
Policyholder benefits paid
|
|
|
(116,941
|
)
|
|
|
(112,404
|
)
|
Policy acquisition and other operating expenses paid
|
|
|
(71,024
|
)
|
|
|
(73,560
|
)
|
Investment income collected
|
|
|
82,586
|
|
|
|
82,486
|
|
Interest expense paid
|
|
|
(57
|
)
|
|
|
(165
|
)
|
Other
|
|
|
5,027
|
|
|
|
2,387
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
77,126
|
|
|
|
67,302
|
|
|
|
|
|
|
|
|
|
|
Cash flows - investing activities
|
|
|
|
|
|
|
|
|
Fixed maturities
|
|
|
|
|
|
|
|
|
Purchases
|
|
|
(317,878
|
)
|
|
|
(284,293
|
)
|
Sales
|
|
|
82,090
|
|
|
|
81,320
|
|
Maturities, paydowns, calls and redemptions
|
|
|
241,233
|
|
|
|
166,847
|
|
Purchase of other invested assets
|
|
|
(10,260
|
)
|
|
|
(12,472
|
)
|
Net cash used in short-term and other investments
|
|
|
(41,403
|
)
|
|
|
(32,073
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(46,218
|
)
|
|
|
(80,671
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows - financing activities
|
|
|
|
|
|
|
|
|
Dividends paid to shareholders
|
|
|
(11,114
|
)
|
|
|
(10,676
|
)
|
Acquisition of treasury stock
|
|
|
(14,466
|
)
|
|
|
(716
|
)
|
Exercise of stock options
|
|
|
1,727
|
|
|
|
884
|
|
Annuity contracts: variable, fixed and FHLB funding agreements
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
112,564
|
|
|
|
141,962
|
|
Benefits, withdrawals and net transfers to Separate Account (variable
annuity) assets
|
|
|
(85,411
|
)
|
|
|
(91,449
|
)
|
Life policy accounts
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
489
|
|
|
|
122
|
|
Withdrawals and surrenders
|
|
|
(926
|
)
|
|
|
(1,044
|
)
|
Change in bank overdrafts
|
|
|
1,174
|
|
|
|
6,542
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
4,037
|
|
|
|
45,625
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash
|
|
|
34,945
|
|
|
|
32,256
|
|
|
|
|
|
|
|
|
|
|
Cash at beginning of period
|
|
|
15,509
|
|
|
|
11,675
|
|
|
|
|
|
|
|
|
|
|
Cash at end of period
|
|
$
|
50,454
|
|
|
$
|
43,931
|
|
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, 2016 and 2015
(Dollars in thousands, except per share
data)
Note 1 - Basis of Presentation
The accompanying unaudited
consolidated financial statements of Horace Mann Educators Corporation (“HMEC”; and together with its subsidiaries,
the “Company” or “Horace Mann”) have been prepared in accordance with United States (“U.S.”)
generally accepted accounting principles (“GAAP”) and with the rules and regulations of the Securities and Exchange
Commission (“SEC”), specifically Regulation S-X and the instructions to Form 10-Q. Certain information and note disclosures
which are normally included in annual financial statements prepared in accordance with GAAP but are not required for interim reporting
purposes have been omitted. The Company believes that these consolidated financial statements contain all adjustments (consisting
of normal recurring accruals) which are, in the opinion of management, necessary to present fairly the Company’s consolidated
financial position as of March 31, 2016 and the consolidated results of operations, comprehensive income, changes in shareholders’
equity and cash flows for the three months ended March 31, 2016 and 2015. The preparation of consolidated financial statements
in conformity with GAAP requires management to make estimates and assumptions that affect (1) the reported amounts of assets and
liabilities, (2) disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and (3)
the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
The subsidiaries of
HMEC market and underwrite personal lines of property and casualty (primarily personal lines automobile and homeowners) insurance,
retirement annuities (primarily tax-qualified products) and life insurance, primarily to K-12 teachers, administrators and other
employees of public schools and their families. HMEC’s principal operating subsidiaries are Horace Mann Life Insurance Company,
Horace Mann Insurance Company, Teachers Insurance Company, Horace Mann Property & Casualty Insurance Company and Horace Mann
Lloyds.
These consolidated
financial statements should be read in conjunction with the consolidated financial statements and the related notes to consolidated
financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.
The results of operations
for the three months ended March 31, 2016 are not necessarily indicative of the results to be expected for the full year.
The Company has reclassified
the presentation of certain prior period information to conform with the 2016 presentation. See “Adopted Accounting Standards”.
Note 1 - Basis of Presentation-(Continued)
Investment Contract
and Life Policy Reserves
This table summarizes
the Company’s investment contract and life policy reserves.
|
|
March 31,
|
|
|
|
December 31,
|
|
|
|
2016
|
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
Investment contract reserves
|
|
$
|
4,128,205
|
|
|
|
$
|
4,072,102
|
|
Life policy reserves
|
|
|
1,061,323
|
|
|
|
|
1,054,740
|
|
Total
|
|
$
|
5,189,528
|
|
|
|
$
|
5,126,842
|
|
Accumulated Other
Comprehensive Income (Loss)
Accumulated other comprehensive
income (loss) represents the accumulated change in shareholders’ equity from transactions and other events and circumstances
from non-shareholder sources. For the Company, accumulated other comprehensive income (loss) includes the after tax change in net
unrealized gains and losses on fixed maturities and equity securities and the after tax change in net funded status of pension
obligations for the period as shown in the Consolidated Statement of Changes in Shareholders’ Equity. The following tables
reconcile these components.
|
Unrealized Gains
|
|
|
|
|
|
|
|
|
|
and Losses on
|
|
|
|
|
|
|
|
|
|
Fixed Maturities
|
|
|
|
|
|
|
|
|
|
and Equity
|
|
Defined
|
|
|
|
|
|
Securities (1)(2)
|
|
Benefit Plans (1)
|
|
Total (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance, 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 (loss)
|
|
|
69,490
|
|
|
|
|
-
|
|
|
|
|
69,490
|
|
Ending balance, March 31, 2016
|
|
$
|
244,657
|
|
|
|
$
|
(11,794
|
)
|
|
|
$
|
232,863
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance, January 1, 2015
|
|
$
|
297,554
|
|
|
|
$
|
(12,953
|
)
|
|
|
$
|
284,601
|
|
Other comprehensive income (loss) before
reclassifications
|
|
|
41,370
|
|
|
|
|
-
|
|
|
|
|
41,370
|
|
Amounts reclassified from
accumulated other comprehensive income (loss)
|
|
|
(3,792
|
)
|
|
|
|
-
|
|
|
|
|
(3,792
|
)
|
Net current period other
comprehensive income (loss)
|
|
|
37,578
|
|
|
|
|
-
|
|
|
|
|
37,578
|
|
Ending balance, March 31, 2015
|
|
$
|
335,132
|
|
|
|
$
|
(12,953
|
)
|
|
|
$
|
322,179
|
|
|
(1)
|
All amounts are net of tax.
|
|
(2)
|
The pretax amounts reclassified from accumulated other comprehensive income (loss), $740 and $5,834,
are included in net realized investment gains and losses and the related tax expenses, $259 and $2,042, are included in income
tax expense in the Consolidated Statements of Operations for the three months ended March 31, 2016 and 2015, 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 — Unrealized Gains and Losses on Fixed Maturities and Equity Securities”.
Adopted Accounting
Standards
Presentation of Debt
Issuance Costs
Effective January 1,
2016, the Company adopted accounting guidance which was issued to simplify the presentation of costs incurred to issue debt securities.
The guidance requires debt issuance costs associated with specific debt securities to be presented in the balance sheet as a direct
deduction from the carrying value of the associated debt liability, consistent with the presentation of a debt discount. Costs
incurred related to line of credit arrangements continue to be presented as an asset in the consolidated balance sheet. Also, the
guidance does not affect the recognition and measurement of debt issuance costs. The guidance required retrospective application.
As a result of this adoption, the following items in the Company’s December 31, 2015 Consolidated Balance Sheet were each
reduced by $2,371: Other Assets, Total Assets, Long-term Debt, Total Liabilities and Total Liabilities and Shareholders’
Equity. Net income per share (basic and diluted) did not change as a result of the adopted accounting change.
Note 2 - Investments
The Company’s
investment portfolio includes free-standing derivative financial instruments (currently over the counter (“OTC”) index
call option contracts) to economically hedge risk associated with its fixed indexed annuity and indexed universal life products’
contingent liabilities. The Company’s fixed indexed annuity and indexed universal life products include embedded derivative
features that are discussed in “Note 1 — Summary of Significant Accounting Policies — Investment Contract and
Life Policy Reserves — Policy Liabilities for Fixed Indexed Annuities and Indexed Universal Life Policies” of the Company’s
Annual Report on Form 10-K for the year ended December 31, 2015. The Company's investment portfolio included no other free-standing
derivative financial instruments (futures, forwards, swaps, option contracts or other financial instruments with similar characteristics),
and there were no other embedded derivative features related to the Company’s insurance products during the three months
ended March 31, 2016 and 2015.
Note 2 - Investments-(Continued)
Fixed Maturities
and Equity Securities
The Company’s
investment portfolio is comprised primarily of fixed maturity securities (“fixed maturities”) and also includes equity
securities. The amortized cost or cost, unrealized investment gains and losses, fair values and other-than-temporary impairment
(“OTTI”) included in accumulated other comprehensive income (loss) (“AOCI”) of all fixed maturities and
equity securities in the portfolio were as follows:
|
|
|
Amortized
|
|
|
|
Unrealized
|
|
|
|
Unrealized
|
|
|
|
|
Fair
|
|
|
|
OTTI in
|
|
|
|
|
Cost/Cost
|
|
|
|
Gains
|
|
|
Losses
|
|
|
|
Value
|
|
|
|
AOCI (1)
|
|
March 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and federally sponsored agency obligations (2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
|
|
$
|
441,038
|
|
|
|
$
|
54,633
|
|
|
|
|
$
|
471
|
|
|
|
|
$
|
495,200
|
|
|
|
$
|
-
|
|
Other, including
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities
|
|
|
|
508,042
|
|
|
|
|
32,078
|
|
|
|
|
|
-
|
|
|
|
|
|
540,120
|
|
|
|
|
-
|
|
Municipal bonds
|
|
|
|
1,536,111
|
|
|
|
|
198,416
|
|
|
|
|
|
7,199
|
|
|
|
|
|
1,727,328
|
|
|
|
|
(2,724
|
)
|
Foreign government bonds
|
|
|
|
67,422
|
|
|
|
|
6,665
|
|
|
|
|
|
-
|
|
|
|
|
|
74,087
|
|
|
|
|
-
|
|
Corporate bonds
|
|
|
|
2,684,520
|
|
|
|
|
177,754
|
|
|
|
|
|
28,343
|
|
|
|
|
|
2,833,931
|
|
|
|
|
-
|
|
Other mortgage-backed securities
|
|
|
|
1,554,168
|
|
|
|
|
20,255
|
|
|
|
|
|
28,587
|
|
|
|
|
|
1,545,836
|
|
|
|
|
1,264
|
|
Totals
|
|
|
$
|
6,791,301
|
|
|
|
$
|
489,801
|
|
|
|
|
$
|
64,600
|
|
|
|
|
$
|
7,216,502
|
|
|
|
$
|
(1,460
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities (3)
|
|
|
$
|
96,305
|
|
|
|
$
|
10,837
|
|
|
|
|
$
|
3,098
|
|
|
|
|
$
|
104,044
|
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and federally sponsored agency obligations (2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
|
|
$
|
461,862
|
|
|
|
$
|
44,413
|
|
|
|
|
$
|
1,861
|
|
|
|
|
$
|
504,414
|
|
|
|
$
|
-
|
|
Other, including
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities
|
|
|
|
532,373
|
|
|
|
|
21,153
|
|
|
|
|
|
7,415
|
|
|
|
|
|
546,111
|
|
|
|
|
-
|
|
Municipal bonds
|
|
|
|
1,553,603
|
|
|
|
|
165,680
|
|
|
|
|
|
10,340
|
|
|
|
|
|
1,708,943
|
|
|
|
|
(4,140
|
)
|
Foreign government bonds
|
|
|
|
67,441
|
|
|
|
|
6,288
|
|
|
|
|
|
112
|
|
|
|
|
|
73,617
|
|
|
|
|
-
|
|
Corporate bonds
|
|
|
|
2,687,376
|
|
|
|
|
140,873
|
|
|
|
|
|
48,834
|
|
|
|
|
|
2,779,415
|
|
|
|
|
-
|
|
Other mortgage-backed securities
|
|
|
|
1,482,971
|
|
|
|
|
16,830
|
|
|
|
|
|
20,961
|
|
|
|
|
|
1,478,840
|
|
|
|
|
1,382
|
|
Totals
|
|
|
$
|
6,785,626
|
|
|
|
$
|
395,237
|
|
|
|
|
$
|
89,523
|
|
|
|
|
$
|
7,091,340
|
|
|
|
$
|
(2,758
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities (3)
|
|
|
$
|
95,722
|
|
|
|
$
|
8,405
|
|
|
|
|
$
|
4,330
|
|
|
|
|
$
|
99,797
|
|
|
|
$
|
-
|
|
|
(1)
|
Related to securities for which an unrealized loss was bifurcated to distinguish the credit-related
portion and the portion driven by other market factors. Represents the amount of other-than-temporary impairment losses in AOCI
which was not included in earnings; amounts also include unrealized gains/(losses) on such impaired securities relating to changes
in the fair value of those securities subsequent to the impairment measurement date.
|
|
(2)
|
Fair value includes securities issued by Federal National Mortgage Association (“FNMA”)
of $234,668 and $231,294; Federal Home Loan Mortgage Corporation (“FHLMC”) of $342,877 and $363,957; and Government
National Mortgage Association (“GNMA”) of $126,252 and $130,940 as of March 31, 2016 and December 31, 2015, respectively.
|
|
(3)
|
Includes nonredeemable (perpetual) preferred stocks, common stocks and closed-end funds.
|
Compared to December
31, 2015, the increase in net unrealized gains at March 31, 2016 was due to slightly tighter credit spreads across most asset classes
and a decline in U.S. Treasury rates, which resulted in an increase in net unrealized gains for virtually all classes of the Company’s
fixed maturity securities holdings.
Note 2 - Investments-(Continued)
The following table
presents the fair value and gross unrealized losses of fixed maturities and equity securities in an unrealized loss position at
March 31, 2016 and December 31, 2015, respectively. The Company views the decrease in value of all of the securities with unrealized
losses at March 31, 2016 — which was driven largely by changes in interest rates, spread widening, financial market illiquidity
and/or market volatility from the date of acquisition — as temporary. For fixed maturity securities, management does not
have the intent to sell the securities and it is not more likely than not the Company will be required to sell the securities before
the anticipated recovery of the amortized cost bases, and management expects to recover the entire amortized cost bases of the
fixed maturity securities. For equity securities, the Company has the ability and intent to hold the securities for the recovery
of cost and recovery of cost is expected within a reasonable period of time.
|
|
12 Months or Less
|
|
More than 12 Months
|
|
Total
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
Gross
|
|
|
|
Fair Value
|
|
Unrealized
Losses
|
|
Fair Value
|
|
Unrealized
Losses
|
|
Fair Value
|
|
Unrealized
Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and federally sponsored agency obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
|
$
|
3,919
|
|
|
|
$
|
188
|
|
|
|
$
|
2,918
|
|
|
$
|
283
|
|
|
$
|
6,837
|
|
|
$
|
471
|
|
|
Other
|
|
|
10,000
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
10,000
|
|
|
|
-
|
|
|
Municipal bonds
|
|
|
37,752
|
|
|
|
|
4,056
|
|
|
|
|
12,324
|
|
|
|
3,143
|
|
|
|
50,076
|
|
|
|
7,199
|
|
|
Foreign government bonds
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Corporate bonds
|
|
|
435,489
|
|
|
|
|
16,822
|
|
|
|
|
64,934
|
|
|
|
11,521
|
|
|
|
500,423
|
|
|
|
28,343
|
|
|
Other mortgage-backed securities
|
|
|
884,292
|
|
|
|
|
24,692
|
|
|
|
|
174,345
|
|
|
|
3,895
|
|
|
|
1,058,637
|
|
|
|
28,587
|
|
|
Total fixed maturity securities
|
|
|
1,371,452
|
|
|
|
|
45,758
|
|
|
|
|
254,521
|
|
|
|
18,842
|
|
|
|
1,625,973
|
|
|
|
64,600
|
|
|
Equity securities (1)
|
|
|
11,789
|
|
|
|
|
1,875
|
|
|
|
|
9,325
|
|
|
|
1,223
|
|
|
|
21,114
|
|
|
|
3,098
|
|
|
Combined totals
|
|
$
|
1,383,241
|
|
|
|
$
|
47,633
|
|
|
|
$
|
263,846
|
|
|
$
|
20,065
|
|
|
$
|
1,647,087
|
|
|
$
|
67,698
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of positions with a gross unrealized loss
|
|
|
421
|
|
|
|
|
|
|
|
|
|
93
|
|
|
|
|
|
|
|
514
|
|
|
|
|
|
|
Fair value as a percentage of total fixed maturities and equity securities
fair value
|
|
|
18.9
|
%
|
|
|
|
|
|
|
|
|
3.6
|
%
|
|
|
|
|
|
|
22.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and federally sponsored agency obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
|
$
|
48,097
|
|
|
|
$
|
1,748
|
|
|
|
$
|
1,595
|
|
|
$
|
113
|
|
|
$
|
49,692
|
|
|
$
|
1,861
|
|
|
Other
|
|
|
248,478
|
|
|
|
|
7,338
|
|
|
|
|
1,921
|
|
|
|
77
|
|
|
|
250,399
|
|
|
|
7,415
|
|
|
Municipal bonds
|
|
|
168,939
|
|
|
|
|
5,382
|
|
|
|
|
21,717
|
|
|
|
4,958
|
|
|
|
190,656
|
|
|
|
10,340
|
|
|
Foreign government bonds
|
|
|
11,867
|
|
|
|
|
112
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
11,867
|
|
|
|
112
|
|
|
Corporate bonds
|
|
|
858,647
|
|
|
|
|
37,244
|
|
|
|
|
50,340
|
|
|
|
11,590
|
|
|
|
908,987
|
|
|
|
48,834
|
|
|
Other mortgage-backed securities
|
|
|
929,268
|
|
|
|
|
19,165
|
|
|
|
|
140,561
|
|
|
|
1,796
|
|
|
|
1,069,829
|
|
|
|
20,961
|
|
|
Total fixed maturity securities
|
|
|
2,265,296
|
|
|
|
|
70,989
|
|
|
|
|
216,134
|
|
|
|
18,534
|
|
|
|
2,481,430
|
|
|
|
89,523
|
|
|
Equity securities (1)
|
|
|
38,764
|
|
|
|
|
3,022
|
|
|
|
|
8,379
|
|
|
|
1,308
|
|
|
|
47,143
|
|
|
|
4,330
|
|
|
Combined totals
|
|
$
|
2,304,060
|
|
|
|
$
|
74,011
|
|
|
|
$
|
224,513
|
|
|
$
|
19,842
|
|
|
$
|
2,528,573
|
|
|
$
|
93,853
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of positions with a gross unrealized
loss
|
|
|
684
|
|
|
|
|
|
|
|
|
|
78
|
|
|
|
|
|
|
|
762
|
|
|
|
|
|
|
Fair value as a percentage of total fixed maturities
and equity securities fair value
|
|
|
32.0
|
%
|
|
|
|
|
|
|
|
|
3.1
|
%
|
|
|
|
|
|
|
35.1
|
%
|
|
|
|
|
|
|
(1)
|
Includes nonredeemable (perpetual) preferred stocks, common
stocks and closed-end funds.
|
Note 2 - Investments-(Continued)
Fixed maturities and
equity securities with an investment grade rating represented 66% of the gross unrealized loss as of March 31, 2016. With respect
to fixed income securities involving securitized financial assets, the underlying collateral cash flows were stress tested to determine
there was no adverse change in the present value of cash flows below the amortized cost basis.
Credit Losses
The following table
summarizes the cumulative amounts related to the Company’s credit loss component of the other-than-temporary impairment losses
on fixed maturity securities held as of March 31, 2016 and 2015 that the Company did not intend to sell as of those dates, and
it was not more likely than not that the Company would be required to sell the securities before the anticipated recovery of the
amortized cost bases, for which the non-credit portions of the other-than-temporary impairment losses were recognized in other
comprehensive income (loss):
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2016
|
|
|
2015
|
|
Cumulative credit loss (1)
|
|
|
|
|
|
|
|
|
Beginning of period
|
|
$
|
7,844
|
|
|
$
|
2,877
|
|
New credit losses
|
|
|
1,824
|
|
|
|
-
|
|
Losses related to securities sold or paid down during the period
|
|
|
-
|
|
|
|
-
|
|
End of period
|
|
$
|
9,668
|
|
|
$
|
2,877
|
|
|
(1)
|
The cumulative credit loss amounts exclude other-than-temporary impairment losses on securities
held as of the periods indicated that the Company intended to sell or it was more likely than not that the Company would be required
to sell the security before the recovery of the amortized cost basis.
|
Note 2 - Investments-(Continued)
Maturities/Sales
of Fixed Maturities and Equity Securities
The following table
presents the distribution of the Company's fixed maturity securities portfolio by estimated expected maturity. Estimated expected
maturities differ from contractual maturities, reflecting assumptions regarding borrowers’ utilization of the right to call
or prepay obligations with or without call or prepayment penalties. For structured securities, including mortgage-backed securities
and other asset-backed securities, estimated expected maturities consider broker-dealer survey prepayment assumptions and are verified
for consistency with the interest rate and economic environments.
|
|
Percent of Total Fair Value
|
|
March 31, 2016
|
|
|
|
March 31,
|
|
December 31,
|
|
Fair
|
|
Amortized
|
|
|
|
2016
|
|
2015
|
|
Value
|
|
Cost
|
|
Estimated expected maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due in 1 year or less
|
|
|
|
3.6
|
%
|
|
|
|
3.1
|
%
|
|
|
$
|
260,299
|
|
|
|
$
|
244,935
|
|
|
Due after 1 year through 5 years
|
|
|
|
26.3
|
|
|
|
|
24.2
|
|
|
|
|
1,900,899
|
|
|
|
|
1,788,903
|
|
|
Due after 5 years through 10 years
|
|
|
|
37.9
|
|
|
|
|
39.6
|
|
|
|
|
2,728,632
|
|
|
|
|
2,567,871
|
|
|
Due after 10 years through 20 years
|
|
|
|
20.4
|
|
|
|
|
20.9
|
|
|
|
|
1,474,836
|
|
|
|
|
1,387,922
|
|
|
Due after 20 years
|
|
|
|
11.8
|
|
|
|
|
12.2
|
|
|
|
|
851,836
|
|
|
|
|
801,670
|
|
|
Total
|
|
|
|
100.0
|
%
|
|
|
|
100.0
|
%
|
|
|
$
|
7,216,502
|
|
|
|
$
|
6,791,301
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average option-adjusted duration, in years
|
|
|
|
5.7
|
|
|
|
|
5.8
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds received from
sales of fixed maturities and equity securities, each determined using the specific identification method, and gross gains and
gross losses realized as a result of those sales for each period were:
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
|
2016
|
|
|
|
2015
|
|
|
Fixed maturity securities
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds received
|
|
|
$
|
82,090
|
|
|
|
$
|
81,320
|
|
|
Gross gains realized
|
|
|
|
2,476
|
|
|
|
|
1,654
|
|
|
Gross losses realized
|
|
|
|
(492
|
)
|
|
|
|
(463
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds received
|
|
|
$
|
6,147
|
|
|
|
$
|
13,969
|
|
|
Gross gains realized
|
|
|
|
520
|
|
|
|
|
4,602
|
|
|
Gross losses realized
|
|
|
|
(646
|
)
|
|
|
|
(10
|
)
|
|
Note 2 - Investments-(Continued)
Unrealized Gains and Losses on Fixed
Maturities and Equity Securities
Net unrealized gains
and losses are computed as the difference between fair value and amortized cost for fixed maturities or cost for equity securities.
The following table reconciles the net unrealized investment gains and losses, net of tax, included in accumulated other comprehensive
income (loss), before the impact on deferred policy acquisition costs:
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
|
2016
|
|
|
|
2015
|
|
|
Net unrealized investment gains (losses) on fixed maturity securities, net of
tax
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of period
|
|
|
$
|
198,714
|
|
|
|
$
|
336,604
|
|
|
Change in unrealized investment gains and losses
|
|
|
|
78,341
|
|
|
|
|
45,486
|
|
|
Reclassification of net realized investment (gains)
losses to net income
|
|
|
|
(674
|
)
|
|
|
|
(846
|
)
|
|
End of period
|
|
|
$
|
276,381
|
|
|
|
$
|
381,244
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized investment gains (losses) on equity securities, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of period
|
|
|
$
|
2,649
|
|
|
|
$
|
6,988
|
|
|
Change in unrealized investment gains and losses
|
|
|
|
2,188
|
|
|
|
|
(658
|
)
|
|
Reclassification of net realized investment (gains)
losses to net income
|
|
|
|
193
|
|
|
|
|
(2,946
|
)
|
|
End of period
|
|
|
$
|
5,030
|
|
|
|
$
|
3,384
|
|
|
Offsetting of Assets
and Liabilities
The Company’s
derivative instruments (call options) are subject to enforceable master netting arrangements. Collateral support agreements associated
with each master netting arrangement provide that the Company will receive or pledge financial collateral in the event minimum
thresholds have been reached.
The following table
presents the instruments that were subject to a master netting arrangement for the Company.
|
|
|
|
|
|
|
|
|
|
Net
Amounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of
Assets/
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
Liabilities
|
|
Gross
Amounts Not Offset
|
|
|
|
|
|
|
|
|
|
|
|
Amounts
|
|
Presented
|
|
in
the Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
Offset
in the
|
|
in
the
|
|
Balance
Sheets
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
Consolidated
|
|
|
|
Cash
|
|
|
|
|
|
|
|
Gross
|
|
Balance
|
|
Balance
|
|
Financial
|
|
Collateral
|
|
Net
|
|
|
|
Amounts
|
|
Sheets
|
|
Sheets
|
|
Instruments
|
|
Received
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset
derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Free-standing
derivatives
|
|
|
$
|
3,140
|
|
|
|
|
-
|
|
|
|
$
|
3,140
|
|
|
|
|
-
|
|
|
|
$
|
2,197
|
|
|
|
$
|
943
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset
derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Free-standing
derivatives
|
|
|
|
2,501
|
|
|
|
|
-
|
|
|
|
|
2,501
|
|
|
|
|
-
|
|
|
|
|
2,617
|
|
|
|
|
(116
|
)
|
|
Note 2 - Investments-(Continued)
Deposits
At March 31, 2016 and
December 31, 2015, securities with a fair value of $18,392 and $18,312, respectively, were on deposit with governmental agencies
as required by law in various states in which the insurance subsidiaries of HMEC conduct business. In addition, at March 31, 2016
and December 31, 2015, securities with a fair value of $621,373 and $621,077, respectively, were on deposit with the Federal Home
Loan Bank of Chicago (“FHLB”) as collateral for amounts subject to funding agreements which were equal to $575,000
at both of the respective dates. The deposited securities are included in Fixed Maturities on the Company’s Consolidated
Balance Sheets.
Note 3 - Fair Value of Financial Instruments
The Company is required
under GAAP to disclose estimated fair values for certain financial and nonfinancial assets and liabilities. Fair values of the
Company’s insurance contracts other than annuity contracts are not required to be disclosed. However, the estimated fair
values of liabilities under all insurance contracts are taken into consideration in the Company’s overall management of interest
rate risk through the matching of investment maturities with amounts due under insurance contracts.
Information regarding
the three-level hierarchy presented below and the valuation methodologies utilized by the Company to estimate fair values at a
point in time is included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015, specifically
in “Note 3 — Fair Value of Financial Instruments”.
Note 3 - Fair Value of Financial Instruments-(Continued)
Financial Instruments
Measured and Carried at Fair Value
The following table
presents the Company’s fair value hierarchy for those assets and liabilities measured and carried at fair value on a recurring
basis. At March 31, 2016, these Level 3 invested assets comprised 2.6% 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, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
maturities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Government and federally sponsored agency obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed
securities
|
|
|
$
|
495,200
|
|
|
|
$
|
495,200
|
|
|
|
$
|
-
|
|
|
|
$
|
493,001
|
|
|
|
$
|
2,199
|
|
|
Other,
including
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury securities
|
|
|
|
540,120
|
|
|
|
|
540,120
|
|
|
|
|
13,863
|
|
|
|
|
526,257
|
|
|
|
|
-
|
|
|
Municipal
bonds
|
|
|
|
1,727,328
|
|
|
|
|
1,727,328
|
|
|
|
|
-
|
|
|
|
|
1,680,835
|
|
|
|
|
46,493
|
|
|
Foreign
government bonds
|
|
|
|
74,087
|
|
|
|
|
74,087
|
|
|
|
|
-
|
|
|
|
|
74,087
|
|
|
|
|
-
|
|
|
Corporate
bonds
|
|
|
|
2,833,931
|
|
|
|
|
2,833,931
|
|
|
|
|
8,711
|
|
|
|
|
2,755,149
|
|
|
|
|
70,071
|
|
|
Other
mortgage-backed securities
|
|
|
|
1,545,836
|
|
|
|
|
1,545,836
|
|
|
|
|
-
|
|
|
|
|
1,464,214
|
|
|
|
|
81,622
|
|
|
Total
fixed maturities
|
|
|
|
7,216,502
|
|
|
|
|
7,216,502
|
|
|
|
|
22,574
|
|
|
|
|
6,993,543
|
|
|
|
|
200,385
|
|
|
Equity
securities
|
|
|
|
104,044
|
|
|
|
|
104,044
|
|
|
|
|
90,321
|
|
|
|
|
13,717
|
|
|
|
|
6
|
|
|
Short-term
investments
|
|
|
|
216,204
|
|
|
|
|
216,204
|
|
|
|
|
210,320
|
|
|
|
|
5,884
|
|
|
|
|
-
|
|
|
Other
investments
|
|
|
|
14,640
|
|
|
|
|
14,640
|
|
|
|
|
-
|
|
|
|
|
14,640
|
|
|
|
|
-
|
|
|
Totals
|
|
|
|
7,551,390
|
|
|
|
|
7,551,390
|
|
|
|
|
323,215
|
|
|
|
|
7,027,784
|
|
|
|
|
200,391
|
|
|
Financial
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
contract and life policy reserves, embedded derivatives
|
|
|
|
23
|
|
|
|
|
23
|
|
|
|
|
-
|
|
|
|
|
23
|
|
|
|
|
-
|
|
|
Other
policyholder funds, embedded derivatives
|
|
|
|
42,085
|
|
|
|
|
42,085
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
42,085
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
maturities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Government and federally sponsored agency obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed
securities
|
|
|
$
|
504,414
|
|
|
|
$
|
504,414
|
|
|
|
$
|
-
|
|
|
|
$
|
504,414
|
|
|
|
$
|
-
|
|
|
Other,
including
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury securities
|
|
|
|
546,111
|
|
|
|
|
546,111
|
|
|
|
|
14,258
|
|
|
|
|
531,853
|
|
|
|
|
-
|
|
|
Municipal
bonds
|
|
|
|
1,708,943
|
|
|
|
|
1,708,943
|
|
|
|
|
-
|
|
|
|
|
1,678,564
|
|
|
|
|
30,379
|
|
|
Foreign
government bonds
|
|
|
|
73,617
|
|
|
|
|
73,617
|
|
|
|
|
-
|
|
|
|
|
73,617
|
|
|
|
|
-
|
|
|
Corporate
bonds
|
|
|
|
2,779,415
|
|
|
|
|
2,779,415
|
|
|
|
|
10,195
|
|
|
|
|
2,701,645
|
|
|
|
|
67,575
|
|
|
Other
mortgage-backed securities
|
|
|
|
1,478,840
|
|
|
|
|
1,478,840
|
|
|
|
|
-
|
|
|
|
|
1,403,374
|
|
|
|
|
75,466
|
|
|
Total
fixed maturities
|
|
|
|
7,091,340
|
|
|
|
|
7,091,340
|
|
|
|
|
24,453
|
|
|
|
|
6,893,467
|
|
|
|
|
173,420
|
|
|
Equity
securities
|
|
|
|
99,797
|
|
|
|
|
99,797
|
|
|
|
|
86,088
|
|
|
|
|
13,703
|
|
|
|
|
6
|
|
|
Short-term
investments
|
|
|
|
174,152
|
|
|
|
|
174,152
|
|
|
|
|
169,764
|
|
|
|
|
4,388
|
|
|
|
|
-
|
|
|
Other
investments
|
|
|
|
14,001
|
|
|
|
|
14,001
|
|
|
|
|
-
|
|
|
|
|
14,001
|
|
|
|
|
-
|
|
|
Totals
|
|
|
|
7,379,290
|
|
|
|
|
7,379,290
|
|
|
|
|
280,305
|
|
|
|
|
6,925,559
|
|
|
|
|
173,426
|
|
|
Financial
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
contract and life policy reserves, embedded derivatives
|
|
|
|
14
|
|
|
|
|
14
|
|
|
|
|
-
|
|
|
|
|
14
|
|
|
|
|
-
|
|
|
Other
policyholder funds, embedded derivatives
|
|
|
|
39,021
|
|
|
|
|
39,021
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
39,021
|
|
|
Note 3 - Fair Value of Financial Instruments-(Continued)
The Company did not
have any transfers between Levels 1 and 2 during the three months ended March 31, 2016. The following table presents reconciliations
for the periods indicated for all Level 3 assets and liabilities measured at fair value on a recurring basis.
|
|
|
|
|
|
Financial
|
|
|
|
Financial Assets
|
|
Liabilities(1)
|
|
|
|
Municipal
Bonds
|
|
Corporate
Bonds
|
|
Mortgage-
Backed
Securities(2)
|
|
Total
Fixed
Maturities
|
|
Equity
Securities
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance, 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 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 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance, January 1, 2015
|
|
|
$
|
13,628
|
|
|
|
$
|
74,717
|
|
|
|
$
|
82,949
|
|
|
|
$
|
171,294
|
|
|
|
$
|
6
|
|
|
|
$
|
171,300
|
|
|
|
$
|
20,049
|
|
|
Transfers into Level 3 (3)
|
|
|
|
-
|
|
|
|
|
1,895
|
|
|
|
|
461
|
|
|
|
|
2,356
|
|
|
|
|
-
|
|
|
|
|
2,356
|
|
|
|
|
-
|
|
|
Transfers out of Level 3 (3)
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
(9,664
|
)
|
|
|
|
(9,664
|
)
|
|
|
|
-
|
|
|
|
|
(9,664
|
)
|
|
|
|
-
|
|
|
Total gains or losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
realized gains (losses)
included
in net income
related
to financial assets
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
Net
realized (gains) losses
included
in net income
related
to financial liabilities
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
(439
|
)
|
|
Net
unrealized gains (losses)
included
in other
comprehensive
income
|
|
|
|
380
|
|
|
|
|
352
|
|
|
|
|
3
|
|
|
|
|
735
|
|
|
|
|
-
|
|
|
|
|
735
|
|
|
|
|
-
|
|
|
Purchases
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
Issuances
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
2,964
|
|
|
Sales
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
Settlements
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
Paydowns,
maturities
and
distributions
|
|
|
|
(123
|
)
|
|
|
|
(4,686
|
)
|
|
|
|
(1,155
|
)
|
|
|
|
(5,964
|
)
|
|
|
|
-
|
|
|
|
|
(5,964
|
)
|
|
|
|
(534
|
)
|
|
Ending balance, March 31, 2015
|
|
|
$
|
13,885
|
|
|
|
$
|
72,278
|
|
|
|
$
|
72,594
|
|
|
|
$
|
158,757
|
|
|
|
$
|
6
|
|
|
|
$
|
158,763
|
|
|
|
$
|
22,040
|
|
|
|
(1)
|
Represents embedded derivatives, all related to the Company’s fixed indexed annuity (“FIA”) products, reported
in Other Policyholder Funds in the Company’s Consolidated Balance Sheets.
|
|
(2)
|
Includes U.S. Government and federally sponsored agency obligations for mortgage-backed securities and other mortgage-backed
securities.
|
|
(3)
|
Transfers into and out of Level 3 during the three months ended March 31, 2016 and 2015 were attributable to changes in the
availability of observable market information for individual fixed maturity securities. The Company’s policy is to recognize
transfers into and transfers out of the levels as having occurred at the end of the reporting period in which the transfers were
determined.
|
At March 31, 2016 and
2015, there were no realized gains or losses included in earnings that were attributable to changes in the fair value of Level
3 assets still held. For the three months ended March 31, 2016 and 2015, realized gains/(losses) of ($674) and $439, 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, 2015. Generally, valuation techniques for fixed maturity
securities include spread pricing, matrix pricing and discounted cash flow methodologies; include inputs such as quoted prices
for identical or similar securities that are less liquid; and are based on lower levels of trading activity than securities classified
as Level 2. The valuation techniques and significant unobservable inputs used in the fair value measurement for equity securities
classified as Level 3 use similar valuation techniques and significant unobservable inputs as fixed maturities.
The sensitivity of
the estimated fair values to changes in the significant unobservable inputs for fixed maturities and equity securities included
in Level 3 generally relates to interest rate spreads, illiquidity premiums and default rates. Significant spread widening in isolation
will adversely impact the overall valuation, while significant spread tightening will lead to substantial valuation increases.
Significant increases (decreases) in illiquidity premiums in isolation will result in substantially lower (higher) valuations.
Significant increases (decreases) in expected default rates in isolation will result in substantially lower (higher) valuations.
Financial Instruments
Not Carried at Fair Value; Disclosure Required
The Company has various
other financial assets and financial liabilities used in the normal course of business that are not carried at fair value, but
for which fair value disclosure is required. The following table presents the carrying value, fair value and fair value hierarchy
of these financial assets and financial liabilities.
|
|
|
|
|
|
|
|
|
|
Fair
Value Measurements at
|
|
|
|
Carrying
|
|
Fair
|
|
Reporting
Date Using
|
|
|
|
Amount
|
|
Value
|
|
Level
1
|
|
Level
2
|
|
Level
3
|
|
March
31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
investments
|
|
|
$
|
148,686
|
|
|
|
$
|
153,150
|
|
|
|
$
|
-
|
|
|
|
$
|
-
|
|
|
|
$
|
153,150
|
|
|
Financial
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
contract and life policy reserves, fixed annuity contracts
|
|
|
|
4,128,205
|
|
|
|
|
4,004,390
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
4,004,390
|
|
|
Investment
contract and life policy reserves, account values on life contracts
|
|
|
|
77,562
|
|
|
|
|
81,486
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
81,486
|
|
|
Other
policyholder funds
|
|
|
|
651,834
|
|
|
|
|
651,834
|
|
|
|
|
-
|
|
|
|
|
575,256
|
|
|
|
|
76,578
|
|
|
Long-term
debt
|
|
|
|
247,022
|
|
|
|
|
254,700
|
|
|
|
|
254,700
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
investments
|
|
|
$
|
148,759
|
|
|
|
$
|
153,228
|
|
|
|
$
|
-
|
|
|
|
$
|
-
|
|
|
|
$
|
153,228
|
|
|
Financial
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
contract and life policy reserves, fixed annuity contracts
|
|
|
|
4,072,102
|
|
|
|
|
4,049,840
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
4,049,840
|
|
|
Investment
contract and life policy reserves, account values on life contracts
|
|
|
|
77,429
|
|
|
|
|
81,360
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
81,360
|
|
|
Other
policyholder funds
|
|
|
|
653,631
|
|
|
|
|
653,631
|
|
|
|
|
-
|
|
|
|
|
575,104
|
|
|
|
|
78,527
|
|
|
Long-term
debt
|
|
|
|
249,346
|
|
|
|
|
252,700
|
|
|
|
|
252,700
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
NOTE 4 - Derivative Instruments
In February 2014, the
Company began offering fixed indexed annuity products (“FIA”), which are deferred fixed annuities that guarantee the
return of principal to the contractholder and credit interest based on a percentage of the gain in a specified market index. In
October 2015, the Company began offering indexed universal life products (“IUL”), which also credit interest based
on a percentage of the gain in a specified market index. When deposits are received for FIA and IUL contracts, a portion is used
to purchase derivatives consisting of call options on the applicable market indices to fund the index credits due to FIA and IUL
policyholders. For the Company, substantially all such call options are one-year options purchased to match the funding requirements
of the underlying contracts. The call options are carried at fair value with the change in fair value included in Net Realized
Investment Gains (Losses), a component of revenues, in the Consolidated Statements of Operations. The change in fair value of derivatives
includes the gains or losses recognized at the expiration of the option term or early termination and the changes in fair value
for open positions. Call options are not purchased to fund the index liabilities which may arise after the next deposit anniversary
date. On the respective anniversary dates of the indexed deposits, the index used to compute the annual index credit is reset and
new one-year call options are purchased to fund the next annual index credit. The cost of these purchases is managed through the
terms of the FIA and IUL contracts, which permit changes to index return caps, participation rates and/or asset fees, subject to
guaranteed minimums on each contract’s anniversary date. By adjusting the index return caps, participation rates or asset
fees, crediting rates generally can be managed except in cases where the contractual features would prevent further modifications.
The future annual index
credits on fixed indexed annuities are treated as a “series of embedded derivatives” over the expected life of the
applicable contract with a corresponding reserve recorded. For the indexed universal life contract, 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 derivative related to the provision of a contingent return at fair value, with changes in the fair
value of the derivatives recognized immediately in the Consolidated Statements of Operations. The fair values of derivative instruments,
including derivative instruments embedded in FIA and IUL contracts, presented in the Consolidated Balance Sheets were as follows:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
Derivative instruments, included in Short-term and Other
Investments
|
|
$
|
3,140
|
|
|
|
$
|
2,501
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
Fixed indexed annuities - embedded derivatives, included in Other Policyholder
Funds
|
|
|
42,085
|
|
|
|
|
39,021
|
|
|
Indexed universal life - embedded derivatives, included in Investment Contract
and Life Policy Reserves
|
|
|
23
|
|
|
|
|
14
|
|
|
NOTE 4 - Derivative Instruments-(Continued)
In general, the change
in the fair value of the embedded derivatives related to the fixed indexed annuities will not correspond to the change in fair
value of the purchased call options because the purchased call options are one-year options while the options valued in those embedded
derivatives represent the rights of the policyholder to receive index credits over the entire period the fixed indexed annuities
are expected to be in force, which typically exceeds 10 years. The changes in fair value of derivatives included in the Consolidated
Statements of Operations were as follows:
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2016
|
|
|
2015
|
|
Change in fair value of derivatives (1):
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
Net realized investment gains (losses)
|
|
$
|
(218
|
)
|
|
$
|
(205
|
)
|
|
|
|
|
|
|
|
|
|
Change in fair value of embedded derivatives:
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
Net realized investment gains (losses)
|
|
|
(676
|
)
|
|
|
439
|
|
|
(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 any potential risk of loss under these agreements through a regular monitoring process, which evaluates
the program's effectiveness. The Company is exposed to risk of loss in the event of nonperformance by the counterparties and, accordingly,
option contracts are purchased from multiple counterparties, which are evaluated for creditworthiness prior to purchase of the
contracts. All of these options have been purchased from nationally recognized financial institutions with a Standard and Poor's/Moody’s
long-term credit rating of “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, 2016
|
|
|
December 31, 2015
|
|
|
|
|
Credit Rating (1)
|
|
Notional
|
|
Fair
|
|
|
Notional
|
|
Fair
|
|
Counterparty
|
|
S&P
|
|
Moody’s
|
|
Amount
|
|
Value
|
|
|
Amount
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank of America, N.A.
|
|
A
|
|
A1
|
|
$
|
34,800
|
|
|
|
$
|
1,022
|
|
|
|
$
|
17,000
|
|
|
|
$
|
5
|
|
|
Barclays Bank PLC
|
|
A-
|
|
A2
|
|
|
11,400
|
|
|
|
|
231
|
|
|
|
|
7,600
|
|
|
|
|
137
|
|
|
Citigroup Inc.
|
|
BBB+
|
|
Baa1
|
|
|
17,300
|
|
|
|
|
705
|
|
|
|
|
17,300
|
|
|
|
|
845
|
|
|
Credit Suisse International
|
|
A
|
|
A2
|
|
|
14,600
|
|
|
|
|
268
|
|
|
|
|
12,000
|
|
|
|
|
167
|
|
|
Societe Generale
|
|
A
|
|
A2
|
|
|
65,300
|
|
|
|
|
914
|
|
|
|
|
80,800
|
|
|
|
|
1,347
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
$
|
143,400
|
|
|
|
$
|
3,140
|
|
|
|
$
|
134,700
|
|
|
|
$
|
2,501
|
|
|
|
(1)
|
As assigned by Standard & Poor’s Corporation (“S&P”) and Moody’s
Investors Service, Inc. (“Moody’s”).
|
NOTE 4 - Derivative Instruments-(Continued)
As of March 31, 2016
and December 31, 2015, the Company held $2,197 and $2,617, respectively, of cash received from counterparties for derivative collateral,
which is included in Other Liabilities on the Consolidated Balance Sheets. This derivative collateral limits the Company’s
maximum amount of economic loss due to credit risk that would be incurred if parties to the call options failed completely to perform
according to the terms of the contracts to $250 per counterparty.
Note 5 - Debt
Indebtedness outstanding
was as follows:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Short-term debt:
|
|
|
|
|
|
|
|
|
|
|
Bank Credit Facility, expires July 30, 2019
|
|
$
|
-
|
|
|
|
$
|
-
|
|
|
Long-term debt:
|
|
|
|
|
|
|
|
|
|
|
4.50% Senior Notes, due December 1, 2025. Aggregate principal amount of $250,000 less unaccrued discount of $644 and $654 (4.5% imputed rate) and unamortized debt issuance costs of $2,334 and $2,371
|
|
|
247,022
|
|
|
|
|
246,975
|
|
|
The Credit Agreement
with Financial Institutions (“Bank Credit Facility”) and 4.50% Senior Notes due 2025 (“Senior Notes due 2025”)
are described in “Notes to Consolidated Financial Statements — Note 7 — Debt” of the Company’s Annual
Report on Form 10-K for the year ended December 31, 2015.
Note 6 - Reinsurance
The Company recognizes
the cost of reinsurance premiums over the contract periods for such premiums in proportion to the insurance protection provided.
Amounts recoverable from reinsurers for unpaid claims and claim settlement expenses, including estimated amounts for unsettled
claims, claims incurred but not yet reported and policy benefits, are estimated in a manner consistent with the insurance liability
associated with the policy. The effects of reinsurance on premiums written and contract deposits; premiums and contract charges
earned; and benefits, claims and settlement expenses were as follows:
|
|
|
|
|
|
Ceded to
|
|
|
Assumed
|
|
|
|
|
|
|
|
Gross
|
|
|
Other
|
|
|
from Other
|
|
|
Net
|
|
|
|
Amount
|
|
|
Companies
|
|
|
Companies
|
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums written and contract deposits
|
|
$
|
311,047
|
|
|
|
$
|
6,124
|
|
|
|
$
|
812
|
|
|
|
$
|
305,735
|
|
|
Premiums and contract charges earned
|
|
|
185,196
|
|
|
|
|
6,315
|
|
|
|
|
858
|
|
|
|
|
179,739
|
|
|
Benefits, claims and settlement expenses
|
|
|
115,840
|
|
|
|
|
2,570
|
|
|
|
|
749
|
|
|
|
|
114,019
|
|
|
Note
7 - Commitments
Investment Commitments
From time to time,
the Company has outstanding commitments to purchase investments and/or commitments to lend funds under bridge loans. Unfunded commitments
to purchase investments were $155,171 and $147,139 at March 31, 2016 and December 31, 2015, respectively.
Note
8 - Segment Information
The Company conducts
and manages its business through four segments. The three operating segments, representing the major lines of insurance business,
are: property and casualty insurance, primarily personal lines automobile and homeowners products; retirement annuity products,
primarily tax-qualified fixed and variable deposits; and life insurance. The Company does not allocate the impact of corporate-level
transactions to the insurance segments, consistent with the basis for management’s evaluation of the results of those segments,
but classifies those items in the fourth segment, corporate and other. In addition to ongoing transactions such as corporate debt
service, realized investment gains and losses and certain public company expenses, such items also have included corporate debt
retirement costs/gains, when applicable. Summarized financial information for these segments is as follows:
|
|
|
Three Months Ended
|
|
|
|
|
|
|
March 31,
|
|
|
|
|
|
|
2016
|
|
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
Insurance premiums and contract charges earned
|
|
|
|
|
|
|
|
|
|
Property and casualty
|
|
$
|
152,120
|
|
|
$
|
146,749
|
|
|
Annuity
|
|
|
6,068
|
|
|
|
6,223
|
|
|
Life
|
|
|
27,262
|
|
|
|
26,767
|
|
|
Total
|
|
$
|
185,450
|
|
|
$
|
179,739
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
|
|
|
|
|
|
|
Property and casualty
|
|
$
|
8,828
|
|
|
$
|
9,433
|
|
|
Annuity
|
|
|
58,049
|
|
|
|
56,392
|
|
|
Life
|
|
|
17,984
|
|
|
|
17,708
|
|
|
Corporate and other
|
|
|
15
|
|
|
|
6
|
|
|
Intersegment eliminations
|
|
|
(217
|
)
|
|
|
(226
|
)
|
|
Total
|
|
$
|
84,659
|
|
|
$
|
83,313
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
|
|
|
|
|
|
|
Property and casualty
|
|
$
|
13,795
|
|
|
$
|
17,623
|
|
|
Annuity
|
|
|
10,553
|
|
|
|
12,510
|
|
|
Life
|
|
|
3,867
|
|
|
|
3,385
|
|
|
Corporate and other
|
|
|
(3,062
|
)
|
|
|
757
|
|
|
Total
|
|
$
|
25,153
|
|
|
$
|
34,275
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
December
31,
|
|
|
|
2016
|
|
2015
|
|
Assets
|
|
|
|
|
|
|
|
|
|
Property and casualty
|
|
$
|
1,124,591
|
|
|
$
|
1,098,415
|
|
|
Annuity
|
|
|
7,105,367
|
|
|
|
7,001,411
|
|
|
Life
|
|
|
1,914,326
|
|
|
|
1,862,719
|
|
|
Corporate and other
|
|
|
126,254
|
|
|
|
131,635
|
|
|
Intersegment eliminations
|
|
|
(39,151
|
)
|
|
|
(37,208
|
)
|
|
Total
|
|
$
|
10,231,387
|
|
|
$
|
10,056,972
|
|
|
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(“MD&A”)
(Dollars in millions, except per share
data)
Forward-looking Information
Statements made in
the following discussion that are not historical in nature are forward-looking within the meaning of the Private Securities Litigation
Reform Act of 1995 and are subject to known and unknown risks, uncertainties and other factors. Horace Mann is not under
any obligation to (and expressly disclaims any such obligation to) update or revise any forward-looking statements, whether as
a result of new information, future events or otherwise. It is important to note that the Company's actual results could
differ materially from those projected in forward-looking statements due to a number of risks and uncertainties inherent in the
Company's business. For additional information regarding risks and uncertainties, see “Item 1A. Risk Factors”
in this Quarterly Report on Form 10-Q and in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015. That
discussion includes factors such as:
|
·
|
The impact that a prolonged economic recession may have on the Company’s investment portfolio;
volume of new business for automobile, homeowners, annuity and life products; policy renewal rates; and additional annuity contract
deposit receipts.
|
|
·
|
Fluctuations in the fair value of securities
in the Company's investment portfolio and the related after tax effect on the Company's shareholders' equity and total capital
through either realized or unrealized investment losses.
|
|
·
|
Prevailing low interest rate levels, including
the impact of interest rates on (1) the Company's ability to maintain appropriate interest rate spreads over minimum fixed rates
guaranteed in the Company's annuity and life products, (2) the book yield of the Company's investment portfolio, (3) unrealized
gains and losses in the Company's investment portfolio and the related after tax effect on the Company's shareholders' equity and
total capital, (4) amortization of deferred policy acquisition costs and (5) capital levels of the Company’s life insurance
subsidiaries.
|
|
·
|
The frequency and severity of events such
as hurricanes, storms, earthquakes and wildfires, and the ability of the Company to provide accurate estimates of ultimate claim
costs in its consolidated financial statements.
|
|
·
|
The Company’s risk exposure to catastrophe-prone
areas. Based on full year 2015 property and casualty direct earned premiums, the Company’s ten largest states
represented 57% of the segment total. Included in this top ten group are certain states which are considered more prone
to catastrophe occurrences: California, North Carolina, Texas, South Carolina, Florida and Louisiana.
|
|
·
|
The ability of the Company to maintain
a favorable catastrophe reinsurance program considering both availability and cost; and the collectibility of reinsurance receivables.
|
|
·
|
Adverse changes in market appreciation,
interest spreads, business persistency and policyholder mortality and morbidity rates and the resulting impact on both estimated
reserves and the amortization of deferred policy acquisition costs.
|
|
·
|
Adverse results from the assessment of
the Company’s goodwill asset requiring write off of the impaired portion.
|
|
·
|
The Company's ability to refinance outstanding
indebtedness or repurchase shares of the Company’s common stock.
|
|
·
|
The Company's ability to (1) develop and
expand its marketing operations, including agents and other points of distribution, and (2) maintain and secure access to educators,
school administrators, principals and school business officials.
|
|
·
|
The effects of economic forces and other
issues affecting the educator market including, but not limited to, federal, state and local budget deficits and cut-backs and
adverse changes in state and local tax revenues. The effects of these forces can include, among others, teacher layoffs
and early retirements, as well as individual concerns regarding employment and economic uncertainty.
|
|
·
|
The Company's ability to profitably expand
its property and casualty business in highly competitive environments.
|
|
·
|
Changes in federal and state laws and regulations,
which affect the relative tax and other advantages of the Company’s life and annuity products to customers, including, but
not limited to, changes in IRS regulations governing Section 403(b) plans and the U.S. Department of Labor’s recently issued
rule defining who is a “fiduciary” of a qualified retirement plan.
|
|
·
|
Changes in public employee retirement programs
as a result of federal and/or state level pension reform initiatives.
|
|
·
|
Changes in federal and state laws and regulations,
which affect the relative tax advantage of certain investments or which affect the ability of debt issuers to declare bankruptcy
or restructure debt.
|
|
·
|
The Company's ability to effectively implement
new or enhanced information technology systems and applications.
|
Executive Summary
Horace Mann Educators
Corporation (“HMEC”; and together with its subsidiaries, the “Company” or “Horace Mann”) is
an insurance holding company. Through its subsidiaries, HMEC markets and underwrites personal lines of property and
casualty insurance, retirement annuities and life insurance in the U.S. The Company markets its products primarily to
K-12 teachers, administrators and other employees of public schools and their families.
For the three months
ended March 31, 2016, the Company’s net income of $25.2 million decreased $9.1 million compared to the prior year. After
tax net realized investment losses were $0.4 million compared to after tax realized investment gains of $4.0 million a year earlier. For
the property and casualty segment, net income of $13.8 million decreased $3.8 million compared to the first quarter of 2015. The
property and casualty combined ratio was 93.8% for the first quarter of 2016, 3.4 percentage points higher than the 90.4% for the
same period in 2015, primarily reflecting continued improvement in current accident year non-catastrophe results for homeowners
— reflecting the impacts of initiatives to improve profitability — more than offset by pressure on automobile results,
primarily due to higher loss severity. In addition, catastrophe losses increased in the current period — representing
a $1.5 million after tax decrease to net income compared to the first three months of 2015 — and the current period reflected
a reduced level of favorable prior years’ reserve development — representing a $1.3 million reduction to net income
compared to the first three months of 2015. Annuity segment net income of $10.6 million for the current period decreased
$1.9 million compared to the first three months of 2015, partially due to a $2.0 million pretax increase in operating expenses,
including costs related to the Company’s continued modernization of technology and infrastructure, as well as pressures of
the interest rate environment. The net interest margin amount decreased $0.4 million pretax compared to the prior year. For
the first three months of 2016 and 2015, unlocking of annuity deferred policy acquisition costs had an immaterial
impact. Annuity assets under
management of $6.0 billion increased 3% compared to the prior year and disciplined crediting rate management continues. Life
segment net income of $3.9 million increased $0.5 million compared to the first three months of 2015 primarily due to a decrease
in mortality losses in the current period. The Company recorded a reduction in incentive compensation expense in the
first quarter of 2015 due to the correction of an immaterial out-of-period adjustment. The majority of the cost reduction
benefited the property and casualty segment, increasing that segment’s 2015 net income by approximately $2 million and decreasing
the combined ratio by approximately 2 percentage points for the three months ended March 31, 2015. The 2015 benefit
to the annuity and life segments was approximately $0.5 million after tax for each segment.
Premiums written and
contract deposits decreased 7% compared to the first three months of 2015 due to a decrease in the amount of annuity deposits received
in the current period, partially offset by growth in the property and casualty and life segments. Annuity deposits received
were 21% less than the prior year, including comparison to the 2015 favorable impact of non-recurring deposits related to changes
in the Company’s employee retirement savings plans as further explained in “Results of Operations — Insurance
Premiums and Contract Charges”. Property and casualty segment premiums written increased 4% compared to the prior
year, primarily due to the favorable impacts from increases in average premium per policy for homeowners and automobile, accompanied
by increases in automobile policies in force and reductions in catastrophe reinsurance costs. Life segment insurance
premiums and contract deposits increased 3% compared to the first quarter of 2015.
The Company’s
book value per share was $33.11 at March 31, 2016, a decrease of 3% compared to 12 months earlier. This decrease reflected
net income for the trailing 12 months more than offset by a decrease in net unrealized investment gains due to wider credit spreads
across most asset classes for the Company’s holdings of fixed income and equity securities. At March 31, 2016,
book value per share excluding investment fair value adjustments was $27.05, representing a 4% increase compared to 12 months earlier.
Critical Accounting Policies
The preparation of
consolidated financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires
the Company's management to make estimates and assumptions based on information available at the time the consolidated financial
statements are prepared. These estimates and assumptions affect the reported amounts of the Company's consolidated assets,
liabilities, shareholders' equity and net income. Certain accounting estimates are particularly sensitive because of
their significance to the Company's consolidated financial statements and because of the possibility that subsequent events and
available information may differ markedly from management's judgments at the time the consolidated financial statements were prepared. Management
has discussed with the Audit Committee the quality, not just the acceptability, of the Company's accounting principles as applied
in its financial reporting. The discussions generally included such matters as the consistency of the Company's accounting
policies and their application, and the clarity and completeness of the Company's consolidated financial statements, which include
related disclosures. For the Company, the areas most subject to significant management judgments include: fair value
measurements, other-than-temporary impairment of investments, goodwill, deferred policy acquisition costs for investment contracts
and life insurance products with account values, liabilities for property and casualty claims and claim expenses, liabilities for
future policy benefits, deferred taxes and valuation of assets and liabilities related to the defined benefit pension plan.
Compared to December
31, 2015, at March 31, 2016 there were no material changes to the accounting policies for the areas most subject to significant
management judgments identified above. In addition to disclosures in “Notes to Consolidated Financial Statements”
in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015, discussion of accounting policies, including
certain sensitivity information, was presented in “Management’s Discussion and Analysis of Financial Condition and
Results of Operations — Critical Accounting Policies” in that Form 10-K.
Results of Operations
Insurance Premiums
and Contract Charges
|
|
Three Months Ended
|
|
|
Change From
|
|
|
|
March 31,
|
|
|
Prior Year
|
|
|
|
2016
|
|
|
2015
|
|
|
Percent
|
|
|
Amount
|
|
Insurance premiums written and contract deposits (includes annuity and life contract deposits)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property & casualty (1)
|
|
$
|
146.7
|
|
|
$
|
140.5
|
|
|
|
4.4
|
%
|
|
$
|
6.2
|
|
Annuity deposits
|
|
|
112.6
|
|
|
|
142.0
|
|
|
|
-20.7
|
%
|
|
|
(29.4
|
)
|
Life
|
|
|
23.9
|
|
|
|
23.2
|
|
|
|
3.0
|
%
|
|
|
0.7
|
|
Total
|
|
$
|
283.2
|
|
|
$
|
305.7
|
|
|
|
-7.4
|
%
|
|
$
|
(22.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance premiums and contract charges earned (excludes annuity and life contract deposits)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property & casualty (1)
|
|
$
|
152.1
|
|
|
$
|
146.7
|
|
|
|
3.7
|
%
|
|
$
|
5.4
|
|
Annuity
|
|
|
6.1
|
|
|
|
6.2
|
|
|
|
-1.6
|
%
|
|
|
(0.1
|
)
|
Life
|
|
|
27.3
|
|
|
|
26.8
|
|
|
|
1.9
|
%
|
|
|
0.5
|
|
Total
|
|
$
|
185.5
|
|
|
$
|
179.7
|
|
|
|
3.2
|
%
|
|
$
|
5.8
|
|
|
(
1)
|
Includes voluntary business
and an immaterial amount of involuntary business. Voluntary business represents policies sold through the Company's marketing
organization and issued under the Company's underwriting guidelines. Involuntary business consists of allocations of business
from state mandatory insurance facilities and assigned risk business.
|
Number of Policies and Contracts in Force
(actual counts)
|
|
March 31,
|
|
|
December 31,
|
|
|
March 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2015
|
|
Property and casualty (voluntary)
|
|
|
|
|
|
|
|
|
|
|
|
|
Automobile
|
|
|
486,590
|
|
|
|
486,850
|
|
|
|
480,428
|
|
Property
|
|
|
223,653
|
|
|
|
224,531
|
|
|
|
227,773
|
|
Total
|
|
|
710,243
|
|
|
|
711,381
|
|
|
|
708,201
|
|
Annuity
|
|
|
212,397
|
|
|
|
211,071
|
|
|
|
204,143
|
|
Life
|
|
|
201,480
|
|
|
|
201,789
|
|
|
|
200,915
|
|
For the first three
months of 2016, the Company’s premiums written and contract deposits of $283.2 million decreased $22.5 million, or 7.4%,
compared to the prior year, due to a decline in the annuity segment partially offset by growth in the property and casualty and
life segments. In 2015, changes in the Company’s employee retirement savings plans resulted in non-recurring deposits received
in the first quarter of 2015 — see additional explanation below. The Company’s premiums and contract charges earned
increased $5.8 million, or 3.2%, 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 4.4%, or $6.2 million, in the first three months of 2016, compared to the prior year. Average
written premium per policy for both automobile and homeowners increased compared to the prior year and the number of automobile
policies in force also increased over the 12 months; the impact of these items were partially offset by a reduced level of homeowners
policies in force in the current period. For 2016, the Company’s full year rate plan anticipates mid-single digit average
rate increases (including states with no rate actions) for both automobile and homeowners; average approved rate changes during
the first three months of 2016 were consistent with those plans at 7% for automobile and 6% for homeowners.
Based on policies in
force, the current year voluntary automobile 12 month retention rate for new and renewal policies was 84.5% compared to 84.9% at
March 31, 2015, with the anticipated decrease due to recent rate and underwriting actions. The property 12 month new and renewal
policy retention rate was 88.4% at March 31, 2016 compared to 87.7% at March 31, 2015. The retention rates have been favorably
impacted by the Company’s focus on expanding the number of multiline customers and customer utilization of automatic payment
plans, particularly for voluntary automobile business.
Automobile premiums
written increased 5.3%, or $5.2 million, compared to the first quarter of 2015. In the first quarter of 2016, the voluntary average
written premium per policy and average earned premium per policy increased approximately 3% and 2%, respectively, compared to a
year earlier, which was augmented by the increase in policies in force compared to a year earlier. The number of educator policies
increased more than the total policy count over the 12 month period and represented approximately 85% of the voluntary automobile
policies in force at March 31, 2016, December 31, 2015 and March 31, 2015.
Homeowners premiums
written increased 2.4%, or $1.0 million, compared to the first quarter of 2015. While the number of homeowners policies in force
has declined, the average written premium per policy and average earned premium per policy each increased approximately 3% in the
first quarter of 2016 compared to a year earlier. In addition, reduced catastrophe reinsurance costs benefited the current period
premiums written by approximately $0.3 million. The number of educator policies declined less than the total homeowners policy
count and represented approximately 82% of the homeowners policies in force at March 31, 2016, compared to approximately 81% at
both December 31, 2015 and March 31, 2015. 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 has impacted the overall policy in force count and premiums in the short-term,
it has 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 has authorized
its agents to write certain third-party vendors’ homeowners policies in Florida.
For the three months
ended March 31, 2016, total annuity deposits received decreased 20.7%, or $29.4 million, compared to the prior year, including
a 26.7% decrease in recurring deposit receipts and a 15.0% decrease in single premium and rollover deposit receipts. In addition
to external contractholder deposits, annuity new recurring deposits include contributions and transfers by Horace Mann’s
employees into the Company’s 401(k) group annuity contract. And in 2015, changes in the Company’s employee retirement
savings plans resulted in non-recurring deposits received in the first quarter of 2015. The majority of the 401(k) related increase
in 2015 was due to employees’ elections to rollover amounts from a previously terminated, fully funded defined contribution
plan third-party investment vehicle into their 401(k) accounts. The Company’s employee retirement savings plans are described
in “Notes to Consolidated Financial Statements — Note 11 — Pension Plans and Other Postretirement Benefits”
in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015. Note that deposits into the Company’s
employee 401(k) group annuity contract are not reported as “sales”. Excluding the 2015 non-recurring item, the remaining
current period decrease was moderate and was primarily due to a decrease in the amount of other single premium and rollover deposits
received in 2016.
In the first three
months of 2016, new deposits to fixed accounts of $74.7 million decreased 21.3%, or $20.2 million, and new deposits to variable
accounts of $37.9 million decreased 19.5%, or $9.2 million, compared to the prior year, including the impact of the 2015 non-recurring
employee retirement savings plans item described above.
Total annuity accumulated
value on deposit of $6.0 billion at March 31, 2016 increased 3.3% 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 94.5% and 93.9%
for the 12 month periods ended March 31, 2016 and 2015, respectively; fixed annuity retention was 94.9% and 94.5% for the respective
periods.
Variable annuity accumulated
balances of $1.8 billion at March 31, 2016 decreased 5.2% compared to March 31, 2015, reflecting a negative impact from financial
market performance over the 12 months and net balances transferred from the variable account option to the guaranteed interest
rate fixed account option partially offset by net positive cash flows. Compared to the first quarter of 2015, annuity segment contract
charges earned decreased 1.6%, or $0.1 million.
Life segment premiums
and contract deposits for the first three months of 2016 increased 3.0%, or $0.7 million, compared to the prior year, including
the favorable impact of new ordinary life business growth. The ordinary life insurance in force lapse ratio was 4.2% for the 12
months ended March 31, 2016 compared to 4.0% for the 12 months ended March 31, 2015.
Sales
For the first three
months of 2016, property and casualty new annualized sales premiums increased 11.9% compared to the first quarter of 2015, as 12.5%,
or $2.3 million, growth in new automobile sales was accompanied by growth in homeowners sales of 8.6%, or $0.3 million, compared
to the prior year.
While first quarter
2016 annuity new business levels were lower than in the prior year period, the Company’s annuity new business levels continued
to benefit from agent training and marketing programs, which focus on retirement planning, and build on the positive results produced
in recent years. Annuity sales by Horace Mann’s agency force decreased 16.2%, or $12.0 million compared to the first quarter
of 2015, including the impact of non-recurring, non 401(k) rollover deposits from the Company’s employee retirement savings
plans in 2015. Sales from the independent agent distribution channel, which represent approximately 13% of total annuity sales
in the current period and are largely single premium and rollover annuity deposits, were comparable to a year earlier. As a result,
total Horace Mann annuity sales from the combined distribution channels decreased 14.6% compared to the three months ended March
31, 2015. Overall, the Company’s new recurring deposit business (measured on an annualized basis at the time of sale, compared
to the reporting of new contract deposits which are recorded when cash is received) decreased 11.5% compared to the first quarter
of 2015, and single premium and rollover deposits decreased 15.0% compared to the prior year. In February 2014, the Company expanded
its annuity product portfolio by introducing a fixed indexed annuity contract. This new product continues to be well received by
the Company’s customers and represented approximately one-third of total annuity sales for the first three months of both
2016 and 2015, largely single premium and rollover deposits. Previously, the Company offered indexed annuity products underwritten
by third-party vendors.
The Company’s
introduction of new educator-focused portfolios of term and whole life products in recent years, including a single premium whole
life product, as well as the October 2015 introduction of the Company’s Indexed Universal Life product have contributed to
an increase in sales of proprietary life products. For the current period, sales of Horace Mann’s proprietary life insurance
products totaled $3.0 million, representing an increase of 57.9%, or $1.1 million, compared to the prior year, including an increase
of $0.9 million for single premium sales.
Distribution
At March 31, 2016,
there was a combined total of 703 Exclusive Agencies and Employee Agents, compared to 735 at December 31, 2015 and 729 at March
31, 2015. The Company continues to expect higher quality standards for agents and agencies to focus on improving both customer
experiences and agent productivity in their respective territories. Growth in new automobile sales and life sales reflects improvement
in average agency productivity. The dedicated sales force is supported by the Company’s Customer Contact Center which provides
a means for educators to begin their experience directly with the Company, if that is their preference. The Customer Contact Center
is also able to assist educators in territories which are not currently served by an Exclusive Agency.
As mentioned above,
the Company also utilizes a nationwide network of Independent Agents who comprise an additional distribution channel for the Company’s
403(b) tax-qualified annuity products. The Independent Agent distribution channel included 522 authorized agents at March 31, 2016.
During the first three months of 2016, this channel generated $8.9 million in annualized new annuity sales for the Company compared
to $9.0 million for the first quarter of 2015, with the new business primarily comprised of single and rollover deposit business
in both periods.
Net Investment Income
For the three months
ended March 31, 2016, pretax investment income of $84.7 million increased 1.7%, or $1.4 million, (1.1%, or $0.6 million, after
tax) compared to the prior year. The increase reflected growth in the size of the average investment portfolio on an amortized
cost basis and continued managed performance in the fixed maturity portfolios considering the low interest rate environment, partially
offset by lower alternative investment returns in the current period and a decline in the average portfolio yield. Average invested
assets increased 5.2% over the 12 months ended March 31, 2016. The average pretax yield on the investment portfolio was 4.99% (3.33%
after tax) for the first three months of 2016, compared to the pretax yield of 5.16% (3.47% after tax) a year earlier. During the
first three months of 2016, management continued to identify and purchase investments, including a modest level of alternative
investments, with attractive risk-adjusted yields without venturing into asset classes or individual securities that would be inconsistent
with the Company’s overall conservative investment guidelines.
Net Realized Investment Gains and Losses
For the first three
months of 2016, net realized investment losses (pretax) were $0.2 million compared to net realized investment gains of $6.1 million
in the prior year’s first quarter. The net gains and losses in both periods were realized primarily from ongoing investment
portfolio management activity and, when determined, the recording of impairment write-down charges.
For the first quarter
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 impairment charges recorded largely on Puerto Rico and energy sector fixed maturity securities.
For the first quarter
of 2015, the Company’s net realized investment gains of $6.1 million included $8.9 million of gross gains realized on security
sales and calls partially offset by $0.5 million of realized losses on securities that were disposed of during the quarter and
$2.3 million of impairment charges recorded largely on energy sector securities.
The Company, from time
to time, sells securities subsequent to the balance sheet date that were considered temporarily impaired at the balance sheet date.
Such sales are due to issuer specific events occurring subsequent to the balance sheet date that result in a change in the Company’s
intent to sell an invested asset.
Fixed Maturity Securities
and Equity Securities Portfolios
The table below presents
the Company’s fixed maturity securities and equity securities portfolios by major asset class, including the ten largest
sectors of the Company’s corporate bond holdings (based on fair value). Compared to December 31, 2015, credit spreads were
slightly tighter across most asset classes at March 31, 2016 and U.S. Treasury rates decreased which resulted in an increase in
net unrealized gains for virtually all classes of the Company’s fixed maturity securities holdings.
|
|
March 31, 2016
|
|
|
|
|
|
|
|
|
|
Amortized
|
|
|
Pretax Net
|
|
|
|
Number of
|
|
|
Fair
|
|
|
Cost or
|
|
|
Unrealized
|
|
|
|
Issuers
|
|
|
Value
|
|
|
Cost
|
|
|
Gain (Loss)
|
|
Fixed maturity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Banking and Finance
|
|
|
94
|
|
|
$
|
651.7
|
|
|
$
|
620.6
|
|
|
$
|
31.1
|
|
Insurance
|
|
|
50
|
|
|
|
240.2
|
|
|
|
219.4
|
|
|
|
20.8
|
|
Real estate
|
|
|
38
|
|
|
|
210.1
|
|
|
|
200.2
|
|
|
|
9.9
|
|
Technology
|
|
|
31
|
|
|
|
193.5
|
|
|
|
187.9
|
|
|
|
5.6
|
|
Energy (1)
|
|
|
48
|
|
|
|
189.8
|
|
|
|
183.6
|
|
|
|
6.2
|
|
Utilities
|
|
|
41
|
|
|
|
182.7
|
|
|
|
160.1
|
|
|
|
22.6
|
|
Healthcare
|
|
|
36
|
|
|
|
169.6
|
|
|
|
158.4
|
|
|
|
11.2
|
|
Transportation
|
|
|
26
|
|
|
|
156.6
|
|
|
|
151.1
|
|
|
|
5.5
|
|
Telecommunications
|
|
|
22
|
|
|
|
144.8
|
|
|
|
135.4
|
|
|
|
9.4
|
|
Broadcasting and Media
|
|
|
27
|
|
|
|
95.4
|
|
|
|
87.1
|
|
|
|
8.3
|
|
All Other Corporates (2)
|
|
|
169
|
|
|
|
599.5
|
|
|
|
580.6
|
|
|
|
18.9
|
|
Total corporate bonds
|
|
|
582
|
|
|
|
2,833.9
|
|
|
|
2,684.4
|
|
|
|
149.5
|
|
Mortgage-backed securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and federally sponsored agencies
|
|
|
369
|
|
|
|
495.2
|
|
|
|
441.1
|
|
|
|
54.1
|
|
Commercial (3)
|
|
|
92
|
|
|
|
344.5
|
|
|
|
342.0
|
|
|
|
2.5
|
|
Other
|
|
|
24
|
|
|
|
50.7
|
|
|
|
48.3
|
|
|
|
2.4
|
|
Municipal bonds (4)
|
|
|
542
|
|
|
|
1,727.3
|
|
|
|
1,536.1
|
|
|
|
191.2
|
|
Government bonds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
|
9
|
|
|
|
540.1
|
|
|
|
508.0
|
|
|
|
32.1
|
|
Foreign
|
|
|
12
|
|
|
|
74.1
|
|
|
|
67.4
|
|
|
|
6.7
|
|
Collateralized debt obligations (5)
|
|
|
106
|
|
|
|
623.3
|
|
|
|
634.4
|
|
|
|
(11.1
|
)
|
Asset-backed securities
|
|
|
92
|
|
|
|
527.4
|
|
|
|
529.6
|
|
|
|
(2.2
|
)
|
Total fixed maturity securities
|
|
|
1,828
|
|
|
$
|
7,216.5
|
|
|
$
|
6,791.3
|
|
|
$
|
425.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-redeemable preferred stocks
|
|
|
9
|
|
|
$
|
15.8
|
|
|
$
|
16.3
|
|
|
$
|
(0.5
|
)
|
Common stocks
|
|
|
174
|
|
|
|
67.3
|
|
|
|
60.0
|
|
|
|
7.3
|
|
Closed-end fund
|
|
|
1
|
|
|
|
20.9
|
|
|
|
20.0
|
|
|
|
0.9
|
|
Total equity securities
|
|
|
184
|
|
|
$
|
104.0
|
|
|
$
|
96.3
|
|
|
$
|
7.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2,012
|
|
|
$
|
7,320.5
|
|
|
$
|
6,887.6
|
|
|
$
|
432.9
|
|
|
(1)
|
At March 31, 2016, $19.7 million were non-investment grade.
|
|
(2)
|
The All Other Corporates category contains 18 additional industry classifications. Consumer products, food and beverage, metal
and mining, gaming, natural gas and retail represented $435.7 million of fair value at March 31, 2016, with the remaining 12 classifications
each representing less than $37 million.
|
|
(3)
|
At March 31, 2016, 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 42% are tax-exempt and 80% are revenue bonds tied to essential services,
such as mass transit, water and sewer. The overall credit quality of the municipal bond portfolio was A+ at March 31, 2016.
|
|
(5)
|
Based on fair value, 97% of the collateralized debt obligation securities were rated investment grade by Standard and Poor’s
Corporation (“S&P”) and/or Moody’s Investors Service, Inc. (“Moody’s”) at March 31, 2016.
|
At March 31, 2016,
the Company’s diversified fixed maturity securities portfolio consisted of 2,309 investment positions, issued by 1,828 entities,
and totaled approximately $7.2 billion in fair value. This portfolio was 96.2% investment grade, based on fair value, with an average
quality rating of A. The Company’s investment guidelines generally limit single corporate issuer concentrations to 0.5% of
invested assets for “AA” or “AAA” rated securities, 0.35% of invested assets for “A” or “BBB”
rated securities, and 0.2% of invested assets for non-investment grade securities.
The following table
presents the composition and value of the Company’s fixed maturity securities and equity securities portfolios by rating
category. At March 31, 2016, 95.1% of these combined portfolios were investment grade, based on fair value, with an overall average
quality rating of A. The Company has classified the entire fixed maturity securities and equity securities portfolios as available
for sale, which are carried at fair value.
Rating of Fixed Maturity Securities and
Equity Securities (1)
(Dollars
in millions)
|
|
Percent of Portfolio
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
|
March 31, 2016
|
|
|
|
December 31,
|
|
|
March 31,
|
|
|
Fair
|
|
|
Amortized
|
|
|
|
2015
|
|
|
2016
|
|
|
Value
|
|
|
Cost or Cost
|
|
Fixed maturity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AAA
|
|
|
7.0
|
%
|
|
|
7.5
|
%
|
|
$
|
541.8
|
|
|
$
|
523.0
|
|
AA (2)
|
|
|
36.1
|
|
|
|
35.8
|
|
|
|
2,582.4
|
|
|
|
2,381.4
|
|
A
|
|
|
23.9
|
|
|
|
23.9
|
|
|
|
1,726.1
|
|
|
|
1,599.4
|
|
BBB
|
|
|
29.5
|
|
|
|
29.0
|
|
|
|
2,094.7
|
|
|
|
2,000.0
|
|
BB
|
|
|
2.1
|
|
|
|
2.2
|
|
|
|
158.8
|
|
|
|
165.6
|
|
B
|
|
|
0.9
|
|
|
|
1.0
|
|
|
|
73.4
|
|
|
|
79.6
|
|
CCC or lower
|
|
|
0.1
|
|
|
|
0.2
|
|
|
|
10.3
|
|
|
|
14.1
|
|
Not rated (3)
|
|
|
0.4
|
|
|
|
0.4
|
|
|
|
29.0
|
|
|
|
28.2
|
|
Total fixed maturity securities
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
$
|
7,216.5
|
|
|
$
|
6,791.3
|
|
Equity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AAA
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
AA
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
A
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
BBB
|
|
|
35.2
|
%
|
|
|
15.2
|
%
|
|
$
|
15.8
|
|
|
$
|
16.3
|
|
BB
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
B
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
CCC or lower
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Not rated
|
|
|
64.8
|
|
|
|
84.8
|
|
|
|
88.2
|
|
|
|
80.0
|
|
Total equity securities
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
$
|
104.0
|
|
|
$
|
96.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
$
|
7,320.5
|
|
|
$
|
6,887.6
|
|
|
(1)
|
Ratings are as assigned primarily by S&P when available, with remaining ratings as assigned on an equivalent basis by Moody's.
Ratings for publicly traded securities are determined when the securities are acquired and are updated monthly to reflect any changes
in ratings.
|
|
(2)
|
At March 31, 2016, the AA rated fair value amount included $540.1 million of U.S. Government and federally sponsored agency
securities and $538.5 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, 2016,
the fixed maturity securities and equity securities portfolios had a combined $67.7 million pretax of gross unrealized losses on
$1,647.1 million fair value related to 514 positions. Of the investment positions (fixed maturity securities and equity securities)
with gross unrealized losses, 40 were trading below 80% of book value at March 31, 2016 and were not considered other-than-temporarily
impaired. These positions had fair value of $53.8 million, representing 0.7% of the Company’s total investment portfolio
at fair value, and had a gross unrealized loss of $20.7 million.
The Company views the
unrealized losses of all of the securities at March 31, 2016 as temporary. Future changes in circumstances related to these and
other securities could require subsequent recognition of other-than-temporary impairment losses.
Benefits, Claims and Settlement Expenses
|
|
Three Months Ended
|
|
|
Change From
|
|
|
|
March 31,
|
|
|
Prior Year
|
|
|
|
2016
|
|
|
2015
|
|
|
Percent
|
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and casualty
|
|
$
|
101.2
|
|
|
$
|
95.2
|
|
|
|
6.3
|
%
|
|
$
|
6.0
|
|
Annuity
|
|
|
0.9
|
|
|
|
0.3
|
|
|
|
N.M.
|
|
|
|
0.6
|
|
Life
|
|
|
17.4
|
|
|
|
18.5
|
|
|
|
-5.9
|
%
|
|
|
(1.1
|
)
|
Total
|
|
$
|
119.5
|
|
|
$
|
114.0
|
|
|
|
4.8
|
%
|
|
$
|
5.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and casualty catastrophe
losses, included above
|
|
$
|
12.7
|
|
|
$
|
10.5
|
|
|
|
21.0
|
%
|
|
$
|
2.2
|
|
Property and Casualty Claims and Claim
Expenses (“losses”)
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2016
|
|
|
2015
|
|
Incurred claims and claim expenses:
|
|
|
|
|
|
|
|
|
Claims occurring in the current year
|
|
$
|
103.2
|
|
|
$
|
99.2
|
|
Decrease in estimated reserves for claims
occurring in prior years
|
|
|
(2.0
|
)
|
|
|
(4.0
|
)
|
Total claims and claim expenses incurred
|
|
$
|
101.2
|
|
|
$
|
95.2
|
|
|
|
|
|
|
|
|
|
|
Property and casualty loss ratio:
|
|
|
|
|
|
|
|
|
Total
|
|
|
66.5
|
%
|
|
|
64.9
|
%
|
Effect of catastrophe costs, included above
|
|
|
8.3
|
%
|
|
|
7.1
|
%
|
Effect of prior years’ reserve development, included above
|
|
|
-1.3
|
%
|
|
|
-2.7
|
%
|
For the three months
ended March 31, 2016, the Company’s benefits, claims and settlement expenses increased $5.5 million, or 4.8%, compared to
the prior year primarily reflecting increases in property and casualty current accident year loss severity — specifically,
in automobile — and catastrophe costs, partially offset by a reduction in homeowners current accident year non-catastrophe
losses and a $1.1 million decrease in life mortality costs. Variability in the Company’s life mortality experience is not
unexpected considering the moderate size of Horace Mann’s life insurance in force.
The current period
favorable development of prior years’ property and casualty reserves of $2.0 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
and was primarily for accident years 2014 and prior and predominantly the result of favorable severity trends in homeowners loss
emergence.
For the three months
ended March 31, 2016, the automobile loss ratio of 71.9% increased by 4.2 percentage points compared to the prior year, including
(1) the favorable impact of rate actions taken in recent years offset by (2) the impacts of higher current accident year non-catastrophe
losses for 2016 primarily driven by loss severity and (3) development of prior years’ reserves that had a 2.3 percentage
point less favorable impact in the current year. The homeowners loss ratio of 55.7% for the three months ended March 31, 2016 decreased
3.6 percentage points compared to a year earlier, including favorable current accident year non-catastrophe experience as well
as a 0.3 percentage point decrease due to a higher amount of favorable development of prior years’ reserves recorded in 2016.
Catastrophe costs represented 23.7 percentage points of the homeowners loss ratio for the current period compared to 20.7 percentage
points for the prior year period.
Interest Credited
to Policyholders
|
|
Three Months Ended
|
|
|
Change From
|
|
|
|
March 31,
|
|
|
Prior Year
|
|
|
|
2016
|
|
|
2015
|
|
|
Percent
|
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annuity
|
|
$
|
35.6
|
|
|
$
|
33.5
|
|
|
|
6.3
|
%
|
|
$
|
2.1
|
|
Life
|
|
|
11.1
|
|
|
|
11.0
|
|
|
|
0.9
|
%
|
|
|
0.1
|
|
Total
|
|
$
|
46.7
|
|
|
$
|
44.5
|
|
|
|
4.9
|
%
|
|
$
|
2.2
|
|
Compared to the first
three months of 2015, the current period increase in annuity segment interest credited reflected a 7.7% increase in average accumulated
fixed deposits, partially offset by a 1 basis point decline in the average annual interest rate credited to 3.57%. Life insurance
interest credited increased slightly as a result of the growth in reserves for life insurance products with account values.
The net interest spread
on fixed annuity assets under management measures the difference between the rate of income earned on the underlying invested assets
and the rate of interest which policyholders are credited on their account values. The annualized net interest spreads for the
three months ended March 31, 2016 and 2015, were 183 basis points and 194 basis points, respectively. The interest spread decreased
due to pressures of the low interest rate environment and lower alternative investment returns in the current period, partially
offset by a continuation of disciplined crediting rate management.
As of March 31, 2016,
fixed annuity account values totaled $4.3 billion, including $4.0 billion of deferred annuities. As shown in the table below, for
approximately 86%, or $3.4 billion of the deferred annuity account values, the credited interest rate was equal to the minimum
guaranteed rate. Due to limitations on the Company’s ability to further lower interest crediting rates, coupled with the
expectation for continued low reinvestment interest rates, management anticipates fixed annuity spread compression in future periods.
The majority of assets backing the net interest spread on fixed annuity business is invested in fixed income securities. The Company
actively manages its interest rate risk exposure, considering a variety of factors, including earned interest rates, credited interest
rates and the relationship
between the expected durations of assets
and liabilities. Management estimates that over the next 12 months approximately $580 million of the annuity segment and life segment
combined investment portfolio and related investable cash flows will be reinvested at current market rates. As interest rates remain
at low levels, borrowers may prepay or redeem the securities with greater frequency in order to borrow at lower market rates, which
could increase investable cash flows and exacerbate the reinvestment risk
.
As a general guideline, for a 100 basis point
decline in the average reinvestment rate and based on the Company’s existing policies and investment portfolio, the impact
from investing in that lower interest rate environment could further reduce annuity segment net investment income by approximately
$2.2 million in year one and $6.7 million in year two,
further reducing the net interest spread by approximately 5 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 annuity deferred policy acquisition costs. In
terms of the sensitivity of this amortization to the net interest spread, based on capitalized annuity policy acquisition costs
as of March 31, 2016 and assuming all other assumptions are met, a 10 basis point deviation in the current year targeted interest
rate spread assumption would impact amortization between $0.25 million and $0.35 million. This result may change depending on the
magnitude and direction of any actual deviations but represents a range of reasonably likely experience for the noted assumption.
Additional information
regarding the interest crediting rates and balances equal to the minimum guaranteed rate for deferred annuity account values is
shown below.
|
|
March
31, 2016
|
|
|
|
|
|
|
|
|
|
Deferred Annuities at
|
|
|
|
Total Deferred Annuities
|
|
|
Minimum Guaranteed Rate
|
|
|
|
|
|
|
|
|
|
Percent of
|
|
|
|
|
|
|
|
|
|
Percent
|
|
|
Accumulated
|
|
|
Total Deferred
|
|
|
Percent
|
|
|
Accumulated
|
|
|
|
of
Total
|
|
|
Value
(“AV”)
|
|
|
Annuities
AV
|
|
|
of
Total
|
|
|
Value
|
|
Minimum guaranteed interest rates:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 2%
|
|
|
22.0
|
%
|
|
$
|
883.9
|
|
|
|
41.9
|
%
|
|
|
10.8
|
%
|
|
$
|
370.2
|
|
Equal to 2% but less than 3%
|
|
|
7.7
|
|
|
|
309.8
|
|
|
|
82.0
|
%
|
|
|
7.4
|
|
|
|
254.0
|
|
Equal to 3% but less than 4%
|
|
|
14.6
|
|
|
|
586.7
|
|
|
|
99.3
|
%
|
|
|
16.9
|
|
|
|
582.4
|
|
Equal to 4% but less than 5%
|
|
|
54.3
|
|
|
|
2,176.7
|
|
|
|
100.0
|
%
|
|
|
63.3
|
|
|
|
2,176.7
|
|
5% or higher
|
|
|
1.4
|
|
|
|
56.7
|
|
|
|
100.0
|
%
|
|
|
1.6
|
|
|
|
56.7
|
|
Total
|
|
|
100.0
|
%
|
|
$
|
4,013.8
|
|
|
|
85.7
|
%
|
|
|
100.0
|
%
|
|
$
|
3,440.0
|
|
The Company will continue
to be disciplined in executing strategies to mitigate the negative impact on profitability of a sustained low interest rate environment.
However, the success of these strategies may be affected by the factors discussed in “Item 1A. Risk Factors” in the
Company’s Annual Report on Form 10-K for the year ended December 31, 2015, and other factors discussed herein.
Policy Acquisition
Expenses Amortized
Amortized policy acquisition
expenses were $24.1 million for the first three months of 2016 compared to $23.7 million for the same period in 2015. The increase
was largely attributable to the annuity segment including the impact of the unlocking of deferred policy acquisition costs (“unlocking”).
In addition, increases in the annuity and property and casualty segments in the first quarter of 2016 reflected the growth in premiums
and related commissions for each segment. At March 31, 2016, annuity segment unlocking resulted in a $0.2 million increase in amortization
compared to a $0.1 million decrease in amortization in the prior year, in each period largely due to financial market performance.
For the life segment, unlocking resulted in an immaterial change in amortization at both March 31, 2016 and 2015.
Operating Expenses
For the first three
months of 2016, operating expenses of $42.8 million increased $6.9 million, or 19.2%, compared to the same period in the prior
year. In 2015, first quarter expenses reflected a reduction in incentive compensation expense with the majority of the cost reduction
benefiting the property and casualty segment. The first quarter 2016 expense level was consistent with management’s expectations
as the Company makes expenditures related to customer service and infrastructure improvements, which are intended to enhance the
overall customer experience and support favorable policy retention and business cross-sale ratios.
The property and casualty
expense ratio of 27.3% for the three months ended March 31, 2016 increased 1.8 percentage points compared to the prior year expense
ratio of 25.5%, consistent with management’s expectations for the current period. The first quarter 2015 incentive compensation
expense reduction reduced the expense ratio for that period by 1.5 percentage points.
Income Tax Expense
The effective income
tax rate on the Company’s pretax income, including net realized investment gains and losses, was 28.6% and 29.1% for the
three months ended March 31, 2016 and 2015, respectively. Income from investments in tax-advantaged securities reduced the effective
income tax rates 6.8 and 6.7 percentage points for the three months ended March 31, 2016 and 2015, respectively.
The Company records
liabilities for uncertain tax filing positions where it is more likely than not that the position will not be sustainable upon
audit by taxing authorities. These liabilities are reevaluated routinely and are adjusted appropriately based on changes in facts
or law. The Company has no unrecorded liabilities from uncertain tax filing positions.
At March 31, 2016,
the Company’s federal income tax returns for years prior to 2012 are no longer subject to examination by the IRS. Management
does not anticipate any assessments for tax years that remain subject to examination to have a material effect on the Company’s
financial position or results of operations.
Net Income
For the three months
ended March 31, 2016, the Company’s net income of $25.2 million represented a decrease of $9.1 million compared to the prior
year as improvements in current accident year non-catastrophe results for homeowners and a reduced level of life mortality losses
were more than offset by pressure on automobile results primarily due to loss severity and a $4.4 million reduction in realized
investment gains compared to the prior year. Additional detail is included in the “Executive Summary” at the beginning
of this MD&A.
Net income (loss) by
segment and net income per share were as follows:
|
|
Three Months Ended
|
|
|
Change From
|
|
|
|
March 31,
|
|
|
Prior Year
|
|
|
|
2016
|
|
|
2015
|
|
|
Percent
|
|
|
Amount
|
|
Analysis of net income (loss) by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and casualty
|
|
$
|
13.8
|
|
|
$
|
17.6
|
|
|
|
-21.6
|
%
|
|
$
|
(3.8
|
)
|
Annuity
|
|
|
10.6
|
|
|
|
12.5
|
|
|
|
-15.2
|
%
|
|
|
(1.9
|
)
|
Life
|
|
|
3.9
|
|
|
|
3.4
|
|
|
|
14.7
|
%
|
|
|
0.5
|
|
Corporate and other (1)
|
|
|
(3.1
|
)
|
|
|
0.8
|
|
|
|
N.M.
|
|
|
|
(3.9
|
)
|
Net income
|
|
$
|
25.2
|
|
|
$
|
34.3
|
|
|
|
-26.5
|
%
|
|
$
|
(9.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of catastrophe costs, after tax,
included above
|
|
$
|
(8.3
|
)
|
|
$
|
(6.8
|
)
|
|
|
22.1
|
%
|
|
$
|
(1.5
|
)
|
Effect of realized investment gains (losses),
after tax, included above
|
|
$
|
(0.4
|
)
|
|
$
|
4.0
|
|
|
|
N.M.
|
|
|
$
|
(4.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share
|
|
$
|
0.61
|
|
|
$
|
0.81
|
|
|
|
-24.7
|
%
|
|
$
|
(0.20
|
)
|
Weighted average number of shares
and equivalent shares (in millions)
|
|
|
41.5
|
|
|
|
42.3
|
|
|
|
-1.9
|
%
|
|
|
(0.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and casualty combined ratio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
93.8
|
%
|
|
|
90.4
|
%
|
|
|
N.M.
|
|
|
|
3.4
|
%
|
Effect of catastrophe costs,
included above
|
|
|
8.3
|
%
|
|
|
7.1
|
%
|
|
|
N.M.
|
|
|
|
1.2
|
%
|
Effect of prior years’ reserve
development, included above
|
|
|
-1.3
|
%
|
|
|
-2.7
|
%
|
|
|
N.M.
|
|
|
|
1.4
|
%
|
N.M. – Not meaningful.
|
(1)
|
The corporate and other segment
includes interest expense on debt, realized investment gains and losses, corporate debt retirement costs (when applicable), certain
public company expenses and other corporate-level items. The Company does not allocate the impact of corporate-level transactions
to the insurance segments, consistent with the basis for management’s evaluation of the results of those segments.
|
As described in footnote
(1) to the table above, the corporate and other segment reflects corporate-level transactions. Of those transactions, realized
investment gains and losses may vary notably between reporting periods and are often the driver of fluctuations in the level of
this segment’s net income or loss. For the three months ended March 31, 2016, net realized investment losses after tax were
$0.4 million, compared to net realized investment gains of $4.0 million a year earlier. In addition, the current period reflected
a $0.7 million pretax reduction in debt interest expense as a result of the refinancing transactions completed in 2015.
Return on average shareholders’
equity based on net income was 6.4% and 8.4% for the trailing 12 months ended March 31, 2016 and 2015, respectively.
Outlook for 2016
At the time of this
Quarterly Report on Form 10-Q, management estimates that 2016 full year net income before realized investment gains and losses
will be within a range of $2.15 to $2.35 per diluted share. This projection incorporates the Company’s results for 2015 and
anticipates continued improvement in the Company’s underlying property and casualty combined ratio, somewhat offset by a
lower amount of property and casualty favorable prior years’ reserve development, modestly lower earnings in the annuity
and life segments reflecting investment interest rate pressure, and additional expenses — as described below — 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 2016, 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 2015. The property line is anticipated to produce further improvement in profitability, although at a more modest rate
than the comparison of 2015 to 2014; and, catastrophe losses are estimated to be lower than the 2015 level. Net income for the
annuity segment will continue to be impacted by the prolonged interest rate environment and the 2015 net interest spread of 184
basis points is anticipated to grade down to the low 170s through the course of 2016. Assuming mortality costs consistent with
the Company’s actuarial models, life segment net income is expected to decrease compared to 2015, 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 2015.
As described in “Critical
Accounting Policies”, certain of the Company’s significant accounting measurements require the use of estimates and
assumptions. As additional information becomes available, adjustments may be required. Those adjustments are charged or credited
to income for the period in which the adjustments are made and may impact actual results compared to management’s estimate
above. Additionally, see “Forward-looking Information” in this Quarterly Report on Form 10-Q and “Item 1A. Risk
Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 concerning other important
factors that could impact actual results. Management believes that a projection of net income including realized investment gains
and losses is not appropriate on a forward-looking basis because it is not possible to provide a valid forecast of realized investment
gains and losses, which can vary substantially from one period to another and may have a significant impact on net income.
Liquidity and Financial Resources
Off-Balance Sheet
Arrangements
At March 31, 2016 and
2015, the Company did not have any relationships with unconsolidated entities or financial partnerships, such as entities often
referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating
off-balance sheet arrangements or for other contractually narrow or limited purposes. As such, the Company is not exposed to any
financing, liquidity, market or credit risk that could arise if the Company had engaged in such relationships.
Investments
Information regarding
the Company’s investment portfolio, which is comprised primarily of investment grade, fixed income securities, is located
in “Results of Operations — Net Realized Investment Gains and Losses” and in the “Notes to Consolidated
Financial Statements — Note 2 — Investments”.
Cash Flow
The short-term liquidity
requirements of the Company, within a 12 month operating cycle, are for the timely payment of claims and benefits to policyholders,
operating expenses, interest payments and federal income taxes. Cash flow generated from operations has been, and is expected to
be, adequate to meet the Company’s operating cash needs in the next 12 months. Cash flow in excess of operational needs has
been used to fund business growth, retire short-term debt, pay dividends to shareholders and repurchase shares of HMEC’s
common stock. Long-term liquidity requirements, beyond one year, are principally for the payment of future insurance and annuity
policy claims and benefits, as well as retirement of long-term debt.
Operating Activities
As a holding company,
HMEC conducts its principal operations in the personal lines segment of the property and casualty and life insurance industries
through its subsidiaries. HMEC’s insurance subsidiaries generate cash flow from premium and investment income, generally
well in excess of their immediate needs for policy obligations, operating expenses and other cash requirements. Cash provided by
operating activities primarily reflects net cash generated by the insurance subsidiaries. For the first three months of 2016, net
cash provided by operating activities increased compared to the same period in 2015, largely due to an increase in premiums collected
in the current period, partially offset by an increase in claims and policyholder benefits paid in the current period.
Payment of principal
and interest on debt, dividends to shareholders and parent company operating expenses is largely dependent on the ability of the
insurance subsidiaries to pay cash dividends or make other cash payments to HMEC, including tax payments pursuant to tax sharing
agreements. Payments for share repurchase programs also have this dependency. If necessary, HMEC also has other potential sources
of liquidity that could provide for additional funding to meet corporate obligations or pay shareholder dividends, which include
a revolving line of credit, as well as issuances of various securities. The insurance subsidiaries are subject to various regulatory
restrictions which limit the amount of annual dividends or other distributions, including loans or cash advances, available to
HMEC without prior approval of the insurance regulatory authorities. The aggregate amount of
dividends that may be paid in 2016 from
all of HMEC’s insurance subsidiaries without prior regulatory approval is approximately $90 million, of which $20.6 million
was paid during the three months ended March 31, 2016. Although regulatory restrictions exist, dividend availability from subsidiaries
has been, and is expected to be, adequate for HMEC’s capital needs. Additional information is contained in “Notes to
Consolidated Financial Statements — Note 10 — Statutory Information and Restrictions” of the Company’s
Annual Report on Form 10-K for the year ended December 31, 2015.
Investing Activities
HMEC’s insurance
subsidiaries maintain significant investments in fixed maturity securities to meet future contractual obligations to policyholders.
In conjunction with its management of liquidity and other asset/liability management objectives, the Company, from time to time,
will sell fixed maturity securities prior to maturity, as well as equity securities, and reinvest the proceeds in other investments
with different interest rates, maturities or credit characteristics. Accordingly, the Company has classified the entire fixed maturity
securities and equity securities portfolios as “available for sale”.
Financing Activities
Financing activities
include primarily payment of dividends, the receipt and withdrawal of funds by annuity contractholders, issuances and repurchases
of HMEC’s common stock, fluctuations in bank overdraft balances, and borrowings, repayments and repurchases related to its
debt facilities.
The Company’s
annuity business produced net positive cash flows in the first three months of 2016. For the three months ended March 31, 2016,
receipts from annuity contracts decreased $29.4 million, or 20.7%, compared to the same period in the prior year, as described
in “Results of Operations — Insurance Premiums and Contract Charges”. In total, annuity contract benefits, withdrawals
and net of transfers from variable annuity accumulated cash values decreased $6.0 million, or 6.6%, compared to the prior year.
Capital Resources
The Company has determined
the amount of capital which is needed to adequately fund and support business growth, primarily based on risk-based capital formulas
including those developed by the National Association of Insurance Commissioners (the “NAIC”). Historically, the Company’s
insurance subsidiaries have generated capital in excess of such needed capital. These excess amounts have been paid to HMEC through
dividends. HMEC has then utilized these dividends and its access to the capital markets to service and retire long-term debt, pay
dividends to its shareholders, fund growth initiatives, repurchase shares of its common stock and for other corporate purposes.
Management anticipates that the Company’s sources of capital will continue to generate sufficient capital to meet the needs
for business growth, debt interest payments, shareholder dividends and its share repurchase program. Additional information is
contained in “Notes to Consolidated Financial Statements — Note 10 — Statutory Information and Restrictions”
of the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.
The total capital of
the Company was $1,583.0 million at March 31, 2016, including $247.0 million of long-term debt and no short-term debt outstanding.
Total debt represented 18.5% of total capital excluding unrealized investment gains and losses (15.6% including unrealized investment
gains and losses) at March 31, 2016, which was below the Company’s long-term target of 25%. Note that this information regarding
long-term debt reflects the Company’s January 1, 2016 adoption of new accounting guidance regarding the presentation of debt
issuance costs as discussed in “Notes to Consolidated Financial Statements — Note 1 — Adopted Accounting Standards”.
Shareholders’
equity was $1,336.0 million at March 31, 2016, including a net unrealized gain in the Company’s investment portfolio of $244.7
million after taxes and the related impact of deferred policy acquisition costs associated with investment contracts and life insurance
products with account values. The market value of the Company’s common stock and the market value per share were $1,278.7
million and $31.69, respectively, at March 31, 2016. Book value per share was $33.11 at March 31, 2016 ($27.05 excluding investment
fair value adjustments).
Additional information
regarding the net unrealized gain in the Company’s investment portfolio at March 31, 2016 is included in “Results of
Operations — Net Realized Investment Gains and Losses”.
Total shareholder dividends
were $11.1 million for the three months ended March 31, 2016. In March 2016, the Board of Directors announced regular quarterly
dividends of $0.265 per share.
During the first three
months of 2016, the Company repurchased 474,277 shares of its common stock, or 1.2% of the outstanding shares on December 31, 2015,
at an aggregate cost of $14.5 million, or an average price per share of $30.48 under its share repurchase program, which is further
described in “Notes to Consolidated Financial Statements — Note 9 — Shareholders’ Equity and Common Stock
Equivalents” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2015. The repurchase of shares
was funded through use of cash. As of March 31, 2016, $36.6 million remained authorized for future share repurchases under the
2015 repurchase program. Utilization of the remaining authorization under the 2011 program was completed in January 2016.
As of March 31, 2016,
the Company had outstanding $250.0 million aggregate principal amount of 4.50% Senior Notes (“Senior Notes due 2025”),
which will mature on December 1, 2025, issued at a discount resulting in an effective yield of 4.53%. Interest on the Senior Notes
due 2025 is payable semi-annually at a rate of 4.50%. Detailed information regarding the redemption terms of the Senior Notes due
2025 is contained in the “Notes to Consolidated Financial Statements — Note 7 — Debt” of the Company’s
Annual Report on Form 10-K for the year ended December 31, 2015. The Senior Notes due 2025 are traded in the open market (HMN 4.50).
As of March 31, 2016,
the Company had no balance outstanding under its Bank Credit Facility. The Bank Credit Facility provides for unsecured borrowings
of up to $150.0 million and expires on July 30, 2019. Interest accrues at varying spreads relative to prime or Eurodollar base
rates and is payable monthly or quarterly depending on the applicable base rate. The unused portion of the Bank Credit Facility
is subject to a variable commitment fee, which was 0.15% on an annual basis at March 31, 2016.
To provide additional
capital management flexibility, the Company filed a “universal shelf” registration on Form S-3 with the SEC on March
12, 2015. The registration statement, which registered the offer and sale by the Company from time to time of an indeterminate
amount of various securities, which may include debt securities, common stock, preferred stock, depositary shares, warrants, delayed
delivery contracts and/or units that include any of these securities, was automatically effective on March 12, 2015. Unless withdrawn
by the Company earlier, this registration statement will remain effective through March 12, 2018. The Senior Notes due 2025, described
above, were issued utilizing this registration statement. No other securities associated with the registration statement have been
issued as of the date of this Quarterly Report on Form 10-Q.
Financial
Ratings
HMEC’s principal
insurance subsidiaries are rated by S&P, Moody’s, A.M. Best Company, Inc. (“A.M. Best”) and Fitch Ratings,
Inc. (“Fitch”). These rating agencies have also assigned ratings to the Company’s long-term debt securities.
The ratings that are assigned by these agencies, which are subject to change, can impact, among other things, the Company’s
access to sources of capital, cost of capital, and competitive position. These ratings are not a recommendation to buy or hold
any of the Company’s securities.
With the exception
of the ratings by A.M. Best, assigned ratings as of April 30, 2016 were unchanged from the disclosure in the Company’s Annual
Report on Form 10-K for the year ended December 31, 2015. In March 2016, A.M. Best upgraded the insurance financial strength rating
of the Company’s property and casualty subsidiaries to “A (Excellent)” from “A- (Excellent)”. Assigned
ratings were as follows (unless otherwise indicated, the insurance financial strength ratings for the Company’s property
and casualty insurance subsidiaries and the Company’s principal life insurance subsidiary are the same):
|
|
Insurance Financial
|
|
|
|
|
Strength Ratings
|
|
Debt Ratings
|
|
|
(Outlook)
|
|
(Outlook)
|
As of April 30, 2016
|
|
|
|
|
S&P
|
|
A
|
(stable)
|
|
BBB
|
(stable)
|
Moody’s
|
|
|
|
|
|
|
Horace Mann Life Insurance Company
|
|
A3
|
(positive)
|
|
N.A.
|
|
HMEC’s property and casualty subsidiaries
|
|
A3
|
(stable)
|
|
N.A.
|
|
HMEC
|
|
N.A.
|
|
|
Baa3
|
(positive)
|
A.M. Best
|
|
A
|
(stable)
|
|
bbb
|
(stable)
|
Fitch
|
|
A
|
(stable)
|
|
BBB
|
(stable)
|
N.A. – Not applicable.
Reinsurance Programs
Information regarding
the reinsurance program for the Company’s property and casualty segment is located in “Business — Property and
Casualty Segment — Property and Casualty Reinsurance” of the Company’s Annual Report on Form 10-K for the year
ended December 31, 2015.
Information regarding
the reinsurance program for the Company’s life segment is located in “Business — Life Segment” of the Company’s
Annual Report on Form 10-K for the year ended December 31, 2015.
Market Value Risk
Market value risk,
the Company’s primary market risk exposure, is the risk that the Company’s invested assets will decrease in value.
This decrease in value may be due to (1) a change in the yields realized on the Company’s assets and prevailing market yields
for similar assets, (2) an unfavorable change in the liquidity of the investment, (3) an unfavorable change in the financial prospects
of the issuer of the investment, or (4) a downgrade in the credit rating of the issuer of the investment. See also “Results
of Operations — Net Realized Investment Gains and Losses”.
Significant changes
in interest rates expose the Company to the risk of experiencing losses or earning a reduced level of income based on the difference
between the interest rates earned on the Company’s investments and the credited interest rates on the Company’s insurance
liabilities. See also “Results of Operations — Interest Credited to Policyholders”.
The Company seeks to
manage its market value risk by coordinating the projected cash inflows of assets with the projected cash outflows of liabilities.
For all its assets and liabilities, the Company seeks to maintain reasonable durations, consistent with the maximization of income
without sacrificing investment quality, while providing for liquidity and diversification. The investment risk associated with
variable annuity deposits and the underlying mutual funds is assumed by those contractholders, and not by the Company. Certain
fees that the Company earns from variable annuity deposits are based on the market value of the funds deposited.
More detailed descriptions
of the Company’s exposure to market value risks and the management of those risks is presented in “Management’s
Discussion and Analysis of Financial Condition and Results of Operations — Market Value Risk” of the Company’s
Annual Report on Form 10-K for the year ended December 31, 2015.
Recent Accounting Changes
Employee Share-based
Payment Accounting
In March 2016, the
Financial Accounting Standards Board (“FASB”) issued guidance to simplify and improve the accounting for employee share-based
payment transactions. Under the new guidance, several aspects of the accounting for share-based payment transactions are changed
including: (1) the entire tax impact of the difference between the company’s share-based payment deduction for tax purposes
and the compensation cost recognized in the financial statements (“excess tax benefits”) will be recorded in the income
statement (the additional paid-in capital pool is eliminated) and classified with other income tax cash flows as an operating activity
in the statement of cash flows; (2) election of an accounting policy regarding forfeitures, either retaining the current GAAP approach
of estimating forfeitures or accounting for forfeitures when they occur; (3) companies may withhold up to the maximum individual
statutory tax rate without triggering classification of the award as a liability; (4) cash paid to satisfy the statutory income
tax withholding obligation is to be classified as a financing activity in the statement of cash flows; and (5) certain additional
aspects which apply only to nonpublic entities. There are different approaches specified for transition to the new guidance encompassing
prospective, retrospective and modified retrospective (cumulative-effect adjustment) approaches. The guidance is effective for
annual reporting periods beginning after December 15, 2016, including interim periods within those years. Early application is
permitted; however, all components of the guidance must be implemented at the same time.
Management is evaluating the impact this
guidance will have on the results of operations and financial position of the Company.
Accounting for Leases
In February 2016, the
FASB issued accounting and disclosure guidance to improve financial reporting and comparability among organizations about leasing
transactions. Under the new guidance, for leases with lease terms of more than 12 months, a lessee will be required to recognize
assets and liabilities on the balance sheet for the rights and obligations created by those leases. Consistent with current accounting
guidance, the recognition, measurement and presentation of expenses and cash flows arising from a lease by a lessee primarily will
depend on its classification as a finance or an operating lease. However, while current guidance requires only capital leases to
be recognized on the balance sheet, the new guidance will require both operating and capital leases to be recognized on the balance
sheet. In transition to the new guidance, companies are required to recognize and measure leases at the beginning of the earliest
period presented using a modified retrospective approach. The guidance is effective for annual reporting periods beginning after
December 15, 2018, including interim periods within those years. Early application is permitted. Management is evaluating the impact
this guidance will have on the results of operations and financial position of the Company.
Recognition and
Measurement of Financial Assets and Liabilities
In January 2016, the
FASB issued accounting guidance to improve certain aspects of the recognition, measurement, presentation and disclosure of financial
instruments. Among other things, this guidance requires public entities to measure equity investments (except those accounted for
under the equity method of accounting or those that result in consolidation of the investee) at fair value with changes in fair
value recognized in net income and to perform a qualitative assessment to identify impairment for equity investments without readily
determinable fair values. Companies are required to apply this guidance by means of a cumulative-effect adjustment to the balance
sheet as of the beginning of the year of adoption and, for the guidance related to equity securities without readily determinable
fair values, companies are required to apply a prospective approach to equity investments that exist as of the date of adoption.
The guidance is effective for annual reporting periods beginning after December 15, 2017, including interim periods within those
years. Early application is permitted. Management is evaluating the impact this guidance will have on the results of operations
and financial position of the Company.
Disclosures About
Short-Duration Insurance Contracts
In May 2015, the FASB
issued accounting guidance which will require expanded disclosure regarding claims on short-duration insurance contracts, which
will apply to the contracts in the Company’s property and casualty segment. Disclosures are to include additional information
about an entity’s initial claim estimates and subsequent adjustments to those estimates, methodologies and judgments in estimating
claims, and the timing, frequency and severity of claims. The guidance requiring these additional disclosures is effective for
annual periods beginning after December 15, 2015, and for interim periods within annual periods beginning after December 31, 2016.
The adoption of this accounting guidance will not have an effect on the results of operations or financial position of the Company.
Revenue Recognition
In May 2014, the FASB
issued accounting guidance to provide a single comprehensive model in accounting for revenue arising from contracts with customers;
in August 2015, the effective date was deferred for one year. The guidance applies to all contracts with customers; however, insurance
contracts are specifically excluded. The guidance is effective for annual reporting periods beginning after December 15, 2017,
including interim periods within those years. Early application is not permitted. Management believes the adoption of this accounting
guidance will not have a material effect on the results of operations or financial position of the Company.