UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[x]
ANNUAL
REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended
December 31,
2016
OR
[ ] TRANSITION
REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to
______
Commission file number 1-10890
HORACE MANN EDUCATORS CORPORATION
(Exact name
of registrant as specified in its charter)
Delaware
|
37-0911756
|
(State
or other jurisdiction of incorporation or organization)
|
(I.R.S.
Employer Identification No.)
|
1 Horace Mann Plaza, Springfield, Illinois
62715-0001
(Address of
principal executive offices, including Zip Code)
Registrant's Telephone Number, Including
Area Code: 217-789-2500
Securities Registered Pursuant to Section
12(b) of the Act:
|
Name of
each exchange on
|
Title
of each class
|
which
registered
|
Common Stock, par value $0.001 per share
|
New York Stock Exchange
|
Securities Registered Pursuant to Section
12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
X
No
Indicate
by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes
No
X
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes
X
No
Indicate
by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files).
Yes
X
No
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not
be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K. [ ]
Indicate
by check mark the registrant’s filer status, as such terms are defined in Rule 12b-2 of the Exchange Act.
Large
accelerated filer
X
Accelerated filer
Non-accelerated filer
Smaller reporting company
Indicate
by check mark whether the registrant is a shell company, as defined in Rule 12b-2 of the Act. Yes
No
X
The
aggregate market value of the registrant’s Common Stock held by non-affiliates of the registrant based on the closing price
of the registrant’s Common Stock on the New York Stock Exchange and the shares outstanding on June 30, 2016, was $1,356.3
million.
As
of February 15, 2017, 40,339,323 shares of the registrant’s Common Stock, par value $0.001 per share, were outstanding,
net of 24,672,932 shares of treasury stock.
DOCUMENTS
INCORPORATED BY REFERENCE
Certain
portions of the registrant’s Proxy Statement for the 2017 Annual Meeting of Shareholders are incorporated by reference into
Part III Items 10, 11, 12, 13 and 14 of Form 10-K as specified in those Items and will be filed with the Securities and Exchange
Commission within 120 days after December 31, 2016.
HORACE
MANN EDUCATORS CORPORATION
FORM
10-K
YEAR
ENDED DECEMBER 31, 2016
INDEX
PART I
Measures within this Annual Report
on Form 10-K 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 Exhibit
99.1 to this Annual Report on Form 10-K.
Forward-looking Information
It is important to note that the
Company's actual results could differ materially from those projected in forward-looking statements. Additional information concerning
factors that could cause actual results to differ materially from those in the forward-looking statements is contained in “Item
1A. Risk Factors” and in “Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
— Forward-looking Information”.
Overview and Available Information
Horace Mann Educators Corporation
(“HMEC”; and together with its subsidiaries, the “Company” or “Horace Mann”) is an insurance
holding company incorporated in Delaware. Through its subsidiaries, HMEC markets and underwrites personal lines of property and
casualty (primarily personal lines automobile and homeowners) insurance, retirement products (primarily tax-qualified annuities)
and life insurance in the United States of America (“U.S.”). HMEC's principal insurance subsidiaries are Horace Mann
Life Insurance Company (“HMLIC”), Horace Mann Insurance Company (“HMIC”), Horace Mann Property & Casualty
Insurance Company (“HMPCIC”) and Teachers Insurance Company (“TIC”), each of which is an Illinois corporation,
and Horace Mann Lloyds (“HM Lloyds”), an insurance company domiciled in Texas.
Founded by Educators for Educators
®
,
the Company markets its products primarily to K-12 teachers, administrators and other employees of public schools and their families.
The Company's nearly one million customers typically have moderate annual incomes, with many belonging to two-income households.
Their financial planning tends to focus on retirement, security, savings and primary insurance needs. Management believes that
Horace Mann is the largest national multiline insurance company focused on the nation's educators as its primary market.
Horace Mann markets and services
its products primarily through a dedicated sales force of full-time agents supported by the Company’s Customer Contact Center.
These agents sell Horace Mann's products and limited additional third-party vendor products. Some of these agents are former educators
or individuals with close ties to the educational community who utilize their contacts within, and knowledge of, the target market.
This dedicated agent sales force is supplemented by an independent agent distribution channel for the Company’s retirement
products.
The Company's insurance premiums
written and contract deposits for the year ended December 31, 2016 were $1.3 billion and net income was $83.8 million. The Company's
total assets were $10.6 billion at December 31, 2016. The Company's investment portfolio had an aggregate fair value of $8.0 billion
at December 31, 2016 and consisted principally of investment grade, publicly traded fixed maturity securities.
The Company conducts and manages
its business through four segments. The three operating segments, representing the major lines of insurance business, are: Property
and Casualty insurance, Retirement products, and Life insurance. The Company does not allocate the impact of corporate-level transactions
to the insurance segments, consistent with the basis for management’s evaluation of the results of those segments, but classifies
those items in the fourth segment, Corporate and Other. The Property and Casualty, Retirement, and Life segments accounted for
50%, 41% and 9%, respectively, of the Company's insurance premiums written and contract deposits for the year ended December 31,
2016.
The Company is one of the largest
participants in the K-12 portion of the 403(b) tax-qualified annuity market, measured by 403(b) net written premium on a statutory
accounting basis. The Company's 403(b) tax-qualified annuities are voluntarily purchased by individuals employed by public school
systems or other tax-exempt organizations through the employee benefit plans of those entities. The Company has 403(b) payroll
deduction capabilities utilized by approximately one-third of the 13,500 public school districts in the U.S.
The Company's annual report on
Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements, and all amendments to those reports are
available free of charge through the Investors section of the Company's Internet website,
www.horacemann.com
, as soon as
reasonably practicable after such reports are electronically filed with, or furnished to, the Securities and Exchange Commission
(“SEC”). The EDGAR filings of such reports are also available at the SEC's website,
www.sec.gov
.
Also available in the Investors
section of the Company’s website are its corporate governance principles, code of conduct and code of ethics as well as the
charters of the Board’s Audit Committee, Compensation Committee, Executive Committee, Investment and Finance Committee, and
Nominating and Governance Committee.
On June 22, 2016, the Chief Executive
Officer (“CEO”) of HMEC timely submitted the Annual Section 12(a) CEO Certification to the New York Stock Exchange
(“NYSE”) without any qualifications. The Company filed with the SEC, as exhibits to the Annual Report on Form 10-K
for the year ended December 31, 2015, the CEO and Chief Financial Officer (“CFO”) certifications required under Section
302 of the Sarbanes-Oxley Act.
History
The Company's business was founded
in Springfield, Illinois in 1945 by two school teachers to sell automobile insurance to other teachers within the State of Illinois.
The Company expanded its business to other states and broadened its product line to include life insurance in 1949, 403(b) tax-qualified
retirement annuities in 1961 and homeowners insurance in 1965. In November 1991, HMEC completed an initial public offering of its
common stock (the “IPO”). The common stock is traded on the New York Stock Exchange under the symbol “HMN”.
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The following consolidated statement
of operations and balance sheet data have been derived from the consolidated financial statements of the Company, which have been
prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). The consolidated financial statements
of the Company for each of the years in the five year period ended December 31, 2016 have been audited by KPMG LLP, an independent
registered public accounting firm. The following selected historical consolidated financial data should be read in conjunction
with the consolidated financial statements of HMEC and its subsidiaries and “Management's Discussion and Analysis of Financial
Condition and Results of Operations”.
|
|
Year Ended December 31,
|
|
|
|
|
2016
|
|
|
|
2015
|
|
|
|
2014
|
|
|
|
2013
|
|
|
|
2012
|
|
|
|
(Dollars in millions, except per share data)
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance premiums and contract charges earned
|
|
$
|
759.1
|
|
|
$
|
731.9
|
|
|
$
|
715.8
|
|
|
$
|
690.9
|
|
|
$
|
670.5
|
|
Net investment income
|
|
|
361.2
|
|
|
|
332.6
|
|
|
|
329.8
|
|
|
|
313.6
|
|
|
|
306.0
|
|
Net realized investment gains
|
|
|
4.1
|
|
|
|
12.7
|
|
|
|
10.9
|
|
|
|
22.2
|
|
|
|
27.3
|
|
Total revenues
|
|
|
1,128.9
|
|
|
|
1,080.4
|
|
|
|
1,060.7
|
|
|
|
1,031.2
|
|
|
|
1,010.8
|
|
Interest expense
|
|
|
11.8
|
|
|
|
13.1
|
|
|
|
14.2
|
|
|
|
14.2
|
|
|
|
14.2
|
|
Income before income taxes
|
|
|
114.2
|
|
|
|
129.5
|
|
|
|
146.1
|
|
|
|
154.1
|
|
|
|
149.2
|
|
Net income
|
|
|
83.8
|
|
|
|
93.5
|
|
|
|
104.2
|
|
|
|
110.9
|
|
|
|
103.9
|
|
Ratio of earnings to fixed charges (1)
|
|
|
1.6
|
x
|
|
|
1.7
|
x
|
|
|
1.8
|
x
|
|
|
1.8
|
x
|
|
|
1.8
|
x
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Share Data (2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
2.04
|
|
|
$
|
2.23
|
|
|
$
|
2.50
|
|
|
$
|
2.75
|
|
|
$
|
2.63
|
|
Diluted
|
|
$
|
2.02
|
|
|
$
|
2.20
|
|
|
$
|
2.47
|
|
|
$
|
2.66
|
|
|
$
|
2.51
|
|
Shares of Common Stock (in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average - basic
|
|
|
41.2
|
|
|
|
41.9
|
|
|
|
41.6
|
|
|
|
40.4
|
|
|
|
39.5
|
|
Weighted average - diluted
|
|
|
41.5
|
|
|
|
42.4
|
|
|
|
42.2
|
|
|
|
41.6
|
|
|
|
41.4
|
|
Ending outstanding
|
|
|
40.2
|
|
|
|
40.6
|
|
|
|
40.9
|
|
|
|
40.5
|
|
|
|
39.4
|
|
Cash dividends per share
|
|
$
|
1.06
|
|
|
$
|
1.00
|
|
|
$
|
0.92
|
|
|
$
|
0.78
|
|
|
$
|
0.55
|
|
Book value per share
|
|
$
|
32.15
|
|
|
$
|
31.18
|
|
|
$
|
32.65
|
|
|
$
|
27.14
|
|
|
$
|
31.65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Data, at Year End:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
$
|
7,999.3
|
|
|
$
|
7,648.0
|
|
|
$
|
7,403.5
|
|
|
$
|
6,539.5
|
|
|
$
|
6,292.1
|
|
Total assets
|
|
|
10,576.8
|
|
|
|
10,057.0
|
|
|
|
9,768.4
|
|
|
|
8,826.3
|
|
|
|
8,167.2
|
|
Total policy liabilities
|
|
|
6,024.1
|
|
|
|
5,683.4
|
|
|
|
5,351.5
|
|
|
|
5,029.2
|
|
|
|
4,736.7
|
|
Short-term debt
|
|
|
-
|
|
|
|
-
|
|
|
|
38.0
|
|
|
|
38.0
|
|
|
|
38.0
|
|
Long-term debt
|
|
|
247.2
|
|
|
|
247.0
|
|
|
|
199.8
|
|
|
|
199.5
|
|
|
|
199.3
|
|
Total shareholders’ equity
|
|
|
1,294.0
|
|
|
|
1,264.7
|
|
|
|
1,336.5
|
|
|
|
1,099.3
|
|
|
|
1,245.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Information (3):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance premiums written and contract deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and Casualty
|
|
$
|
634.3
|
|
|
$
|
605.8
|
|
|
$
|
584.4
|
|
|
$
|
570.4
|
|
|
$
|
550.8
|
|
Retirement
|
|
|
520.2
|
|
|
|
548.0
|
|
|
|
480.6
|
|
|
|
423.0
|
|
|
|
417.6
|
|
Life
|
|
|
108.0
|
|
|
|
102.7
|
|
|
|
102.7
|
|
|
|
100.8
|
|
|
|
99.3
|
|
Total
|
|
|
1,262.5
|
|
|
|
1,256.5
|
|
|
|
1,167.7
|
|
|
|
1,094.2
|
|
|
|
1,067.7
|
|
Net income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and Casualty
|
|
|
25.6
|
|
|
|
40.0
|
|
|
|
46.9
|
|
|
|
44.4
|
|
|
|
37.1
|
|
Retirement
|
|
|
50.7
|
|
|
|
43.4
|
|
|
|
45.3
|
|
|
|
44.7
|
|
|
|
40.5
|
|
Life
|
|
|
16.6
|
|
|
|
15.0
|
|
|
|
17.5
|
|
|
|
20.4
|
|
|
|
21.9
|
|
Corporate and Other (4)
|
|
|
(9.1
|
)
|
|
|
(4.9
|
)
|
|
|
(5.5
|
)
|
|
|
1.4
|
|
|
|
4.4
|
|
Total
|
|
|
83.8
|
|
|
|
93.5
|
|
|
|
104.2
|
|
|
|
110.9
|
|
|
|
103.9
|
|
|
(1)
|
For the purpose of determining the ratio of earnings to fixed charges, “earnings” consist of income before income
taxes and fixed charges, and “fixed charges” consist of interest expense (including amortization of debt issuance cost)
and interest credited to policyholders on investment contracts and life insurance products with account values.
|
|
(2)
|
Basic earnings per share is computed based on the weighted average number of shares outstanding plus the weighted average number
of fully vested restricted stock units and common stock units payable as shares of HMEC common stock. Diluted earnings per share
is computed based on the weighted average number of shares and common stock equivalents outstanding, to the extent dilutive. The
Company's common stock equivalents relate to outstanding common stock options, common stock units (related to deferred compensation
for Directors and employees) and restricted stock units.
|
|
(3)
|
Information regarding assets by segment at December 31, 2016, 2015 and 2014 is contained in
“Notes to Consolidated Financial
Statements —
Note 14 — Segment Information” listed on page F-1 of this report.
|
|
(4)
|
The Corporate and Other segment primarily includes interest expense on debt, the impact of net
realized investment gains and
losses, corporate debt
retirement costs, and certain public company expenses.
|
Corporate
Strategy and Marketing
The Horace Mann Value Proposition
The Horace Mann Value Proposition
articulates the Company's overarching strategy and business purpose: Provide lifelong financial well-being for educators and their
families through personalized service, advice, and a full range of tailored insurance and financial products.
Target Market
Management believes that Horace
Mann is the largest national multiline insurance company focused on the nation's educators as its primary market. The Company's
target market consists primarily of K-12 teachers, administrators and other employees of public schools and their families located
throughout the U.S. The U.S. Department of Education estimates that there are approximately 6.2 million teachers, school administrators
and education support personnel in public schools in the U.S.; approximately 3.1 million of these individuals are elementary and
secondary teachers.
Distribution Strategy
In addition to the Company’s
traditional exclusive agency force, Horace Mann continues to build complementary distribution channels (i.e., on-line quoting,
direct sales channel, and institutional business to business). These various channels allow customers to access Horace Mann how
they choose. The Company believes that its customers will need expert advice at the point of sale at some point in their lifetime,
and they will choose the advice of a trusted advisor.
Dedicated Agency Force
A cornerstone of Horace Mann’s
marketing strategy is its dedicated sales force of agents, supported by the Company’s Customer Contact Center. As of December
31, 2016, the Company had a combined total of 666 Exclusive Agencies and Employee Agents. Approximately 72% of the appointed agents
are licensed by the Financial Industry Regulatory Authority, Inc. (“FINRA”) to sell variable annuities and variable
universal life policies. Some individuals in the agency force were previously teachers, other members of the education profession
or persons with close ties to the educational community. The Company’s dedicated agents are under contract to market only
the Company's products and limited additional third-party vendor products. Collectively, the Company's principal insurance subsidiaries
are licensed to write business in 49 states and the District of Columbia.
The Company’s dedicated agency
force operates in its Agency Business Model (“ABM”), consisting of Exclusive Agencies as well as a limited number of
Employee Agents. The Company’s Exclusive Agent (“EA”) agreement is designed to place agents in the position to
become business owners in their marketing territories and invest their own capital to grow their agencies. Exclusive Agents are
non-employee, independent contractors. The Company provides ongoing training and support to agents regarding the Company’s
products, as well as to further embed repeatable processes and fully maximize the potential of ABM.
Broadening Distribution Options
To complement and extend the reach
of the Company’s agency force and to more fully utilize its approved payroll slots in school systems across the country,
the Company utilizes a network of independent agents to distribute the Company's 403(b) tax-qualified annuity products. In addition
to serving educators in areas where the Company does not have dedicated agents, the independent agents complement the annuity capabilities
of the Company's agency force in under-penetrated areas. At December 31, 2016, there were 272 independent agents approved to market
the Company’s annuity products throughout the U.S. During 2016, collected contract deposits from this distribution channel
were approximately $46 million. Combined with business from the Company’s dedicated agency force, total annuity collected
contract deposits were $520.2 million for the year ended December 31, 2016.
Geographic Composition of Business
The Company's business is geographically
diversified. For the year ended December 31, 2016, based on direct premiums and contract deposits for all product lines, the top
five states and their portion of total direct insurance premiums and contract deposits were California, 8.1%; Texas, 6.7%; North
Carolina, 6.4%; Florida, 6.3%; and Minnesota, 5.7%.
HMEC's Property and Casualty subsidiaries
are licensed to write business in 48 states and the District of Columbia. The following table shows the Company's top ten Property
and Casualty states based on total direct premiums.
Property and Casualty Segment Top Ten States
(Dollars in millions)
|
Property and Casualty
|
|
Segment
|
|
2016 Direct
|
|
Percent
|
|
Premiums (1)
|
|
of Total
|
State
|
|
|
|
|
|
|
California
|
|
$
|
67.9
|
|
|
|
10.8
|
%
|
Texas
|
|
|
46.5
|
|
|
|
7.4
|
|
North Carolina
|
|
|
44.5
|
|
|
|
7.1
|
|
Minnesota
|
|
|
39.3
|
|
|
|
6.2
|
|
Florida
|
|
|
37.1
|
|
|
|
5.9
|
|
South Carolina
|
|
|
32.5
|
|
|
|
5.2
|
|
Louisiana
|
|
|
30.1
|
|
|
|
4.8
|
|
Georgia
|
|
|
25.5
|
|
|
|
4.0
|
|
Pennsylvania
|
|
|
21.6
|
|
|
|
3.4
|
|
Maine
|
|
|
16.8
|
|
|
|
2.7
|
|
Total of top ten states
|
|
|
361.8
|
|
|
|
57.5
|
|
All other areas
|
|
|
267.7
|
|
|
|
42.5
|
|
Total direct premiums
|
|
$
|
629.5
|
|
|
|
100.0
|
%
|
|
(1)
|
Defined as earned premiums before reinsurance as determined
under statutory accounting principles.
|
HMEC's principal Life insurance
subsidiary is licensed to write business in 48 states and the District of Columbia. The following table shows the Company's top
ten combined Life and Retirement states based on total direct premiums and contract deposits.
Combined Life and Retirement Segments Top Ten States
(Dollars in millions)
|
2016 Direct
|
|
|
|
Premiums and
|
|
Percent
|
|
Contract Deposits (1)
|
|
of Total
|
State
|
|
|
|
|
|
|
Illinois
|
|
$
|
47.8
|
|
|
|
7.6
|
%
|
Florida
|
|
|
42.8
|
|
|
|
6.8
|
|
Pennsylvania
|
|
|
41.4
|
|
|
|
6.5
|
|
Texas
|
|
|
37.4
|
|
|
|
5.9
|
|
North Carolina
|
|
|
36.2
|
|
|
|
5.7
|
|
California
|
|
|
34.0
|
|
|
|
5.4
|
|
Minnesota
|
|
|
33.1
|
|
|
|
5.2
|
|
South Carolina
|
|
|
33.0
|
|
|
|
5.2
|
|
Virginia
|
|
|
28.2
|
|
|
|
4.4
|
|
Indiana
|
|
|
26.5
|
|
|
|
4.2
|
|
Total of top ten states
|
|
|
360.4
|
|
|
|
56.9
|
|
All other areas
|
|
|
272.7
|
|
|
|
43.1
|
|
Total direct premiums
|
|
$
|
633.1
|
|
|
|
100.0
|
%
|
|
(1)
|
Defined as collected premiums before reinsurance as determined
under statutory accounting principles.
|
National, State and Local Education
Associations
The Company has established relationships
with a number of educator groups throughout the U.S. These groups include the National Education Association (“NEA”);
The NEA Foundation; the Association of School Business Officials International (“ASBO”); and various school administrator
and principal associations such as the American Association of School Administrators (“AASA”), The School Superintendents
Association; the National Association of Elementary School Principals (“NAESP”); and the National Association of Secondary
School Principals (“NASSP”). The Company does not pay these groups any consideration in exchange for endorsement of
the Company or its products. Depending on the organization, the Company does pay for certain special functions and advertising.
In recent years, the Company has
developed relationships and programs to align its agents with school districts in a business to business relationship. In addition
to working relationships, Horace Mann has strategic alliances with AASA and ASBO, as well as ASBO’s state and regional affiliates.
The Company holds an annual meeting with selected ASBO members to gain feedback on a variety of school district programs.
The Company has had its longest
relationship with the NEA, the nation's largest confederation of state and local teachers' associations, and many of the state
and local education associations affiliated with the NEA. The NEA has approximately 3.2 million members. A number of state and
local associations affiliated with the NEA endorse various insurance products and services of the Company and its competitors.
The Company does not pay the NEA or any affiliated associations any consideration in exchange for endorsement of Company products.
The Company does pay for marketing agreements, certain special functions and advertising.
Support of Educator Programs
The Company’s agents conduct
state-specific State Teacher Retirement System Workshops in addition to Financial Success Workshops designed to help educators
gain or increase their financial literacy. In addition, the Company offers services and products to school districts that help
meet the needs of educators including payroll deduction options for individual insurance products, group life insurance and Section
125 programs. To help districts determine what programs meet their needs, the Company has developed an Employer Benefit Review
Service and conducts workshops for school business officials.
Along
with differentiating, value-added product features, the Company has a number of programs that demonstrate its commitment to the
educator profession, while also further distinguishing Horace Mann from competitors within the K-12 educator market. Examples of
these programs include: the NEA Foundation’s Horace Mann Awards for Teaching Excellence honoring 5 national finalists; Horace
Mann is a national sponsor of DonorsChoose.org, an online, not-for-profit organization that connects corporate and individual donors
to teachers with classroom projects in need of funding; Horace Mann sponsors ASBO’s Certified Administrator of School Finance
and Operations
®
(“SFO
®
”)
certification program; and Horace Mann is a sponsor of the AASA National Superintendent Certification Program and AASA’s
National Conference on Education.
Property and Casualty Segment
The Property and Casualty segment
represented 50% of the Company's consolidated insurance premiums written and contract deposits in 2016.
The primary Property and Casualty
product offered by the Company is private passenger automobile insurance, which in 2016 represented 34% of the Company’s
total insurance premiums written and contract deposits and 67% of Property and Casualty net written premiums. As of December 31,
2016, the Company had approximately 485,000 automobile policies in force. The Company's automobile business is primarily preferred
risk, defined as a household whose drivers have had no recent accidents and no more than one recent moving violation.
In 2016, homeowners insurance represented
16% of the Company’s total insurance premiums written and contract deposits and 32% of Property and Casualty net written
premiums. As of December 31, 2016, the Company had approximately 220,000 homeowners policies in force. The Company insures primarily
residential homes.
The Company has programs in a majority
of states to provide higher-risk automobile and homeowners coverages, as well as a number of other insurance coverages, with third-party
vendors underwriting and bearing the risk of such insurance and the Company receiving commissions on the sales. Similarly, the
Company has increased its offering of third-party vendor products in many areas to include coverage for small business owners and
classic/collector automobile owners to meet those aspects of an educator’s needs.
Selected Historical Financial
Information for the Property and Casualty Segment
The following table provides certain
financial information for the Property and Casualty segment for the periods indicated.
Property and Casualty Segment
Selected Historical Financial Information
(Dollars in millions)
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Financial Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance premiums written
|
|
$
|
634.3
|
|
|
$
|
605.8
|
|
|
$
|
584.4
|
|
Insurance premiums earned
|
|
|
620.5
|
|
|
|
596.0
|
|
|
|
581.8
|
|
Net investment income
|
|
|
39.0
|
|
|
|
33.5
|
|
|
|
36.8
|
|
Income before income taxes
|
|
|
30.3
|
|
|
|
51.3
|
|
|
|
60.8
|
|
Net income
|
|
|
25.6
|
|
|
|
40.0
|
|
|
|
46.9
|
|
Catastrophe costs, pretax (1)
|
|
|
60.0
|
|
|
|
44.4
|
|
|
|
37.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Statistics:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss adjustment expense ratio
|
|
|
74.8
|
%
|
|
|
70.5
|
%
|
|
|
68.7
|
%
|
Expense ratio
|
|
|
26.7
|
%
|
|
|
26.5
|
%
|
|
|
27.4
|
%
|
Combined loss and expense ratio
|
|
|
101.5
|
%
|
|
|
97.0
|
%
|
|
|
96.1
|
%
|
Effect of catastrophe costs on the combined ratio (1)
|
|
|
9.7
|
%
|
|
|
7.4
|
%
|
|
|
6.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Automobile and Homeowners:
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance premiums written
|
|
|
|
|
|
|
|
|
|
|
|
|
Automobile
|
|
$
|
425.9
|
|
|
$
|
402.2
|
|
|
$
|
383.8
|
|
Homeowners
|
|
|
208.2
|
|
|
|
203.4
|
|
|
|
200.4
|
|
Insurance premiums earned
|
|
|
|
|
|
|
|
|
|
|
|
|
Automobile
|
|
|
414.3
|
|
|
|
393.6
|
|
|
|
381.4
|
|
Homeowners
|
|
|
206.0
|
|
|
|
202.2
|
|
|
|
200.2
|
|
Policies in force (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Automobile
|
|
|
485
|
|
|
|
487
|
|
|
|
481
|
|
Homeowners
|
|
|
220
|
|
|
|
224
|
|
|
|
229
|
|
Total
|
|
|
705
|
|
|
|
711
|
|
|
|
710
|
|
|
(1)
|
These measures are used by the Company's management to evaluate performance against historical
results and establish targets on a consolidated basis. These measures are components of net income but are considered non-GAAP
financial measures under applicable SEC rules because they are not displayed as separate line items in the Consolidated Statements
of Operations and there is inclusion or exclusion of certain items not ordinarily included or excluded in a GAAP financial measure.
In the opinion of the Company's management, a discussion of these measures is meaningful to provide investors with an understanding
of the significant factors that comprise the Company's periodic results of operations.
|
|
·
|
Catastrophe costs - The sum of catastrophe losses and
Property and Casualty catastrophe reinsurance reinstatement premiums.
|
|
·
|
Catastrophe losses - In categorizing Property and Casualty
claims as being from a catastrophe, the Company utilizes the designations of the Property Claim Services, a subsidiary of Insurance
Services Office, Inc. (“ISO”), and additionally beginning in 2007, includes losses from all such events that meet the
definition of covered loss in the Company’s primary catastrophe excess of loss reinsurance contract, and reports loss and
loss adjustment expense amounts net of reinsurance recoverables. A catastrophe is a severe loss resulting from natural and man-made
events within a particular territory, including risks such as hurricane, fire, earthquake, windstorm, explosion, terrorism and
other similar events, that causes $25 million or more in insured Property and Casualty losses for the industry and affects a significant
number of Property and Casualty insurers and policyholders. Each catastrophe has unique characteristics. Catastrophes are not predictable
as to timing or amount of loss in advance. Their effects are not included in earnings or claim and claim adjustment expense reserves
prior to occurrence. In the opinion of the Company's management, a discussion of the impact of catastrophes is meaningful for investors
to understand the variability in periodic earnings.
|
Catastrophe Costs
The level of catastrophe costs
can fluctuate significantly from year to year. Catastrophe costs before federal income tax benefits for the Company for the last
ten years are shown in the following table.
Catastrophe Costs
(Dollars in millions)
|
The
|
|
Company (1)
|
Year Ended December 31,
|
|
2016
|
|
$
|
60.0
|
|
2015
|
|
|
44.4
|
|
2014
|
|
|
37.5
|
|
2013
|
|
|
40.2
|
|
2012
|
|
|
43.3
|
|
2011
|
|
|
86.0
|
|
2010
|
|
|
49.2
|
|
2009
|
|
|
33.1
|
|
2008
|
|
|
73.9
|
|
2007
|
|
|
23.6
|
|
|
(1)
|
Net
of reinsurance and before federal income tax benefits. Includes allocated loss adjustment
expenses and reinsurance reinstatement premiums; excludes unallocated loss adjustment
expenses. The Company's individually significant catastrophe losses net of reinsurance
were as follows:
|
|
2016 -
|
Wind/hail
event in March was $3.9 million; wind/hail event in April was $9.2 million; wind/hail/tornado
event in May was $3.4 million; Hurricane Matthew was $10.0 million; other weather events
throughout the year were each less than $3.0 million.
|
|
2015 -
|
Winter
storm in February was $8.9 million; wind/flooding event in October was $3.0 million;
other weather events throughout the year were each less than $3.0 million.
|
|
2014 -
|
Wind/hail
event in May was $8.5 million; other weather events throughout the year were each less
than $3.0 million.
|
|
2013 -
|
Wind/hail/tornado
events in May, June and August were $10.1 million, $4.0 million and $7.9 million, respectively;
winter storm events in February and April were $3.7 million and $3.4 million, respectively.
|
|
2012 -
|
Wind/hail/tornado
events in March, April, May and June were $6.6 million, $6.6 million, $5.8 million and
$11.9 million, respectively; June tropical storm and wildfire events, $1.4 million combined;
$4.0 million, Hurricane Isaac; $2.8 million, Hurricane/Superstorm Sandy.
|
|
2011 -
|
Wind/hail/tornado
events in April, May and June were $28.0 million, $17.6 million and $8.5 million, respectively;
$8.0 million, Hurricane Irene.
|
|
2010 -
|
Wind/hail/tornado
events in March, May, June, July and October were $4.8 million, $8.3 million, $12.1 million,
$5.5 million and $7.7 million, respectively.
|
|
2009 -
|
$9.3
million, July wind/hail/tornadoes; $6.3 million, June wind/hail/tornadoes.
|
|
2008 -
|
$16.5
million, Hurricane Gustav; $15.5 million, Hurricane Ike; $9.8 million, May wind/hail/tornadoes;
$7.0 million, June wind/hail/tornadoes; $3.0 million, December winter storm.
|
|
2007-
|
$4.7
million, August wind/hail/tornadoes; $4.5 million, October California wildfires; $3.5
million, June wind/hail/tornadoes.
|
Fluctuations from year to year
in the level of catastrophe losses impact a property and casualty insurance company’s claims and claim adjustment expenses
incurred and paid. For comparison purposes, the following table provides amounts for the Company excluding catastrophe losses.
Impact of Catastrophe Losses
(Dollars in millions)
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
|
Claims and claim expenses incurred (1)
|
|
$
|
464.1
|
|
|
$
|
420.3
|
|
|
$
|
399.5
|
|
Deduct: amount attributable to catastrophes (2)
|
|
|
60.0
|
|
|
|
44.4
|
|
|
|
37.5
|
|
Excluding catastrophes (1)
|
|
$
|
404.1
|
|
|
$
|
375.9
|
|
|
$
|
362.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Claims and claim expense payments
|
|
$
|
468.8
|
|
|
$
|
436.4
|
|
|
$
|
393.8
|
|
Deduct: amount attributable to catastrophes (2)
|
|
|
62.0
|
|
|
|
44.6
|
|
|
|
38.2
|
|
Excluding catastrophes
|
|
$
|
406.8
|
|
|
$
|
391.8
|
|
|
$
|
355.6
|
|
|
(1)
|
Includes the impact of development of prior years’ reserves as quantified in “Property and Casualty Reserves”.
|
|
(2)
|
Net of reinsurance and before federal income tax benefits. Includes allocated loss adjustment expenses; excludes unallocated
loss adjustment expenses.
|
Property and Casualty Reserves
Property and Casualty unpaid claims
and claim expenses (“loss reserves”) represent management’s estimate of ultimate unpaid costs of losses and settlement
expenses for claims that have been reported and claims that have been incurred but not yet reported. The Company calculates and
records a single best estimate of the reserve as of each balance sheet date in conformity with generally accepted actuarial standards.
For additional information regarding the process used to estimate Property and Casualty reserves and the risk factors involved,
as well as a summary reconciliation of the beginning and ending Property and Casualty insurance claims and claim expense reserves
and reserve development recorded in each of the three years ended December 31, 2016, see “Notes to Consolidated Financial
Statements — Note 5 — Property and Casualty Unpaid Claims and Claim Expenses”, “Management’s Discussion
and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies — Liabilities for Property
and Casualty Claims and Claim Expenses” and “Management’s Discussion and Analysis of Financial Condition and
Results of Operations — Results of Operations for the Three Years Ended December 31, 2016 — Benefits, Claims and Settlement
Expenses”.
All of the Company's reserves for
Property and Casualty unpaid claims and claim expenses are carried at the full value of estimated liabilities and are not discounted
for interest expected to be earned on reserves. Due to the nature of the Company's personal lines business, the Company has no
exposure to losses related to claims for toxic waste cleanup, other environmental remediation or asbestos-related illnesses other
than claims under homeowners insurance policies for environmentally related items such as mold.
Property and Casualty Reinsurance
All reinsurance is obtained through
contracts which generally are entered into for each calendar year. Although reinsurance does not legally discharge the Company
from primary liability for the full amount of its policies, it does allow for recovery from assuming reinsurers to the extent of
the reinsurance ceded. Past due reinsurance recoverables as of December 31, 2016 were not material.
The Company maintains catastrophe
excess of loss reinsurance coverage. For 2016, the Company’s catastrophe excess of loss coverage consisted of one contract
in addition to a minimal amount of coverage by the Florida Hurricane Catastrophe Fund (“FHCF”). The catastrophe excess
of loss contract provided 95% coverage for catastrophe losses above a retention of $25.0 million per occurrence up to $175.0 million
per occurrence. This contract consisted of three layers, each of which provided for one mandatory reinstatement. The layers were
$25.0 million excess of $25.0 million, $40.0 million excess of $50.0 million and $85.0 million excess of $90.0 million.
For 2017, the Company’s catastrophe
excess of loss coverage consists of one contract in addition to a minimal amount of coverage by the FHCF. The catastrophe excess
of loss contract provides 95% coverage for catastrophe losses above a retention of $25 million per occurrence up to $90 million
per occurrence and 100% coverage for catastrophe losses above $90 million per occurrence up to $175 million per occurrence. This
contract consists of three layers, each of which provide for one mandatory reinstatement. The layers are $25 million excess of
$25 million, $40 million excess of $50 million and $85 million excess of $90 million.
The Company has not joined the
California Earthquake Authority (“CEA”). The Company's exposure to losses from earthquakes is managed through its underwriting
standards, its earthquake policy coverage limits and deductible levels, and the geographic distribution of its business, as well
as its reinsurance program. After reviewing the exposure to earthquake losses from the Company’s own policies and from what
it would be with participation in the CEA, including estimated start-up and ongoing costs related to CEA participation, management
believes it is in the Company's best economic interest to offer earthquake coverage directly to its homeowners policyholders.
For liability coverages, in 2016
the Company reinsured each loss above a retention of $0.9 million up to $5.0 million on a per occurrence basis and $20.0 million
in a clash event. (A clash cover is a reinsurance casualty excess contract requiring two or more casualty coverages or policies
issued by the Company to be involved in the same loss occurrence for coverage to apply.) Effective January 1, 2017, for liability
coverages the retention is $1.0 million with coverage up to $5.0 million on a per occurrence basis and $20.0 million in a clash
event.
For property coverages, in 2016
the Company reinsured each loss above a retention of $0.9 million up to $5.0 million on a per risk basis, including catastrophe
losses. Also, the Company could submit to the reinsurers two per risk losses from the same occurrence for a total of $8.2 million
of property recovery in any one event. Retention for property coverage in 2017 is $1.0 million, with coverage up to $5.0 million
on a per risk basis, including catastrophe losses and the Company can submit to the reinsurers two per risk losses from the same
occurrence for a total of $8.0 million of property recovery in any one event.
The following table identifies
the Company's most significant reinsurers under the catastrophe first event excess of loss reinsurance program, their percentage
participation in this program and their ratings by A.M. Best Company (“A.M. Best”) and Standard & Poor's Corporation
(“S&P” or “Standard & Poor's”) as of January 1, 2017. No other single reinsurer's percentage participation
in 2017 or 2016 exceeds 5%.
Property Catastrophe First Event Excess of Loss
Reinsurance Participants In Excess of 5%
A.M. Best
|
|
S&P
|
|
|
|
|
|
Participation
|
|
Rating
|
|
Rating
|
|
Reinsurer
|
|
Parent
|
|
|
2017
|
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A
|
|
A+
|
|
Lloyd’s of London Syndicates
|
|
|
|
|
33%
|
|
|
|
27%
|
|
A+
|
|
AA-
|
|
Swiss Re Underwriters Agency, Inc
|
|
Swiss Re Ltd
|
|
|
10%
|
|
|
|
10%
|
|
NR
|
|
AA-
|
|
R+V Versicherung AG
|
|
DZ BANK AG
|
|
|
8%
|
|
|
|
7%
|
|
A
|
|
AA-
|
|
SCOR Global P&C SE
|
|
SCOR SE
|
|
|
7%
|
|
|
|
7%
|
|
A++
|
|
A+
|
|
Tokio Millennium Re AG
|
|
Tokio Marine Holdings, Inc.
|
|
|
2%
|
|
|
|
5%
|
|
NR - Not rated.
For 2017 and 2016, property catastrophe
reinsurers representing 92% and 93%, respectively, of the Company’s total reinsured catastrophe coverage were rated “A-
(Excellent)” or above by A.M. Best with the remaining percentages provided by a reinsurer rated “AA-” by S&P
but not formally followed by A.M. Best.
Retirement Segment
Effective December 31, 2016, the
Company changed the name of its Annuity segment to Retirement. The name change better aligns our external reports with internally
used terminology. This name change does not affect any previously reported results for the Retirement segment.
Educators in the Company's target
market continue to benefit from the provisions of Section 403(b) of the Internal Revenue Code (the “Code”) which began
in 1961. This section of the Code allows public school employees and employees of other tax-exempt organizations, such as not-for-profit
private schools, to utilize pretax income to make periodic contributions to a qualified retirement plan. (Also see “Regulation
— Regulation at Federal Level”.) The Company entered the educators retirement annuity market in 1961 and is one of
the largest participants in the K-12 portion of the 403(b) tax-qualified annuity market, measured by 403(b) net written premium
on a statutory accounting basis. The Company has 403(b) payroll deduction capabilities utilized by approximately one-third of the
13,500 public school districts in the U.S. Approximately 49% of the Company's new annuity contract deposits in 2016 were for 403(b)
tax-qualified annuities; approximately 60% of accumulated annuity value on deposit is 403(b) tax-qualified. In 2016, annuities
represented 41% of the Company’s consolidated insurance premiums written and contract deposits.
The Company markets both fixed
and variable annuity contracts, primarily on a tax-qualified basis. Fixed only annuities provide a guarantee of principal and a
guaranteed minimum rate of return. These contracts are backed by the Company’s general account investments. The Company bears
the investment risk associated with the investments and may change the declared interest rate on these contracts subject to contract
guarantees. In 2014, the Company began offering fixed indexed annuity (“FIA”) products with interest crediting strategies
linked to the Standard & Poor’s 500 Index and the Dow Jones Industrial Average. These products are fixed annuities with
a guaranteed minimum interest rate, as
described above, plus a contingent return based on equity
market performance. The Company purchases call options on the applicable indices as an investment to provide the income needed
to fund the annual index credits on the indexed products.
Variable annuities combine a fixed
account option with equity- and bond-linked sub-account options. In general, the contractholders bear the investment risk related
to the variable annuity sub-accounts and may change their allocation between the guaranteed interest rate fixed account and the
wide range of variable investment options at any time. By utilizing tools that provide assistance in determining needs and making
asset allocation decisions, contractholders are able to choose the investment mix that matches their personal risk tolerance and
retirement goals. The Company’s sub-account options also include both lifecycle funds and asset allocation funds. These all-purpose
funds have assets allocated among multiple investment classes within each fund based on a specific targeted retirement date or
risk tolerance.
Variable annuity contracts with
a guaranteed minimum death benefit (“GMDB”) provide an additional benefit if the contractholder dies and the contract
value is less than a contractually defined amount. The Company has a relatively low exposure to GMDB risk because approximately
32% of contract values have no guarantee; approximately 62% have only a return of premium guarantee; and only approximately 6%
have a guarantee of premium roll-up at an annual rate of 3% or 5%.
As of December 31, 2016, the Company
had 80 variable sub-account options including funds managed by some of the best-known names in the mutual fund industry, such as
AllianceBernstein, American Funds, Ariel, BlackRock, Calvert, Davis, Dreyfus, Fidelity, Franklin Templeton, Goldman Sachs, JPMorgan,
Lord Abbett, MFS, Neuberger Berman, Putnam, T. Rowe Price, Vanguard, Wells Fargo and Wilshire, offering the Company's customers
multiple investment options to address their personal investment objectives and risk tolerance. These funds have been selected
with the assistance of Wilshire Associates, the Company’s fund advisor, which provides oversight and input to fund manager
additions and replacements. Total accumulated fixed and variable annuity cash value on deposit at December 31, 2016 was $6.4 billion.
Among the Company’s annuity
products, the Goal Planning Annuity offers educators a variable annuity with the Company’s wide array of sub-account investment
choices. It includes an optional first year premium bonus and two optional riders that enhance the death benefit feature of the
product. Another product, Expanding Horizon, is a fixed interest rate annuity contract for investors who do not want investment
risk exposure. This product offers educators a competitive rate of interest on their retirement dollars and a choice of bonuses
to optimize their benefits at retirement. The Destination Fixed Indexed Annuity product is designed to have potentially greater
credited interest rates over the long term than traditional fixed rate annuities, because the credited interest rate will be linked
to changes in an index, either the S&P 500 or the Dow Jones Industrial Average.
In addition to individual annuities,
the Company offers group variable and fixed annuity products that allow flexibility in customizing 403(b) annuity programs to meet
the needs of school districts.
To assist agents in delivering
the Horace Mann Value Proposition, the Company has entered into third-party vendor agreements with American Funds Distributors,
Inc. and Fidelity Distributors Corporation to market their retail mutual funds and with Raymond James Financial, Inc. to market
their mutual fund brokerage accounts. In addition to retail mutual fund accounts, the Company’s agents can offer a 529 college
savings program and Coverdell Education Savings Accounts utilizing certain funds. The Company also markets 403(b)(7) tax-deferred
mutual fund investment programs and a minimal amount of fixed indexed annuities through additional third-party vendor agreements.
Third-party vendors underwrite these accounts or contracts and the Company receives commissions on the sales of these products.
Selected Historical Financial
Information for the Retirement Segment
The following table provides certain
information for the Retirement segment for the periods indicated.
Retirement Segment
Selected Historical Financial Information
(Dollars in millions, unless otherwise indicated)
|
|
|
Year Ended December 31,
|
|
|
|
|
2016
|
|
|
|
2015
|
|
|
|
2014
|
|
Financial Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable
|
|
$
|
163.6
|
|
|
$
|
174.9
|
|
|
$
|
140.6
|
|
Fixed
|
|
|
356.6
|
|
|
|
373.1
|
|
|
|
340.0
|
|
Total
|
|
|
520.2
|
|
|
|
548.0
|
|
|
|
480.6
|
|
Contract charges earned
|
|
|
24.9
|
|
|
|
25.4
|
|
|
|
25.6
|
|
Net investment income
|
|
|
249.4
|
|
|
|
228.4
|
|
|
|
222.1
|
|
Net interest margin (without net realized investment gains and
losses)
|
|
|
102.1
|
|
|
|
89.7
|
|
|
|
89.6
|
|
Income before income taxes
|
|
|
71.0
|
|
|
|
63.3
|
|
|
|
66.7
|
|
Net income
|
|
$
|
50.7
|
|
|
$
|
43.4
|
|
|
$
|
45.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Statistics:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated value
|
|
$
|
4,503.1
|
|
|
$
|
4,197.0
|
|
|
$
|
3,885.1
|
|
Accumulated value persistency
|
|
|
94.6
|
%
|
|
|
94.8
|
%
|
|
|
94.5
|
%
|
Variable
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated value
|
|
$
|
1,923.9
|
|
|
$
|
1,800.7
|
|
|
$
|
1,813.6
|
|
Accumulated value persistency
|
|
|
94.7
|
%
|
|
|
94.3
|
%
|
|
|
94.0
|
%
|
Number of contracts in force
|
|
|
219,105
|
|
|
|
211,071
|
|
|
|
202,572
|
|
Average accumulated value (in dollars)
|
|
$
|
29,333
|
|
|
$
|
28,415
|
|
|
$
|
28,132
|
|
Average annual deposit by contractholders (in dollars)
|
|
$
|
2,412
|
|
|
$
|
2,381
|
|
|
$
|
2,352
|
|
Annuity contracts terminated due to surrender, death, maturity or
other
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of contracts
|
|
|
7,482
|
|
|
|
7,089
|
|
|
|
7,246
|
|
Amount
|
|
$
|
373.2
|
|
|
$
|
343.5
|
|
|
$
|
340.9
|
|
Fixed accumulated value grouped by applicable surrender charge
|
|
|
|
|
|
|
|
|
|
|
|
|
0%
|
|
$
|
2,650.4
|
|
|
$
|
2,318.9
|
|
|
$
|
2,000.7
|
|
Greater than 0% but less than 5%
|
|
|
172.9
|
|
|
|
171.2
|
|
|
|
190.9
|
|
5% and greater but less than 10%
|
|
|
1,525.7
|
|
|
|
1,542.3
|
|
|
|
1,528.9
|
|
10% and greater
|
|
|
33.1
|
|
|
|
44.9
|
|
|
|
45.7
|
|
Supplementary contracts with life contingencies not subject to
discretionary withdrawal
|
|
|
121.0
|
|
|
|
119.7
|
|
|
|
118.9
|
|
Total
|
|
$
|
4,503.1
|
|
|
$
|
4,197.0
|
|
|
$
|
3,885.1
|
|
Life Segment
The Company entered the individual
life insurance business in 1949. The Company offers traditional term and whole life insurance products and, from time to time,
revises products and product features or develops new products. For instance, the Company offers a discount for educator customers.
Following is a description of some
of the products and other features in the Company’s life product portfolio. Life by Design is a portfolio of Horace Mann
manufactured and branded life insurance products which specifically addresses the financial planning needs of educators. The Life
by Design portfolio features individual whole life and individual term products, including 10-, 20- and 30-year level term policies.
The Life by Design policies have premiums that are guaranteed for the duration of the contract and offer lower minimum face amounts.
The Company offers a combination
product called Life Select that mixes a base of either traditional whole life, 20-pay life or life paid-up at age 65 with a variety
of term riders to allow for more flexibility in tailoring the coverage to the customers’ varying life insurance needs. Additional
products and features are single premium whole life products, as well as a preferred plus underwriting category and $500 thousand
and $1 million rate band enhancements for term products. The Company offers Cash Value Term — a term policy that builds cash
value while providing the income protection of traditional level term life insurance.
In October 2015, the Company introduced
an indexed universal life (“IUL”) product with interest crediting strategies linked to the Standard & Poor’s
500 Index and the Dow Jones Industrial Average offering a contingent return based on equity market performance. Along with expanded
product offerings, new marketing support tools continue to be introduced to aid the agency force. After December 31, 2006, the
Company no longer issues new policies for its “Experience Life” product, a flexible, adjustable-premium life insurance
contract that includes availability of an interest-bearing account.
The Company's traditional term,
whole life and group life business in force consists of approximately 144,000 policies, representing approximately $13.5 billion
of life insurance in force, with annual insurance premiums and contract deposits of approximately $52.3 million as of December
31, 2016. In addition, the Company also had in force approximately 54,000 Experience Life policies, representing approximately
$3.6 billion of life insurance in force, with annual insurance premiums and contract deposits of approximately $44.2 million.
In 2016, the Life segment represented
9% of the Company’s consolidated insurance premiums written and contract deposits.
During 2016, the average face amount
of ordinary life insurance policies issued by the Company was approximately $182,000 and the average face amount of all ordinary
life insurance policies in force at December 31, 2016 was approximately $100,000.
The maximum individual life insurance
risk retained by the Company is $300,000 on any individual life, while either $100,000 or $125,000 is retained on each group life
policy depending on the type of coverage. The excess of the amounts retained are reinsured with life reinsurers that are rated
“A- (Excellent)” or above by A.M. Best. The Company also maintains a life catastrophe reinsurance program. In 2016,
the Company reinsured 100% of the catastrophe risk in excess of $1 million up to $35 million per occurrence, with one reinstatement.
For 2017, the Company’s catastrophe risk coverage is unchanged. The Company’s life catastrophe risk reinsurance program
covers acts of terrorism and includes nuclear, biological and chemical explosions but excludes other acts of war.
Selected Historical Financial
Information for the Life Segment
The following table provides certain
information for the Life segment for the periods indicated.
Life Segment
Selected Historical Financial Information
(Dollars in millions, unless otherwise indicated)
|
|
|
Year Ended December 31,
|
|
|
|
|
2016
|
|
|
|
2015
|
|
|
|
2014
|
|
Financial Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance premiums and contract deposits
|
|
$
|
108.0
|
|
|
$
|
102.7
|
|
|
$
|
102.7
|
|
Insurance premiums and contract charges earned
|
|
|
113.7
|
|
|
|
110.5
|
|
|
|
108.4
|
|
Net investment income
|
|
|
73.6
|
|
|
|
71.6
|
|
|
|
71.8
|
|
Income before income taxes
|
|
|
26.3
|
|
|
|
22.9
|
|
|
|
26.9
|
|
Net income
|
|
|
16.6
|
|
|
|
15.0
|
|
|
|
17.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Statistics:
|
|
|
|
|
|
|
|
|
|
|
|
|
Life insurance in force
|
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary life
|
|
$
|
16,261
|
|
|
$
|
15,589
|
|
|
$
|
14,871
|
|
Group life
|
|
|
764
|
|
|
|
916
|
|
|
|
930
|
|
Total
|
|
$
|
17,025
|
|
|
$
|
16,505
|
|
|
$
|
15,801
|
|
Number of policies in force
|
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary life
|
|
|
163,056
|
|
|
|
162,670
|
|
|
|
161,759
|
|
Group life
|
|
|
34,881
|
|
|
|
39,119
|
|
|
|
39,108
|
|
Total
|
|
|
197,937
|
|
|
|
201,789
|
|
|
|
200,867
|
|
Average face amount in force (in dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary life
|
|
$
|
99,726
|
|
|
$
|
95,832
|
|
|
$
|
91,933
|
|
Group life
|
|
|
21,903
|
|
|
|
23,416
|
|
|
|
23,780
|
|
Total
|
|
|
86,012
|
|
|
|
81,793
|
|
|
|
78,664
|
|
Lapse ratio (ordinary life insurance in force)
|
|
|
4.3
|
%
|
|
|
4.1
|
%
|
|
|
4.0
|
%
|
Ordinary life insurance terminated due to death, surrender, lapse or
other
|
|
|
|
|
|
|
|
|
|
|
|
|
Face amount of insurance surrendered or lapsed
|
|
$
|
674.7
|
|
|
$
|
643.5
|
|
|
$
|
565.2
|
|
Number of policies
|
|
|
4,951
|
|
|
|
5,014
|
|
|
|
4,093
|
|
Amount of death claims opened
|
|
$
|
55.9
|
|
|
$
|
58.6
|
|
|
$
|
50.0
|
|
Number of death claims opened
|
|
|
1,512
|
|
|
|
1,645
|
|
|
|
1,507
|
|
Competition
The Company operates in a highly
competitive environment. The insurance industry consists of a large number of insurance companies, some of which have substantially
greater financial resources, widespread advertising campaigns, more diversified product lines, greater economies of scale and/or
lower-cost marketing approaches compared to the Company. In the Company’s target market, management believes that the principal
competitive factors in the sale of the Property and Casualty segment’s insurance products are price, overall service, name
recognition and worksite sales and service. Management believes that the principal competitive factors in the sale of the Retirement
segment’s products and Life segment’s insurance are worksite sales and service, product features, perceived stability
of the insurer, price, overall service and name recognition.
The Company competes in its target
market with a number of national providers of personal automobile, homeowners and life insurance such as State Farm, Allstate,
Farmers, Liberty Mutual and Nationwide as well as several regional companies. The Company also competes for automobile business
with other companies such as GEICO, Progressive and USAA, many of which feature direct marketing distribution.
Among the major national providers
of annuities to educators, the Company’s competitors for annuity business include The Variable Annuity Life Insurance Company
(“VALIC”), a subsidiary of American International Group (“AIG”); AXA; Voya Financial, Inc.; Life Insurance
Company of the Southwest, a subsidiary of National Life Insurance Company; MetLife; Security Benefit; and Teachers Insurance and
Annuity Association – College Retirement Equities Fund (“TIAA-CREF”). Select mutual fund families and financial
planners also compete in this marketplace.
The market for tax-deferred retirement
products in the Company’s target market has been impacted by the revised Internal Revenue Service (“IRS”) Section
403(b) regulations, which made the 403(b) market more comparable to the 401(k) market than it was in the past. While this change
has and may continue to reduce the number of competitors in this market, it has made the 403(b) market more attractive to some
of the larger companies experienced in 401(k) plans, including both insurance and mutual fund companies, that had not previously
been active competitors in this business.
Investments
The Company's investments are selected
to balance the objectives of protecting principal, minimizing exposure to interest rate risk and providing a high current yield.
These objectives are implemented through a portfolio that emphasizes investment grade, publicly traded fixed maturity securities,
which are selected to match the anticipated duration of the Company’s liabilities. When impairment of the value of an investment
is considered other-than-temporary, the decrease in value is recorded and a new cost basis is established. At December 31, 2016,
fixed maturity securities represented 93.2% of the Company’s total investment portfolio, at fair value. Of the fixed maturity
securities portfolio, 95.6% was investment grade and 95.5% was publicly traded. At December 31, 2016, the average quality and average
option-adjusted duration of the total fixed maturity securities portfolio were A and 5.9 years, respectively. At December 31, 2016,
investments in non-investment grade fixed income securities represented 3.8% of the total investment portfolio, at fair value.
There are no significant investments in mortgage whole loans, real estate or non-U.S. dollar-denominated foreign securities.
The Company has separate investment
strategies and guidelines for its Property and Casualty, Retirement and Life assets, which recognize different characteristics
of the associated insurance liabilities, as well as different tax and regulatory environments. The Company manages interest rate
exposure for its portfolios through asset/liability management techniques which attempt to coordinate the duration of the assets
with the duration of the insurance policy liabilities. Duration of assets and liabilities will generally differ only because of
opportunities to significantly increase yields or because policy values are not interest-sensitive, as is the case in the Property
and Casualty segment.
The investments of each insurance
subsidiary must comply with the insurance laws of such insurance subsidiary's domiciliary state. These laws prescribe the type
and amount of investments that may be purchased and held by insurance companies. In general, these laws permit investments, within
specified limits and subject to certain qualifications, in federal, state and municipal obligations, corporate bonds, mortgage-backed
bonds, other asset-backed bonds, preferred stocks, common stocks, real estate mortgages, real estate, and alternative investments.
The following table presents the
carrying values and amortized cost of the Company's investment portfolio.
Investment Portfolio
December 31, 2016
(Dollars in millions)
|
|
Percentage
|
|
|
|
|
|
|
|
|
|
|
of Total
|
|
Carrying
Value
|
|
|
|
|
|
|
|
|
Carrying
|
|
|
|
Life and
|
|
Property and
|
|
Amortized
|
|
|
|
Value
|
|
Total
|
|
Retirement
|
|
Casualty
|
|
Cost or Cost
|
|
Publicly Traded Fixed Maturity Securities,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Securities and Short-term Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and agency obligations, all
investment grade (1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
|
|
5.5
|
%
|
|
$
|
442.4
|
|
|
$
|
439.1
|
|
|
|
$
|
3.3
|
|
|
|
$
|
412.9
|
|
|
Other, including U.S. Treasury securities
|
|
|
5.8
|
|
|
|
467.1
|
|
|
|
459.4
|
|
|
|
|
7.7
|
|
|
|
|
458.7
|
|
|
Investment grade corporate and public utility
bonds
|
|
|
29.7
|
|
|
|
2,375.3
|
|
|
|
2,232.6
|
|
|
|
|
142.7
|
|
|
|
|
2,249.9
|
|
|
Non-investment grade corporate and public utility
bonds (2)
|
|
|
2.3
|
|
|
|
186.2
|
|
|
|
116.7
|
|
|
|
|
69.5
|
|
|
|
|
184.7
|
|
|
Investment grade municipal bonds
|
|
|
21.2
|
|
|
|
1,685.8
|
|
|
|
1,230.4
|
|
|
|
|
455.4
|
|
|
|
|
1,561.6
|
|
|
Non-investment grade municipal bonds (2)
|
|
|
0.5
|
|
|
|
37.1
|
|
|
|
17.9
|
|
|
|
|
19.2
|
|
|
|
|
40.6
|
|
|
Investment grade other mortgage-backed securities
(3)
|
|
|
21.9
|
|
|
|
1,750.7
|
|
|
|
1,677.6
|
|
|
|
|
73.1
|
|
|
|
|
1,752.6
|
|
|
Non-investment grade other mortgage-backed
securities (2)(3)
|
|
|
0.7
|
|
|
|
54.7
|
|
|
|
54.6
|
|
|
|
|
0.1
|
|
|
|
|
49.2
|
|
|
Foreign government bonds, all investment grade
|
|
|
1.2
|
|
|
|
98.7
|
|
|
|
97.4
|
|
|
|
|
1.3
|
|
|
|
|
93.9
|
|
|
Redeemable preferred stock, all investment
grade
|
|
|
0.2
|
|
|
|
19.7
|
|
|
|
19.7
|
|
|
|
|
-
|
|
|
|
|
17.6
|
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-redeemable preferred stocks, all investment grade
|
|
|
0.6
|
|
|
|
50.0
|
|
|
|
46.1
|
|
|
|
|
3.9
|
|
|
|
|
52.3
|
|
|
Common stocks
|
|
|
0.9
|
|
|
|
72.2
|
|
|
|
1.1
|
|
|
|
|
71.1
|
|
|
|
|
61.7
|
|
|
Closed-end fund
|
|
|
0.2
|
|
|
|
19.4
|
|
|
|
19.4
|
|
|
|
|
-
|
|
|
|
|
20.0
|
|
|
Short-term investments
(4)
|
|
|
0.6
|
|
|
|
44.9
|
|
|
|
9.9
|
|
|
|
|
35.0
|
|
|
|
|
44.9
|
|
|
Total publicly traded
securities
|
|
|
91.3
|
|
|
|
7,304.2
|
|
|
|
6,421.9
|
|
|
|
|
882.3
|
|
|
|
|
7,000.6
|
|
|
Other Invested Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment grade private placements
|
|
|
4.0
|
|
|
|
319.8
|
|
|
|
319.8
|
|
|
|
|
-
|
|
|
|
|
311.7
|
|
|
Non-investment grade private placements (2)
|
|
|
0.3
|
|
|
|
19.2
|
|
|
|
19.2
|
|
|
|
|
-
|
|
|
|
|
18.8
|
|
|
Mortgage loans (5)
|
|
|
-
|
|
|
|
*
|
|
|
|
*
|
|
|
|
|
-
|
|
|
|
|
*
|
|
|
Policy loans
|
|
|
1.8
|
|
|
|
151.9
|
|
|
|
151.9
|
|
|
|
|
-
|
|
|
|
|
151.9
|
|
|
Other
|
|
|
2.6
|
|
|
|
204.2
|
|
|
|
159.2
|
|
|
|
|
45.0
|
|
|
|
|
204.2
|
|
|
Total other invested assets
|
|
|
8.7
|
|
|
|
695.1
|
|
|
|
650.1
|
|
|
|
|
45.0
|
|
|
|
|
686.6
|
|
|
Total investments (6)
|
|
|
100.0
|
%
|
|
$
|
7,999.3
|
|
|
$
|
7,072.0
|
|
|
|
$
|
927.3
|
|
|
|
$
|
7,687.2
|
|
|
|
*
|
Less than $0.1 million.
|
|
(1)
|
Includes $429.0 million fair value of investments guaranteed by the full faith and credit of the U.S. Government and $480.5
million fair value of federally sponsored agency securities which are not backed by the full faith and credit of the U.S. Government.
|
|
(2)
|
A non-investment grade rating is assigned to a security when it is acquired or when it is downgraded from investment grade,
primarily on the basis of the Standard & Poor's Corporation (“Standard & Poor’s” or “S&P”)
rating for such security, or if there is no S&P rating, the Moody's Investors Service, Inc. (“Moody's”) rating
for such security, or if there is no S&P or Moody's rating, the National Association of Insurance Commissioners’ (the
“NAIC”) rating for such security. The rating agencies monitor securities, and their issuers, regularly and make changes
to the ratings as necessary. The Company incorporates rating changes on a monthly basis.
|
|
(3)
|
Includes commercial mortgage-backed securities, asset-backed securities, other mortgage-backed securities and collateralized
debt obligations. See also “Management’s Discussion and Analysis of Financial Condition and Results of Operations —
Results of Operations for the Three Years Ended December 31, 2016 — Net Realized Investment Gains and Losses” listed
on page F-1 of this report.
|
|
(4)
|
Short-term investments mature within one year of being acquired and are carried at cost, which approximates fair value. Short-term
investments included $44.2 million in money market funds rated AAA and one $0.7 million corporate bond rated BBB.
|
|
(5)
|
Mortgage loans are carried at amortized cost or unpaid principal balance.
|
|
(6)
|
Approximately 8%
of the Company's investment portfolio, having a carrying value of $628.7 million as of December 31,
2016, consisted of securities with some form of credit support, such as insurance. Of the securities with credit support as of
December 31, 2016, municipal bonds represented $382.8 million carrying value.
|
Fixed Maturity Securities
and Equity Securities
At December 31, 2016, approximately
33% of the Company's fixed maturity securities portfolio was expected to mature within the next 5 years. Mortgage-backed securities,
including mortgage-backed securities of U.S. Governmental agencies, represented approximately 30% of the total investment portfolio
at December 31, 2016. These securities typically have average lives shorter than their stated maturities due to unscheduled prepayments
on the underlying mortgages. Mortgages are prepaid for a variety of reasons, including sales of existing homes, interest rate changes
over time that encourage homeowners to refinance their mortgages and defaults by homeowners on mortgages that are then paid by
guarantors.
For financial reporting purposes,
the Company has classified the entire fixed maturity securities portfolio as “available for sale”. Fixed maturity securities
to be held for indefinite periods of time and not intended to be held to maturity are classified as available for sale and carried
at fair value. The net adjustment for unrealized investment gains and losses on securities available for sale is recorded as a
separate component of accumulated other comprehensive income within shareholders' equity, net of applicable deferred tax assets
or liabilities and the related impact on deferred policy acquisition costs associated with investment contracts and life insurance
products with account values. Fixed maturity securities held for indefinite periods of time include securities that management
intends to use as part of its asset/liability management strategy and that may be sold in response to changes in interest rates,
resultant prepayment risk and other related factors, other than securities that are in an unrealized loss position for which management
has the stated intent to hold until recovery.
Cash
Flow
Information regarding HMEC’s
sources and uses of cash, including payment of principal and interest with respect to HMEC's indebtedness, and payment by HMEC
of dividends to its shareholders, is contained in “Notes to Consolidated Financial Statements — Note 10 — Statutory
Information and Restrictions” and “Management’s Discussion and Analysis of Financial Condition and Results of
Operations — Liquidity and Financial Resources — Cash Flow” and “— Capital Resources” listed
on page F-1 of this report.
The ability of the insurance subsidiaries
to pay cash dividends to HMEC is subject to state insurance department regulations which generally permit dividends to be paid
for any 12 month period in amounts equal to the greater of (i) net income for the preceding calendar year or (ii) 10% of surplus,
determined in conformity with statutory accounting principles, as of the preceding December 31st. Any dividend in excess of these
levels requires the prior approval of the Director or Commissioner of the state insurance department of the state in which the
dividend paying insurance subsidiary is domiciled. The aggregate amount of dividends that may be paid in 2017 from all of HMEC's
insurance subsidiaries without prior regulatory approval is approximately $91 million.
Notwithstanding the foregoing,
if insurance regulators otherwise determine that payment of a dividend or any other payment to an affiliate would be detrimental
to an insurance subsidiary's policyholders or creditors, because of the financial condition of the insurance subsidiary or otherwise,
the regulators may block dividends or other payments to affiliates that would otherwise be permitted without prior approval.
Regulation
General Regulation at State
Level
As an insurance holding company,
HMEC is subject to extensive regulation by the states in which its insurance subsidiaries are domiciled or transact business. Some
regulations, such as those addressing unclaimed property, generally apply to all corporations. In addition, the laws of the various
states establish regulatory agencies with broad administrative powers, which relate to a wide variety of matters, including granting
and revoking licenses to transact business, regulating trade practices and rate setting, licensing agents, requiring statutory
financial statements, monitoring insurer solvency and reserve adequacy, and prescribing the type and amount of investments permitted.
On an ongoing basis, various state legislators and insurance regulators examine the nature and scope of state insurance regulation.
In addition to individual state
monitoring and regulation, state regulators develop coordinated regulatory policies through the National Association of Insurance
Commissioners (“NAIC”). States have adopted NAIC risk-based capital guidelines to evaluate the adequacy of statutory
capital and surplus in relation to an insurance company's risks. Based on current guidelines, the risk-based capital statutory
requirements are not expected to have a negative regulatory impact on HMEC’s insurance subsidiaries. At December 31, 2016
and 2015, statutory capital and surplus of each of the Company’s insurance subsidiaries was above required levels. States
have also adopted the NAIC’s U.S. Own Risk and Solvency Assessment (“ORSA”) which requires insurance companies
to submit their own assessment of their current and future risks and provide a consolidated group-level perspective on risk and
capital formulated through an internal risk self-assessment process.
Assessments Against Insurers
and Mandatory Insurance Facilities
Under insurance insolvency or guaranty
laws in most states in which the Company operates, insurers doing business therein can be assessed for policyholder losses related
to insolvencies of other insurance companies, and many assessments paid by the Company pursuant to these laws may be used as credits
for a portion of the Company's premium taxes in certain states. Also, the Company is required to participate in various mandatory
insurance facilities in proportion to the amount of the Company's direct writings in the applicable state. For the three years
ended December 31, 2016, the impact of the above industry items were not material to the Company’s results of operations.
Regulation at Federal Level
Although the federal government
generally does not directly regulate the insurance industry, federal initiatives often impact the insurance business. Current and
proposed federal measures which may significantly affect insurance and retirement business include employee benefits regulation,
standards applied to employer sponsored retirement plans, standards applied to certain financial advisors, controls on the costs
of medical care, medical entitlement programs such as Medicare, structure of retirement plans and accounts, changes to the insurance
industry anti-trust exemption, and minimum solvency requirements. See also “Item 1A. Risk Factors”. Other federal regulation
such as the Patient Protection and Affordable Care Act, Fair Credit Reporting Act, Gramm-Leach-Bliley Act and USA PATRIOT Act,
including its anti-money laundering regulations, also impact the Company’s business.
The variable annuities underwritten
by HMLIC are regulated by the SEC. Horace Mann Investors, Inc., the broker-dealer and Registered Investment Adviser subsidiary
of HMEC, also is regulated by the SEC, FINRA, the Municipal Securities Rule-making Board (“MSRB”) and various state
securities regulators.
Federal income taxation of the
build-up of cash value within a life insurance policy or an annuity contract could have a materially adverse impact on the Company's
ability to market and sell such products. Various legislation to this effect has been proposed in the past, but has not been enacted.
Although no such legislative proposals are known to exist at this time, such proposals may be made again in the future. Changes
in other federal and state laws and regulations could also affect the relative tax and other advantages of the Company's annuity
and life products to customers.
Financial Regulation Legislation
The Dodd-Frank Wall Street Reform
and Consumer Protection Act (“Dodd-Frank”) created the Federal Insurance Office (“FIO”) within the U.S.
Department of the Treasury. The FIO studies the current insurance regulatory system and is charged with monitoring and providing
specific reports on various aspects of the insurance industry. However, the FIO does not have general supervisory or regulatory
authority over the business of insurance. The FIO has suggested an expanded federal role in some circumstances. The executive branch
has requested a review of financial regulation, including Dodd-Frank. Management will continue to monitor these future developments
for impact on the Company, insurers of similar size and the insurance industry as a whole.
Employees
At December 31, 2016, the Company
had approximately 1,440 non-agent employees and 33 full-time Employee Agents. (This does not include 588 Exclusive Agent independent
contractors that were part of the Company’s total dedicated agency force at December 31, 2016.) The Company has no collective
bargaining agreement with any employees.
ITEM 1A. Risk Factors
The following are certain risk
factors that could affect the Company’s business, financial results and results of operations. In addition, refer to the
risk factors disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations —
Forward-looking Information”, listed on page F-1 of this report for certain important factors that may cause our financial
condition and results of operations to differ materially from current expectations. The risks that the Company has highlighted
in these two sections of this report are not the only ones that the Company faces. In this discussion, the Company is also referred
to as “our”, “we” and “us”.
The Company’s business involves
various risks and uncertainties which are based on the lines of business the Company writes as well as more global risks associated
with the general business and insurance industry environments.
Volatile financial markets and adverse economic
environments can impact financial market risk as well as our financial condition and results of operations.
Financial markets in the U.S. and
elsewhere can experience extreme volatility and disruption for uncertain periods of time. During such times, stresses affecting
the global banking system can lead to economic volatility which can exert significant downward pressure on prices of equity securities
and many other investment asset classes and result in substantially increased market volatility, severely constrained credit and
capital markets, particularly for financial institutions, and an overall loss of investor confidence. Many states and local governments
can also be impacted by adverse economic conditions which could have an impact on both the Company’s niche market and its
investment portfolio. Like other financial institutions which face significant financial market risk in their operations, the Company
was adversely affected by these conditions and could be adversely impacted by similar circumstances in the future. The Company’s
ability to access the capital markets to refinance outstanding indebtedness or raise capital could be impaired during significant
financial market disruptions.
As discussed further in subsequent
risk factors, in addition to the effects of financial markets volatility, a prolonged economic recession may have other adverse
impacts on our financial condition and results of operations.
If our investment strategy is not successful,
we could suffer unexpected losses.
The success of our investment strategy
is crucial to the success of our business. Specifically, our fixed income portfolio is subject to a number of risks including:
|
·
|
|
interest rate risk
, which is the risk that interest rates will decline and funds reinvested will earn less than expected;
|
|
·
|
|
market value risk
, which is the risk that our invested assets will decrease in value due to a change in the yields realized on our assets and prevailing market yields for similar assets, an unfavorable change in the liquidity of the investment or an unfavorable change in the financial prospects or a downgrade in the credit rating of the issuer of the investment;
|
|
·
|
|
credit risk
, which is the risk that the value of certain investments becomes impaired due to deterioration in the financial condition of one or more issuers of those instruments or the deterioration in performance or credit quality of the underlying collateral of certain structured securities and, ultimately, the risk of permanent loss in the event of default by an issuer or underlying credit;
|
|
·
|
|
market fundamentals risk
, which is the risk that there are changes in the market that can have an unfavorable impact on securities valuation such as availability of credit in the capital markets, re-pricing of credit risk, reduced market liquidity due to broker-dealers’ unwillingness to hold inventory, and increased market volatility;
|
|
·
|
|
concentration risk
, which is the risk that the portfolio may be too heavily concentrated in the securities of one or more issuers, sectors or industries, which could result in a significant decrease in the value of the portfolio in the event of deterioration in the financial condition of those issuers or the market value of their securities;
|
|
·
|
|
liquidity risk
, which is the risk that liabilities are surrendered or mature sooner than anticipated requiring us to sell assets at an undesirable time to provide for policyholder surrenders, withdrawals or claims; and
|
|
·
|
|
regulatory risk
, which is the risk that regulatory bodies or governments, in the U.S. or in other countries, may make substantial investments or take significant ownership positions in, or ultimately nationalize, financial institutions or other issuers of securities held in the Company’s investment portfolio, which could adversely impact the seniority or contractual terms of the securities. Regulatory risk could also come from changes in tax laws or bankruptcy laws that would adversely impact the valuation and/or after tax yields of certain invested assets.
|
In addition to significant steps
taken to attempt to mitigate these risks through our investment guidelines, policies and procedures, we also attempt to mitigate
these risks through product pricing, product features and the establishment of policy reserves, but we cannot provide assurance
that assets will be properly matched to meet anticipated liabilities or that our investments will provide sufficient returns to
enable us to satisfy our guaranteed fixed benefit obligations.
The Company’s investment
strategy and guidelines have resulted in an investment portfolio which is comprised primarily of investment grade, fixed maturity
securities. Inclusion of alternative investments, even those consistent with the Company’s overall conservative investment
guidelines, could result in some volatility in our financial condition and results of operations.
From time to time, the Company
could enter into foreign currency, interest rate, credit derivative and other hedging transactions in an effort to manage risks,
including risks that may be attributable to any new products offered by the Company. For instance, the Company recently began utilizing
call options to manage interest crediting risk related to its newly introduced fixed indexed annuity and indexed universal life
products. We cannot provide assurance that we will successfully structure derivatives and hedges so as to effectively manage risks.
If our calculations are incorrect, or if we do not properly structure our derivatives or hedges, we may have unexpected losses
and our assets may not be adequate to meet our needed reserves, which could adversely affect our financial condition and results
of operations.
Although the Company’s defined
benefit pension plan is frozen, declining financial markets could also cause, and in the past have caused, the value of the investments
in this pension plan to decrease, resulting in additional pension expense, a reduction in other comprehensive income and an increase
in required contributions to the defined benefit pension plan, which could have an adverse effect on our financial condition and
results of operations.
The determination of the fair value of our fixed
maturity and equity securities includes methodologies, estimations and assumptions that are subject to differing interpretations
and could result in changes to investment valuations that may materially impact our financial condition and results of operations.
The determination of fair values
is made at a specific point in time, based on available market information and judgments about financial instruments, including
estimates of the timing and amounts of expected future cash flows and the credit standing of the issuer or counterparty. The use
of different methodologies and assumptions may have a material effect on the estimated fair value amounts. During periods of market
disruption, including periods of rapidly widening credit spreads or illiquidity, it may be difficult to value certain of our securities
if trading becomes less frequent and/or market data becomes less observable. There may be certain asset classes that were in active
markets with significant observable data that become illiquid due to the financial environment. In such cases, fair value determination
may require more subjectivity and management judgment and those fair values may differ materially from the value at which the investments
ultimately could be sold. Further, rapidly changing and unprecedented credit and equity market conditions could materially impact
the valuation of securities and the period-to-period changes in value could vary significantly. The difference between fair value
and amortized cost or cost, net of applicable deferred income tax asset or liability and the related impact on deferred policy
acquisition costs associated with investment (annuity) contracts and life insurance products with account values, and interest-sensitive
life contracts, is reflected as a component of accumulated other comprehensive income within shareholders' equity. Decreases in
the fair value of our investments could have a material adverse effect on our financial condition and results of operations.
A sustained period of low interest rates or interest
rate fluctuations could negatively affect the income we derive from the difference between the interest rates we earn on our investments
and the interest we pay under our fixed annuity contracts and life insurance products with account values.
Significant changes in interest
rates expose us to the risk of not earning income or experiencing losses based on the differences between the interest rates earned
on our investments and the credited interest rates paid on our outstanding fixed annuity contracts and life insurance products
with account values. Significant changes in interest rates may affect:
|
·
|
|
the ability to maintain appropriate interest rate spreads over the fixed rates guaranteed in our annuity and life products;
|
|
·
|
|
the book yield of our investment portfolio; and
|
|
·
|
|
the unrealized gains and losses in our investment portfolio and the related after tax effect on our shareholders’ equity and total capital.
|
Both rising and declining interest
rates can negatively affect the income we derive from our annuity and life products’ interest rate spreads. During periods
of falling interest rates or a sustained period of low interest rates, our investment earnings will be lower because new investments
in fixed maturity securities likely will bear lower interest rates. We may not be able to fully offset the decline in investment
earnings with lower crediting rates on our annuity contracts, particularly in a multi-year period of low interest rates. As of
the time of this Annual Report on Form 10-K, new money rates remain at historically low levels. If interest rates do remain low
over an extended period of time, it could pressure our net investment income by having to invest insurance cash flows and reinvest
the cash flows from the investment portfolio in lower yielding securities.
During periods of rising interest
rates, there may be competitive pressure to increase the crediting rates on our annuity contracts. We may not, however, immediately
have the ability to acquire investments with interest rates sufficient to offset an increase in crediting rates under our annuity
contracts. Although we develop and maintain asset/liability management programs and procedures designed to reduce the volatility
of our income when interest rates are rising or falling, changes in interest rates can affect our interest rate spreads.
Changes in interest rates may also
affect our business in other ways. For example, a rapidly changing interest rate environment may result in less competitive crediting
rates on certain of our fixed rate products which could make those products less attractive, leading to lower sales and/or increases
in the level of life insurance and annuity product surrenders and withdrawals. New business volume also could be negatively impacted
by product or agent compensation changes which we might make to mitigate the income effect of spread compression. Interest rate
fluctuations that impact future profits may also impact the amortization of deferred policy acquisition costs.
As another example of potential
interest rate impacts, our Retirement and Life operations participate in the cash flow testing procedures imposed by statutory
insurance regulations, the purpose of which is to ensure that such liabilities are adequate to meet the Company’s obligations
under a variety of interest rate scenarios. A continuation of the current low interest rate environment over a prolonged period
of time could cause the Company to increase statutory reserves as a result of cash flow testing, which would reduce statutory surplus
of the Life insurance subsidiaries and potentially limit the subsidiaries’ ability to distribute cash to the holding company
or write insurance business (as further described in a subsequent risk factor).
Regulatory initiatives, including the enactment
of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”), could adversely impact liquidity and
volatility of financial markets in which we participate.
In response to the credit and financial
crisis, U.S. and overseas governmental and regulatory authorities are considering or implementing enhanced or new regulatory requirements
intended to prevent future crises or stabilize the institutions under their supervision. Such measures are leading to stricter
regulation of financial institutions. Changes from Dodd-Frank and other U.S. and overseas governmental initiatives have created
uncertainty and could continue to adversely impact liquidity and increase volatility of the financial markets in which we participate
and, in turn, negatively affect our financial condition or results of operations. The executive branch has requested a review of
financial regulations including Dodd-Frank, which may eliminate or mitigate this risk.
Our Retirement business may be, and in the past
has been, adversely affected by volatile or declining financial market conditions.
Conditions in the U.S. and international
financial markets affect the sale and profitability of our annuity products. In general, sales of variable annuities decrease when
financial markets are declining or experiencing a higher than normal level of volatility over an extended period of time. Therefore,
weak and/or volatile financial market performance may adversely affect sales of our variable annuity products to potential customers,
may cause current customers to withdraw or reduce the amounts invested in our variable annuity products and may reduce the market
value of existing customers’ investments in our variable annuity products, in turn reducing the amount of variable annuity
fee revenues generated. In addition, some of our variable annuity contracts offer guaranteed minimum death benefit features, which
provide for a benefit if the contractholder dies and the contract value is less than a specified amount. A decline in the financial
markets could cause the contract value to fall below this specified amount, increasing our exposure to losses from variable annuity
products featuring guaranteed minimum death benefits. Declining or volatile financial markets that impact future profits may also
impact the amortization of deferred policy acquisition costs.
We may experience volatility in our results of
operations and financial condition due to the fair value accounting for derivative instruments.
All derivative instruments, including
derivative instruments embedded in fixed indexed annuity contracts and indexed universal life policies, are recognized in the balance
sheet at their fair values. Changes in the fair value of these instruments are recognized immediately in our results of operations
as follows:
|
·
|
|
Call options purchased to fund the annual index credits on our fixed indexed annuity and indexed universal life products are presented at fair value. The fair value of the call options is based on the amount of cash expected to be received to settle the call options obtained from the counterparties adjusted for the nonperformance risk of the counterparty. The change in fair value of derivatives includes the gains or losses recognized at expiration of the option term or upon early termination as well as changes in fair value for open positions.
|
|
·
|
|
The fixed indexed annuity contractual obligations for future annual index credits are treated as a "series of embedded derivatives" over the expected lives of the applicable contracts. Increases or decreases in the fair value of embedded derivatives generally correspond to increases or decreases in equity market performance and changes in the interest rates used to discount the excess of the projected policy contract values over the projected minimum guaranteed contract values.
|
|
·
|
|
The indexed universal life contractual obligations for future index credits are set equal to the fair value of outstanding 12 month derivatives held in support of the applicable contracts.
|
In future periods, the application
of fair value accounting for derivatives and embedded derivatives to our fixed indexed annuity and indexed universal life business
may cause volatility in our results of operations.
Mark-to-market adjustments on certain equity method
investments may reduce our profitability and/or cause volatility in our reported results of operations.
We invest a portion of our invested
assets in limited partnership funds, which are accounted for using the equity method with changes in fair value reported in net
investment income in the Consolidated Statement of Operations. The amount and timing of income from such investment funds tend
to be uneven as a result of the performance of the underlying investments. The timing of distributions from the funds, which depends
on particular events relating to the underlying investments, as well as the funds’ schedules for making distributions and
their needs for cash, can be difficult to predict. As a result, the amount of income that we record from these investments can
vary substantially from period to period. Recent equity and credit market volatility may reduce investment income from these types
of investments and negatively impact our results of operations.
An inability to access Federal Home Loan Bank
(“FHLB”) funding could adversely affect our results of operations.
Any changes in requirements to
retain membership in the Federal Home Loan Bank, or changes in regulation, could impact our eligibility for continued FHLB membership
or our FHLB funding capacity. Any event that adversely affects amounts received from FHLB could have an adverse effect on our results
of operations.
Losses due to defaults by others could reduce
our profitability or negatively affect the value of our investments.
Third-party debtors may not pay
or perform their obligations. These parties may include the issuers whose securities we hold, customers, reinsurers, borrowers
under mortgage loans, trading counterparties, counterparties under swaps and other derivative contracts, clearing agents, exchanges,
clearing houses and other financial intermediaries. These parties may default on their obligations to us due to bankruptcy, lack
of liquidity, downturns in the economy or real estate values, operational failure or other reasons.
During or following an economic
downturn, our municipal bond portfolio could be subject to a higher risk of default or impairment due to declining municipal tax
bases and revenue. States are currently barred from seeking protection in federal bankruptcy court. However, federal legislation
could possibly be enacted to allow states to declare bankruptcy in connection with deficit reductions or mounting unfunded pension
liabilities, which could adversely impact the value of our investment portfolio.
The default of a major market participant
could disrupt the securities markets or clearance and settlement systems in the U.S. or abroad. A failure of a major market participant
could cause some clearance and settlement systems to assess members of that system, including our broker-dealer and Registered
Investment Adviser regulatory entities, or could lead to a chain of defaults that could adversely affect us. A default of a major
market participant could disrupt various markets, which could in turn cause market declines or volatility and negatively impact
our financial condition and results of operations.
Catastrophic events, as well as significant weather
events not designated as catastrophes, can have a material adverse effect on our financial condition and results of operations.
Underwriting results of property
and casualty insurers are subject to weather and other conditions prevailing in an accident year. While one year may be relatively
free of major weather or other disasters — not all of which are designated by the insurance industry as a catastrophe, another
year may have numerous such events causing results for such a year to be materially worse than for other years.
Our Property and Casualty insurance
subsidiaries have experienced, and we anticipate that in the future they will continue to experience, catastrophe losses. A catastrophic
event, a series of multiple catastrophic events or a series of non-catastrophe severe weather events could have a material adverse
effect on the financial condition and results of operations of our insurance subsidiaries.
Various events can cause catastrophes,
including hurricanes, windstorms, hail, severe winter weather, wildfires, earthquakes, explosions and terrorism. The frequency
and severity of these catastrophes are inherently unpredictable. The extent of losses from a catastrophe is a function of both
the total amount of insured exposures in the area affected by the event and the severity of the event. Although catastrophes can
cause losses in a variety of Property and Casualty lines, most of the catastrophe-related claims of our insurance subsidiaries
are related to homeowners’ coverages. Our ability to provide accurate estimates of ultimate catastrophe costs is based on
several factors, including:
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the proximity of the catastrophe occurrence date to the date of our estimate;
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potential inflation of property repair costs in the affected area;
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the occurrence of multiple catastrophes in a geographic area over a relatively short period of time; and
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the outcome of litigation which may be filed against the Company by policyholders, state attorneys general and other parties relative to loss coverage disputes and loss settlement payments.
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Based on 2016 direct premiums earned,
57% of the total annual premiums for our Property and Casualty business were for policies issued in the ten largest states in which
our insurance subsidiaries write property and casualty coverage. Included in this top ten group are certain states which are considered
to be more prone to catastrophe occurrences: California, North Carolina, Texas, South Carolina, Florida and Louisiana.
As an ongoing practice, we manage
our exposure to catastrophes, as well as our exposure to non-catastrophe weather and other property loss risks. Reductions in Property
and Casualty business written in catastrophe-prone areas may have a negative impact on near-term business growth and results of
operations.
In addition to the potential impact
on our Property and Casualty subsidiaries, our Life subsidiary could experience claims of a catastrophic magnitude from events
such as pandemics; terrorism; nuclear, biological or chemical explosions; or other acts of war.
Our insurance subsidiaries seek
to reduce their exposure to catastrophe losses through their underwriting strategies and the purchase of catastrophe reinsurance.
Nevertheless, reinsurance may prove inadequate under certain circumstances.
Uncollectible reinsurance, as well as reinsurance
availability and pricing, can have a material adverse effect upon our business volume and profitability.
Reinsurance is a contract by which
one insurer, called a reinsurer, agrees to cover a portion of the losses incurred by a second insurer in the event a claim is made
under a policy issued by the second insurer. Our insurance subsidiaries obtain reinsurance to help manage their exposure to property,
casualty and life insurance risks. Although a reinsurer is liable to our insurance subsidiaries according to the terms of its reinsurance
policy, the insurance subsidiaries remain primarily liable as the direct insurers on all risks reinsured. As a result, reinsurance
does not eliminate the obligation of our insurance subsidiaries to pay all claims, and each insurance subsidiary is subject to
the risk that one or more of its reinsurers will be unable or unwilling to honor its obligations.
Although we limit participation
in our reinsurance programs to reinsurers with high financial strength ratings and also limit the amount of coverage from each
reinsurer, our insurance subsidiaries cannot guarantee that their reinsurers will pay in a timely fashion, if at all. Reinsurers
may become financially unsound by the time that they are called upon to pay amounts due, which may not occur for many years.
Additionally, the availability
and cost of reinsurance are subject to prevailing market conditions beyond our control. For example, significant losses from hurricanes
or terrorist attacks, an increase in capital requirements, or a future lapse of the provisions of the Terrorism Risk Insurance
Act could have a significant adverse impact on the reinsurance market.
If one of our insurance subsidiaries
is unable to obtain adequate reinsurance at reasonable rates, that insurance subsidiary would have to increase its risk exposure
and/or reduce the level of its underwriting commitments, which could have a material adverse effect upon the business volume and
profitability of the subsidiary. Alternately, the insurance subsidiary could elect to pay the higher than reasonable rates for
reinsurance coverage, which could have a material adverse effect upon its profitability until policy premium rates could be raised,
in some cases subject to approval by state regulators, to incorporate this additional cost.
Our Property and Casualty loss reserves may not
be adequate.
Our Property and Casualty insurance
subsidiaries maintain loss reserves to provide for their estimated ultimate liability for losses and loss adjustment expenses with
respect to reported and unreported claims incurred as of the end of each accounting period. If these loss reserves prove inadequate,
we will record a loss measured by the amount of the shortfall and, as a result, the financial condition and results of operations
of our insurance subsidiaries will be adversely affected, potentially affecting their ability to distribute cash to the holding
company.
Reserves do not represent an exact
calculation of liability. Reserves represent estimates, generally involving actuarial projections at a given time, of what our
insurance subsidiaries expect the ultimate settlement and adjustment of claims will cost, net of salvage and subrogation. Estimates
are based on assessments of known facts and circumstances, assumptions related to the ultimate cost to settle such claims, estimates
of future trends in claims severity and frequency, changing judicial theories of liability, and other factors. These variables
are affected by both internal and external events, including changes in claims handling procedures, economic inflation, unpredictability
of court decisions, plaintiffs’ expanded theories of liability, risks inherent in major litigation and legislative changes.
Many of these items are not directly quantifiable, particularly on a prospective basis. Significant reporting lags may exist between
the occurrence of an insured event and the time it is actually reported. Our insurance subsidiaries adjust their reserve estimates
regularly as experience develops and further claims are reported and settled.
Due to the inherent uncertainty
in estimating reserves for losses and loss adjustment expenses, we cannot be certain that the ultimate liability will not exceed
amounts reserved, with a resulting adverse effect on our financial condition and results of operations.
Changing climate conditions may adversely affect
our financial condition, results of operations or cash flows.
Many scientists indicate that the
world’s overall climate is getting warmer. Climate change, to the extent it produces rising temperatures and changes in weather
patterns, could impact the frequency and/or severity of weather events and wildfires, the affordability and availability of our
catastrophe reinsurance coverage, and our results of operations. If an increase in weather events and/or wildfires were to occur,
in addition to the attendant increase in claim costs, which could adversely impact our results of operations and financial condition,
concentrations of insurance risk could impact our ability to make homeowners insurance available to our customers. This could adversely
impact our volume of business and our results of operations or cash flows.
Deviations from assumptions regarding future market
appreciation, interest spreads, business persistency, mortality and morbidity used in calculating life and annuity reserves and
deferred policy acquisition expense amounts could have a material adverse impact on our financial condition and results of operations.
The processes of calculating reserve
and deferred policy acquisition expense amounts for our life and annuity businesses involve the use of a number of assumptions,
including those related to market appreciation (the rate of growth in market value of the underlying variable annuity subaccounts
due to price appreciation), interest spreads (the interest rates expected to be received on investments less the rate of interest
credited to contractholders), business persistency (how long a contract stays with the company), mortality (the relative incidence
of death over a given period of time) and morbidity (the relative incidence of disability resulting from disease or physical impairment).
We periodically review the adequacy of these reserves and deferred policy acquisition expenses on an aggregate basis and, if future
experience is estimated to differ significantly from previous assumptions, adjustments to reserves and deferred policy acquisition
expenses may be required which could have a material adverse effect on our financial condition and results of operations.
An impairment of all or part of our goodwill could
adversely affect our results of operations.
At December 31, 2016, we had $47.4
million of goodwill recorded on our Consolidated Balance Sheet. Goodwill was recorded when the Company was acquired in 1989 and
when Horace Mann Property & Casualty Insurance Company was acquired in 1994, in both instances reflecting the excess of cost
over the fair market value of net assets acquired. In 2016, the goodwill balance was evaluated for impairment, as described in
“Notes to Consolidated Financial Statements — Note 1 — Summary of Significant Accounting Policies”, with
no impairment charge resulting from such assessment. The evaluation of goodwill considers a number of factors including the impacts
of a volatile financial market on earnings, discount rate assumptions, liquidity and the Company’s market capitalization.
If an evaluation of the Company’s fair value or of the Company’s segments’ fair value indicated that all or a
portion of the goodwill balance was impaired, the Company would be required to write off the impaired portion. Such a write-off
could have a material adverse effect on our results of operations in the period of the write-off; however, management does not
anticipate a material effect on the Company’s financial condition.
Any downgrade in or adverse change in outlook
for our claims-paying ratings, financial strength ratings or credit ratings could adversely affect our financial condition and
results of operations.
Claims-paying ratings and financial
strength ratings have become an increasingly important factor in establishing the competitive position of insurance companies.
In the evolving 403(b) annuity market, school districts and benefit consultants have placed an emphasis on the relative financial
strength ratings of competing companies. Each rating agency reviews its ratings periodically and from time to time may modify its
rating criteria including, among other factors, its expectations regarding capital adequacy, profitability and revenue growth.
A downgrade in the ratings or adverse change in the ratings outlook of any of our insurance subsidiaries by a major rating agency
could result in a substantial loss of business for that subsidiary if school districts, policyholders or independent agents move
their business to other companies having higher claims-paying ratings and financial strength ratings than we do. This loss of business
could have a material adverse effect on the results of operations and financial condition of that subsidiary.
A downgrade in our holding company
debt rating also could adversely impact our cost and flexibility of borrowing which could have an adverse impact on our liquidity,
financial condition and results of operations.
Reduction of the statutory surplus
of our insurance subsidiaries could adversely affect their ability to write insurance business.
Insurance companies write business
based, in part, upon guidelines including capital ratios considered by the NAIC and various rating agencies. Some of these ratios
include risk-based capital ratios for both property and casualty insurance companies and life insurance companies, as well as a
ratio of premiums to surplus for property and casualty insurance companies. Risk-based capital ratios measure an insurer’s
capital adequacy and consider various risks such as underwriting, investment, credit, asset concentration and interest rate. If
our insurance subsidiaries cannot maintain profitability in the future or if significant investment valuation losses are incurred,
they may be required to draw on their surplus, thereby reducing capital adequacy, in order to pay dividends to us to enable us
to meet our financial obligations. As their surplus is reduced by the payment of dividends, continuing losses or both, our insurance
subsidiaries’ ability to write business and maintain acceptable financial strength ratings could also be reduced. This could
have a material adverse effect upon the business volume and profitability of our insurance subsidiaries.
If we are not able to effectively develop and
expand our marketing operations, including agents and other points of distribution, our financial condition and results of operations
could be adversely affected.
The Company’s agencies are
owned primarily by non-employee, independent contractor, Exclusive Agents and nearly all of these agencies operate under the Agency
Business Model — agents in outside offices with licensed producers — which is designed to remove capacity constraints
while increasing productivity. The economic viability of each agency is directly dependent of the productivity of the agency and
the success at penetrating, serving and cross-selling the Company’s educator market.
Our success in marketing and selling
our products is largely dependent upon the efforts of our agent sales force and the success of their agency operations. As we expand
our business, we may need to expand the number of agencies marketing our products. If we are unable to appoint additional agents,
fail to retain high-producing agents, are unable to maintain the productivity of those agency operations or are unable to maintain
market penetration in existing territories, sales of our products likely would decline and our financial condition and results
of operations could be adversely affected.
If we are not able to maintain and secure (1)
access to educators and (2) endorsements and other relationships with the educational community, our financial condition and results
of operations could be adversely affected
.
Our ability to successfully increase
new business in the educator market is largely dependent on our ability to effectively access educators either in their school
buildings or through other approaches. While this is especially true for the sale of 403(b) tax-qualified annuity products via
payroll deduction, any significant decrease in access, either through fewer payroll slots, increased security measures, impacts
of state or federal level pension reform initiatives, requirements of national and state Do Not Call registries, or for other reasons
could adversely affect the sale of all lines of our business and require us to change our traditional approach to worksite marketing
and promotion, as well as contact with potential customers. With the current IRS regulations regarding Section 403(b) arrangements,
including annuities, our ability to maintain and increase our share of the 403(b) market, and the access it gives us for other
product lines, will depend on our ability to successfully compete in this market. Some school districts and benefit consultants
have placed an emphasis on the relative financial strength ratings of competing companies, as well as low cost product and distribution
approaches, which may put us at a competitive disadvantage relative to other more highly-rated insurance companies.
Our ability to maintain and obtain
product and corporate endorsements from, and/or marketing agreements with, local, state and national education-related associations
is important to our marketing strategy. In addition to teacher organizations, we have established relationships with various other
educator, principal, school administrator and school business official groups. These contacts and endorsements help to establish
our brand name and presence in the educational community and to enhance our access to educators.
The Department of Labor (“DOL”) fiduciary
rule and the possible adoption by the Securities and Exchange Commission (“SEC”) of a fiduciary standard of care could
have a material adverse effect on our business, financial condition and results of operations.
On April 6, 2016, the DOL released
a final regulation which more broadly defines the types of activities that will result in a person being deemed a “fiduciary”
for purposes of the prohibited transaction rules of the Employee Retirement Income Security Act (“ERISA”) and Internal
Revenue Code Section 4975. Section 4975 prohibits certain kinds of compensation with respect to transactions involving assets in
certain accounts, including individual retirement accounts (“IRAs”).
The DOL regulation provides that
its requirements will generally become applicable on April 10, 2017, with certain requirements becoming applicable on January 1,
2018.
The DOL regulation will affect
the ways in which financial services representatives can be compensated for sales to participants in ERISA employer-sponsored qualified
plans and sales to IRA customers, and it will impose significant additional legal obligations and disclosure requirements. The
DOL regulation could have a material adverse effect on our business and results of operations. While the regulation does not affect
non-ERISA employer-sponsored qualified plans, such as public school 403(b) plans, it could have the following impacts, among others:
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It could inhibit our ability to sell and service IRAs, resulting in a change and/or a reduction of the types of products we offer for IRAs, and impact our relationship with current clients.
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It could require changes in the way that we compensate our agents, thereby impacting our agents’ business model.
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It could require changes in our distribution model for financial services products and could result in a decrease in the number of our agents.
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It could increase our costs of doing IRA business and increase our litigation and regulatory risks.
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It could increase the cost and complexity of regulatory compliance for our Retirement segment’s products, including our recently introduced fixed indexed annuity product.
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At the request of the executive
branch, the DOL is evaluating the fiduciary role, and the related prohibited transaction exception. As a result of this review,
the implementation of the rule may be delayed. At this point, however, the regulatory landscape is uncertain.
Further, in January 2011, under
the authority of the Dodd-Frank Act, the SEC submitted a report to Congress recommending that the SEC adopt a fiduciary standard
of conduct for broker-dealers. According to the SEC, notice of proposed rulemaking is anticipated in 2017. This regulatory activity
by the SEC also has the potential to adversely impact our business, financial condition and results of operations.
Economic and other factors affecting our niche
market could adversely impact our financial condition and results of operations.
Horace Mann's strategic objective
is to become the company of choice in meeting the insurance and financial services needs of the educational community. With K-12
teachers, administrators, and support personnel representing a significant percentage of our business, the financial condition
and results of operations of our subsidiaries could be more prone than many of our competitors to 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.
While the U.S. financial market
and certain sectors of the economy have shown improvement over recent years, federal and state revenue shortages continue to pressure
the budgets of many school districts. Teacher layoffs and early retirements have taken place and it is possible that additional
reductions could occur. Similar to others in the insurance industry, the Company has experienced periods with pressure on new business
sales levels. However, despite the economic headwinds, as of the time of this Annual Report on Form 10-K, the Company’s retention
of annuity accumulated values remains strong with continued positive total annuity net fund flows. However, there can be no assurance
that these business factors will remain favorable.
The personal lines insurance and annuity markets
are highly competitive and our financial condition and results of operations may be adversely affected by competitive forces.
We operate in a highly competitive
environment and compete with numerous insurance companies, as well as mutual fund families, independent agent companies and financial
planners. In some instances and geographic locations, competitors have specifically targeted the educator marketplace with specialized
products and programs. We compete in our target market with a number of national providers of personal automobile and homeowners
insurance and life insurance and annuities.
The insurance industry consists
of a large number of insurance companies, some of which have substantially greater financial resources, more diversified product
lines, more sophisticated product pricing, greater economies of scale and/or lower-cost marketing approaches compared to us. In
our target market, we believe that the principal competitive factors in the sale of property and casualty insurance products are
price, overall service, name recognition and worksite sales and service. We believe that for our market the principal competitive
factors in the sale of annuity products and life insurance are worksite sales and service, product features, perceived stability
of the insurer, price, overall service and name recognition. And, we believe that the Company’s focus on the educator market
niche, as well as the knowledge obtained regarding this niche throughout the Company’s history, contribute to our ability
to effectively and profitably serve this market.
Particularly in the property and
casualty business, our insurance subsidiaries from time to time, generally on a cyclical basis, experience periods of intense competition
during which they may be unable to increase policyholders and revenues without adversely impacting profit margins. During the current
cycle, and potentially beyond, competition from direct writers and large, mass market carriers has been particularly aggressive,
evidenced in part by their significant national advertising expenditures. In addition, advancements in vehicle technology and safety
features, such as accident prevention technologies or the development of autonomous or partially autonomous vehicles — once
widely available and utilized, as well as expanded availability of usage-based insurance could materially alter the way that automobile
insurance is marketed, priced and underwritten. The inability of our insurance subsidiaries to effectively anticipate the impact
of these issues on our business and compete successfully in the property and casualty business could adversely affect the subsidiaries’
financial condition and results of operations and the resulting ability to distribute cash to the holding company.
In our Retirement business, the
current IRS Section 403(b) regulations make the 403(b) market similar to the 401(k) market. These regulations have reduced and
could continue to reduce the number of competitors in this market as the 403(b) market has become more attractive to some of the
larger companies experienced in 401(k) plans, including both insurance and mutual fund companies, that had not previously been
active competitors in this business. While not yet widespread, there has been continued pressure in some states to adopt state-sponsored
or mandated 403(b) plans with single- or limited-provider options; this pressure has come from competitor lobbying efforts and
state legislature-initiated pension reform initiatives. The inability of our insurance subsidiaries to compete successfully in
these markets could adversely affect the subsidiaries’ financial condition and results of operations and the resulting ability
to distribute cash to the holding company.
A reduction or elimination of the tax advantages
of annuity and life products and/or a change in the tax benefits of various government-authorized retirement programs, such as
403(b) annuities and individual retirement accounts (“IRAs”), could make our products less attractive to clients and
adversely affect our operating results.
A significant part of our Retirement
business involves fixed and variable 403(b) tax-qualified annuities, which are annuities purchased voluntarily by individuals employed
by public school systems or other tax-exempt organizations. Our financial condition and results of operations could be adversely
affected by changes in federal and state laws and regulations that affect the relative tax and other advantages of our life and
annuity products to clients or the tax benefits of programs utilized by our customers. As a result of persisting economic conditions,
revenue challenges exist at federal, state and local government levels. These challenges could increase the risk of future adverse
impacts on current tax-advantaged products or result in notable reforms to educator pension programs. See also “Item 1. Business
— Regulation — Regulation at Federal Level”.
Current federal income tax laws
generally permit the tax-deferred accumulation of earnings on the premiums paid by the holders of retirement and life insurance
products. Taxes, if any, are generally payable on income attributable to a distribution under the contract for the year in which
the distribution is made. From time to time, Congress has considered legislation that would reduce or eliminate the benefit of
such deferral of taxation on the accretion of value within life insurance and non-qualified annuity contracts. Enactment of this
legislation, or other tax reform efforts, including a simplified “flat tax” income structure with an exemption from
taxation for investment income, could result in fewer sales of our life insurance and annuity products.
The insurance industry is highly regulated.
We are subject to extensive regulation
and supervision in the jurisdictions in which we do business. Each jurisdiction has a unique and complex set of laws and regulations.
Furthermore, certain federal laws impose additional requirements on businesses, including insurers. Regulation generally is designed
to protect the interests of policyholders, as opposed to stockholders and non-policyholder creditors. Such regulations, among other
things, impose restrictions on the amount and type of investments our subsidiaries may hold. Certain states also regulate the rates
insurers may charge for certain property and casualty products. Legislation and voter initiatives have expanded, in some instances,
the states’ regulation of rates and have increased data reporting requirements. Consumer-related pressures to roll back rates,
even if not enacted by legislation or upheld upon judicial appeal, may affect our ability to obtain timely rate increases or operate
at desired levels of profitability. Changes in insurance regulations, including those affecting the ability of our insurance subsidiaries
to distribute cash to us and those affecting the ability of our insurance subsidiaries to write profitable property and casualty
insurance policies in one or more states, may adversely affect the financial condition and results of operations of our insurance
subsidiaries. In addition, consumer privacy requirements may increase our cost of processing business. Our ability to comply with
laws and regulations, at a reasonable cost, and to obtain necessary regulatory action in a timely manner, is and will continue
to be critical to our success.
Regulation that could adversely
affect our insurance subsidiaries also includes statutory surplus and risk-based capital requirements. Maintaining appropriate
levels of surplus, as measured by statutory accounting principles, is considered important by state insurance regulatory authorities
and the private agencies that rate insurers’ claims-paying abilities and financial strength. The failure of an insurance
subsidiary to maintain levels of statutory surplus
that are sufficient for the amount
of its insurance written could result in increased regulatory scrutiny, action by state regulatory authorities or a downgrade by
rating agencies.
Similarly, the NAIC has adopted
a system of assessing minimum capital adequacy that is applicable to our insurance subsidiaries. This system, known as risk-based
capital, is used to identify companies that may merit further regulatory action by analyzing the adequacy of the insurer’s
surplus in relation to statutory requirements.
Because state legislatures remain
concerned about the availability and affordability of property and casualty insurance and the protection of policyholders, our
insurance subsidiaries expect that they will continue to face efforts by those legislatures to expand regulations to address these
concerns. Resulting new legislation could adversely affect the financial condition and results of operations of our insurance subsidiaries.
In the event of the insolvency,
liquidation or other reorganization of any of our insurance subsidiaries, our creditors and stockholders would have no right to
proceed against any such insurance subsidiary or to cause the liquidation or bankruptcy of any such insurance subsidiary under
federal or state bankruptcy laws. The insurance laws of the domiciliary state would govern such proceedings and the relevant insurance
commissioner would act as liquidator or rehabilitator for the insurance subsidiary. Creditors and policyholders of any such insurance
subsidiary would be entitled to payment in full from the assets of the insurance subsidiary before we, as a stockholder, would
be entitled to receive any distribution.
The financial position of our insurance
subsidiaries also may be affected by court decisions that expand insurance coverage beyond the intention of the insurer at the
time it originally issued an insurance policy.
Dodd-Frank created the Federal
Insurance Office (“FIO”) within the U.S. Department of the Treasury. The FIO studies the current insurance regulatory
system and is charged with monitoring and providing specific reports on various aspects of the insurance industry. However, the
FIO does not have general supervisory or regulatory authority over the business of insurance. The FIO has suggested an expanded
federal role in some circumstances. Management will continue to monitor developments under Dodd-Frank, as various aspects of it
continue to be addressed by governmental bodies. Additional regulations could adversely affect the efficiency and effectiveness
of business processes, financial condition and results of operations of the Company, insurers of similar size and/or the insurance
industry as a whole.
The insurance industry is highly cyclical.
The results of companies in the
insurance industry historically have been subject to significant fluctuations due to competition, economic conditions, interest
rates and other factors. In particular, companies in the property and casualty insurance segment of the industry historically have
experienced pricing and profitability cycles. With respect to these cycles, the factors having the greatest impact include significant
and/or rapid changes in loss costs, including changes in loss frequency and/or severity; prior approval and restrictions in certain
states for price increases; intense price competition; less restrictive underwriting standards; aggressive marketing; and increased
advertising, which have resulted in higher industry-wide combined loss and expense ratios.
Cybersecurity Requirements for Financial Services
Companies at State Level
Individual state regulation of
Cybersecurity programs are being adopted on a state by state basis to ensure the safety and soundness of the institution and protect
its customers. New York State Department of Financial Services adopted a regulation providing minimum standards for an organization’s
Cybersecurity program and requiring an annual certification confirming compliance. Additional states may establish Cybersecurity
regulations with varying compliance requirements.
Litigation may harm our financial strength or
reduce our profitability.
Companies in the insurance industry
have been subject to substantial litigation resulting from claims, disputes and other matters. Most recently, they have faced expensive
claims, including class action lawsuits, alleging, among other things, improper sales practices and improper claims settlement
procedures. Negotiated settlements of certain such actions have had a material adverse effect on many insurance companies. The
resolution of similar future claims against any of our insurance subsidiaries, including the potential adverse effect on our reputation
and charges against the earnings of our insurance subsidiaries as a result of legal defense costs, a settlement agreement or an
adverse finding or findings against our insurance subsidiaries in such a claim, could have a material adverse effect on the financial
condition and results of operations of our insurance subsidiaries.
Data security breaches or denial of service on
our websites could have an adverse impact on the Company’s business and reputation.
Unauthorized access to and unintentional
dissemination of our confidential, highly-sensitive customer, employee or Company data or other breaches of data security in our
facilities, networks or databases, or those of our agents or third-party vendors — including information technology and software
vendors, could result in loss or theft of assets or sensitive information, data corruption or operational disruption that may expose
the Company to liability and/or regulatory action and may have an adverse impact on the Company’s customers, employees, investors,
reputation and business. In addition, any compromise of the security of our data or prolonged denial of service on our websites
could harm the Company’s business and reputation. We have designed, implemented and routinely test industry-compliant procedures
for protection of confidential information and sensitive corporate data, including rapid response procedures to help contain or
prevent data loss if a breach were to occur. We have also implemented multiple technical security protections and contractual obligations
regarding security breaches for our agents and third-party vendors. Even with these efforts, there can be no assurance that security
breaches or service disruptions will be prevented.
Successful execution of our business growth
strategy is dependent on effective implementation of new or enhanced technology systems and applications.
Our ability to effectively execute
our business growth strategy and leverage potential economies of scale is dependent on our ability to provide the requisite technology
components for that strategy. While we have effectively upgraded our infrastructure technologies with improvements in our data
center, a new communications platform and enhancements to our disaster recovery capabilities, our ability to replace or supplement
dated, monolithic legacy business systems — such as our life, annuity and property and casualty policy administrative systems
— with more flexible, maintainable, and customer accessible solutions will be necessary to achieve our plans. The inherent
difficulty in replacing and/or modernizing these older technologies, coupled with the Company’s limited experience in these
endeavors, presents an increased risk to delivering these technology solutions in a cost effective and timely manner. Our scale
will require us to develop innovative solutions to address these challenges, including consideration of “software as a service”
arrangements and other third-party based information technology capabilities. More modern approaches to software development and
utilization of third-party vendors can augment the Company’s internal capacity for these implementations, but may not adequately
reduce the operational risks of timely and cost effective delivery.
Loss of key vendor relationships could affect
our operations.
We increasing rely on services
and products provided by a number of vendors in the United States and abroad. These include, for example, vendors of computer hardware
and software, including on-demand software, and vendors of services such as investment management advisement, information technology
services — such as those associated with our life, annuity and property and casualty policy administrative systems —
and delivery services for customer policy-level communications. In the event that one or more of our vendors suffers a bankruptcy
or otherwise becomes unable to continue to provide products or services, we may suffer operational difficulties and financial losses.
ITEM 1B. Unresolved Staff Comments
None.
ITEM 2. Properties
HMEC's home office property at
1 Horace Mann Plaza in Springfield, Illinois, consisting of an office building totaling 225,000 square feet, is owned by the Company.
Also in Springfield, the Company owns and leases some smaller buildings at other locations. In addition, the Company leases office
space in suburban Dallas, Texas, and Raleigh, North Carolina, for its claims operations and leases some office space related to
its field marketing operations. These properties, which are utilized by all of the Company’s business segments, are adequate
and suitable for the Company's current and anticipated future needs.
ITEM 3. Legal Proceedings
At the time of this Annual Report
on Form 10-K, the Company does not have pending litigation from which there is a reasonable possibility of material loss.
ITEM 4. Mine Safety Disclosures
Not applicable.
PART II
ITEM 5. Market for Registrant's Common Equity,
Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information and Dividends
HMEC's common stock is traded on
the NYSE under the symbol of HMN. The following table provides the high and low closing prices of the common stock on the NYSE
Composite Tape and the cash dividends paid per share of common stock during the periods indicated.
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Market Price
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Dividend
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Fiscal Period
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High
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Low
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Paid
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2016:
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Fourth Quarter
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$
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43.30
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$
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33.30
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$
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0.265
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Third Quarter
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37.36
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33.40
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0.265
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Second Quarter
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34.51
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30.36
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0.265
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First Quarter
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32.30
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27.59
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0.265
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2015:
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|
|
|
|
|
|
|
|
|
|
Fourth Quarter
|
|
$
|
36.42
|
|
|
$
|
32.42
|
|
|
$
|
0.250
|
|
Third Quarter
|
|
|
37.74
|
|
|
|
31.84
|
|
|
|
0.250
|
|
Second Quarter
|
|
|
37.04
|
|
|
|
33.97
|
|
|
|
0.250
|
|
First Quarter
|
|
|
34.29
|
|
|
|
30.38
|
|
|
|
0.250
|
|
The payment of dividends in the
future is subject to the discretion of the Board of Directors of HMEC and will depend upon general business conditions, legal restrictions
and other factors the Board of Directors may deem to be relevant. Additional information is contained in “Notes to Consolidated
Financial Statements — Note 10 — Statutory Information and Restrictions” listed on page F-1 of this report and
in “Item 1. Business — Cash Flow”.
Shareholder Return Performance Graph
The graph below compares cumulative
total return* of Horace Mann Educators Corporation’s common stock, the S&P 500 Insurance Index and the S&P 500 Index.
The graph assumes $100 invested on December 31, 2011 in HMEC, the S&P 500 Insurance Index and the S&P 500 Index.
|
|
12/11
|
|
12/12
|
|
12/13
|
|
12/14
|
|
12/15
|
|
12/16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HMEC
|
|
$
|
100
|
|
|
$
|
150
|
|
|
$
|
242
|
|
|
$
|
262
|
|
|
$
|
270
|
|
|
$
|
357
|
|
S&P 500 Insurance Index
|
|
|
100
|
|
|
|
119
|
|
|
|
174
|
|
|
|
188
|
|
|
|
193
|
|
|
|
226
|
|
S&P 500 Index
|
|
|
100
|
|
|
|
116
|
|
|
|
153
|
|
|
|
174
|
|
|
|
176
|
|
|
|
197
|
|
|
*
|
The S&P 500 Index and the S&P 500 Insurance Index, as published by S&P, assume an
annual reinvestment of dividends in calculating total return. Horace Mann Educators Corporation assumes reinvestment of quarterly
dividends when paid.
|
Holders and Shares Issued
As of February 15, 2017, the approximate
number of holders of HMEC’s common stock was 12,000.
During 2016, options were exercised
for the issuance of 142,203 shares, 0.4% of the Company’s common stock shares outstanding at December 31, 2015. The Company
received $3.0 million as a result of these option exercises, including related federal income tax benefits, which was used for
general corporate purposes.
Regarding the equity compensation
plan information required by Item 201(d) of Regulation S-K, see “Item 12. Security Ownership of Certain Beneficial Owners
and Management, and Related Stockholder Matters”.
Issuer Purchases of Equity Securities
On December 7, 2011, the Company’s
Board of Directors (the “Board”) authorized a share repurchase program allowing repurchases of up to $50.0 million
of Horace Mann Educators Corporation’s Common Stock, par value $0.001 (the “2011 Plan”). On September 30, 2015,
the Board authorized an additional share repurchase program allowing repurchases of up to $50.0 million to begin following the
completion of the 2011 Plan and utilization of that authorization began in January 2016. Both share repurchase programs authorize
the repurchase of common shares in open market or privately negotiated transactions, from time to time, depending on market conditions.
The current share repurchase program does not have an expiration date and may be limited or terminated at any time without notice.
During the three months ended December 31, 2016, the Company did not repurchase shares of HMEC common stock. As of December 31,
2016, $29.5 million remained authorized for future share repurchases.
ITEM 6. Selected Financial Data
The information required by Item
301 of Regulation S-K is contained in the table in “Item 1. Business — Selected Historical Consolidated Financial Data”.
ITEM 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations
The information required by Item
303 of Regulation S-K is listed on page F-1 of this report.
ITEM 7A. Quantitative and Qualitative Disclosures
About Market Risk
The information required by Item
305 of Regulation S-K is contained under the heading “Market Value Risk” in “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” listed on page F-1 of this report.
ITEM 8. Consolidated Financial Statements and
Supplementary Data
The Company's consolidated financial
statements, financial statement schedules, the report of its independent registered public accounting firm and the selected quarterly
financial data required by Item 302 of Regulation S-K are listed on page F-1 of this report.
ITEM 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure
None.
ITEM 9A. Controls and Procedures
a.) Management’s Conclusion
Regarding the Effectiveness of Disclosure Controls and Procedures
Under the supervision and with
the participation of our management, including our chief executive officer and chief financial officer, we conducted an evaluation
of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) of the Securities and Exchange Act of 1934
as amended (the “Exchange Act”) as of December 31, 2016. Based on this evaluation, our chief executive officer and
our chief financial officer concluded that our disclosure controls and procedures were effective as of December 31, 2016, the end
of the period covered by this Annual Report on Form 10-K.
b.) Management’s Annual
Report on Internal Control Over Financial Reporting
Management of Horace Mann is responsible
for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f)
of the Exchange Act. Internal control over financial reporting is a process designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S.
generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures
that:
|
(i)
|
Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect
the transactions and dispositions of the assets of the company;
|
|
(ii)
|
Provide reasonable assurance that transactions are recorded as necessary to permit preparation
of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures of
the company are being made only in accordance with authorizations of management and directors of the company; and
|
|
(iii)
|
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition,
use, or disposition of the company's assets that could have a material effect on the consolidated financial statements.
|
Management of Horace Mann conducted
an evaluation of the effectiveness of the Company's internal control over financial reporting as of December 31, 2016, using the
criteria set forth in
Internal Control – Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations
of the Treadway Commission (“COSO”). Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to
the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies
or procedures may deteriorate. Based on this evaluation, management, including our CEO and our CFO, determined that, as of December
31, 2016, the Company maintained effective internal control over financial reporting.
The effectiveness of the Company’s
internal control over financial reporting as of December 31, 2016 has been audited by KPMG LLP, the independent registered public
accounting firm that audited the Company’s consolidated financial statements, as stated in their report listed on page F-1
of this Annual Report on Form 10-K.
c.) Independent Registered Public
Accounting Firm’s Report on Internal Control Over Financial Reporting
The information required by Item
308(b) of Regulation S-K is contained in the “Report of Independent Registered Public Accounting Firm” listed on page
F-1 of this report.
d.) Changes in Internal Control Over Financial Reporting
There were no changes in the Company’s
internal control over financial reporting that occurred during the Company’s last fiscal quarter that have materially affected,
or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
ITEM 9B. Other Information
None.
PART III
ITEM 10. Directors, Executive Officers and Corporate
Governance
The information required by Items
401, 405, 406, 407(c)(3), 407(d)(4) and 407(d)(5) of Regulation S-K is incorporated by reference to the Company's Proxy Statement
for the 2017 Annual Meeting of Shareholders.
Horace Mann Educators Corporation
has adopted a code of ethics that applies to its principal executive officer, principal financial officer, principal accounting
officer and all other employees of the Company. In addition, the Board of Directors of Horace Mann Educators Corporation has adopted
the code of ethics for its Board members as it applies to each Board member’s business conduct on behalf of the Company.
The code of ethics is posted on the Company’s website,
www.horacemann.com
, under “Investors — Corporate
Overview — Governance Documents”. In addition, amendments to the code of ethics and any grant of a waiver from a provision
of the code of ethics requiring disclosure under applicable SEC rules will be disclosed at the same location as the code of ethics
on the Company’s website.
ITEM 11. Executive Compensation
The information required by Items
402, 407(e)(4) and 407(e)(5) of Regulation S-K is incorporated by reference to the Company's Proxy Statement for the 2017 Annual
Meeting of Shareholders.
ITEM 12. Security Ownership of Certain Beneficial
Owners and Management, and Related Stockholder Matters
The information required by Items
201(d) and 403 of Regulation S-K is incorporated by reference to the Company's Proxy Statement for the 2017 Annual Meeting of Shareholders.
ITEM 13. Certain Relationships and Related Transactions,
and Director Independence
The information required by Items
404 and 407(a) of Regulation S-K is incorporated by reference to the Company's Proxy Statement for the 2017 Annual Meeting of Shareholders.
ITEM 14. Principal Accounting Fees and Services
The information required by Item
9(e) of Schedule 14A is incorporated by reference to the Company’s Proxy Statement for the 2017 Annual Meeting of Shareholders.
PART IV
ITEM 15. Exhibits and Financial Statement Schedules
(a)(1) The following consolidated
financial statements of the Company are contained in the Index to Financial Information on page F-1 of this report:
Consolidated Balance Sheets as
of December 31, 2016 and 2015.
Consolidated Statements of Operations
for the Years Ended December 31, 2016, 2015 and 2014.
Consolidated Statements of Comprehensive
Income (Loss) for the Years Ended December 31, 2016, 2015 and 2014.
Consolidated Statements of Changes
in Shareholders' Equity for the Years Ended December 31, 2016, 2015 and 2014.
Consolidated Statements of Cash
Flows for the Years Ended December 31, 2016, 2015 and 2014.
(a)(2) The following financial
statement schedules of the Company are contained in the Index to Financial Information on page F-1 of this report:
Schedule I - Summary of Investments
- Other than Investments in Related Parties.
Schedule II - Condensed Financial
Information of Registrant.
Schedules III and VI Combined -
Supplementary Insurance Information and Supplemental Information Concerning Property and Casualty Insurance Operations.
Schedule IV - Reinsurance.
(a)(3) The following items are
filed as Exhibits. Management contracts and compensatory plans are indicated by an asterisk (*).
Exhibit
|
|
|
No.
|
|
Description
|
|
|
|
(3)
|
Articles of incorporation and bylaws:
|
|
|
|
|
3.1
|
Restated Certificate of Incorporation of HMEC, filed with the Delaware Secretary of State on June 24, 2003, incorporated by reference to Exhibit 3.1 to HMEC’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2003, filed with the Securities and Exchange Commission (the “SEC”) on August 14, 2003.
|
|
|
|
|
3.2
|
Form of Certificate for shares of Common Stock, $0.001 par value per share, of HMEC, incorporated by reference to Exhibit 4.5 to HMEC’s Registration Statement on Form S-3 (Registration No. 33-53118) filed with the SEC on October 9, 1992.
|
|
|
|
|
3.3
|
Bylaws of HMEC, incorporated by reference to Exhibit 3.2 to HMEC’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2003, filed with the SEC on August 14, 2003.
|
|
|
|
(4)
|
Instruments defining the rights of security holders, including indentures:
|
|
|
|
|
4.1
|
Indenture, dated as of November 23, 2015, by and between HMEC and The Bank of New York Mellon Trust Company, N.A., as trustee, incorporated by reference to Exhibit 4.1 to HMEC’s Current Report on Form 8-K dated November 18, 2015, filed with the SEC on November 23, 2015.
|
|
|
|
|
4.1(a)
|
Form of HMEC 4.5000% Senior Notes due 2025, incorporated by reference to Exhibit 4.2 to HMEC’s Current Report on Form 8-K dated November 18, 2015, filed with the SEC on November 23, 2015.
|
|
|
|
|
4.2
|
Certificate of Designations for HMEC Series A Cumulative Convertible Preferred Stock, incorporated by reference to Exhibit 4.3 to HMEC’s Annual Report on Form 10-K for the year ended December 31, 2005, filed with the SEC on March 16, 2006.
|
|
|
|
(10)
|
Material contracts:
|
|
|
|
|
10.1
|
Amended and Restated Credit Agreement dated as of July 30, 2014 among HMEC, certain financial institutions named therein and JPMorgan Chase Bank, N.A., as administrative agent, incorporated by reference to Exhibit 10.1 to HMEC’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014, filed with the SEC on August 8, 2014.
|
Exhibit
|
|
|
No.
|
|
Description
|
|
|
|
|
10.1(a)
|
First Amendment to Credit Agreement dated as of November 16, 2015 among HMEC, certain financial institutions named therein and JPMorgan Chase Bank, N.A., as administrative agent, incorporated by reference to Exhibit 10.1(a) to HMEC’s Annual Report on Form 10-K for the year ended December 31, 2015, filed with the SEC on February 29, 2016.
|
|
|
|
|
10.2*
|
Horace Mann Educators Corporation Amended and Restated 2002 Incentive Compensation Plan (“2002 Incentive Compensation Plan”), incorporated by reference to Exhibit 10.2 to HMEC’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2005, filed with the SEC on August 9, 2005.
|
|
|
|
|
10.2(a)*
|
Revised Specimen Employee Stock Option Agreement under the 2002 Incentive Compensation Plan, incorporated by reference to Exhibit 10.6(b) to HMEC’s Annual Report on Form 10-K for the year ended December 31, 2008, filed with the SEC on March 2, 2009.
|
|
|
|
|
10.2(b)*
|
Specimen Employee Restricted Stock Unit Agreement under the 2002 Incentive Compensation Plan, incorporated by reference to Exhibit 10.6(d) to HMEC’s Annual Report on Form 10-K for the year ended December 31, 2005, filed with the SEC on March 16, 2006.
|
|
|
|
|
10.2(c)*
|
Revised Specimen Employee Restricted Stock Unit Agreement under the 2002 Incentive Compensation Plan, incorporated by reference to Exhibit 10.6(f) to HMEC’s Annual Report on Form 10-K for the year ended December 31, 2008, filed with the SEC on March 2, 2009.
|
|
|
|
|
10.2(d)*
|
Specimen Non-employee Director Restricted Stock Unit Agreement under the 2002 Incentive Compensation Plan, incorporated by reference to Exhibit 10.6(e) to HMEC’s Annual Report on Form 10-K for the year ended December 31, 2005, filed with the SEC on March 16, 2006.
|
|
|
|
|
10.2(e)*
|
Revised Specimen Non-employee Director Restricted Stock Unit Agreement under the 2002 Incentive Compensation Plan, incorporated by reference to Exhibit 10.6(h) to HMEC’s Annual Report on Form 10-K for the year ended December 31, 2008, filed with the SEC on March 2, 2009.
|
|
|
|
|
10.3*
|
HMEC 2010 Comprehensive Executive Compensation Plan As Amended and Restated, incorporated by reference to Exhibit 1 (beginning on page E-1) to HMEC’s Proxy Statement, filed with the SEC on April 8, 2015.
|
|
|
|
|
10.3(a)*
|
Specimen Incentive Stock Option Agreement for Section 16 Officers under the HMEC 2010 Comprehensive Executive Compensation Plan, incorporated by reference to Exhibit 10.7(a) to HMEC’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2011, filed with the SEC on August 9, 2011.
|
Exhibit
|
|
|
No.
|
|
Description
|
|
|
|
|
10.3(b)*
|
Specimen Incentive Stock Option Agreement for Non-Section 16 Officers under the HMEC 2010 Comprehensive Executive Compensation Plan, incorporated by reference to Exhibit 10.7(b) to HMEC’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2011, filed with the SEC on August 9, 2011.
|
|
|
|
|
10.3(c)*
|
Specimen Employee Service-Vested Restricted Stock Units Agreement under the HMEC 2010 Comprehensive Executive Compensation Plan, incorporated by reference to Exhibit 10.7(c) to HMEC’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2011, filed with the SEC on August 9, 2011.
|
|
|
|
|
10.3(d)*
|
Specimen Employee Performance-Based Restricted Stock Units Agreement under the HMEC 2010 Comprehensive Executive Compensation Plan, incorporated by reference to Exhibit 10.7(d) to HMEC’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2011, filed with the SEC on August 9, 2011.
|
|
|
|
|
10.3(e)*
|
Specimen Employee Performance-Based Restricted Stock Units Agreement - Key Strategic Grantee under the HMEC 2010 Comprehensive Executive Compensation Plan incorporated by reference to Exhibit 10.3(e) to HMEC’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2016, filed with the SEC on May 6, 2016.
|
|
|
|
|
10.3(f)*
|
Specimen Non-employee Director Restricted Stock Unit Agreement under the HMEC 2010 Comprehensive Executive Compensation Plan, incorporated by reference to Exhibit 10.17(a) to HMEC’s Current Report on Form 8-K dated May 27, 2010, filed with the SEC on June 2, 2010.
|
|
|
|
|
10.4*
|
Horace Mann Supplemental Employee Retirement Plan, 2002 Restatement, incorporated by reference to Exhibit 10.1 to HMEC’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2002, filed with the SEC on May 15, 2002.
|
|
|
|
|
10.5*
|
Horace Mann Executive Supplemental Employee Retirement Plan, 2002 Restatement, incorporated by reference to Exhibit 10.2 to HMEC’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2002, filed with the SEC on May 15, 2002.
|
|
|
|
|
10.6*
|
Amended and Restated Horace Mann Nonqualified Supplemental Money Purchase Pension Plan, incorporated by reference to Exhibit 10.9 to HMEC’s Annual Report on Form 10-K for the year ended December 31, 2008, filed with the SEC on March 2, 2009.
|
|
|
|
|
10.7*
|
Summary of HMEC Non-employee Director Compensation, incorporated by reference to Exhibit 10.7 to HMEC’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2016, filed with the SEC on August 5, 2016.
|
Exhibit
|
|
|
No.
|
|
Description
|
|
|
|
|
10.8*
|
Summary of HMEC Named Executive Officer Annualized Salaries incorporated by reference to Exhibit 10.8 to HMEC’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2016, filed with the SEC on May 6, 2016.
|
|
|
|
|
10.9*
|
Form of Severance Agreement between HMEC, Horace Mann Service Corporation (“HMSC”) and certain officers of HMEC and/or HMSC, incorporated by reference to Exhibit 10.13 to HMEC’s Annual Report on Form 10-K for the year ended December 31, 2012, filed with the SEC on February 28, 2013.
|
|
|
|
|
10.9(a)*
|
Revised Schedule to Severance Agreements between HMEC, HMSC and certain officers of HMEC and/or HMSC, incorporated by reference to Exhibit 10.9(a) to HMEC’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2016, filed with the SEC on August 5, 2016.
|
|
|
|
|
10.10*
|
HMSC Executive Change in Control Plan, incorporated by reference to Exhibit 10.15 to HMEC’s Current Report on Form 8-K dated February 15, 2012, filed with the SEC on February 22, 2012.
|
|
|
|
|
10.10(a)*
|
HMSC Executive Change in Control Plan Schedule A Plan Participants incorporated by reference to Exhibit 10.10(a) to HMEC’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2016, filed with the SEC on May 6, 2016.
|
|
|
|
|
10.11*
|
HMSC Executive Severance Plan, incorporated by reference to Exhibit 10.16 to HMEC’s Current Report on Form 8-K dated March 7, 2012, filed with the SEC on March 13, 2012.
|
|
|
|
|
10.11(a)*
|
First Amendment to the HMSC Executive Severance Plan, incorporated by reference to Exhibit 10.16(a) to HMEC’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2012, filed with the SEC on August 9, 2012.
|
|
|
|
|
10.11(b)*
|
HMSC Executive Severance Plan Schedule A Participants incorporated by reference to Exhibit 10.11(b) to HMEC’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2016, filed with the SEC on May 6, 2016.
|
|
|
|
(11)
|
Statement regarding computation of per share earnings.
|
|
|
(12)
|
Statement regarding computation of ratios.
|
|
|
(21)
|
Subsidiaries of HMEC.
|
|
|
(23)
|
Consent of KPMG LLP.
|
Exhibit
|
|
|
No.
|
|
Description
|
|
|
|
(31)
|
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
|
31.1
|
Certification by Marita Zuraitis, Chief Executive Officer of HMEC.
|
|
|
|
|
31.2
|
Certification by Bret A. Conklin, Senior Vice President and Acting Chief Financial Officer of HMEC.
|
|
|
|
(32)
|
Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
|
32.1
|
Certification by Marita Zuraitis, Chief Executive Officer of HMEC.
|
|
|
|
|
32.2
|
Certification by Bret A. Conklin, Senior Vice President and Acting Chief Financial Officer of HMEC.
|
|
|
|
(99)
|
Additional exhibits
|
|
|
|
|
99.1
|
Glossary of Selected Terms.
|
|
|
|
(101)
|
Interactive Data File
|
|
|
|
|
101.INS
|
XBRL Instance Document
|
|
|
|
|
101.SCH
|
XBRL Taxonomy Extension Schema
|
|
|
|
|
101.CAL
|
XBRL Taxonomy Extension Calculation Linkbase
|
|
|
|
|
101.DEF
|
XBRL Taxonomy Extension Definition Linkbase
|
|
|
|
|
101.LAB
|
XBRL Taxonomy Extension Label Linkbase
|
|
|
|
|
101.PRE
|
XBRL Taxonomy Extension Presentation Linkbase
|
Copies of Form 10-K, Exhibits to
Form 10-K, Horace Mann Educators Corporation’s Code of Ethics and charters of the committees of the Board of Directors are
available through the Investors section of the Company’s Internet website, www.horacemann.com. Copies also may be obtained
by writing to Investor Relations, Horace Mann Educators Corporation, 1 Horace Mann Plaza, Springfield, Illinois 62715-0001.
SIGNATURES
Pursuant to the requirements of
Section 13 or 15(d) of the Securities Exchange Act of 1934, Horace Mann Educators Corporation has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
HORACE MANN EDUCATORS CORPORATION
|
|
|
|
/s/ Marita Zuraitis
|
|
Marita Zuraitis
|
|
President and Chief Executive Officer
|
|
Pursuant to the requirements of
the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of Horace Mann Educators
Corporation and in the capacities and on the date indicated.
Principal Executive Officer:
|
|
Directors:
|
|
|
|
/s/ Marita Zuraitis
|
|
/s/ Gabriel L. Shaheen
|
Marita Zuraitis
|
|
Gabriel L. Shaheen, Chairman of the Board of Directors
|
President, Chief Executive Officer and a Director
|
|
|
|
|
/s/ Daniel A. Domenech
|
|
|
Daniel A. Domenech, Director
|
|
|
|
|
|
/s/ Stephen J. Hasenmiller
|
Principal Financial and Accounting Officer:
|
|
Stephen J. Hasenmiller, Director
|
|
|
|
/s/ Bret A. Conklin
|
|
/s/ Ronald J. Helow
|
Bret A. Conklin
|
|
Ronald J. Helow, Director
|
Senior Vice President and Acting Chief Financial Officer
|
|
|
|
|
/s/ Beverley J. McClure
|
|
|
Beverley J. McClure, Director
|
|
|
|
|
|
/s/ H. Wade Reece
|
|
|
H. Wade Reece, Director
|
|
|
|
|
|
/s/ Robert Stricker
|
|
|
Robert Stricker, Director
|
|
|
|
|
|
/s/ Steven O. Swyers
|
|
|
Steven O. Swyers, Director
|
|
|
|
Dated: March 1, 2017
HORACE MANN EDUCATORS CORPORATION
INDEX TO FINANCIAL INFORMATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (“MD&A”)
(Dollars in millions, except per share data)
Forward-looking Information
Statements made in the following
discussion that are not historical in nature are forward-looking within the meaning of the Private Securities Litigation Reform
Act of 1995 and are subject to known and unknown risks, uncertainties and other factors. Horace Mann is not under any obligation
to (and expressly disclaims any such obligation to) update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise. It is important to note that the Company’s actual results could differ materially
from those projected in forward-looking statements due to a number of risks and uncertainties inherent in the Company’s business.
For additional information regarding risks and uncertainties, see “Item 1A. Risk Factors”. That discussion includes
factors such as:
|
·
|
The impact that a prolonged economic recession may
have on the Company’s investment portfolio; volume of new business for automobile, homeowners, retirement and life products;
policy renewal rates; and additional annuity contract deposit receipts.
|
|
·
|
Fluctuations in the fair value of securities in the
Company’s investment portfolio and the related after tax effect on the Company’s shareholders’ equity and total
capital through either realized or unrealized investment losses.
|
|
·
|
Prevailing low interest rate levels, including the
impact of interest rates on (1) the Company’s ability to maintain appropriate interest rate spreads over minimum fixed rates
guaranteed in the Company’s annuity and life products, (2) the book yield of the Company’s investment portfolio, (3)
unrealized gains and losses in the Company’s investment portfolio and the related after tax effect on the Company’s
shareholders’ equity and total capital, (4) amortization of deferred policy acquisition costs and (5) capital levels of the
Company’s life insurance subsidiaries.
|
|
·
|
The frequency and severity of events such as hurricanes,
storms, earthquakes and wildfires, and the ability of the Company to provide accurate estimates of ultimate claim costs in its
consolidated financial statements.
|
|
·
|
The Company’s risk exposure to catastrophe-prone
areas. Based on full year 2016 Property and Casualty direct earned premiums, the Company’s ten largest states represented
57% of the segment total. Included in this top ten group are certain states which are considered more prone to catastrophe occurrences:
California, North Carolina, Texas, South Carolina, Florida and Louisiana.
|
|
·
|
The ability of the Company to maintain a favorable
catastrophe reinsurance program considering both availability and cost; and the collectibility of reinsurance receivables.
|
|
·
|
Adverse changes in market appreciation, interest spreads,
business persistency and policyholder mortality and morbidity rates and the resulting impact on both estimated reserves and the
amortization of deferred policy acquisition costs.
|
|
·
|
The Company’s ability to refinance outstanding
indebtedness or repurchase shares of the Company’s common stock.
|
|
·
|
The Company’s ability to (1) develop and expand
its marketing operations, including agents and other points of distribution, (2) maintain and secure access to educators, school
administrators, principals and school business officials; and (3) profitably expand its Property and Casualty business in highly
competitive environments.
|
|
·
|
The effects of economic forces and other issues affecting
the educator market including, but not limited to, federal, state and local budget deficits and cut-backs and adverse changes in
state and local tax revenues. The effects of these forces can include, among others, teacher layoffs and early retirements, as
well as individual concerns regarding employment and economic uncertainty.
|
|
·
|
Changes in federal and state laws and regulations,
which affect the relative tax and other advantages of the Company’s life and annuity products to customers, including, but
not limited to, changes in IRS regulations governing Section 403(b) plans.
|
|
·
|
Changes in public employee retirement programs as a
result of federal and/or state level pension reform initiatives.
|
|
·
|
Changes in federal and state laws and regulations,
which affect the relative tax advantage of certain investments or which affect the ability of debt issuers to declare bankruptcy
or restructure debt.
|
|
·
|
The Company’s ability to effectively implement
new or enhanced information technology systems and applications.
|
|
·
|
Changes in Cybersecurity regulations as a result of
state level requirements.
|
Executive Summary
Horace Mann Educators Corporation
(“HMEC”; and together with its subsidiaries, the “Company” or “Horace Mann”) is an insurance
holding company. Through its subsidiaries, HMEC markets and underwrites personal lines of property and casualty insurance, annuities
and life insurance in the U.S. The Company markets its products primarily to K-12 teachers, administrators and other employees
of public schools and their families.
For 2016, the Company’s net
income of $83.8 million decreased $9.7 million compared to 2015. After tax net realized investment gains were $2.3 million compared
to $8.6 million a year earlier. For the Property and Casualty segment, net income of $25.6 million decreased $14.4 million compared
to 2015. The Property and Casualty combined ratio was 101.5% for 2016, 4.5 percentage points higher than the 97.0% in 2015, primarily
as a result of a 2.3 point increase in catastrophe losses, or an increase of $15.6 million on pretax basis. One percentage increase,
or $5.5 million pretax basis, was related to a lower level of favorable prior years’ reserve development in 2016 compared
to the full year 2015. On an underlying basis, the combined ratio increased 1.2 percentage points to 92.9%. The underlying auto
combined ratio increased 2.4 percentage points, to 105.1%, primarily as a result of higher loss frequency and severity. This increase
was somewhat offset by a 1.7 percentage point improvement in the underlying property combined ratio, which for the full year 2016
was 68.6%. The improvement in property results was primarily driven by the impacts of profitability improvement initiatives, as
well as, lower catastrophe reinsurance costs. The Retirement segment’s net income was $50.7 million for 2016 which increased
$7.3 million compared to 2015, primarily due to an increase in investment income that drove improvement in the net interest spread
offset by costs related to the Company’s continued infrastructure and strategic investments. The net interest margin amount
(without net realized investment gains/losses) increased $8.1 million after tax compared to 2015, including increases in investment
prepayment activity. The impact of unlocking deferred policy acquisition costs increased income by $2.4 million compared to 2015.
In addition, income tax expense was reduced by approximately $0.9 million related to the filing of the prior calendar year tax
return. Annuity assets under management of $6.4 billion increased 7.2% compared to a year earlier and disciplined crediting rate
management continues. Life segment net income of $16.6 million increased $1.6 million compared to 2015 primarily as a result of
an increase in investment income and a decrease in mortality expenses in 2016.
Premiums written and contract deposits*
increased slightly compared to 2015 as growth in the Property and Casualty and Life segments was offset by a decrease in the amount
of annuity deposits received in 2016. Property and Casualty segment premiums written increased 4.7% compared to the prior year,
primarily due to the favorable impacts from increases in average premium per policy for homeowners and automobile, accompanied
by reductions in catastrophe reinsurance costs. Life segment insurance premiums and contract deposits increased 5.2% compared to
2015. Annuity deposits received for Retirement decreased 5.1%, due to the inclusion of a favorable impact of non-recurring deposits
in 2015 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 $32.15 at December 31, 2016, an increase of 3.1% 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, 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.
Information regarding the Company’s
accounting policies pertaining to these topics is located in the “Notes to Consolidated Financial Statements” as listed
on page F-1 of this report and is not repeated in the discussion below.
Fair Value Measurements
The fair value of a financial instrument
is the estimated amount at which the instrument could be exchanged in an orderly transaction between knowledgeable, unrelated and
willing parties. The valuation of fixed maturity securities and equity securities is more subjective when markets are less liquid
due to the lack of market based inputs, which may increase the potential that the estimated fair value of an investment is not
reflective of the price at which an actual transaction would occur. See also “Notes to Consolidated Financial Statements
— Note 3 — Fair Value of Financial Instruments”.
Valuation of Fixed Maturity and
Equity Securities
The fair value of the Company’s
fixed maturity securities portfolio was $7,456.7 million at December 31, 2016. For fixed maturity securities, each month the Company
obtains fair value prices from its investment managers and custodian bank, each of which use a variety of independent, nationally
recognized pricing sources to determine market valuations. Typical inputs used by these pricing sources include, but are not limited
to, reported trades, benchmark yield curves, benchmarking of like securities, rating designations, sector groupings, issuer spreads,
bids, offers, and/or estimated cash flows and prepayment speeds. The Company’s fixed maturity securities portfolio is primarily
publicly traded, which allows for a high percentage of the portfolio to be priced through pricing services. Approximately 90% of
the portfolio, based on fair value, was priced through pricing services or index priced using observable inputs as of December
31, 2016. The remainder of the portfolio was priced by broker-dealers or pricing models.
When the pricing sources cannot
provide fair value determinations, the Company obtains non-binding price quotes from broker-dealers. The broker-dealers’
valuation methodology is sometimes matrix-based, using indicative evaluation measures and adjustments for specific security characteristics
and market sentiment. The market inputs utilized in the evaluation measures and adjustments include: benchmark yield curves, reported
trades, broker/dealer quotes, ratings and corresponding issuer spreads, two-sided markets, benchmark securities, bids, offers,
reference data, and industry and economic events. The extent of the use of each market input depends on the market sector and the
market conditions. Depending on the security, the priority of the use of inputs may change or some market inputs may not be relevant.
For some securities, additional inputs may be necessary.
The Company analyzes price and
market valuations received and has in place certain control processes to determine the reasonableness of the financial asset fair
values. These processes are designed to ensure (1) the values received are reasonable and accurately recorded, (2) the data inputs
and valuation techniques utilized are appropriate and consistently applied, and (3) the assumptions are reasonable and consistent
with the objective of determining fair value.
The fair value of the Company’s
equity securities portfolio was $141.6 million at December 31, 2016. All of the portfolio was priced from observable market quotations
at December 31, 2016. Fair values of equity securities have been determined by the Company from observable market quotations, when
available. When a public quotation is not available, equity securities are valued by using non-binding broker quotes or through
the use of pricing models or analysis that is based on market information regarding interest rates, credit spreads and liquidity.
The underlying source data for calculating the matrix of credit spreads relative to the U.S. Treasury curve are nationally recognized
indices. In addition, credit rating (or credit quality equivalent information) of securities is also factored into a pricing matrix.
These inputs are based on assumptions deemed appropriate given the circumstances and are believed to be consistent with what other
market participants would use when pricing such securities.
At December 31, 2016, Level 3 invested
assets comprised approximately 3% of the Company’s total investment portfolio fair value. Invested assets are classified
as Level 3 when fair value is determined based on unobservable inputs that are supported by little or no market activity and those
inputs are significant to the fair value.
Other-than-temporary Impairment
of Investments
The Company's methodology of assessing
other-than-temporary impairments is based on security-specific facts and circumstances as of the balance sheet date. The Company
reviews the fair value of all investments in its portfolio on a monthly basis to assess whether an other-than-temporary decline
in value has occurred. These reviews, in conjunction with the Company's investment managers' monthly credit reports and relevant
factors such as (1) the financial condition and near-term prospects of the issuer, (2) the length of time and extent to which the
fair value has been less than amortized cost for fixed maturity securities or cost for equity securities, (3) for fixed maturity
securities, the Company’s intent to sell a security or whether it is more likely than not the Company will be required to
sell the security before the anticipated recovery of the amortized cost basis; and for equity securities, the Company’s ability
and intent to hold the security for the recovery of cost or if recovery of cost is not expected within a reasonable period of time,
(4) the stock price trend of the issuer, (5) the market leadership position of the issuer, (6) the debt ratings of the issuer,
and (7) the cash flows and liquidity of the issuer or the underlying cash flows for asset-backed securities, are all considered
in the impairment assessment.
When an other-than-temporary impairment
is deemed to have occurred, the investment is written-down to fair value, with a realized loss charged to income for the period
for the full loss amount for all equity securities and the credit-related loss portion associated with impaired fixed maturity
securities. The amount of the total other-than-temporary impairment related to non-credit factors for fixed maturity securities
is recognized in other comprehensive income, net of applicable taxes, in which the Company has the intent to sell the security
or if it is more likely than not the Company will be required to sell the security before the anticipated recovery of the amortized
cost basis. See also “Notes to Consolidated Financial Statements — Note 1 — Summary of Significant Accounting
Policies — Other-than-temporary Impairment of Investments”.
Goodwill
Goodwill represents the excess
of the amounts paid to acquire a business over the fair value of its net assets at the date of acquisition. Goodwill is not amortized,
but is tested for impairment at the reporting unit level at least annually or more frequently if events occur or circumstances
change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. If the carrying amount
of the reporting unit goodwill exceeds the implied goodwill value, an impairment loss would be recognized in an amount equal to
that excess; the charge could have a material adverse effect on the Company’s results of operations. The Company’s
reporting units, for which goodwill has been allocated, are equivalent to the Company’s operating segments. As of December
31, 2016, the Company’s allocation of goodwill by reporting unit/segment was as follows: $28.0 million, Retirement; $9.9
million, Life; and $9.5 million, Property and Casualty. Also see “Notes to Consolidated Financial Statements — Note
1 — Summary of Significant Accounting Policies — Goodwill”.
The process of evaluating goodwill
for impairment requires management to make multiple judgments and assumptions to determine the fair value of each reporting unit,
including discounted cash flow calculations, the level of the Company’s own share price and assumptions that market participants
would make in valuing each reporting unit. Fair value estimates are based primarily on an in-depth analysis of historical experience,
projected future cash flows and relevant discount rates, which consider market participant inputs and the relative risk associated
with the projected cash flows. Other assumptions include levels of
economic capital, future business growth, earnings projections
and assets under management for each reporting unit. Estimates of fair value are subject to assumptions that are sensitive to change
and represent the Company’s reasonable expectation regarding future developments. The Company also considers other valuation
techniques such as peer company price-to-earnings and price-to-book multiples.
The assessment of goodwill recoverability
requires significant judgment and is subject to inherent uncertainty. The use of different assumptions, within a reasonable range,
could cause the fair value to be below carrying value. Subsequent goodwill assessments could result in impairment, particularly
for each reporting unit with at-risk goodwill, due to the impact of a volatile financial market on earnings, discount rate assumptions,
liquidity and market capitalization. There were no events or material changes in circumstances during 2016 that indicated that
a material change in the fair value of the Company’s reporting units had occurred.
Deferred Policy Acquisition
Costs for Investment Contracts and Life Insurance Products with Account Values
Policy acquisition costs, consisting
of commissions, policy issuance and other costs which are incremental and directly related to the successful acquisition of new
or renewal business, are deferred and amortized on a basis consistent with the type of insurance coverage. For all investment (annuity)
contracts, deferred policy acquisition costs are amortized over 20 years in proportion to estimated gross profits. Deferred policy
acquisition costs are amortized in proportion to estimated gross profits over 20 years for certain life insurance products with
account values and over 30 years for indexed universal life contracts (“IUL”). See also “Notes to Consolidated
Financial Statements — Note 1 — Summary of Significant Accounting Policies — Deferred Policy Acquisition Costs”.
The most significant assumptions
that are involved in the estimation of annuity gross profits include interest rate spreads, future financial market performance,
business surrender/lapse rates, expenses and the impact of realized investment gains and losses. For the variable deposit portion
of the Retirement segment, the Company amortizes deferred policy acquisition costs utilizing a future financial market performance
assumption of a 10% reversion to the mean approach with a 200 basis point corridor around the mean during the reversion period,
representing a cap and a floor on the Company’s long-term assumption. The Company’s practice with regard to returns
on Separate Accounts assumes that long-term appreciation in the financial market is not changed by short-term market fluctuations,
but is only changed when sustained annual deviations are experienced. The Company monitors these fluctuations and only changes
the assumption when the long-term expectation changes. The potential effect of an increase/ (decrease) by 100 basis points in the
assumed future rate of return is reasonably likely to result in an estimated decrease/ (increase) in the deferred policy acquisition
costs amortization expense of approximately $1 million. Although this evaluation reflects likely outcomes, it is possible an actual
outcome may fall below or above these estimates. At December 31, 2016, the ratio of deferred annuity policy acquisition costs to
the total annuity accumulated cash value was approximately 3%.
In the event actual experience
differs significantly from assumptions or assumptions are significantly revised, the Company may be required to record a material
charge or credit to current period amortization expense for the period in which the adjustment is made. As noted above, there are
key assumptions involved in the evaluation of deferred policy acquisition costs. In terms of the sensitivity of this amortization
to two of the more significant assumptions, based on deferred annuity policy acquisition costs as of December 31, 2016 and assuming
all other assumptions are met, (1) a 10 basis point deviation in the annual targeted interest rate spread assumption would impact
amortization between $0.25 million and $0.35 million and (2) a 1% deviation from the targeted financial market performance for
the underlying mutual funds of the Company’s variable annuities would impact amortization between $0.20 million and $0.30
million. These results may change depending on the magnitude and direction of any actual deviations but represent a range of reasonably
likely experience for the noted assumptions. Detailed discussion of the impact of adjustments to the amortization of deferred acquisition
costs is included in “Results of Operations for the Three Years Ended December 31, 2016 — Policy Acquisition Expenses
Amortized”.
Liabilities for Property and
Casualty Claims and Claim Expenses
Underwriting results of the Property
and Casualty segment are significantly influenced by estimates of the Company's ultimate liability for insured events. There is
a high degree of uncertainty inherent in the estimates of ultimate losses underlying the liability for unpaid claims and claim
settlement expenses. This inherent uncertainty is particularly significant for liability-related exposures due to the extended
period, often many years that transpires between a loss event, receipt of related claims data from policyholders and ultimate settlement
of the claim. Reserves for Property and Casualty claims include provisions for payments to be made on reported claims (“case
reserves”), claims incurred but not yet reported (“IBNR”) and associated settlement expenses (together, “loss
reserves”).
The process by which these reserves
are established requires reliance upon estimates based on known facts and on interpretations of circumstances, including the Company's
experience with similar cases and historical trends involving claim payments and related patterns, pending levels of unpaid claims
and product mix, as well as other factors including court decisions, economic conditions, public attitudes and medical costs. The
Company calculates and records a single best estimate of the reserve (which is equal to the actuarial point estimate) as of each
balance sheet date.
Reserves are re-estimated quarterly.
Changes to reserves are recorded in the period in which development factor changes result in reserve re-estimates. A detailed discussion
of the process utilized to estimate loss reserves, risk factors considered and the impact of adjustments recorded during recent
years is included in “Notes to Consolidated Financial Statements — Note 5 — Property and Casualty Unpaid Claims
and Claim Expenses”. Due to the nature of the Company’s personal lines business, the Company has no exposure to losses
related to claims for toxic waste cleanup, other environmental remediation or asbestos-related illnesses other than claims under
homeowners insurance policies for environmentally related items such as mold.
Based on the Company’s products
and coverages, historical experience, and modeling of various actuarial methodologies used to develop reserve estimates, the Company
estimates that the potential variability of the Property and Casualty loss reserves within a reasonable probability of other possible
outcomes may be approximately plus or minus 6%, which equates to plus or minus approximately $10 million of net income based on
net reserves as of December 31, 2016. Although this evaluation reflects the most likely outcomes, it is possible the final outcome
may fall below or above these estimates.
There are a number of assumptions
involved in the determination of the Company’s Property and Casualty loss reserves. Among the key factors affecting recorded
loss reserves for both long-tail and short-tail related coverages, claim severity and claim frequency are of particular significance.
Management estimates that a 2% change in claim severity or claim frequency for the most recent 36 month period is a reasonably
likely scenario based on recent experience and would result in a change in the estimated net reserves of between $6.0 million and
$10.0 million for long-tail liability related exposures (automobile liability coverages) and between $1.0 million and $3.0 million
for short-tail liability related exposures (homeowners and automobile physical damage coverages). Actual results may differ, depending
on the magnitude and direction of the deviation.
The Company’s actuaries discuss
their loss and loss adjustment expense actuarial analysis with management. As part of this discussion, the indicated point estimate
of the IBNR loss reserve by line of business (coverage) is reviewed. The Company’s actuaries also discuss any indicated changes
to the underlying assumptions used to calculate the indicated point estimate. Any variance between the indicated reserves from
these changes in assumptions and the previously carried reserves is reviewed. After discussion of these analyses and all relevant
risk factors, management determines whether the reserve balances require adjustment. The Company’s best estimate of loss
reserves may change depending on a revision in the underlying assumptions.
The Company’s liabilities
for unpaid claims and claim expenses for the Property and Casualty segment were as follows:
|
|
December
31, 2016
|
|
December
31, 2015
|
|
|
Case
|
|
IBNR
|
|
|
|
Case
|
|
IBNR
|
|
|
|
|
Reserves
|
|
Reserves
|
|
Total
(1)
|
|
Reserves
|
|
Reserves
|
|
Total
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Automobile
liability
|
|
|
$
|
95.2
|
|
|
|
$
|
152.5
|
|
|
|
$
|
247.7
|
|
|
|
$
|
92.5
|
|
|
|
$
|
139.5
|
|
|
|
$
|
232.0
|
|
Automobile other
|
|
|
|
6.9
|
|
|
|
|
1.8
|
|
|
|
|
8.7
|
|
|
|
|
8.4
|
|
|
|
|
1.5
|
|
|
|
|
9.9
|
|
Homeowners
|
|
|
|
11.2
|
|
|
|
|
26.2
|
|
|
|
|
37.4
|
|
|
|
|
15.3
|
|
|
|
|
30.7
|
|
|
|
|
46.0
|
|
All other
|
|
|
|
2.9
|
|
|
|
|
11.1
|
|
|
|
|
14.0
|
|
|
|
|
4.7
|
|
|
|
|
9.0
|
|
|
|
|
13.7
|
|
Total
|
|
|
$
|
116.2
|
|
|
|
$
|
191.6
|
|
|
|
$
|
307.8
|
|
|
|
$
|
120.9
|
|
|
|
$
|
180.7
|
|
|
|
$
|
301.6
|
|
|
(1)
|
These amounts are gross, before reduction for ceded reinsurance
reserves.
|
The facts and circumstances leading
to the Company’s re-estimate of reserves relate to revisions of the development factors used to predict how losses are likely
to develop from the end of a reporting period until all claims have been paid. Re-estimates occur because actual loss amounts are
different than those predicted by the estimated development factors used in prior reserve estimates. At December 31, 2016, the
impact of a reserve re-estimation resulting in a 1% increase in net reserves would be a decrease of approximately $2 million in
net income. A reserve re-estimation resulting in a 1% decrease in net reserves would increase net income by approximately $2 million.
Favorable prior years’ reserve
reestimates increased net income in 2016 by approximately $5 million, primarily the result of favorable severity trends in property
for accident years 2014 and prior. The lower than expected claims emergence and resultant lower expected loss ratios caused the
Company to lower its reserve estimate at December 31, 2016.
Investment Contract and Life Policy Reserves
Liabilities for future benefits
on life and annuity policies are established in amounts adequate to meet the estimated future obligations on policies in force.
Liabilities for future policy benefits on certain life insurance policies are computed using the net level premium method and are
based on assumptions as to future investment yield, mortality and lapses. Mortality and lapse assumptions for all policies have
been based on actuarial tables which are consistent with the Company's own experience. In the event actual experience is worse
than the assumptions, additional reserves may be required. This would result in a charge to income for the period in which the
increase in reserves occurred. Liabilities for future benefits on annuity contracts and certain long-duration life insurance contracts
are carried at accumulated policyholder values without reduction for potential surrender or withdrawal charges. See also “Notes
to Consolidated Financial Statements — Note 1 — Summary of Significant Accounting Policies — Investment Contract
and Life Policy Reserves”.
Deferred Taxes
Deferred tax assets and liabilities
represent the tax effect of the differences between the financial statement carrying value of existing assets and liabilities and
their respective tax bases. The Company evaluates deferred tax assets periodically to determine if they are realizable. Factors
in the determination include the performance of the business including the ability to generate taxable income from a variety of
sources and tax planning strategies. If, based on available information, it is more likely than not that the deferred income tax
asset will not be realized, then a valuation allowance must be established with a corresponding charge to net income. Charges to
establish a valuation allowance could have a material adverse effect on the Company’s results of operations and financial
position. See also “Notes to Consolidated Financial Statements — Note 8 — Income Taxes”.
Valuation of Liabilities Related
to the Defined Benefit Pension Plan
The Company's cost estimates for
its frozen defined benefit pension plan are determined annually based on assumptions which include the discount rate, expected
return on plan assets, anticipated retirement rate and estimated lump sum distributions. A discount rate of 3.90% was used by the
Company for estimating accumulated benefits under the plan at December 31, 2016, which was based on the average yield for long-term,
high grade securities having maturities generally consistent with the defined benefit pension payout period. To set its discount
rate, the Company looks to leading indicators, including the Mercer Above Mean Yield Curve. The expected annual return on plan
assets assumed by the Company at December 31, 2016 was 6.50%. The assumption for the long-term rate of return on plan assets was
determined by considering actual investment experience during the lifetime of the plan, balanced with reasonable expectations of
future growth considering the various classes of assets and percentage allocation for each asset class. Management believes that
it has adopted reasonable assumptions for investment returns, discount rates and other key factors used in the estimation of pension
costs and asset values.
To the extent that actual experience
differs from the Company's assumptions, subsequent adjustments may be required, with the effects of those adjustments charged or
credited to income and/or shareholders' equity for the period in which the adjustments are made. Generally, a change of 50 basis
points in the discount rate would inversely impact pension expense and accumulated other comprehensive income (“AOCI”)
by approximately $0.1 million and $1.1 million, respectively. In addition, for every $1 million increase (decrease) in the value
of pension plan assets, there is a comparable pretax increase (decrease) in AOCI. See also “Notes to Consolidated Financial
Statements — Note 11 — Pension Plans and Other Postretirement Benefits”.
Results of Operations for the Three Years Ended December 31, 2016
Insurance Premiums and Contract
Charges
|
|
Year
Ended
|
|
|
Change
From
|
|
|
Year
Ended
|
|
|
|
December
31,
|
|
|
Prior
Year
|
|
|
December
31,
|
|
|
|
2016
|
|
|
2015
|
|
|
Percent
|
|
Amount
|
|
|
|
2014
|
|
|
Insurance
premiums written and contract deposits (includes annuity and life contract deposits)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
and Casualty
|
|
$
|
634.3
|
|
|
$
|
605.8
|
|
|
|
4.7
|
%
|
|
$
|
28.5
|
|
|
$
|
584.4
|
|
|
Retirement
(annuity)
|
|
|
520.2
|
|
|
|
548.0
|
|
|
|
-5.1
|
%
|
|
|
(27.8
|
)
|
|
|
480.6
|
|
|
Life
|
|
|
108.0
|
|
|
|
102.7
|
|
|
|
5.2
|
%
|
|
|
5.3
|
|
|
|
102.7
|
|
|
Total
|
|
$
|
1,262.5
|
|
|
$
|
1,256.5
|
|
|
|
0.5
|
%
|
|
$
|
6.0
|
|
|
$
|
1,167.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance
premiums and contract charges earned (excludes annuity and life contract deposits)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
and Casualty
|
|
$
|
620.5
|
|
|
$
|
596.0
|
|
|
|
4.1
|
%
|
|
$
|
24.5
|
|
|
$
|
581.8
|
|
|
Retirement
(annuity)
|
|
|
24.9
|
|
|
|
25.4
|
|
|
|
-2.0
|
%
|
|
|
(0.5
|
)
|
|
|
25.6
|
|
|
Life
|
|
|
113.7
|
|
|
|
110.5
|
|
|
|
2.9
|
%
|
|
|
3.2
|
|
|
|
108.4
|
|
|
Total
|
|
$
|
759.1
|
|
|
$
|
731.9
|
|
|
|
3.7
|
%
|
|
$
|
27.2
|
|
|
$
|
715.8
|
|
|
Number of Policies and Contracts in Force
(actual counts)
|
|
As of December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Property and Casualty
|
|
|
|
|
|
|
|
|
|
|
|
|
Automobile
|
|
|
484,915
|
|
|
|
486,939
|
|
|
|
480,777
|
|
Property
|
|
|
220,137
|
|
|
|
224,531
|
|
|
|
229,072
|
|
Total
|
|
|
705,052
|
|
|
|
711,470
|
|
|
|
709,849
|
|
Retirement
|
|
|
219,105
|
|
|
|
211,071
|
|
|
|
202,572
|
|
Life
|
|
|
197,937
|
|
|
|
201,789
|
|
|
|
200,867
|
|
For 2016, the Company’s premiums
written and contract deposits* of $1,262.5 million increased $6.0 million, or 0.5%. For 2015, the Company’s premiums written
and contract deposits of $1,256.5 million increased $88.8 million, or 7.6%, compared to a year earlier, led by growth in the Retirement
segment as well as growth in the Property and Casualty segment. Changes in the Company’s employee retirement savings plans
which were effective beginning in 2015 led to approximately $30 million of the $88.8 million increase in 2015; consolidated and
Retirement segment growth were approximately 5% and 7%, respectively, in 2015 excluding this item. The Company’s premiums
and contract charges earned increased $27.2 million, or 3.7%, compared to 2015, primarily due to increases in average premium per
policy for both homeowners and automobile. For 2015, the Company’s premiums and contract charges earned increased $16.1 million,
or 2.2%, compared to 2014 primarily due to increases in average premium per policy for both homeowners and automobile.
Total Property and Casualty premiums
written* increased 4.7%, or $28.5 million, in 2016, compared to 2015, primarily due to increases in average written premium per
policy for both homeowners and automobile. For 2016, the Company’s full year rate plan anticipated mid-single digit average
rate increases (including states with no rate actions) for both automobile and homeowners; average approved rate changes during
2016 were consistent with those plans at 6.5% for automobile and 5% for homeowners.
Based on policies in force, the
automobile 12 month retention rate for new and renewal policies was 83.5% compared to 84.7% at both December 31, 2015 and 2014,
respectively, with the decrease due to recent rate and underwriting actions. The property 12 month new and renewal policy retention
rate was 87.8%, 88.3% and 87.9% at December 31, 2016, 2015 and 2014, respectively, with decrease due to recent rate and underwriting
actions.
Automobile premiums written* increased
5.9%, or $23.7 million, compared to 2015. In 2016, the average written premium per policy and average earned premium per policy
increased approximately 5% and 4%, respectively, compared to a year earlier. In 2015, automobile premiums written increased 4.8%,
or $18.4 million, compared to 2014. In 2015, the average written premium per policy and average earned premium per policy increased
approximately 3% and 2%, respectively, compared to a year earlier, which was augmented by the 2015 increase in policies in force.
The number of educator policies increased more than the total policy count over the three year period and represented approximately
85%, 85% and 84% of the automobile policies in force at December 31, 2016, 2015 and 2014, respectively.
Homeowners premiums written* increased
2.4%, or $4.8 million, compared to 2015. Homeowners premiums written increased 1.5%, or $3.0 million, compared to 2014. While the
number of homeowners policies in force has declined, the average written premium per policy and average earned premium per policy
each increased approximately 4%, in 2016 compared to a year earlier. In addition, reduced catastrophe reinsurance costs benefited
the current period premiums written by approximately $1.4 million. In 2015, while the number of homeowners policies in force declined,
the average written premium per policy and average earned premium per policy each increased approximately 3% compared to a year
earlier. The number of educator policies represented approximately 82% of the homeowners policies in force at December 31, 2016,
compared to approximately 81% at December 31, 2015 and 80% at December 31, 2014, respectively, 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 2016, total annuity deposits*
received decreased 5.1%, or $27.8 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 2015. The 2016 decrease reflected a 7.6% decrease
in recurring deposit receipts and a 3.3% decrease in single premium and rollover deposit receipts. Excluding the 2015 non-recurring
item, the remaining 2016 decrease was minimal. For 2015, total annuity deposits received increased 14.0%, or $67.4 million, compared
to the prior year, including a 22.6% increase in recurring deposit receipts and an 8.7% increase in single premium and rollover
deposit receipts.
In addition to external contractholder
deposits, annuity new recurring deposits include contributions and transfers by Horace Mann’s employees into the Company’s
401(k) group annuity contract. The Company’s employee retirement savings plans are described in “Notes to Consolidated
Financial Statements — Note 11 — Pension Plans and Other Postretirement Benefits”. Note that deposits into the
Company’s employee 401(k) group annuity contract are not reported as “sales”.
In 2016, new deposits to fixed
accounts of $356.6 million decreased 4.4%, or $16.5 million, and new deposits to variable accounts of $163.6 million decreased
6.5%, or $11.3 million, compared to the prior year, including the impact of the 2015 non-recurring employee retirement savings
plans item described above. In 2015, new deposits to fixed accounts of $373.1 million increased 9.7%, or $33.1 million, and new
deposits to variable accounts of $174.9 million increased 24.4%, or $34.3 million, compared to the prior year.
Total annuity accumulated value
on deposit of $6.4 billion at December 31, 2016 increased 7.2% compared to a year earlier, reflecting the increase from new deposits
received as well as favorable retention. Accumulated value retention for the variable annuity option was 94.7%, 94.3% and 94.0%
for the 12 month periods ended December 31, 2016, 2015 and 2014, respectively; fixed annuity retention was 94.6%, 94.8% and 94.5%
for the respective periods.
Variable annuity accumulated balances
of $1.9 billion at December 31, 2016 increased 6.8% compared to December 31, 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 2015, Retirement segment contract charges earned decreased 2.0%, or $0.5 million.
Variable annuity accumulated balances of $1.8 billion at December 31, 2015 decreased 0.7% compared to December 31, 2014, reflecting
minimal impact from financial market performance over the 12 months and net balances transferred from the variable account option
to the guaranteed interest rate fixed account option partially offset by net positive cash flows. Retirement segment contract charges
earned decreased 0.8%, or $0.2 million, compared to 2014.
Life segment premiums and contract
deposits* for 2016 increased 5.2%, or $5.3 million, compared to the prior year, including the favorable impact of new ordinary
life business growth. Life segment premiums and contract deposits for 2015 were equal to the prior year, including the favorable
impact of new ordinary life business growth offset by a modest decline in group life premiums. The ordinary life insurance in force
lapse ratio was 4.3%, 4.1% and 4.0% for the 12 months ended December 31, 2016, 2015 and 2014, respectively.
Sales*
For 2016, Property and Casualty
new annualized sales premiums increased 5.5% compared to 2015, as 5.7%, or $4.8 million, growth in new automobile sales was accompanied
by growth in homeowners sales of 4.7%, or $0.8 million, compared to the prior year.
While the 2016 annuity new business
levels were lower than in the prior year period, the Company’s Retirement segment new business levels continued to benefit
from agent training and marketing programs, which focus on retirement planning, and build on the positive results produced in recent
years. Annuity sales by Horace Mann’s agency force decreased 2.1% compared to 2015, 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 9.2% of total annuity sales in 2016 and are largely single premium and
rollover annuity deposits, decreased approximately 17.6% compared to a year earlier. As a result, total Horace Mann annuity sales
from the combined distribution channels decreased 3.7%, or $13.8, compared to 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 6.3% compared to 2015, and single premium and rollover deposits decreased 3.3%
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 both 2016 and 2015. 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 IUL product have contributed to an increase in sales of proprietary
life products. For 2016, sales of Horace Mann’s proprietary life insurance products totaled $15.6 million, representing an
increase of 43.1%, or $4.7 million, compared to the prior year, including an increase of $3.8 million for single premium sales.
Distribution
At December 31, 2016, there was
a combined total of 666 Exclusive Agencies and Employee Agents, compared to 735 at December 31, 2015 and 755 at December 31, 2014.
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 272 authorized agents at December 31,
2016. During 2016, this channel generated $32.8 million in annualized new annuity sales for the Company compared to $39.8 million
for 2015 and $34.4 million for 2014, with the new business primarily comprised of single and rollover deposit business over the
three year period.
Net Investment Income
For 2016, pretax net investment
income of $361.2 million increased 8.6%, or $28.6 million, (7.9%, or $17.7 million, after tax) compared to 2015. While asset balances
in the Retirement segment continue to grow, overall investment results reflected an increase in investment prepayment activity
and favorable returns on alternative investments, partially offset by the impact of the current low interest rate environment.
For 2015, pretax net investment income of $332.6 million increased 0.8%, or $2.8 million, (0.7%, or $1.5 million, after tax) compared
to 2014. Average invested assets increased 5.6% over the 12 months ended December 31, 2016. The average pretax yield on the total
investment portfolio was 5.21% (3.47% after tax) for 2016, compared to the pretax yield of 5.06% (3.39% after tax) and 5.32% (3.57%
after tax) for 2015 and 2014, respectively. During 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 2016, net realized investment
gains were $4.1 million compared to net realized investment gains of $12.7 million and $10.9 million in 2015 and 2014, respectively.
The net gains and losses in all periods were realized primarily from ongoing investment portfolio management activity and, when
determined, the recognition of other-than-temporary impairment.
For the year ended December 31,
2016, the Company’s net realized investment gains of $4.1 million included $23.3 million of gross gains realized on security
sales and calls partially offset by $8.1 million of realized losses primarily on securities that were disposed of during 2016 and
$11.1 million of other-than-temporary impairment charges recorded largely on Puerto Rico and energy sector fixed maturity securities,
as well as some equity securities.
For the year ended December 31,
2015, the Company’s net realized investment gains of $12.7 million included $39.6 million of gross gains realized on security
sales and calls partially offset by $7.4 million of realized losses on securities that were disposed of during 2015 and $19.5 million
of other-than-temporary impairment charges recorded largely on energy sector and Puerto Rico fixed maturity securities and one
unrelated equity security.
For the year ended December 31,
2014, the Company’s net realized investment gains of $10.9 million included $26.7 million of gross gains realized on security
sales and calls partially offset by $9.4 million of realized losses on securities that were disposed of during 2014, primarily
mortgage-backed and municipal securities, and the $6.4 million other-than-temporary charge recorded largely on energy sector securities
in the fourth quarter.
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 December 31, 2016 and U.S. Treasury rates increased, which resulted in net unrealized investment gains to be flat in the Company’s
fixed maturity securities holdings.
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
Amortized
|
|
Pretax Net
|
|
|
Number of
|
|
Fair
|
|
Cost or
|
|
Unrealized
|
|
|
Issuers
|
|
Value
|
|
Cost
|
|
Gain (Loss)
|
Fixed maturity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Banking and Finance
|
|
|
97
|
|
|
|
$
|
709.8
|
|
|
|
$
|
682.3
|
|
|
|
$
|
27.5
|
|
Insurance
|
|
|
51
|
|
|
|
|
260.9
|
|
|
|
|
240.8
|
|
|
|
|
20.1
|
|
Energy (1)
|
|
|
48
|
|
|
|
|
221.8
|
|
|
|
|
208.7
|
|
|
|
|
13.1
|
|
Healthcare, Pharmacy
|
|
|
39
|
|
|
|
|
168.2
|
|
|
|
|
161.6
|
|
|
|
|
6.6
|
|
Real estate
|
|
|
35
|
|
|
|
|
162.5
|
|
|
|
|
156.8
|
|
|
|
|
5.7
|
|
Technology
|
|
|
28
|
|
|
|
|
161.8
|
|
|
|
|
158.8
|
|
|
|
|
3.0
|
|
Utilities
|
|
|
39
|
|
|
|
|
159.3
|
|
|
|
|
140.9
|
|
|
|
|
18.4
|
|
Transportation
|
|
|
22
|
|
|
|
|
156.3
|
|
|
|
|
150.4
|
|
|
|
|
5.9
|
|
Telecommunications
|
|
|
23
|
|
|
|
|
123.8
|
|
|
|
|
115.8
|
|
|
|
|
8.0
|
|
Natural gas
|
|
|
19
|
|
|
|
|
96.5
|
|
|
|
|
93.1
|
|
|
|
|
3.4
|
|
All Other Corporates (2)
|
|
|
180
|
|
|
|
|
589.4
|
|
|
|
|
563.7
|
|
|
|
|
25.7
|
|
Total corporate bonds
|
|
|
581
|
|
|
|
|
2,810.3
|
|
|
|
|
2,672.9
|
|
|
|
|
137.4
|
|
Mortgage-backed securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Government and federally sponsored agencies
|
|
|
359
|
|
|
|
|
442.4
|
|
|
|
|
412.9
|
|
|
|
|
29.5
|
|
Commercial (3)
|
|
|
121
|
|
|
|
|
503.8
|
|
|
|
|
508.5
|
|
|
|
|
(4.7
|
)
|
Other
|
|
|
29
|
|
|
|
|
70.4
|
|
|
|
|
69.2
|
|
|
|
|
1.2
|
|
Municipal bonds (4)
|
|
|
593
|
|
|
|
|
1,769.4
|
|
|
|
|
1,648.3
|
|
|
|
|
121.1
|
|
Government bonds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
|
10
|
|
|
|
|
467.1
|
|
|
|
|
458.7
|
|
|
|
|
8.4
|
|
Foreign
|
|
|
17
|
|
|
|
|
98.7
|
|
|
|
|
93.9
|
|
|
|
|
4.8
|
|
Collateralized debt obligations (5)
|
|
|
112
|
|
|
|
|
667.7
|
|
|
|
|
662.9
|
|
|
|
|
4.8
|
|
Asset-backed securities
|
|
|
107
|
|
|
|
|
626.9
|
|
|
|
|
624.8
|
|
|
|
|
2.1
|
|
Total fixed maturity securities
|
|
|
1,929
|
|
|
|
$
|
7,456.7
|
|
|
|
$
|
7,152.1
|
|
|
|
$
|
304.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-redeemable preferred stocks
|
|
|
14
|
|
|
|
$
|
50.0
|
|
|
|
$
|
52.3
|
|
|
|
$
|
(2.3
|
)
|
Common stocks
|
|
|
177
|
|
|
|
|
72.2
|
|
|
|
|
61.7
|
|
|
|
|
10.5
|
|
Closed-end fund
|
|
|
1
|
|
|
|
|
19.4
|
|
|
|
|
20.0
|
|
|
|
|
(0.6
|
)
|
Total equity securities
|
|
|
192
|
|
|
|
$
|
141.6
|
|
|
|
$
|
134.0
|
|
|
|
$
|
7.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2,121
|
|
|
|
$
|
7,598.3
|
|
|
|
$
|
7,286.1
|
|
|
|
$
|
312.2
|
|
|
(1)
|
At December 31, 2016, the fair value amount included $13.9 million which were non-investment grade.
|
|
(2)
|
The All Other Corporates category contains 19 additional industry classifications.
Gaming, broadcast and media, food and beverage, consumer products and retail represented $428.9 million of fair value at December
31, 2016, with the remaining 13 classifications each representing less than $34.0 million.
|
|
(3)
|
At December 31, 2016, 100% were investment grade, with an overall credit rating of AA, and the positions were well diversified
by property type, geography and sponsor.
|
|
(4)
|
Holdings are geographically diversified, approximately 40% are tax-exempt and 78% are revenue bonds tied to essential services,
such as mass transit, water and sewer. The overall credit quality of the municipal bond portfolio was AA- at December 31, 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 December 31,
2016.
|
At December 31, 2016, the Company’s
diversified fixed maturity securities portfolio consisted of 2,465 investment positions, issued by 1,929 entities, and totaled
approximately $7.5 billion in fair value. This portfolio was 95.9% investment grade, based on fair value, with an average quality
rating of A. The Company’s investment guidelines 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
December 31, 2016, 94.7% of these combined portfolios were investment grade, based on fair value, with an overall average quality
rating of A. The Company has classified the entire fixed maturity securities and equity securities portfolios as available for
sale, which are carried at fair value.
Rating of Fixed Maturity Securities and Equity Securities
(1)
(Dollars in millions)
|
|
December 31, 2016
|
|
|
|
Percent
|
|
|
|
|
|
|
|
of Total
|
|
|
|
|
|
|
|
Fair
|
|
Fair
|
|
Amortized
|
|
|
Value
|
|
Value
|
|
Cost or Cost
|
Fixed maturity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AAA
|
|
|
8.3
|
%
|
|
|
$
|
620.8
|
|
|
|
$
|
611.6
|
|
AA (2)
|
|
|
35.5
|
|
|
|
|
2,648.4
|
|
|
|
|
2,533.5
|
|
A
|
|
|
23.6
|
|
|
|
|
1,759.6
|
|
|
|
|
1,663.9
|
|
BBB
|
|
|
28.4
|
|
|
|
|
2,118.7
|
|
|
|
|
2,038.5
|
|
BB
|
|
|
2.4
|
|
|
|
|
176.4
|
|
|
|
|
174.7
|
|
B
|
|
|
1.0
|
|
|
|
|
76.3
|
|
|
|
|
79.5
|
|
CCC or lower
|
|
|
0.2
|
|
|
|
|
10.9
|
|
|
|
|
10.6
|
|
Not rated (3)
|
|
|
0.6
|
|
|
|
|
45.6
|
|
|
|
|
39.8
|
|
Total fixed maturity securities
|
|
|
100.0
|
%
|
|
|
$
|
7,456.7
|
|
|
|
$
|
7,152.1
|
|
Equity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AAA
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
AA
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
A
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
BBB
|
|
|
35.3
|
%
|
|
|
$
|
50.0
|
|
|
|
$
|
52.3
|
|
BB
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
B
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
CCC or lower
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
Not rated
|
|
|
64.7
|
|
|
|
|
91.6
|
|
|
|
|
81.7
|
|
Total equity securities
|
|
|
100.0
|
%
|
|
|
$
|
141.6
|
|
|
|
$
|
134.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
$
|
7,598.3
|
|
|
|
$
|
7,286.1
|
|
|
(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 December 31, 2016, the AA rated fair value amount included $467.1 million of U.S. Government and federally sponsored agency
securities and $522.8 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 December 31, 2016, the fixed
maturity securities and equity securities portfolios had a combined $76.0 million pretax of gross unrealized investment losses
on $2,302.4 million fair value related to 731 positions. Of the investment positions (fixed maturity securities and equity securities)
with gross unrealized investment losses, 12 were trading below 80% of the carrying value at December 31, 2016 and were not considered
other-than-temporarily impaired. These positions had fair value of $15.2 million, representing 0.2% of the Company’s total
investment portfolio at fair value, and had a gross unrealized investment loss of $6.6 million.
The Company views the unrealized
investment losses of all of the securities at December 31, 2016 as temporary. Future changes in circumstances related to these
and other securities could require subsequent recognition of other-than-temporary impairment.
Benefits, Claims and Settlement Expenses
|
Year Ended
December 31,
|
|
Change From
Prior Year
|
|
Year Ended
December 31,
|
|
2016
|
|
2015
|
|
Percent
|
|
Amount
|
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and Casualty
|
|
$
|
464.1
|
|
|
|
$
|
420.3
|
|
|
|
10.4
|
%
|
|
|
$
|
43.8
|
|
|
|
$
|
399.5
|
|
|
Retirement (annuity)
|
|
|
3.9
|
|
|
|
|
3.2
|
|
|
|
21.9
|
%
|
|
|
|
0.7
|
|
|
|
|
2.2
|
|
|
Life
|
|
|
73.1
|
|
|
|
|
72.9
|
|
|
|
0.3
|
%
|
|
|
|
0.2
|
|
|
|
|
|
66.7
|
|
|
Total
|
|
$
|
541.1
|
|
|
|
$
|
496.4
|
|
|
|
9.0
|
%
|
|
|
$
|
44.7
|
|
|
|
$
|
468.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and Casualty catastrophe losses,
included above (1)
|
|
$
|
60.0
|
|
|
|
$
|
44.4
|
|
|
|
35.1
|
%
|
|
|
$
|
15.6
|
|
|
|
$
|
37.5
|
|
|
|
(1)
|
See footnote (1) to the table below.
|
Property and Casualty Claims and Claim Expenses
(“losses”)
|
Year Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
|
Incurred claims and claim expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Claims occurring in the current year
|
|
$
|
471.1
|
|
|
|
$
|
432.8
|
|
|
|
$
|
416.5
|
|
|
Decrease in estimated reserves for claims occurring in prior years (2)
|
|
|
(7.0
|
)
|
|
|
|
(12.5
|
)
|
|
|
|
(17.0
|
)
|
|
Total claims and claim expenses incurred
|
|
$
|
464.1
|
|
|
|
$
|
420.3
|
|
|
|
$
|
399.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and Casualty loss ratio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
74.8
|
%
|
|
|
|
70.5
|
%
|
|
|
|
68.7
|
%
|
|
Effect of catastrophe costs, included above (1)
|
|
|
9.7
|
%
|
|
|
|
7.4
|
%
|
|
|
|
6.5
|
%
|
|
Effect
of prior years’ reserve development, included above (2)
|
|
|
-1.1
|
%
|
|
|
|
-2.1
|
%
|
|
|
|
-2.9
|
%
|
|
|
(1)
|
Property and Casualty catastrophe losses were incurred as follows:
|
|
|
2016
|
|
2015
|
|
2014
|
|
|
Three months ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31
|
|
$
|
12.7
|
|
|
|
$
|
10.5
|
|
|
|
$
|
6.3
|
|
|
|
June 30
|
|
|
27.3
|
|
|
|
|
21.3
|
|
|
|
|
23.5
|
|
|
|
September 30
|
|
|
8.4
|
|
|
|
|
5.0
|
|
|
|
|
5.7
|
|
|
|
December 31
|
|
|
11.6
|
|
|
|
|
7.6
|
|
|
|
|
2.0
|
|
|
|
Total full year
|
|
$
|
60.0
|
|
|
|
$
|
44.4
|
|
|
|
$
|
37.5
|
|
|
|
(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 indicating that the
actual and remaining projected losses for prior years are below the level anticipated in the previous December 31 loss reserve
estimate.
|
|
|
2016
|
|
2015
|
|
2014
|
|
|
Three
months ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March
31
|
|
$
|
(2.0
|
)
|
|
|
$
|
(4.0
|
)
|
|
|
$
|
(4.0
|
)
|
|
|
June
30
|
|
|
(1.6
|
)
|
|
|
|
(3.2
|
)
|
|
|
|
(3.0
|
)
|
|
|
September
30
|
|
|
(0.7
|
)
|
|
|
|
(2.8
|
)
|
|
|
|
(4.4
|
)
|
|
|
December
31
|
|
|
(2.7
|
)
|
|
|
|
(2.5
|
)
|
|
|
|
(5.6
|
)
|
|
|
Total
full year
|
|
$
|
(7.0
|
)
|
|
|
$
|
(12.5
|
)
|
|
|
$
|
(17.0
|
)
|
|
For 2016, the Company’s benefits,
claims and settlement expenses increased $44.7 million, or 9.0%, 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 $4.0 million decrease in life
mortality costs. In 2015, the Company’s benefits, claims and settlement expenses increased $28.0 million, or 6.0%, compared
to the prior year primarily reflecting increases in Property and Casualty current accident year loss severity — specifically,
in automobile — and catastrophe costs, as well as a $4.5 million increase in life mortality costs.
For 2016, 2015 and 2014, the favorable
development of prior years’ Property and Casualty reserves of $7.0 million, $12.5 million and $17.0 million, respectively,
for each year 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. In 2016, the favorable development was predominantly the result of favorable
severity trends in property for accident years 2014 and prior. For 2015, the favorable development was primarily for accident years
2013 and prior and predominantly the result of favorable severity trends in homeowners loss emergence, accompanied by favorable
severity and frequency trends in automobile loss emergence. For 2014, the favorable development was primarily for accident years
2011 and prior and predominantly the result of favorable frequency and severity trends in automobile loss emergence.
For 2016, the automobile loss ratio
of 80.2% increased by 4.8 percentage points compared to the prior year, including (1) the impact of catastrophe costs that resulted
in a 1.7 percentage point increase, (2) 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 (3) development of prior years’ reserves that had
a 0.8 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 63.9% for 2016 increased 2.4 percentage points compared to a year earlier, including
favorable current accident year non-catastrophe experience offset by development of prior years’ reserves that had a 0.8
percentage point less favorable impact in the current year and high catastrophe costs. Catastrophe costs represented 24.2 percentage
points of the homeowners loss ratio for 2016 compared to 20.4 percentage points for 2015.
Interest Credited to Policyholders
|
Year
Ended
|
|
Change
From
|
|
Year
Ended
|
|
December
31,
|
|
Prior
Year
|
|
December
31,
|
|
2016
|
|
2015
|
|
Percent
|
|
Amount
|
|
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement (annuity)
|
|
$
|
147.3
|
|
|
|
$
|
138.7
|
|
|
|
|
6.2
|
%
|
|
|
$
|
8.6
|
|
|
|
|
$
|
132.5
|
|
|
Life
|
|
|
44.7
|
|
|
|
|
44.1
|
|
|
|
|
1.4
|
%
|
|
|
|
0.6
|
|
|
|
|
|
43.6
|
|
|
Total
|
|
$
|
192.0
|
|
|
|
$
|
182.8
|
|
|
|
|
5.0
|
%
|
|
|
$
|
9.2
|
|
|
|
|
$
|
176.1
|
|
|
Compared to 2015, the 2016 increase
in Retirement segment interest credited reflected a 7.6% increase in average accumulated fixed deposits, at an average crediting
rate of 3.55%. Compared to a year earlier, the 2015 increase in Retirement segment interest credited reflected a 7.7% increase
in average accumulated fixed deposits, partially offset by a 6 basis point decline in the average annual interest rate credited
to 3.56%. Life insurance interest credited increased slightly in both 2016 and 2015 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 net interest spreads for the years ended December
31, 2016, 2015 and 2014, were 193 basis points, 184 basis points and 204 basis points, respectively. The interest spread increased
due to an increase in investment prepayment activity 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 December 31, 2016, fixed
annuity account values totaled $4.5 billion, including $4.3 billion of deferred annuities. As shown in the table below, for approximately
87%, or $3.7 billion of the deferred annuity account values, the credited interest rate was equal to the minimum guaranteed rate.
Due to limitations on the Company’s ability to further lower interest crediting rates, coupled with the expectation for continued
low reinvestment interest rates, management anticipates fixed annuity spread compression in future periods. The majority of assets
backing the net interest spread on fixed annuity business is invested in fixed maturity securities.
The Company actively manages its
interest rate risk exposure, considering a variety of factors, including earned interest rates, credited interest rates and the
relationship between the expected durations of assets and liabilities. Management estimates that over the next 12 months approximately
$530 million of the Retirement segment and Life segment combined investment portfolio and related investable cash flows will be
reinvested at current market rates. As interest rates remain at low levels, borrowers may prepay or redeem the securities with
greater frequency in order to borrow at lower market rates, which could increase investable cash flows and exacerbate the reinvestment
risk
.
As a general guideline, for a 100
basis point decline in the average reinvestment rate and based on the Company’s existing policies and investment portfolio,
the impact from investing in that lower interest rate environment could further reduce Retirement segment net investment income
by approximately $1.5 million in year one and $5.3 million in year two,
further reducing the net interest spread by approximately
3 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 deferred policy acquisition costs. In terms of the sensitivity
of this amortization to the net interest spread, based on deferred policy acquisition costs as of December 31, 2016 and assuming
all other assumptions are met, a 10 basis point deviation in the current year targeted interest rate spread assumption would impact
amortization between $0.25 million and $0.35 million. This result may change depending on the magnitude and direction of any actual
deviations but represents a range of reasonably likely experience for the noted assumption.
Additional information regarding
the interest crediting rates and balances equal to the minimum guaranteed rate for deferred annuity account values is shown below.
|
|
December
31, 2016
|
|
|
|
|
|
|
|
|
|
|
Deferred Annuities at
|
|
|
Total Deferred Annuities
|
|
Minimum Guaranteed Rate
|
|
|
|
|
|
|
|
|
Percent
of
|
|
|
|
|
|
|
|
|
Percent
|
|
Accumulated
|
|
Total
Deferred
|
|
Percent
|
|
Accumulated
|
|
|
of
Total
|
|
Value
(“AV”)
|
|
Annuities
AV
|
|
of
Total
|
|
Value
|
Minimum guaranteed
interest rates:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less
than 2%
|
|
|
23.5
|
|
|
|
$
|
1,003.6
|
|
|
|
|
48.2
|
%
|
|
|
|
13.1
|
%
|
|
|
$
|
483.8
|
|
Equal
to 2% but less than 3%
|
|
|
7.2
|
|
|
|
|
308.6
|
|
|
|
|
82.8
|
%
|
|
|
|
6.9
|
|
|
|
|
255.4
|
|
Equal
to 3% but less than 4%
|
|
|
14.2
|
|
|
|
|
606.7
|
|
|
|
|
99.8
|
%
|
|
|
|
16.4
|
|
|
|
|
605.1
|
|
Equal
to 4% but less than 5%
|
|
|
53.7
|
|
|
|
|
2,290.2
|
|
|
|
|
100.0
|
%
|
|
|
|
62.1
|
|
|
|
|
2,290.2
|
|
5%
or higher
|
|
|
1.4
|
%
|
|
|
|
55.5
|
|
|
|
|
100.0
|
%
|
|
|
|
1.5
|
|
|
|
|
55.5
|
|
Total
|
|
|
100.0
|
%
|
|
|
$
|
4,264.6
|
|
|
|
|
86.5
|
%
|
|
|
|
100.0
|
%
|
|
|
$
|
3,690.0
|
|
The Company will continue to be
disciplined in executing strategies to mitigate the negative impact on profitability of a sustained low interest rate environment.
However, the success of these strategies may be affected by the factors discussed in “Item 1A. Risk Factors” in this
Annual Report on Form 10-K and other factors discussed herein.
Policy Acquisition Expenses
Amortized
Amortized policy acquisition expenses
were $96.7 million for 2016 compared to $98.9 million and $93.8 million for the years ended December 31, 2015 and 2014, respectively.
The decrease in 2016 was largely attributable to the Retirement segment including the impact of the unlocking of deferred policy
acquisition costs (“unlocking”) offset by the growth in premiums and related commissions for the Property and Casualty
segment. At December 31, 2016, Retirement segment unlocking resulted in a $0.3 million decrease in amortization compared to a $3.4
million increase in amortization a year earlier. For the prior period, the impact was largely due to financial market performance.
For the Life segment, unlocking resulted in an immaterial change in amortization at December 31, 2016, 2015 and 2014.
Operating Expenses
In 2016, operating expenses of
$173.1 million increased $15.7 million, or 10.0%, compared to 2015. In 2015, expenses reflected a reduction in incentive compensation
expense with the majority of the cost reduction benefiting the Property and Casualty segment. The 2016 expense level was consistent
with management’s expectations as the Company makes expenditures related to customer service and infrastructure improvements,
which are intended to enhance the overall customer experience and support favorable policy retention and business cross-sale ratios.
In 2015, operating expenses of $157.4 million decreased $4.7 million, or 2.9%, compared to 2014.
The Property and Casualty expense
ratio of 26.7% for 2016 increased 0.2 percentage points compared to the prior year expense ratio of 26.5%, or slightly below management’s
expectations for 2016. The 2015 incentive compensation expense reduction reduced the expense ratio for 2015 by 0.4 percentage points.
The Property and Casualty expense ratio was 27.4% for 2014.
Interest Expense and Debt Retirement Costs
In June 2015, the Company repaid
its outstanding $75.0 million 6.05% Senior Notes upon maturity initially utilizing funds borrowed under its existing Bank Credit
Facility. In November 2015, the Company issued $250.0 million face amount of 4.50% Senior Notes due 2025. The Company used the
net proceeds from this issuance to redeem all its outstanding 6.85% Senior Notes due April 15, 2016 and to repay in full the $113.0
million of outstanding borrowings under its Bank Credit Facility. The combined impact of these transactions reduced interest expense
in 2016 by $1.3 million compared to 2015 and $1.1 million in 2015, compared to 2014.
The redemption of the 6.85% Senior
Notes in 2015 resulted in a pretax charge of $2.3 million, largely due to the make-whole premium.
Income Tax Expense
The effective income tax rate on
the Company’s pretax income, including net realized investment gains and losses, was 26.6%, 27.8% and 28.7% for the years
ended December 31, 2016, 2015 and 2014, respectively. Income from investments in tax-advantaged securities reduced the effective
income tax rates 8.5, 7.9 and 7.1 percentage points for 2016, 2015 and 2014, respectively. In 2016, income tax expense was reduced
by approximately $0.9 million related to the filing of the prior calendar year tax return; this item primarily benefited the Retirement
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 December 31, 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 2016, the Company’s net
income of $83.8 million decreased $9.7 million compared to 2015. After tax net realized investment gains were $2.3 million compared
to $8.6 million a year earlier. Additional detail is included in the “Executive Summary” at the beginning of this MD&A.
For 2015, the Company’s net
income of $93.5 million represented a decrease of $10.7 million compared to 2014 reflecting improvement in current accident year
non-catastrophe results for homeowners, pressure on automobile results primarily due to loss severity, a higher level of life mortality
losses and a negative impact due to the unlocking of Retirement segment deferred policy acquisition costs. Net income in 2015 was
also reduced by debt retirement costs.
For 2014, the Company’s net
income of $104.2 million declined $6.7 million compared to 2013, as improvements in Property and Casualty segment and Retirement
segment results, as well as solid earnings in the Life segment, were offset by a decrease in net realized investment gains. After
tax net realized investment
gains of $6.9 million were $7.5 million less than in
2013. For the Property and Casualty segment, net income of $46.9 million increased $2.5 million compared to 2013. The Property
and Casualty combined ratio was 96.1% for 2014, a 0.2 percentage point improvement compared to 96.3% for 2013.
Net income (loss) by segment and net income per share
were as follows:
|
|
Year
Ended
|
|
Change
From
|
|
Year
Ended
|
|
|
|
December
31,
|
|
Prior
Year
|
|
December
31,
|
|
|
|
2016
|
|
|
2015
|
|
Percent
|
|
Amount
|
|
|
2014
|
|
|
Analysis
of net income (loss) by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
and Casualty
|
|
|
$
|
25.6
|
|
|
|
$
|
40.0
|
|
|
|
-36.0
|
%
|
|
|
|
$
|
(14.4
|
)
|
|
|
|
$
|
46.9
|
|
|
|
Retirement
|
|
|
|
50.7
|
|
|
|
|
43.4
|
|
|
|
16.8
|
%
|
|
|
|
|
7.3
|
|
|
|
|
|
45.3
|
|
|
|
Life
|
|
|
|
16.6
|
|
|
|
|
15.0
|
|
|
|
10.7
|
%
|
|
|
|
|
1.6
|
|
|
|
|
|
17.5
|
|
|
|
Corporate
and Other (1)
|
|
|
|
(9.1
|
)
|
|
|
|
(4.9
|
)
|
|
|
-85.7
|
%
|
|
|
|
|
(4.2
|
)
|
|
|
|
|
(5.5
|
)
|
|
|
Net
income
|
|
|
$
|
83.8
|
|
|
|
$
|
93.5
|
|
|
|
-10.4
|
%
|
|
|
|
$
|
(9.7
|
)
|
|
|
|
$
|
104.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of catastrophe costs, after tax, included above
|
|
|
$
|
(39.1
|
)
|
|
|
$
|
(28.9
|
)
|
|
|
35.3
|
%
|
|
|
|
$
|
10.2
|
|
|
|
|
$
|
(24.4
|
)
|
|
|
Effect
of net realized investment gains, after tax,
included above
|
|
|
$
|
2.3
|
|
|
|
$
|
8.6
|
|
|
|
-73.3
|
%
|
|
|
|
$
|
(6.3
|
)
|
|
|
|
$
|
6.9
|
|
|
|
Effect
of debt retirement costs, after tax, included above
|
|
|
$
|
-
|
|
|
|
$
|
(1.5
|
)
|
|
|
N.M.
|
|
|
|
|
$
|
(1.5
|
)
|
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per share
|
|
|
$
|
2.02
|
|
|
|
$
|
2.20
|
|
|
|
-8.2
|
%
|
|
|
|
$
|
(0.18
|
)
|
|
|
|
$
|
2.47
|
|
|
|
Weighted
average number of shares and equivalent shares (in millions)
|
|
|
|
41.5
|
|
|
|
|
42.4
|
|
|
|
-2.1
|
%
|
|
|
|
|
(0.9
|
)
|
|
|
|
|
42.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
and Casualty combined ratio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
101.5
|
%
|
|
|
|
97.0
|
%
|
|
|
N.M.
|
|
|
|
|
|
4.5
|
%
|
|
|
|
|
96.1
|
%
|
|
|
Effect
of catastrophe costs, included above
|
|
|
|
9.7
|
%
|
|
|
|
7.4
|
%
|
|
|
N.M.
|
|
|
|
|
|
2.3
|
%
|
|
|
|
|
6.5
|
%
|
|
|
Effect
of prior years’ reserve development, included above
|
|
|
|
-1.1
|
%
|
|
|
|
-2.1
|
%
|
|
|
N.M.
|
|
|
|
|
|
1.0
|
%
|
|
|
|
|
-2.9
|
%
|
|
|
N.M. - Not meaningful.
|
(1)
|
The Corporate and Other segment includes interest expense
on debt, realized investment gains and losses, corporate debt retirement costs, 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 2016, 2015 and 2014, net realized investment gains after tax were $2.3 million, $8.6 million and $6.9 million,
respectively. In addition, 2016 reflected a $1.3 million pretax reduction in debt interest expense as a result of the refinancing
transactions completed in 2015. The debt redemption in 2015 resulted in a pretax charge of $2.3 million, partially offset by a
$1.1 million reduction in debt interest expense compared to 2014.
Return on average shareholders’
equity based on net income was 6.2%, 7.1% and 8.4% for the years ended December 31, 2016, 2015 and 2014, respectively.
Outlook for 2017
At the time of this Annual Report
on Form 10-K, management estimates that 2017 full year net income before net realized investment gains and losses will be within
a range of $1.95 to $2.15 per diluted share. This projection incorporates the Company’s results for 2016 and anticipates
continued improvement in the Company’s underlying automobile combined ratio, modeled catastrophe losses as well as modestly
lower earnings in the Retirement and Life segments reflecting lower net interest spreads, and approximately $0.10 cents of continued
strategic investing in our Retirement business that we expect will accelerate growth momentum related to the Company’s continued
modernization of technology and infrastructure. As a result of the continued low interest rate environment, management expects
the Company’s overall portfolio yield to decline by approximately 10 basis points over the course of 2017, impacting each
of the three business segments. Within the Property and Casualty segment, both approved and planned premium rate increases, as
well as underwriting initiatives, are expected to improve profitability margins for the automobile line compared to 2016. The property
line is anticipated to produce solid profitability, although at a reduced level that assumes non-catastrophe weather related losses
return to a more normalized level than the comparison to 2016; and, catastrophe losses are estimated to be lower than the 2016
level. Net income for the Retirement segment will continue to be impacted by the prolonged interest rate environment and the 2016
net interest spread of 193 basis points is anticipated to grade down to the low 180s through the course of 2017. Assuming mortality
costs consistent with the Company’s actuarial models, Life segment net income is expected to decrease compared to 2016, due
to net investment income pressure and the increase in expenses. In addition to the segment-specific factors, the Company’s
initiatives for customer service and infrastructure improvements, as well as enhanced training and education for the Company’s
agency force, all intended to enhance the overall customer experience and support further improvement in policy retention and business
cross-sale ratios, will continue and result in a moderate increase in expense levels compared to 2016.
As described in “Critical
Accounting Policies”, certain of the Company’s significant accounting measurements require the use of estimates and
assumptions. As additional information becomes available, adjustments may be required. Those adjustments are charged or credited
to income for the period in which the adjustments are made and may impact actual results compared to management’s estimate
above. Additionally, see “Forward-looking Information” and “Item 1A. Risk Factors” in this Annual Report
on Form 10-K concerning other important factors that could impact actual results. Management believes that a projection of net
income including net realized investment gains and losses* is not appropriate on a forward-looking basis because it is not possible
to provide a valid forecast of net realized investment gains and losses, which can vary substantially from one period to another
and may have a significant impact on net income.
Liquidity and Financial Resources
Off-Balance Sheet Arrangements
At December 31, 2016, 2015 and
2014, the Company did not have any relationships with unconsolidated entities or financial partnerships, such as entities often
referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating
off-balance sheet arrangements or for other contractually narrow or limited purposes. As such, the Company is not exposed to any
financing, liquidity, market or credit risk that could arise if the Company had engaged in such relationships.
Investments
Information regarding the Company’s
investment portfolio, which is comprised primarily of investment grade, fixed maturity securities, is located in “Results
of Operations for the Three Years Ended December 31, 2016 — Net Realized Investment Gains and Losses”, “Item
1. Business — Investments” and in the “Notes to Consolidated Financial Statements — Note 2 — Investments”
listed on page F-1 of this report.
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, 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 2016, net cash provided by operating activities increased slightly compared
to 2015, largely due to a decrease in claims and policyholder benefits paid in 2016, partially offset by a decrease in premiums
collected and an increase in investment income collected in 2016.
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 2017 from all of
HMEC’s insurance subsidiaries without prior regulatory approval is approximately $91 million. 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”
listed on page F-1 of this report.
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.
In 2013, one of the Company’s
subsidiaries became a member of the Federal Home Loan Bank of Chicago (“FHLB”). That subsidiary received $250.0 million
under a funding agreement in December 2013, received an additional $250.0 million in September 2014, and received an additional
$75.0 million in December 2015 with receipt of those funds reflected in Annuity Contracts: Variable, Fixed and FHLB Funding Agreements,
Deposits as a component of the Company’s financing activities for the respective years. Exclusive of these transactions,
the Company’s annuity business produced net positive cash flows in 2016, 2015 and 2014. For the year ended December 31, 2016,
receipts from annuity contracts, also excluding the FHLB transactions, decreased $27.8 million, or 5.1%, compared to 2015, as described
in “Results of Operations for the Three Years Ended December 31, 2016 — Insurance Premiums and Contract Charges”.
In total, annuity contract benefits, withdrawals and net transfers to variable annuity accumulated cash values decreased $4.8 million,
or 1.4%, compared to the prior year.
The Company’s Senior Notes
due 2015 matured on June 15, 2015 and the Company repaid the $75.0 million initially utilizing funds borrowed under its existing
Bank Credit Facility. Repayment of the Senior Notes due 2015 resulted in no debt retirement costs impacting the Company’s
net income for 2015. In November 2015, the Company issued $250.0 million aggregate principal amount of 4.50% Senior Notes due 2025
and used the net proceeds to redeem all of its outstanding 6.85% Senior Notes due April 15, 2016 and fully repay the $113.0 million
of outstanding borrowings under the Company’s Bank Credit Facility. Repayment of the Senior Notes due 2016 resulted in $2.3
million pretax of debt retirement costs impacting the Company’s net income for 2015, nearly all of which required cash. The
remaining net proceeds from the issuance of the Senior Notes due 2025 were available for general corporate purposes.
Contractual
Obligations
The following table shows the Company’s
contractual obligations, as well as the projected timing of payments.
|
|
Payments Due By Period as of December 31, 2016
|
|
|
|
|
|
|
Less
Than
|
|
1
- 3 Years
|
|
3
- 5 Years
|
|
More Than
5 Years
|
|
|
|
|
|
|
1 Year
|
|
(2018 and
|
|
(2020 and
|
|
(2022 and
|
|
|
|
Total
|
|
(2017)
|
|
2019)
|
|
2021)
|
|
beyond)
|
|
Fixed
annuities and fixed option of variable
annuities (1)
|
|
|
$
|
6,901.2
|
|
|
|
$
|
248.8
|
|
|
|
$
|
507.5
|
|
|
|
$
|
521.2
|
|
|
|
$
|
5,623.7
|
|
|
Supplemental contracts (1)(2)
|
|
|
|
1,058.0
|
|
|
|
|
27.1
|
|
|
|
|
299.3
|
|
|
|
|
43.2
|
|
|
|
|
688.4
|
|
|
Life insurance policies (1)
|
|
|
|
2,564.0
|
|
|
|
|
87.2
|
|
|
|
|
180.2
|
|
|
|
|
184.7
|
|
|
|
|
2,111.9
|
|
|
Property and casualty claims and claim adjustment
expenses (1)
|
|
|
|
246.6
|
|
|
|
|
161.4
|
|
|
|
|
76.0
|
|
|
|
|
8.4
|
|
|
|
|
0.8
|
|
|
Long-term debt obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Notes due December 1, 2025
|
|
|
|
351.3
|
|
|
|
|
11.3
|
|
|
|
|
22.5
|
|
|
|
|
22.5
|
|
|
|
|
295.0
|
|
|
Operating lease obligations (4)
|
|
|
|
11.9
|
|
|
|
|
2.6
|
|
|
|
|
5.0
|
|
|
|
|
2.7
|
|
|
|
|
1.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
$
|
11,133.0
|
|
|
|
$
|
538.4
|
|
|
|
$
|
1,090.5
|
|
|
|
$
|
782.7
|
|
|
|
$
|
8,721.4
|
|
|
|
(1)
|
This information represents estimates of both the amounts to be paid to policyholders and the timing of such payments and is
net of anticipated reinsurance recoveries.
|
|
(2)
|
Includes $575.0 million obligation to FHLB plus interest.
|
|
(3)
|
Includes principal and interest.
|
|
(4)
|
The Company has entered into various operating lease agreements, primarily for real estate (claims and marketing offices in
a few states, as well as portions of the home office complex) and also for computer equipment and copy machines.
|
Estimated Future Policy Benefit
and Claim Payments - Retirement and Life Segments
This discussion addresses the following
contractual obligations disclosed above: fixed annuities and fixed option of variable annuities, supplemental contracts and life
insurance policies. Payment amounts reflect the Company’s estimate of undiscounted cash flows related to these obligations
and commitments. Balance sheet amounts were determined in accordance with GAAP, including the effect of discounting, and consequently
in many cases differ significantly from the summation of undiscounted cash flows.
For the majority of the Company’s
Retirement and Life insurance operations, the estimated contractual obligations for future policyholder benefits as presented in
the table above were derived from the annual cash flow testing analysis used to develop actuarial opinions of statutory reserve
adequacy for state regulatory purposes. These cash flows are materially representative of the cash flows under GAAP. Actual amounts
may vary, potentially in a significant manner, from the amounts indicated due to deviations between assumptions and actual results
and the addition of new business in future periods.
Amounts presented in the table
above represent the estimated cash payments to be made to policyholders undiscounted by interest and including assumptions related
to the receipt of future premiums and deposits, future interest credited, full and partial withdrawals, policy lapses, surrender
charges, annuitization, mortality, and other contingent events as appropriate to the respective product types. Additionally, coverage
levels are assumed to remain unchanged from those provided under contracts in force at December 31, 2016. Separate Account (variable
annuity) payments are not reflected due to the matched nature of these obligations and the fact that the contract owners maintain
the investment risk on such deposits.
See “Notes to Consolidated
Financial Statements — Note 1 — Summary of Significant Accounting Policies — Investment Contract and Life Policy
Reserves” listed on page F-1 of this report for a description of the Company’s method for establishing life and annuity
reserves in accordance with GAAP.
Estimated Claims and Claim Related Payments - Property
and Casualty Segment
This discussion addresses claims
and claim adjustment expenses as disclosed above. The amounts reported in the table are presented on a nominal basis, have not
been discounted and represent the estimated timing of future payments for both reported and unreported claims incurred and related
claim adjustment expenses. Both the total liability and the estimated payments are based on actuarial projection techniques, at
a given accounting date. These estimates include assumptions of the ultimate settlement and administrative costs based on the Company’s
assessment of facts and circumstances then known, review of historical settlement patterns, estimates of trends in claims severity,
frequency and other factors. Variables in the reserve estimation process can be affected by both internal and external events,
such as changes in claims handling procedures, economic inflation, legal trends and legislative changes. Many of these items are
not directly quantifiable, particularly on a prospective basis. Additionally, there may be significant reporting lags between the
occurrence of a claim and the time it is actually reported to the Company. The future cash flows related to the items contained
in the table above required estimation of both amount (including severity considerations) and timing. Amount and timing are frequently
estimated separately. An estimation of both amount and timing of future cash flows related to claims and claim related payments
is generally reliable only in the aggregate with some unavoidable estimation uncertainty.
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 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” listed on page F-1 of this report.
The total capital of the Company
was $1,541.2 million at December 31, 2016, including $247.2 million of long-term debt and no short-term debt outstanding. Total
debt represented 18.1% of total capital excluding net unrealized investment gains and losses (16.0% including net unrealized investment
gains and losses) at December 31, 2016, which was below the Company's long-term target of 25%.
Shareholders' equity was $1,294.0
million at December 31, 2016, including a net unrealized investment gain in the Company's investment portfolio of $175.7 million
after taxes and the related impact of deferred policy acquisition costs associated with investment contracts and life insurance
products with account values. The market value of the Company's
common stock and the market value per share were $1,722.2
million and $42.80, respectively, at December 31, 2016. Book value per share was $32.15 at December 31, 2016 ($27.79 excluding
investment fair value adjustments).
Additional information regarding
the net unrealized gain in the Company’s investment portfolio at December 31, 2016 is included in “Results of Operations
for the Three Years Ended December 31, 2016 — Net Realized Investment Gains and Losses”.
Total shareholder dividends were
$44.3 million for the year ended December 31, 2016. In March, May, September and December 2016, the Board of Directors announced
regular quarterly dividends of $0.265 per share. Compared to the full year per share dividends paid in 2015 of $1.00, the total
2016 dividends paid per share of $1.06 represented an increase of 6.0%.
In December 2011, HMEC’s
Board of Directors (the “Board”) authorized a share repurchase program allowing repurchases of up to $50,000 (the “2011
Plan”). In September 2015, the Board authorized an additional share repurchase program allowing repurchases of up to $50,000
(the “2015 Plan”) to begin following the completion of the 2011 Plan. Both share repurchase programs authorize the
repurchase of HMEC’s common share in open market or privately negotiated transactions, from time to time, depending on market
conditions. The share repurchase programs do not have expiration dates and may be limited or terminated at any time without notice.
During 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 of $30.65 per share, under the 2011 and the 2015 Plans. Utilization
of the remaining authorization under the 2011 program was completed in January 2016. In total and through December 31, 2016, 2,799,610
shares were repurchased under the 2011 and 2015 Plans at an average price of $25.18 per share. The repurchase of shares was funded
through use of cash. As of December 31, 2016, $29.5 million remained authorized for future share repurchases under the 2015 Plan
authorization.
In November 2015, the Company issued
$250.0 million aggregate principal amount of 4.50% Senior Notes (“Senior Notes due 2025”), which will mature on December
1, 2025, 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” listed on page F-1 of this report. For information regarding
the use of proceeds from the issuance, see “Liquidity and Financial Resources — Cash Flow — Financing Activities”.
The Senior Notes due 2025 are traded in the open market (HMN 4.50).
As of December 31, 2016, the Company
had no balance outstanding under its Bank Credit Facility. The Bank Credit Facility provides for unsecured borrowings of up to
$150.0 million and expires on July 30, 2019. Interest accrues at varying spreads relative to prime or Eurodollar base rates and
is payable monthly or quarterly depending on the applicable base rate. The unused portion of the Bank Credit Facility is subject
to a variable commitment fee, which was 0.15% on an annual basis at December 31, 2016. On June 15, 2015, the Senior Notes due 2015
matured and the Company repaid the $75.0 million aggregate principal amount initially utilizing $75.0 million of additional borrowing
under the existing Bank Credit Facility. In November 2015, the Company utilized a portion of the proceeds from the issuance of
the Senior Notes due 2025, described above, to fully repay the $113.0 million outstanding balance under the Company’s Bank
Credit Facility.
To provide additional capital management
flexibility, the Company filed a “universal shelf” registration on Form S-3 with the SEC on March 12, 2015. The registration
statement, which 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 Annual Report on Form 10-K.
The Company's ratio of earnings
to fixed charges (with fixed charges including interest credited to policyholders on investment contracts and life insurance products
with account values) for the years ended December 31, 2016, 2015 and 2014 was 1.6x, 1.7x and 1.8x, respectively. See also “Exhibit
12 — Statement Regarding Computation of Ratios”. The Company’s ratio of earnings before interest expense to interest
expense was 10.7x, 10.9x and 11.3x for the years ended December 31, 2016, 2015 and 2014, respectively.
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.
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)”. With the exception of the ratings by A.M. Best, assigned ratings as of February 15, 2017 were
unchanged from the disclosure in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015. In addition,
in November 2016, Moody’s affirmed the A3 insurance financial strength rating of HMEC’s Property and Casualty subsidiaries
and changed the rating outlook to positive from stable. 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 February 15, 2017
|
|
|
|
|
|
|
|
|
S&P
|
|
|
A
|
(stable)
|
|
|
BBB
|
(stable)
|
Moody’s
|
|
|
|
|
|
|
|
|
Horace
Mann Life Insurance Company
|
|
|
A3
|
(positive)
|
|
|
N.A.
|
|
HMEC’s
Property and Casualty subsidiaries
|
|
|
A3
|
(positive)
|
|
|
N.A.
|
|
HMEC
|
|
|
N.A.
|
|
|
|
Baa(3)
|
(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 “Item 1. Business — Property and Casualty
Segment — Property and Casualty Reinsurance”.
Information regarding the reinsurance
program for the Company’s Life segment is located in “Item 1. Business — Life Segment”.
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 for the Three Years
Ended December 31, 2016 — Net Realized Investment Gains and Losses".
Significant changes in interest
rates expose the Company to the risk of experiencing losses or earning a reduced level of income based on the difference between
the interest rates earned on the Company's investments and the credited interest rates on the Company's insurance liabilities.
See also “Results of Operations for the Three Years Ended December 31, 2016 — 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.
Through active investment management,
the Company invests available funds with the objective of funding future obligations to policyholders, subject to appropriate risk
considerations, and maximizing shareholder value. This objective is met through investments that (1) have similar characteristics
to the liabilities they support; (2) are diversified among industries, issuers and geographic locations; and (3) are predominately
investment-grade fixed maturity securities classified as available for sale. As of the time of this Annual Report on Form 10-K,
derivatives are only used to manage the interest crediting rate risk within the fixed indexed annuity and indexed universal life
products. At December 31, 2016, approximately 10% of the fixed maturity securities portfolio represented investments supporting
the Property and Casualty operations and approximately 90% supported the Retirement and Life business. For discussions regarding
the Company’s investments see “Results of Operations for the Three Years Ended December 31, 2016 — Net Realized
Investment Gains and Losses” and “Item 1. Business — Investments”.
The Company’s Retirement
and Life earnings are affected by the spreads between interest yields on investments and rates credited or accruing on fixed annuity
and life insurance liabilities. Although credited rates on fixed annuities may be changed annually
(subject to minimum guaranteed rates), competitive pricing
and other factors, including the impact on the level of surrenders and withdrawals, may limit the Company’s ability to adjust
or to maintain crediting rates at levels necessary to avoid narrowing of spreads under certain market conditions. See also “Results
of Operations for the Three Years Ended December 31, 2016 — Interest Credited to Policyholders”.
Using financial modeling and other
techniques, the Company regularly evaluates the appropriateness of investments relative to the characteristics of the liabilities
that they support. Simulations of cash flows generated from existing business under various interest rate scenarios measure the
potential gain or loss in fair value of interest-rate sensitive assets and liabilities. Such estimates are used to closely match
the duration of assets to the duration of liabilities. The overall duration of liabilities of the Company’s multiline insurance
operations combines the characteristics of its long duration annuity and interest-sensitive life liabilities with its short duration
non-interest-sensitive property and casualty liabilities. Overall, at December 31, 2016, the duration of the fixed maturity securities
portfolio was estimated to be approximately 5.9 years and the duration of the Company’s insurance liabilities and debt was
estimated to be approximately 7.5 years.
The Retirement and Life operations
participate in the cash flow testing procedures imposed by statutory insurance regulations, the purpose of which is to ensure that
such liabilities are adequate to meet the Company’s obligations under a variety of interest rate scenarios. Based on these
procedures, the Company’s assets and the investment income expected to be received on such assets are adequate to meet the
insurance policy obligations and expenses of the Company’s insurance activities in all but the most extreme circumstances.
The
Company periodically evaluates its sensitivity to interest rate risk. Based on commonly used models, the Company projects the impact
of interest rate changes, assuming a wide range of factors, including duration and
prepayment,
on the fair value of assets and liabilities. Fair value is estimated based on the net present value of cash flows or duration estimates.
At December 31, 2016, assuming an immediate decrease of 100 basis points in interest rates, the fair value of the Company’s
assets and liabilities would both increase, the net of which would result in a decrease in shareholders’ equity of approximately
$51 million after tax, or 4.8%. A 100 basis point increase in interest rates would decrease the fair value of both assets and liabilities,
the net of which would result in an increase in shareholders’ equity of approximately $4 million after tax, or 0.4%. At December
31, 2015, assuming an immediate decrease of 100 basis points in interest rates, the fair value of the Company’s assets and
liabilities would both increase, the net of which would result in a decrease in shareholders’ equity of approximately $47
million after tax, or 4.0%. A 100 basis point increase in interest rates would decrease the fair value of both assets and liabilities,
the net of which would result in an increase in shareholders’ equity of approximately $2 million after tax, or 0.2%. In each
case, these changes in interest rates assume a parallel shift in the yield curve. While the Company believes that these assumed
market rate changes are reasonably possible, actual results may differ, particularly as a result of any management actions that
would be taken to attempt to mitigate such hypothetical losses in fair value of shareholders’ equity.
Interest rates continue to be at
historically low levels. If interest rates remain low over an extended period of time, management recognizes it could pressure
net investment income by having to invest insurance cash flows and reinvest the cash flows from the investment portfolio in lower
yielding securities. Moreover, issuers of securities in the Company’s investment portfolio may prepay or redeem fixed maturity
securities, as well as asset-backed and commercial and mortgage-backed securities, with greater frequency to borrow at lower market
rates. As a general guideline, management estimates
that pretax net income in 2017 and 2018 would decrease by approximately $2.1 million (by segment: Retirement $1.5 million, Life
$0.4 million and Property and Casualty $0.2 million) and $7.4 million (by segment: Retirement $5.3 million, Life $1.5 million and
Property and Casualty $0.6 million), respectively, for each 100 basis point decline in reinvestment rates, before assuming any
reduction in annuity crediting rates on in-force contracts. In addition, declining interest rates also could negatively impact
the amortization of deferred policy acquisition costs, as well as the recoverability of goodwill, due to the impacts on the estimated
fair value of the Company’s reporting segments.
The Company has been and continues
to be proactive in its investment strategies, product designs and crediting rate strategies to mitigate the risk of unfavorable
consequences in this type of interest rate environment without venturing into asset classes or individual securities that would
be inconsistent with the Company’s conservative investment guidelines. Lowering interest crediting rates on annuity contracts
can help offset decreases in investment margins on some products. The Company’s ability to lower interest crediting rates
could be limited by competition, regulatory approval or contractual guarantees of minimum rates and may not match the timing or
magnitude of changes in investment yields.
Based on the Company’s overall
exposure to interest rate risk, the Company believes that these changes in interest rates would not materially affect its consolidated
near-term financial position, results of operations or cash flows.
Pending Accounting Standards
There are several pending accounting
standards that we have not implemented because the implementation date has not yet occurred. For a discussion of these pending
standards, see “Notes to Consolidated Financial Statements — Note 1 — Summary of Significant Accounting Policies
— Pending Accounting Standards”.
Effects of Inflation and Changes in Interest Rates
The Company's operating results
are affected significantly in at least three ways by changes in interest rates and inflation. First, inflation directly affects
property and casualty claims costs. Second, the investment income earned on the Company's investment portfolio and the fair value
of the investment portfolio are related to the yields available in the fixed income markets. An increase in interest rates will
decrease the fair value of the investment portfolio, but will increase investment income as investments mature and proceeds are
reinvested at higher rates. Third, as interest rates increase, competitors will typically increase crediting rates on investment
contracts and life insurance products with account values, and may lower premium rates on property and casualty lines to reflect
the higher yields available in the market. The risk of interest rate fluctuation is managed through asset/liability management
techniques, including cash flow analysis.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
The Board of Directors and Shareholders
Horace Mann Educators Corporation:
We have audited the accompanying
consolidated
balance sheets of Horace Mann Educators Corporation and subsidiaries (the Company) as of December 31, 2016
and 2015, and the related consolidated statements of operations, comprehensive income (loss), changes in shareholders’ equity,
and cash flows for each of the years in the three-year period ended December 31, 2016. In connection with our audits of the consolidated
financial statements, we also have audited financial statement schedules I to IV and VI. We also have audited the Company’s
internal control over financial reporting as of December 31, 2016, based on criteria established in
Internal Control - Integrated
Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management
is responsible for these consolidated financial statements and financial statement schedules, for maintaining effective internal
control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included
in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting (Item 9A.b.). Our responsibility
is to express an opinion on these consolidated financial statements and financial statement schedules, and an opinion on the Company's
internal control over financial reporting based on our audits.
We conducted our audits in accordance
with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform
the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether
effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial
statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation.
Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company's internal control over
financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's
internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records
that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial
statements.
Because of its inherent limitations,
internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, the consolidated
financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December
31, 2016 and 2015, and the results of its operations and its cash flows for each of the years in the three-year period ended December
31, 2016, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement
schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all
material respects, the information set forth therein.
Also in our opinion, the Company
maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on criteria
established in
Internal Control - Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO).
/s/ KPMG LLP
KPMG LLP
Chicago, Illinois
March 1, 2017
HORACE MANN EDUCATORS CORPORATION
CONSOLIDATED BALANCE SHEETS
As of December 31, 2016 and 2015
(Dollars in thousands, except per share data)
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Investments
|
|
|
|
|
|
|
|
|
Fixed maturities, available for sale, at fair value (amortized cost 2016, $7,152,127; 2015, $6,785,626)
|
|
$
|
7,456,708
|
|
|
$
|
7,091,340
|
|
Equity securities, available for sale, at fair value (cost 2016, $134,013; 2015, $95,722)
|
|
|
141,649
|
|
|
|
99,797
|
|
Short-term and other investments
|
|
|
401,015
|
|
|
|
456,893
|
|
Total investments
|
|
|
7,999,372
|
|
|
|
7,648,030
|
|
Cash
|
|
|
16,670
|
|
|
|
15,509
|
|
Deferred policy acquisition costs
|
|
|
267,580
|
|
|
|
253,176
|
|
Goodwill
|
|
|
47,396
|
|
|
|
47,396
|
|
Other assets
|
|
|
321,874
|
|
|
|
292,139
|
|
Separate Account (variable annuity) assets
|
|
|
1,923,932
|
|
|
|
1,800,722
|
|
Total assets
|
|
$
|
10,576,824
|
|
|
$
|
10,056,972
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS' EQUITY
|
Policy liabilities
|
|
|
|
|
|
|
|
|
Investment contract and life policy reserves
|
|
$
|
5,447,969
|
|
|
$
|
5,126,842
|
|
Unpaid claims and claim expenses
|
|
|
329,888
|
|
|
|
323,720
|
|
Unearned premiums
|
|
|
246,274
|
|
|
|
232,841
|
|
Total policy liabilities
|
|
|
6,024,131
|
|
|
|
5,683,403
|
|
Other policyholder funds
|
|
|
708,950
|
|
|
|
692,652
|
|
Other liabilities
|
|
|
378,620
|
|
|
|
368,559
|
|
Long-term debt
|
|
|
247,209
|
|
|
|
246,975
|
|
Separate Account (variable annuity) liabilities
|
|
|
1,923,932
|
|
|
|
1,800,722
|
|
Total liabilities
|
|
|
9,282,842
|
|
|
|
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, 64,917,683; 2015, 64,537,554
|
|
|
65
|
|
|
|
65
|
|
Additional paid-in capital
|
|
|
453,479
|
|
|
|
442,648
|
|
Retained earnings
|
|
|
1,155,732
|
|
|
|
1,116,277
|
|
Accumulated other comprehensive income (loss), net of taxes:
|
|
|
|
|
|
|
|
|
Net unrealized gains on fixed maturities and equity securities
|
|
|
175,738
|
|
|
|
175,167
|
|
Net funded status of benefit plans
|
|
|
(11,817
|
)
|
|
|
(11,794
|
)
|
Treasury stock, at cost, 2016, 24,672,932 shares; 2015, 23,971,522 shares
|
|
|
(479,215
|
)
|
|
|
(457,702
|
)
|
Total shareholders' equity
|
|
|
1,293,982
|
|
|
|
1,264,661
|
|
Total liabilities and shareholders' equity
|
|
$
|
10,576,824
|
|
|
$
|
10,056,972
|
|
See accompanying Notes to Consolidated Financial Statements.
HORACE MANN EDUCATORS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance premiums and contract charges earned
|
|
$
|
759,146
|
|
|
$
|
731,880
|
|
|
$
|
715,760
|
|
Net investment income
|
|
|
361,186
|
|
|
|
332,600
|
|
|
|
329,815
|
|
Net realized investment gains
|
|
|
4,123
|
|
|
|
12,713
|
|
|
|
10,917
|
|
Other income
|
|
|
4,455
|
|
|
|
3,255
|
|
|
|
4,193
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
1,128,910
|
|
|
|
1,080,448
|
|
|
|
1,060,685
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits, losses and expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits, claims and settlement expenses
|
|
|
541,004
|
|
|
|
496,364
|
|
|
|
468,426
|
|
Interest credited
|
|
|
192,022
|
|
|
|
182,842
|
|
|
|
176,139
|
|
Policy acquisition expenses amortized
|
|
|
96,732
|
|
|
|
98,919
|
|
|
|
93,817
|
|
Operating expenses
|
|
|
173,112
|
|
|
|
157,411
|
|
|
|
161,992
|
|
Interest expense
|
|
|
11,808
|
|
|
|
13,122
|
|
|
|
14,198
|
|
Debt retirement costs
|
|
|
-
|
|
|
|
2,338
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefits, losses and expenses
|
|
|
1,014,678
|
|
|
|
950,996
|
|
|
|
914,572
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
114,232
|
|
|
|
129,452
|
|
|
|
146,113
|
|
Income tax expense
|
|
|
30,467
|
|
|
|
35,970
|
|
|
|
41,870
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
83,765
|
|
|
$
|
93,482
|
|
|
$
|
104,243
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
2.04
|
|
|
$
|
2.23
|
|
|
$
|
2.50
|
|
Diluted
|
|
$
|
2.02
|
|
|
$
|
2.20
|
|
|
$
|
2.47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares and equivalent shares
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
41,158,349
|
|
|
|
41,914,864
|
|
|
|
41,646,281
|
|
Diluted
|
|
|
41,475,516
|
|
|
|
42,424,806
|
|
|
|
42,230,559
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized investment gains
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other-than-temporary impairment losses on securities
|
|
$
|
(11,401
|
)
|
|
$
|
(23,796
|
)
|
|
$
|
(6,385
|
)
|
Portion of losses recognized in other comprehensive income (loss)
|
|
|
(290
|
)
|
|
|
(4,300
|
)
|
|
|
-
|
|
Net other-than-temporary impairment losses on securities recognized in earnings
|
|
|
(11,111
|
)
|
|
|
(19,496
|
)
|
|
|
(6,385
|
)
|
Realized gains, net
|
|
|
15,234
|
|
|
|
32,209
|
|
|
|
17,302
|
|
Total
|
|
$
|
4,123
|
|
|
$
|
12,713
|
|
|
$
|
10,917
|
|
See accompanying Notes to Consolidated Financial Statements.
HORACE MANN EDUCATORS CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Dollars in thousands)
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
83,765
|
|
|
$
|
93,482
|
|
|
$
|
104,243
|
|
Other comprehensive income (loss), net of taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in net unrealized investment gains and losses on fixed maturities and equity securities
|
|
|
571
|
|
|
|
(122,387
|
)
|
|
|
163,564
|
|
Change in net funded status of benefit plans
|
|
|
(23
|
)
|
|
|
1,159
|
|
|
|
(1,177
|
)
|
Other comprehensive income (loss)
|
|
|
548
|
|
|
|
(121,228
|
)
|
|
|
162,387
|
|
Total
|
|
$
|
84,313
|
|
|
$
|
(27,746
|
)
|
|
$
|
266,630
|
|
See accompanying Notes to Consolidated Financial Statements.
HORACE MANN EDUCATORS CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS'
EQUITY
(Dollars in thousands, except per share data)
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par value
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
65
|
|
|
$
|
64
|
|
|
$
|
64
|
|
Options exercised, 2016, 142,203 shares; 2015, 85,532 shares;
2014, 435,665 shares
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Conversion of common stock units, 2016, 15,629 shares; 2015, 8,293 shares;
2014, 10,834 shares
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Conversion of restricted stock
units, 2016, 222,297 shares; 2015, 198,681 shares;
2014, 169,444 shares
|
|
|
-
|
|
|
|
1
|
|
|
|
-
|
|
Ending balance
|
|
|
65
|
|
|
|
65
|
|
|
|
64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional paid-in capital
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
|
442,648
|
|
|
|
422,232
|
|
|
|
407,056
|
|
Options exercised and conversion of common stock units and restricted stock units
|
|
|
2,696
|
|
|
|
13,605
|
|
|
|
13,906
|
|
Share-based compensation expense
|
|
|
8,135
|
|
|
|
6,811
|
|
|
|
1,270
|
|
Ending balance
|
|
|
453,479
|
|
|
|
442,648
|
|
|
|
422,232
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
|
1,116,277
|
|
|
|
1,065,318
|
|
|
|
1,000,312
|
|
Net income
|
|
|
83,765
|
|
|
|
93,482
|
|
|
|
104,243
|
|
Cash dividends, 2016, $1.06 per share; 2015, $1.00 per share;
2014, $0.92 per share
|
|
|
(44,310
|
)
|
|
|
(42,523
|
)
|
|
|
(39,237
|
)
|
Ending balance
|
|
|
1,155,732
|
|
|
|
1,116,277
|
|
|
|
1,065,318
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income (loss), net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
|
163,373
|
|
|
|
284,601
|
|
|
|
122,214
|
|
Change in net unrealized investment gains and losses on fixed maturities
and equity securities
|
|
|
571
|
|
|
|
(122,387
|
)
|
|
|
163,564
|
|
Change in net funded status of benefit plans
|
|
|
(23
|
)
|
|
|
1,159
|
|
|
|
(1,177
|
)
|
Ending balance
|
|
|
163,921
|
|
|
|
163,373
|
|
|
|
284,601
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury stock, at cost
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance, 2016, 23,971,522 shares; 2015, 23,308,430 shares;
2014, 23,117,554 shares
|
|
|
(457,702
|
)
|
|
|
(435,752
|
)
|
|
|
(430,341
|
)
|
Acquisition of shares, 2016, 701,410 shares; 2015, 663,092 shares;
2014, 190,876 shares
|
|
|
(21,513
|
)
|
|
|
(21,950
|
)
|
|
|
(5,411
|
)
|
Ending balance, 2016, 24,672,932 shares; 2015, 23,971,522 shares;
2014, 23,308,430 shares
|
|
|
(479,215
|
)
|
|
|
(457,702
|
)
|
|
|
(435,752
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders' equity at end of period
|
|
$
|
1,293,982
|
|
|
$
|
1,264,661
|
|
|
$
|
1,336,463
|
|
See accompanying Notes to Consolidated Financial Statements.
HORACE MANN EDUCATORS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Cash flows - operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums collected
|
|
$
|
710,646
|
|
|
$
|
723,705
|
|
|
$
|
707,275
|
|
Policyholder benefits paid
|
|
|
(511,017
|
)
|
|
|
(534,359
|
)
|
|
|
(486,295
|
)
|
Policy acquisition and other operating expenses paid
|
|
|
(277,076
|
)
|
|
|
(267,854
|
)
|
|
|
(262,765
|
)
|
Federal income taxes paid
|
|
|
(27,847
|
)
|
|
|
(24,861
|
)
|
|
|
(29,195
|
)
|
Investment income collected
|
|
|
344,778
|
|
|
|
330,034
|
|
|
|
324,252
|
|
Interest expense paid
|
|
|
(11,754
|
)
|
|
|
(13,521
|
)
|
|
|
(13,902
|
)
|
Other
|
|
|
(20,312
|
)
|
|
|
(6,101
|
)
|
|
|
(17,437
|
)
|
Net cash provided by operating activities
|
|
|
207,418
|
|
|
|
207,043
|
|
|
|
221,933
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows - investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases
|
|
|
(1,566,047
|
)
|
|
|
(1,490,376
|
)
|
|
|
(1,309,267
|
)
|
Sales
|
|
|
429,251
|
|
|
|
445,100
|
|
|
|
261,696
|
|
Maturities, paydowns, calls and redemptions
|
|
|
799,653
|
|
|
|
683,335
|
|
|
|
451,074
|
|
Purchase of other invested assets
|
|
|
(83,588
|
)
|
|
|
(38,018
|
)
|
|
|
(16,041
|
)
|
Net cash provided by (used in) short-term and other investments
|
|
|
95,371
|
|
|
|
(15,890
|
)
|
|
|
47,023
|
|
Net cash used in investing activities
|
|
|
(325,360
|
)
|
|
|
(415,849
|
)
|
|
|
(565,515
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows - financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends paid to shareholders
|
|
|
(44,310
|
)
|
|
|
(42,523
|
)
|
|
|
(39,237
|
)
|
Proceeds from issuance of Senior Notes due 2025
|
|
|
-
|
|
|
|
246,937
|
|
|
|
-
|
|
Redemption of Senior Notes due 2016
|
|
|
-
|
|
|
|
(127,292
|
)
|
|
|
-
|
|
Maturity of Senior Notes due 2015
|
|
|
-
|
|
|
|
(75,000
|
)
|
|
|
-
|
|
Principal repayment on Bank Credit Facility
|
|
|
-
|
|
|
|
(38,000
|
)
|
|
|
-
|
|
Acquisition of treasury stock
|
|
|
(21,513
|
)
|
|
|
(21,950
|
)
|
|
|
(5,411
|
)
|
Exercise of stock options
|
|
|
3,329
|
|
|
|
1,629
|
|
|
|
8,252
|
|
Annuity contracts: variable, fixed and FHLB funding agreements
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
520,211
|
|
|
|
623,021
|
|
|
|
730,632
|
|
Benefits, withdrawals and net transfers to
|
|
|
|
|
|
|
|
|
|
|
|
|
Separate Account (variable annuity) assets
|
|
|
(349,915
|
)
|
|
|
(354,735
|
)
|
|
|
(326,374
|
)
|
Life policy accounts
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
4,018
|
|
|
|
1,455
|
|
|
|
1,093
|
|
Withdrawals and surrenders
|
|
|
(3,965
|
)
|
|
|
(3,985
|
)
|
|
|
(4,883
|
)
|
Cash received (paid) related to repurchase agreements
|
|
|
-
|
|
|
|
-
|
|
|
|
(25,848
|
)
|
Change in bank overdrafts
|
|
|
11,248
|
|
|
|
3,083
|
|
|
|
(1,156
|
)
|
Net cash provided by financing activities
|
|
|
119,103
|
|
|
|
212,640
|
|
|
|
337,068
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
|
|
|
1,161
|
|
|
|
3,834
|
|
|
|
(6,514
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash at beginning of period
|
|
|
15,509
|
|
|
|
11,675
|
|
|
|
18,189
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash at end of period
|
|
$
|
16,670
|
|
|
$
|
15,509
|
|
|
$
|
11,675
|
|
See accompanying Notes to Consolidated Financial Statements.
HORACE MANN EDUCATORS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016, 2015 and 2014
(Dollars in thousands, except per share data)
NOTE 1 - Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial
statements 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-K. 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 consolidated financial statements
include the accounts of Horace Mann Educators Corporation and its wholly-owned subsidiaries (“HMEC”; and together with
its subsidiaries, the “Company” or “Horace Mann”). HMEC and its subsidiaries have common management, share
office facilities and are parties to intercompany service agreements for management, administrative, utilization of personnel,
financial, investment advisory, underwriting, claims adjusting, agency and data processing services. Under these agreements, costs
have been allocated among the companies in conformity with GAAP. In addition, certain of the subsidiaries have entered into intercompany
reinsurance agreements. HMEC and its subsidiaries file a consolidated federal income tax return, and there are related tax sharing
agreements. All significant intercompany balances and transactions have been eliminated in consolidation.
The subsidiaries of HMEC market
and underwrite personal lines of property and casualty insurance products (primarily personal lines automobile and homeowners insurance),
retirement products (primarily tax-qualified annuities) and life insurance, primarily to K-12 teachers, administrators and other
employees of public schools and their families. HMEC’s principal operating subsidiaries are Horace Mann Life Insurance Company,
Horace Mann Insurance Company, Teachers Insurance Company, Horace Mann Property & Casualty Insurance Company and Horace Mann
Lloyds.
The Company has evaluated subsequent
events through the date these consolidated financial statements were issued. There were no subsequent events requiring adjustment
to the financial statements or disclosure.
NOTE 1 - Summary of Significant Accounting Policies-(Continued)
Investments
The Company invests primarily in
fixed maturity securities (“fixed maturities”). This category includes primarily bonds and notes, but also includes
redeemable preferred stocks. These securities are classified as available for sale and carried at fair value. The adjustment for
net unrealized investment gains and losses on all securities available for sale, carried at fair value, is recorded as a separate
component of accumulated other comprehensive income within shareholders' equity, net of applicable deferred taxes and the related
impact on deferred policy acquisition costs associated with annuity contracts and life insurance products with account values that
would have occurred if the securities had been sold at their aggregate fair value and the proceeds reinvested at current yields.
Equity securities are classified
as available for sale and carried at fair value. This category includes nonredeemable preferred stocks and common stocks.
Short-term and other investments
are comprised of short-term fixed maturity securities, generally carried at cost which approximates fair value; derivative instruments
(all call options), carried at fair value; policy loans, carried at unpaid principal balances; mortgage loans, carried at unpaid
principal; certain alternative investments (primarily investments in limited partnerships) which are accounted for as equity method
investments; and restricted Federal Home Loan Bank membership and activity stocks, carried at redemption value which approximates
fair value.
The Company invests in fixed maturity
securities and alternative investment funds that could qualify as variable interest entities, including corporate securities, mortgage-backed
securities and asset-backed securities. Such securities have been reviewed and determined not to be subject to consolidation as
the Company is not the primary beneficiary of these securities because the Company does not have the power to direct the activities
that most significantly impact the entities’ economic performance.
Investment income is recognized
as earned. Investment income reflects amortization of premiums and accrual of discounts on an effective-yield basis.
Realized gains and losses arising
from the disposal (recorded on a trade date basis) or impairment of securities are determined based upon specific identification
of securities. The Company evaluates all investments in its portfolio for other-than-temporary declines in value as described in
the following section.
NOTE 1 - Summary of Significant Accounting Policies-(Continued)
Other-than-temporary Impairment
of Investments
The Company's methodology of assessing
other-than-temporary impairments is based on security-specific facts and circumstances as of the balance sheet date. Based on these
facts, for fixed maturity securities if (1) the Company has the intent to sell the fixed maturity security, (2) it is more likely
than not the Company will be required to sell the fixed maturity security before the anticipated recovery of the amortized cost
basis, or (3) management does not expect to recover the entire cost basis of the fixed maturity security, an other-than-temporary
impairment is considered to have occurred. For equity securities, if (1) the Company does not have the ability and intent to hold
the security for the recovery of cost or (2) recovery of cost is not expected within a reasonable period of time, an other-than-temporary
impairment is considered to have occurred. Additionally, if events become known that call into question whether the security issuer
has the ability to honor its contractual commitments, such security holding will be evaluated to determine whether or not such
security has suffered an other-than-temporary decline in value.
The Company reviews the fair value
of all investments in its portfolio on a monthly basis to assess whether an other-than-temporary decline in value has occurred.
These reviews, in conjunction with the Company's investment managers' monthly credit reports and relevant factors such as (1) the
financial condition and near-term prospects of the issuer, (2) the length of time and extent to which the fair value has been less
than amortized cost for fixed maturity securities or cost for equity securities, (3) for fixed maturity securities, the Company’s
intent to sell a security or whether it is more likely than not the Company will be required to sell the security before the anticipated
recovery in the amortized cost basis; and for equity securities, the Company’s ability and intent to hold the security for
the recovery of cost or if recovery of cost is not expected within a reasonable period of time, (4) the stock price trend of the
issuer, (5) the market leadership position of the issuer, (6) the debt ratings of the issuer, and (7) the cash flows and liquidity
of the issuer or the underlying cash flows for asset-backed securities, are all considered in the impairment assessment. When an
other-than-temporary impairment is deemed to have occurred, the investment is written-down to fair value, with a realized loss
charged to income for the period for the full loss amount for all equity securities and the credit-related loss portion associated
with impaired fixed maturity securities. The amount of the total other-than-temporary impairment related to non-credit factors
for fixed maturity securities is recognized in other comprehensive income, net of applicable taxes, in which the Company has the
intent to sell the security or if it is more likely than not the Company will be required to sell the security before the anticipated
recovery of the amortized cost basis.
With respect to fixed maturity
securities involving securitized financial assets — primarily asset-backed and commercial mortgage-backed securities in the Company’s
portfolio — the securitized financial asset securities’ underlying collateral cash flows are stress tested to determine
if there has been any adverse change in the expected cash flows.
NOTE 1 - Summary of Significant Accounting Policies-(Continued)
A decline in fair value below amortized
cost is not assumed to be other-than-temporary for fixed maturity investments with unrealized losses due to spread widening, market
illiquidity or changes in interest rates where there exists a reasonable expectation based on the Company’s consideration
of all objective information available that the Company will recover the entire cost basis of the security and the Company does
not have the intent to sell the investment before maturity or a market recovery is realized and it is more likely than not the
Company will not be required to sell the investment. An other-than-temporary impairment loss will be recognized based upon all
relevant facts and circumstances for each investment, as appropriate.
Additional considerations for certain
types of securities include the following:
Corporate Fixed Maturity Securities
Judgments regarding whether a corporate
fixed maturity security is other-than-temporarily impaired include analyzing the issuer’s financial condition and whether
there has been a decline in the issuer’s ability to service the specific security. The analysis of the security issuer is
based on asset coverage, cash flow multiples or other industry standards. Several factors assessed include, but are not limited
to, credit quality ratings, cash flow sustainability, liquidity, financial strength, industry and market position. Sources of information
include, but are not limited to, management projections, independent consultants, external analysts’ research, peer analysis
and the Company’s internal analysis.
If the Company has concerns regarding
the viability of the issuer or its ability to service the specific security after this assessment, a cash flow analysis is prepared
to determine if the present value of future cash flows has declined below the amortized cost of the fixed maturity security. This
analysis to determine an estimate of ultimate recovery value is combined with the estimated timing to recovery and any other applicable
cash flows that are expected. If a cash flow analysis estimate is not feasible, then the market’s view of cash flows implied
by the period end fair value, market discount rates and effective yield are the primary factors used to estimate a recovery value.
Mortgage-Backed Securities Not
Issued By the U.S. Government or Federally Sponsored Agencies
The Company uses an estimate of
future cash flows expected to be collected to evaluate its mortgage-backed securities for other-than-temporary impairment. The
determination of cash flow estimates is inherently subjective and methodologies may vary depending on facts and circumstances specific
to the security. All reasonably available information relevant to the collectability of the security, including past events, current
conditions, and reasonable and supportable assumptions and forecasts, are considered when developing the estimate of cash flows
expected to be collected. Information includes, but is not limited to, debt-servicing, missed refinancing opportunities and geography.
NOTE 1 - Summary of Significant Accounting Policies-(Continued)
Loan level characteristics such
as issuer, FICO score, payment terms, level of documentation, property or residency type, and economic outlook are also utilized
in financial models, along with historical performance, to estimate or measure the loan’s propensity to default. Additionally,
financial models take into account loan age, lease rollovers, rent volatilities, vacancy rates and exposure to refinancing as additional
drivers of default. For transactions where loan level data is not available, financial models use a proxy based on the collateral
characteristics. Loss severity is a function of multiple factors including, but not limited to, the unpaid balance, interest rate,
mortgage insurance ratios, assessed property value at origination, change in property valuation and loan-to-value ratio at origination.
Prepayment speeds, both actual and estimated, cost of capital rates and debt service ratios are also considered. The cash flows
generated by the collateral securing these securities are then estimated with these default, loss severity and prepayment assumptions.
These collateral cash flows are then utilized, along with consideration for the issue’s position in the overall structure,
to estimate the cash flows associated with the residential or commercial mortgage-backed security held by the Company.
Municipal Bonds
The Company’s municipal bond
portfolio consists primarily of special revenue bonds, which present unique considerations in evaluating other-than-temporary impairments,
but also includes general obligation bonds. The Company evaluates special revenue bonds for other-than-temporary impairment based
on guarantees associated with the repayment from revenues generated by the specified revenue-generating activity associated with
the purpose of the bonds. Judgments regarding whether a municipal bond is other-than-temporarily impaired include analyzing the
issuer’s financial condition and whether there has been a decline in the overall financial condition of the issuer or its
ability to service the specific security. Security credit ratings are reviewed with emphasis on the economy, finances, debt and
management of the municipal issuer. Certain securities may be guaranteed by the mono-line credit insurers or other forms of guarantee.
While not relied upon in the initial
security purchase decision, insurance benefits are considered in the assessments for other-than-temporary impairment, including
the credit-worthiness of the guarantor. Municipalities possess unique powers, along with a special legal standing and protections,
that enable them to act quickly to restore budgetary balance and fiscal integrity. These powers include the sovereign power to
tax, access to one-time revenue sources, capacity to issue or restructure debt, and ability to shift spending to other authorities.
State governments often provide secondary support to local governments in times of financial stress and the federal government
has provided assistance to state governments during recessions.
If the Company has concerns regarding
the viability of the municipal issuer or its ability to service the specific security after this analysis, a cash flow analysis
is prepared to determine a present value and whether it has declined below the amortized cost of the security. If a cash flow analysis
is not feasible, then the market’s view of the period end fair value, market discount rates and effective yield are the primary
factors used to estimate the present value.
NOTE 1 - Summary of Significant Accounting Policies-(Continued)
Credit Losses
The Company estimates the amount
of the credit loss component of a fixed maturity security impairment as the difference between amortized cost and the present value
of the expected cash flows of the security. The present value is determined using the best estimate cash flows discounted at the
effective interest rate implicit to the security at the date of purchase or the current yield to accrete an asset-backed or floating
rate security. The methodology and assumptions for establishing the best estimate cash flows vary depending on the type of security.
Corporate fixed maturity security and municipal bond cash flow estimates are derived from scenario-based outcomes of expected restructurings
or the disposition of assets using specific facts and other circumstances, including timing, security interests and loss severity
and when not reasonably estimable, such securities are impaired to fair value as management’s best estimate of the present
value of future cash flows. The cash flow estimates for mortgage-backed and other structured securities are based on security specific
facts and circumstances that may include collateral characteristics, expectations of delinquency and default rates, loss severity
and prepayment speeds, and structural support, including subordination and guarantees.
Deferred Policy Acquisition
Costs
The Company’s deferred policy
acquisition costs (“DAC”) asset by segment was as follows:
|
|
December
31,
|
|
|
|
|
2016
|
|
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
Retirement (annuity)
|
|
$
|
188,117
|
|
|
$
|
178,300
|
|
Life
|
|
|
51,859
|
|
|
|
48,191
|
|
Property
and Casualty
|
|
|
27,604
|
|
|
|
26,685
|
|
Total
|
|
$
|
267,580
|
|
|
$
|
253,176
|
|
Policy acquisition costs, consisting
of commissions, policy issuance and other costs which are incremental and directly related to the successful acquisition of new
or renewal business, are deferred and amortized on a basis consistent with the type of insurance coverage. For all investment (annuity)
contracts, deferred policy acquisition costs are amortized over 20 years in proportion to estimated gross profits. Deferred policy
acquisition costs are amortized in proportion to estimated gross profits over 20 years for certain life insurance products with
account values and over 30 years for indexed universal life contracts. For other individual life contracts, deferred policy acquisition
costs are amortized in proportion to anticipated premiums over the terms of the insurance policies (10, 15, 20 or 30 years). For
Property and Casualty policies, deferred policy acquisition costs are amortized over the terms of the insurance policies (6 or
12 months).
NOTE 1 - Summary of Significant Accounting Policies-(Continued)
The Company periodically reviews
the assumptions and estimates used in deferring policy acquisition costs and also periodically reviews its estimations of gross
profits, a process sometimes referred to as “unlocking”. The most significant assumptions that are involved in the
estimation of annuity gross profits include interest rate spreads, future financial market performance, business surrender/lapse
rates, expenses and the impact of net realized investment gains and losses. For the variable deposit portion of the Retirement
segment, the Company amortizes deferred policy acquisition costs utilizing a future financial market performance assumption of
a 10% reversion to the mean approach with a 200 basis point corridor around the mean during the reversion period, representing
a cap and a floor on the Company’s long-term assumption. The Company’s practice with regard to returns on Separate
Accounts assumes that long-term appreciation in the financial market is not changed by short-term market fluctuations, but is only
changed when sustained deviations are experienced. The Company monitors these fluctuations and only changes the assumption when
its long-term expectation changes.
In the event actual experience
differs significantly from assumptions or assumptions are significantly revised, the Company may be required to record a material
charge or credit to current period amortization expense for the period in which the adjustment is made. The Company recorded the
following adjustments to amortization expense as a result of evaluating actual experience and prospective assumptions, the impact
of unlocking:
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Increase (decrease) to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
Annuity
|
|
$
|
(313
|
)
|
|
$
|
3,403
|
|
|
$
|
1,224
|
|
Life
|
|
|
(394
|
)
|
|
|
(34
|
)
|
|
|
(131
|
)
|
Total
|
|
$
|
(707
|
)
|
|
$
|
3,369
|
|
|
$
|
1,093
|
|
Deferred policy acquisition costs
for investment contracts and life insurance products with account values are adjusted for the impact on estimated future gross
profits as if net unrealized investment gains and losses had been realized at the balance sheet date. This adjustment reduced the
deferred policy acquisition costs by $40,274 and $38,819 at December 31, 2016 and 2015, respectively. The after tax impact of this
adjustment is included in accumulated other comprehensive income (net unrealized investment gains and losses on fixed maturities
and equity securities) within shareholders' equity.
Deferred policy acquisition costs
is reviewed for recoverability from future income, including investment income, and costs which are deemed unrecoverable are expensed
in the period in which the determination is made. No such costs were deemed unrecoverable during the years ended December 31, 2016,
2015 and 2014.
Goodwill
When the Company was acquired in
1989, intangible assets were recorded in the application of purchase accounting to recognize goodwill. In addition, goodwill was
recorded in 1994 related to the purchase of Horace Mann Property & Casualty Insurance Company.
NOTE 1 - Summary of Significant Accounting Policies-(Continued)
Goodwill represents the excess
of the amounts paid to acquire a business over the fair value of its net assets at the date of acquisition. Goodwill is not amortized,
but is tested for impairment at the reporting unit level at least annually or more frequently if events occur or circumstances
change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. A reporting unit is
defined as an operating segment or a business unit one level below an operating segment, if separate financial information is prepared
and regularly reviewed by management at that level. The Company’s reporting units, for which goodwill has been allocated,
are equivalent to the Company’s operating segments.
The allocation of goodwill by reporting
unit is as follows:
Retirement
|
|
$
|
28,025
|
|
Life
|
|
|
9,911
|
|
Property and Casualty
|
|
|
9,460
|
|
Total
|
|
$
|
47,396
|
|
The goodwill impairment test, as
defined in the accounting guidance, allows an entity the option to first assess qualitative factors to determine whether the existence
of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is
less than its carrying amount. If an entity determines it is more likely than not that the fair value of a reporting unit is less
than its carrying amount, then the entity follows a two-step process. In the first step, the fair value of a reporting unit is
compared to its carrying value. If the carrying value of a reporting unit exceeds its fair value, the second step of the impairment
test is performed for purposes of confirming and measuring the impairment. In the second step, the fair value of the reporting
unit is allocated to all of the assets and liabilities of the reporting unit to determine an implied goodwill value. If the carrying
amount of the reporting unit goodwill exceeds the implied goodwill value, an impairment loss would be recognized in an amount equal
to that excess. Any amount of goodwill determined to be impaired will be recorded as an expense in the period in which the impairment
determination is made.
The Company completed its annual
goodwill assessment for the individual reporting units as of October 1, 2016 and did not utilize the option to perform an initial
assessment of qualitative factors. The first step of the Company’s analysis indicated that fair value exceeded carrying value
for all reporting units. The process of evaluating goodwill for impairment required management to make multiple judgments and assumptions
to determine the fair value of each reporting unit, including discounted cash flow calculations, the level of the Company’s
own share price and assumptions that market participants would make in valuing each reporting unit. Fair value estimates were based
primarily on an in-depth analysis of historical experience, projected future cash flows and relevant discount rates, which considered
market participant inputs and the relative risk associated with the projected cash flows. Other assumptions included levels of
economic capital, future business growth, earnings projections and assets under management for each reporting unit. Estimates of
fair value are subject to assumptions that are sensitive to change and represent the Company’s reasonable expectation regarding
future developments. The Company also considered other valuation techniques such as peer company price-to-earnings and price-to-book
multiples.
NOTE 1 - Summary of Significant Accounting Policies-(Continued)
As part of the Company’s
October 1, 2016 goodwill analysis, the Company compared the fair value of the aggregated reporting units to the market capitalization
of the Company. The difference between the aggregated fair value of the reporting units and the market capitalization of the Company
was attributed to several factors, most notably market sentiment, trading volume and transaction premium. The amount of the transaction
premium was determined to be reasonable based on insurance industry and Company-specific facts and circumstances. There were no
other events or material changes in circumstances during 2016 that indicated that a material change in the fair value of the Company’s
reporting units had occurred.
During each year from 2014 through
2016, the Company completed the required annual testing; no impairment charges were necessary as a result of such assessments.
The assessment of goodwill recoverability requires significant judgment and is subject to inherent uncertainty. The use of different
assumptions, within a reasonable range, could cause the fair value to be below carrying value. Subsequent goodwill assessments
could result in impairment, particularly for any reporting unit with at-risk goodwill, due to the impact of a volatile financial
market on earnings, discount rate assumptions, liquidity and market capitalization.
Property and Equipment
Property and equipment are carried
at cost less accumulated depreciation, which is calculated on the straight-line method based on the estimated useful lives of the
assets. The estimated life for real estate is identified by specific property and ranges from 20 to 45 years. The estimated useful
lives of leasehold improvements and other property and equipment, including capitalized software, generally range from 2 to 10
years. The following amounts are included in Other assets in the Consolidated Balance Sheets:
|
|
December 31,
|
|
|
|
|
2016
|
|
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
Property and equipment
|
|
$
|
120,712
|
|
|
$
|
107,876
|
|
Less: accumulated depreciation
|
|
|
88,524
|
|
|
|
82,236
|
|
Total
|
|
$
|
32,188
|
|
|
$
|
25,640
|
|
Separate Account (Variable
Annuity) Assets and Liabilities
Separate Account assets represent
variable annuity contractholder funds invested in various mutual funds. Separate Account assets are recorded at fair value primarily
based on market quotations of the underlying securities. Separate Account liabilities are equal to the estimated fair value of
Separate Account assets. The investment income, gains and losses of these accounts accrue directly to the contractholders and are
not included in the operations of the Company. The activity of the Separate Accounts is not reflected in the Consolidated Statements
of Operations except for (1) contract charges earned, (2) the activity related to contract guarantees, which are benefits on existing
variable annuity contracts, and (3) the impact of financial market performance on the amortization of deferred policy acquisition
costs. The Company’s contract charges earned include fees charged to the Separate Accounts, including mortality charges,
risk charges, policy administration fees, investment management fees and surrender charges.
NOTE 1 - Summary of Significant Accounting Policies-(Continued)
Investment Contract and Life
Policy Reserves
This table summarizes the Company’s
investment contract and life policy reserves.
|
|
December 31,
|
|
|
|
|
2016
|
|
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
Investment contract reserves
|
|
$
|
4,360,456
|
|
|
$
|
4,072,102
|
|
Life policy reserves
|
|
|
1,087,513
|
|
|
|
1,054,740
|
|
Total
|
|
$
|
5,447,969
|
|
|
$
|
5,126,842
|
|
Liabilities for future benefits
on life and annuity policies are established in amounts adequate to meet the estimated future obligations on policies in force.
Liabilities for future policy benefits
on certain life insurance policies are computed using the net level premium method including assumptions as to investment yields,
mortality, persistency, expenses and other assumptions based on the Company’s experience, including a provision for adverse
deviation. These assumptions are established at the time the policy is issued and are intended to estimate the experience for the
period the policy benefits are payable. If experience is less favorable than the assumptions, additional liabilities may be established,
resulting in a charge to income for that period. At December 31, 2016, reserve investment yield assumptions ranged from 3.5% to
8.0%.
Liabilities for future benefits
on annuity contracts and certain long-duration life insurance contracts are carried at accumulated policyholder values without
reduction for potential surrender or withdrawal charges. The liability also includes provisions for the unearned portion of certain
policy charges.
A guaranteed minimum death benefit
(“GMDB”) generally provides an additional benefit if the contractholder dies and the variable annuity contract value
is less than a contractually defined amount. The Company has estimated and recorded a GMDB reserve on variable annuity contracts
in accordance with accounting guidance. Contractually defined amounts vary from contract to contract based on the date the contract
was entered into as well as the GMDB feature elected by the contractholder. The Company regularly monitors the GMDB reserve considering
fluctuations in the financial market. The Company has a relatively low exposure to GMDB risk as shown below.
|
|
December 31,
|
|
|
|
|
2016
|
|
|
|
2015
|
|
|
|
|
|
|
|
|
GMDB reserve
|
|
$
|
225
|
|
|
$
|
358
|
|
Aggregate in-the-money death benefits under the GMDB provision
|
|
|
32,106
|
|
|
|
35,563
|
|
Variable annuity contract value distribution based on GMDB feature:
|
|
|
|
|
|
|
|
|
No guarantee
|
|
|
32
|
%
|
|
|
32
|
%
|
Return of premium guarantee
|
|
|
62
|
%
|
|
|
62
|
%
|
Guarantee of premium roll-up at an annual rate of 3% or 5%
|
|
|
6
|
%
|
|
|
6
|
%
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
NOTE 1 - Summary of Significant Accounting Policies-(Continued)
Reserves for Fixed Indexed Annuities
and Indexed Universal Life Policies
In 2014, the Company began offering
fixed indexed annuity (“FIA”) products with interest crediting strategies linked to the Standard & Poor’s
500 Index and the Dow Jones Industrial Average. The Company purchases call options on the applicable indices as an investment to
provide the income needed to fund the annual index credits on the indexed products. These products are deferred fixed annuities
with a guaranteed minimum interest rate plus a contingent return based on equity market performance and are considered hybrid financial
instruments under the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”)
Topic 815 “Derivatives and Hedging”.
The Company elected to not use
hedge accounting for derivative transactions related to the FIA products. As a result, the Company records the purchased call options
and the embedded derivative related to the provision of a contingent return at fair value, with changes in fair value reported
in Net realized investment gains and losses in the Consolidated Statements of Operations. The embedded derivative is bifurcated
from the host contract and included in Other policyholder funds in the Consolidated Balance Sheets. The host contract is accounted
for as a debt instrument in accordance with ASC Topic 944 “Financial Services — Insurance” and is included in Investment
contract and life policy reserves in the Consolidated Balance Sheets with any discount to the minimum account value being accreted
using the effective yield method. In the Consolidated Statements of Operations, accreted interest for FIA products and benefit
claims on these products incurred during the reporting period are included in Benefits, claims and settlement expenses.
In October 2015, the Company began
offering indexed universal life (“IUL”) products as part of its product portfolio with interest crediting strategies
linked to the Standard & Poor’s 500 Index and the Dow Jones Industrial Average as well as a fixed option. The Company
purchases call options monthly to hedge the potential liabilities arising in IUL accounts. The Company elected to not use hedge
accounting for derivative transactions related to the IUL products. As a result, the Company records the purchased call options
and the embedded derivative related to the provision of a contingent return at fair value, with changes in fair value reported
in Net realized investment gains and losses in the Consolidated Statements of Operations. IUL policies with a balance in one or
more indexed accounts are considered to have an embedded derivative. The benefit reserve for the host contract is measured using
the retrospective deposit method, which for Horace Mann’s IUL product is equal to the account balance. The embedded derivative
is bifurcated from the host contract, carried at fair value and included in Investment contract and life policy reserves in the
Consolidated Balance Sheets.
More information regarding the
determination of fair value of the FIA and IUL embedded derivatives and purchased call options, the only derivative instruments
utilized by the Company, is included in “Note 3 — Fair Value of Financial Instruments”.
NOTE 1 - Summary of Significant Accounting Policies-(Continued)
Unpaid Claims and Claim Expenses
Liabilities for Property and Casualty
unpaid claims and claim expenses include provisions for payments to be made on reported claims, claims incurred but not yet reported
and associated settlement expenses. All of the Company's reserves for Property and Casualty unpaid claims and claim expenses are
carried at the full value of estimated liabilities and are not discounted for interest expected to be earned on reserves. Estimated
amounts of salvage and subrogation on unpaid Property and Casualty claims are deducted from the liability for unpaid claims. Due
to the nature of the Company's personal lines business, the Company has no exposure to losses related to claims for toxic waste
cleanup, other environmental remediation or asbestos-related illnesses other than claims under homeowners insurance policies for
environmentally related items such as mold.
Other Policyholder Funds
Other policyholder funds includes
supplementary contracts without life contingencies and dividend accumulations, as well as balances outstanding under the funding
agreements with the Federal Home Loan Bank of Chicago (“FHLB”) and embedded derivatives related to fixed indexed annuities.
Except for embedded derivatives, each of these components is carried at cost. Embedded derivatives are carried at fair value. Amounts
received and repaid under the FHLB funding agreements are classified in the financing activities section of the Company’s
Consolidated Statements of Cash Flows combined with annuity contract deposits and disbursements, respectively.
Federal Home Loan Bank Funding Agreements
In 2013, one of the Company's subsidiaries,
Horace Mann Life Insurance Company (“HMLIC”), became a member of the FHLB, which provides HMLIC with access to collateralized
borrowings and other FHLB products. As membership requires the ownership of member stock, in June 2013, HMLIC purchased common
stock to meet the membership requirement. Any borrowing from the FHLB requires the purchase of FHLB activity-based common stock
in an amount equal to 5.0% of the borrowing, or a lower percentage — such as 2.0% based on the Reduced Capitalization Advance
Program. For FHLB advances and funding agreements combined, HMEC's Board of Directors has authorized a maximum amount equal to
10% of HMLIC’s admitted assets using prescribed statutory accounting principles. On both September 18, 2014 and December
27, 2013, the Company received $250,000 under funding agreements and on December 28, 2015, an additional $75,000 was received under
a funding agreement. For the total $575,000 received, $250,000 matures on September 13, 2019, $125,000 matures on December 15,
2023 and $200,000 matures on January 16, 2026. Interest on the funding agreements accrues at an annual weighted average rate of
0.52% as of December 31, 2016. FHLB borrowings of $575,000 are included in Other policyholder funds in the Consolidated Balance
Sheet.
NOTE 1 - Summary of Significant Accounting Policies-(Continued)
Insurance Premiums and Contract
Charges Earned
Property and Casualty insurance
premiums are recognized as revenue ratably over the related contract periods in proportion to the risks insured. The unexpired
portions of these Property and Casualty premiums are recorded as unearned premiums, using the monthly pro rata method.
Premiums and contract charges for
life insurance contracts with account values and investment (annuity) contracts consist of charges for the cost of insurance, policy
administration and withdrawals. Premiums for long-term traditional life policies are recognized as revenues when due over the premium-paying
period. Contract deposits to investment contracts and life insurance contracts with account values represent funds deposited by
policyholders and are not included in the Company's premiums or contract charges earned.
Share-Based Compensation
The Company grants stock options
and both service-based and performance-based restricted common stock units (“RSUs”) to executive officers, other employees
and Directors in an effort to attract and retain individuals while also aligning compensation with the interests of the Company’s
shareholders. Additional information regarding the Company's share-based compensation plans is contained in “Note 9 — Shareholders'
Equity and Common Stock Equivalents”.
Stock options are accounted for
under the fair value method of accounting using a Black-Scholes valuation model to measure stock option expense at the date of
grant. The fair value of RSUs is measured at the market price of the Company’s common stock on the date of grant, with the
exception of market-based performance awards, for which the Company uses a Monte Carlo simulation model to determine fair value
for purposes of measuring RSU expense. For the years ended December 31, 2016, 2015 and 2014, the Company recognized $1,207, $1,285
and $1,270, respectively, in stock option expense as a result of the vesting of stock options during the respective periods. For
the years ended December 31, 2016, 2015 and 2014, the Company recognized $6,929, $892 and $6,132, respectively, in RSU expense
as a result of the earning and/or vesting of RSUs during the respective periods.
NOTE 1 - Summary of Significant Accounting Policies-(Continued)
In 2016, 2015 and 2014, the Company
granted stock options as quantified in the table below, which also provides the weighted average grant date fair value for stock
options granted in each year. The fair value of stock options granted was estimated on the respective dates of grant using the
Black-Scholes option pricing model with the weighted average assumptions shown in the following table.
|
|
Year Ended December 31,
|
|
|
|
|
2016
|
|
|
|
2015
|
|
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
|
Number of stock options granted
|
|
|
307,176
|
|
|
|
142,908
|
|
|
|
175,632
|
|
Weighted average grant date fair value of stock options granted
|
|
$
|
5.01
|
|
|
$
|
11.18
|
|
|
$
|
9.01
|
|
Weighted average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk-free interest rate
|
|
|
1.3
|
%
|
|
|
1.7
|
%
|
|
|
1.9
|
%
|
Expected dividend yield
|
|
|
3.2
|
%
|
|
|
2.6
|
%
|
|
|
2.5
|
%
|
Expected life, in years
|
|
|
4.9
|
|
|
|
7.2
|
|
|
|
5.7
|
|
Expected volatility (based on historical volatility)
|
|
|
25.6
|
%
|
|
|
42.8
|
%
|
|
|
40.3
|
%
|
The weighted average fair value
of nonvested stock options outstanding on December 31, 2016 was $6.82. Total unrecognized compensation expense relating to the
nonvested stock options outstanding as of December 31, 2016 was approximately $2,299. This amount will be recognized as expense
over the remainder of the vesting period, which is scheduled to be 2017 through 2020. Expense is reflected on a straight-line basis
over the vesting period for the entire award.
Total unrecognized compensation
expense relating to RSUs outstanding as of December 31, 2016 was approximately $9,517. This amount will be recognized as expense
over the remainder of the earning and vesting period, which is scheduled to be 2017 through 2020. Expense is reflected on a straight-line
basis from the date of grant through the end of the vesting period for the entire award.
Income Taxes
The Company uses the asset and
liability method for calculating deferred federal income taxes. Income tax provisions are generally based on income reported for
financial statement purposes. The provisions for federal income taxes for the years ended December 31, 2016, 2015 and 2014 included
amounts currently payable and deferred income taxes resulting from the cumulative differences in the Company's assets and liabilities,
determined on a tax return versus financial statement basis.
Deferred tax assets and liabilities
include provisions for unrealized investment gains and losses as well as the net funded status of pension and other postretirement
benefit obligations with the changes for each period included in the respective components of accumulated other comprehensive income
(loss) within shareholders' equity.
NOTE 1 - Summary of Significant Accounting Policies-(Continued)
Earnings Per Share
Basic earnings per share is computed
based on the weighted average number of common shares outstanding plus the weighted average number of fully vested restricted stock
units and common stock units payable as shares of HMEC common stock. Diluted earnings per share is computed based on the weighted
average number of common shares and common stock equivalents outstanding, to the extent dilutive. The Company’s common stock
equivalents relate to outstanding common stock options, deferred compensation common stock units and incentive compensation restricted
common stock units, which are described in “Note 9 — Shareholders’ Equity and Common Stock Equivalents”.
The computations of net income
per share on both basic and diluted bases, including reconciliations of the numerators and denominators, were as follows:
|
|
|
Year Ended December 31,
|
|
|
|
|
2016
|
|
|
|
2015
|
|
|
|
2014
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income for the period
|
|
$
|
83,765
|
|
|
$
|
93,482
|
|
|
$
|
104,243
|
|
Weighted average number of common shares during the period (in thousands)
|
|
|
41,158
|
|
|
|
41,915
|
|
|
|
41,646
|
|
Net income per share - basic
|
|
$
|
2.04
|
|
|
$
|
2.23
|
|
|
$
|
2.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income for the period
|
|
$
|
83,765
|
|
|
$
|
93,482
|
|
|
$
|
104,243
|
|
Weighted average number of common shares during the period (in thousands)
|
|
|
41,158
|
|
|
|
41,915
|
|
|
|
41,646
|
|
Weighted average number of common equivalent shares to reflect the dilutive effect
of common
|
|
|
|
|
|
|
|
|
|
|
|
|
stock equivalent securities (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
100
|
|
|
|
158
|
|
|
|
137
|
|
Common stock units related to deferred compensation for employees
|
|
|
52
|
|
|
|
55
|
|
|
|
70
|
|
Restricted common stock units related to incentive compensation
|
|
|
166
|
|
|
|
297
|
|
|
|
378
|
|
Total common and common equivalent shares adjusted to calculate diluted
earnings per share (in thousands)
|
|
|
41,476
|
|
|
|
42,425
|
|
|
|
42,231
|
|
Net income per share - diluted
|
|
$
|
2.02
|
|
|
$
|
2.20
|
|
|
$
|
2.47
|
|
Options to purchase 413,406 shares
of common stock at $31.01 to $36.04 per share were granted in 2015 through 2016 but were not included in the computation of 2016
diluted earnings per share because of their anti-dilutive effect as a result of the effect of unrecognized compensation cost. The
options, which expire in 2025 through 2026, were still outstanding at December 31, 2016.
NOTE 1 - Summary of Significant Accounting Policies-(Continued)
Comprehensive Income (Loss)
and Accumulated Other Comprehensive Income (Loss)
Comprehensive income (loss) represents
the change in shareholders’ equity during a reporting period from transactions and other events and circumstances from non-shareholder
sources. For the Company, comprehensive income (loss) is equal to net income plus or minus 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 benefit plans for the
period as shown in the Consolidated Statements of Changes in Shareholders' Equity. Accumulated other comprehensive income (loss)
represents the accumulated change in shareholders’ equity from these transactions and other events and circumstances from
non-shareholder sources as shown in the Consolidated Balance Sheets.
In the Consolidated Balance Sheets,
the Company recognizes the funded status of benefit plans as a component of accumulated other comprehensive income (loss), net
of tax.
Comprehensive Income (Loss)
The components of comprehensive
income (loss) were as follows:
|
|
|
Year Ended December 31,
|
|
|
|
|
2016
|
|
|
|
2015
|
|
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
83,765
|
|
|
$
|
93,482
|
|
|
$
|
104,243
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in net unrealized investment gains and losses on fixed maturities
and equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized investment gains and losses on fixed maturities and
equity securities arising during the period
|
|
|
6,144
|
|
|
|
(178,035
|
)
|
|
|
264,136
|
|
Less: reclassification adjustment for net gains included in income
before income tax
|
|
|
5,176
|
|
|
|
11,667
|
|
|
|
10,943
|
|
Total, before tax
|
|
|
968
|
|
|
|
(189,702
|
)
|
|
|
253,193
|
|
Income tax expense (benefit)
|
|
|
397
|
|
|
|
(67,315
|
)
|
|
|
89,629
|
|
Total, net of tax
|
|
|
571
|
|
|
|
(122,387
|
)
|
|
|
163,564
|
|
Change in net funded status of benefit plan obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Before tax
|
|
|
(37
|
)
|
|
|
1,815
|
|
|
|
(1,810
|
)
|
Income tax expense (benefit)
|
|
|
(14
|
)
|
|
|
656
|
|
|
|
(633
|
)
|
Total, net of tax
|
|
|
(23
|
)
|
|
|
1,159
|
|
|
|
(1,177
|
)
|
Total comprehensive income (loss)
|
|
$
|
84,313
|
|
|
$
|
(27,746
|
)
|
|
$
|
266,630
|
|
NOTE 1 - Summary of Significant Accounting Policies-(Continued)
Accumulated Other Comprehensive
Income (Loss)
The following table reconciles
the components of accumulated other comprehensive income (loss) for the periods indicated.
|
|
Unrealized
|
|
|
|
|
|
|
|
|
|
|
|
Gains
and
|
|
|
|
|
|
|
|
|
|
|
|
Losses
on
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
Maturities
|
|
|
|
|
|
|
|
|
|
|
|
and
Equity
|
|
|
|
Defined
|
|
|
|
|
|
|
|
Securities
(1)(2)
|
|
|
|
Benefit
Plans (1)
|
|
|
|
Total
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance, January 1,
2016
|
|
$
|
175,167
|
|
|
|
$
|
(11,794
|
)
|
|
|
$
|
163,373
|
|
Other comprehensive income (loss) before reclassifications
|
|
|
3,935
|
|
|
|
|
(23
|
)
|
|
|
|
3,912
|
|
Amounts
reclassified from accumulated other comprehensive income (loss)
|
|
|
(3,364
|
)
|
|
|
|
-
|
|
|
|
|
(3,364
|
)
|
Net current period other
comprehensive income (loss)
|
|
|
571
|
|
|
|
|
(23
|
)
|
|
|
|
548
|
|
Ending balance, December 31, 2016
|
|
$
|
175,738
|
|
|
|
$
|
(11,817
|
)
|
|
|
$
|
163,921
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance, January 1, 2015
|
|
$
|
297,554
|
|
|
|
$
|
(12,953
|
)
|
|
|
$
|
284,601
|
|
Other comprehensive income (loss) before reclassifications
|
|
|
(114,803
|
)
|
|
|
|
1,159
|
|
|
|
|
(113,644
|
)
|
Amounts
reclassified from accumulated other comprehensive income (loss)
|
|
|
(7,584
|
)
|
|
|
|
-
|
|
|
|
|
(7,584
|
)
|
Net current period other
comprehensive income (loss)
|
|
|
(122,387
|
)
|
|
|
|
1,159
|
|
|
|
|
(121,228
|
)
|
Ending balance, December 31, 2015
|
|
$
|
175,167
|
|
|
|
$
|
(11,794
|
)
|
|
|
$
|
163,373
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance, January 1, 2014
|
|
$
|
133,990
|
|
|
|
$
|
(11,776
|
)
|
|
|
$
|
122,214
|
|
Other comprehensive income (loss) before reclassifications
|
|
|
170,677
|
|
|
|
|
(1,177
|
)
|
|
|
|
169,500
|
|
Amounts
reclassified from accumulated other comprehensive income (loss)
|
|
|
(7,113
|
)
|
|
|
|
-
|
|
|
|
|
(7,113
|
)
|
Net current period other
comprehensive income (loss)
|
|
|
163,564
|
|
|
|
|
(1,177
|
)
|
|
|
|
162,387
|
|
Ending balance, December 31, 2014
|
|
$
|
297,554
|
|
|
|
$
|
(12,953
|
)
|
|
|
$
|
284,601
|
|
|
(1)
|
All amounts are net of tax.
|
|
(2)
|
The pretax amounts reclassified from accumulated other comprehensive
income, $5,176, $11,667 and $10,943, are included in net realized investment gains and losses and the related tax expenses, $1,812,
$4,083 and $3,830, are included in income tax expense in the Consolidated Statements of Operations for the years ended December
31, 2016, 2015 and 2014, respectively.
|
Comparative information for elements
that are not required to be reclassified in their entirety to net income in the same reporting period is located in “Note
2 — Investments — Unrealized Gains and Losses on Fixed Maturities and Equity Securities”.
Statements of Cash Flows
For purposes of the Consolidated
Statements of Cash Flows, cash constitutes cash on deposit at banks.
Reclassification and Retrospective
Adoption
The Company has reclassified the
presentation of certain prior period information to conform to the current year’s presentation.
NOTE 1 - Summary of Significant Accounting Policies-(Continued)
Adopted Accounting Standards
Disclosures About Short-Duration Insurance
Contracts
Effective December 31, 2016, the
Company adopted accounting guidance which requires expanded disclosure regarding claims on short-duration insurance contracts,
which applies primarily to the contracts in the Company’s Property and Casualty segment.
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.
Pending Accounting Standards
Simplifying the Test for Goodwill
Impairment
In January 2017, the Financial
Accounting Standards Board (“FASB”) issued guidance to simplify the accounting for goodwill impairment. The guidance
removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment
will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount
of goodwill. All other goodwill impairment guidance will remain largely unchanged. Entities will continue to have the option to
perform a qualitative assessment to determine if a quantitative impairment test is necessary. The same one-step impairment test
will be applied to goodwill at all reporting units, even those with zero or negative carrying amounts. Entities will be required
to disclose the amount of goodwill for reporting units with zero or negative carrying amounts. Public business entities should
adopt the guidance prospectively for its annual or any interim goodwill impairment tests in fiscal years beginning after December
15, 2019. Early application is permitted. Management believes the adoption of this accounting guidance will not have a material
effect on how it tests goodwill for impairment.
NOTE 1 - Summary of Significant Accounting Policies-(Continued)
Statement of Cash Flows — Classification
In August 2016, the FASB issued
guidance to reduce diversity in practice in the statement of cash flows between operating, investing and financing activities related
to the classification of cash receipts and cash payments for eight specific issues. The FASB acknowledged that current GAAP either
is unclear or does not include specific guidance on these eight cash flow classification issues: (1) debt prepayment or extinguishment
costs; (2) settlement of zero-coupon bonds (pertains to issuers); (3) contingent consideration payments made after a business combination;
(4) proceeds from the settlement of insurance claims (pertains to claimants); (5) proceeds from the settlement of corporate-owned
life insurance policies; (6) distributions received from equity method investees; (7) beneficial interests in securitization transactions
(pertains to transferors) and (8) separately identifiable cash flows and application of the predominance principle. For public
business entities, the guidance is effective for annual reporting periods beginning after December 15, 2017, including interim
periods within those years, using a retrospective approach. The guidance allows prospective adoption for individual issues if it
is impracticable to apply the amendments retrospectively for those issues. Early application is permitted. Management believes
the adoption of this accounting guidance will not have a material effect on the classifications in the Company’s consolidated
statement of cash flows. The adoption of this accounting guidance will not have any effect on the results of operations or financial
position of the Company.
Measurement of Credit Losses on
Financial Instruments
In June 2016, the FASB issued guidance
to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments, including
reinsurance receivables, held by companies. The new guidance replaces the incurred loss impairment methodology and requires an
organization to measure and recognize all current expected credit losses (“CECL”) for financial assets held at the
reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Companies will need
to utilize forward-looking information to better inform their credit loss estimates. Companies will continue to use judgment to
determine which loss estimation method is appropriate for their circumstances. Credit losses related to available for sale debt
securities — which represent over 90% of Horace Mann’s total investment portfolio — will be recorded through an allowance
for credit losses with this allowance having a limit equal to the amount by which fair value is below amortized cost. The guidance
also requires enhanced qualitative and quantitative disclosures to provide additional information about the amounts recorded in
the financial statements. For public business entities that are SEC filers, the guidance is effective for annual reporting periods
beginning after December 15, 2019, including interim periods within those years, using a modified-retrospective approach. Early
application is permitted for annual reporting periods, and interim periods within those years, beginning after December 15, 2018.
Management is evaluating the impact this guidance will have on the results of operations and financial position of the Company.
NOTE 1 - Summary of Significant Accounting Policies-(Continued)
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 a 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.
NOTE 1 - Summary of Significant Accounting Policies-(Continued)
Recognition and Measurement of
Financial Assets and Liabilities
In January 2016, the FASB issued
accounting guidance to improve certain aspects of the recognition, measurement, presentation and disclosure of financial instruments.
Among other things, this guidance requires public entities to measure equity investments (except those accounted for under the
equity method of accounting or those that result in consolidation of the investee) at fair value with changes in fair value recognized
in net income and to perform a qualitative assessment to identify impairment for equity investments without readily determinable
fair values. Companies are required to apply this guidance by means of a cumulative-effect adjustment to the balance sheet as of
the beginning of the year of adoption and, for the guidance related to equity securities without readily determinable fair values,
companies are required to apply a prospective approach to equity investments that exist as of the date of adoption. The guidance
is effective for annual reporting periods beginning after December 15, 2017, including interim periods within those years. Early
application is permitted. The guidance will not have an impact on the Company’s financial position and management is evaluating
the impact that this guidance will have on the Company’s results of operations.
Revenue Recognition
In May 2014, the FASB issued accounting
guidance to provide a single comprehensive model in accounting for revenue arising from contracts with customers. The guidance
applies to all contracts with customers; however, insurance contracts are specifically excluded from this updated guidance. The
guidance is effective for annual reporting periods beginning after December 15, 2017, including interim periods within those years.
Early adoption is permitted only for annual reporting periods beginning after December 15, 2016. The Company plans to adopt the
guidance as of January 1, 2018. Management believes the adoption of this accounting guidance will not have a material effect on
the results of operations or financial position, and related disclosures, of the Company.
NOTE 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”. The Company's investment portfolio included
no other free-standing derivative financial instruments (futures, forwards, swaps, option contracts or other financial instruments
with similar characteristics), and there were no other embedded derivative features related to the Company’s insurance products
during the three years ended December 31, 2016.
Net Investment Income
The components of net investment
income for the following periods were:
|
|
Year Ended December 31,
|
|
|
|
|
2016
|
|
|
|
|
2015
|
|
|
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities
|
|
$
|
342,773
|
|
|
$
|
326,207
|
|
|
$
|
317,756
|
|
Equity securities
|
|
|
4,703
|
|
|
|
4,355
|
|
|
|
4,849
|
|
Short-term and other investments
|
|
|
9,668
|
|
|
|
9,187
|
|
|
|
8,459
|
|
Other invested assets (equity method investments)
|
|
|
13,609
|
|
|
|
1,984
|
|
|
|
7,229
|
|
Total investment income
|
|
|
370,753
|
|
|
|
341,733
|
|
|
|
338,293
|
|
Investment expenses
|
|
|
(9,567
|
)
|
|
|
(9,133
|
)
|
|
|
(8,478
|
)
|
Net investment income
|
|
$
|
361,186
|
|
|
$
|
332,600
|
|
|
$
|
329,815
|
|
Realized Investment Gains (Losses)
Net realized investment gains (losses)
for the following periods were:
|
|
Year Ended December 31,
|
|
|
|
|
2016
|
|
|
|
|
2015
|
|
|
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities
|
|
$
|
5,784
|
|
|
$
|
10,289
|
|
|
$
|
8,150
|
|
Equity securities
|
|
|
(608
|
)
|
|
|
1,378
|
|
|
|
2,793
|
|
Short-term investments and other
|
|
|
(1,053
|
)
|
|
|
1,046
|
|
|
|
(26
|
)
|
Net realized investment gains
|
|
$
|
4,123
|
|
|
$
|
12,713
|
|
|
$
|
10,917
|
|
The Company, from time to time,
sells invested assets 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 or ability to hold an invested asset. The types of events that may result in a sale include significant changes in the economic
facts and circumstances related to the invested asset, significant unforeseen changes in liquidity needs, or changes in the Company’s
investment strategy.
NOTE 2 - Investments-(Continued)
Fixed Maturities and Equity Securities
The Company’s investment
portfolio is comprised primarily of fixed maturity securities and also includes equity securities. The amortized cost or cost,
net unrealized investment gains and losses, fair values and other-than-temporary impairment 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)
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
maturity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Government and federally sponsored agency obligations (2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed
securities
|
|
$
|
412,891
|
|
|
$
|
33,168
|
|
|
$
|
3,640
|
|
|
$
|
442,419
|
|
|
$
|
-
|
|
Other,
including
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury securities
|
|
|
458,745
|
|
|
|
18,518
|
|
|
|
10,120
|
|
|
|
467,143
|
|
|
|
-
|
|
Municipal
bonds
|
|
|
1,648,252
|
|
|
|
143,733
|
|
|
|
22,588
|
|
|
|
1,769,397
|
|
|
|
-
|
|
Foreign
government bonds
|
|
|
93,864
|
|
|
|
5,102
|
|
|
|
297
|
|
|
|
98,669
|
|
|
|
-
|
|
Corporate
bonds
|
|
|
2,672,818
|
|
|
|
152,229
|
|
|
|
14,826
|
|
|
|
2,810,221
|
|
|
|
-
|
|
Other
mortgage-backed securities
|
|
|
1,865,557
|
|
|
|
22,241
|
|
|
|
18,939
|
|
|
|
1,868,859
|
|
|
|
1,618
|
|
Totals
|
|
$
|
7,152,127
|
|
|
$
|
374,991
|
|
|
$
|
70,410
|
|
|
$
|
7,456,708
|
|
|
$
|
1,618
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
securities (3)
|
|
$
|
134,013
|
|
|
$
|
13,210
|
|
|
$
|
5,574
|
|
|
$
|
141,649
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 net unrealized investment gains and losses on such impaired securities relating to changes in
the fair value of those securities subsequent to the impairment measurement date.
|
|
(2)
|
Fair value includes securities issued by Federal National Mortgage Association (“FNMA”) of $196,468 and $231,294;
Federal Home Loan Mortgage Corporation (“FHLMC”) of $284,050 and $363,957; and Government National Mortgage Association
(“GNMA”) of $115,627 and $130,940 as of December 31, 2016 and 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 December 31,
2016 and 2015, respectively. The Company views the decrease in value of all of the securities with unrealized losses at December
31, 2016 — which was driven largely by changes in interest rates, spread widening, financial market illiquidity and/or market
volatility from the date of acquisition — as temporary. For fixed maturity securities, management does not have the intent to
sell the securities and it is not more likely than not the Company will be required to sell the securities before the anticipated
recovery of the amortized cost bases, and management expects to recover the entire amortized cost bases of the fixed maturity securities.
For equity securities, the Company has the ability and intent to hold the securities for the recovery of cost and recovery of cost
is expected within a reasonable period of time. Therefore, no impairment of these securities was recorded at December 31, 2016.
|
|
12 months or less
|
|
|
More than 12 months
|
|
|
Total
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
Unrealized
|
|
|
|
Fair Value
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and federally
sponsored agency obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
|
$
|
76,573
|
|
|
$
|
3,096
|
|
|
$
|
3,235
|
|
|
$
|
544
|
|
|
$
|
79,808
|
|
|
$
|
3,640
|
|
Other
|
|
|
219,372
|
|
|
|
10,120
|
|
|
|
-
|
|
|
|
-
|
|
|
|
219,372
|
|
|
|
10,120
|
|
Municipal bonds
|
|
|
408,163
|
|
|
|
19,006
|
|
|
|
9,928
|
|
|
|
3,582
|
|
|
|
418,091
|
|
|
|
22,588
|
|
Foreign government bonds
|
|
|
24,182
|
|
|
|
297
|
|
|
|
-
|
|
|
|
-
|
|
|
|
24,182
|
|
|
|
297
|
|
Corporate bonds
|
|
|
459,402
|
|
|
|
11,056
|
|
|
|
57,261
|
|
|
|
3,770
|
|
|
|
516,663
|
|
|
|
14,826
|
|
Other mortgage-backed securities
|
|
|
750,557
|
|
|
|
13,550
|
|
|
|
229,106
|
|
|
|
5,389
|
|
|
|
979,663
|
|
|
|
18,939
|
|
Total fixed
maturity securities
|
|
|
1,938,249
|
|
|
|
57,125
|
|
|
|
299,530
|
|
|
|
13,285
|
|
|
|
2,237,779
|
|
|
|
70,410
|
|
Equity securities (1)
|
|
|
56,676
|
|
|
|
4,567
|
|
|
|
7,956
|
|
|
|
1,007
|
|
|
|
64,632
|
|
|
|
5,574
|
|
Combined totals
|
|
$
|
1,994,925
|
|
|
$
|
61,692
|
|
|
$
|
307,486
|
|
|
$
|
14,292
|
|
|
$
|
2,302,411
|
|
|
$
|
75,984
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of positions with a
gross unrealized loss
|
|
|
629
|
|
|
|
|
|
|
|
102
|
|
|
|
|
|
|
|
731
|
|
|
|
|
|
Fair value as a percentage of
total fixed maturities and
equity securities fair value
|
|
|
26.3
|
%
|
|
|
|
|
|
|
4.0
|
%
|
|
|
|
|
|
|
30.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 88% of the gross unrealized loss as of December 31, 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 December 31, 2016 and 2015 that the Company did not intend to sell as of those dates, and it was
not more likely than not that the Company would be required to sell the securities before the anticipated recovery of the amortized
cost bases, for which the non-credit portions of the other-than-temporary impairment losses were recognized in other comprehensive
income (loss):
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Cumulative credit loss (1)
|
|
|
|
|
|
|
|
|
Beginning of period
|
|
$
|
7,844
|
|
|
$
|
2,877
|
|
New credit losses
|
|
|
300
|
|
|
|
4,967
|
|
Increases to previously recognized credit losses
|
|
|
5,859
|
|
|
|
-
|
|
Losses related to securities sold or paid down during the period
|
|
|
(300
|
)
|
|
|
-
|
|
End of period
|
|
$
|
13,703
|
|
|
$
|
7,844
|
|
|
(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.
|
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.
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
Percent of
|
|
|
Amortized
|
|
|
Fair
|
|
|
Total Fair
|
|
|
Cost
|
|
|
Value
|
|
|
Value
|
Estimated expected maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Due in 1 year or less
|
|
$
|
276,403
|
|
|
$
|
290,811
|
|
|
|
3.9
|
%
|
Due after 1 year through 5 years
|
|
|
2,051,674
|
|
|
|
2,140,074
|
|
|
|
28.7
|
%
|
Due after 5 years through 10 years
|
|
|
2,518,896
|
|
|
|
2,624,759
|
|
|
|
35.2
|
%
|
Due after 10 years through 20 years
|
|
|
1,397,499
|
|
|
|
1,454,057
|
|
|
|
19.5
|
%
|
Due after 20 years
|
|
|
907,655
|
|
|
|
947,007
|
|
|
|
12.7
|
%
|
Total
|
|
$
|
7,152,127
|
|
|
$
|
7,456,708
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average option-adjusted duration, in years
|
|
|
5.9
|
|
|
|
|
|
|
|
|
|
NOTE 2 - Investments-(Continued)
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 year were:
|
|
Year
Ended December 31,
|
|
|
|
|
2016
|
|
|
|
2015
|
|
|
|
2014
|
|
Fixed maturity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
received
|
|
$
|
429,251
|
|
|
$
|
445,100
|
|
|
$
|
261,696
|
|
Gross gains realized
|
|
|
15,915
|
|
|
|
22,476
|
|
|
|
13,224
|
|
Gross losses realized
|
|
|
(4,163
|
)
|
|
|
(5,487
|
)
|
|
|
(6,325
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds received
|
|
$
|
21,210
|
|
|
$
|
31,621
|
|
|
$
|
17,194
|
|
Gross gains realized
|
|
|
2,869
|
|
|
|
6,604
|
|
|
|
3,206
|
|
Gross losses realized
|
|
|
(935
|
)
|
|
|
(672
|
)
|
|
|
(482
|
)
|
Net Unrealized Investment
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:
|
|
Year
Ended December 31,
|
|
|
|
|
2016
|
|
|
|
2015
|
|
|
|
2014
|
|
Net
unrealized investment gains and losses on fixed maturity securities, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
of period
|
|
$
|
198,714
|
|
|
$
|
336,604
|
|
|
$
|
146,489
|
|
Change in unrealized
investment gains and losses
|
|
|
3,024
|
|
|
|
(131,202
|
)
|
|
|
195,413
|
|
Reclassification
of net realized investment (gains) losses to net income
|
|
|
(3,760
|
)
|
|
|
(6,688
|
)
|
|
|
(5,298
|
)
|
End
of period
|
|
$
|
197,978
|
|
|
$
|
198,714
|
|
|
$
|
336,604
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
unrealized investment gains and losses on equity securities, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of
period
|
|
$
|
2,649
|
|
|
$
|
6,988
|
|
|
$
|
4,618
|
|
Change in unrealized
investment gains and losses
|
|
|
1,919
|
|
|
|
(3,443
|
)
|
|
|
4,185
|
|
Reclassification
of net realized investment (gains) losses to net income
|
|
|
395
|
|
|
|
(896
|
)
|
|
|
(1,815
|
)
|
End
of period
|
|
$
|
4,963
|
|
|
$
|
2,649
|
|
|
$
|
6,988
|
|
Investment in Entities Exceeding
10% of Shareholders' Equity
At December 31, 2016 and 2015,
there were no investments which exceeded 10% of total shareholders' equity in entities other than obligations of the U.S. Government
and federally sponsored government agencies and authorities.
NOTE 2 - Investments-(Continued)
Offsetting of Assets
and Liabilities
The Company’s derivative
instruments (call options) are subject to enforceable master netting arrangements. Collateral support agreements associated with
each master netting arrangement provide that the Company will receive or pledge financial collateral in the event minimum thresholds
have been reached.
The following table presents
the instruments that were subject to a master netting arrangement for the Company.
|
|
|
|
|
|
|
|
Net Amounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of Assets/
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Liabilities
|
|
|
Gross Amounts Not Offset
|
|
|
|
|
|
|
|
|
Amounts
|
|
|
Presented
|
|
|
in the Consolidated
|
|
|
|
|
|
|
|
|
Offset in the
|
|
|
in the
|
|
|
Balance Sheets
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
Consolidated
|
|
|
|
|
Cash
|
|
|
|
|
|
Gross
|
|
|
Balance
|
|
|
Balance
|
|
|
Financial
|
|
Collateral
|
|
Net
|
|
|
Amounts
|
|
|
Sheets
|
|
|
Sheets
|
|
|
Instruments
|
|
Received
|
|
Amount
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Free-standing derivatives
|
|
$
|
8,694
|
|
|
$
|
-
|
|
|
$
|
8,694
|
|
|
$
|
-
|
|
|
$
|
8,824
|
|
|
$
|
(130
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Free-standing derivatives
|
|
|
2,501
|
|
|
|
-
|
|
|
|
2,501
|
|
|
|
-
|
|
|
|
2,617
|
|
|
|
(116
|
)
|
Deposits
At December 31, 2016 and
2015, fixed maturity securities with a fair value of $18,119 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 December 31,
2016 and 2015, fixed maturity securities with a fair value of $620,489 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.
Fair value is defined as
the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most
advantageous market for the asset or liability in an orderly transaction between knowledgeable, unrelated and willing market participants
on the measurement date. In determining fair value, the Company utilizes valuation techniques that maximize the use of observable
inputs and minimize the use of unobservable inputs. The Company categorizes its financial and nonfinancial assets and liabilities
into a three-level hierarchy based on the priority of the inputs to the valuation technique. The three levels of inputs that may
be used to measure fair value are:
Level 1
|
Unadjusted quoted prices in active markets for identical assets or liabilities. Level 1 assets and liabilities include fixed maturity and equity securities (both common stock and preferred stock) that are traded in an active exchange market, as well as U.S. Treasury securities.
|
|
|
Level 2
|
Unadjusted observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for the assets or liabilities. Level 2 assets and liabilities include fixed maturity securities (1) with quoted prices that are traded less frequently than exchange-traded instruments or (2) values based on discounted cash flows with observable inputs. This category generally includes certain U.S. Government and agency mortgage-backed securities, non-agency structured securities, corporate fixed maturity securities, preferred stocks and derivative securities.
|
|
|
Level 3
|
Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, certain discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation and for which the significant inputs are unobservable. This category generally includes certain private debt and equity investments, as well as embedded derivatives.
|
When the inputs used to
measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized
is based on the lowest level input that is significant to the fair value measurement in its entirety. As a result, a Level 3 fair
value measurement may include inputs that are observable (Level 1 or Level 2) and unobservable (Level 3). Net transfers into or
out of each of the three levels are reported as having occurred at the end of the reporting period in which the transfers were
determined.
NOTE 3 - Fair Value of Financial Instruments-(Continued)
The following discussion
describes the valuation methodologies used for financial assets and financial liabilities measured at fair value. The techniques
utilized in estimating the fair values are affected by the assumptions used, including discount rates and estimates of the amount
and timing of future cash flows. The use of different methodologies, assumptions and inputs may have a material effect on the estimated
fair values of the Company’s securities holdings. Care should be exercised in deriving conclusions about the Company’s
business, its value or financial position based on the fair value information of financial and nonfinancial assets and liabilities
presented below.
Fair value estimates are
made at a specific point in time, based on available market information and judgments about the financial asset or financial liability,
including estimates of timing, amount of expected future cash flows and the credit standing of the issuer. In some cases, the fair
value estimates cannot be substantiated by comparison to independent markets. In addition, the disclosed fair value may not be
realized in the immediate settlement of the financial asset or financial liability. The disclosed fair values do not reflect any
premium or discount that could result from offering for sale at one time an entire holding of a particular financial asset or financial
liability. In periods of market disruption, the ability to observe prices and inputs may be reduced for many instruments. This
condition could cause an instrument to be reclassified from Level 1 to Level 2 or from Level 2 to Level 3. Potential taxes and
other expenses that would be incurred in an actual sale or settlement are not reflected in amounts disclosed.
Investments
For fixed maturity securities,
each month the Company obtains fair value prices from its investment managers and custodian bank. Fair values for the Company’s
fixed maturity securities are based primarily on prices provided by its investment managers as well as its custodian bank for certain
securities. The prices from the custodian bank are compared to prices from the investment managers. Differences in prices between
the sources that the Company considers significant are researched and the Company utilizes the price that it considers most representative
of an exit price. Both the investment managers and the custodian bank use a variety of independent, nationally recognized pricing
sources to determine market valuations. Each designate specific pricing services or indexes for each sector of the market based
upon the provider’s expertise. Typical inputs used by these pricing sources include, but are not limited to, reported trades,
benchmark yield curves, benchmarking of like securities, ratings designations, sector groupings, issuer spreads, bids, offers,
and/or estimated cash flows and prepayment speeds.
When the pricing sources
cannot provide fair value determinations, the Company obtains non-binding price quotes from broker-dealers. The broker-dealers’
valuation methodology is sometimes matrix-based, using indicative evaluation measures and adjustments for specific security characteristics
and market sentiment. The market inputs utilized in the evaluation measures and adjustments include: benchmark yield curves, reported
trades, broker/dealer quotes, ratings and corresponding issuer spreads, two-sided markets, benchmark securities, bids, offers,
reference data, and industry and economic events. The extent of the use of each market input depends on the market sector and the
market conditions. Depending on the security, the priority of the use of inputs may change or some market inputs may not be relevant.
For some securities, additional inputs may be necessary.
NOTE 3 - Fair Value of Financial Instruments-(Continued)
The Company analyzes price
and market valuations received to verify reasonableness, to understand the key assumptions used and their sources, to conclude
the prices obtained are appropriate, and to determine an appropriate fair value hierarchy level based upon trading activity and
the observability of market inputs. Based on this evaluation and investment class analysis, each security is classified into Level
1, 2, or 3. The Company has in place certain control processes to determine the reasonableness of the financial asset fair values.
These processes are designed to ensure (1) the values received are reasonable and accurately recorded, (2) the data inputs and
valuation techniques utilized are appropriate and consistently applied, and (3) the assumptions are reasonable and consistent with
the objective of determining fair value. For example, on a continuing basis, the Company assesses the reasonableness of individual
security values received from pricing sources that vary from certain thresholds.
The Company’s fixed
maturity securities portfolio is primarily publicly traded, which allows for a high percentage of the portfolio to be priced through
pricing services. Approximately 90% of the portfolio, based on fair value, was priced through pricing services or index priced
as of both December 31, 2016 and 2015. The remainder of the portfolio was priced by broker-dealers or pricing models. When non-binding
broker-dealer quotes could be corroborated by comparison to other vendor quotes, pricing models or analyses, the securities were
generally classified as Level 2, otherwise they were classified as Level 3. There were no significant changes to the valuation
process during 2016.
At December 31, 2016, all
of the equity securities portfolio was priced from observable market quotations. Fair values of equity securities have been determined
by the Company from observable market quotations, when available. When a public quotation is not available, equity securities are
valued by using non-binding broker quotes or through the use of pricing models or analyses that are based on market information
regarding interest rates, credit spreads and liquidity. The underlying source data for calculating the matrix of credit spreads
relative to the U.S. Treasury curve are nationally recognized indices. In addition, credit rating (or credit quality equivalent
information) of securities is also factored into a pricing matrix. These inputs are based on assumptions deemed appropriate given
the circumstances and are believed to be consistent with what other market participants would use when pricing such securities.
There were no significant changes to the valuation process in 2016.
Short-term and other investments
are comprised of short-term fixed maturity securities, derivative instruments (all call options), policy loans, mortgage loans,
and restricted FHLB membership and activity stocks, as well as certain alternative investments which are accounted for using the
equity method and therefore excluded from the fair value tabular disclosures.
NOTE 3 - Fair Value of Financial Instruments-(Continued)
In summary, the following
investments are carried at fair value:
|
·
|
Fixed
maturity securities, as described above.
|
|
·
|
Equity securities, as described above.
|
|
·
|
Short-term fixed maturity securities —
Because of the nature of these assets, carrying amounts generally approximate fair values.
|
|
·
|
Derivative instruments, all call options
— Fair values are based on the amount of cash expected to be received to settle each derivative instrument on the reporting
date. These amounts are obtained from each of the counterparties using industry accepted valuation models and observable inputs.
Significant inputs include contractual terms, underlying index prices, market volatilities, interest rates and dividend yields.
|
|
·
|
FHLB membership and activity stocks —
Fair value is based on redemption value, which is equal to par value.
|
The following investments
are not carried at fair value; disclosure is provided:
|
·
|
Policy loans — Fair value is based
on estimates using discounted cash flow analysis and current interest rates being offered for new loans.
|
|
·
|
Mortgage loans — Fair value is estimated
by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit
ratings and the same remaining maturities.
|
Investment Contract
and Life Policy Reserves
The fair values of fixed
annuity contract liabilities and policyholder account balances on life contracts are equal to the discounted estimated future cash
flows (using the Company's current interest rates for similar products including consideration of minimum guaranteed interest rates).
The Company carries these financial liabilities at cost.
Also included in investment
contract and life policy reserves are embedded derivatives related to the Company’s indexed universal life product, which
was introduced in October 2015. The fair value of these embedded derivatives is estimated to be equal to the fair value of the
current call options purchased to hedge the liability. The Company carries these embedded derivatives at fair value.
NOTE 3 - Fair Value of Financial Instruments-(Continued)
Other Policyholder Funds
Other policyholder funds
are liabilities related to supplementary contracts without life contingencies and dividend accumulations, as well as balances outstanding
under funding agreements with the FHLB and embedded derivatives related to fixed indexed annuities (“FIA”). Except
for embedded derivatives, each of these components is carried at cost, which management believes is a reasonable estimate of fair
value due to the relatively short duration of these items, based on the Company’s past experience.
The fair value of the embedded
derivatives, all related to the Company’s FIA products, is estimated at each valuation date by (1) projecting policy contract
values and minimum guaranteed contract values over the expected lives of the contracts and (2) discounting the excess of the projected
contract value amounts at the applicable risk free interest rates adjusted for the Company’s nonperformance risk related
to those liabilities. The projections of policy contract values are based on the Company’s best estimate assumptions for
future contract growth and decrements. The assumptions for future contract growth include the expected index credits which are
derived from the fair values of the underlying call options purchased to fund such index credits and the expected costs of annual
call options that will be purchased in the future to fund index credits beyond the next contract anniversary. Projections of minimum
guaranteed contract values include the same best estimate assumptions for contract decrements used to project policy contract values.
Long-term Debt
The Company carries long-term
debt at amortized cost. The fair value of long-term debt is estimated based on unadjusted quoted market prices of the Company’s
securities or unadjusted market prices based on similar publicly traded issues when trading activity for the Company’s securities
is not sufficient to provide a market price.
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 December 31, 2016, these Level 3 invested assets comprised approximately 2.7% of the Company’s total investment portfolio
fair value.
|
|
|
|
|
|
|
|
Fair Value Measurements
at
|
|
|
|
Carrying
|
|
|
Fair
|
|
|
Reporting
Date Using
|
|
|
|
Amount
|
|
|
Value
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Government and federally
sponsored
agency obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
|
$
|
442,419
|
|
|
$
|
442,419
|
|
|
$
|
-
|
|
|
$
|
439,004
|
|
|
$
|
3,415
|
|
Other, including
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities
|
|
|
467,143
|
|
|
|
467,143
|
|
|
|
13,631
|
|
|
|
453,512
|
|
|
|
-
|
|
Municipal bonds
|
|
|
1,769,397
|
|
|
|
1,769,397
|
|
|
|
-
|
|
|
|
1,722,900
|
|
|
|
46,497
|
|
Foreign government bonds
|
|
|
98,669
|
|
|
|
98,669
|
|
|
|
-
|
|
|
|
98,669
|
|
|
|
-
|
|
Corporate bonds
|
|
|
2,810,221
|
|
|
|
2,810,221
|
|
|
|
13,532
|
|
|
|
2,736,498
|
|
|
|
60,191
|
|
Other mortgage-backed securities
|
|
|
1,868,859
|
|
|
|
1,868,859
|
|
|
|
-
|
|
|
|
1,767,615
|
|
|
|
101,244
|
|
Total fixed maturities
|
|
|
7,456,708
|
|
|
|
7,456,708
|
|
|
|
27,163
|
|
|
|
7,218,198
|
|
|
|
211,347
|
|
Equity securities
|
|
|
141,649
|
|
|
|
141,649
|
|
|
|
98,632
|
|
|
|
43,011
|
|
|
|
6
|
|
Short-term investments
|
|
|
44,918
|
|
|
|
44,918
|
|
|
|
44,167
|
|
|
|
-
|
|
|
|
751
|
|
Other investments
|
|
|
20,194
|
|
|
|
20,194
|
|
|
|
-
|
|
|
|
20,194
|
|
|
|
-
|
|
Totals
|
|
|
7,663,469
|
|
|
|
7,663,469
|
|
|
|
169,962
|
|
|
|
7,281,403
|
|
|
|
212,104
|
|
Financial Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
contract and life policy
reserves,
embedded derivatives
|
|
|
158
|
|
|
|
158
|
|
|
|
-
|
|
|
|
158
|
|
|
|
-
|
|
Other
policyholder funds,
embedded
derivatives
|
|
|
59,393
|
|
|
|
59,393
|
|
|
|
-
|
|
|
|
-
|
|
|
|
59,393
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 other transfers between Levels 1 and 2 during the years ended December 31, 2016 and 2015. The following tables present reconciliations
for the periods indicated for all Level 3 assets and liabilities measured at fair value on a recurring basis.
|
|
|
|
|
Financial
|
|
|
|
Financial Assets
|
|
|
Liabilities(1)
|
|
|
|
Municipal
Bonds
|
|
|
|
Corporate
Bonds
|
|
|
|
Other
Mortgage-
Backed
Securities (2)
|
|
|
|
Total
Fixed
Maturities
|
|
|
|
Equity
Securities
|
|
|
|
Short-term
Investments
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance, January 1, 2016
|
|
$
|
30,379
|
|
|
|
$
|
67,575
|
|
|
|
$
|
75,466
|
|
|
|
$
|
173,420
|
|
|
|
$
|
6
|
|
|
|
$
|
-
|
|
|
|
$
|
173,426
|
|
|
$
|
39,021
|
|
Transfers into Level 3 (3)
|
|
|
17,710
|
|
|
|
|
27,561
|
|
|
|
|
39,128
|
|
|
|
|
84,399
|
|
|
|
|
-
|
|
|
|
|
751
|
|
|
|
|
85,150
|
|
|
|
-
|
|
Transfers out of Level 3 (3)
|
|
|
-
|
|
|
|
|
(14,334
|
)
|
|
|
|
(6,694
|
)
|
|
|
|
(21,028
|
)
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
(21,028
|
)
|
|
|
-
|
|
Total gains or losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
realized investment gains
(losses)
included in net
income
related to
financial
assets
|
|
|
-
|
|
|
|
|
(1,833
|
)
|
|
|
|
(56
|
)
|
|
|
|
(1,889
|
)
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
(1,889
|
)
|
|
|
-
|
|
Net
realized (gains) losses
included
in net income
related
to financial liabilities
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
5,011
|
|
Net
unrealized investment gains
(losses)
included in other
comprehensive
income
|
|
|
(990
|
)
|
|
|
|
(205
|
)
|
|
|
|
5,895
|
|
|
|
|
4,700
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
4,700
|
|
|
|
-
|
|
Purchases
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
-
|
|
Issuances
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
17,113
|
|
Sales
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
-
|
|
Settlements
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
-
|
|
Paydowns,
maturities and distributions
|
|
|
(602
|
)
|
|
|
|
(18,573
|
)
|
|
|
|
(9,080
|
)
|
|
|
|
(28,255
|
)
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
(28,255
|
)
|
|
|
(1,752
|
)
|
Ending balance, December 31, 2016
|
|
$
|
46,497
|
|
|
|
$
|
60,191
|
|
|
|
$
|
104,659
|
|
|
|
$
|
211,347
|
|
|
|
$
|
6
|
|
|
|
$
|
751
|
|
|
|
$
|
212,104
|
|
|
$
|
59,393
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance, January 1, 2015
|
|
$
|
13,628
|
|
|
|
$
|
74,717
|
|
|
|
$
|
82,949
|
|
|
|
$
|
171,294
|
|
|
|
$
|
6
|
|
|
|
$
|
-
|
|
|
|
$
|
171,300
|
|
|
$
|
20,049
|
|
Transfers into Level 3 (3)
|
|
|
16,326
|
|
|
|
|
5,729
|
|
|
|
|
15,685
|
|
|
|
|
37,740
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
37,740
|
|
|
|
-
|
|
Transfers out of Level 3 (3)
|
|
|
-
|
|
|
|
|
(1,351
|
)
|
|
|
|
(9,663
|
)
|
|
|
|
(11,014
|
)
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
(11,014
|
)
|
|
|
-
|
|
Total gains or losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
realized investment gains
(losses)
included in net
income
related to
financial
assets
|
|
|
-
|
|
|
|
|
1,087
|
|
|
|
|
-
|
|
|
|
|
1,087
|
|
|
|
|
(3
|
)
|
|
|
|
-
|
|
|
|
|
1,084
|
|
|
|
-
|
|
Net
realized (gains) losses
included
in net income
related
to financial liabilities
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
(2,528
|
)
|
Net
unrealized investment gains
(losses)
included in other
comprehensive
income
|
|
|
782
|
|
|
|
|
(1,935
|
)
|
|
|
|
(854
|
)
|
|
|
|
(2,007
|
)
|
|
|
|
4
|
|
|
|
|
-
|
|
|
|
|
(2,003
|
)
|
|
|
-
|
|
Purchases
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
-
|
|
Issuances
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
23,595
|
|
Sales
|
|
|
-
|
|
|
|
|
(476
|
)
|
|
|
|
-
|
|
|
|
|
(476
|
)
|
|
|
|
(1
|
)
|
|
|
|
-
|
|
|
|
|
(477
|
)
|
|
|
-
|
|
Settlements
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
-
|
|
Paydowns,
maturities and distributions
|
|
|
(357
|
)
|
|
|
|
(10,196
|
)
|
|
|
|
(12,651
|
)
|
|
|
|
(23,204
|
)
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
(23,204
|
)
|
|
|
(2,095
|
)
|
Ending balance, December 31, 2015
|
|
$
|
30,379
|
|
|
|
$
|
67,575
|
|
|
|
$
|
75,466
|
|
|
|
$
|
173,420
|
|
|
|
$
|
6
|
|
|
|
$
|
-
|
|
|
|
$
|
173,426
|
|
|
$
|
39,021
|
|
|
(1)
|
Represents embedded derivatives, all related to the Company’s
FIA products, reported in Other policyholder funds in the Company’s Consolidated Balance Sheets.
|
|
(2)
|
Includes U.S. Government and federally sponsored agency
obligations for mortgage-backed securities and other mortgage-backed securities.
|
|
(
3)
|
Transfers
into and out of Level 3 during the years ended December 31, 2016 and 2015 were attributable to changes in the availability of
observable market information for individual fixed maturity securities and short-term investments. The Company’s policy
is to recognize transfers into and transfers out of the levels as having occurred at the end of the reporting period in which
the transfers were determined.
|
At December 31, 2016, the
Company impaired a Level 3 security for a $1,833 realized loss. At December 31, 2015, there were no net realized investment gains
or losses included in earnings that were attributable to changes in the fair value of Level 3 assets still held. For the years
ended December 31, 2016 and 2015, realized gains/(losses) of ($5,011) and $2,528, respectively, were included in earnings that
were attributable to the changes in the fair value of Level 3 liabilities (embedded derivatives) still held.
NOTE 3 - Fair Value of Financial Instruments-(Continued)
The valuation techniques
and significant unobservable inputs used in the fair value measurement for financial assets classified as Level 3 are subject to
the control processes as previously described in this note for “Investments”. 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
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other investments
|
|
$
|
151,965
|
|
|
$
|
156,536
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
156,536
|
|
Financial Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment contract and life policy
reserves, fixed annuity
contracts
|
|
|
4,360,456
|
|
|
|
4,280,528
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,280,528
|
|
Investment contract and life policy
reserves, account values on
life contracts
|
|
|
79,591
|
|
|
|
85,066
|
|
|
|
-
|
|
|
|
-
|
|
|
|
85,066
|
|
Other policyholder funds
|
|
|
649,557
|
|
|
|
649,557
|
|
|
|
-
|
|
|
|
575,253
|
|
|
|
74,304
|
|
Long-term debt
|
|
|
247,209
|
|
|
|
248,191
|
|
|
|
248,191
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 and
losses, a component of revenues, in the Consolidated Statements of Operations.
The change in fair value
of derivatives includes the gains or losses recognized at the expiration of the option term or early termination and the changes
in fair value for open positions. Call options are not purchased to fund the index liabilities which may arise after the next deposit
anniversary date. On the respective anniversary dates of the indexed deposits, the index used to compute the annual index credit
is reset and new one-year call options are purchased to fund the next annual index credit. The cost of these purchases is managed
through the terms of the FIA and IUL contracts, which permit changes to index return caps, participation rates and/or asset fees,
subject to guaranteed minimums on each contract’s anniversary date. By adjusting the index return caps, participation rates
or asset fees, crediting rates generally can be managed except in cases where the contractual features would prevent further modifications.
The future annual index
credits on fixed indexed annuities are treated as a “series of embedded derivatives” over the expected life of the
applicable contract with a corresponding reserve recorded. For the indexed universal life contract, the embedded derivative represents
a single year liability for the index return.
The Company carries all
derivative instruments as assets or liabilities in the Consolidated Balance Sheets at fair value. The Company elected to not use
hedge accounting for derivative transactions related to the FIA and IUL products. As a result, the Company records the purchased
call options and the embedded 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:
|
|
December 31,
|
|
|
|
2016
|
|
2015
|
|
Assets
|
|
|
|
|
|
|
|
|
Derivative instruments, included in Short-term and other
investments
|
|
$
|
8,694
|
|
|
|
$
|
2,501
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
Fixed indexed annuities - embedded derivatives,
included in Other
policyholder funds
|
|
|
59,393
|
|
|
|
|
39,021
|
|
|
Indexed universal life - embedded derivatives,
included in Investment
contract and life policy reserves
|
|
|
158
|
|
|
|
|
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:
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Change in fair value of derivatives (1):
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized investment gains (losses)
|
|
$
|
4,024
|
|
|
$
|
(1,483
|
)
|
|
$
|
995
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value of embedded derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized investment gains (losses)
|
|
|
(5,076
|
)
|
|
|
2,529
|
|
|
|
(1,157
|
)
|
|
(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:
|
|
December
31, 2016
|
|
|
December
31, 2015
|
|
|
|
Credit
Rating (1)
|
|
Notional
|
|
|
Fair
|
|
|
|
Notional
|
|
|
|
Fair
|
|
Counterparty
|
|
S&P
|
|
Moody’s
|
|
Amount
|
|
|
Value
|
|
|
|
Amount
|
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank of America, N.A.
|
|
|
A+
|
|
|
A1
|
|
$
|
38,500
|
|
|
$
|
1,934
|
|
|
|
$
|
17,000
|
|
|
|
$
|
5
|
|
Barclays Bank PLC
|
|
|
A-
|
|
|
A1
|
|
|
66,800
|
|
|
|
1,543
|
|
|
|
|
7,600
|
|
|
|
|
137
|
|
Citigroup Inc.
|
|
|
BBB+
|
|
|
Baa1
|
|
|
-
|
|
|
|
-
|
|
|
|
|
17,300
|
|
|
|
|
845
|
|
Credit Suisse International
|
|
|
A
|
|
|
A1
|
|
|
65,200
|
|
|
|
4,281
|
|
|
|
|
12,000
|
|
|
|
|
167
|
|
Societe Generale
|
|
|
A
|
|
|
A2
|
|
|
15,600
|
|
|
|
936
|
|
|
|
|
80,800
|
|
|
|
|
1,347
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
$
|
186,100
|
|
|
$
|
8,694
|
|
|
|
$
|
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 December 31, 2016
and 2015, the Company held $8,824 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 - Property and Casualty Unpaid Claims
and Claim Expenses
The following table is
a summary reconciliation of the beginning and ending Property and Casualty unpaid claims and claim expense reserves for the periods
indicated. The table presents reserves on both gross and net (after reinsurance) bases. The total net Property and Casualty insurance
claims and claim expense incurred amounts are reflected in the Consolidated Statements of Operations. The end of the year gross
reserve (before reinsurance) balances and the reinsurance recoverable balances are reflected on a gross basis in the Consolidated
Balance Sheets.
|
|
Year
Ended December 31,
|
|
|
|
|
2016
|
|
|
|
|
2015
|
|
|
|
|
2014
|
|
|
Property and Casualty segment
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross reserves, beginning of year (1)
|
|
$
|
301,569
|
|
|
$
|
311,097
|
|
|
$
|
275,809
|
|
Less: reinsurance
recoverables
|
|
|
50,332
|
|
|
|
43,740
|
|
|
|
14,107
|
|
Net reserves, beginning
of year (2)
|
|
|
251,237
|
|
|
|
267,357
|
|
|
|
261,702
|
|
Incurred claims and claim expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Claims occurring in the current year
|
|
|
471,099
|
|
|
|
432,811
|
|
|
|
416,512
|
|
Decrease in estimated reserves for
|
|
|
|
|
|
|
|
|
|
|
|
|
claims occurring in
prior years (3)
|
|
|
(7,000
|
)
|
|
|
(12,500
|
)
|
|
|
(17,000
|
)
|
Total claims and claim
expenses incurred (4)
|
|
|
464,099
|
|
|
|
420,311
|
|
|
|
399,512
|
|
Claims and claim expense payments for claims
occurring during:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current year
|
|
|
323,025
|
|
|
|
294,449
|
|
|
|
273,699
|
|
Prior years
|
|
|
145,753
|
|
|
|
141,982
|
|
|
|
120,158
|
|
Total claims and claim
expense payments
|
|
|
468,778
|
|
|
|
436,431
|
|
|
|
393,857
|
|
Net reserves, end of year (2)
|
|
|
246,558
|
|
|
|
251,237
|
|
|
|
267,357
|
|
Plus: reinsurance
recoverables
|
|
|
61,199
|
|
|
|
50,332
|
|
|
|
43,740
|
|
Gross reserves, end
of year (1)
|
|
$
|
307,757
|
|
|
$
|
301,569
|
|
|
$
|
311,097
|
|
|
(1)
|
Unpaid claims and claim expenses as reported in the Consolidated
Balance Sheets also include reserves for the Life and Retirement segments of $22,131, $22,151 and $14,687 as of December 31, 2016,
2015 and 2014, respectively, in addition to Property and Casualty segment reserves.
|
|
(2)
|
Reserves net of anticipated reinsurance recoverables.
|
|
(3)
|
Shows the amounts by which the Company decreased its reserves
in each of the periods indicated for claims occurring in previous periods to reflect subsequent information on such claims and
changes in their projected final settlement costs. Also refer to the paragraphs below for additional information regarding the
reserve development recorded in 2016, 2015 and 2014.
|
|
(4)
|
Benefits, claims and settlement expenses as reported in
the Consolidated Statements of Operations also include amounts for the Life and Retirement segments of $76,905, $76,053 and $68,914
for the years ended December 31, 2016, 2015 and 2014, respectively, in addition to the Property and Casualty segment amounts.
|
NOTE 5 - Property and Casualty Unpaid Claims and Claim Expenses-(Continued)
Underwriting results of
the Property and Casualty segment are significantly influenced by estimates of the Company's ultimate liability for insured events.
There is a high degree of uncertainty inherent in the estimates of ultimate losses underlying the liability for unpaid claims and
claim settlement expenses. This inherent uncertainty is particularly significant for liability-related exposures due to the extended
period, often many years, that transpires between a loss event, receipt of related claims data from policyholders and ultimate
settlement of the claim. Reserves for Property and Casualty claims include provisions for payments to be made on reported claims
(“case reserves”), claims incurred but not yet reported (“IBNR”) and associated settlement expenses (together,
“loss reserves”). The process by which these reserves are established requires reliance upon estimates based on known
facts and on interpretations of circumstances, including the Company's experience with similar cases and historical trends involving
claim payments and related patterns, pending levels of unpaid claims and product mix, as well as other factors including court
decisions, economic conditions, public attitudes and medical costs.
The Company believes the
Property and Casualty loss reserves are appropriately established based on available facts, laws, and regulations. The Company
calculates and records a single best estimate of the reserve (which is equal to the actuarial point estimate) as of each balance
sheet date, for each line of business and its coverages for reported losses and for IBNR losses and as a result believes no other
estimate is better than the recorded amount. Due to uncertainties involved, the ultimate cost of losses may vary materially from
recorded amounts.
The Company continually
updates loss estimates using both quantitative and qualitative information from its reserving actuaries and information derived
from other sources. Adjustments may be required as information develops which varies from experience, or, in some cases, augments
data which previously were not considered sufficient for use in determining liabilities. The effects of these adjustments may be
significant and are charged or credited to income in the period in which the adjustments are made.
Numerous risk factors will
affect more than one product line. One of these factors is changes in claim department practices, including claim closure rates,
number of claims closed without payment, the use of third-party claim adjusters and the level of needed case reserve estimated
by the adjuster. Other risk factors include changes in claim frequency, changes in claim severity, regulatory and legislative actions,
court actions, changes in economic conditions and trends (e.g. medical costs, labor rates and the cost of materials), the occurrence
of unusually large or frequent catastrophic loss events, timeliness of claim reporting, the state in which the claim occurred and
degree of claimant fraud. The extent of the impact of a risk factor will also vary by coverages within a product line. Individual
risk factors are also subject to interactions with other risk factors within product line coverages.
While all product lines
are exposed to these risks, there are some loss types or product lines for which the financial effect will be more significant.
For instance, given the relatively large proportion (approximately 80% as of December 31, 2016) of the Company’s reserves
that are in the longer-tail automobile liability coverages, regulatory and court actions, changes in economic conditions and trends,
and medical costs could be expected to impact this product line more extensively than others.
NOTE 5 - Property and Casualty Unpaid Claims and Claim Expenses-(Continued)
Reserves are established
for claims as they occur for each line of business based on estimates of the ultimate cost to settle the claims. The actual loss
results are compared to prior estimates and differences are recorded as reestimates. The primary actuarial techniques (development
of paid loss dollars, development of reported loss dollars, methods based on expected loss ratios and methods utilizing frequency
and severity of claims) used to estimate reserves and provide for losses are applied to actual paid losses and reported losses
(paid losses plus individual case reserves set by claim adjusters) for an accident year to create an estimate of how losses are
likely to develop over time.
An accident year refers
to classifying claims based on the year in which the claim occurred. For estimating short-tail coverage reserves (e.g. homeowners
and automobile physical damage), which comprise approximately 15% of the Company’s total loss reserves as of December 31,
2016, the primary actuarial technique utilized is the development of paid loss dollars due to the relatively quick claim settlement
period. As it relates to estimating long-tail coverage reserves (primarily related to automobile liability), which comprise approximately
85% of the Company’s total loss reserves as of December 31, 2016, the primary actuarial technique utilized is the development
of reported loss dollars due to the relatively long claim settlement period.
In all of the loss estimation
techniques referred to above, a ratio (development factor) is calculated which compares current results to results in the prior
period for each accident year. Various development factors, based on historical results, are multiplied by the current experience
to estimate the development of losses of each accident year from the current time period into the next time period. The development
factors for the next time period for each accident year are compounded over the remaining calendar years to calculate an estimate
of ultimate losses for each accident year. Occasionally, unusual aberrations in loss patterns are caused by factors such as changes
in claim reporting, settlement patterns, unusually large losses, process changes, legal or regulatory environment changes, and
other influences. In these instances, analyses of alternate development factor selections are performed to evaluate the effect
of these factors, and actuarial judgment is applied to make appropriate development factor assumptions needed to develop a best
estimate of ultimate losses. Paid losses are then subtracted from estimated ultimate losses to determine the indicated loss reserves.
The difference between indicated reserves and recorded reserves is the amount of reserve reestimate.
Reserves are reestimated
quarterly. When new development factors are calculated from actual losses, and they differ from estimated development factors used
in previous reserve estimates, assumptions about losses and required reserves are revised based on the new development factors.
Changes to reserves are recorded in the period in which development factor changes result in reserve reestimates.
NOTE 5 - Property and Casualty Unpaid Claims and Claim Expenses-(Continued)
Claim count estimates are
also established for claims as they occur for each line of business based on estimates of the ultimate claim counts. (These counts
are derived by counting the number of claimants by insurance coverage.) The primary actuarial techniques (development of paid claim
counts, and development of reported claim counts) used to estimate ultimate claim counts are applied to actual paid claim counts
and reported claim counts (paid claims plus individual unpaid claims set by claim adjusters) for an accident year to create an
estimate of how claims are likely to develop over time. An accident year refers to classifying claims based on the year in which
the claim occurred. The ultimate claim count generally gives equal consideration to the results of the two actuarial techniques
described.
Occasionally, unusual aberrations
in claim reporting patterns or claims payment patterns may occur. In these instances, analyses of alternate development factor
selections are performed to evaluate the effect of these factors, and actuarial judgment is applied to make appropriate development
factor assumptions needed to develop a best estimate of ultimate claims.
See tables on the following
pages of Note 5 for details of the average annual percentage payout of incurred claims by age, also referred to as a history of
claims duration and tables illustrating the incurred and paid claims development information by accident year on a net basis for
the lines of Homeowners, Auto Liability, and Auto Physical Damage, which represents over 97% of the Company’s incurred losses
for 2016.
Numerous actuarial estimates
of the types described above are prepared each quarter to monitor losses for each line of business, including the line’s
individual coverages; for reported losses and IBNR. Often, several different estimates are prepared for each detailed component,
incorporating alternative analyses of changing claim settlement patterns and other influences on losses, from which the Company
selects the best estimate for each component, occasionally incorporating additional analyses and actuarial judgment, as described
above. These estimates also incorporate the historical impact of inflation into reserve estimates, the implicit assumption being
that a multi-year average development factor represents an adequate provision. Based on the Company’s review of these estimates,
as well as the review of the independent reserve studies, the best estimate of required reserves for each line of business, including
the line’s individual coverages, is determined by management and is recorded for each accident year, then the required reserves
for each component are summed to create the reserve balances carried on the Company’s Consolidated Balance Sheets.
Based on the Company’s
products and coverages, historical experience, and various actuarial methodologies used to develop reserve estimates, the Company
estimates that the potential variability of the Property and Casualty loss reserves within a reasonable probability of other possible
outcomes may be approximately plus or minus 6% of reserves, which equates to plus or minus approximately $10,000 of net income
as of December 31, 2016. Although this evaluation reflects the most likely outcomes, it is possible the final outcome may fall
below or above these estimates.
NOTE 5 - Property and Casualty Unpaid Claims and Claim Expenses-(Continued)
Net favorable development
of total reserves for Property and Casualty claims occurring in prior years was $17,000 in 2014, $12,500 in 2015 and $7,000 in
2016. The favorable development in 2014 was predominantly the result of favorable frequency and severity trends in automobile liability
loss emergence for accident years 2011 and prior. In 2015, the favorable development was predominantly the result of favorable
frequency and severity trends in automobile liability loss emergence for accident years 2013 and prior, as well as favorable severity
trends in property for accident years 2013 and prior. In 2016, the favorable development was predominantly the result of favorable
severity trends in property for accident years 2014 and prior.
The Company completes a
detailed study of Property and Casualty reserves based on information available at the end of each quarter and year. Trends of
reported losses (paid amounts and case reserves on claims reported to the Company) for each accident year are reviewed and ultimate
loss costs for those accident years are estimated. The Company engages an independent property and casualty actuarial consulting
firm to prepare an independent study of the Company's Property and Casualty reserves at December 31 of each year. The result of
the independent actuarial study at December 31, 2016 was consistent with management’s analysis and selected estimates and
did not result in any adjustments to the Company’s recorded Property and Casualty reserves.
At the time each of the
reserve analyses was performed, the Company believed that each estimate was based upon sound methodology and such methodologies
were appropriately applied and that there were no trends which indicated the likelihood of future loss reserve development. The
financial impact of the net reserve development was therefore accounted for in the period that the development was determined.
No other adjustments were
made in the determination of the liabilities during the periods covered by these consolidated financial statements. Management
believes that, based on data currently available, it has reasonably estimated the Company's ultimate losses.
Below is the average annual
percentage payout of incurred claims by age, also referred to as a history of claims duration:
Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance
|
Years
|
|
1
|
|
|
2
|
|
|
3
|
|
|
4
|
|
|
5
|
|
|
6
|
|
|
7
|
|
|
8
|
|
|
9
|
|
|
10
|
|
Homeowners
|
|
|
76.8
|
%
|
|
|
18.4
|
%
|
|
|
2.8
|
%
|
|
|
1.4
|
%
|
|
|
0.7
|
%
|
|
|
0.2
|
%
|
|
|
0.1
|
%
|
|
|
-
|
|
|
|
0.1
|
%
|
|
|
-
|
|
Auto liability
|
|
|
41.0
|
%
|
|
|
34.3
|
%
|
|
|
13.8
|
%
|
|
|
6.3
|
%
|
|
|
2.4
|
%
|
|
|
1.0
|
%
|
|
|
0.4
|
%
|
|
|
0.2
|
%
|
|
|
0.1
|
%
|
|
|
0.1
|
%
|
Auto physical damage
|
|
|
95.1
|
%
|
|
|
4.9
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
The
following tables illustrate the incurred and paid claims development by accident year on a net basis for the lines of homeowners,
auto liability and auto physical damage. Conditions and trends that have affected the development of these reserves in the past
will not necessarily recur in the future. It may not be appropriate to use this cumulative history in the projection of future
performance.
NOTE 5 - Property and Casualty Unpaid Claims
and Claim Expenses-(Continued)
Homeowners
|
|
|
|
Incurred Claims and Allocated Claim Adjustment Expense, Net of Reinsurance
|
|
|
|
Year Ended December 31,
|
|
As of December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
of Incurred-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
But-Not-Reported
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
Plus
|
|
|
Cumulative
|
|
Accident
|
|
Unaudited
|
|
|
Unaudited
|
|
|
Unaudited
|
|
|
Unaudited
|
|
|
Unaudited
|
|
|
Unaudited
|
|
|
Unaudited
|
|
|
Unaudited
|
|
|
Unaudited
|
|
|
Audited
|
|
|
Expected
Development
|
|
|
Number
of
|
|
Year
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
on Reported Claims
|
|
|
Reported Claims
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
$
|
85,552
|
|
|
$
|
85,725
|
|
|
$
|
84,666
|
|
|
$
|
85,605
|
|
|
$
|
83,198
|
|
|
$
|
83,266
|
|
|
$
|
83,241
|
|
|
$
|
83,090
|
|
|
$
|
83,101
|
|
|
$
|
83,111
|
|
|
$
|
-
|
|
|
|
19,298
|
|
2008
|
|
|
|
|
|
|
140,469
|
|
|
|
136,743
|
|
|
|
136,002
|
|
|
|
139,743
|
|
|
|
139,232
|
|
|
|
139,511
|
|
|
|
139,472
|
|
|
|
139,348
|
|
|
|
139,306
|
|
|
|
-
|
|
|
|
31,376
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
113,274
|
|
|
|
112,280
|
|
|
|
112,970
|
|
|
|
113,096
|
|
|
|
113,357
|
|
|
|
113,230
|
|
|
|
113,216
|
|
|
|
112,900
|
|
|
|
22
|
|
|
|
20,320
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
140,994
|
|
|
|
136,907
|
|
|
|
133,358
|
|
|
|
133,235
|
|
|
|
133,216
|
|
|
|
133,136
|
|
|
|
132,859
|
|
|
|
235
|
|
|
|
23,624
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
150,141
|
|
|
|
150,334
|
|
|
|
150,791
|
|
|
|
148,860
|
|
|
|
148,755
|
|
|
|
148,414
|
|
|
|
358
|
|
|
|
27,676
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
108,754
|
|
|
|
109,156
|
|
|
|
109,360
|
|
|
|
106,486
|
|
|
|
106,309
|
|
|
|
502
|
|
|
|
20,239
|
|
2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
105,584
|
|
|
|
107,489
|
|
|
|
103,982
|
|
|
|
102,406
|
|
|
|
1,023
|
|
|
|
18,066
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
111,647
|
|
|
|
113,506
|
|
|
|
109,058
|
|
|
|
3,136
|
|
|
|
18,400
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
111,706
|
|
|
|
115,134
|
|
|
|
4,480
|
|
|
|
17,054
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
115,931
|
|
|
|
11,737
|
|
|
|
15,578
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
$
|
1,165,428
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Homeowners
|
|
|
|
|
|
|
|
|
Cumulative Paid Claims and Allocated Claim Adjustment Expense, Net of Reinsurance
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accident
|
|
Unaudited
|
|
|
Unaudited
|
|
|
Unaudited
|
|
|
Unaudited
|
|
|
Unaudited
|
|
|
Unaudited
|
|
|
Unaudited
|
|
|
Unaudited
|
|
|
Unaudited
|
|
|
Audited
|
|
|
|
|
|
|
|
|
|
Year
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
$
|
59,268
|
|
|
$
|
79,566
|
|
|
$
|
82,272
|
|
|
$
|
82,862
|
|
|
$
|
82,722
|
|
|
$
|
82,977
|
|
|
$
|
83,028
|
|
|
$
|
83,028
|
|
|
$
|
83,096
|
|
|
$
|
83,096
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
105,401
|
|
|
|
130,888
|
|
|
|
134,235
|
|
|
|
136,923
|
|
|
|
138,802
|
|
|
|
138,992
|
|
|
|
139,121
|
|
|
|
139,224
|
|
|
|
139,256
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
81,570
|
|
|
|
104,407
|
|
|
|
108,217
|
|
|
|
110,324
|
|
|
|
112,554
|
|
|
|
112,720
|
|
|
|
112,827
|
|
|
|
112,848
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
98,190
|
|
|
|
124,326
|
|
|
|
129,790
|
|
|
|
132,246
|
|
|
|
132,523
|
|
|
|
132,604
|
|
|
|
132,599
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
123,046
|
|
|
|
142,846
|
|
|
|
145,852
|
|
|
|
146,908
|
|
|
|
147,451
|
|
|
|
148,026
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
84,260
|
|
|
|
101,566
|
|
|
|
104,203
|
|
|
|
105,156
|
|
|
|
105,561
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
76,890
|
|
|
|
96,599
|
|
|
|
99,361
|
|
|
|
100,968
|
|
|
|
|
|
|
|
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
83,314
|
|
|
|
103,030
|
|
|
|
105,703
|
|
|
|
|
|
|
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
90,704
|
|
|
|
109,303
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
95,772
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
1,133,132
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding prior to 2006
|
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior years paid
|
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities for
claims and claim adjustment
expenses, net of
reinsurance
|
|
|
$
|
32,314
|
|
|
|
|
|
|
|
|
|
NOTE 5 - Property and Casualty Unpaid Claims
and Claim Expenses-(Continued)
Auto Liability
|
|
|
|
Incurred Claims and Allocated Claim Adjustment Expense, Net of Reinsurance
|
|
|
|
Year Ended December 31,
|
|
As of December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
of Incurred-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
But-Not-Reported
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
Plus
|
|
|
Cumulative
|
|
Accident
|
|
Unaudited
|
|
|
Unaudited
|
|
|
Unaudited
|
|
|
Unaudited
|
|
|
Unaudited
|
|
|
Unaudited
|
|
|
Unaudited
|
|
|
Unaudited
|
|
|
Unaudited
|
|
|
Audited
|
|
|
Expected
Development
|
|
|
Number
of
|
|
Year
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
on
Reported Claims
|
|
|
Reported
Claims
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
$
|
148,884
|
|
|
$
|
146,400
|
|
|
$
|
144,661
|
|
|
$
|
139,619
|
|
|
$
|
138,148
|
|
|
$
|
137,151
|
|
|
$
|
136,817
|
|
|
$
|
136,855
|
|
|
$
|
136,745
|
|
|
$
|
136,826
|
|
|
$
|
-
|
|
|
|
49,856
|
|
2008
|
|
|
|
|
|
|
144,694
|
|
|
|
145,669
|
|
|
|
142,279
|
|
|
|
149,225
|
|
|
|
141,666
|
|
|
|
140,648
|
|
|
|
139,938
|
|
|
|
139,131
|
|
|
|
138,975
|
|
|
|
2
|
|
|
|
47,932
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
159,934
|
|
|
|
158,703
|
|
|
|
153,662
|
|
|
|
157,941
|
|
|
|
151,418
|
|
|
|
150,919
|
|
|
|
150,568
|
|
|
|
149,822
|
|
|
|
-
|
|
|
|
48,780
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
157,712
|
|
|
|
160,058
|
|
|
|
156,369
|
|
|
|
154,222
|
|
|
|
152,483
|
|
|
|
151,653
|
|
|
|
149,818
|
|
|
|
324
|
|
|
|
49,310
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
150,803
|
|
|
|
146,713
|
|
|
|
145,735
|
|
|
|
143,133
|
|
|
|
142,488
|
|
|
|
139,840
|
|
|
|
1,164
|
|
|
|
46,171
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
156,448
|
|
|
|
153,815
|
|
|
|
150,336
|
|
|
|
149,347
|
|
|
|
147,594
|
|
|
|
2.849
|
|
|
|
45,615
|
|
2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
153,860
|
|
|
|
152,858
|
|
|
|
150,720
|
|
|
|
150,657
|
|
|
|
6,501
|
|
|
|
46,195
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
155,105
|
|
|
|
157,249
|
|
|
|
158,470
|
|
|
|
8,493
|
|
|
|
47,146
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
165,515
|
|
|
|
172,553
|
|
|
|
13,074
|
|
|
|
47,529
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
180,380
|
|
|
|
55,506
|
|
|
|
41,220
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
$
|
1,524,935
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auto Liability
|
|
|
|
|
|
|
|
|
Cumulative Paid Claims and Allocated Claim Adjustment Expense, Net of Reinsurance
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accident
|
|
Unaudited
|
|
|
Unaudited
|
|
|
Unaudited
|
|
|
Unaudited
|
|
|
Unaudited
|
|
|
Unaudited
|
|
|
Unaudited
|
|
|
Unaudited
|
|
|
Unaudited
|
|
|
Audited
|
|
|
|
|
|
|
|
|
|
Year
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
$
|
56,819
|
|
|
$
|
101,803
|
|
|
$
|
122,129
|
|
|
$
|
130,555
|
|
|
$
|
134,207
|
|
|
$
|
135,467
|
|
|
$
|
136,056
|
|
|
$
|
136,504
|
|
|
$
|
136,630
|
|
|
$
|
136,815
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
54,750
|
|
|
|
103,370
|
|
|
|
123,062
|
|
|
|
134,377
|
|
|
|
137,980
|
|
|
|
138,539
|
|
|
|
138,758
|
|
|
|
138,875
|
|
|
|
138,962
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
60,011
|
|
|
|
110,921
|
|
|
|
133,568
|
|
|
|
142,524
|
|
|
|
146,383
|
|
|
|
148,783
|
|
|
|
149,608
|
|
|
|
149,801
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
63,416
|
|
|
|
118,345
|
|
|
|
137,012
|
|
|
|
144,255
|
|
|
|
147,337
|
|
|
|
148,751
|
|
|
|
149,247
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
61,070
|
|
|
|
108,837
|
|
|
|
126,812
|
|
|
|
133,931
|
|
|
|
136,906
|
|
|
|
138,151
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
61,279
|
|
|
|
109,574
|
|
|
|
127,185
|
|
|
|
138,641
|
|
|
|
142,916
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
62,224
|
|
|
|
108,856
|
|
|
|
131,215
|
|
|
|
139,954
|
|
|
|
|
|
|
|
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
61,329
|
|
|
|
117,468
|
|
|
|
139,463
|
|
|
|
|
|
|
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70,834
|
|
|
|
134,473
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
73,073
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
1,342,855
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding prior to 2006
|
|
|
|
80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior years paid
|
|
|
|
451
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities for
claims and claim adjustment
expenses, net of
reinsurance
|
|
|
$
|
182,162
|
|
|
|
|
|
|
|
|
|
NOTE 5 - Property and Casualty Unpaid Claims
and Claim Expenses-(Continued)
Auto Physical Damage
|
|
|
|
Incurred Claims and Allocated Claim Adjustment Expense, Net of Reinsurance
|
|
|
|
Year Ended December 31,
|
|
As of December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
of Incurred-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
But-Not-Reported
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
Plus
|
|
|
Cumulative
|
|
Accident
|
|
Unaudited
|
|
|
Unaudited
|
|
|
Unaudited
|
|
|
Unaudited
|
|
|
Unaudited
|
|
|
Unaudited
|
|
|
Unaudited
|
|
|
Unaudited
|
|
|
Unaudited
|
|
|
Audited
|
|
|
Expected
Development
|
|
|
Number
of
|
|
Year
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
on
Reported Claims
|
|
|
Reported
Claims
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
$
|
87,051
|
|
|
$
|
86,178
|
|
|
$
|
86,178
|
|
|
$
|
85,515
|
|
|
$
|
86,695
|
|
|
$
|
86,713
|
|
|
$
|
86,706
|
|
|
$
|
86,694
|
|
|
$
|
86,683
|
|
|
$
|
86,680
|
|
|
$
|
-
|
|
|
|
70,280
|
|
2008
|
|
|
|
|
|
|
89,088
|
|
|
|
87,854
|
|
|
|
87,834
|
|
|
|
86,900
|
|
|
|
87,992
|
|
|
|
87,979
|
|
|
|
87,976
|
|
|
|
87,966
|
|
|
|
87,954
|
|
|
|
-
|
|
|
|
72,117
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
84,539
|
|
|
|
83,515
|
|
|
|
83,202
|
|
|
|
82,635
|
|
|
|
82,000
|
|
|
|
81,986
|
|
|
|
81,972
|
|
|
|
81,963
|
|
|
|
-
|
|
|
|
72,867
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
84,112
|
|
|
|
83,420
|
|
|
|
83,103
|
|
|
|
83,046
|
|
|
|
83,052
|
|
|
|
83,050
|
|
|
|
83,036
|
|
|
|
-
|
|
|
|
77,343
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
86,205
|
|
|
|
85,507
|
|
|
|
86,023
|
|
|
|
85,120
|
|
|
|
85,143
|
|
|
|
85,116
|
|
|
|
-
|
|
|
|
76,113
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
83,770
|
|
|
|
82,337
|
|
|
|
83,402
|
|
|
|
83,431
|
|
|
|
83,354
|
|
|
|
7
|
|
|
|
72,803
|
|
2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
91,448
|
|
|
|
88,856
|
|
|
|
88,672
|
|
|
|
88,627
|
|
|
|
95
|
|
|
|
75,845
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
95,572
|
|
|
|
95,634
|
|
|
|
95,422
|
|
|
|
151
|
|
|
|
82,467
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
99,291
|
|
|
|
97,994
|
|
|
|
139
|
|
|
|
82,335
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
112,430
|
|
|
|
(944
|
)
|
|
|
77,495
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
$
|
902,576
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auto Physical Damage
|
|
|
|
|
|
|
|
|
Cumulative Paid Claims and Allocated Claim Adjustment Expense, Net of Reinsurance
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accident
|
|
Unaudited
|
|
|
Unaudited
|
|
|
Unaudited
|
|
|
Unaudited
|
|
|
Unaudited
|
|
|
Unaudited
|
|
|
Unaudited
|
|
|
Unaudited
|
|
|
Unaudited
|
|
|
Audited
|
|
|
|
|
|
|
|
|
|
Year
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
$
|
81,171
|
|
|
$
|
86,439
|
|
|
$
|
86,678
|
|
|
$
|
86,637
|
|
|
$
|
86,695
|
|
|
$
|
86,713
|
|
|
$
|
86,706
|
|
|
$
|
86,694
|
|
|
$
|
86,685
|
|
|
$
|
86,680
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
82,412
|
|
|
|
87,963
|
|
|
|
87,905
|
|
|
|
87,949
|
|
|
|
87,992
|
|
|
|
87,979
|
|
|
|
87,976
|
|
|
|
87,966
|
|
|
|
87,954
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
78,456
|
|
|
|
82,117
|
|
|
|
82,039
|
|
|
|
82,015
|
|
|
|
82,000
|
|
|
|
81,985
|
|
|
|
81,973
|
|
|
|
81,963
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
79,329
|
|
|
|
83,120
|
|
|
|
83,103
|
|
|
|
83,087
|
|
|
|
83,067
|
|
|
|
83,051
|
|
|
|
83,036
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
83,227
|
|
|
|
85,254
|
|
|
|
85,181
|
|
|
|
85,148
|
|
|
|
85,127
|
|
|
|
85,116
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
80,519
|
|
|
|
83,418
|
|
|
|
83,372
|
|
|
|
83,355
|
|
|
|
83,347
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
85,110
|
|
|
|
88,688
|
|
|
|
88,580
|
|
|
|
88,532
|
|
|
|
|
|
|
|
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
88,939
|
|
|
|
95,444
|
|
|
|
95,266
|
|
|
|
|
|
|
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
92,138
|
|
|
|
97,850
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
106,458
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
896,202
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding prior to 2006
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior years paid
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
for claims and claim adjustment
expenses, net of reinsurance
|
|
|
$
|
6,374
|
|
|
|
|
|
|
|
|
|
NOTE 5 - Property and Casualty Unpaid Claims
and Claim Expenses-(Continued)
The reconciliation of the
net incurred and paid claims development tables to the liability for claims and claim adjustment expenses in the Consolidated Balance
Sheet is as follows:
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
Property and Casualty segment
|
|
|
|
|
Net reserves
|
|
|
|
|
Homeowners
|
|
$
|
32,314
|
|
Auto liability
|
|
|
182,162
|
|
Auto physical damage
|
|
|
6,374
|
|
Other short duration lines
|
|
|
3,588
|
|
Total net reserves for unpaid claims and claim adjustment expense, net of reinsurance
|
|
|
224,438
|
|
|
|
|
|
|
Reinsurance recoverable on unpaid claims
|
|
|
|
|
Homeowners
|
|
|
375
|
|
Auto liability
|
|
|
50,959
|
|
Other short duration lines
|
|
|
9,865
|
|
Total reinsurance recoverable on unpaid claims
|
|
|
61,199
|
|
|
|
|
|
|
Insurance lines other than short duration (1)
|
|
|
22,131
|
|
Unallocated claims adjustment expenses
|
|
|
22,120
|
|
Total other than short duration and unallocated claims adjustment expenses
|
|
|
44,251
|
|
|
|
|
|
|
Gross reserves, end of year (1)
|
|
$
|
329,888
|
|
|
(1)
|
This line includes Retirement and Life reserves as included
in the Consolidated Balance Sheet.
|
NOTE 6 - Reinsurance and Catastrophes
In the normal course of
business, the Company’s insurance subsidiaries assume and cede reinsurance with other insurers. Reinsurance is ceded primarily
to limit losses from large events and to permit recovery of a portion of direct losses; however, such a transfer does not relieve
the originating insurance company of primary liability.
The Company is a national
underwriter and therefore has exposure to catastrophic losses in certain coastal states and other regions throughout the U.S. Catastrophes
can be caused by various events including hurricanes, windstorms, hail, severe winter weather, wildfires and earthquakes, and the
frequency and severity of catastrophes are inherently unpredictable. The financial impact from catastrophic losses results from
both the total amount of insured exposure in the area affected by the catastrophe as well as the severity of the event. The Company
seeks to reduce its exposure to catastrophe losses through the geographic diversification of its insurance coverage, deductibles,
maximum coverage limits and the purchase of catastrophe reinsurance.
The Company’s catastrophe
losses incurred of approximately $60,043, $44,429 and $37,500 for the years ended December 31, 2016, 2015 and 2014, respectively,
reflected losses from winter storm events in the first part of each year, wind/hail/tornado events in the spring and summer months
of each year, as well as losses from several storms in the latter part of each year. The fourth quarter of 2016 also included losses
from Hurricane Matthew.
NOTE 6 - Reinsurance and Catastrophes-(Continued)
The total amounts of reinsurance
recoverable on unpaid insurance reserves classified as assets and reported in Other assets in the Consolidated Balance Sheets were
as follows:
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Reinsurance recoverables on reserves and unpaid claims
|
|
|
|
|
|
|
|
|
Property and Casualty
|
|
|
|
|
|
|
|
|
Reinsurance companies
|
|
$
|
10,239
|
|
|
$
|
9,026
|
|
State insurance facilities
|
|
|
50,960
|
|
|
|
41,306
|
|
Life and health
|
|
|
9,275
|
|
|
|
9,780
|
|
Total
|
|
$
|
70,474
|
|
|
$
|
60,112
|
|
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
|
Year ended December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums written and contract deposits
|
|
$
|
1,280,903
|
|
|
$
|
22,728
|
|
|
$
|
4,324
|
|
|
$
|
1,262,499
|
|
Premiums and contract charges earned
|
|
|
777,651
|
|
|
|
22,826
|
|
|
|
4,321
|
|
|
|
759,146
|
|
Benefits, claims and settlement expenses
|
|
|
562,385
|
|
|
|
25,739
|
|
|
|
4,358
|
|
|
|
541,004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums written and contract deposits
|
|
|
1,277,066
|
|
|
|
24,737
|
|
|
|
4,184
|
|
|
|
1,256,513
|
|
Premiums and contract charges earned
|
|
|
752,798
|
|
|
|
25,077
|
|
|
|
4,159
|
|
|
|
731,880
|
|
Benefits, claims and settlement expenses
|
|
|
508,904
|
|
|
|
16,221
|
|
|
|
3,681
|
|
|
|
496,364
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums written and contract deposits
|
|
|
1,191,123
|
|
|
|
27,144
|
|
|
|
3,676
|
|
|
|
1,167,655
|
|
Premiums and contract charges earned
|
|
|
739,281
|
|
|
|
27,276
|
|
|
|
3,755
|
|
|
|
715,760
|
|
Benefits, claims and settlement expenses
|
|
|
504,550
|
|
|
|
39,236
|
|
|
|
3,112
|
|
|
|
468,426
|
|
There were no losses from
uncollectible reinsurance recoverables in the three years ended December 31, 2016. Past due reinsurance recoverables as of December
31, 2016 were not material.
The Company maintains catastrophe
excess of loss reinsurance coverage. For 2016, the Company’s catastrophe excess of loss coverage consisted of one contract
and it provided 95% coverage for catastrophe losses above a retention of $25,000 per occurrence up to $175,000 per occurrence.
This contract consisted of three layers, each of which provided for one mandatory reinstatement. The layers were $25,000 excess
of $25,000, $40,000 excess of $50,000 and $85,000 excess of $90,000.
NOTE 6 - Reinsurance and Catastrophes-(Continued)
For liability coverages,
in 2016, the Company reinsured each loss above a retention of $900 with coverage up to $5,000 on a per occurrence basis and $20,000
in a clash event. (A clash cover is a reinsurance casualty excess contract requiring two or more casualty coverages or policies
issued by the Company to be involved in the same loss occurrence for coverage to apply.) For property coverages, in 2016 the Company
reinsured each loss above a retention of $900 up to $5,000 on a per risk basis, including catastrophe losses. Also, the Company
could submit to the reinsurers two per risk losses from the same occurrence for a total of $8,200 of property recovery in any one
event.
The maximum individual
life insurance risk retained by the Company is $300 on any individual life, while either $100 or $125 is retained on each group
life policy depending on the type of coverage. Excess amounts are reinsured. The Company also maintains a life catastrophe reinsurance
program. For 2016, the Company reinsured 100% of the catastrophe risk in excess of $1,000 up to $35,000 per occurrence, with one
reinstatement. The Company’s life catastrophe risk reinsurance program covers acts of terrorism and includes nuclear, biological
and chemical explosions but excludes other acts of war.
NOTE 7 - Debt
Indebtedness and scheduled
maturities consisted of the following:
|
|
Effective
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
Final
|
|
|
|
December 31,
|
|
|
|
Rates
|
|
|
Maturity
|
|
|
|
2016
|
|
|
|
2015
|
|
|
Short-term debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank Credit Facility
|
|
|
Variable
|
|
|
|
2019
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Long-term debt (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.50% Senior Notes, Aggregate principal
amount of $250,000 less unaccrued discount of $603 and $654 and unamortized debt issuance costs of $2,188 and
$2,371
|
|
|
4.5%
|
|
|
|
2025
|
|
|
|
247,209
|
|
|
|
246,975
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
$
|
247,209
|
|
|
$
|
246,975
|
|
|
(1)
|
The Company designates debt obligations as “long-term”
based on maturity date at issuance.
|
Credit Agreement with
Financial Institutions (“Bank Credit Facility”
)
In 2014, HMEC’s Bank
Credit Agreement (the “Bank Credit Facility”) was amended and restated to extend the commitment termination date to
July 30, 2019 from the previous termination date of October 6, 2015 and to decrease the interest rate spread relative to Eurodollar
base rates. The financial covenants within the agreement were not changed. The Bank Credit Facility is by and between HMEC, certain
financial institutions named therein and JPMorgan Chase Bank, N.A., as administrative agent, and provides for unsecured borrowings
of up to $150,000. Interest accrues at varying spreads relative to prime or Eurodollar base rates and is payable monthly or quarterly
depending on the applicable base rate (Eurodollar base rate plus 1.15%). The unused portion of the Bank Credit Facility is subject
to a variable commitment fee, which was 0.15% on an annual basis at December 31, 2016.
NOTE 7 - Debt-(Continued)
On June 15, 2015, the Senior
Notes due 2015 matured and the Company repaid the $75,000 aggregate principal amount initially utilizing $75,000 of additional
borrowing under the existing Bank Credit Facility. In November 2015, the Company repaid the Bank Credit Facility balance in full
utilizing a portion of the net proceeds from the issuance of the 4.50% Senior Notes due 2025, as described below.
4.50% Senior Notes due
2025 (“Senior Notes due 2025”)
On November 23, 2015, the
Company issued $250,000 aggregate principal amount of 4.50% senior notes, which will mature on December 1, 2025, issued at a discount
of 0.265% resulting in an effective yield of 4.533%. Interest on the Senior Notes due 2025 is payable semi-annually at a rate of
4.50%. The Senior Notes due 2025 are redeemable in whole or in part, at any time, at the Company's option, at a redemption price
equal to the greater of (1) 100% of the principal amount of the notes being redeemed or (2) the sum of the present values of the
remaining scheduled payments of principal and interest thereon discounted, on a semi-annual basis, at the Treasury yield (as defined
in the indenture) plus 35 basis points, plus, in either of the above cases, accrued interest to the date of redemption.
The net proceeds from the
sale of the Senior Notes due 2025 were used to (1) repay the $113,000 balance on the Bank Credit Facility, (2) redeem the Senior
Notes due 2016, as described below, and (3) for general corporate purposes.
6.05% Senior Notes due
2015 (“Senior Notes due 2015”)
On June 15, 2015, the Senior
Notes due 2015 matured and the Company repaid the $75,000 aggregate principal amount initially utilizing $75,000 of additional
borrowing under the existing Bank Credit Facility.
6.85% Senior Notes due
2016 (“Senior Notes due 2016”)
On December 23, 2015, the
Company redeemed all of its outstanding Senior Notes due 2016, $125,000 aggregate principal amount, at a cost of $127,292. The
redemption was funded utilizing a portion of the net proceeds from the issuance of the 4.50% Senior Notes due 2025.
Debt Retirement Charges
The redemption of the Senior
Notes due 2016 resulted in a pretax charge to income for the year ended December 31, 2015 of $2,338.
Covenants
The Company is in compliance
with all of the financial covenants contained in the Senior Notes due 2025 indenture and the Bank Credit Facility agreement, consisting
primarily of relationships of (1) debt to capital, (2) net worth, as defined in the financial covenants, (3) insurance subsidiaries'
risk-based capital and (4) securities subject to funding agreements and repurchase agreements.
NOTE 8 - Income Taxes
The income tax assets and
liabilities included in Other assets and Other liabilities, respectively, in the Consolidated Balance Sheets were as follows:
|
|
December
31,
|
|
|
|
|
2016
|
|
|
|
|
2015
|
|
|
Income tax (asset)
liability
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
(3,832
|
)
|
|
$
|
1,000
|
|
Deferred
|
|
|
205,699
|
|
|
|
201,208
|
|
Deferred tax assets and
liabilities are recognized for all future tax consequences attributable to “temporary differences” between the financial
statement carrying value of existing assets and liabilities and their respective tax bases. There are no deferred tax liabilities
that have not been recognized. The “temporary differences” that gave rise to the deferred tax balances were as follows:
|
|
December 31,
|
|
|
|
|
2016
|
|
|
|
2015
|
|
Deferred tax assets
|
|
|
|
|
|
|
|
|
Unearned premium reserve reduction
|
|
$
|
18,253
|
|
|
$
|
17,402
|
|
Compensation accruals
|
|
|
15,893
|
|
|
|
13,737
|
|
Impaired securities
|
|
|
8,214
|
|
|
|
7,635
|
|
Other comprehensive income - net funded status of pension
|
|
|
|
|
|
|
|
|
and other postretirement benefit obligations
|
|
|
6,387
|
|
|
|
6,375
|
|
Discounting of unpaid claims and claim expense tax reserves
|
|
|
2,463
|
|
|
|
3,213
|
|
Postretirement benefits other than pensions
|
|
|
578
|
|
|
|
664
|
|
Other, net
|
|
|
-
|
|
|
|
1,189
|
|
Total gross deferred tax assets
|
|
|
51,788
|
|
|
|
50,215
|
|
Deferred tax liabilities
|
|
|
|
|
|
|
|
|
Other comprehensive income - net unrealized gains
|
|
|
|
|
|
|
|
|
on fixed maturities and equity securities
|
|
|
112,311
|
|
|
|
112,934
|
|
Deferred policy acquisition costs
|
|
|
91,028
|
|
|
|
85,341
|
|
Life insurance future policy benefit reserve
|
|
|
33,145
|
|
|
|
30,177
|
|
Investment related adjustments
|
|
|
15,762
|
|
|
|
18,709
|
|
Intangible assets
|
|
|
4,262
|
|
|
|
4,262
|
|
Other, net
|
|
|
979
|
|
|
|
-
|
|
Total gross deferred tax liabilities
|
|
|
257,487
|
|
|
|
251,423
|
|
Net deferred tax liability
|
|
$
|
205,699
|
|
|
$
|
201,208
|
|
The Company evaluated sources
and character of income, including historical earnings, loss carryback potential, taxable income from future reversals of existing
taxable temporary differences, future taxable income exclusive of reversing temporary differences, and taxable income from prudent
and feasible tax planning strategies. Although realization of deferred tax assets is not assured, the Company believes it is more
likely than not that gross deferred tax assets will be fully realized and that a valuation allowance with respect to the realization
of the total gross deferred tax assets was not necessary as of December 31, 2016 and 2015.
At December 31, 2016, the
Company did not have any loss carryforwards or credits.
NOTE 8 - Income Taxes-(Continued)
The components of income
tax expense were as follows:
|
|
|
Year Ended December 31,
|
|
|
|
|
2016
|
|
|
|
2015
|
|
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
26,359
|
|
|
$
|
29,885
|
|
|
$
|
32,295
|
|
Deferred
|
|
|
4,108
|
|
|
|
6,085
|
|
|
|
9,575
|
|
Total
income tax expense
|
|
$
|
30,467
|
|
|
$
|
35,970
|
|
|
$
|
41,870
|
|
Income tax expense for
the following periods differed from the expected tax computed by applying the federal corporate tax rate of 35% to income before
income taxes as follows:
|
|
|
Year
Ended December 31,
|
|
|
|
|
2016
|
|
|
|
2015
|
|
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected
federal tax on income
|
|
$
|
39,981
|
|
|
$
|
45,308
|
|
|
$
|
51,140
|
|
Add (deduct) tax effects
of:
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax-exempt
interest
|
|
|
(5,789
|
)
|
|
|
(6,678
|
)
|
|
|
(6,849
|
)
|
Dividend
received deduction
|
|
|
(3,985
|
)
|
|
|
(3,564
|
)
|
|
|
(3,566
|
)
|
Other,
net
|
|
|
260
|
|
|
|
904
|
|
|
|
1,145
|
|
Income
tax expense provided on income
|
|
$
|
30,467
|
|
|
$
|
35,970
|
|
|
$
|
41,870
|
|
The Company’s federal
income tax returns for years prior to 2013 are no longer subject to examination by the Internal Revenue Service (“IRS”).
The Company recognizes
tax benefits from tax return positions only if it is more likely than not the position will be sustainable, upon examination, on
its technical merits and any relevant administrative practices or precedents. As a result, the Company applies a more likely than
not recognition threshold for all tax uncertainties.
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 upon changes in facts or law. The
Company has no unrecorded liabilities from uncertain tax filing positions.
HMEC and its subsidiaries
file a consolidated federal income tax return. The federal income tax sharing agreements between HMEC and its subsidiaries, as
approved by the Board of Directors, provide that tax on income is charged to each subsidiary as if it were filing a separate tax
return with the limitation that each subsidiary will receive the benefit of any losses or tax credits to the extent utilized in
the consolidated tax return. Intercompany balances are settled quarterly with a final settlement after filing the consolidated
federal income tax return with the IRS.
NOTE 8 - Income Taxes-(Continued)
A reconciliation of the
beginning and ending amounts of unrecognized tax benefits, excluding interest and penalties, is as follows:
|
|
|
Year
Ended December 31,
|
|
|
|
|
2016
|
|
|
|
2015
|
|
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of the beginning of the year
|
|
$
|
1,039
|
|
|
$
|
656
|
|
|
$
|
641
|
|
Increases
related to prior year tax positions
|
|
|
348
|
|
|
|
-
|
|
|
|
-
|
|
Decreases
related to prior year tax positions
|
|
|
-
|
|
|
|
(15
|
)
|
|
|
(244
|
)
|
Increases
related to current year tax positions
|
|
|
283
|
|
|
|
398
|
|
|
|
259
|
|
Settlements
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Lapse
of statue
|
|
|
(76
|
)
|
|
|
-
|
|
|
|
-
|
|
Balance
as of the end of the year
|
|
$
|
1,594
|
|
|
$
|
1,039
|
|
|
$
|
656
|
|
The Company’s effective
tax rate would be affected to the extent there were unrecognized tax benefits that could be recognized. There are no positions
for which it is reasonably possible that the total amount of unrecognized tax benefit will significantly increase within the next
12 months.
The Company classifies
all tax related interest and penalties as income tax expense.
Interest and penalties
were both immaterial in each of the years ended December 31, 2016, 2015 and 2014.
NOTE 9 - Shareholders' Equity and Common
Stock Equivalents
Share Repurchase
Programs and Treasury Shares Held (Common Stock)
In December 2011, HMEC’s
Board of Directors (the “Board”) authorized a share repurchase program allowing repurchases of up to $50,000 (the “2011
Plan”). In September 2015, the Board authorized an additional share repurchase program allowing repurchases of up to $50,000
(the “2015 Plan”) to begin following the completion of the 2011 Plan. Both share repurchase programs authorize the
repurchase of HMEC’s common shares in open market or privately negotiated transactions, from time to time, depending on market
conditions. The share repurchase programs do not have expiration dates and may be limited or terminated at any time without notice.
During 2014, the Company
repurchased 190,876 shares of its common stock, or 0.5% of the outstanding shares on December 31, 2013, at an aggregate cost of
$5,411, or an average price of $28.33 per share, under the 2011 Plan. During 2015, the Company repurchased 663,092 shares of its
common stock, or 1.6% of the outstanding shares on December 31, 2014, at an aggregate cost of $21,950, or an average price of $33.08
per share, under the 2011 Plan. During 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 $21,513, or an average price of $30.65 per share, under the 2011 and the 2015
Plans. Utilization of the remaining authorization under the 2011 program was completed in January 2016. In total and through December
31, 2016, 2,799,610 shares were repurchased under the 2011 and 2015 Plans at an average price of $25.18 per share. The repurchase
of shares was financed through use of cash. As of December 31, 2016, $29,511 remained authorized for future share repurchases under
the 2015 Plan authorization.
NOTE 9 - Shareholders' Equity and Common
Stock Equivalents-(Continued)
At December 31, 2016, the
Company held 24,673 shares in treasury.
Authorization of
Preferred Stock
In 1996, the shareholders
of HMEC approved authorization of 1,000,000 shares of $0.001 par value preferred stock. The Board of Directors is authorized to
(1) direct the issuance of the preferred stock in one or more series, (2) fix the dividend rate, conversion or exchange rights,
redemption price and liquidation preference, of any series of the preferred stock, (3) fix the number of shares for any series
and (4) increase or decrease the number of shares of any series. No shares of preferred stock were outstanding at December 31,
2016 and 2015.
2010 Comprehensive Executive Compensation
Plan
In 2010, the shareholders
of HMEC approved the 2010 Comprehensive Executive Compensation Plan (the “Comprehensive Plan”). The purpose of the
Comprehensive Plan is to aid the Company in attracting, retaining, motivating and rewarding employees and non-employee Directors;
to provide for equitable and competitive compensation opportunities, including deferral opportunities; to encourage long-term service;
to recognize individual contributions and reward achievement of Company goals; and to promote the creation of long-term value for
the Company’s shareholders by closely aligning the interests of plan participants with those of shareholders. The Comprehensive
Plan authorizes share-based and cash-based incentives for plan participants. In 2012, the shareholders of HMEC approved the implementation
of a fungible share pool under which grants of full value shares will count against the share limit as two and one half shares
for every share subject to a full value award. In 2015, the shareholders of HMEC approved an amendment and restatement of the Comprehensive
Plan which included an increase of 3.25 million in the number of shares of common stock reserved for issuance under the Comprehensive
Plan. As of December 31, 2016, approximately 2.9 million shares were available for grant under the Comprehensive Plan. Shares of
common stock issued under the Comprehensive Plan may be either authorized and unissued shares of HMEC or shares that have been
reacquired by HMEC; however, new shares have been issued historically.
As further described in
the paragraphs below, outstanding stock units and stock options under the Comprehensive Plan were as follows:
|
|
|
December
31,
|
|
|
|
|
2016
|
|
|
|
|
2015
|
|
|
|
|
2014
|
|
|
Common stock units related to
deferred
compensation for Directors
|
|
|
74,058
|
|
|
|
85,200
|
|
|
|
87,993
|
|
Common stock units related to
deferred
compensation for employees
|
|
|
51,502
|
|
|
|
55,443
|
|
|
|
69,598
|
|
Stock options
|
|
|
747,032
|
|
|
|
669,693
|
|
|
|
634,437
|
|
Restricted common stock units
related
to incentive compensation
|
|
|
1,419,268
|
|
|
|
1,442,325
|
|
|
|
1,590,138
|
|
Total
|
|
|
2,291,860
|
|
|
|
2,252,661
|
|
|
|
2,382,166
|
|
NOTE 9 - Shareholders' Equity and Common
Stock Equivalents-(Continued)
Director
Common Stock Units
Deferred compensation of
Directors is in the form of common stock units, which represent an equal number of common shares to be issued in the future. The
outstanding units of Directors serving on the Board accrue dividends at the same rate as dividends paid to HMEC’s shareholders;
outstanding units of retired Directors do not accrue dividends. These dividends are reinvested into additional common stock units.
Employee
Common Stock Units
Deferred compensation of
employees is in the form of common stock units, which represent an equal number of common shares to be issued in the future. Distributions
of employee deferred compensation are allowed to be either in common shares or cash. Through December 31, 2016, all distributions
have been in cash. The outstanding units accrue dividends at the same rate as dividends paid to HMEC’s shareholders. These
dividends are reinvested into additional common stock units.
Stock
Options
Options to purchase shares
of HMEC common stock may be granted to executive officers, other employees and Directors. The options become exercisable in installments
based on service generally beginning in the first year from the date of grant and generally become fully vested 4 years from the
date of grant. The options generally expire 7 to 10 years from the date of grant. The exercise price of the option is equal to
the market price of HMEC’s common stock on the date of grant resulting in a grant date intrinsic value of $0.
Changes in outstanding
options were as follows:
|
|
Weighted Average
|
|
Range of
|
|
Options
|
|
|
|
Option Price
|
|
Option Prices
|
|
|
|
Vested and
|
|
|
|
per Share
|
|
per Share
|
|
Outstanding
|
|
Exercisable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
$24.00
|
|
|
$ 6.91-$33.41
|
|
|
669,693
|
|
|
|
281,632
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
$31.13
|
|
|
$31.01-$36.04
|
|
|
307,176
|
|
|
|
-
|
|
Vested
|
|
|
$22.73
|
|
|
$13.83-$36.04
|
|
|
-
|
|
|
|
137,763
|
|
Exercised
|
|
|
$17.02
|
|
|
$ 6.91-$33.41
|
|
|
(146,278
|
)
|
|
|
(146,278
|
)
|
Forfeited
|
|
|
$27.53
|
|
|
$17.32-$32.35
|
|
|
(83,559
|
)
|
|
|
-
|
|
Expired
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
$27.67
|
|
|
$13.83-$36.04
|
|
|
747,032
|
|
|
|
273,117
|
|
NOTE 9 - Shareholders' Equity and Common
Stock Equivalents-(Continued)
Option information segregated
by ranges of exercise prices was as follows:
|
|
December
31, 2016
|
|
|
|
|
Total
Outstanding Options
|
|
|
Vested
and Exercisable Options
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
Range
of
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
Option
Prices
|
|
|
|
|
Option
Price
|
|
|
Remaining
|
|
|
|
|
|
Option
Price
|
|
|
Remaining
|
|
|
|
per
Share
|
|
Options
|
|
|
per
Share
|
|
|
Term
|
|
|
Options
|
|
|
per
Share
|
|
|
Term
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$13.83-$20.75
|
|
|
176,688
|
|
|
|
$18.57
|
|
|
|
2.3
years
|
|
|
|
157,029
|
|
|
|
$18.32
|
|
|
|
2.3
years
|
|
|
|
$28.88-$31.13
|
|
|
450,674
|
|
|
|
$29.91
|
|
|
|
8.2
years
|
|
|
|
87,832
|
|
|
|
$27.50
|
|
|
|
6.2
years
|
|
|
|
$32.35-$36.04
|
|
|
119,670
|
|
|
|
$32.67
|
|
|
|
8.3
years
|
|
|
|
28,256
|
|
|
|
$32.39
|
|
|
|
8.2
years
|
|
Total
|
|
$13.83-$36.04
|
|
|
747,032
|
|
|
|
$27.67
|
|
|
|
6.9
years
|
|
|
|
273,117
|
|
|
|
$22.73
|
|
|
|
4.1
years
|
|
The weighted average exercise
prices of vested and exercisable options as of December 31, 2015 and 2014 were $19.32 and $17.20, respectively.
As of December 31, 2016,
based on a closing stock price of $42.80 per share, the aggregate intrinsic (in-the-money) values of vested options and all options
outstanding were $5,482 and $11,303, respectively.
Restricted Common Stock Units
Restricted common stock
units may be granted to executive officers, other employees and Directors and represent an equal number of common shares to be
issued in the future. The restricted common stock units vest in installments based on service or attainment of performance criteria
generally beginning in the first year from the date of grant and generally become fully vested 1 to 5 years from the date of grant.
The outstanding units accrue dividends at the same rate as dividends paid to HMEC’s shareholders. These dividends are reinvested
into additional restricted common stock units.
Changes in outstanding restricted common stock
units were as follows:
|
|
Total Outstanding Units
|
|
Vested Units
|
|
|
|
|
|
Weighted Average
|
|
|
|
Weighted Average
|
|
|
|
|
|
Grant Date Fair
|
|
|
|
Grant Date Fair
|
|
|
|
Units
|
|
Value per Unit
|
|
|
Units
|
|
Value per Unit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
1,442,325
|
|
|
|
$24.29
|
|
|
|
849,912
|
|
|
|
$15.51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted (1)
|
|
|
370,175
|
|
|
|
$31.75
|
|
|
|
-
|
|
|
|
-
|
|
Vested
|
|
|
-
|
|
|
|
-
|
|
|
|
262,074
|
|
|
|
$22.92
|
|
Forfeited
|
|
|
(49,310
|
)
|
|
|
$26.01
|
|
|
|
-
|
|
|
|
-
|
|
Distributed (2)
|
|
|
(343,922
|
)
|
|
|
$18.28
|
|
|
|
(343,922
|
)
|
|
|
$18.28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
1,419,268
|
|
|
|
$27.63
|
|
|
|
768,064
|
|
|
|
$16.80
|
|
|
(1)
|
Includes dividends reinvested into additional restricted
common stock units.
|
|
(2)
|
Includes distributed units which were utilized to satisfy
withholding taxes due on the distribution.
|
NOTE 10 - Statutory Information and Restrictions
The insurance departments
of various states in which the insurance subsidiaries of HMEC are domiciled recognize as net income and surplus those amounts determined
in conformity with statutory accounting principles prescribed or permitted by the insurance departments, which differ in certain
respects from GAAP.
Reconciliations of statutory
capital and surplus and net income, as determined using statutory accounting principles, to the amounts included in the accompanying
consolidated financial statements are as follows:
|
|
|
December
31,
|
|
|
|
|
|
|
|
|
2016
|
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statutory capital and
surplus of insurance subsidiaries
|
|
$
|
912,336
|
|
|
$
|
883,870
|
|
|
|
|
|
Increase (decrease) due to:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred policy
acquisition costs
|
|
|
267,580
|
|
|
|
253,176
|
|
|
|
|
|
Difference in
policyholder reserves
|
|
|
98,360
|
|
|
|
95,536
|
|
|
|
|
|
Goodwill
|
|
|
47,396
|
|
|
|
47,396
|
|
|
|
|
|
Investment fair
value adjustments on fixed maturities
|
|
|
301,518
|
|
|
|
314,705
|
|
|
|
|
|
Difference in
investment reserves
|
|
|
125,805
|
|
|
|
120,795
|
|
|
|
|
|
Federal income
tax liability
|
|
|
(228,090
|
)
|
|
|
(224,492
|
)
|
|
|
|
|
Net
funded status of pension and other postretirement benefit obligations
|
|
|
(18,250
|
)
|
|
|
(18,213
|
)
|
|
|
|
|
Non-admitted assets
and other, net
|
|
|
22,888
|
|
|
|
21,691
|
|
|
|
|
|
Shareholders'
equity of parent company and non-insurance
subsidiaries
|
|
|
11,648
|
|
|
|
17,172
|
|
|
|
|
|
Parent
company short-term and long-term debt
|
|
|
(247,209
|
)
|
|
|
(246,975
|
)
|
|
|
|
|
Shareholders'
equity as reported herein
|
|
$
|
1,293,982
|
|
|
$
|
1,264,661
|
|
|
|
|
|
|
|
|
Year
Ended December 31,
|
|
|
|
|
2016
|
|
|
|
2015
|
|
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
|
Statutory net income of
insurance subsidiaries
|
|
$
|
74,574
|
|
|
$
|
87,619
|
|
|
$
|
97,875
|
|
Net loss of non-insurance companies
|
|
|
(5,135
|
)
|
|
|
(4,474
|
)
|
|
|
(3,906
|
)
|
Interest expense
|
|
|
(11,808
|
)
|
|
|
(13,122
|
)
|
|
|
(14,198
|
)
|
Debt retirement costs
|
|
|
-
|
|
|
|
(2,338
|
)
|
|
|
-
|
|
Tax
benefit of interest expense and other parent company current tax adjustments
|
|
|
5,637
|
|
|
|
6,829
|
|
|
|
6,371
|
|
Combined net income
|
|
|
63,268
|
|
|
|
74,514
|
|
|
|
86,142
|
|
Increase (decrease) due to:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred policy
acquisition costs
|
|
|
19,442
|
|
|
|
13,249
|
|
|
|
16,828
|
|
Policyholder benefits
|
|
|
14,919
|
|
|
|
14,065
|
|
|
|
15,284
|
|
Federal income
tax expense
|
|
|
(5,312
|
)
|
|
|
(6,678
|
)
|
|
|
(10,548
|
)
|
Investment reserves
|
|
|
(1,320
|
)
|
|
|
7,339
|
|
|
|
3,574
|
|
Other
adjustments, net
|
|
|
(7,232
|
)
|
|
|
(9,007
|
)
|
|
|
(7,037
|
)
|
Net
income as reported herein
|
|
$
|
83,765
|
|
|
$
|
93,482
|
|
|
$
|
104,243
|
|
HMEC has principal insurance
subsidiaries domiciled in Illinois and Texas. The statutory financial statements of these subsidiaries are prepared in accordance
with accounting principles prescribed or permitted by the Illinois Department of Insurance and the Texas Department of Insurance,
as applicable. Prescribed statutory accounting principles include a variety of publications of the National Association of Insurance
Commissioners (the “NAIC”), as well as state laws, regulations and general administrative rules.
NOTE 10 - Statutory Information and Restrictions-(Continued)
The NAIC has risk-based capital guidelines
to evaluate the adequacy of statutory capital and surplus in relation to risks assumed in investments, reserving policies, and
volume and types of insurance business written. At December 31, 2016 and 2015, the minimum statutory-basis capital and surplus
required to be maintained by HMEC’s insurance subsidiaries was $148,583 and $139,949, respectively. At December 31, 2016
and 2015, statutory capital and surplus of each of the Company’s insurance subsidiaries was above required levels. The restricted
net assets of HMEC’s insurance subsidiaries were $18,119 and $18,312 as of December 31, 2016 and 2015, respectively. The
minimum statutory-basis capital and surplus amount at each date is the total estimated authorized control level risk-based capital
for all of HMEC’s insurance subsidiaries combined. Authorized control level risk-based capital represents the minimum level
of statutory-basis capital and surplus necessary before the insurance commissioner in the respective state of domicile is authorized
to take whatever regulatory actions considered necessary to protect the best interests of the policyholders and creditors of the
insurer. The amount of restricted net assets represents the combined fair value of securities on deposit with governmental agencies
for the insurance subsidiaries as required by law in various states in which the insurance subsidiaries of HMEC conduct business.
HMEC relies largely on dividends from
its insurance subsidiaries to meet its obligations for payment of principal and interest on debt, dividends to shareholders and
parent company operating expenses, including tax payments pursuant to tax sharing agreements. Payments for share repurchase programs
also have this dependency. HMEC’s 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. As a result, HMEC may not be able to receive dividends from such subsidiaries at times and in amounts necessary
to pay desired dividends to shareholders. The aggregate amount of dividends that may be paid in 2017 from all of HMEC’s insurance
subsidiaries without prior regulatory approval is approximately $91,000.
As disclosed in the reconciliation
of the statutory capital and surplus of insurance subsidiaries to the consolidated GAAP shareholders’ equity, the insurance
subsidiaries have statutory capital and surplus of $912,336 as of December 31, 2016, which is subject to regulatory restrictions.
The parent company equity is not restricted. At December 31, 2016, HMEC had $4,069 of liquid assets, comprised of investments and
cash, which could be used to fund debt interest, general corporate obligations, as well as dividend payments to shareholders. 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.
At the time of this Annual Report on
Form 10-K and during each of the years in the three year period ended December 31, 2016, the Company had no financial reinsurance
agreements in effect.
NOTE 11 - Pension Plans and Other Postretirement Benefits
The Company sponsors three qualified
and two non-qualified retirement plans. Substantially all employees participate in the 401(k) plan and through December 31, 2014
participated in the non-contributory defined contribution plan. Both the qualified and the non-qualified defined benefit plans
have been frozen since 2002. All participants in both frozen plans are 100% vested in their accrued benefit and all non-qualified
defined benefit plan participants are receiving payment. Certain employees participate in a non-qualified defined contribution
plan.
Qualified Plans
All employees participate in the 401(k)
plan and receive a 100% vested 3% “safe harbor” company contribution based on employees’ eligible earnings. Effective
January 1, 2015, the Company began matching each dollar of employee contributions up to a 5% maximum — in addition to maintaining
the automatic 3% “safe harbor” contribution. The new matching company contribution vests after 5 years of service.
The 401(k) plan is fully funded.
Prior to 2015, employees participated
in a defined contribution plan after one year of service; contributions were made based on eligible earnings and years of service
and were credited to each employee’s individual plan account. The majority of employees received a 5% contribution. Accounts
vested after 3 years of service. The Company terminated this fully funded defined contribution plan on December 31, 2014 and all
participant accounts became 100% vested. The majority of plan assets were distributed to participants in 2015, with a final settlement
of all remaining participant accounts in 2016 through the purchase of qualified individual annuities under a HMLIC group annuity
contract.
In 2002, participants ceased accruing
benefits for earnings and years of service in the frozen defined benefit plan. A substantial number of those participants are former
employees of the Company who are not eligible to receive an immediate annuity benefit until age 65 and/or are not eligible for
a lump sum distribution. In November 2014, the Company announced a cash-out election period or “window” ending in December
2014, for terminated vested participants with accrued lump sum values under $100. During the window, 385 former employees elected
to receive a total of approximately $4,200 in lump sum distributions, resulting in approximately $1,600 of additional settlement
expense in 2014. Subsequently, in August of 2016, the Company announced a second cash-out election “window” ending
in September 2016 for all vested terminated participants, regardless of lump sum value. During this window, 52 former employees
elected to receive a total of approximately $1,400 in lump sums distributions.
The Company’s policy for the
frozen defined benefit plan is to contribute to the plan amounts which are actuarially determined to provide sufficient funding
to meet future benefit payments as defined by federal laws and regulations.
For the two qualified plans, all assets
are held in their respective plan trusts.
NOTE 11 - Pension Plans and Other Postretirement Benefits-(Continued)
Non-qualified Plans
The non-qualified plans were established
for specific employees whose otherwise eligible earnings exceeded the statutory limits under the qualified plans. Benefit accruals
under the non-qualified defined benefit plan were frozen in 2002 and all participants are currently in payment status. Both the
non-qualified frozen defined benefit plan and the non-qualified contribution plan are unfunded plans with the Company’s contributions
made at the time payments are made to participants.
Total Expense and Contribution Plans’
Information
Total expense recorded for the qualified
and non-qualified defined contribution, 401(k), defined benefit and supplemental retirement plans was $8,527, $8,899 and $11,850
for the years ended December 31, 2016, 2015 and 2014, respectively.
Contributions to employees' accounts
under the qualified defined contribution plan, the 401(k) plan and the non-qualified defined contribution plan, as well as total
assets of the plans, were as follows:
|
|
|
Year Ended December 31,
|
|
|
|
|
2016
|
|
|
|
2015
|
|
|
|
2014
|
|
401(k) plan
|
|
|
|
|
|
|
|
|
|
|
|
|
Contributions to employees’ accounts
|
|
$
|
6,918
|
|
|
$
|
6,466
|
|
|
$
|
2,753
|
|
Total assets at the end of the year
|
|
|
177,352
|
|
|
|
161,956
|
|
|
|
132,053
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Qualified defined contribution plan
|
|
|
|
|
|
|
|
|
|
|
|
|
Contributions to employees’ accounts
|
|
|
-
|
|
|
|
-
|
|
|
|
4,580
|
|
Total assets at the end of the year
|
|
|
-
|
|
|
|
9,118
|
|
|
|
123,008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-qualified defined contribution plan
|
|
|
|
|
|
|
|
|
|
|
|
|
Contributions to employees’ accounts
|
|
|
72
|
|
|
|
122
|
|
|
|
74
|
|
Total assets at the end of the year
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
NOTE 11 - Pension Plans and Other Postretirement Benefits-(Continued)
Defined Benefit Plan and Supplemental
Retirement Plans
The following tables summarize the
funded status of the defined benefit and supplemental retirement pension plans as of December 31, 2016, 2015 and 2014 (the measurement
dates) and identify (1) the assumptions used to determine the projected benefit obligation and (2) the components of net pension
cost for the defined benefit plan and supplemental retirement plans for the following periods:
|
|
|
|
|
Supplemental
|
|
|
|
Defined Benefit Plan
|
|
Defined Benefit Plans
|
|
|
December 31,
|
|
December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
|
2016
|
|
2015
|
|
2014
|
Change in benefit obligation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected benefit obligation at beginning of year
|
|
$
|
31,233
|
|
|
$
|
34,279
|
|
|
$
|
39,483
|
|
|
$
|
17,004
|
|
|
$
|
18,524
|
|
|
$
|
16,706
|
|
Service cost
|
|
|
650
|
|
|
|
450
|
|
|
|
360
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Interest cost
|
|
|
1,244
|
|
|
|
1,189
|
|
|
|
1,679
|
|
|
|
687
|
|
|
|
654
|
|
|
|
716
|
|
Plan amendments
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Actuarial loss (gain)
|
|
|
(220
|
)
|
|
|
(1,371
|
)
|
|
|
1,254
|
|
|
|
488
|
|
|
|
(845
|
)
|
|
|
2,431
|
|
Benefits paid
|
|
|
(3,500
|
)
|
|
|
(3,314
|
)
|
|
|
(1,737
|
)
|
|
|
(1,332
|
)
|
|
|
(1,329
|
)
|
|
|
(1,329
|
)
|
Settlements
|
|
|
-
|
|
|
|
-
|
|
|
|
(6,760
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Projected benefit obligation at end of year
|
|
$
|
29,407
|
|
|
$
|
31,233
|
|
|
$
|
34,279
|
|
|
$
|
16,847
|
|
|
$
|
17,004
|
|
|
$
|
18,524
|
|
Change in plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
$
|
27,667
|
|
|
$
|
31,408
|
|
|
$
|
35,879
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Actual return on plan assets
|
|
|
1,766
|
|
|
|
200
|
|
|
|
2,535
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Employer contributions
|
|
|
-
|
|
|
|
-
|
|
|
|
2,000
|
|
|
|
1.332
|
|
|
|
1,329
|
|
|
|
1,329
|
|
Benefits paid
|
|
|
(3,500
|
)
|
|
|
(3,314
|
)
|
|
|
(1,737
|
)
|
|
|
(1,332
|
)
|
|
|
(1,329
|
)
|
|
|
(1,329
|
)
|
Expenses paid
|
|
|
(487
|
)
|
|
|
(627
|
)
|
|
|
(509
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Settlements
|
|
|
-
|
|
|
|
-
|
|
|
|
(6,760
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Fair value of plan assets at end of year
|
|
$
|
25,446
|
|
|
$
|
27,667
|
|
|
$
|
31,408
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Funded status
|
|
$
|
(3,961
|
)
|
|
$
|
(3,566
|
)
|
|
$
|
(2,871
|
)
|
|
$
|
(16,847
|
)
|
|
$
|
(17,004
|
)
|
|
$
|
(18,524
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid (accrued) benefit expense
|
|
$
|
8,653
|
|
|
$
|
9,265
|
|
|
$
|
10,656
|
|
|
$
|
(11,210
|
)
|
|
$
|
(11,622
|
)
|
|
$
|
(12,024
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total amount recognized in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Balance Sheets, all in Other liabilities
|
|
$
|
(3,961
|
)
|
|
$
|
(3,566
|
)
|
|
$
|
(2,871
|
)
|
|
$
|
(16,847
|
)
|
|
$
|
(17,004
|
)
|
|
$
|
(18,524
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized in accumulated other comprehensive income (loss) (“AOCI”):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior service cost
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Net actuarial loss
|
|
|
12,613
|
|
|
|
12,831
|
|
|
|
13,527
|
|
|
|
5,637
|
|
|
|
5,382
|
|
|
|
6,500
|
|
Total amount recognized in AOCI
|
|
$
|
12,613
|
|
|
$
|
12,831
|
|
|
$
|
13,527
|
|
|
$
|
5,637
|
|
|
$
|
5,382
|
|
|
$
|
6,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Information for pension plans with an accumulated benefit obligation greater than plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected benefit obligation
|
|
$
|
29,407
|
|
|
$
|
31,233
|
|
|
$
|
34,279
|
|
|
$
|
16,847
|
|
|
$
|
17,004
|
|
|
$
|
18,524
|
|
Accumulated benefit obligation
|
|
|
29,407
|
|
|
|
31,233
|
|
|
|
34,279
|
|
|
|
16,847
|
|
|
|
17,004
|
|
|
|
18,524
|
|
Fair value of plan assets
|
|
|
25,446
|
|
|
|
27,667
|
|
|
|
31,408
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
NOTE 11 - Pension Plans and Other Postretirement Benefits-(Continued)
The change in the Company’s AOCI
for the defined benefit plans for the year ended December 31, 2016 was primarily attributable to a decrease in the discount rate,
partially offset by the performance of plan assets. The change in the Company’s AOCI for the defined benefit plans for the
year ended December 31, 2015 was primarily attributable to an increase in the discount rate, partially offset by the performance
of plan assets. The change in the Company’s AOCI for the defined benefit plans for the year ended December 31, 2014 was primarily
attributable to loss recognition in 2014, due to settlement accounting as well as loss amortization included in net periodic benefit
cost for 2014. This loss recognition was partially offset by liability losses in 2014 due to a decrease in the discount rate as
well as a change in the mortality assumption.
|
|
|
|
|
Supplemental
|
|
|
|
Defined Benefit Plan
|
|
Defined Benefit Plans
|
|
|
Year Ended December 31,
|
|
Year Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
|
2016
|
|
2015
|
|
2014
|
Components of net periodic pension (income) expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit accrual
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Other expenses
|
|
|
650
|
|
|
|
450
|
|
|
|
360
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Interest cost
|
|
|
1,244
|
|
|
|
1,189
|
|
|
|
1,679
|
|
|
|
687
|
|
|
|
654
|
|
|
|
716
|
|
Expected return on plan assets
|
|
|
(1,675
|
)
|
|
|
(1,875
|
)
|
|
|
(2,402
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Settlement loss
|
|
|
-
|
|
|
|
-
|
|
|
|
2,668
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Amortization of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior service cost
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Actuarial loss
|
|
|
393
|
|
|
|
1,626
|
|
|
|
1,371
|
|
|
|
233
|
|
|
|
273
|
|
|
|
157
|
|
Net periodic pension expense
|
|
$
|
612
|
|
|
$
|
1,390
|
|
|
$
|
3,676
|
|
|
$
|
920
|
|
|
$
|
927
|
|
|
$
|
873
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in plan assets and benefit obligations included in other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior service cost
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Net actuarial loss (gain)
|
|
|
175
|
|
|
|
930
|
|
|
|
(1,037
|
)
|
|
|
488
|
|
|
|
(845
|
)
|
|
|
2,431
|
|
Amortization of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior service cost
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2
|
)
|
Actuarial loss
|
|
|
(393
|
)
|
|
|
(1,626
|
)
|
|
|
(1,371
|
)
|
|
|
(233
|
)
|
|
|
(273
|
)
|
|
|
(157
|
)
|
Total recognized in other comprehensive income (loss)
|
|
$
|
(218
|
)
|
|
$
|
(696
|
)
|
|
$
|
(2,408
|
)
|
|
$
|
255
|
|
|
$
|
(1,118
|
)
|
|
$
|
2,272
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average assumptions used to determine expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
4.20
|
%
|
|
|
3.66
|
%
|
|
|
4.46
|
%
|
|
|
4.20
|
%
|
|
|
3.66
|
%
|
|
|
4.46
|
%
|
Expected return on plan assets
|
|
|
6.50
|
%
|
|
|
6.75
|
%
|
|
|
7.50
|
%
|
|
|
6.50
|
%
|
|
|
*
|
|
|
|
*
|
|
Annual rate of salary increase
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average assumptions used to determine benefit obligations as of December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
3.90
|
%
|
|
|
4.20
|
%
|
|
|
3.66
|
%
|
|
|
3.90
|
%
|
|
|
4.20
|
%
|
|
|
3.66
|
%
|
Expected return on plan assets
|
|
|
6.50
|
%
|
|
|
6.75
|
%
|
|
|
7.50
|
%
|
|
|
6.50
|
%
|
|
|
*
|
|
|
|
*
|
|
Annual rate of salary increase
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
* Not applicable.
NOTE 11 - Pension Plans and Other Postretirement Benefits-(Continued)
The discount rates at December 31,
2016 were based on the average yield for long-term, high-grade securities available during the benefit payout period. To set its
discount rate, the Company looks to leading indicators, including the Mercer Above Mean Yield Curve.
The assumption for the long-term rate
of return on plan assets was determined by considering actual investment experience during the lifetime of the plan, balanced with
reasonable expectations of future growth considering the various classes of assets and percentage allocation for each asset class.
The Company has an investment policy
for the defined benefit pension plan that aligns the assets within the plan’s trust to an approximate allocation of 50% equity
and 50% fixed income funds. Management believes this allocation will produce the targeted long-term rate of return on assets necessary
for payment of future benefit obligations, while providing adequate liquidity for payments to current beneficiaries. Assets are
reviewed against the defined benefit pension plan’s investment policy and the trustee has been directed to adjust invested
assets at least quarterly to maintain the target allocation percentages.
Fair values of the equity security
funds and fixed income funds have been determined from public quotations. The following table presents the fair value hierarchy
for the Company’s defined benefit pension plan assets, excluding cash held.
|
|
|
|
Fair Value Measurements at
|
|
|
|
|
Reporting Date Using
|
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset category
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity security funds (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
9,836
|
|
|
|
$
|
-
|
|
|
$
|
9,836
|
|
|
|
$
|
-
|
|
International
|
|
|
2,492
|
|
|
|
|
-
|
|
|
|
2,492
|
|
|
|
|
-
|
|
Fixed income funds
|
|
|
12,402
|
|
|
|
|
-
|
|
|
|
12,402
|
|
|
|
|
-
|
|
Short-term investment funds
|
|
|
716
|
|
|
|
|
716
|
|
|
|
-
|
|
|
|
|
-
|
|
Total
|
|
$
|
25,446
|
|
|
|
$
|
716
|
|
|
$
|
24,730
|
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset category
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity security funds (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
10,844
|
|
|
|
$
|
-
|
|
|
$
|
10,844
|
|
|
|
$
|
-
|
|
International
|
|
|
2,681
|
|
|
|
|
-
|
|
|
|
2,681
|
|
|
|
|
-
|
|
Fixed income funds
|
|
|
13,720
|
|
|
|
|
-
|
|
|
|
13,720
|
|
|
|
|
-
|
|
Short-term investments funds
|
|
|
422
|
|
|
|
|
422
|
|
|
|
-
|
|
|
|
|
-
|
|
Total
|
|
$
|
27,667
|
|
|
|
$
|
422
|
|
|
$
|
27,245
|
|
|
|
$
|
-
|
|
(1)
|
|
None of the trust fund assets for the defined benefit pension plan have been invested
in shares of HMEC’s common stock.
|
There were no Level 3 assets held during
the years ended December 31, 2016 and 2015.
NOTE 11 - Pension Plans and Other Postretirement Benefits-(Continued)
In 2017, the Company expects amortization
of net losses of $389 and $258 for the defined benefit plan and the supplemental retirement plans, respectively, and expects no
amortization of prior service cost for the supplemental retirement plans to be included in net periodic pension expense.
Postretirement Benefits Other
than Pensions
In addition to providing pension benefits,
as further described below, prior to 2015 the Company also provided certain health care and life insurance benefits to a closed
group of eligible employees (pre-age 65 and former employees). Postretirement benefits other than pensions of active and retired
employees were accrued as expense over the employees' service years.
As of December 31, 2006, upon discontinuation
of retiree medical benefits, Health Reimbursement Accounts (“HRAs”) were established for eligible participants and
totaled $7,310. As of December 31, 2016, the balance of the previously established HRAs was $1,652. Funding of HRAs was $218, $523
and $252 for the years ended December 31, 2016, 2015 and 2014, respectively.
In December 2013, the Company announced
the elimination of postretirement medical coverage for all remaining eligible participants effective March 31, 2014. As a result
of this plan change, prior service cost was amortized over the average working lifetime of active eligible participants.
In November 2014, the Company announced
it would no longer sponsor the retiree group life benefit as of December 2014 and offered a conversion option to individual policies.
This was the last remaining postretirement benefit other than pensions.
As a result of the changes in the plan
for other postretirement benefits, the Company recorded a reduction in its expenses of $2,980 for the year ended December 31, 2014.
NOTE 11 - Pension Plans and Other Postretirement Benefits-(Continued)
The following table presents the funded
status of postretirement benefits other than pensions of active and retired employees (including employees on disability more than
2 years) as of December 31, 2014 (the measurement date) reconciled with amounts recognized in the Company's Consolidated Balance
Sheets. The tables present postretirement expenses and liabilities only for those years in which the Company incurred expenses
or accrued liabilities.
|
|
|
December 31,
|
|
|
|
|
|
2014
|
|
|
Change in accumulated postretirement benefit obligations:
|
|
|
|
|
|
|
Accumulated postretirement benefit obligations at beginning of year
|
|
|
$
|
1,130
|
|
|
Changes during fiscal year:
|
|
|
|
|
|
|
Service cost
|
|
|
|
-
|
|
|
Interest cost
|
|
|
|
46
|
|
|
Plan amendment
|
|
|
|
-
|
|
|
Settlements
|
|
|
|
(965
|
)
|
|
Employer payments net of participant contributions
|
|
|
|
(95
|
)
|
|
Actuarial (gain) loss
|
|
|
|
(116
|
)
|
|
Accumulated postretirement benefit obligations at end of year
|
|
|
$
|
-
|
|
|
Unfunded status
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
Total amount recognized in Consolidated Balance Sheets, all in Other liabilities
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
Amounts recognized in accumulated other comprehensive income (loss) (“AOCI”):
|
|
|
|
|
|
|
Prior service cost (credit)
|
|
|
$
|
-
|
|
|
Net actuarial loss (gain)
|
|
|
|
-
|
|
|
Total amount recognized in AOCI
|
|
|
$
|
-
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
2014
|
|
|
Components of net periodic benefit:
|
|
|
|
|
|
|
Service cost
|
|
|
$
|
-
|
|
|
Interest cost
|
|
|
|
46
|
|
|
Curtailment gain
|
|
|
|
(713
|
)
|
|
Settlement gain
|
|
|
|
(1,439
|
)
|
|
Amortization of prior service cost
|
|
|
|
(628
|
)
|
|
Amortization of prior gain
|
|
|
|
(246
|
)
|
|
Net periodic income
|
|
|
$
|
(2,980
|
)
|
|
NOTE 11 - Pension Plans and Other Postretirement Benefits-(Continued)
Sensitivity Analysis and Assumptions
for Postretirement Benefits Other than Pensions
A one percentage point change in the
assumed health care cost trend rate for each year would change the accumulated postretirement benefit obligations as follows:
|
|
December 31,
|
|
|
|
|
|
2014
|
|
|
Accumulated postretirement benefit obligations
|
|
|
|
|
|
|
Effect of a one percentage point increase
|
|
|
|
*
|
|
|
Effect of a one percentage point decrease
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
Service and interest cost components of the net periodic postretirement benefit expense
|
|
|
|
|
|
|
Effect of a one percentage point increase
|
|
|
|
*
|
|
|
Effect of a one percentage point decrease
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
Weighted average assumptions used to determine benefit obligations as of December 31:
|
|
|
|
|
|
|
Discount rate
|
|
|
|
3.66
|
%
|
|
Healthcare cost trend rate
|
|
|
|
*
|
|
|
Rate to which the cost trend rate is assumed to decline (ultimate trend rate)
|
|
|
|
*
|
|
|
Year the rate is assumed to reach the ultimate trend rate
|
|
|
|
*
|
|
|
Expected return on plan assets
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
Weighted average assumptions used to determine net periodic benefit cost for the years ended December 31:
|
|
|
|
|
|
|
Discount rate
|
|
|
|
4.46
|
%
|
|
Healthcare cost trend rate
|
|
|
|
*
|
|
|
Rate to which the cost trend rate is assumed to decline (ultimate trend rate)
|
|
|
|
*
|
|
|
Year the rate is assumed to reach the ultimate trend rate
|
|
|
|
*
|
|
|
Expected return on plan assets
|
|
|
|
*
|
|
|
*
Not
applicable.
The discount rates were based on the
average yield for long-term, high-grade securities available during the benefit payout period. To set its discount rate, the Company
looks to leading indicators, including the Mercer Above Mean Yield Curve.
2017 Contributions
In 2017, there is no minimum funding
requirement for the Company’s defined benefit plan. The following table discloses that minimum funding requirement and the
expected full year contributions for the Company’s plans.
|
|
Defined Benefit Pension Plans
|
|
|
|
Defined
|
|
|
Supplemental
|
|
|
|
Benefit
|
|
|
Defined Benefit
|
|
|
|
Plan
|
|
|
Plans
|
|
|
|
|
|
|
|
|
Minimum funding requirement for 2017
|
|
$
|
-
|
|
|
|
N/A
|
|
Expected contributions (approximations) for the year ended December 31, 2017 as of the time of
this Form 10-K (1)
|
|
|
-
|
|
|
$
|
1,318
|
|
N/A - Not applicable.
(1) HMEC’s Annual Report on Form
10-K for the year ended December 31, 2016.
NOTE 11 - Pension Plans and Other Postretirement Benefits-(Continued)
Estimated Future Benefit Payments
The Company’s defined benefit
plan may be subject to settlement accounting. Assumptions for both the number of individuals retiring in a calendar year and their
elections regarding lump sum distributions are significant factors impacting the payout patterns for each of the plans below. Therefore,
actual results could vary from the estimates shown. Estimated future benefit payments as of December 31, 2016 were as follows:
|
|
2017
|
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
|
2021
|
|
|
2022-2026
|
|
Pension plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined benefit plan
|
|
$
|
2,850
|
|
|
$
|
2,752
|
|
|
$
|
3,043
|
|
|
$
|
2,431
|
|
|
$
|
2,180
|
|
|
$
|
10,275
|
|
Supplemental retirement plans
|
|
|
1,318
|
|
|
|
1,305
|
|
|
|
1,291
|
|
|
|
1,274
|
|
|
|
1,256
|
|
|
|
5,909
|
|
NOTE 12 - Contingencies and Commitments
Lawsuits and Legal Proceedings
Companies in the insurance industry
have been subject to substantial litigation resulting from claims, disputes and other matters. For instance, they have faced expensive
claims, including class action lawsuits, alleging, among other things, improper sales practices and improper claims settlement
procedures. Negotiated settlements of certain such actions have had a material adverse effect on many insurance companies.
At the time of this Annual Report on
Form 10-K, the Company does not have pending litigation from which there is a reasonable possibility of material loss.
Assessments for Insolvencies
of Unaffiliated Insurance Companies
The Company is contingently liable
for possible assessments under regulatory requirements pertaining to potential insolvencies of unaffiliated insurance companies.
Liabilities, which are established based upon regulatory guidance, have generally been insignificant.
Leases
The Company has entered into various
operating lease agreements, primarily for real estate (claims and marketing offices in a few states, as well as portions of the
home office complex) and also for computer equipment and copy machines. Rental expenses were $2,546, $2,872 and $2,823 for the
years ended December 31, 2016, 2015 and 2014, respectively. Future minimum lease payments under leases expiring subsequent to December
31, 2016 are as follows:
|
|
As of December 31, 2016
|
|
|
|
2017
|
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
|
2021
|
|
|
2022-
2026
|
|
|
2027 and
beyond
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum operating lease payments
|
|
$
|
2,608
|
|
|
$
|
2,583
|
|
|
$
|
2,400
|
|
|
$
|
1,598
|
|
|
$
|
1,147
|
|
|
$
|
1,627
|
|
|
$
|
-
|
|
NOTE 12 - Contingencies and Commitments-(Continued)
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 $135,054 and $147,139 for the years ended December 31, 2016 and 2015, respectively.
NOTE 13 - Supplementary Data on Cash Flows
A reconciliation of net income to net
cash provided by operating activities as presented in the Consolidated Statements of Cash Flows is as follows:
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
83,765
|
|
|
$
|
93,482
|
|
|
$
|
104,243
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized investment gains
|
|
|
(4,123
|
)
|
|
|
(12,713
|
)
|
|
|
(10,917
|
)
|
Increase in accrued investment income
|
|
|
(2,208
|
)
|
|
|
(2,566
|
)
|
|
|
(5,563
|
)
|
Increase (decrease) in accrued expenses
|
|
|
4,378
|
|
|
|
(5,798
|
)
|
|
|
1,513
|
|
Depreciation and amortization
|
|
|
6,896
|
|
|
|
7,734
|
|
|
|
7,958
|
|
Increase in insurance liabilities
|
|
|
176,315
|
|
|
|
145,313
|
|
|
|
153,423
|
|
Increase in premium receivables
|
|
|
(11,496
|
)
|
|
|
(8,641
|
)
|
|
|
(3,638
|
)
|
Increase in deferred policy acquisition costs
|
|
|
(15,859
|
)
|
|
|
(8,981
|
)
|
|
|
(12,662
|
)
|
(Increase) decrease in reinsurance recoverables
|
|
|
(481
|
)
|
|
|
(748
|
)
|
|
|
1,570
|
|
(Decrease) increase in income tax liabilities
|
|
|
(1,293
|
)
|
|
|
8,935
|
|
|
|
9,745
|
|
Debt retirement costs
|
|
|
-
|
|
|
|
2,338
|
|
|
|
-
|
|
Other
|
|
|
(28,476
|
)
|
|
|
(11,312
|
)
|
|
|
(23,739
|
)
|
Total adjustments
|
|
|
123,653
|
|
|
|
113,561
|
|
|
|
117,690
|
|
Net cash provided by operating activities
|
|
$
|
207,418
|
|
|
$
|
207,043
|
|
|
$
|
221,933
|
|
The Company’s redemption of debt
in 2015 resulted in non-cash financing charges of $45.
NOTE 14 - Segment Information
The Company conducts and manages its
business through four segments. The three operating segments, representing the major lines of insurance business, are: Property
and Casualty segment, primarily personal lines automobile and homeowners products; Retirement segment, primarily tax-qualified
fixed and variable annuities; and Life segment life insurance. The Company does not allocate the impact of corporate-level transactions
to these operating segments, consistent with the basis for management’s evaluation of the results of those segments, but
classifies those items in the fourth segment, Corporate and Other. In addition to ongoing transactions such as corporate debt service,
realized investment gains and losses and certain public company expenses, such items also have included corporate debt retirement
costs/gains, when applicable.
The accounting policies of the segments
are the same as those described in “Note 1 — Summary of Significant Accounting Policies”. The Company accounts
for intersegment transactions, primarily the allocation of operating and agency costs from the Corporate and Other segment to the
Property and Casualty, Retirement and Life segments, on a direct cost basis.
Summarized financial information for
these segments is as follows:
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Insurance premiums and contract charges earned
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and Casualty
|
|
$
|
620,514
|
|
|
$
|
595,958
|
|
|
$
|
581,828
|
|
Retirement
|
|
|
24,937
|
|
|
|
25,378
|
|
|
|
25,540
|
|
Life
|
|
|
113,695
|
|
|
|
110,544
|
|
|
|
108,392
|
|
Total
|
|
$
|
759,146
|
|
|
$
|
731,880
|
|
|
$
|
715,760
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and Casualty
|
|
$
|
38,998
|
|
|
$
|
33,461
|
|
|
$
|
36,790
|
|
Retirement
|
|
|
249,410
|
|
|
|
228,378
|
|
|
|
222,071
|
|
Life
|
|
|
73,567
|
|
|
|
71,614
|
|
|
|
71,865
|
|
Corporate and Other
|
|
|
66
|
|
|
|
38
|
|
|
|
14
|
|
Intersegment eliminations
|
|
|
(855
|
)
|
|
|
(891
|
)
|
|
|
(925
|
)
|
Total
|
|
$
|
361,186
|
|
|
$
|
332,600
|
|
|
$
|
329,815
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and Casualty
|
|
$
|
25,644
|
|
|
$
|
40,043
|
|
|
$
|
46,907
|
|
Retirement
|
|
|
50,674
|
|
|
|
43,384
|
|
|
|
45,336
|
|
Life
|
|
|
16,559
|
|
|
|
14,982
|
|
|
|
17,503
|
|
Corporate and Other
|
|
|
(9,112
|
)
|
|
|
(4,927
|
)
|
|
|
(5,503
|
)
|
Total
|
|
$
|
83,765
|
|
|
$
|
93,482
|
|
|
$
|
104,243
|
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Assets
|
|
|
|
|
|
|
|
|
|
Property and Casualty
|
|
$
|
1,110,958
|
|
|
$
|
1,098,415
|
|
|
$
|
1,107,962
|
|
Retirement
|
|
|
7,449,777
|
|
|
|
7,001,411
|
|
|
|
6,683,473
|
|
Life
|
|
|
1,912,771
|
|
|
|
1,862,719
|
|
|
|
1,858,150
|
|
Corporate and Other
|
|
|
140,104
|
|
|
|
131,635
|
|
|
|
155,497
|
|
Intersegment eliminations
|
|
|
(36,786
|
)
|
|
|
(37,208
|
)
|
|
|
(36,736
|
)
|
Total
|
|
$
|
10,576,824
|
|
|
$
|
10,056,972
|
|
|
$
|
9,768,346
|
|
NOTE 14 - Segment Information-(Continued)
Additional significant financial information
for these segments is as follows:
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Policy acquisition expenses amortized
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and Casualty
|
|
$
|
74,950
|
|
|
$
|
73,173
|
|
|
$
|
71,327
|
|
Retirement
|
|
|
14,635
|
|
|
|
18,155
|
|
|
|
14,781
|
|
Life
|
|
|
7,147
|
|
|
|
7,591
|
|
|
|
7,709
|
|
Total
|
|
$
|
96,732
|
|
|
$
|
98,919
|
|
|
$
|
93,817
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit)
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and Casualty
|
|
$
|
4,627
|
|
|
$
|
11,274
|
|
|
$
|
13,944
|
|
Retirement
|
|
|
20,334
|
|
|
|
19,873
|
|
|
|
21,319
|
|
Life
|
|
|
9,775
|
|
|
|
7,951
|
|
|
|
9,432
|
|
Corporate and Other
|
|
|
(4,269
|
)
|
|
|
(3,128
|
)
|
|
|
(2,825
|
)
|
Total
|
|
$
|
30,467
|
|
|
$
|
35,970
|
|
|
$
|
41,870
|
|
NOTE 15 - Unaudited Selected Quarterly Financial Data
Selected quarterly financial data is
presented below.
|
|
Three Months Ended
|
|
|
December 31,
|
|
September 30,
|
|
June 30,
|
|
March 31,
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance premiums written and contract deposits
|
|
|
$
|
315,917
|
|
|
|
$
|
351,534
|
|
|
|
$
|
311,879
|
|
|
|
$
|
283,169
|
|
Total revenues
|
|
|
|
282,873
|
|
|
|
|
291,176
|
|
|
|
|
283,558
|
|
|
|
|
271,303
|
|
Net income
|
|
|
|
19,823
|
|
|
|
|
26,923
|
|
|
|
|
11,866
|
|
|
|
|
25,153
|
|
Per share information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
$
|
0.48
|
|
|
|
$
|
0.66
|
|
|
|
$
|
0.29
|
|
|
|
$
|
0.61
|
|
Shares of common stock - weighted average (1)
|
|
|
|
41,093
|
|
|
|
|
41,092
|
|
|
|
|
41,082
|
|
|
|
|
41,297
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
$
|
0.48
|
|
|
|
$
|
0.65
|
|
|
|
$
|
0.29
|
|
|
|
$
|
0.61
|
|
Shares of common stock and equivalent shares - weighted average (1)
|
|
|
|
41,482
|
|
|
|
|
41,347
|
|
|
|
|
41,314
|
|
|
|
|
41,492
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance premiums written and contract deposits
|
|
|
$
|
305,186
|
|
|
|
$
|
326,198
|
|
|
|
$
|
319,394
|
|
|
|
$
|
305,735
|
|
Total revenues
|
|
|
|
276,106
|
|
|
|
|
265,753
|
|
|
|
|
268,470
|
|
|
|
|
270,119
|
|
Net income
|
|
|
|
21,040
|
|
|
|
|
21,984
|
|
|
|
|
16,183
|
|
|
|
|
34,275
|
|
Per share information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
$
|
0.51
|
|
|
|
$
|
0.53
|
|
|
|
$
|
0.39
|
|
|
|
$
|
0.82
|
|
Shares of common stock - weighted average (1)
|
|
|
|
41,564
|
|
|
|
|
41,852
|
|
|
|
|
41,990
|
|
|
|
|
41,950
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
$
|
0.50
|
|
|
|
$
|
0.52
|
|
|
|
$
|
0.38
|
|
|
|
$
|
0.81
|
|
Shares of common stock and equivalent shares - weighted average (1)
|
|
|
|
42,127
|
|
|
|
|
42,305
|
|
|
|
|
42,425
|
|
|
|
|
42,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance premiums written and contract deposits
|
|
|
$
|
292,241
|
|
|
|
$
|
322,746
|
|
|
|
$
|
292,393
|
|
|
|
$
|
260,275
|
|
Total revenues
|
|
|
|
269,157
|
|
|
|
|
265,520
|
|
|
|
|
264,743
|
|
|
|
|
261,265
|
|
Net income
|
|
|
|
30,068
|
|
|
|
|
25,357
|
|
|
|
|
20,452
|
|
|
|
|
28,366
|
|
Per share information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
$
|
0.72
|
|
|
|
$
|
0.61
|
|
|
|
$
|
0.49
|
|
|
|
$
|
0.69
|
|
Shares of common stock - weighted average (1)
|
|
|
|
41,748
|
|
|
|
|
41,514
|
|
|
|
|
41,432
|
|
|
|
|
41,180
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
$
|
0.71
|
|
|
|
$
|
0.60
|
|
|
|
$
|
0.48
|
|
|
|
$
|
0.67
|
|
Shares of common stock and equivalent shares - weighted average (1)
|
|
|
|
42,362
|
|
|
|
|
42,319
|
|
|
|
|
42,310
|
|
|
|
|
42,259
|
|
(1) Rounded to thousands.
SCHEDULE I
HORACE MANN EDUCATORS CORPORATION
SUMMARY OF INVESTMENTS-OTHER THAN
INVESTMENTS IN RELATED PARTIES
December 31, 2016
(Dollars in thousands)
|
|
|
|
|
|
|
|
Amount
|
|
|
|
|
|
|
|
|
|
Shown in
|
|
|
|
|
|
|
Fair
|
|
|
Balance
|
|
Type of Investments
|
|
Cost (1)
|
|
|
Value
|
|
|
Sheet
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and federally sponsored agency obligations
|
|
$
|
921,477
|
|
|
$
|
946,268
|
|
|
$
|
946,268
|
|
States, municipalities and political subdivisions
|
|
|
1,648,252
|
|
|
|
1,769,398
|
|
|
|
1,769,398
|
|
Foreign government bonds
|
|
|
93,864
|
|
|
|
98,669
|
|
|
|
98,669
|
|
Public utilities
|
|
|
140,893
|
|
|
|
159,328
|
|
|
|
159,328
|
|
Other bonds
|
|
|
4,347,641
|
|
|
|
4,483,045
|
|
|
|
4,483,045
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturity securities
|
|
|
7,152,127
|
|
|
|
7,456,708
|
|
|
|
7,456,708
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-redeemable preferred stocks
|
|
|
52,294
|
|
|
|
50,048
|
|
|
|
50,048
|
|
Common stocks
|
|
|
61,715
|
|
|
|
72,233
|
|
|
|
72,233
|
|
Closed-end fund
|
|
|
20,004
|
|
|
|
19,368
|
|
|
|
19,368
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity securities
|
|
|
134,013
|
|
|
|
141,649
|
|
|
|
141,649
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments
|
|
|
44,918
|
|
|
|
XXX
|
|
|
|
44,918
|
|
Policy loans
|
|
|
151,908
|
|
|
|
XXX
|
|
|
|
151,908
|
|
Derivative instruments
|
|
|
8,694
|
|
|
|
XXX
|
|
|
|
8,694
|
|
Mortgage loans
|
|
|
57
|
|
|
|
XXX
|
|
|
|
57
|
|
Other
|
|
|
195,438
|
|
|
|
XXX
|
|
|
|
195,438
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
$
|
7,687,155
|
|
|
|
XXX
|
|
|
$
|
7,999,372
|
|
|
(1)
|
Bonds at original cost reduced by repayments and adjusted for amortization of premiums or accrual of discounts and impairment
in value of specifically identified investments.
|
See accompanying Report of Independent Registered Public
Accounting Firm.
SCHEDULE II
HORACE MANN EDUCATORS CORPORATION
(Parent Company Only)
CONDENSED FINANCIAL INFORMATION
OF REGISTRANT
BALANCE SHEETS
As of December 31, 2016 and 2015
(Dollars in thousands, except per
share data)
|
|
|
December 31,
|
|
|
|
|
2016
|
|
|
|
2015
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
Investments and cash
|
|
$
|
4,069
|
|
|
$
|
13,237
|
|
Investment in subsidiaries
|
|
|
1,487,457
|
|
|
|
1,451,290
|
|
Other assets
|
|
|
60,057
|
|
|
|
57,743
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,551,583
|
|
|
$
|
1,522,270
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
247,209
|
|
|
$
|
246,975
|
|
Other liabilities
|
|
|
10,392
|
|
|
|
10,634
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
257,601
|
|
|
|
257,609
|
|
|
|
|
|
|
|
|
|
|
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, 64,917,683; 2015, 64,537,554
|
|
|
65
|
|
|
|
65
|
|
Additional paid-in capital
|
|
|
453,479
|
|
|
|
442,648
|
|
Retained earnings
|
|
|
1,155,732
|
|
|
|
1,116,277
|
|
Accumulated other comprehensive income (loss), net of taxes:
|
|
|
|
|
|
|
|
|
Net unrealized investment gains on fixed maturities and equity securities
|
|
|
175,738
|
|
|
|
175,167
|
|
Net funded status of pension benefit obligations
|
|
|
(11,817
|
)
|
|
|
(11,794
|
)
|
Treasury stock, at cost, 2016, 24,672,932 shares; 2015, 23,971,522 shares
|
|
|
(479,215
|
)
|
|
|
(457,702
|
)
|
|
|
|
|
|
|
|
|
|
Total shareholders' equity
|
|
|
1,293,982
|
|
|
|
1,264,661
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders' equity
|
|
$
|
1,551,583
|
|
|
$
|
1,522,270
|
|
See accompanying Note to Condensed Financial Statements.
See accompanying Report of Independent Registered Public
Accounting Firm.
SCHEDULE II
HORACE MANN EDUCATORS CORPORATION
(Parent Company Only)
CONDENSED FINANCIAL INFORMATION
OF REGISTRANT
STATEMENTS OF OPERATIONS
(Dollars in thousands)
|
|
|
Year Ended December 31,
|
|
|
|
|
2016
|
|
|
|
2015
|
|
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
$
|
20
|
|
|
$
|
33
|
|
|
$
|
10
|
|
Realized investment gains
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
20
|
|
|
|
33
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
11,808
|
|
|
|
13,122
|
|
|
|
14,198
|
|
Debt retirement costs
|
|
|
-
|
|
|
|
2,338
|
|
|
|
-
|
|
Other
|
|
|
5,631
|
|
|
|
5,153
|
|
|
|
5,071
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
17,439
|
|
|
|
20,613
|
|
|
|
19,269
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income tax benefit and equity in net earnings of subsidiaries
|
|
|
(17,419
|
)
|
|
|
(20,580
|
)
|
|
|
(19,259
|
)
|
Income tax benefit
|
|
|
(6,076
|
)
|
|
|
(7,202
|
)
|
|
|
(6,734
|
)
|
Loss before equity in net earnings of subsidiaries
|
|
|
(11,343
|
)
|
|
|
(13,378
|
)
|
|
|
(12,525
|
)
|
Equity in net earnings of subsidiaries
|
|
|
95,108
|
|
|
|
106,860
|
|
|
|
116,768
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
83,765
|
|
|
$
|
93,482
|
|
|
$
|
104,243
|
|
See accompanying Note to Condensed Financial Statements.
See accompanying Report of Independent Registered Public
Accounting Firm.
SCHEDULE II
HORACE MANN EDUCATORS CORPORATION
(Parent Company Only)
CONDENSED FINANCIAL INFORMATION
OF REGISTRANT
STATEMENTS OF CASH FLOWS
(Dollars in thousands)
|
|
|
Year Ended December 31,
|
|
|
|
|
2016
|
|
|
|
2015
|
|
|
|
2014
|
|
Cash flows - operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense paid
|
|
$
|
(11,754
|
)
|
|
$
|
(13,521
|
)
|
|
$
|
(13,902
|
)
|
Federal income taxes recovered
|
|
|
8,914
|
|
|
|
8,413
|
|
|
|
10,030
|
|
Cash dividends received from subsidiaries
|
|
|
59,600
|
|
|
|
50,000
|
|
|
|
46,000
|
|
Other, net, including settlement of payables to subsidiaries
|
|
|
(3,434
|
)
|
|
|
(4,097
|
)
|
|
|
(1,478
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
53,326
|
|
|
|
40,795
|
|
|
|
40,650
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows - investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in investments
|
|
|
9,161
|
|
|
|
15,402
|
|
|
|
(4,647
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
9,161
|
|
|
|
15,402
|
|
|
|
(4,647
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows - financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends paid to shareholders
|
|
|
(44,310
|
)
|
|
|
(42,523
|
)
|
|
|
(39,237
|
)
|
Proceeds from issuance of Senior Notes due 2025
|
|
|
-
|
|
|
|
246,937
|
|
|
|
-
|
|
Redemption of Senior Notes due 2016
|
|
|
-
|
|
|
|
(127,292
|
)
|
|
|
-
|
|
Maturity of Senior Notes due 2015
|
|
|
-
|
|
|
|
(75,000
|
)
|
|
|
-
|
|
Principal repayment on Bank Credit Facility
|
|
|
-
|
|
|
|
(38,000
|
)
|
|
|
-
|
|
Acquisition of treasury stock
|
|
|
(21,513
|
)
|
|
|
(21,950
|
)
|
|
|
(5,411
|
)
|
Exercise of stock options
|
|
|
3,329
|
|
|
|
1,629
|
|
|
|
8,252
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(62,494
|
)
|
|
|
(56,199
|
)
|
|
|
(36,396
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash
|
|
|
(7
|
)
|
|
|
(2
|
)
|
|
|
(393
|
)
|
Cash at beginning of period
|
|
|
75
|
|
|
|
77
|
|
|
|
470
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash at end of period
|
|
$
|
68
|
|
|
$
|
75
|
|
|
$
|
77
|
|
See accompanying Note to Condensed Financial Statements.
See accompanying Report of Independent Registered Public
Accounting Firm.
SCHEDULE II
HORACE MANN EDUCATORS CORPORATION
(Parent Company Only)
CONDENSED FINANCIAL INFORMATION
OF REGISTRANT
NOTE TO CONDENSED FINANCIAL STATEMENTS
The accompanying condensed financial
statements should be read in conjunction with the Consolidated Financial Statements and the accompanying notes thereto.
SCHEDULE III & VI (COMBINED)
HORACE MANN EDUCATORS CORPORATION
SCHEDULE III: SUPPLEMENTARY INSURANCE INFORMATION
SCHEDULE VI: SUPPLEMENTAL INFORMATION CONCERNING PROPERTY
AND CASUALTY INSURANCE OPERATIONS
(Dollars in thousands)
Column
identification for
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Schedule
III: A
|
|
B
|
|
|
C
|
|
|
|
|
|
D
|
|
|
E
|
|
|
F
|
|
|
G
|
|
|
H
|
|
|
|
|
|
I
|
|
|
J
|
|
|
|
|
|
K
|
|
Schedule
VI: A
|
|
B
|
|
|
C
|
|
|
D
|
|
|
E
|
|
|
|
|
|
F
|
|
|
G
|
|
|
|
|
|
H
|
|
|
I
|
|
|
|
|
|
J
|
|
|
K
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount,
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
Benefits,
|
|
|
Claims
and claim
|
|
|
Amortization
|
|
|
|
|
|
Paid
|
|
|
|
|
|
|
Deferred
|
|
|
Future
policy
|
|
|
if
any,
|
|
|
|
|
|
policy
|
|
|
Premium
|
|
|
|
|
|
claims
|
|
|
adjustment
expenses
|
|
|
of
deferred
|
|
|
|
|
|
claims
|
|
|
|
|
|
|
policy
|
|
|
benefits,
|
|
|
deducted
in
|
|
|
|
|
|
claims
and
|
|
|
revenue/
|
|
|
Net
|
|
|
and
|
|
|
incurred
related to
|
|
|
policy
|
|
|
O
ther
|
|
|
and
claim
|
|
|
|
|
|
|
acquisition
|
|
|
claims
and
|
|
|
previous
|
|
|
Unearned
|
|
|
benefits
|
|
|
premium
|
|
|
i
nvestment
|
|
|
settlement
|
|
|
Current
|
|
|
Prior
|
|
|
acquisition
|
|
|
operating
|
|
|
adjustment
|
|
|
Premiums
|
|
Segment
|
|
costs
|
|
|
claim
expenses
|
|
|
column
|
|
|
premiums
|
|
|
payable
|
|
|
earned
|
|
|
income
|
|
|
expenses
|
|
|
year
|
|
|
y
ears
|
|
|
costs
|
|
|
expenses
|
|
|
expenses
|
|
|
written
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
and Casualty
|
|
$
|
27,604
|
|
|
$
|
307,757
|
|
|
$
|
0
|
|
|
$
|
244,005
|
|
|
$
|
-
|
|
|
$
|
620,514
|
|
|
$
|
38,997
|
|
|
$
|
464,098
|
|
|
$
|
471,098
|
|
|
$
|
(7,000
|
)
|
|
$
|
74,950
|
|
|
$
|
90,802
|
|
|
$
|
468,778
|
|
|
$
|
634,319
|
|
Retirement
|
|
|
188,117
|
|
|
|
4,372,062
|
|
|
|
xxx
|
|
|
|
671
|
|
|
|
705,603
|
|
|
|
24,937
|
|
|
|
249,410
|
|
|
|
151,185
|
|
|
|
xxx
|
|
|
|
xxx
|
|
|
|
14,635
|
|
|
|
40,289
|
|
|
|
xxx
|
|
|
|
xxx
|
|
Life
|
|
|
51,859
|
|
|
|
1,098,038
|
|
|
|
xxx
|
|
|
|
1,598
|
|
|
|
3,347
|
|
|
|
113,695
|
|
|
|
73,567
|
|
|
|
117,743
|
|
|
|
xxx
|
|
|
|
xxx
|
|
|
|
7,147
|
|
|
|
36,806
|
|
|
|
xxx
|
|
|
|
xxx
|
|
Other,
including
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
consolidating
eliminations
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
xxx
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
(788
|
)
|
|
|
N/A
|
|
|
|
xxx
|
|
|
|
xxx
|
|
|
|
N/A
|
|
|
|
17,023
|
|
|
|
xxx
|
|
|
|
xxx
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
267,580
|
|
|
$
|
5,777,857
|
|
|
|
xxx
|
|
|
$
|
246,274
|
|
|
$
|
708,950
|
|
|
$
|
759,146
|
|
|
$
|
361,186
|
|
|
$
|
733,026
|
|
|
|
xxx
|
|
|
|
xxx
|
|
|
$
|
96,732
|
|
|
$
|
184,920
|
|
|
|
xxx
|
|
|
|
xxx
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
and Casualty
|
|
$
|
26,685
|
|
|
$
|
301,569
|
|
|
$
|
0
|
|
|
$
|
230,201
|
|
|
$
|
-
|
|
|
$
|
595,958
|
|
|
$
|
33,461
|
|
|
$
|
420,311
|
|
|
$
|
432,811
|
|
|
$
|
(12,500
|
)
|
|
$
|
73,173
|
|
|
$
|
84,785
|
|
|
$
|
436,431
|
|
|
$
|
605,753
|
|
Retirement
|
|
|
178,300
|
|
|
|
4,082,217
|
|
|
|
xxx
|
|
|
|
734
|
|
|
|
689,116
|
|
|
|
25,378
|
|
|
|
228,378
|
|
|
|
141,893
|
|
|
|
xxx
|
|
|
|
xxx
|
|
|
|
18,155
|
|
|
|
32,555
|
|
|
|
xxx
|
|
|
|
xxx
|
|
Life
|
|
|
48,191
|
|
|
|
1,066,776
|
|
|
|
xxx
|
|
|
|
1,906
|
|
|
|
3,536
|
|
|
|
110,544
|
|
|
|
71,614
|
|
|
|
117,002
|
|
|
|
xxx
|
|
|
|
xxx
|
|
|
|
7,591
|
|
|
|
35,470
|
|
|
|
xxx
|
|
|
|
xxx
|
|
Other,
including
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
consolidating
eliminations
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
xxx
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
(853
|
)
|
|
|
N/A
|
|
|
|
xxx
|
|
|
|
xxx
|
|
|
|
N/A
|
|
|
|
20,061
|
|
|
|
xxx
|
|
|
|
xxx
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
253,176
|
|
|
$
|
5,450,562
|
|
|
|
xxx
|
|
|
$
|
232,841
|
|
|
$
|
692,652
|
|
|
$
|
731,880
|
|
|
$
|
332,600
|
|
|
$
|
679,206
|
|
|
|
xxx
|
|
|
|
xxx
|
|
|
$
|
98,919
|
|
|
$
|
172,871
|
|
|
|
xxx
|
|
|
|
xxx
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended December 31, 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
and Casualty
|
|
$
|
27,160
|
|
|
$
|
311,097
|
|
|
$
|
0
|
|
|
$
|
220,406
|
|
|
$
|
-
|
|
|
$
|
581,828
|
|
|
$
|
36,790
|
|
|
$
|
399,512
|
|
|
$
|
416,512
|
|
|
$
|
(17,000
|
)
|
|
$
|
71,327
|
|
|
$
|
88,305
|
|
|
$
|
393,857
|
|
|
$
|
584,393
|
|
Retirement
|
|
|
143,522
|
|
|
|
3,781,260
|
|
|
|
xxx
|
|
|
|
708
|
|
|
|
603,267
|
|
|
|
25,540
|
|
|
|
222,071
|
|
|
|
134,760
|
|
|
|
xxx
|
|
|
|
xxx
|
|
|
|
14,781
|
|
|
|
33,210
|
|
|
|
xxx
|
|
|
|
xxx
|
|
Life
|
|
|
44,400
|
|
|
|
1,035,698
|
|
|
|
xxx
|
|
|
|
2,299
|
|
|
|
3,471
|
|
|
|
108,392
|
|
|
|
71,865
|
|
|
|
110,293
|
|
|
|
xxx
|
|
|
|
xxx
|
|
|
|
7,709
|
|
|
|
36,421
|
|
|
|
xxx
|
|
|
|
xxx
|
|
Other,
including
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
consolidating
eliminations
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
xxx
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
(911
|
)
|
|
|
N/A
|
|
|
|
xxx
|
|
|
|
xxx
|
|
|
|
N/A
|
|
|
|
18,254
|
|
|
|
xxx
|
|
|
|
xxx
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
215,082
|
|
|
$
|
5,128,055
|
|
|
|
xxx
|
|
|
$
|
223,413
|
|
|
$
|
606,738
|
|
|
$
|
715,760
|
|
|
$
|
329,815
|
|
|
$
|
644,565
|
|
|
|
xxx
|
|
|
|
xxx
|
|
|
$
|
93,817
|
|
|
$
|
176,190
|
|
|
|
xxx
|
|
|
|
xxx
|
|
N/A - Not applicable.
See accompanying Report of Independent Registered Public
Accounting Firm.
SCHEDULE IV
HORACE MANN EDUCATORS CORPORATION
REINSURANCE
(Dollars in thousands)
Column A
|
|
Column B
|
|
|
Column C
|
|
|
Column D
|
|
Column E
|
|
|
Column F
|
|
|
|
|
|
Ceded to
|
|
|
Assumed
|
|
|
|
|
Percentage
|
|
|
Gross
|
|
|
Other
|
|
|
from Other
|
|
Net
|
|
|
of Amount
|
|
|
Amount
|
|
|
Companies
|
|
|
Companies
|
|
Amount
|
|
|
Assumed to Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life insurance in force
|
|
$
|
17,025,125
|
|
|
$
|
4,065,449
|
|
|
|
$
|
-
|
|
|
$
|
12,959,676
|
|
|
|
-
|
|
Premiums
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and Casualty
|
|
$
|
632,372
|
|
|
$
|
16,179
|
|
|
|
$
|
4,321
|
|
|
$
|
620,514
|
|
|
|
0.7
|
%
|
Retirement
|
|
|
24,937
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
24,937
|
|
|
|
-
|
|
Life
|
|
|
120,342
|
|
|
|
6,647
|
|
|
|
|
-
|
|
|
|
113,695
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total premiums
|
|
$
|
777,651
|
|
|
$
|
22,826
|
|
|
|
$
|
4,321
|
|
|
$
|
759,146
|
|
|
|
0.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life insurance in force
|
|
$
|
16,504,539
|
|
|
$
|
3,625,946
|
|
|
|
$
|
-
|
|
|
$
|
12,878,593
|
|
|
|
-
|
|
Premiums
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and Casualty
|
|
$
|
610,347
|
|
|
$
|
18,548
|
|
|
|
$
|
4,159
|
|
|
$
|
595,958
|
|
|
|
0.7
|
%
|
Retirement
|
|
|
25,378
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
25,378
|
|
|
|
-
|
|
Life
|
|
|
117,073
|
|
|
|
6,529
|
|
|
|
|
-
|
|
|
|
110,544
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total premiums
|
|
$
|
752,798
|
|
|
$
|
25,077
|
|
|
|
$
|
4,159
|
|
|
$
|
731,880
|
|
|
|
0.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life insurance in force
|
|
$
|
15,800,701
|
|
|
$
|
3,360,016
|
|
|
|
$
|
-
|
|
|
$
|
12,440,685
|
|
|
|
-
|
|
Premiums
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and Casualty
|
|
$
|
599,230
|
|
|
$
|
21,157
|
|
|
|
$
|
3,755
|
|
|
$
|
581,828
|
|
|
|
0.6
|
%
|
Retirement
|
|
|
25,540
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
25,540
|
|
|
|
-
|
|
Life
|
|
|
114,511
|
|
|
|
6,119
|
|
|
|
|
-
|
|
|
|
108,392
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total premiums
|
|
$
|
739,281
|
|
|
$
|
27,276
|
|
|
|
$
|
3,755
|
|
|
$
|
715,760
|
|
|
|
0.5
|
%
|
Note: Premiums above include insurance premiums earned and contract charges
earned.
See accompanying Report of Independent Registered Public
Accounting Firm.
HORACE MANN EDUCATORS CORPORATION
EXHIBITS
To
FORM 10-K
For the Year Ended December 31, 2016
VOLUME 1 OF 1
The following items
are filed as Exhibits to Horace Mann Educators Corporation's ("HMEC") Annual Report on Form 10-K for the year ended December
31, 2016. Management contracts and compensatory plans are indicated by an asterisk (*).
EXHIBIT INDEX
Exhibit
|
|
No.
|
|
|
Description
|
|
|
(3)
|
Articles of incorporation and bylaws:
|
|
|
|
|
3.1
|
Restated Certificate of Incorporation of HMEC, filed with the Delaware Secretary of State on June 24, 2003, incorporated by reference to Exhibit 3.1 to HMEC’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2003, filed with the Securities and Exchange Commission (the “SEC”) on August 14, 2003.
|
|
|
|
|
3.2
|
Form of Certificate for shares of Common Stock, $0.001 par value per share, of HMEC, incorporated by reference to Exhibit 4.5 to HMEC’s Registration Statement on Form S-3 (Registration No. 33-53118) filed with the SEC on October 9, 1992.
|
|
|
|
|
3.3
|
Bylaws of HMEC, incorporated by reference to Exhibit 3.2 to HMEC’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2003, filed with the SEC on August 14, 2003.
|
|
|
|
(4)
|
Instruments defining the rights of security holders, including indentures:
|
|
|
|
|
4.1
|
Indenture, dated as of November 23, 2015, by and between HMEC and The Bank of New York Mellon Trust Company, N.A., as trustee, incorporated by reference to Exhibit 4.1 to HMEC’s Current Report on Form 8-K dated November 18, 2015, filed with the SEC on November 23, 2015.
|
|
|
|
|
4.1(a)
|
Form of HMEC 4.5000% Senior Notes due 2025, incorporated by reference to Exhibit 4.2 to HMEC’s Current Report on Form 8-K dated November 18, 2015, filed with the SEC on November 23, 2015.
|
|
|
|
|
4.2
|
Certificate of Designations for HMEC Series A Cumulative Convertible Preferred Stock, incorporated by reference to Exhibit 4.3 to HMEC’s Annual Report on Form 10-K for the year ended December 31, 2005, filed with the SEC on March 16, 2006.
|
|
|
|
(10)
|
Material contracts:
|
|
|
|
|
10.1
|
Amended and Restated Credit Agreement dated as of July 30, 2014 among HMEC, certain financial institutions named therein and JPMorgan Chase Bank, N.A., as administrative agent, incorporated by reference to Exhibit 10.1 to HMEC’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014, filed with the SEC on August 8, 2014.
|
Exhibit
|
|
No.
|
|
|
Description
|
|
|
|
|
10.1(a)
|
First Amendment to Credit Agreement dated as of November 16, 2015 among HMEC, certain financial institutions named therein and JPMorgan Chase Bank, N.A., as administrative agent, incorporated by reference to Exhibit 10.1(a) to HMEC’s Annual Report on Form 10-K for the year ended December 31, 2015, filed with the SEC on February 29, 2016.
|
|
|
|
|
10.2*
|
Horace Mann Educators Corporation Amended and Restated 2002 Incentive Compensation Plan (“2002 Incentive Compensation Plan”), incorporated by reference to Exhibit 10.2 to HMEC’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2005, filed with the SEC on August 9, 2005.
|
|
|
|
|
10.2(a)*
|
Revised Specimen Employee Stock Option Agreement under the 2002 Incentive Compensation Plan, incorporated by reference to Exhibit 10.6(b) to HMEC’s Annual Report on Form 10-K for the year ended December 31, 2008, filed with the SEC on March 2, 2009.
|
|
|
|
|
10.2(b)*
|
Specimen Employee Restricted Stock Unit Agreement under the 2002 Incentive Compensation Plan, incorporated by reference to Exhibit 10.6(d) to HMEC’s Annual Report on Form 10-K for the year ended December 31, 2005, filed with the SEC on March 16, 2006.
|
|
|
|
|
10.2(c)*
|
Revised Specimen Employee Restricted Stock Unit Agreement under the 2002 Incentive Compensation Plan, incorporated by reference to Exhibit 10.6(f) to HMEC’s Annual Report on Form 10-K for the year ended December 31, 2008, filed with the SEC on March 2, 2009.
|
|
|
|
|
10.2(d)*
|
Specimen Non-employee Director Restricted Stock Unit Agreement under the 2002 Incentive Compensation Plan, incorporated by reference to Exhibit 10.6(e) to HMEC’s Annual Report on Form 10-K for the year ended December 31, 2005, filed with the SEC on March 16, 2006.
|
|
|
|
|
10.2(e)*
|
Revised Specimen Non-employee Director Restricted Stock Unit Agreement under the 2002 Incentive Compensation Plan, incorporated by reference to Exhibit 10.6(h) to HMEC’s Annual Report on Form 10-K for the year ended December 31, 2008, filed with the SEC on March 2, 2009.
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|
|
|
|
10.3*
|
HMEC 2010 Comprehensive Executive Compensation Plan As Amended and Restated, incorporated by reference to Exhibit 1 (beginning on page E-1) to HMEC’s Proxy Statement, filed with the SEC on April 8, 2015.
|
|
|
|
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10.3(a)*
|
Specimen Incentive Stock Option Agreement for Section 16 Officers under the HMEC 2010 Comprehensive Executive Compensation Plan, incorporated by reference to Exhibit 10.7(a) to HMEC’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2011, filed with the SEC on August 9, 2011.
|
Exhibit
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No.
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|
|
Description
|
|
|
|
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10.3(b)*
|
Specimen Incentive Stock Option Agreement for Non-Section 16 Officers under the HMEC 2010 Comprehensive Executive Compensation Plan, incorporated by reference to Exhibit 10.7(b) to HMEC’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2011, filed with the SEC on August 9, 2011.
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|
|
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10.3(c)*
|
Specimen Employee Service-Vested Restricted Stock Units Agreement under the HMEC 2010 Comprehensive Executive Compensation Plan, incorporated by reference to Exhibit 10.7(c) to HMEC’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2011, filed with the SEC on August 9, 2011.
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|
|
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10.3(d)*
|
Specimen Employee Performance-Based Restricted Stock Units Agreement under the HMEC 2010 Comprehensive Executive Compensation Plan, incorporated by reference to Exhibit 10.7(d) to HMEC’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2011, filed with the SEC on August 9, 2011.
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|
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10.3(e)*
|
Specimen Employee Performance-Based Restricted Stock Units Agreement - Key Strategic Grantee under the HMEC 2010 Comprehensive Executive Compensation Plan incorporated by reference to Exhibit 10.3(e) to HMEC’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2016, filed with the SEC on May 6, 2016.
|
|
|
|
|
10.3(f)*
|
Specimen Non-employee Director Restricted Stock Unit Agreement under the HMEC 2010 Comprehensive Executive Compensation Plan, incorporated by reference to Exhibit 10.17(a) to HMEC’s Current Report on Form 8-K dated May 27, 2010, filed with the SEC on June 2, 2010.
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|
|
|
|
10.4*
|
Horace Mann Supplemental Employee Retirement Plan, 2002 Restatement, incorporated by reference to Exhibit 10.1 to HMEC’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2002, filed with the SEC on May 15, 2002.
|
|
|
|
|
10.5*
|
Horace Mann Executive Supplemental Employee Retirement Plan, 2002 Restatement, incorporated by reference to Exhibit 10.2 to HMEC’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2002, filed with the SEC on May 15, 2002.
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|
|
|
|
10.6*
|
Amended and Restated Horace Mann Nonqualified Supplemental Money Purchase Pension Plan, incorporated by reference to Exhibit 10.9 to HMEC’s Annual Report on Form 10-K for the year ended December 31, 2008, filed with the SEC on March 2, 2009.
|
|
|
|
|
10.7*
|
Summary of HMEC Non-employee Director Compensation, incorporated by reference to Exhibit 10.7 to HMEC’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2016, filed with the SEC on August 5, 2016.
|
Exhibit
|
|
No.
|
|
|
Description
|
|
|
|
|
10.8*
|
Summary of HMEC Named Executive Officer Annualized Salaries incorporated by reference to Exhibit 10.8 to HMEC’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2016, filed with the SEC on May 6, 2016.
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|
|
|
|
10.9*
|
Form of Severance Agreement between HMEC, Horace Mann Service Corporation (“HMSC”) and certain officers of HMEC and/or HMSC, incorporated by reference to Exhibit 10.13 to HMEC’s Annual Report on Form 10-K for the year ended December 31, 2012, filed with the SEC on February 28, 2013.
|
|
|
|
|
10.9(a)*
|
Revised Schedule to Severance Agreements between HMEC, HMSC and certain officers of HMEC and/or HMSC, incorporated by reference to Exhibit 10.9(a) to HMEC’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2016, filed with the SEC on August 5, 2016.
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|
|
|
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10.10*
|
HMSC Executive Change in Control Plan, incorporated by reference to Exhibit 10.15 to HMEC’s Current Report on Form 8-K dated February 15, 2012, filed with the SEC on February 22, 2012.
|
|
|
|
|
10.10(a)*
|
HMSC Executive Change in Control Plan Schedule A Plan Participants incorporated by reference to Exhibit 10.10(a) to HMEC’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2016, filed with the SEC on May 6, 2016.
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|
|
|
|
10.11*
|
HMSC Executive Severance Plan, incorporated by reference to Exhibit 10.16 to HMEC’s Current Report on Form 8-K dated March 7, 2012, filed with the SEC on March 13, 2012.
|
|
|
|
|
10.11(a)*
|
First Amendment to the HMSC Executive Severance Plan, incorporated by reference to Exhibit 10.16(a) to HMEC’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2012, filed with the SEC on August 9, 2012.
|
|
|
|
|
10.11(b)*
|
HMSC Executive Severance Plan Schedule A Participants incorporated by reference to Exhibit 10.11(b) to HMEC’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2016, filed with the SEC on May 6, 2016.
|
|
|
|
(11)
|
Statement regarding computation of per share earnings.
|
|
|
(12)
|
Statement regarding computation of ratios.
|
|
|
(21)
|
Subsidiaries of HMEC.
|
|
|
(23)
|
Consent of KPMG LLP.
|
Exhibit
|
|
No.
|
|
|
Description
|
|
|
(31)
|
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
|
31.1
|
Certification by Marita Zuraitis, Chief Executive Officer of HMEC.
|
|
|
|
|
31.2
|
Certification by Bret A. Conklin, Senior Vice President and Acting Chief Financial Officer of HMEC.
|
|
|
|
(32)
|
Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
|
32.1
|
Certification by Marita Zuraitis, Chief Executive Officer of HMEC.
|
|
|
|
|
32.2
|
Certification by Bret A. Conklin, Senior Vice President and Acting Chief Financial Officer of HMEC.
|
|
|
|
(99)
|
Additional exhibits
|
|
|
|
|
99.1
|
Glossary of Selected Terms.
|
|
|
|
(101)
|
Interactive Data File
|
|
|
|
|
101.INS
|
XBRL Instance Document
|
|
|
|
|
101.SCH
|
XBRL Taxonomy Extension Schema
|
|
|
|
|
101.CAL
|
XBRL Taxonomy Extension Calculation Linkbase
|
|
|
|
|
101.DEF
|
XBRL Taxonomy Extension Definition Linkbase
|
|
|
|
|
101.LAB
|
XBRL Taxonomy Extension Label Linkbase
|
|
|
|
|
101.PRE
|
XBRL Taxonomy Extension Presentation Linkbase
|
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