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 September
30, 2016, the related consolidated statements of operations and comprehensive income for the three-month and nine-month periods
ended September 30, 2016 and 2015, and the related consolidated statements of changes in shareholders’ equity and cash flows
for the nine-month periods ended September 30, 2016 and 2015. These consolidated financial statements are the responsibility of
the Company’s management.
We
conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review
of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible
for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards
of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding
the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based
on our review, we are not aware of any material modifications that should be made to the consolidated financial statements referred
to above for them to be in conformity with U.S. generally accepted accounting principles.
We
have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
consolidated balance sheet of Horace Mann Educators Corporation and subsidiaries as of December 31, 2015, and the related consolidated
statements of operations, comprehensive loss, changes in shareholders’ equity, and cash flows for the year then ended (not
presented herein); and in our report dated February 29, 2016, we expressed an unqualified opinion on those consolidated financial
statements.
/s/
KPMG LLP
KPMG
LLP
Chicago,
Illinois
November 8, 2016
HORACE
MANN EDUCATORS CORPORATION
CONSOLIDATED
BALANCE SHEETS
(Dollars
in thousands, except per share data)
|
|
September
30,
|
|
|
December
31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(Unaudited)
|
|
|
|
|
ASSETS
|
Investments
|
|
|
|
|
|
|
Fixed
maturities, available for sale, at fair value
|
|
|
|
|
|
|
|
|
(amortized
cost 2016, $6,907,575; 2015, $6,785,626)
|
|
$
|
7,494,053
|
|
|
$
|
7,091,340
|
|
Equity
securities, available for sale, at fair value
|
|
|
|
|
|
|
|
|
(cost
2016, $124,806; 2015, $95,722)
|
|
|
137,640
|
|
|
|
99,797
|
|
Short-term
and other investments
|
|
|
537,459
|
|
|
|
456,893
|
|
Total
investments
|
|
|
8,169,152
|
|
|
|
7,648,030
|
|
Cash
|
|
|
53,616
|
|
|
|
15,509
|
|
Deferred policy acquisition
costs
|
|
|
225,792
|
|
|
|
253,176
|
|
Goodwill
|
|
|
47,396
|
|
|
|
47,396
|
|
Other assets
|
|
|
321,475
|
|
|
|
292,139
|
|
Separate
Account (variable annuity) assets
|
|
|
1,873,646
|
|
|
|
1,800,722
|
|
Total
assets
|
|
$
|
10,691,077
|
|
|
$
|
10,056,972
|
|
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
Policy liabilities
|
|
|
|
|
|
|
|
|
Investment
contract and life policy reserves
|
|
$
|
5,385,907
|
|
|
$
|
5,126,842
|
|
Unpaid
claims and claim expenses
|
|
|
332,787
|
|
|
|
323,720
|
|
Unearned
premiums
|
|
|
247,229
|
|
|
|
232,841
|
|
Total
policy liabilities
|
|
|
5,965,923
|
|
|
|
5,683,403
|
|
Other policyholder
funds
|
|
|
706,384
|
|
|
|
692,652
|
|
Other liabilities
|
|
|
453,894
|
|
|
|
368,559
|
|
Long-term debt
|
|
|
247,146
|
|
|
|
246,975
|
|
Separate
Account (variable annuity) liabilities
|
|
|
1,873,646
|
|
|
|
1,800,722
|
|
Total
liabilities
|
|
|
9,246,993
|
|
|
|
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, 64,855,897; 2015, 64,537,554
|
|
|
65
|
|
|
|
65
|
|
Additional paid-in capital
|
|
|
450,759
|
|
|
|
442,648
|
|
Retained earnings
|
|
|
1,146,978
|
|
|
|
1,116,277
|
|
Accumulated other comprehensive
income (loss), net of taxes:
|
|
|
|
|
|
|
|
|
Net
unrealized gains on fixed maturities
|
|
|
|
|
|
|
|
|
and
equity securities
|
|
|
337,291
|
|
|
|
175,167
|
|
Net
funded status of pension obligations
|
|
|
(11,794
|
)
|
|
|
(11,794
|
)
|
Treasury stock, at
cost, 2016, 24,672,932 shares;
|
|
|
|
|
|
|
|
|
2015,
23,971,522 shares
|
|
|
(479,215
|
)
|
|
|
(457,702
|
)
|
Total
shareholders’ equity
|
|
|
1,444,084
|
|
|
|
1,264,661
|
|
Total
liabilities and shareholders’ equity
|
|
$
|
10,691,077
|
|
|
$
|
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
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
|
2016
|
|
|
|
|
2015
|
|
|
|
|
2016
|
|
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance
premiums and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
contract
charges earned
|
|
$
|
191,050
|
|
|
$
|
182,812
|
|
|
$
|
564,860
|
|
|
$
|
544,927
|
|
Net
investment income
|
|
|
94,847
|
|
|
|
81,016
|
|
|
|
270,685
|
|
|
|
248,324
|
|
Net
realized investment gains
|
|
|
3,985
|
|
|
|
1,308
|
|
|
|
6,911
|
|
|
|
8,789
|
|
Other
income
|
|
|
1,294
|
|
|
|
617
|
|
|
|
3,581
|
|
|
|
2,302
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenues
|
|
|
291,176
|
|
|
|
265,753
|
|
|
|
846,037
|
|
|
|
804,342
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits, losses and
expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits,
claims and settlement expenses
|
|
|
135,710
|
|
|
|
121,181
|
|
|
|
403,631
|
|
|
|
368,139
|
|
Interest
credited
|
|
|
48,658
|
|
|
|
46,216
|
|
|
|
142,924
|
|
|
|
136,103
|
|
Policy
acquisition expenses amortized
|
|
|
24,474
|
|
|
|
25,709
|
|
|
|
73,113
|
|
|
|
73,400
|
|
Operating
expenses
|
|
|
44,337
|
|
|
|
39,647
|
|
|
|
130,478
|
|
|
|
115,611
|
|
Interest
expense
|
|
|
2,975
|
|
|
|
2,652
|
|
|
|
8,858
|
|
|
|
9,610
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
benefits, losses and expenses
|
|
|
256,154
|
|
|
|
235,405
|
|
|
|
759,004
|
|
|
|
702,863
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income
taxes
|
|
|
35,022
|
|
|
|
30,348
|
|
|
|
87,033
|
|
|
|
101,479
|
|
Income
tax expense
|
|
|
8,099
|
|
|
|
8,364
|
|
|
|
23,091
|
|
|
|
29,037
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
26,923
|
|
|
$
|
21,984
|
|
|
$
|
63,942
|
|
|
$
|
72,442
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.66
|
|
|
$
|
0.53
|
|
|
$
|
1.55
|
|
|
$
|
1.73
|
|
Diluted
|
|
$
|
0.65
|
|
|
$
|
0.52
|
|
|
$
|
1.55
|
|
|
$
|
1.71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number
of shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
equivalent shares (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
41,092
|
|
|
|
41,852
|
|
|
|
41,155
|
|
|
|
41,965
|
|
Diluted
|
|
|
41,347
|
|
|
|
42,305
|
|
|
|
41,386
|
|
|
|
42,362
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized investment
gains (losses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other-than-temporary impairment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
losses
on securities
|
|
$
|
(160
|
)
|
|
$
|
(3,602
|
)
|
|
$
|
(7,686
|
)
|
|
$
|
(20,860
|
)
|
Portion
of losses recognized in other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
comprehensive
income
|
|
|
-
|
|
|
|
-
|
|
|
|
(290
|
)
|
|
|
(4,300
|
)
|
Net
other-than-temporary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
impairment
losses on
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
securities
recognized in earnings
|
|
|
(160
|
)
|
|
|
(3,602
|
)
|
|
|
(7,396
|
)
|
|
|
(16,560
|
)
|
Realized
gains, net
|
|
|
4,145
|
|
|
|
4,910
|
|
|
|
14,307
|
|
|
|
25,349
|
|
Total
|
|
$
|
3,985
|
|
|
$
|
1,308
|
|
|
$
|
6,911
|
|
|
$
|
8,789
|
|
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
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
|
2016
|
|
|
|
|
2015
|
|
|
|
|
2016
|
|
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
26,923
|
|
|
$
|
21,984
|
|
|
$
|
63,942
|
|
|
$
|
72,442
|
|
Other
comprehensive income (loss),
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
net
of taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in net unrealized gains
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
losses on fixed maturities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
equity securities
|
|
|
7,638
|
|
|
|
2,832
|
|
|
|
162,124
|
|
|
|
(70,936
|
)
|
Change
in net funded status of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
pension
obligations
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Other
comprehensive income (loss)
|
|
|
7,638
|
|
|
|
2,832
|
|
|
|
162,124
|
|
|
|
(70,936
|
)
|
Total
|
|
$
|
34,561
|
|
|
$
|
24,816
|
|
|
$
|
226,066
|
|
|
$
|
1,506
|
|
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)
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
|
|
2016
|
|
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
Common stock, $0.001
par value
|
|
|
|
|
|
|
|
|
Beginning
balance
|
|
$
|
65
|
|
|
$
|
64
|
|
Options
exercised, 2016, 114,507 shares; 2015, 80,660 shares
|
|
|
-
|
|
|
|
-
|
|
Conversion
of common stock units,
|
|
|
|
|
|
|
|
|
2016,
15,629 shares; 2015, 8,293 shares
|
|
|
-
|
|
|
|
-
|
|
Conversion
of restricted stock units,
|
|
|
|
|
|
|
|
|
2016,
188,207 shares; 2015, 191,998 shares
|
|
|
-
|
|
|
|
1
|
|
Ending
balance
|
|
|
65
|
|
|
|
65
|
|
|
|
|
|
|
|
|
|
|
Additional paid-in
capital
|
|
|
|
|
|
|
|
|
Beginning
balance
|
|
|
442,648
|
|
|
|
422,232
|
|
Options
exercised and conversion of common stock
|
|
|
|
|
|
|
|
|
units
and restricted stock units
|
|
|
2,045
|
|
|
|
11,926
|
|
Share-based
compensation expense
|
|
|
6,066
|
|
|
|
5,032
|
|
Ending
balance
|
|
|
450,759
|
|
|
|
439,190
|
|
|
|
|
|
|
|
|
|
|
Retained earnings
|
|
|
|
|
|
|
|
|
Beginning
balance
|
|
|
1,116,277
|
|
|
|
1,065,318
|
|
Net
income
|
|
|
63,942
|
|
|
|
72,442
|
|
Cash
dividends, 2016, $0.795 per share;
|
|
|
|
|
|
|
|
|
2015,
$0.750 per share
|
|
|
(33,241
|
)
|
|
|
(31,975
|
)
|
Ending
balance
|
|
|
1,146,978
|
|
|
|
1,105,785
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
162,124
|
|
|
|
(70,936
|
)
|
Change
in net funded status of pension obligations
|
|
|
-
|
|
|
|
-
|
|
Ending
balance
|
|
|
325,497
|
|
|
|
213,665
|
|
|
|
|
|
|
|
|
|
|
Treasury stock, at
cost
|
|
|
|
|
|
|
|
|
Beginning
balance, 2016, 23,971,522 shares;
|
|
|
|
|
|
|
|
|
2015,
23,308,430 shares
|
|
|
(457,702
|
)
|
|
|
(435,752
|
)
|
Acquisition
of shares, 2016, 701,410 shares;
|
|
|
|
|
|
|
|
|
2015,
476,498 shares
|
|
|
(21,513
|
)
|
|
|
(15,775
|
)
|
Ending
balance, 2016, 24,672,932 shares;
|
|
|
|
|
|
|
|
|
2015,
23,784,928 shares
|
|
|
(479,215
|
)
|
|
|
(451,527
|
)
|
|
|
|
|
|
|
|
|
|
Shareholders’
equity at end of period
|
|
$
|
1,444,084
|
|
|
$
|
1,307,178
|
|
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)
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
|
|
2016
|
|
|
|
|
2015
|
|
|
Cash flows - operating
activities
|
|
|
|
|
|
|
|
|
Premiums
collected
|
|
$
|
557,816
|
|
|
$
|
538,633
|
|
Policyholder
benefits paid
|
|
|
(422,184
|
)
|
|
|
(399,465
|
)
|
Policy
acquisition and other operating expenses paid
|
|
|
(207,825
|
)
|
|
|
(196,209
|
)
|
Federal
income taxes paid
|
|
|
(18,156
|
)
|
|
|
(20,327
|
)
|
Investment
income collected
|
|
|
259,373
|
|
|
|
246,042
|
|
Interest
expense paid
|
|
|
(6,072
|
)
|
|
|
(7,316
|
)
|
Other
|
|
|
(1,437
|
)
|
|
|
(1,881
|
)
|
|
|
|
|
|
|
|
|
|
Net
cash provided by operating activities
|
|
|
161,515
|
|
|
|
159,477
|
|
|
|
|
|
|
|
|
|
|
Cash flows - investing
activities
|
|
|
|
|
|
|
|
|
Fixed
maturities
|
|
|
|
|
|
|
|
|
Purchases
|
|
|
(1,097,880
|
)
|
|
|
(1,111,958
|
)
|
Sales
|
|
|
351,739
|
|
|
|
327,641
|
|
Maturities,
paydowns, calls and redemptions
|
|
|
634,686
|
|
|
|
502,554
|
|
Purchase
of other invested assets
|
|
|
(42,578
|
)
|
|
|
(19,037
|
)
|
Net
cash provided by (used in) short-term and other investments
|
|
|
(75,665
|
)
|
|
|
56,831
|
|
|
|
|
|
|
|
|
|
|
Net
cash used in investing activities
|
|
|
(229,698
|
)
|
|
|
(243,969
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows - financing
activities
|
|
|
|
|
|
|
|
|
Dividends
paid to shareholders
|
|
|
(33,241
|
)
|
|
|
(31,975
|
)
|
Principal
borrowings on Bank Credit Facility
|
|
|
-
|
|
|
|
75,000
|
|
Maturity
of Senior Notes due 2015
|
|
|
-
|
|
|
|
(75,000
|
)
|
Acquisition
of treasury stock
|
|
|
(21,513
|
)
|
|
|
(15,775
|
)
|
Exercise
of stock options
|
|
|
2,361
|
|
|
|
1,518
|
|
Annuity
contracts: variable, fixed and FHLB funding agreements
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
391,944
|
|
|
|
422,195
|
|
Benefits,
withdrawals and net transfers to
|
|
|
|
|
|
|
|
|
Separate
Account (variable annuity) assets
|
|
|
(240,489
|
)
|
|
|
(258,076
|
)
|
Life
policy accounts
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
2,957
|
|
|
|
742
|
|
Withdrawals
and surrenders
|
|
|
(3,151
|
)
|
|
|
(3,050
|
)
|
Change
in bank overdrafts
|
|
|
7,422
|
|
|
|
7,153
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by financing activities
|
|
|
106,290
|
|
|
|
122,732
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash
|
|
|
38,107
|
|
|
|
38,240
|
|
|
|
|
|
|
|
|
|
|
Cash
at beginning of period
|
|
|
15,509
|
|
|
|
11,675
|
|
|
|
|
|
|
|
|
|
|
Cash
at end of period
|
|
$
|
53,616
|
|
|
$
|
49,915
|
|
See
accompanying Notes to Consolidated Financial Statements.
See
accompanying Report of Independent Registered Public Accounting Firm.
HORACE
MANN EDUCATORS CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September
30, 2016 and 2015
(Dollars
in thousands, except per share data)
Note
1 - Basis of Presentation
The
accompanying unaudited consolidated financial statements of Horace Mann Educators Corporation (“HMEC”; and together
with its subsidiaries, the “Company” or “Horace Mann”) have been prepared in accordance with United States
(“U.S.”) generally accepted accounting principles (“GAAP”) and with the rules and regulations of the Securities
and Exchange Commission (“SEC”), specifically Regulation S-X and the instructions to Form 10-Q. Certain information
and note disclosures which are normally included in annual financial statements prepared in accordance with GAAP but are not required
for interim reporting purposes have been omitted. The Company believes that these consolidated financial statements contain all
adjustments (consisting of normal recurring accruals) which are, in the opinion of management, necessary to present fairly the
Company’s consolidated financial position as of September 30, 2016, the consolidated results of operations and comprehensive
income (loss) for the three and nine months ended September 30, 2016 and 2015, and the consolidated changes in shareholders’
equity and cash flows for the nine months ended September 30, 2016 and 2015. The preparation of consolidated financial statements
in conformity with GAAP requires management to make estimates and assumptions that affect (1) the reported amounts of assets and
liabilities, (2) disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and (3)
the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
The
subsidiaries of HMEC market and underwrite personal lines of property and casualty (primarily personal lines automobile and homeowners)
insurance, retirement annuities (primarily tax-qualified products) and life insurance, primarily to K-12 teachers, administrators
and other employees of public schools and their families. HMEC’s principal operating subsidiaries are Horace Mann Life Insurance
Company, Horace Mann Insurance Company, Teachers Insurance Company, Horace Mann Property & Casualty Insurance Company and
Horace Mann Lloyds.
These
consolidated financial statements should be read in conjunction with the consolidated financial statements and the related notes
to consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31,
2015.
The
results of operations for the three and nine months ended September 30, 2016 are not necessarily indicative of the results to
be expected for the full year.
The
Company has reclassified the presentation of certain prior period information to conform with the 2016 presentation. See “Adopted
Accounting Standards”.
Note
1 - Basis of Presentation-(Continued)
Investment
Contract and Life Policy Reserves
This
table summarizes the Company’s investment contract and life policy reserves.
|
|
September
30,
|
|
|
|
December
31,
|
|
|
|
2016
|
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
Investment
contract reserves
|
|
$
|
4,308,100
|
|
|
|
$
|
4,072,102
|
|
Life
policy reserves
|
|
|
1,077,807
|
|
|
|
|
1,054,740
|
|
Total
|
|
$
|
5,385,907
|
|
|
|
$
|
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, July 1, 2016
|
|
$
|
329,653
|
|
|
|
$
|
(11,794
|
)
|
|
|
$
|
317,859
|
|
Other
comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
before
reclassifications
|
|
|
9,912
|
|
|
|
|
-
|
|
|
|
|
9,912
|
|
Amounts
reclassified from accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
other
comprehensive income (loss)
|
|
|
(2,274
|
)
|
|
|
|
-
|
|
|
|
|
(2,274
|
)
|
Net
current period other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
comprehensive
income (loss)
|
|
|
7,638
|
|
|
|
|
-
|
|
|
|
|
7,638
|
|
Ending
balance, September 30, 2016
|
|
$
|
337,291
|
|
|
|
$
|
(11,794
|
)
|
|
|
$
|
325,497
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
balance, January 1, 2016
|
|
$
|
175,167
|
|
|
|
$
|
(11,794
|
)
|
|
|
$
|
163,373
|
|
Other
comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
before
reclassifications
|
|
|
167,692
|
|
|
|
|
-
|
|
|
|
|
167,692
|
|
Amounts
reclassified from accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
other
comprehensive income (loss)
|
|
|
(5,568
|
)
|
|
|
|
-
|
|
|
|
|
(5,568
|
)
|
Net
current period other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
comprehensive
income (loss)
|
|
|
162,124
|
|
|
|
|
-
|
|
|
|
|
162,124
|
|
Ending
balance, September 30, 2016
|
|
$
|
337,291
|
|
|
|
$
|
(11,794
|
)
|
|
|
$
|
325,497
|
|
|
(1)
|
All
amounts are net of tax.
|
|
(2)
|
The
pretax amounts reclassified from accumulated other comprehensive income (loss), $3,499
and $8,566, are included in net realized investment gains and losses and the related
tax expenses, $1,225 and $2,998, are included in income tax expense in the Consolidated
Statements of Operations for the three and nine months ended September 30, 2016, respectively.
|
Note
1 - Basis of Presentation-(Continued)
|
Unrealized Gains
|
|
|
|
|
|
|
|
|
|
and Losses on
|
|
|
|
|
|
|
|
|
|
Fixed Maturities
|
|
|
|
|
|
|
|
|
|
and Equity
|
|
Defined
|
|
|
|
|
|
Securities (1)(2)
|
|
Benefit Plans (1)
|
|
Total (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
balance, July 1, 2015
|
|
$
|
223,786
|
|
|
|
$
|
(12,953
|
)
|
|
|
$
|
210,833
|
|
Other
comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
before
reclassifications
|
|
|
3,836
|
|
|
|
|
-
|
|
|
|
|
3,836
|
|
Amounts
reclassified from accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
other
comprehensive income (loss)
|
|
|
(1,004
|
)
|
|
|
|
-
|
|
|
|
|
(1,004
|
)
|
Net
current period other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
comprehensive
income (loss)
|
|
|
2,832
|
|
|
|
|
-
|
|
|
|
|
2,832
|
|
Ending
balance, September 30, 2015
|
|
$
|
226,618
|
|
|
|
$
|
(12,953
|
)
|
|
|
$
|
213,665
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
balance, January 1, 2015
|
|
$
|
297,554
|
|
|
|
$
|
(12,953
|
)
|
|
|
$
|
284,601
|
|
Other
comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
before
reclassifications
|
|
|
(64,979
|
)
|
|
|
|
-
|
|
|
|
|
(64,979
|
)
|
Amounts
reclassified from accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
other
comprehensive income (loss)
|
|
|
(5,957
|
)
|
|
|
|
-
|
|
|
|
|
(5,957
|
)
|
Net
current period other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
comprehensive
income (loss)
|
|
|
(70,936
|
)
|
|
|
|
-
|
|
|
|
|
(70,936
|
)
|
Ending
balance, September 30, 2015
|
|
$
|
226,618
|
|
|
|
$
|
(12,953
|
)
|
|
|
$
|
213,665
|
|
|
(1)
|
All
amounts are net of tax.
|
|
(2)
|
The
pretax amounts reclassified from accumulated other comprehensive income (loss), $1,545
and $9,165, are included in net realized investment gains and losses and the related
tax expenses, $541 and $3,208, are included in income tax expense in the Consolidated
Statements of Operations for the three and nine months ended September 30, 2015, respectively.
|
Comparative
information for elements that are not required to be reclassified in their entirety to net income in the same reporting period
is located in “Note 2 -- Investments -- Unrealized Gains and Losses on Fixed Maturities and Equity Securities”.
Adopted
Accounting Standards
Presentation
of Debt Issuance Costs
Effective
January 1, 2016, the Company adopted accounting guidance which was issued to simplify the presentation of costs incurred to issue
debt securities. The guidance requires debt issuance costs associated with specific debt securities to be presented in the balance
sheet as a direct deduction from the carrying value of the associated debt liability, consistent with the presentation of a debt
discount. Costs incurred related to line of credit arrangements continue to be presented as an asset in the consolidated balance
sheet. Also, the guidance does not affect the recognition and measurement of debt issuance costs. The guidance required retrospective
application. As a result of this adoption, the following items in the Company’s December 31, 2015 Consolidated Balance Sheet
were each reduced by $2,371: Other Assets, Total Assets, Long-term Debt, Total Liabilities and Total Liabilities and Shareholders’
Equity. Net income per share (basic and diluted) did not change as a result of the adopted accounting change.
Note
2 - Investments
The
Company’s investment portfolio includes free-standing derivative financial instruments (currently over the counter (“OTC”)
index call option contracts) to economically hedge risk associated with its fixed indexed annuity and indexed universal life products’
contingent liabilities. The Company’s fixed indexed annuity and indexed universal life products include embedded derivative
features that are discussed in “Note 1 -- Summary of Significant Accounting Policies -- Investment Contract and Life Policy
Reserves -- Reserves for Fixed Indexed Annuities and Indexed Universal Life Policies” of the Company’s Annual Report
on Form 10-K for the year ended December 31, 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 nine months
ended September 30, 2016 and 2015.
Note
2 - Investments-(Continued)
Fixed
Maturities and Equity Securities
The
Company’s investment portfolio is comprised primarily of fixed maturity securities (“fixed maturities”) and
also includes equity securities. The amortized cost or cost, unrealized investment gains and losses, fair values and other-than-temporary
impairments (“OTTI”) included in accumulated other comprehensive income (loss) (“AOCI”) of all fixed maturities
and equity securities in the portfolio were as follows:
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
OTTI in
|
|
|
Cost/Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
|
AOCI (1)
|
|
September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
maturity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Government and federally
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
sponsored
agency obligations (2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed
securities
|
|
|
$
|
419,651
|
|
|
|
|
$
|
52,772
|
|
|
|
|
$
|
267
|
|
|
|
|
$
|
472,156
|
|
|
|
|
$
|
-
|
|
Other,
including
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury securities
|
|
|
|
449,016
|
|
|
|
|
|
39,383
|
|
|
|
|
|
272
|
|
|
|
|
|
488,127
|
|
|
|
|
|
-
|
|
Municipal
bonds
|
|
|
|
1,555,326
|
|
|
|
|
|
228,185
|
|
|
|
|
|
4,770
|
|
|
|
|
|
1,778,741
|
|
|
|
|
|
(1,899
|
)
|
Foreign
government bonds
|
|
|
|
71,402
|
|
|
|
|
|
8,437
|
|
|
|
|
|
-
|
|
|
|
|
|
79,839
|
|
|
|
|
|
-
|
|
Corporate
bonds
|
|
|
|
2,720,987
|
|
|
|
|
|
239,109
|
|
|
|
|
|
6,758
|
|
|
|
|
|
2,953,338
|
|
|
|
|
|
(340
|
)
|
Other
mortgage-backed securities
|
|
|
|
1,691,193
|
|
|
|
|
|
40,302
|
|
|
|
|
|
9,643
|
|
|
|
|
|
1,721,852
|
|
|
|
|
|
1,700
|
|
Totals
|
|
|
$
|
6,907,575
|
|
|
|
|
$
|
608,188
|
|
|
|
|
$
|
21,710
|
|
|
|
|
$
|
7,494,053
|
|
|
|
|
$
|
(539
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
securities (3)
|
|
|
$
|
124,806
|
|
|
|
|
$
|
14,355
|
|
|
|
|
$
|
1,521
|
|
|
|
|
$
|
137,640
|
|
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 $203,381 and $231,294; Federal Home Loan Mortgage Corporation (“FHLMC”)
of $302,472 and $363,957; and Government National Mortgage Association (“GNMA”)
of $122,311 and $130,940 as of September 30, 2016 and December 31, 2015, respectively.
|
|
(3)
|
Includes
nonredeemable (perpetual) preferred stocks, common stocks and closed-end funds.
|
Note
2 - Investments-(Continued)
The
following table presents the fair value and gross unrealized losses of fixed maturities and equity securities in an unrealized
loss position at September 30, 2016 and December 31, 2015, respectively. The Company views the decrease in value of all of the
securities with unrealized losses at September 30, 2016 -- which was driven largely by changes in interest rates, spread widening,
financial market illiquidity and/or market volatility from the date of acquisition -- as temporary. For fixed maturity securities,
management does not have the intent to sell the securities and it is not more likely than not the Company will be required to
sell the securities before the anticipated recovery of the amortized cost bases, and management expects to recover the entire
amortized cost bases of the fixed maturity securities. For equity securities, the Company has the ability and intent to hold the
securities for the recovery of cost and recovery of cost is expected within a reasonable period of time.
|
|
12
Months or Less
|
|
|
More
than 12 Months
|
|
|
Total
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
maturity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Government and federally
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
sponsored
agency obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed
securities
|
|
|
$
|
9,701
|
|
|
|
$
|
60
|
|
|
|
$
|
3,564
|
|
|
|
$
|
207
|
|
|
|
$
|
13,265
|
|
|
|
$
|
267
|
|
Other
|
|
|
|
27,728
|
|
|
|
|
272
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
27,728
|
|
|
|
|
272
|
|
Municipal
bonds
|
|
|
|
53,583
|
|
|
|
|
879
|
|
|
|
|
16,768
|
|
|
|
|
3,891
|
|
|
|
|
70,351
|
|
|
|
|
4,770
|
|
Foreign
government bonds
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
Corporate
bonds
|
|
|
|
114,009
|
|
|
|
|
1,514
|
|
|
|
|
63,800
|
|
|
|
|
5,244
|
|
|
|
|
177,809
|
|
|
|
|
6,758
|
|
Other
mortgage-backed securities
|
|
|
|
266,884
|
|
|
|
|
5,447
|
|
|
|
|
207,444
|
|
|
|
|
4,196
|
|
|
|
|
474,328
|
|
|
|
|
9,643
|
|
Total
fixed
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
maturity
securities
|
|
|
|
471,905
|
|
|
|
|
8,172
|
|
|
|
|
291,576
|
|
|
|
|
13,538
|
|
|
|
|
763,481
|
|
|
|
|
21,710
|
|
Equity
securities (1)
|
|
|
|
15,494
|
|
|
|
|
885
|
|
|
|
|
8,603
|
|
|
|
|
636
|
|
|
|
|
24,097
|
|
|
|
|
1,521
|
|
Combined
totals
|
|
|
$
|
487,399
|
|
|
|
$
|
9,057
|
|
|
|
$
|
300,179
|
|
|
|
$
|
14,174
|
|
|
|
$
|
787,578
|
|
|
|
$
|
23,231
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of positions with a
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
gross
unrealized loss
|
|
|
|
201
|
|
|
|
|
|
|
|
|
|
107
|
|
|
|
|
|
|
|
|
|
308
|
|
|
|
|
|
|
Fair
value as a percentage of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
total
fixed maturities and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
equity
securities fair value
|
|
|
|
6.4
|
%
|
|
|
|
|
|
|
|
|
3.9
|
%
|
|
|
|
|
|
|
|
|
10.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 64% of the gross unrealized loss as of September
30, 2016. With respect to fixed maturity securities involving securitized financial assets, the underlying collateral cash flows
were stress tested to determine there was no adverse change in the present value of cash flows below the amortized cost basis.
Credit
Losses
The
following table summarizes the cumulative amounts related to the Company’s credit loss component of the other-than-temporary
impairment losses on fixed maturity securities held as of September 30, 2016 and 2015 that the Company did not intend to sell
as of those dates, and it was not more likely than not that the Company would be required to sell the securities before the anticipated
recovery of the amortized cost bases, for which the non-credit portions of the other-than-temporary impairment losses were recognized
in other comprehensive income (loss):
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
|
2016
|
|
|
2015
|
|
Cumulative credit loss
(1)
|
|
|
|
|
|
|
|
|
Beginning
of period
|
|
$
|
7,844
|
|
|
$
|
2,877
|
|
New
credit losses
|
|
|
300
|
|
|
|
5,162
|
|
Increases
to previously recognized credit losses
|
|
|
2,480
|
|
|
|
-
|
|
Losses
related to securities sold or paid down during the period
|
|
|
-
|
|
|
|
-
|
|
End
of period
|
|
$
|
10,624
|
|
|
$
|
8,039
|
|
|
(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
|
|
September 30, 2016
|
|
|
|
September
30,
|
|
December 31,
|
|
Fair
|
|
|
Amortized
|
|
|
|
2016
|
|
2015
|
|
Value
|
|
|
Cost
|
|
Estimated expected
maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due
in 1 year or less
|
|
|
|
3.8
|
%
|
|
|
|
3.1
|
%
|
|
|
$
|
287,079
|
|
|
|
$
|
264,641
|
|
|
Due
after 1 year through 5 years
|
|
|
|
27.6
|
|
|
|
|
24.2
|
|
|
|
|
2,065,099
|
|
|
|
|
1,903,694
|
|
|
Due
after 5 years through 10 years
|
|
|
|
37.1
|
|
|
|
|
39.6
|
|
|
|
|
2,780,699
|
|
|
|
|
2,563,365
|
|
|
Due
after 10 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
through
20 years
|
|
|
|
19.7
|
|
|
|
|
20.9
|
|
|
|
|
1,473,916
|
|
|
|
|
1,358,717
|
|
|
Due
after 20 years
|
|
|
|
11.8
|
|
|
|
|
12.2
|
|
|
|
|
887,260
|
|
|
|
|
817,158
|
|
|
Total
|
|
|
|
100.0
|
%
|
|
|
|
100.0
|
%
|
|
|
$
|
7,494,053
|
|
|
|
$
|
6,907,575
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
option-adjusted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
duration,
in years
|
|
|
|
5.8
|
|
|
|
|
5.8
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
received from sales of fixed maturities and equity securities, each determined using the specific identification method, and gross
gains and gross losses realized as a result of those sales for each period were:
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 30,
|
|
September 30,
|
|
|
|
2016
|
|
|
|
2015
|
|
|
|
2016
|
|
|
|
2015
|
|
Fixed maturity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
received
|
|
$
|
94,706
|
|
|
$
|
81,120
|
|
|
$
|
351,739
|
|
|
$
|
327,641
|
|
Gross
gains realized
|
|
|
2,966
|
|
|
|
6,400
|
|
|
|
13,824
|
|
|
|
18,631
|
|
Gross
losses realized
|
|
|
(102
|
)
|
|
|
(3,267
|
)
|
|
|
(1,542
|
)
|
|
|
(5,012
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
received
|
|
$
|
4,479
|
|
|
$
|
5,633
|
|
|
$
|
17,101
|
|
|
$
|
26,442
|
|
Gross
gains realized
|
|
|
790
|
|
|
|
680
|
|
|
|
1,960
|
|
|
|
5,878
|
|
Gross
losses realized
|
|
|
(21
|
)
|
|
|
(397
|
)
|
|
|
(862
|
)
|
|
|
(514
|
)
|
Note
2 - Investments-(Continued)
Unrealized
Gains and Losses on Fixed Maturities and Equity Securities
Net
unrealized investment gains and losses are computed as the difference between fair value and amortized cost for fixed maturities
or cost for equity securities. The following table reconciles the net unrealized investment gains and losses, net of tax, included
in accumulated other comprehensive income (loss), before the impact on deferred policy acquisition costs:
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
|
2016
|
|
|
|
|
2015
|
|
|
|
|
2016
|
|
|
|
|
2015
|
|
|
Net unrealized investment
gains (losses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
on
fixed maturity securities, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
of period
|
|
$
|
371,456
|
|
|
$
|
254,827
|
|
|
$
|
198,714
|
|
|
$
|
336,604
|
|
Change
in unrealized investment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
gains
and losses
|
|
|
20,827
|
|
|
|
7,436
|
|
|
|
188,912
|
|
|
|
(69,787
|
)
|
Reclassification
of net realized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
investment
(gains) losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
to
net income
|
|
|
(11,072
|
)
|
|
|
(835
|
)
|
|
|
(6,415
|
)
|
|
|
(5,389
|
)
|
End
of period
|
|
$
|
381,211
|
|
|
$
|
261,428
|
|
|
$
|
381,211
|
|
|
$
|
261,428
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized investment
gains (losses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
on
equity securities, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of period
|
|
$
|
8,183
|
|
|
$
|
3,399
|
|
|
$
|
2,649
|
|
|
$
|
6,988
|
|
Change
in unrealized investment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
gains
and losses
|
|
|
(2,052
|
)
|
|
|
(2,584
|
)
|
|
|
4,846
|
|
|
|
(5,774
|
)
|
Reclassification
of net realized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
investment
(gains) losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
to
net income
|
|
|
2,211
|
|
|
|
(169
|
)
|
|
|
847
|
|
|
|
(568
|
)
|
End
of period
|
|
$
|
8,342
|
|
|
$
|
646
|
|
|
$
|
8,342
|
|
|
$
|
646
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Offsetting
of Assets and Liabilities
The
Company’s derivative instruments (call options) are subject to enforceable master netting arrangements. Collateral support
agreements associated with each master netting arrangement provide that the Company will receive or pledge financial collateral
in the event minimum thresholds are reached.
The
following table presents the instruments that were subject to a master netting arrangement for the Company.
|
|
|
|
|
|
|
|
|
|
Net Amounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of Assets/
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
Liabilities
|
|
Gross Amounts Not Offset
|
|
|
|
|
|
|
|
|
|
|
Amounts
|
|
Presented
|
|
in the Consolidated
|
|
|
|
|
|
|
|
|
|
|
Offset
in the
|
|
in the
|
|
Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
Consolidated
|
|
|
|
|
|
Cash
|
|
|
|
|
|
|
Gross
|
|
Balance
|
|
Balance
|
|
Financial
|
|
Collateral
|
|
Net
|
|
|
Amounts
|
|
Sheets
|
|
Sheets
|
|
Instruments
|
|
Received
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset
derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Free-standing
derivatives
|
|
|
$
|
4,534
|
|
|
|
|
-
|
|
|
|
$
|
4,534
|
|
|
|
|
-
|
|
|
|
$
|
4,770
|
|
|
|
$
|
(236
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset
derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Free-standing
derivatives
|
|
|
|
2,501
|
|
|
|
|
-
|
|
|
|
|
2,501
|
|
|
|
|
-
|
|
|
|
|
2,617
|
|
|
|
|
(116
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note
2 - Investments-(Continued)
Deposits
At
September 30, 2016 and December 31, 2015, fixed maturity securities with a fair value of $18,309 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 September 30, 2016 and December 31, 2015, fixed maturity securities with a fair value of $620,124 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 September 30, 2016, these Level 3 invested assets comprised 2.8% 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
|
September
30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
maturities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Government and federally
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
sponsored
agency obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed
securities
|
|
$
|
472,156
|
|
|
$
|
472,156
|
|
|
|
$
|
-
|
|
|
|
$
|
468,694
|
|
|
|
$
|
3,462
|
|
Other,
including
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury securities
|
|
|
488,127
|
|
|
|
488,127
|
|
|
|
|
13,894
|
|
|
|
|
474,233
|
|
|
|
|
-
|
|
Municipal
bonds
|
|
|
1,778,741
|
|
|
|
1,778,741
|
|
|
|
|
-
|
|
|
|
|
1,733,575
|
|
|
|
|
45,166
|
|
Foreign
government bonds
|
|
|
79,839
|
|
|
|
79,839
|
|
|
|
|
-
|
|
|
|
|
79,839
|
|
|
|
|
-
|
|
Corporate
bonds
|
|
|
2,953,338
|
|
|
|
2,953,338
|
|
|
|
|
7,341
|
|
|
|
|
2,868,376
|
|
|
|
|
77,621
|
|
Other
mortgage-backed securities
|
|
|
1,721,852
|
|
|
|
1,721,852
|
|
|
|
|
-
|
|
|
|
|
1,623,165
|
|
|
|
|
98,687
|
|
Total
fixed maturities
|
|
|
7,494,053
|
|
|
|
7,494,053
|
|
|
|
|
21,235
|
|
|
|
|
7,247,882
|
|
|
|
|
224,936
|
|
Equity
securities
|
|
|
137,640
|
|
|
|
137,640
|
|
|
|
|
110,398
|
|
|
|
|
27,236
|
|
|
|
|
6
|
|
Short-term
investments
|
|
|
214,206
|
|
|
|
214,206
|
|
|
|
|
213,450
|
|
|
|
|
756
|
|
|
|
|
-
|
|
Other
investments
|
|
|
16,034
|
|
|
|
16,034
|
|
|
|
|
-
|
|
|
|
|
16,034
|
|
|
|
|
-
|
|
Totals
|
|
|
7,861,933
|
|
|
|
7,861,933
|
|
|
|
|
345,083
|
|
|
|
|
7,291,908
|
|
|
|
|
224,942
|
|
Financial
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
contract and life policy
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
reserves,
embedded derivatives
|
|
|
80
|
|
|
|
80
|
|
|
|
|
-
|
|
|
|
|
80
|
|
|
|
|
-
|
|
Other
policyholder funds,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
embedded
derivatives
|
|
|
55,179
|
|
|
|
55,179
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
55,179
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 nine months ended September 30, 2016. The following table
presents reconciliations for the periods indicated for all Level 3 assets and liabilities measured at fair value on a recurring
basis.
|
|
|
|
|
Financial
|
|
|
Financial Assets
|
|
Liabilities(1)
|
|
|
Municipal
Bonds
|
|
|
Corporate
Bonds
|
|
Mortgage-
Backed
Securities(2)
|
|
Total
Fixed
Maturities
|
|
Equity
Securities
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance, July 1, 2016
|
|
$
|
47,647
|
|
|
|
$
|
73,408
|
|
|
|
$
|
96,581
|
|
|
|
$
|
217,636
|
|
|
|
$
|
6
|
|
|
|
$
|
217,642
|
|
|
|
$
|
47,706
|
|
Transfers
into Level 3 (3)
|
|
|
-
|
|
|
|
|
10,375
|
|
|
|
|
7,655
|
|
|
|
|
18,030
|
|
|
|
|
-
|
|
|
|
|
18,030
|
|
|
|
|
-
|
|
Transfers
out of Level 3 (3)
|
|
|
-
|
|
|
|
|
(5,967
|
)
|
|
|
|
(788
|
)
|
|
|
|
(6,755
|
)
|
|
|
|
-
|
|
|
|
|
(6,755
|
)
|
|
|
|
-
|
|
Total
gains or losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
realized gains (losses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
included
in net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
related
to financial assets
|
|
|
-
|
|
|
|
|
1
|
|
|
|
|
(56
|
)
|
|
|
|
(55
|
)
|
|
|
|
-
|
|
|
|
|
(55
|
)
|
|
|
|
-
|
|
Net
realized (gains) losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
included
in net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
related
to financial liabilities
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
68
|
|
Net
unrealized gains (losses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
included
in other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
comprehensive
income
|
|
|
(2,361
|
)
|
|
|
|
1,292
|
|
|
|
|
3,951
|
|
|
|
|
2,882
|
|
|
|
|
-
|
|
|
|
|
2,882
|
|
|
|
|
-
|
|
Purchases
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
Issuances
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
6,710
|
|
Sales
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
Settlements
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
Paydowns,
maturities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
distributions
|
|
|
(120
|
)
|
|
|
|
(1,488
|
)
|
|
|
|
(5,194
|
)
|
|
|
|
(6,802
|
)
|
|
|
|
-
|
|
|
|
|
(6,802
|
)
|
|
|
|
695
|
|
Ending balance, September
30, 2016
|
|
$
|
45,166
|
|
|
|
$
|
77,621
|
|
|
|
$
|
102,149
|
|
|
|
$
|
224,936
|
|
|
|
$
|
6
|
|
|
|
$
|
224,942
|
|
|
|
$
|
55,179
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
21,451
|
|
|
|
|
32,281
|
|
|
|
|
68,483
|
|
|
|
|
-
|
|
|
|
|
68,483
|
|
|
|
|
-
|
|
Transfers
out of Level 3 (3)
|
|
|
-
|
|
|
|
|
(5,967
|
)
|
|
|
|
(788
|
)
|
|
|
|
(6,755
|
)
|
|
|
|
-
|
|
|
|
|
(6,755
|
)
|
|
|
|
-
|
|
Total
gains or losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
realized gains (losses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
included
in net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
related
to financial assets
|
|
|
-
|
|
|
|
|
(656
|
)
|
|
|
|
(56
|
)
|
|
|
|
(712
|
)
|
|
|
|
-
|
|
|
|
|
(712
|
)
|
|
|
|
-
|
|
Net
realized (gains) losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
included
in net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
related
to financial liabilities
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
2,066
|
|
Net
unrealized gains (losses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
included
in other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
comprehensive
income
|
|
|
420
|
|
|
|
|
3,073
|
|
|
|
|
4,173
|
|
|
|
|
7,666
|
|
|
|
|
-
|
|
|
|
|
7,666
|
|
|
|
|
-
|
|
Purchases
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
Issuances
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
15,194
|
|
Sales
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
Settlements
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
Paydowns,
maturities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
distributions
|
|
|
(384
|
)
|
|
|
|
(7,855
|
)
|
|
|
|
(8,927
|
)
|
|
|
|
(17,166
|
)
|
|
|
|
-
|
|
|
|
|
(17,166
|
)
|
|
|
|
(1,102
|
)
|
Ending balance, September
30, 2016
|
|
$
|
45,166
|
|
|
|
$
|
77,621
|
|
|
|
$
|
102,149
|
|
|
|
$
|
224,936
|
|
|
|
$
|
6
|
|
|
|
$
|
224,942
|
|
|
|
$
|
55,179
|
|
|
(1)
|
Represents
embedded derivatives, all related to the Company’s fixed indexed annuity (“FIA”)
products, reported in Other Policyholder Funds in the Company’s Consolidated Balance
Sheets.
|
|
(2)
|
Includes
U.S. Government and federally sponsored agency obligations for mortgage-backed securities
and other mortgage-backed securities.
|
|
(3)
|
Transfers
into and out of Level 3 during the three and nine months ended September 30, 2016 were
attributable to changes in the availability of observable market information for individual
fixed maturity securities. The Company’s policy is to recognize transfers
into and transfers out of the levels as having occurred at the end of the reporting period
in which the transfers were determined.
|
Note
3 - Fair Value of Financial Instruments-(Continued)
|
|
|
|
|
Financial
|
|
Financial
Assets
|
|
Liabilities(1)
|
|
Municipal
Bonds
|
|
Corporate
Bonds
|
|
Other
Mortgage-
Backed
Securities
|
|
Total
Fixed
Maturities
|
|
Equity
Securities
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance, July 1, 2015
|
|
$
|
29,669
|
|
|
|
$
|
72,724
|
|
|
|
$
|
84,700
|
|
|
|
$
|
187,093
|
|
|
|
$
|
6
|
|
|
|
$
|
187,099
|
|
|
|
$
|
26,719
|
|
Transfers
into Level 3 (2)
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
505
|
|
|
|
|
505
|
|
|
|
|
-
|
|
|
|
|
505
|
|
|
|
|
-
|
|
Transfers
out of Level 3 (2)
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
Total
gains or losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
realized gains (losses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
included
in net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
related
to financial assets
|
|
|
-
|
|
|
|
|
(164
|
)
|
|
|
|
-
|
|
|
|
|
(164
|
)
|
|
|
|
1
|
|
|
|
|
(163
|
)
|
|
|
|
-
|
|
Net
realized (gains) losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
included
in net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
related
to financial liabilities
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
(1,328
|
)
|
Net
unrealized gains (losses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
included
in other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
comprehensive
income
|
|
|
1,464
|
|
|
|
|
326
|
|
|
|
|
167
|
|
|
|
|
1,957
|
|
|
|
|
-
|
|
|
|
|
1,957
|
|
|
|
|
-
|
|
Purchases
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
Issuances
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
6,899
|
|
Sales
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
(1
|
)
|
|
|
|
(1
|
)
|
|
|
|
-
|
|
Settlements
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
Paydowns,
maturities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
distributions
|
|
|
(122
|
)
|
|
|
|
(2,638
|
)
|
|
|
|
(1,286
|
)
|
|
|
|
(4,046
|
)
|
|
|
|
-
|
|
|
|
|
(4,046
|
)
|
|
|
|
(535
|
)
|
Ending balance, September
30, 2015
|
|
$
|
31,011
|
|
|
|
$
|
70,248
|
|
|
|
$
|
84,086
|
|
|
|
$
|
185,345
|
|
|
|
$
|
6
|
|
|
|
$
|
185,351
|
|
|
|
$
|
31,755
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance, January 1, 2015
|
|
$
|
13,628
|
|
|
|
$
|
74,717
|
|
|
|
$
|
82,949
|
|
|
|
$
|
171,294
|
|
|
|
$
|
6
|
|
|
|
$
|
171,300
|
|
|
|
$
|
20,049
|
|
Transfers
into Level 3 (2)
|
|
|
16,326
|
|
|
|
|
5,729
|
|
|
|
|
15,685
|
|
|
|
|
37,740
|
|
|
|
|
-
|
|
|
|
|
37,740
|
|
|
|
|
-
|
|
Transfers
out of Level 3 (2)
|
|
|
-
|
|
|
|
|
(1,350
|
)
|
|
|
|
(9,664
|
)
|
|
|
|
(11,014
|
)
|
|
|
|
-
|
|
|
|
|
(11,014
|
)
|
|
|
|
-
|
|
Total
gains or losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
realized gains (losses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
included
in net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
related
to financial assets
|
|
|
-
|
|
|
|
|
1,087
|
|
|
|
|
-
|
|
|
|
|
1,087
|
|
|
|
|
1
|
|
|
|
|
1,088
|
|
|
|
|
-
|
|
Net
realized (gains) losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
included
in net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
related
to financial liabilities
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
(1,795
|
)
|
Net
unrealized gains (losses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
included
in other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
comprehensive
income
|
|
|
1,359
|
|
|
|
|
(758
|
)
|
|
|
|
(268
|
)
|
|
|
|
333
|
|
|
|
|
-
|
|
|
|
|
333
|
|
|
|
|
-
|
|
Purchases
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
Issuances
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
14,811
|
|
Sales
|
|
|
-
|
|
|
|
|
(476
|
)
|
|
|
|
-
|
|
|
|
|
(476
|
)
|
|
|
|
(1
|
)
|
|
|
|
(477
|
)
|
|
|
|
-
|
|
Settlements
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
Paydowns,
maturities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
distributions
|
|
|
(302
|
)
|
|
|
|
(8,701
|
)
|
|
|
|
(4,616
|
)
|
|
|
|
(13,619
|
)
|
|
|
|
-
|
|
|
|
|
(13,619
|
)
|
|
|
|
(1,310
|
)
|
Ending balance, September
30, 2015
|
|
$
|
31,011
|
|
|
|
$
|
70,248
|
|
|
|
$
|
84,086
|
|
|
|
$
|
185,345
|
|
|
|
$
|
6
|
|
|
|
$
|
185,351
|
|
|
|
$
|
31,755
|
|
|
(1)
|
Represents
embedded derivatives, all related to the Company’s fixed indexed annuity (“FIA”)
products, reported in Other Policyholder Funds in the Company’s Consolidated Balance
Sheets.
|
|
(2)
|
Transfers
into and out of Level 3 during the three and nine months ended September 30, 2015 were
attributable to changes in the availability of observable market information for individual
fixed maturity securities. The Company’s policy is to recognize transfers
into and transfers out of the levels as having occurred at the end of the reporting period
in which the transfers were determined.
|
At
September 30, 2016 and 2015, there were no realized gains or losses included in earnings that were attributable to changes in
the fair value of Level 3 assets still held. For the three and nine months ended September 30, 2016, realized gains/(losses) of
($68) and ($2,066), respectively, were included in earnings that were attributable to the changes in the fair value of Level 3
liabilities (embedded derivatives) still held; for the three and nine months ended September 30, 2015, the respective amounts
were $1,328 and $1,795.
Note
3 - Fair Value of Financial Instruments-(Continued)
The
valuation techniques and significant unobservable inputs used in the fair value measurement for financial assets classified as
Level 3 are subject to the control processes as described in “Note 3 -- Fair Value of Financial Instruments -- Investments”
in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015. Generally, valuation techniques for fixed
maturity securities include spread pricing, matrix pricing and discounted cash flow methodologies; include inputs such as quoted
prices for identical or similar securities that are less liquid; and are based on lower levels of trading activity than securities
classified as Level 2. The valuation techniques and significant unobservable inputs used in the fair value measurement for equity
securities classified as Level 3 use similar valuation techniques and significant unobservable inputs as those used for fixed
maturities.
The
sensitivity of the estimated fair values to changes in the significant unobservable inputs for fixed maturities and equity securities
included in Level 3 generally relates to interest rate spreads, illiquidity premiums and default rates. Significant spread widening
in isolation will adversely impact the overall valuation, while significant spread tightening will lead to substantial valuation
increases. Significant increases (decreases) in illiquidity premiums in isolation will result in substantially lower (higher)
valuations. Significant increases (decreases) in expected default rates in isolation will result in substantially lower (higher)
valuations.
Financial
Instruments Not Carried at Fair Value; Disclosure Required
The
Company has various other financial assets and financial liabilities used in the normal course of business that are not carried
at fair value, but for which fair value disclosure is required. The following table presents the carrying value, fair value and
fair value hierarchy of these financial assets and financial liabilities.
|
|
|
|
|
|
Fair Value Measurements at
|
|
|
Carrying
|
|
Fair
|
|
Reporting Date Using
|
|
|
Amount
|
|
Value
|
|
Level
1
|
|
Level
2
|
|
Level
3
|
September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
investments
|
|
|
$
|
150,661
|
|
|
|
$
|
155,183
|
|
|
|
$
|
-
|
|
|
|
$
|
-
|
|
|
|
$
|
155,183
|
|
Financial
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
contract and life policy
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
reserves,
fixed annuity contracts
|
|
|
|
4,308,100
|
|
|
|
|
4,179,033
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
4,179,033
|
|
Investment
contract and life policy
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
reserves,
account values on life contracts
|
|
|
|
78,741
|
|
|
|
|
82,642
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
82,642
|
|
Other
policyholder funds
|
|
|
|
651,205
|
|
|
|
|
651,205
|
|
|
|
|
-
|
|
|
|
|
575,247
|
|
|
|
|
75,958
|
|
Long-term
debt
|
|
|
|
247,146
|
|
|
|
|
267,634
|
|
|
|
|
267,634
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
investments
|
|
|
$
|
148,759
|
|
|
|
$
|
153,228
|
|
|
|
$
|
-
|
|
|
|
$
|
-
|
|
|
|
$
|
153,228
|
|
Financial
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
contract and life policy
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
reserves,
fixed annuity contracts
|
|
|
|
4,072,102
|
|
|
|
|
4,049,840
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
4,049,840
|
|
Investment
contract and life policy
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
reserves,
account values on life contracts
|
|
|
|
77,429
|
|
|
|
|
81,360
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
81,360
|
|
Other
policyholder funds
|
|
|
|
653,631
|
|
|
|
|
653,631
|
|
|
|
|
-
|
|
|
|
|
575,104
|
|
|
|
|
78,527
|
|
Long-term
debt
|
|
|
|
246,975
|
|
|
|
|
252,700
|
|
|
|
|
252,700
|
|
|
|
|
-
|
|
|
|
|
-
|
|
Note
4 - Derivative Instruments
In
February 2014, the Company began offering fixed indexed annuity products (“FIA”), which are deferred fixed annuities
that guarantee the return of principal to the contractholder and credit interest based on a percentage of the gain in a specified
market index. In October 2015, the Company began offering indexed universal life products (“IUL”), which also credit
interest based on a percentage of the gain in a specified market index. When deposits are received for FIA and IUL contracts,
a portion is used to purchase derivatives consisting of call options on the applicable market indices to fund the index credits
due to FIA and IUL policyholders. For the Company, substantially all such call options are one-year options purchased to match
the funding requirements of the underlying contracts. The call options are carried at fair value with the change in fair value
included in Net Realized Investment Gains (Losses), a component of revenues, in the Consolidated Statements of Operations. The
change in fair value of derivatives includes the gains or losses recognized at the expiration of the option term or early termination
and the changes in fair value for open positions. Call options are not purchased to fund the index liabilities which may arise
after the next deposit anniversary date. On the respective anniversary dates of the indexed deposits, the index used to compute
the annual index credit is reset and new one-year call options are purchased to fund the next annual index credit. The cost of
these purchases is managed through the terms of the FIA and IUL contracts, which permit changes to index return caps, participation
rates and/or asset fees, subject to guaranteed minimums on each contract’s anniversary date. By adjusting the index return
caps, participation rates or asset fees, crediting rates generally can be managed except in cases where the contractual features
would prevent further modifications.
The
future annual index credits on fixed indexed annuities are treated as a “series of embedded derivatives” over the
expected life of the applicable contract with a corresponding reserve recorded. For the indexed universal life contracts, the
embedded derivative represents a single year liability for the index return.
The
Company carries all derivative instruments as assets or liabilities in the Consolidated Balance Sheets at fair value. The Company
elected to not use hedge accounting for derivative transactions related to the FIA and IUL products. As a result, the Company
records the purchased call options and the embedded derivatives related to the provision of a contingent return at fair value,
with changes in the fair value of the derivatives recognized immediately in the Consolidated Statements of Operations. The fair
values of derivative instruments, including derivative instruments embedded in FIA and IUL contracts, presented in the Consolidated
Balance Sheets were as follows:
|
|
September
30,
|
|
December
31,
|
|
|
2016
|
|
2015
|
Assets
|
|
|
|
|
|
|
|
|
|
|
Derivative instruments, included in Short-term
|
|
|
|
|
|
|
|
|
|
|
and Other Investments
|
|
|
$
|
4,534
|
|
|
|
$
|
2,501
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
Fixed indexed annuities - embedded derivatives,
|
|
|
|
|
|
|
|
|
|
|
included in Other Policyholder Funds
|
|
|
|
55,179
|
|
|
|
|
39,021
|
|
Indexed universal life - embedded derivatives,
|
|
|
|
|
|
|
|
|
|
|
included in Investment Contract and Life Policy Reserves
|
|
|
|
80
|
|
|
|
|
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
|
|
Nine
Months Ended
|
|
|
September
30,
|
|
September
30,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Change in fair value
of derivatives (1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
realized investment gains (losses)
|
|
|
$
|
562
|
|
|
|
$
|
(1,564
|
)
|
|
|
$
|
422
|
|
|
|
$
|
(2,171
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value
of embedded derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
realized investment gains (losses)
|
|
|
|
(76
|
)
|
|
|
|
1,328
|
|
|
|
|
(2,077
|
)
|
|
|
|
1,795
|
|
|
(1)
|
Includes
the gains or losses recognized at the expiration of the option term or early termination
and the changes in fair value for open options.
|
The
Company’s strategy attempts to mitigate potential risk of loss under these agreements through a regular monitoring process,
which evaluates the program’s effectiveness. The Company is exposed to risk of loss in the event of nonperformance by the
counterparties and, accordingly, option contracts are purchased from multiple counterparties, which are evaluated for creditworthiness
prior to purchase of the contracts. All of these options have been purchased from nationally recognized financial institutions
with a Standard and Poor’s/Moody’s long-term credit rating of “BBB+”/“Baa1” or higher at the
time of purchase and the maximum credit exposure to any single counterparty is subject to concentration limits. The Company also
obtains credit support agreements that allow it to request the counterparty to provide collateral when the fair value of the exposure
to the counterparty exceeds specified amounts.
The
notional amount and fair value of call options by counterparty and each counterparty’s long-term credit ratings were as
follows:
|
|
September
30, 2016
|
|
December 31, 2015
|
|
|
Credit
Rating (1)
|
|
Notional
|
|
Fair
|
|
Notional
|
|
Fair
|
Counterparty
|
|
S&P
|
|
Moody’s
|
|
Amount
|
|
Value
|
|
Amount
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank of
America, N.A.
|
|
A
|
|
A1
|
|
|
$
|
38,500
|
|
|
|
$
|
1,598
|
|
|
|
$
|
17,000
|
|
|
|
$
|
5
|
|
Barclays Bank PLC
|
|
A-
|
|
A2
|
|
|
|
41,400
|
|
|
|
|
720
|
|
|
|
|
7,600
|
|
|
|
|
137
|
|
Citigroup Inc.
|
|
BBB+
|
|
Baa1
|
|
|
|
5,800
|
|
|
|
|
2
|
|
|
|
|
17,300
|
|
|
|
|
845
|
|
Credit Suisse International
|
|
A
|
|
A2
|
|
|
|
64,300
|
|
|
|
|
1,442
|
|
|
|
|
12,000
|
|
|
|
|
167
|
|
Societe
Generale
|
|
A
|
|
A2
|
|
|
|
23,200
|
|
|
|
|
772
|
|
|
|
|
80,800
|
|
|
|
|
1,347
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
$
|
173,200
|
|
|
|
$
|
4,534
|
|
|
|
$
|
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 September 30, 2016 and December 31, 2015, the Company held $4,770 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:
|
|
September 30,
|
|
December 31,
|
|
|
2016
|
|
2015
|
Short-term debt:
|
|
|
|
|
|
|
|
|
|
|
Bank
Credit Facility, expires July 30, 2019
|
|
|
$
|
-
|
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt:
|
|
|
|
|
|
|
|
|
|
|
4.50%
Senior Notes, due December 1, 2025. Aggregate
|
|
|
|
|
|
|
|
|
|
|
principal
amount of $250,000 less unaccrued discount of
|
|
|
|
|
|
|
|
|
|
|
$617
and $654 (4.5% imputed rate) and unamortized
|
|
|
|
|
|
|
|
|
|
|
debt
issuance costs of $2,237 and $2,371
|
|
|
|
247,146
|
|
|
|
|
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
September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums
written and contract deposits
|
|
|
$
|
356,155
|
|
|
|
$
|
5,555
|
|
|
|
$
|
934
|
|
|
|
$
|
351,534
|
|
Premiums
and contract charges earned
|
|
|
|
195,654
|
|
|
|
|
5,584
|
|
|
|
|
980
|
|
|
|
|
191,050
|
|
Benefits,
claims and settlement expenses
|
|
|
|
139,114
|
|
|
|
|
4,642
|
|
|
|
|
1,238
|
|
|
|
|
135,710
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
September 30, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums
written and contract deposits
|
|
|
$
|
331,223
|
|
|
|
$
|
5,952
|
|
|
|
$
|
927
|
|
|
|
$
|
326,198
|
|
Premiums
and contract charges earned
|
|
|
|
187,813
|
|
|
|
|
5,961
|
|
|
|
|
960
|
|
|
|
|
182,812
|
|
Benefits,
claims and settlement expenses
|
|
|
|
123,061
|
|
|
|
|
3,034
|
|
|
|
|
1,154
|
|
|
|
|
121,181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended
September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums
written and contract deposits
|
|
|
$
|
960,945
|
|
|
|
$
|
17,244
|
|
|
|
$
|
2,881
|
|
|
|
$
|
946,582
|
|
Premiums
and contract charges earned
|
|
|
|
579,283
|
|
|
|
|
17,305
|
|
|
|
|
2,882
|
|
|
|
|
564,860
|
|
Benefits,
claims and settlement expenses
|
|
|
|
422,352
|
|
|
|
|
21,748
|
|
|
|
|
3,027
|
|
|
|
|
403,631
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended
September 30, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums
written and contract deposits
|
|
|
$
|
966,867
|
|
|
|
$
|
18,260
|
|
|
|
$
|
2,720
|
|
|
|
$
|
951,327
|
|
Premiums
and contract charges earned
|
|
|
|
560,818
|
|
|
|
|
18,608
|
|
|
|
|
2,717
|
|
|
|
|
544,927
|
|
Benefits,
claims and settlement expenses
|
|
|
|
378,939
|
|
|
|
|
13,397
|
|
|
|
|
2,597
|
|
|
|
|
368,139
|
|
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 $184,825 and $147,139 at September 30, 2016 and December 31, 2015, respectively.
Note
8 - Segment Information
The
Company conducts and manages its business through four segments. The three operating segments, representing the major lines of
insurance business, are: (1) property and casualty insurance, primarily personal lines automobile and homeowners products; (2)
retirement annuity products, primarily tax-qualified fixed and variable deposits; and (3) life insurance. The Company does not
allocate the impact of corporate-level transactions to the insurance segments, consistent with the basis for management’s
evaluation of the results of those segments, but classifies those items in the fourth segment, corporate and other. In addition
to ongoing transactions such as corporate debt service, realized investment gains and losses and certain public company expenses,
such items also have included corporate debt retirement costs/gains, when applicable. Summarized financial information for these
segments is as follows:
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
|
2016
|
|
|
|
|
2015
|
|
|
|
|
2016
|
|
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance premiums
and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
contract
charges earned
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
and casualty
|
|
$
|
155,727
|
|
|
$
|
149,210
|
|
|
$
|
461,520
|
|
|
$
|
443,616
|
|
Annuity
|
|
|
6,448
|
|
|
|
6,541
|
|
|
|
18,614
|
|
|
|
19,280
|
|
Life
|
|
|
28,875
|
|
|
|
27,061
|
|
|
|
84,726
|
|
|
|
82,031
|
|
Total
|
|
$
|
191,050
|
|
|
$
|
182,812
|
|
|
$
|
564,860
|
|
|
$
|
544,927
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
and casualty
|
|
$
|
10,018
|
|
|
$
|
7,350
|
|
|
$
|
28,997
|
|
|
$
|
25,790
|
|
Annuity
|
|
|
66,174
|
|
|
|
56,271
|
|
|
|
186,950
|
|
|
|
169,846
|
|
Life
|
|
|
18,852
|
|
|
|
17,612
|
|
|
|
55,338
|
|
|
|
53,342
|
|
Corporate
and other
|
|
|
15
|
|
|
|
5
|
|
|
|
44
|
|
|
|
17
|
|
Intersegment
eliminations
|
|
|
(212
|
)
|
|
|
(222
|
)
|
|
|
(644
|
)
|
|
|
(671
|
)
|
Total
|
|
$
|
94,847
|
|
|
$
|
81,016
|
|
|
$
|
270,685
|
|
|
$
|
248,324
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
and casualty
|
|
$
|
6,715
|
|
|
$
|
11,253
|
|
|
$
|
16,047
|
|
|
$
|
32,120
|
|
Annuity
|
|
|
15,732
|
|
|
|
8,716
|
|
|
|
39,348
|
|
|
|
32,973
|
|
Life
|
|
|
4,583
|
|
|
|
3,619
|
|
|
|
13,072
|
|
|
|
10,647
|
|
Corporate
and other
|
|
|
(107
|
)
|
|
|
(1,604
|
)
|
|
|
(4,525
|
)
|
|
|
(3,298
|
)
|
Total
|
|
$
|
26,923
|
|
|
$
|
21,984
|
|
|
$
|
63,942
|
|
|
$
|
72,442
|
|
|
Septembe
r
30,
|
|
December
31,
|
|
2016
|
|
2015
|
Assets
|
|
|
|
|
|
|
|
|
|
Property
and casualty
|
|
$
|
1,147,850
|
|
|
|
$
|
1,098,415
|
|
Annuity
|
|
|
7,437,926
|
|
|
|
|
7,001,411
|
|
Life
|
|
|
1,997,990
|
|
|
|
|
1,862,719
|
|
Corporate
and other
|
|
|
141,162
|
|
|
|
|
131,635
|
|
Intersegment
eliminations
|
|
|
(33,851
|
)
|
|
|
|
(37,208
|
)
|
Total
|
|
$
|
10,691,077
|
|
|
|
$
|
10,056,972
|
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (“MD&A”)
(Dollars
in millions, except per share data)
Measures
within this MD&A that are not based on accounting principles generally accepted in the United States (“non-GAAP”)
are marked by an asterisk (“*”). An explanation of these measures is contained in the Glossary of Selected Terms included
as an exhibit to this Quarterly Report on Form 10-Q.
Forward-looking
Information
Statements
made in the following discussion that are not historical in nature are forward-looking within the meaning of the Private Securities
Litigation Reform Act of 1995 and are subject to known and unknown risks, uncertainties and other factors. Horace Mann is not
under any obligation to (and expressly disclaims any such obligation to) update or revise any forward-looking statements, whether
as a result of new information, future events or otherwise. It is important to note that the Company’s actual results could
differ materially from those projected in forward-looking statements due to a number of risks and uncertainties inherent in the
Company’s business. For additional information regarding risks and uncertainties, see “Item 1A. Risk Factors”
in this Quarterly Report on Form 10-Q and in the Company’s Annual Report on Form 10-K for the year ended December 31, 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 September 30, 2016, the Company’s net income of $26.9 million increased $5.0 million compared to
the prior year. The increase was driven primarily by strong investment results recorded in each of the Company’s three operating
segments. Total property and casualty segment net income of $6.7 million decreased $4.5 million compared to the prior year, including
a $2.2 million after tax increase in property and casualty catastrophe losses as well as elevated automobile loss frequencies
impacted by severe weather and higher non-catastrophe property losses. Annuity segment net income of $15.7 million for the current
period increased $7.0 million compared to the third quarter of 2015, primarily due to an increase in investment income that drove
improvement in the net interest spread. Unlocking of deferred policy acquisition costs had a favorable impact on the annuity net
income comparison. In addition, income tax expense was reduced by approximately $1.5 million in the current quarter related to
the filing of the prior calendar year tax return; this item primarily benefited the annuity segment. Life segment net income of
$4.6 million increased $1.0 million compared to the third quarter of 2015 due to investment income growth and slightly lower mortality
costs in the current quarter. The Company’s after tax net realized investment gains were $2.7 million compared to after
tax realized investment gains of $0.7 million a year earlier.
For
the nine months ended September 30, 2016, the Company’s net income of $63.9 million decreased $8.5 million compared to the
prior year. After tax net realized investment gains were $3.8 million compared to $5.5 million a year earlier. For the property
and casualty segment, net income of $16.0 million decreased $16.1 million compared to the first nine months of 2015. The property
and casualty combined ratio was 102.4% for the first nine months of 2016, 5.9 percentage points higher than the 96.5% for the
same period in 2015, primarily reflecting improvement in current accident year non-catastrophe results for homeowners
-- reflecting the impacts of initiatives to improve profitability -- more than offset by pressure on automobile results, including
higher non-catastrophe loss severity and an increase in loss frequencies. In addition, catastrophe losses increased in the current
period -- representing a $7.6 million after tax decrease to net income compared to the same period in 2015 -- and the current
period reflected a reduced level of favorable prior years’ reserve development -- representing a $3.7 million reduction
to net income compared to the first nine months of 2015. Annuity segment net income of $39.3 million for the current period increased
$6.3 million compared to the first nine months of 2015, driven by investment income growth -- improving the net interest spread
-- partially offset by pressures of the interest rate environment, as well as an increase in operating expenses -- including costs
related to the Company’s continued modernization of technology and infrastructure. The net interest margin amount increased
$7.0 million after tax compared to the prior year, including an increase in gains on investment prepayments. For the first nine
months of 2016 and 2015, unlocking of annuity deferred policy acquisition costs decreased net income $0.4 million and $1.2 million,
respectively, largely due to financial market performance. For the nine months ended September 30, 2016, income tax expense was
reduced by approximately $1.5 million related to the filing of the prior calendar year tax return; this item primarily benefited
the annuity segment. Annuity assets under management of $6.3 billion increased 8% compared to the prior year and disciplined crediting
rate management continues. Life segment net income of $13.1 million increased $2.5 million compared to the first nine months of
2015 primarily due to investment income growth accompanied by a decrease in mortality losses in the current period.
Premiums
written and contract deposits* decreased slightly compared to the first nine months of 2015 as growth in the property and casualty
and life segments was offset by a decrease in the amount of annuity deposits received in the current period. Property and casualty
segment premiums written increased 5% compared to the prior year, primarily due to the favorable impacts from increases in average
premium per policy for homeowners and automobile, accompanied by increases in automobile policies in force and reductions in catastrophe
reinsurance costs. Life segment insurance premiums and contract deposits increased 6% compared to the first nine months of 2015.
Annuity deposits received increased 11% for the third quarter, moderating the year-to-date decrease to 7%, 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”.
The
Company’s book value per share was $35.94 at September 30, 2016, an increase of 12% compared to 12 months earlier. This
increase reflected net income for the trailing 12 months accompanied by a significant increase in net unrealized investment gains
primarily due to lower yields on U.S. Treasury securities and tighter credit spreads. At September 30, 2016, book value per share
excluding investment fair value adjustments* was $27.54, 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 September 30, 2016 there were no material changes to the accounting policies for the areas most subject
to significant management judgments identified above. In addition to disclosures in “Notes to Consolidated Financial Statements”
in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015, discussion of accounting policies, including
certain sensitivity information, was presented in “Management’s Discussion and Analysis of Financial Condition and
Results of Operations -- Critical Accounting Policies” in that Form 10-K.
Results
of Operations
Insurance
Premiums and Contract Charges
|
|
Three
Months Ended
|
|
Change
From
|
|
Nine
Months Ended
|
|
Change
From
|
|
|
September
30,
|
|
Prior
Year
|
|
September
30,
|
|
Prior
Year
|
|
|
2016
|
|
2015
|
|
Percent
|
|
Amount
|
|
2016
|
|
2015
|
|
Percent
|
|
Amount
|
Insurance
premiums written
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
contract deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(includes
annuity and life
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
contract
deposits)*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
& casualty (1)
|
|
|
$
|
169.8
|
|
|
|
$
|
162.0
|
|
|
|
|
4.8
|
%
|
|
|
|
$
|
7.8
|
|
|
|
$
|
476.3
|
|
|
|
|
$
|
455.0
|
|
|
|
|
4.7
|
%
|
|
|
|
$
|
21.3
|
|
Annuity
deposits
|
|
|
|
154.6
|
|
|
|
|
139.3
|
|
|
|
|
11.0
|
%
|
|
|
|
|
15.3
|
|
|
|
|
391.9
|
|
|
|
|
|
422.2
|
|
|
|
|
-7.2
|
%
|
|
|
|
|
(30.3
|
)
|
Life
|
|
|
|
27.2
|
|
|
|
|
24.9
|
|
|
|
|
9.2
|
%
|
|
|
|
|
2.3
|
|
|
|
|
78.4
|
|
|
|
|
|
74.1
|
|
|
|
|
5.8
|
%
|
|
|
|
|
4.3
|
|
Total
|
|
|
$
|
351.6
|
|
|
|
$
|
326.2
|
|
|
|
|
7.8
|
%
|
|
|
|
$
|
25.4
|
|
|
|
$
|
946.6
|
|
|
|
|
$
|
951.3
|
|
|
|
|
-0.5
|
%
|
|
|
|
$
|
(4.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance
premiums and contract
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
charges
earned (excludes annuity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
life contract deposits)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
& casualty (1)
|
|
|
$
|
155.7
|
|
|
|
$
|
149.2
|
|
|
|
|
4.4
|
%
|
|
|
|
$
|
6.5
|
|
|
|
$
|
461.5
|
|
|
|
|
$
|
443.6
|
|
|
|
|
4.0
|
%
|
|
|
|
$
|
17.9
|
|
Annuity
|
|
|
|
6.4
|
|
|
|
|
6.6
|
|
|
|
|
-3.0
|
%
|
|
|
|
|
(0.2
|
)
|
|
|
|
18.6
|
|
|
|
|
|
19.3
|
|
|
|
|
-3.6
|
%
|
|
|
|
|
(0.7
|
)
|
Life
|
|
|
|
29.0
|
|
|
|
|
27.0
|
|
|
|
|
7.4
|
%
|
|
|
|
|
2.0
|
|
|
|
|
84.8
|
|
|
|
|
|
82.0
|
|
|
|
|
3.4
|
%
|
|
|
|
|
2.8
|
|
Total
|
|
|
$
|
191.1
|
|
|
|
$
|
182.8
|
|
|
|
|
4.5
|
%
|
|
|
|
$
|
8.3
|
|
|
|
$
|
564.9
|
|
|
|
|
$
|
544.9
|
|
|
|
|
3.7
|
%
|
|
|
|
$
|
20.0
|
|
|
(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)
|
|
September 30,
|
|
December 31,
|
|
September 30,
|
|
|
2016
|
|
2015
|
|
2015
|
Property and casualty
(voluntary)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Automobile
|
|
|
486,123
|
|
|
|
|
486,850
|
|
|
|
|
484,555
|
|
Property
|
|
|
221,094
|
|
|
|
|
224,531
|
|
|
|
|
225,416
|
|
Total
|
|
|
707,217
|
|
|
|
|
711,381
|
|
|
|
|
709,971
|
|
Annuity
|
|
|
215,445
|
|
|
|
|
211,071
|
|
|
|
|
207,285
|
|
Life
|
|
|
197,792
|
|
|
|
|
201,789
|
|
|
|
|
201,226
|
|
For
the three months ended September 30, 2016, the Company’s premiums written and contract deposits* of $351.6 million increased
$25.4 million, or 7.8%, compared to the prior year, primarily due to an increase in the annuity segment accompanied by growth
in the property and casualty and life segments.
For
the first nine months of 2016, the Company’s premiums written and contract deposits* of $946.6 million decreased $4.7 million,
or 0.5%, compared to the prior year, as a decline in the annuity segment more than offset growth in the property and casualty
and life segments. In 2015, changes in the Company’s employee retirement savings plans resulted in non-recurring deposits
received in the first half of 2015 -- see additional explanation below. The Company’s premiums and contract charges earned
increased $8.3 million, or 4.5%, compared to the third quarter of 2015 and increased $20.0 million, or 3.7%, compared to the nine
months ended September 30, 2015, primarily due to increases in average premium per policy for both homeowners and automobile.
Total
property and casualty premiums written* increased 4.7%, or $21.3 million, in the first nine months of 2016, compared to the prior
year. Average written premium per policy for both automobile and homeowners increased compared to the prior year and the number
of automobile policies in force also increased compared to 12 months earlier; the impacts of these items were partially offset
by a reduced level of homeowners policies in force in the current period. For 2016, the Company’s full year rate plan anticipates
mid-single digit average rate increases (including states with no rate actions) for both automobile and homeowners; average approved
rate changes during the first nine months of 2016 were consistent with those plans at 7% for automobile and 5% for homeowners.
Based
on policies in force, the current year voluntary automobile 12 month retention rate for new and renewal policies was 83.5% compared
to 84.8% at September 30, 2015, with the anticipated decrease due to recent rate and underwriting actions. The property 12 month
new and renewal policy retention rate was 87.8% at September 30, 2016 compared to 88.1% at September 30, 2015. The retention rates
have been favorably impacted by the Company’s focus on expanding the number of multiline customers and customer utilization
of automatic payment plans modestly offset by underwriting profitability programs, particularly for voluntary automobile business.
Automobile
premiums written* increased 5.9%, or $17.6 million, compared to the first nine months of 2015. In the first nine months of 2016,
the voluntary average written premium per policy and average earned premium per policy increased approximately 4% and 3%, 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 September 30, 2016, December 31, 2015 and September 30, 2015.
Homeowners
premiums written* increased 2.4%, or $3.7 million, compared to the first nine months of 2015. While the number of homeowners policies
in force has declined, the average written premium per policy and average earned premium per policy increased approximately 4%
and 3%, respectively, in the first nine months of 2016 compared to a year earlier. In addition, reduced catastrophe reinsurance
costs benefited the current period premiums written by approximately $1.1 million. The number of educator policies represented
approximately 82% of the homeowners policies in force at September 30, 2016, compared to approximately 81% at both December 31,
2015 and September 30, 2015, and has reflected more moderate declines than the overall homeowner policies in force count. The
number of educator policies and total policies has been, and may continue to be, impacted by the Company’s risk mitigation
programs, including actions in catastrophe-prone coastal areas, involving policies of both educators and non-educators.
The
Company continues to evaluate and implement actions to further mitigate its risk exposure in hurricane-prone areas, as well as
other areas of the country. Such actions could include, but are not limited to, non-renewal of homeowners policies, restricted
agent geographic placement, limitations on agent new business sales, further tightening of underwriting standards and increased
utilization of third-party vendor products. By June 30, 2015, the Company completed a non-renewal program to further address homeowners
profitability and hurricane exposure issues in Florida. While this program impacted the overall policy in force count and premiums
in the short-term, it reduced risk exposure concentration, reduced overall catastrophe reinsurance costs and is expected to improve
homeowners longer-term underwriting results. The Company continues to write policies for tenants in Florida. The Company also
authorized its agents to write certain third-party vendors’ homeowners policies in Florida.
For
the nine months ended September 30, 2016, total annuity deposits* received decreased 7.2%, or $30.3 million, compared to the prior
year, primarily due to changes in the Company’s employee retirement savings plans which resulted in non-recurring deposits
received in the first half of 2015. The current nine month decrease reflected an 11.8% decrease in recurring deposit receipts
and a 3.9% decrease in single premium and rollover deposit receipts. Excluding the 2015 non-recurring item, the remaining current
period decrease was minimal.
In
addition to external contractholder deposits, annuity new recurring deposits include contributions and transfers by Horace Mann’s
employees into the Company’s 401(k) group annuity contract. The majority of the 401(k) related increase in 2015 was due
to employees’ elections to rollover amounts from a previously terminated, fully funded defined contribution plan third-party
investment vehicle into their 401(k) accounts. The Company’s employee retirement savings plans are described in “Notes
to Consolidated Financial Statements -- Note 11 -- Pension Plans and Other Postretirement Benefits” in the Company’s
Annual Report on Form 10-K for the year ended December 31, 2015. Note that deposits into the Company’s employee 401(k) group
annuity contract are not reported as “sales”.
In
the first nine months of 2016, new deposits to fixed accounts of $274.3 million decreased 5.3%, or $15.3 million, and new deposits
to variable accounts of $117.6 million decreased 11.3%, or $15.0 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 $6.3 billion at September 30, 2016 increased 7.5% compared to a year earlier, reflecting
the increase from new deposits received as well as favorable retention. Accumulated value retention for the variable annuity option
was 94.6% and 94.1% for the 12 month periods ended September 30, 2016 and 2015, respectively; fixed annuity retention was 94.6%
and 94.8% for the respective periods.
Variable
annuity accumulated balances of $1.9 billion at September 30, 2016 increased 7.6% compared to September 30, 2015, reflecting a
positive impact from financial market performance over the 12 months partially offset by net balances transferred from the variable
account option to the guaranteed interest rate fixed account option. Compared to the first nine months of 2015, annuity segment
contract charges earned decreased 3.6%, or $0.7 million.
Life
segment premiums and contract deposits* for the first nine months of 2016 increased 5.8%, or $4.3 million, compared to the prior
year, including the favorable impact of new ordinary life business growth. The ordinary life insurance in force lapse ratio was
4.1% and 4.0% for the 12 months ended September 30, 2016 and 2015, respectively.
Sales*
For
the first nine months of 2016, property and casualty new annualized sales premiums increased 7.2% compared to the first nine months
of 2015, as 7.9%, or $4.9 million, growth in new automobile sales was accompanied by growth in homeowners sales of 3.9%, or $0.5
million, compared to the prior year.
While
the first nine months of 2016 annuity new business levels were lower than in the prior year period, the Company’s annuity
new business levels continued to benefit from agent training and marketing programs, which focus on retirement planning, and build
on the positive results produced in recent years. Annuity sales by Horace Mann’s agency force increased 12.2% compared to
the third quarter of 2015, reducing the year to date decline to 3.3%, or $8.2 million compared to the first nine months of 2015,
with this decline primarily due to the impact in 2015 of non-recurring, non 401(k) rollover deposits from the Company’s
employee retirement savings plans. Sales from the independent agent distribution channel, which represent approximately 10% of
total annuity sales in the current period and are largely single premium and rollover annuity deposits, decreased approximately
9% compared to a year earlier. As a result, total Horace Mann annuity sales from the combined distribution channels decreased
3.9% compared to the nine months ended September 30, 2015. Overall, the Company’s new recurring deposit business (measured
on an annualized basis at the time of sale, compared to the reporting of new contract deposits which are recorded when cash is
received) decreased 3.5% compared to the first nine months of 2015, and single premium and rollover deposits decreased 3.9% 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 nine 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 nine months ended September 30, 2016, sales of Horace
Mann’s proprietary life insurance products totaled $10.7 million, representing an increase of 44.6%, or $3.3 million, compared
to the prior year, including an increase of $2.3 million for single premium sales.
Distribution
At
September 30, 2016, there was a combined total of 669 Exclusive Agencies and Employee Agents, compared to 735 at December 31,
2015 and 701 at September 30, 2015. The Company continues to expect higher quality standards for agents and agencies to focus
on improving both customer experiences and agent productivity in their respective territories. Growth in new automobile sales
and life sales reflects improvement in average agency productivity. The dedicated sales force is supported by the Company’s
Customer Contact Center which provides a means for educators to begin their experience directly with the Company, if that is their
preference. The Customer Contact Center is also able to assist educators in territories which are not currently served by an Exclusive
Agency.
As
mentioned above, the Company also utilizes a nationwide network of Independent Agents who comprise an additional distribution
channel for the Company’s 403(b) tax-qualified annuity products. The Independent Agent distribution channel included 521
authorized agents at September 30, 2016. During the first nine months of 2016, this channel generated $25.9 million in annualized
new annuity sales for the Company compared to $28.5 million for the first nine months 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 September 30, 2016, pretax net investment income of $94.9 million increased 17.2%, or $13.9 million, (16.0%,
or $8.7 million, after tax) compared to the same period in the prior year. Pretax net investment income of $270.7 million for
the nine months ended September 30, 2016 increased 9.0%, or $22.4 million, (8.3%, or $13.8 million, after tax) compared to the
prior year. The increase primarily reflected growth in the size of the average investment portfolio on an amortized cost basis
and continued managed performance in the fixed maturity portfolios considering the low interest rate environment, partially offset
by a decline in the average fixed maturity securities portfolio yield. In addition, net investment income in the three and nine
months ended September 30, 2016 benefited from an increase in gains on investment prepayments, as well as favorable returns on
the Company’s alternative investment portfolio. Average invested assets increased 5.7% over the 12 months ended September
30, 2016. The average pretax yield on the total investment portfolio was 5.25% (3.50% after tax) for the first nine months of
2016, compared to the pretax yield of 5.09% (3.41% after tax) a year earlier. During the first nine months of 2016, management
continued to identify and purchase investments, including a modest level of alternative investments, with attractive risk-adjusted
yields without venturing into asset classes or individual securities that would be inconsistent with the Company’s overall
conservative investment guidelines.
Net
Realized Investment Gains and Losses (Pretax)
For
the three months ended September 30, 2016, net realized investment gains were $4.0 million compared to net realized investment
gains of $1.3 million in the same period in the prior year. For the nine months, net realized investment gains were $6.9 million
in 2016 compared to net realized investment gains of $8.8 million in the prior year. The net gains and losses in both periods
were realized primarily from ongoing investment portfolio management activity and, when determined, the recording of impairment
write-down charges.
For
the first nine months of 2016, the Company’s net realized investment gains of $6.9 million included $19.2 million of gross
gains realized on security sales and calls partially offset by $4.9 million of realized losses primarily on securities that were
disposed of during the nine months and $7.4 million of impairment charges recorded largely on Puerto Rico and energy sector fixed
maturity securities, as well as some equity securities.
For
the first nine months of 2015, the Company’s net realized investment gains of $8.8 million included $32.5 million of gross
gains realized on security sales and calls partially offset by $7.2 million of realized losses on securities that were disposed
of during the nine months and $16.5 million of impairment charges recorded largely on Puerto Rico and energy sector fixed maturity
securities and one unrelated equity security. Of the year-to-date impairment charges, $3.5 million was recorded in the third quarter
of 2015.
The
Company, from time to time, sells securities subsequent to the balance sheet date that were considered temporarily impaired at
the balance sheet date. Such sales are due to issuer specific events occurring subsequent to the balance sheet date that result
in a change in the Company’s intent to sell an invested asset.
Fixed
Maturity Securities and Equity Securities Portfolios
The
table below presents the Company’s fixed maturity securities and equity securities portfolios by major asset class, including
the ten largest sectors of the Company’s corporate bond holdings (based on fair value). Compared to December 31, 2015, credit
spreads were tighter across most asset classes at September 30, 2016 and U.S. Treasury rates decreased, which resulted in an increase
in net unrealized gains for virtually all classes of the Company’s fixed maturity securities holdings.
|
September
30, 2016
|
|
|
|
|
|
|
|
|
|
|
Amortized
|
|
Pretax
Net
|
|
|
Number
of
|
|
Fair
|
|
Cost
or
|
|
Unrealized
|
|
|
Issuers
|
|
Value
|
|
Cost
|
|
Gain
|
|
Fixed maturity
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
bonds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Banking
and Finance
|
|
|
99
|
|
|
|
$
|
728.6
|
|
|
|
$
|
682.1
|
|
|
|
$
|
46.5
|
|
|
Insurance
|
|
|
50
|
|
|
|
|
246.3
|
|
|
|
|
219.9
|
|
|
|
|
26.4
|
|
|
Energy
(1)
|
|
|
50
|
|
|
|
|
217.0
|
|
|
|
|
199.5
|
|
|
|
|
17.5
|
|
|
Real
estate
|
|
|
37
|
|
|
|
|
208.7
|
|
|
|
|
193.9
|
|
|
|
|
14.8
|
|
|
Healthcare,
Pharmacy
|
|
|
38
|
|
|
|
|
178.6
|
|
|
|
|
163.0
|
|
|
|
|
15.6
|
|
|
Utilities
|
|
|
39
|
|
|
|
|
174.0
|
|
|
|
|
148.3
|
|
|
|
|
25.7
|
|
|
Technology
|
|
|
24
|
|
|
|
|
166.2
|
|
|
|
|
157.2
|
|
|
|
|
9.0
|
|
|
Transportation
|
|
|
25
|
|
|
|
|
160.2
|
|
|
|
|
148.7
|
|
|
|
|
11.5
|
|
|
Telecommunications
|
|
|
22
|
|
|
|
|
147.3
|
|
|
|
|
133.8
|
|
|
|
|
13.5
|
|
|
Broadcasting
and Media
|
|
|
27
|
|
|
|
|
89.6
|
|
|
|
|
80.0
|
|
|
|
|
9.6
|
|
|
All
Other Corporates (2)
|
|
|
170
|
|
|
|
|
637.0
|
|
|
|
|
594.7
|
|
|
|
|
42.3
|
|
|
Total
corporate bonds
|
|
|
581
|
|
|
|
|
2,953.5
|
|
|
|
|
2,721.1
|
|
|
|
|
232.4
|
|
|
Mortgage-backed
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Government and federally
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
sponsored
agencies
|
|
|
362
|
|
|
|
|
472.1
|
|
|
|
|
419.6
|
|
|
|
|
52.5
|
|
|
Commercial
(3)
|
|
|
107
|
|
|
|
|
431.5
|
|
|
|
|
414.8
|
|
|
|
|
16.7
|
|
|
Other
|
|
|
29
|
|
|
|
|
58.6
|
|
|
|
|
55.5
|
|
|
|
|
3.1
|
|
|
Municipal
bonds (4)
|
|
|
564
|
|
|
|
|
1,778.7
|
|
|
|
|
1,555.3
|
|
|
|
|
223.4
|
|
|
Government
bonds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
|
9
|
|
|
|
|
488.1
|
|
|
|
|
449.0
|
|
|
|
|
39.1
|
|
|
Foreign
|
|
|
14
|
|
|
|
|
79.8
|
|
|
|
|
71.4
|
|
|
|
|
8.4
|
|
|
Collateralized
debt obligations (5)
|
|
|
110
|
|
|
|
|
650.4
|
|
|
|
|
646.4
|
|
|
|
|
4.0
|
|
|
Asset-backed
securities
|
|
|
98
|
|
|
|
|
581.4
|
|
|
|
|
574.5
|
|
|
|
|
6.9
|
|
|
Total
fixed maturity securities
|
|
|
1,874
|
|
|
|
$
|
7,494.1
|
|
|
|
$
|
6,907.6
|
|
|
|
$
|
586.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-redeemable
preferred stocks
|
|
|
12
|
|
|
|
$
|
46.3
|
|
|
|
$
|
44.2
|
|
|
|
$
|
2.1
|
|
|
Common
stocks
|
|
|
171
|
|
|
|
|
70.3
|
|
|
|
|
60.6
|
|
|
|
|
9.7
|
|
|
Closed-end
fund
|
|
|
1
|
|
|
|
|
21.0
|
|
|
|
|
20.0
|
|
|
|
|
1.0
|
|
|
Total
equity securities
|
|
|
184
|
|
|
|
$
|
137.6
|
|
|
|
$
|
124.8
|
|
|
|
$
|
12.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2,058
|
|
|
|
$
|
7,631.7
|
|
|
|
$
|
7,032.4
|
|
|
|
$
|
599.3
|
|
|
|
(1)
|
At
September 30, 2016, the fair value amount included $15.6 million which were non-investment grade.
|
|
(2)
|
The
All Other Corporates category contains 19 additional industry classifications. Consumer
products, food and beverage, natural gas, retail, gaming and metal and mining
represented $444.5 million of fair value at September 30, 2016, with the remaining 13
classifications each representing less than $46 million.
|
|
(3)
|
At
September 30, 2016, 100.0% were investment grade, with an overall credit rating of AA,
and the positions were well diversified by property type, geography and sponsor.
|
|
(4)
|
Holdings
are geographically diversified, approximately 40% are tax-exempt and 80% are revenue
bonds tied to essential services, such as mass transit, water and sewer. The
overall credit quality of the municipal bond portfolio was AA- at September 30, 2016.
|
|
(5)
|
Based
on fair value, 96% of the collateralized debt obligation securities were rated investment
grade by Standard and Poor’s Corporation (“S&P”) and/or Moody’s
Investors Service, Inc. (“Moody’s”) at September 30, 2016.
|
At
September 30, 2016, the Company’s diversified fixed maturity securities portfolio consisted of 2,375 investment positions,
issued by 1,874 entities, and totaled approximately $7.5 billion in fair value. This portfolio was 96.1% 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 September 30, 2016, 95.0% 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)
|
|
Percent of Portfolio
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
September 30, 2016
|
|
|
December 31,
|
|
September 30,
|
|
Fair
|
|
Amortized
|
|
|
2015
|
|
2016
|
|
Value
|
|
Cost or Cost
|
Fixed maturity
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AAA
|
|
|
|
7.0
|
%
|
|
|
|
7.8
|
%
|
|
|
$
|
584.5
|
|
|
|
$
|
556.9
|
|
AA
(2)
|
|
|
|
36.1
|
|
|
|
|
35.2
|
|
|
|
|
2,639.1
|
|
|
|
|
2,393.2
|
|
A
|
|
|
|
23.9
|
|
|
|
|
23.7
|
|
|
|
|
1,776.4
|
|
|
|
|
1,619.3
|
|
BBB
|
|
|
|
29.5
|
|
|
|
|
29.4
|
|
|
|
|
2,200.9
|
|
|
|
|
2,049.9
|
|
BB
|
|
|
|
2.1
|
|
|
|
|
2.0
|
|
|
|
|
152.9
|
|
|
|
|
149.6
|
|
B
|
|
|
|
0.9
|
|
|
|
|
1.0
|
|
|
|
|
75.2
|
|
|
|
|
77.7
|
|
CCC
or lower
|
|
|
|
0.1
|
|
|
|
|
0.2
|
|
|
|
|
12.4
|
|
|
|
|
14.5
|
|
Not
rated (3)
|
|
|
|
0.4
|
|
|
|
|
0.7
|
|
|
|
|
52.7
|
|
|
|
|
46.5
|
|
Total
fixed maturity securities
|
|
|
|
100.0
|
%
|
|
|
|
100.0
|
%
|
|
|
$
|
7,494.1
|
|
|
|
$
|
6,907.6
|
|
Equity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AAA
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
AA
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
A
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
BBB
|
|
|
|
35.2
|
%
|
|
|
|
33.7
|
%
|
|
|
$
|
46.4
|
|
|
|
$
|
44.3
|
|
BB
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
*
|
|
|
|
|
*
|
|
B
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
CCC
or lower
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
Not
rated
|
|
|
|
64.8
|
|
|
|
|
66.3
|
|
|
|
|
91.2
|
|
|
|
|
80.5
|
|
Total
equity securities
|
|
|
|
100.0
|
%
|
|
|
|
100.0
|
%
|
|
|
$
|
137.6
|
|
|
|
$
|
124.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7,631.7
|
|
|
|
$
|
7,032.4
|
|
|
*
|
Less
than $0.1 million.
|
|
(1)
|
Ratings
are as assigned primarily by S&P when available, with remaining ratings as assigned
on an equivalent basis by Moody’s. Ratings for publicly traded securities
are determined when the securities are acquired and are updated monthly to reflect any
changes in ratings.
|
|
(2)
|
At
September 30, 2016, the AA rated fair value amount included $488.1 million of U.S. Government
and federally sponsored agency securities and $520.9 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
September 30, 2016, the fixed maturity securities and equity securities portfolios had a combined $23.2 million pretax of gross
unrealized losses on $787.6 million fair value related to 308 positions. Of the investment positions (fixed maturity securities
and equity securities) with gross unrealized losses, 13 were trading below 80% of book value at September 30, 2016 and were not
considered other-than-temporarily impaired. These positions had fair value of $23.2 million, representing 0.3% of the Company’s
total investment portfolio at fair value, and had a gross unrealized loss of $8.0 million.
The
Company views the unrealized losses of all of the securities at September 30, 2016 as temporary. Future changes in circumstances
related to these and other securities could require subsequent recognition of other-than-temporary impairment losses.
Benefits,
Claims and Settlement Expenses
|
|
Three
Months Ended
|
|
Change
From
|
|
Nine
Months Ended
|
|
Change
From
|
|
|
September
30,
|
|
Prior
Year
|
|
September
30,
|
|
Prior
Year
|
|
|
2016
|
|
2015
|
|
Percent
|
|
Amount
|
|
2016
|
|
2015
|
|
Percent
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
and casualty
|
|
|
$
|
116.0
|
|
|
|
$
|
102.7
|
|
|
|
|
13.0
|
%
|
|
|
$
|
13.3
|
|
|
|
$
|
347.0
|
|
|
|
$
|
311.4
|
|
|
|
|
11.4
|
%
|
|
|
$
|
35.6
|
|
Annuity
|
|
|
|
1.4
|
|
|
|
|
1.0
|
|
|
|
|
40.0
|
%
|
|
|
|
0.4
|
|
|
|
|
3.1
|
|
|
|
|
1.9
|
|
|
|
|
63.2
|
%
|
|
|
|
1.2
|
|
Life
|
|
|
|
18.3
|
|
|
|
|
17.4
|
|
|
|
|
5.2
|
%
|
|
|
|
0.9
|
|
|
|
|
53.5
|
|
|
|
|
54.8
|
|
|
|
|
-2.4
|
%
|
|
|
|
(1.3
|
)
|
Total
|
|
|
$
|
135.7
|
|
|
|
$
|
121.1
|
|
|
|
|
12.1
|
%
|
|
|
$
|
14.6
|
|
|
|
$
|
403.6
|
|
|
|
$
|
368.1
|
|
|
|
|
9.6
|
%
|
|
|
$
|
35.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and casualty
catastrophe
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
losses,
included above (1)
|
|
|
$
|
8.4
|
|
|
|
$
|
5.0
|
|
|
|
|
68.0
|
%
|
|
|
$
|
3.4
|
|
|
|
$
|
48.4
|
|
|
|
$
|
36.8
|
|
|
|
|
31.5
|
%
|
|
|
$
|
11.6
|
|
__________________
|
(1)
|
See
footnote (1) to the table below.
|
Property
and Casualty Claims and Claim Expenses (“losses”)
|
|
Three
Months Ended
|
|
Nine
Months Ended
|
|
|
|
|
|
|
|
|
|
|
September
30,
|
|
September
30,
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
|
Incurred claims and
claim expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Claims
occurring
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in
the current year
|
|
|
$
|
116.7
|
|
|
|
$
|
105.5
|
|
|
|
$
|
351.3
|
|
|
|
$
|
321.4
|
|
|
|
|
|
|
|
|
|
Decrease
in estimated reserves
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
for
claims occurring in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
prior
years (2)
|
|
|
|
(0.7
|
)
|
|
|
|
(2.8
|
)
|
|
|
|
(4.3
|
)
|
|
|
|
(10.0
|
)
|
|
|
|
|
|
|
|
|
Total
claims and claim
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
expenses
incurred
|
|
|
$
|
116.0
|
|
|
|
$
|
102.7
|
|
|
|
$
|
347.0
|
|
|
|
$
|
311.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and casualty
loss ratio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
74.5
|
%
|
|
|
|
68.8
|
%
|
|
|
|
75.2
|
%
|
|
|
|
70.2
|
%
|
|
|
|
|
|
|
|
|
Effect
of catastrophe costs,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
included
above (1)
|
|
|
|
5.3
|
%
|
|
|
|
3.4
|
%
|
|
|
|
10.5
|
%
|
|
|
|
8.3
|
%
|
|
|
|
|
|
|
|
|
Effect
of prior years’ reserve
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
development,
included
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
above
(2)
|
|
|
|
-0.4
|
%
|
|
|
|
-1.9
|
%
|
|
|
|
-0.9
|
%
|
|
|
|
-2.3
|
%
|
|
|
|
|
|
|
|
|
__________________
|
(1)
|
Property
and casualty catastrophe losses were incurred as follows:
|
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
months ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March
31
|
|
|
$
|
12.7
|
|
|
|
$
|
10.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June
30
|
|
|
|
27.3
|
|
|
|
|
21.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September
30
|
|
|
|
8.4
|
|
|
|
|
5.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
year-to-date
|
|
|
$
|
48.4
|
|
|
|
$
|
36.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2)
|
Shows
the amounts by which the Company decreased its reserves in each of the periods indicated
for claims occurring in previous years to reflect subsequent information on such claims
and changes in their projected final settlement costs.
|
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31
|
|
|
$
|
(2.0
|
)
|
|
|
$
|
(4.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30
|
|
|
|
(1.6
|
)
|
|
|
|
(3.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September
30
|
|
|
|
(0.7
|
)
|
|
|
|
(2.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total year-to-date
|
|
|
$
|
(4.3
|
)
|
|
|
$
|
(10.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the three months ended September 30, 2016, the Company’s benefits, claims and settlement expenses increased $14.6 million,
or 12.1%, compared to the prior year due to the increase in the property and casualty segment. Catastrophe losses increased $3.4
million compared to the prior year, including automobile flood-related losses in Louisiana and other severe weather in the current
period. Non-catastrophe weather also contributed to increases in property and casualty current accident year loss frequencies
-- for both automobile and homeowners. Included in the third quarter 2016 property and casualty segment amount was approximately
$1 million of unfavorable development of first and second quarter 2016 automobile weather-related losses. For the life segment,
life mortality costs were $0.4 million lower than the third quarter of 2015. Variability in the Company’s life mortality
experience is not unexpected considering the moderate size of Horace Mann’s life insurance in force.
For
the nine months ended September 30, 2016, the Company’s benefits, claims and settlement expenses increased $35.5
million, or 9.6%, compared to the prior year primarily reflecting increases in property and casualty current accident year
loss severity and frequency -- specifically, in automobile -- and catastrophe costs, partially offset by a reduction in
homeowners current accident year non-catastrophe losses and a $2.6 million decrease in life mortality costs.
For
the first nine months of 2016, the favorable development of prior years’ property and casualty reserves of $4.3 million
was the result of actual and remaining projected losses for prior years being below the level anticipated in the immediately preceding
December 31 loss reserve estimate and was primarily the result of favorable severity trends in homeowners loss emergence for accident
years 2014 and prior.
For
the first nine months of 2015, the favorable development of prior years’ property and casualty reserves of $10.0 million
was the result of actual and remaining projected losses for prior years being below the level anticipated in the December 31,
2014 loss reserve estimate and was primarily for accident years 2013 and prior and predominantly the result of favorable severity
trends in homeowners loss emergence and favorable severity and frequency trends in automobile loss emergence.
For
the nine months ended September 30, 2016, the automobile loss ratio of 79.3% increased by 6.4 percentage points compared to the
prior year, including (1) the impacts of higher current accident year non-catastrophe losses for 2016 primarily driven by loss
severity and accompanied by an increase in loss frequencies and (2) development of prior years’ reserves that had a 1.4
percentage point less favorable impact in the current year, partially offset by the favorable impact of rate actions taken in
recent years. The homeowners loss ratio of 66.7% for the nine months ended September 30, 2016 increased 1.2 percentage points
compared to a year earlier, including favorable current accident year non-catastrophe experience with favorable development of
prior years’ reserves having a similar impact in both periods. Catastrophe costs represented 25.9 percentage points of the
homeowners loss ratio for the current nine months compared to 22.7 percentage points for the prior year period.
Interest
Credited to Policyholders
|
|
Three
Months Ended
|
|
Change
From
|
|
Nine
Months Ended
|
|
Change
From
|
|
|
September
30,
|
|
Prior
Year
|
|
September
30,
|
|
Prior
Year
|
|
|
2016
|
|
2015
|
|
Percent
|
|
Amount
|
|
2016
|
|
2015
|
|
Percent
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annuity
|
|
|
$
|
37.4
|
|
|
|
$
|
35.1
|
|
|
|
|
6.6
|
%
|
|
|
$
|
2.3
|
|
|
|
$
|
109.4
|
|
|
|
$
|
103.0
|
|
|
|
|
6.2
|
%
|
|
|
$
|
6.4
|
|
Life
|
|
|
|
11.2
|
|
|
|
|
11.1
|
|
|
|
|
0.9
|
%
|
|
|
|
0.1
|
|
|
|
|
33.5
|
|
|
|
|
33.1
|
|
|
|
|
1.2
|
%
|
|
|
|
0.4
|
|
Total
|
|
|
$
|
48.6
|
|
|
|
$
|
46.2
|
|
|
|
|
5.2
|
%
|
|
|
$
|
2.4
|
|
|
|
$
|
142.9
|
|
|
|
$
|
136.1
|
|
|
|
|
5.0
|
%
|
|
|
$
|
6.8
|
|
For
the three and nine months ended September 30, 2016, interest credited increased approximately 5% compared to the same periods
in 2015. Compared to the first nine months of 2015, the current year increase in annuity segment interest credited reflected a
7.8% increase in average accumulated fixed deposits, partially offset by a 2 basis point decline in the average annual interest
rate credited to 3.54%. 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 nine months ended September 30, 2016 and 2015, were 195 basis points and 185 basis points, respectively.
The interest spread increased due to an increase in gains on investment prepayments as well as favorable returns within the Company’s
alternative investment portfolio and a continuation of disciplined crediting rate management, partially offset by pressures of
the low interest rate environment.
As
of September 30, 2016, fixed annuity account values totaled $4.4 billion, including $4.2 billion of deferred annuities. As shown
in the table below, for approximately 87%, or $3.6 billion of the deferred annuity account values, the credited interest rate
was equal to the minimum guaranteed rate. Due to limitations on the Company’s ability to further lower interest crediting
rates, coupled with the expectation for continued low reinvestment interest rates, management anticipates fixed annuity spread
compression in future periods. The majority of assets backing the net interest spread on fixed annuity business is invested in
fixed maturity securities.
The
Company actively manages its interest rate risk exposure, considering a variety of factors, including earned interest rates, credited
interest rates and the relationship between the expected durations of assets and liabilities. Management estimates that over the
next 12 months approximately $490 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 $1.9 million in year one and $5.6
million in year two, further reducing the net interest spread by approximately 5 basis points and 11 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 September 30, 2016 and assuming all other assumptions are met, a 10 basis point deviation in the current year targeted
interest rate spread assumption would impact amortization between $0.25 million and $0.35 million. This result may change depending
on the magnitude and direction of any actual deviations but represents a range of reasonably likely experience for the noted assumption.
Additional
information regarding the interest crediting rates and balances equal to the minimum guaranteed rate for deferred annuity account
values is shown below.
|
|
September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred Annuities at
|
|
|
Total Deferred Annuities
|
|
Minimum Guaranteed Rate
|
|
|
|
|
|
|
|
|
|
|
|
Percent of
|
|
|
|
|
|
|
|
|
|
|
|
Percent
|
|
|
Accumulated
|
|
Total Deferred
|
|
Percent
|
|
Accumulated
|
|
|
of Total
|
|
Value (“AV”)
|
|
Annuities AV
|
|
of Total
|
|
Value
|
Minimum
guaranteed interest rates:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less
than 2%
|
|
|
|
23.2
|
%
|
|
|
|
$
|
978.2
|
|
|
|
|
47.6
|
%
|
|
|
|
|
12.8
|
%
|
|
|
|
$
|
466.1
|
|
Equal
to 2% but less than 3%
|
|
|
|
7.3
|
|
|
|
|
|
307.3
|
|
|
|
|
82.9
|
%
|
|
|
|
|
7.0
|
|
|
|
|
|
254.6
|
|
Equal
to 3% but less than 4%
|
|
|
|
14.3
|
|
|
|
|
|
601.4
|
|
|
|
|
99.6
|
%
|
|
|
|
|
16.4
|
|
|
|
|
|
599.2
|
|
Equal
to 4% but less than 5%
|
|
|
|
53.9
|
|
|
|
|
|
2,269.4
|
|
|
|
|
100.0
|
%
|
|
|
|
|
62.2
|
|
|
|
|
|
2,269.4
|
|
5%
or higher
|
|
|
|
1.3
|
|
|
|
|
|
56.8
|
|
|
|
|
100.0
|
%
|
|
|
|
|
1.6
|
|
|
|
|
|
56.8
|
|
Total
|
|
|
|
100.0
|
%
|
|
|
|
$
|
4,213.1
|
|
|
|
|
86.5
|
%
|
|
|
|
|
100.0
|
%
|
|
|
|
$
|
3,646.1
|
|
The
Company will continue to be disciplined in executing strategies to mitigate the negative impact on profitability of a sustained
low interest rate environment. However, the success of these strategies may be affected by the factors discussed in “Item
1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015, and other factors
discussed herein.
Policy
Acquisition Expenses Amortized
Amortized
policy acquisition expenses were $24.5 million for the three months ended September 30, 2016 compared to $25.7 million for the
same period in 2015. At September 30, 2016, annuity segment unlocking resulted in a $0.1 million decrease in amortization compared
to a $1.9 million increase in amortization in the prior year. For the life segment, unlocking resulted in an immaterial change
in amortization at both September 30, 2016 and 2015.
Amortized
policy acquisition expenses were $73.1 million for the first nine months of 2016 compared to $73.4 million for the same period
in 2015. The change included a decrease of $1.1 million 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 nine months of 2016 reflected the growth in premiums and related commissions for each segment. At September
30, 2016, annuity segment unlocking resulted in a $0.6 million increase in amortization compared to a $1.9 million increase in
amortization in the prior year, for both periods the impact was largely due to financial market performance. For the life segment,
unlocking resulted in an immaterial change in amortization at both September 30, 2016 and 2015.
Operating
Expenses
For
the three months ended September 30, 2016, operating expenses of $44.5 million increased $4.8 million, or 12.1%, compared to the
third quarter of 2015.
For
the first nine months of 2016, operating expenses of $130.6 million increased $15.0 million, or 13.0%, compared to the same period
in the prior year. In 2015, year to date expenses reflected a reduction in incentive compensation expense (recorded in the first
quarter) with the majority of the cost reduction benefiting the property and casualty segment. The current period expense level
was consistent with management’s expectations as the Company makes expenditures related to customer service and infrastructure
improvements, which are intended to enhance the overall customer experience and support favorable policy retention and business
cross-sale ratios.
The
property and casualty expense ratio of 27.2% for the nine months ended September 30, 2016 increased 0.9 percentage points compared
to the prior year expense ratio of 26.3%, consistent with management’s expectations for the current period. The 2015 incentive
compensation expense reduction reduced the expense ratio for the nine months by 0.5 percentage points.
Income
Tax Expense
The
effective income tax rate on the Company’s pretax income, including net realized investment gains and losses, was 26.6%
and 28.7% for the nine months ended September 30, 2016 and 2015, respectively. Income from investments in tax-advantaged securities
reduced the effective income tax rates 7.4 percentage points for both the nine months ended September 30, 2016 and 2015. In 2016,
income tax expense was reduced by approximately $1.5 million related to the filing of the prior calendar year tax return; this
item primarily benefited the annuity segment.
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
September 30, 2016, the Company’s federal income tax returns for years prior to 2013 are no longer subject to examination
by the IRS. Management does not anticipate any assessments for tax years that remain subject to examination to have a material
effect on the Company’s financial position or results of operations.
Net
Income
For
the three months ended September 30, 2016, the Company’s net income of $26.9 million represented an increase of $5.0 million
compared to the prior year. For the nine months ended September 30, 2016, the Company’s net income of $63.9 million represented
a decrease of $8.5 million as investment income growth, improvements in current accident year non-catastrophe results for homeowners
and a reduced level of life mortality losses were more than offset by a higher level of catastrophe losses, pressure on automobile
current accident year loss experience, and a $1.7 million reduction in net 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
|
|
Nine Months Ended
|
|
Change From
|
|
|
September 30,
|
|
Prior Year
|
|
September 30,
|
|
Prior Year
|
|
|
2016
|
|
2015
|
|
Percent
|
|
Amount
|
|
2016
|
|
2015
|
|
Percent
|
|
Amount
|
Analysis of net
income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
by
segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
and casualty
|
|
|
$
|
6.7
|
|
|
|
$
|
11.2
|
|
|
|
|
-40.2
|
%
|
|
|
|
$
|
(4.5
|
)
|
|
|
$
|
16.0
|
|
|
|
$
|
32.1
|
|
|
|
|
-50.2
|
%
|
|
|
$
|
(16.1
|
)
|
Annuity
|
|
|
|
15.7
|
|
|
|
|
8.7
|
|
|
|
|
80.5
|
%
|
|
|
|
|
7.0
|
|
|
|
|
39.3
|
|
|
|
|
33.0
|
|
|
|
|
19.1
|
%
|
|
|
|
6.3
|
|
Life
|
|
|
|
4.6
|
|
|
|
|
3.6
|
|
|
|
|
27.8
|
%
|
|
|
|
|
1.0
|
|
|
|
|
13.1
|
|
|
|
|
10.6
|
|
|
|
|
23.6
|
%
|
|
|
|
2.5
|
|
Corporate
and other (1)
|
|
|
|
(0.1
|
)
|
|
|
|
(1.6
|
)
|
|
|
|
-93.8
|
%
|
|
|
|
|
1.5
|
|
|
|
|
(4.5
|
)
|
|
|
|
(3.3
|
)
|
|
|
|
36.4
|
%
|
|
|
|
(1.2
|
)
|
Net
income
|
|
|
$
|
26.9
|
|
|
|
$
|
21.9
|
|
|
|
|
22.8
|
%
|
|
|
|
$
|
5.0
|
|
|
|
$
|
63.9
|
|
|
|
$
|
72.4
|
|
|
|
|
-11.7
|
%
|
|
|
$
|
(8.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of catastrophe
costs,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
after
tax, included above
|
|
|
$
|
(5.5
|
)
|
|
|
$
|
(3.3
|
)
|
|
|
|
66.7
|
%
|
|
|
|
$
|
(2.2
|
)
|
|
|
$
|
(31.5
|
)
|
|
|
$
|
(23.9
|
)
|
|
|
|
31.8
|
%
|
|
|
$
|
(7.6
|
)
|
Effect of realized
investment gains
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(losses),
after tax, included above
|
|
|
$
|
2.7
|
|
|
|
$
|
0.7
|
|
|
|
|
N.M.
|
|
|
|
|
$
|
2.0
|
|
|
|
$
|
3.8
|
|
|
|
$
|
5.5
|
|
|
|
|
-30.9
|
%
|
|
|
$
|
(1.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per share
|
|
|
$
|
0.65
|
|
|
|
$
|
0.52
|
|
|
|
|
25.0
|
%
|
|
|
|
$
|
0.13
|
|
|
|
$
|
1.55
|
|
|
|
$
|
1.71
|
|
|
|
|
-9.4
|
%
|
|
|
$
|
(0.16
|
)
|
Weighted
average number of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
shares
and equivalent shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
millions)
|
|
|
|
41.3
|
|
|
|
|
42.3
|
|
|
|
|
-2.4
|
%
|
|
|
|
|
(1.0
|
)
|
|
|
|
41.4
|
|
|
|
|
42.4
|
|
|
|
|
-2.4
|
%
|
|
|
|
(1.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and casualty
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
combined
ratio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
101.5
|
%
|
|
|
|
95.4
|
%
|
|
|
|
N.M.
|
|
|
|
|
|
6.1
|
%
|
|
|
|
102.4
|
%
|
|
|
|
96.5
|
%
|
|
|
|
N.M.
|
|
|
|
|
5.9
|
%
|
Effect
of catastrophe costs,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
included
above
|
|
|
|
5.3
|
%
|
|
|
|
3.4
|
%
|
|
|
|
N.M.
|
|
|
|
|
|
1.9
|
%
|
|
|
|
10.5
|
%
|
|
|
|
8.3
|
%
|
|
|
|
N.M.
|
|
|
|
|
2.2
|
%
|
Effect
of prior years’
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
reserve
development,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
included
above
|
|
|
|
-0.4
|
%
|
|
|
|
-1.9
|
%
|
|
|
|
N.M.
|
|
|
|
|
|
1.5
|
%
|
|
|
|
-0.9
|
%
|
|
|
|
-2.3
|
%
|
|
|
|
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, net realized investment gains and losses may vary notably between reporting periods and are often the driver of
fluctuations in the level of this segment’s net income or loss. For the nine months ended September 30, 2016, net realized
investment gains after tax were $3.8 million, compared to net realized investment gains of $5.5 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 6.3% and 7.7% for the trailing 12 months ended September 30, 2016
and 2015, respectively.
Outlook
for 2016
At
the time of this Quarterly Report on Form 10-Q, management estimates that 2016 full year net income before realized
investment gains and losses* will be within a range of $1.80 to $1.90 per diluted share. This projection incorporates the
Company’s results for the first nine months of 2016, which benefited from strong investment results, including an
increase in investment prepayment activity and favorable returns on alternative investments. Tempering this benefit, the
Company’s nine month earnings were impacted by a higher than anticipated level of weather-related catastrophe and
non-catastrophe losses for the property and casualty segment. The anticipated income range also includes the Company’s
current estimate -- $9 million to $11 million -- of catastrophe losses related to Hurricane Matthew which occurred in October
2016. For full year 2016, the Company now anticipates its underlying property and casualty combined ratio* to be 1.5 to 2.5
percentage points higher than the result for full year 2015, as continued pressure from current accident year automobile loss
frequency and severity and a modest increase in segment specific infrastructure expenses offset improvements in the property
line. Net income for the annuity segment is anticipated to exceed full year 2015, reflecting favorable investment income
partially offset by additional expenses -- compared to 2015 and as described below -- related to the Company’s
continued modernization of technology and infrastructure, as well as costs incurred to address regulatory changes. The net
interest spread is anticipated to be in the mid-190s for full year 2016. Though life mortality experience was more favorable
than anticipated for the first nine months of 2016, mortality costs continue to be consistent with the Company’s
actuarial models and life segment net income is expected to be comparable to 2015. 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
September 30, 2016 and 2015, the Company did not have any relationships with unconsolidated entities or financial partnerships,
such as entities often referred to as structured finance or special purpose entities, which would have been established for the
purpose of facilitating off-balance sheet arrangements or for other contractually narrow or limited purposes. As such, the Company
is not exposed to any financing, liquidity, market or credit risk that could arise if the Company engaged in such relationships.
Investments
Information
regarding the Company’s investment portfolio, which is comprised primarily of investment grade, fixed income securities,
is located in “Results of Operations -- Net Realized Investment Gains and Losses (Pretax)” and in the “Notes
to Consolidated Financial Statements -- Note 2 -- Investments”.
Cash
Flow
The
short-term liquidity requirements of the Company, within a 12 month operating cycle, are for the timely payment of claims and
benefits to policyholders, operating expenses, interest payments and federal income taxes. Cash flow generated from operations
has been, and is expected to be, adequate to meet the Company’s operating cash needs in the next 12 months. Cash flow in
excess of operational needs has been used to fund business growth, retire short-term debt, pay dividends to shareholders and repurchase
shares of HMEC’s common stock. Long-term liquidity requirements, beyond one year, are principally for the payment of future
insurance and annuity policy claims and benefits, as well as retirement of long-term debt.
Operating
Activities
As
a holding company, HMEC conducts its principal operations in the personal lines segment of the property and casualty and life
insurance industries through its subsidiaries. HMEC’s insurance subsidiaries generate cash flow from premium and investment
income, generally well in excess of their immediate needs for policy obligations, operating expenses and other cash requirements.
Cash provided by operating activities primarily reflects net cash generated by the insurance subsidiaries. For the first nine
months of 2016, net cash provided by operating activities increased slightly compared to the same period in 2015, as an increase
in investment income collected, as well as the increase in premiums collected in the current period were nearly offset by the
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 $54.6 million was
paid during the nine months ended September 30, 2016. Although regulatory restrictions exist, dividend availability from subsidiaries
has been, and is expected to be, adequate for HMEC’s capital needs. Additional information is contained in “Notes
to Consolidated Financial Statements -- Note 10 -- Statutory Information and Restrictions” of the Company’s Annual
Report on Form 10-K for the year ended December 31, 2015.
Investing
Activities
HMEC’s
insurance subsidiaries maintain significant investments in fixed maturity securities to meet future contractual obligations to
policyholders. In conjunction with its management of liquidity and other asset/liability management objectives, the Company, from
time to time, will sell fixed maturity securities prior to maturity, as well as equity securities, and reinvest the proceeds in
other investments with different interest rates, maturities or credit characteristics. Accordingly, the Company has classified
the entire fixed maturity securities and equity securities portfolios as “available for sale”.
Financing
Activities
Financing
activities include primarily payment of dividends, the receipt and withdrawal of funds by annuity contractholders, issuances and
repurchases of HMEC’s common stock, fluctuations in bank overdraft balances, and borrowings, repayments and repurchases
related to its debt facilities.
The
Company’s annuity business produced net positive cash flows in the first nine months of 2016. For the nine months ended
September 30, 2016, receipts from annuity contracts decreased $30.3 million, or 7.2%, compared to the same period in the prior
year, as described in “Results of Operations -- Insurance Premiums and Contract Charges”. In total, annuity contract
benefits, withdrawals and net of transfers from variable annuity accumulated cash values decreased $17.6 million, or 6.8%, 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 $1,691.2 million at September 30, 2016, including $247.1 million of long-term debt. Total debt
represented 18.3% of total capital excluding unrealized investment gains and losses (14.6% including unrealized investment gains
and losses) at September 30, 2016, which was below the Company’s long-term target of 25%. Note that this information regarding
long-term debt reflects the Company’s January 1, 2016 adoption of new accounting guidance regarding the presentation of
debt issuance costs as discussed in “Notes to Consolidated Financial Statements -- Note 1 -- Basis of Presentation -- Adopted
Accounting Standards”.
Shareholders’
equity was $1,444.1 million at September 30, 2016, including a net unrealized gain in the Company’s investment portfolio
of $337.3 million after taxes and the related impact of deferred policy acquisition costs associated with investment contracts
and life insurance products with account values. The market value of the Company’s common stock and the market value per
share were $1,472.7 million and $36.65, respectively, at September 30, 2016. Book value per share was $35.94 at September 30,
2016 ($27.54 excluding investment fair value adjustments*).
Additional
information regarding the net unrealized gain in the Company’s investment portfolio at September 30, 2016 is included in
“Results of Operations -- Net Realized Investment Gains and Losses (Pretax)”.
Total
shareholder dividends were $33.2 million for the nine months ended September 30, 2016. In March, May and September 2016, the Board
of Directors announced regular quarterly dividends of $0.265 per share.
During
the first nine months of 2016, the Company repurchased 701,410 shares of its common stock, or 1.7% of the outstanding shares on
December 31, 2015, at an aggregate cost of $21.5 million, or an average price per share of $30.65 under its share repurchase program,
which is further described in “Notes to Consolidated Financial Statements -- Note 9 -- Shareholders’ Equity and Common
Stock Equivalents” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2015. The repurchase
of shares was funded through use of cash. As of September 30, 2016, $29.5 million remained authorized for future share repurchases
under the 2015 repurchase program. Utilization of the remaining authorization under the 2011 program was completed in January
2016.
As
of September 30, 2016, the Company had outstanding $250.0 million aggregate principal amount of 4.50% Senior Notes (“Senior
Notes due 2025”), which will mature on December 1, 2025, issued at a discount resulting in an effective yield of 4.53%.
Interest on the Senior Notes due 2025 is payable semi-annually at a rate of 4.50%. Detailed information regarding the redemption
terms of the Senior Notes due 2025 is contained in the “Notes to Consolidated Financial Statements -- Note 7 -- Debt”
of the Company’s Annual Report on Form 10-K for the year ended December 31, 2015. The Senior Notes due 2025 are traded in
the open market (HMN 4.50).
As
of September 30, 2016, the Company had no balance outstanding under its Bank Credit Facility. The Bank Credit Facility provides
for unsecured borrowings of up to $150.0 million and expires on July 30, 2019. Interest accrues at varying spreads relative to
prime or Eurodollar base rates and is payable monthly or quarterly depending on the applicable base rate. The unused portion of
the Bank Credit Facility is subject to a variable commitment fee, which was 0.15% on an annual basis at September 30, 2016.
To
provide additional capital management flexibility, the Company filed a “universal shelf” registration on Form S-3
with the SEC on March 12, 2015. The registration statement, which registered the offer and sale by the Company from time to time
of an indeterminate amount of various securities, which may include debt securities, common stock, preferred stock, depositary
shares, warrants, delayed delivery contracts and/or units that include any of these securities, was automatically effective on
March 12, 2015. Unless withdrawn by the Company earlier, this registration statement will remain effective through March 12, 2018.
The Senior Notes due 2025, described above, were issued utilizing this registration statement. No other securities associated
with the registration statement have been issued as of the date of this Quarterly Report on Form 10-Q.
Financial
Ratings
HMEC’s
principal insurance subsidiaries are rated by S&P, Moody’s, A.M. Best Company, Inc. (“A.M. Best”) and Fitch
Ratings, Inc. (“Fitch”). These rating agencies have also assigned ratings to the Company’s long-term debt securities.
The ratings that are assigned by these agencies, which are subject to change, can impact, among other things, the Company’s
access to sources of capital, cost of capital, and competitive position. These ratings are not a recommendation to buy or hold
any of the Company’s securities.
With
the exception of the ratings by A.M. Best, assigned ratings as of October 31, 2016 were unchanged from the disclosure in the Company’s
Annual Report on Form 10-K for the year ended December 31, 2015. In March 2016, A.M. Best upgraded the insurance financial strength
rating of the Company’s property and casualty subsidiaries to “A (Excellent)” from “A- (Excellent)”.
Assigned ratings were as follows (unless otherwise indicated, the insurance financial strength ratings for the Company’s
property and casualty insurance subsidiaries and the Company’s principal life insurance subsidiary are the same):
|
|
Insurance
Financial
|
|
|
|
|
Strength
Ratings
|
|
Debt
Ratings
|
|
|
(Outlook)
|
|
(Outlook)
|
As of October
31, 2016
|
|
|
|
|
S&P
|
|
A
|
(stable)
|
|
BBB
|
(stable)
|
Moody’s
|
|
|
|
|
Horace
Mann Life Insurance Company
|
|
A3
|
(positive)
|
|
N.A.
|
|
HMEC’s
property and casualty subsidiaries
|
|
A3
|
(stable)
|
|
N.A.
|
|
HMEC
|
|
N.A.
|
|
|
Baa3
|
(positive)
|
A.M.
Best
|
|
A
|
(stable)
|
|
bbb
|
(stable)
|
Fitch
|
|
A
|
(stable)
|
|
BBB
|
(stable)
|
N.A. –
Not applicable.
Reinsurance
Programs
Information
regarding the reinsurance program for the Company’s property and casualty segment is located in “Business -- Property
and Casualty Segment -- Property and Casualty Reinsurance” of the Company’s Annual Report on Form 10-K for the year
ended December 31, 2015.
Information
regarding the reinsurance program for the Company’s life segment is located in “Business -- Life Segment” of
the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.
Market
Value Risk
Market
value risk, the Company’s primary market risk exposure, is the risk that the Company’s invested assets will decrease
in value. This decrease in value may be due to (1) a change in the yields realized on the Company’s assets and prevailing
market yields for similar assets, (2) an unfavorable change in the liquidity of the investment, (3) an unfavorable change in the
financial prospects of the issuer of the investment, or (4) a downgrade in the credit rating of the issuer of the investment.
See also “Results of Operations -- Net Realized Investment Gains and Losses (Pretax)”.
Significant
changes in interest rates expose the Company to the risk of experiencing losses or earning a reduced level of income based on
the difference between the interest rates earned on the Company’s investments and the credited interest rates on the Company’s
insurance liabilities. See also “Results of Operations -- Interest Credited to Policyholders”.
The
Company seeks to manage its market value risk by coordinating the projected cash inflows of assets with the projected cash outflows
of liabilities. For all its assets and liabilities, the Company seeks to maintain reasonable durations, consistent with the maximization
of income without sacrificing investment quality, while providing for liquidity and diversification. The investment risk associated
with variable annuity deposits and the underlying mutual funds is assumed by those contractholders, and not by the Company. Certain
fees that the Company earns from variable annuity deposits are based on the market value of the funds deposited.
More
detailed descriptions of the Company’s exposure to market value risks and the management of those risks is presented in
“Management’s Discussion and Analysis of Financial Condition and Results of Operations -- Market Value Risk”
of the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.
Recent
Accounting Changes
Statement
of Cash Flows -- Classification
In
August 2016, the Financial Accounting Standards Board (“FASB”) issued guidance to reduce diversity in practice in
the statement of cash flows between operating, investing and financing activities related to the classification of cash receipts
and cash payments for eight specific issues. The FASB acknowledged that current GAAP either is unclear or does not include specific
guidance on these eight cash flow classification issues: (1) debt prepayment or extinguishment costs; (2) settlement of zero-coupon
bonds (pertains to issuers); (3) contingent consideration payments made after a business combination; (4) proceeds from the settlement
of insurance claims (pertains to claimants); (5) proceeds from the settlement of corporate-owned life insurance policies; (6)
distributions received from equity method investees; (7) beneficial interests in securitization transactions (pertains to transferors)
and (8) separately identifiable cash flows and application of the predominance principle. For public business entities, the guidance
is effective for annual reporting periods beginning after December 15, 2017, including interim periods within those years, using
a retrospective approach. The guidance allows prospective adoption for individual issues if it is impracticable to apply the amendments
retrospectively for those issues. Early application is permitted. Management believes the adoption of this accounting guidance
will not have a material effect on the classifications in the Company’s consolidated statement of cash flows. The adoption
of this accounting guidance will not have an effect on the results of operations or financial position of the Company.
Measurement
of Credit Losses on Financial Instruments
In
June 2016, the FASB issued guidance to improve financial reporting by requiring timelier recording of credit losses on loans and
other financial instruments, including reinsurance receivables, held by companies. The new guidance replaces the incurred loss
impairment methodology and requires an organization to measure and recognize all current expected credit losses (“CECL”)
for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable
forecasts. Companies will need to utilize forward-looking information to better inform their credit loss estimates. Companies
will continue to use judgment to determine which loss estimation method is appropriate for their circumstances. Credit losses
related to available for sale debt securities -- which represent over 90% of Horace Mann’s total investment portfolio --
will be recorded through an allowance for credit losses with this allowance having a limit equal to the amount by which fair value
is below amortized cost. The guidance also requires enhanced qualitative and quantitative disclosures to provide additional information
about the amounts recorded in the financial statements. For public business entities that are SEC filers, the guidance is effective
for annual reporting periods beginning after December 15, 2019, including interim periods within those years, using a modified-retrospective
approach. Early application is permitted for annual reporting periods, and interim periods within those years, beginning after
December 15, 2018. Management is evaluating the impact this guidance will have on the results of operations and financial position
of the Company.
Employee
Share-based Payment Accounting
In
March 2016, the FASB issued guidance to simplify and improve the accounting for employee share-based payment transactions. Under
the new guidance, several aspects of the accounting for share-based payment transactions are changed including: (1) the entire
tax impact of the difference between the company’s share-based payment deduction for tax purposes and the compensation cost
recognized in the financial statements (“excess tax benefits”) will be recorded in the income statement (the additional
paid-in capital pool is eliminated) and classified with other income tax cash flows as an operating activity in the statement
of cash flows; (2) election of an accounting policy regarding forfeitures, either retaining the current GAAP approach of estimating
forfeitures or accounting for forfeitures when they occur; (3) companies may withhold up to the maximum individual statutory tax
rate without triggering classification of the award as a liability; (4) cash paid to satisfy the statutory income tax withholding
obligation is to be classified as a financing activity in the statement of cash flows; and (5) certain additional aspects which
apply only to nonpublic entities. There are different approaches specified for transition to the new guidance encompassing prospective,
retrospective and modified retrospective (cumulative-effect adjustment) approaches. The guidance is effective for annual reporting
periods beginning after December 15, 2016, including interim periods within those years. Early application is permitted; however,
all components of the guidance must be implemented at the same time. Management is evaluating the impact this guidance will have
on the results of operations and financial position of the Company.
Accounting
for Leases
In
February 2016, the FASB issued accounting and disclosure guidance to improve financial reporting and comparability among organizations
about leasing transactions. Under the new guidance, for leases with lease terms of more than 12 months, a lessee will be required
to recognize assets and liabilities on the balance sheet for the rights and obligations created by those leases. Consistent with
current accounting guidance, the recognition, measurement and presentation of expenses and cash flows arising from a lease by
a lessee primarily will depend on its classification as a finance or an operating lease. However, while current guidance requires
only capital leases to be recognized on the balance sheet, the new guidance will require both operating and capital leases to
be recognized on the balance sheet. In transition to the new guidance, companies are required to recognize and measure leases
at the beginning of the earliest period presented using a modified retrospective approach. The guidance is effective for annual
reporting periods beginning after December 15, 2018, including interim periods within those years. Early application is permitted.
Management is evaluating the impact this guidance will have on the results of operations and financial position of the Company.
Recognition
and Measurement of Financial Assets and Liabilities
In
January 2016, the FASB issued accounting guidance to improve certain aspects of the recognition, measurement, presentation and
disclosure of financial instruments. Among other things, this guidance requires public entities to measure equity investments
(except those accounted for under the equity method of accounting or those that result in consolidation of the investee) at fair
value with changes in fair value recognized in net income and to perform a qualitative assessment to identify impairment for equity
investments without readily determinable fair values. Companies are required to apply this guidance by means of a cumulative-effect
adjustment to the balance sheet as of the beginning of the year of adoption and, for the guidance related to equity securities
without readily determinable fair values, companies are required to apply a prospective approach to equity investments that exist
as of the date of adoption. The guidance is effective for annual reporting periods beginning after December 15, 2017, including
interim periods within those years. Early application is permitted. Management is evaluating the impact this guidance will have
on the results of operations and financial position of the Company.
Disclosures
About Short-Duration Insurance Contracts
In
May 2015, the FASB issued accounting guidance which will require expanded disclosure regarding claims on short-duration insurance
contracts, which will apply to the contracts in the Company’s property and casualty segment. Disclosures are to include
additional information about an entity’s initial claim estimates and subsequent adjustments to those estimates, methodologies
and judgments in estimating claims, and the timing, frequency and severity of claims. The guidance requiring these additional
disclosures is effective for annual periods beginning after December 15, 2015, and for interim periods within annual periods beginning
after December 31, 2016. The adoption of this accounting guidance will not have an effect on the results of operations or financial
position of the Company.
Revenue
Recognition
In
May 2014, the FASB issued accounting guidance to provide a single comprehensive model in accounting for revenue arising from contracts
with customers; in August 2015, the effective date was deferred for one year. The guidance applies to all contracts with customers;
however, insurance contracts are specifically excluded. The guidance is effective for annual reporting periods beginning after
December 15, 2017, including interim periods within those years. Early application is not permitted. Management believes the adoption
of this accounting guidance will not have a material effect on the results of operations or financial position of the Company.