REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The
Board of Directors and Shareholders
Horace
Mann Educators Corporation:
We
have reviewed the accompanying consolidated balance sheet of Horace Mann Educators Corporation and subsidiaries (the Company)
as of June 30, 2014, the related consolidated statements of operations and comprehensive income (loss) for the three-month and
six-month periods ended June 30, 2014 and 2013, and the related consolidated statements of changes in shareholders’ equity
and cash flows for the six-month periods ended June 30, 2014 and 2013. These consolidated financial statements are the responsibility
of the Company’s management.
We
conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review
of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible
for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards
of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding
the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based
on our review, we are not aware of any material modifications that should be made to the accompanying consolidated financial statements
referred to above for them to be in conformity with U.S. generally accepted accounting principles.
We
have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
consolidated balance sheet of Horace Mann Educators Corporation and subsidiaries as of December 31, 2013, and the related consolidated
statements of operations, comprehensive income (loss), changes in shareholders’ equity, and cash flows for the year then
ended (not presented herein); and in our report dated March 3, 2014, we expressed an unqualified opinion on those consolidated
financial statements.
/s/
KPMG LLP
KPMG
LLP
Chicago,
Illinois
August
8, 2014
HORACE
MANN EDUCATORS CORPORATION
CONSOLIDATED
BALANCE SHEETS
(Dollars
in thousands, except per share data)
|
|
June 30,
|
|
December 31,
|
|
|
2014
|
|
2013
|
|
|
(Unaudited)
|
|
|
|
|
|
ASSETS
|
Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities,
available for sale, at fair value
|
|
|
|
|
|
|
|
|
|
|
|
|
(amortized
cost 2014, $6,187,429; 2013, $5,784,205)
|
|
|
$
|
6,676,339
|
|
|
|
|
$
|
6,009,573
|
|
|
Equity securities,
available for sale, at fair value
|
|
|
|
|
|
|
|
|
|
|
|
|
(cost 2014, $97,224;
2013, $84,754)
|
|
|
|
109,462
|
|
|
|
|
|
91,858
|
|
|
Short-term
and other investments
|
|
|
|
303,879
|
|
|
|
|
|
438,042
|
|
|
Total investments
|
|
|
|
7,089,680
|
|
|
|
|
|
6,539,473
|
|
|
Cash
|
|
|
|
44,703
|
|
|
|
|
|
18,189
|
|
|
Deferred policy acquisition costs
|
|
|
|
209,998
|
|
|
|
|
|
245,355
|
|
|
Goodwill
|
|
|
|
47,396
|
|
|
|
|
|
47,396
|
|
|
Other assets
|
|
|
|
240,246
|
|
|
|
|
|
228,264
|
|
|
Separate Account
(variable annuity) assets
|
|
|
|
1,814,152
|
|
|
|
|
|
1,747,995
|
|
|
Total
assets
|
|
|
$
|
9,446,175
|
|
|
|
|
$
|
8,826,672
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
Policy liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed annuity contract
liabilities
|
|
|
$
|
3,629,065
|
|
|
|
|
$
|
3,515,865
|
|
|
Interest-sensitive
life contract liabilities
|
|
|
|
785,308
|
|
|
|
|
|
777,292
|
|
|
Unpaid claims and
claim expenses
|
|
|
|
302,636
|
|
|
|
|
|
291,627
|
|
|
Future policy benefits
|
|
|
|
228,593
|
|
|
|
|
|
223,295
|
|
|
Unearned
premiums
|
|
|
|
217,729
|
|
|
|
|
|
221,114
|
|
|
Total policy liabilities
|
|
|
|
5,163,331
|
|
|
|
|
|
5,029,193
|
|
|
Other policyholder funds
|
|
|
|
347,052
|
|
|
|
|
|
346,292
|
|
|
Other liabilities
|
|
|
|
600,590
|
|
|
|
|
|
366,013
|
|
|
Short-term debt
|
|
|
|
38,000
|
|
|
|
|
|
38,000
|
|
|
Long-term debt
|
|
|
|
199,907
|
|
|
|
|
|
199,874
|
|
|
Separate Account
(variable annuity) liabilities
|
|
|
|
1,814,152
|
|
|
|
|
|
1,747,995
|
|
|
Total
liabilities
|
|
|
|
8,163,032
|
|
|
|
|
|
7,727,367
|
|
|
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, 2014, 64,114,248; 2013, 63,629,105
|
|
|
|
64
|
|
|
|
|
|
64
|
|
|
Additional
paid-in capital
|
|
|
|
417,992
|
|
|
|
|
|
407,056
|
|
|
Retained
earnings
|
|
|
|
1,029,516
|
|
|
|
|
|
1,000,312
|
|
|
Accumulated
other comprehensive income (loss), net of taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
unrealized gains on fixed maturities and equity securities
|
|
|
|
281,555
|
|
|
|
|
|
133,990
|
|
|
Net
funded status of pension and other postretirement benefit obligations
|
|
|
|
(11,776
|
)
|
|
|
|
|
(11,776
|
)
|
|
Treasury
stock, at cost, 2014, 23,254,530 shares; 2013, 23,117,554 shares
|
|
|
|
(434,208
|
)
|
|
|
|
|
(430,341
|
)
|
|
Total
shareholders’ equity
|
|
|
|
1,283,143
|
|
|
|
|
|
1,099,305
|
|
|
Total
liabilities and shareholders’ equity
|
|
|
$
|
9,446,175
|
|
|
|
|
$
|
8,826,672
|
|
|
See
accompanying Notes to Consolidated Financial Statements.
See
accompanying Report of Independent Registered Public Accounting Firm.
HORACE
MANN EDUCATORS CORPORATION
CONSOLIDATED
STATEMENTS OF OPERATIONS (UNAUDITED)
(Dollars
in thousands, except per share data)
|
|
Three Months Ended
|
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
|
June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
|
2014
|
|
|
2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance
premiums and contract charges earned
|
|
$
|
179,138
|
|
|
$
|
171,561
|
|
|
|
$
|
354,541
|
|
|
$
|
340,719
|
|
Net investment income
|
|
|
81,405
|
|
|
|
77,361
|
|
|
|
|
164,449
|
|
|
|
154,764
|
|
Net realized investment
gains
|
|
|
3,463
|
|
|
|
15,417
|
|
|
|
|
5,162
|
|
|
|
22,279
|
|
Other
income
|
|
|
737
|
|
|
|
1,298
|
|
|
|
|
1,856
|
|
|
|
2,406
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenues
|
|
|
264,743
|
|
|
|
265,637
|
|
|
|
|
526,008
|
|
|
|
520,168
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits, losses and expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits, claims
and settlement expenses
|
|
|
127,158
|
|
|
|
120,765
|
|
|
|
|
239,146
|
|
|
|
233,464
|
|
Interest credited
|
|
|
43,730
|
|
|
|
42,098
|
|
|
|
|
86,817
|
|
|
|
83,506
|
|
Policy acquisition
expenses amortized
|
|
|
22,517
|
|
|
|
23,000
|
|
|
|
|
45,550
|
|
|
|
43,074
|
|
Operating expenses
|
|
|
39,211
|
|
|
|
39,014
|
|
|
|
|
79,158
|
|
|
|
77,832
|
|
Interest
expense
|
|
|
3,546
|
|
|
|
3,549
|
|
|
|
|
7,092
|
|
|
|
7,103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
benefits, losses and expenses
|
|
|
236,162
|
|
|
|
228,426
|
|
|
|
|
457,763
|
|
|
|
444,979
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
28,581
|
|
|
|
37,211
|
|
|
|
|
68,245
|
|
|
|
75,189
|
|
Income tax expense
|
|
|
8,129
|
|
|
|
11,216
|
|
|
|
|
19,427
|
|
|
|
22,182
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
20,452
|
|
|
$
|
25,995
|
|
|
|
$
|
48,818
|
|
|
$
|
53,007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.49
|
|
|
$
|
0.65
|
|
|
|
$
|
1.18
|
|
|
$
|
1.34
|
|
Diluted
|
|
$
|
0.48
|
|
|
$
|
0.63
|
|
|
|
$
|
1.16
|
|
|
$
|
1.29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average
number of shares and equivalent shares (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
41,432
|
|
|
|
39,768
|
|
|
|
|
41,343
|
|
|
|
39,648
|
|
Diluted
|
|
|
42,310
|
|
|
|
41,395
|
|
|
|
|
42,213
|
|
|
|
41,219
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized investment gains
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other-than-temporary impairment losses on securities
|
|
$
|
(452
|
)
|
|
$
|
(963
|
)
|
|
|
$
|
(452
|
)
|
|
$
|
(963
|
)
|
Portion
of losses recognized in other comprehensive income
|
|
|
-
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
-
|
|
Net
other-than-temporary impairment losses on securities recognized in earnings
|
|
|
(452
|
)
|
|
|
(963
|
)
|
|
|
|
(452
|
)
|
|
|
(963
|
)
|
Realized
gains, net
|
|
|
3,915
|
|
|
|
16,380
|
|
|
|
|
5,614
|
|
|
|
23,242
|
|
Total
|
|
$
|
3,463
|
|
|
$
|
15,417
|
|
|
|
$
|
5,162
|
|
|
$
|
22,279
|
|
See
accompanying Notes to Consolidated Financial Statements.
See
accompanying Report of Independent Registered Public Accounting Firm.
HORACE
MANN EDUCATORS CORPORATION
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
(Dollars
in thousands)
|
|
Three Months Ended
|
|
|
|
Six Months Ended
|
|
|
|
June
30,
|
|
|
|
June
30,
|
|
|
|
2014
|
|
|
2013
|
|
|
|
2014
|
|
|
2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
20,452
|
|
|
$
|
25,995
|
|
|
|
$
|
48,818
|
|
|
$
|
53,007
|
|
Other
comprehensive income (loss), net of taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in net unrealized gains and losses on fixed maturities and equity securities
|
|
|
70,157
|
|
|
|
(177,219
|
)
|
|
|
|
147,565
|
|
|
|
(185,553
|
)
|
Change
in net funded status of pension and other postretirement benefit obligations
|
|
|
-
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
-
|
|
Other
comprehensive income (loss)
|
|
|
70,157
|
|
|
|
(177,219
|
)
|
|
|
|
147,565
|
|
|
|
(185,553
|
)
|
Total
|
|
$
|
90,609
|
|
|
$
|
(151,224
|
)
|
|
|
$
|
196,383
|
|
|
$
|
(132,546
|
)
|
See
accompanying Notes to Consolidated Financial Statements.
See
accompanying Report of Independent Registered Public Accounting Firm.
HORACE
MANN EDUCATORS CORPORATION
CONSOLIDATED
STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)
(Dollars
in thousands, except per share data)
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par value
|
|
|
|
|
|
|
|
|
Beginning
balance
|
|
$
|
64
|
|
|
$
|
62
|
|
Options exercised,
2014, 382,956 shares;
|
|
|
|
|
|
|
|
|
2013, 563,487 shares
|
|
|
-
|
|
|
|
1
|
|
Conversion of common
stock units,
|
|
|
|
|
|
|
|
|
2014, 10,834 shares; 2013, 11,851
shares
|
|
|
-
|
|
|
|
-
|
|
Conversion of restricted
stock units,
|
|
|
|
|
|
|
|
|
2014, 91,353
shares; 2013, 141,732 shares
|
|
|
-
|
|
|
|
-
|
|
Ending balance
|
|
|
64
|
|
|
|
63
|
|
|
|
|
|
|
|
|
|
|
Additional paid-in capital
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
|
407,056
|
|
|
|
383,135
|
|
Options
exercised and conversion of common stock units and restricted stock units
|
|
|
10,301
|
|
|
|
12,413
|
|
Share-based
compensation expense
|
|
|
635
|
|
|
|
710
|
|
Ending balance
|
|
|
417,992
|
|
|
|
396,258
|
|
|
|
|
|
|
|
|
|
|
Retained earnings
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
|
1,000,312
|
|
|
|
921,969
|
|
Net income
|
|
|
48,818
|
|
|
|
53,007
|
|
Cash dividends,
2014, $0.46 per share; 2013, $0.39 per share
|
|
|
(19,614
|
)
|
|
|
(16,160
|
)
|
Ending balance
|
|
|
1,029,516
|
|
|
|
958,816
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income
(loss), net of taxes
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
|
122,214
|
|
|
|
367,089
|
|
Change
in net unrealized gains and losses on fixed maturities and equity securities
|
|
|
147,565
|
|
|
|
(185,553
|
)
|
Change
in net funded status of pension and other postretirement benefit obligations
|
|
|
-
|
|
|
|
-
|
|
Ending balance
|
|
|
269,779
|
|
|
|
181,536
|
|
|
|
|
|
|
|
|
|
|
Treasury stock, at cost
|
|
|
|
|
|
|
|
|
Beginning balance,
2014, 23,117,554 shares;
|
|
|
|
|
|
|
|
|
2013, 22,943,925 shares
|
|
|
(430,341
|
)
|
|
|
(426,452
|
)
|
Acquisition of shares, 2014, 136,976
shares;
|
|
|
|
|
|
|
|
|
2013, 173,428
shares
|
|
|
(3,867
|
)
|
|
|
(3,884
|
)
|
Ending balance, 2014, 23,254,530 shares;
|
|
|
|
|
|
|
|
|
2013, 23,117,353
shares
|
|
|
(434,208
|
)
|
|
|
(430,336
|
)
|
|
|
|
|
|
|
|
|
|
Shareholders’
equity at end of period
|
|
$
|
1,283,143
|
|
|
$
|
1,106,337
|
|
See
accompanying Notes to Consolidated Financial Statements.
See
accompanying Report of Independent Registered Public Accounting Firm.
HORACE
MANN EDUCATORS CORPORATION
CONSOLIDATED
STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollars
in thousands)
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2014
|
|
|
2013
|
|
Cash flows - operating activities
|
|
|
|
|
|
|
|
|
Premiums
collected
|
|
$
|
351,404
|
|
|
$
|
335,344
|
|
Policyholder benefits
paid
|
|
|
(242,035
|
)
|
|
|
(235,046
|
)
|
Policy acquisition
and other operating expenses paid
|
|
|
(135,428
|
)
|
|
|
(136,046
|
)
|
Federal income taxes
paid
|
|
|
(17,363
|
)
|
|
|
(22,545
|
)
|
Investment income collected
|
|
|
161,033
|
|
|
|
152,500
|
|
Interest expense paid
|
|
|
(7,005
|
)
|
|
|
(6,972
|
)
|
Other
|
|
|
(2,490
|
)
|
|
|
(1,908
|
)
|
|
|
|
|
|
|
|
|
|
Net
cash provided by operating activities
|
|
|
108,116
|
|
|
|
85,327
|
|
|
|
|
|
|
|
|
|
|
Cash flows - investing activities
|
|
|
|
|
|
|
|
|
Fixed maturities
|
|
|
|
|
|
|
|
|
Purchases
|
|
|
(657,797
|
)
|
|
|
(677,196
|
)
|
Sales
|
|
|
99,249
|
|
|
|
213,986
|
|
Maturities, paydowns,
calls and redemptions
|
|
|
177,370
|
|
|
|
254,763
|
|
Purchase of other
invested assets
|
|
|
-
|
|
|
|
(10,000
|
)
|
Net
cash provided by (used in) short-term and other investments
|
|
|
139,984
|
|
|
|
(18,971
|
)
|
|
|
|
|
|
|
|
|
|
Net
cash used in investing activities
|
|
|
(241,194
|
)
|
|
|
(237,418
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows - financing activities
|
|
|
|
|
|
|
|
|
Dividends paid to shareholders
|
|
|
(19,614
|
)
|
|
|
(16,160
|
)
|
Acquisition of treasury
stock
|
|
|
(3,867
|
)
|
|
|
(3,884
|
)
|
Exercise of stock options
|
|
|
7,262
|
|
|
|
9,394
|
|
Annuity contracts:
variable, fixed and
|
|
|
|
|
|
|
|
|
FHLB funding agreements
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
218,331
|
|
|
|
188,562
|
|
Benefits, withdrawals
and net transfers to
|
|
|
|
|
|
|
|
|
Separate Account
(variable annuity) assets
|
|
|
(159,680
|
)
|
|
|
(135,036
|
)
|
Life policy accounts
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
476
|
|
|
|
801
|
|
Withdrawals and
surrenders
|
|
|
(2,410
|
)
|
|
|
(2,410
|
)
|
Cash received related
to repurchase agreements
|
|
|
114,083
|
|
|
|
133,980
|
|
Change
in bank overdrafts
|
|
|
5,011
|
|
|
|
(456
|
)
|
|
|
|
|
|
|
|
|
|
Net
cash provided by financing activities
|
|
|
159,592
|
|
|
|
174,791
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash
|
|
|
26,514
|
|
|
|
22,700
|
|
|
|
|
|
|
|
|
|
|
Cash at beginning of period
|
|
|
18,189
|
|
|
|
15,181
|
|
|
|
|
|
|
|
|
|
|
Cash at end of period
|
|
$
|
44,703
|
|
|
$
|
37,881
|
|
See
accompanying Notes to Consolidated Financial Statements.
See
accompanying Report of Independent Registered Public Accounting Firm.
HORACE
MANN EDUCATORS CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June
30, 2014 and 2013
(Dollars
in thousands, except per share data)
Note
1 - Basis of Presentation
The
accompanying unaudited consolidated financial statements of Horace Mann Educators Corporation (“HMEC”; and together
with its subsidiaries, the “Company” or “Horace Mann”) have been prepared in accordance with United States
(“U.S.”) generally accepted accounting principles (“GAAP”) and with the rules and regulations of the Securities
and Exchange Commission (“SEC”), specifically Regulation S-X and the instructions to Form 10-Q. Certain information
and note disclosures which are normally included in annual financial statements prepared in accordance with GAAP but are not required
for interim reporting purposes have been omitted. The Company believes that these consolidated financial statements contain all
adjustments (consisting of normal recurring accruals) which are, in the opinion of management, necessary to present fairly the
Company’s consolidated financial position as of June 30, 2014, the consolidated results of operations and comprehensive
income (loss) for the three and six months ended June 30, 2014 and 2013, and the consolidated changes in shareholders’ equity
and cash flows for the six months ended June 30, 2014 and 2013. The preparation of consolidated financial statements in conformity
with GAAP requires management to make estimates and assumptions that affect (1) the reported amounts of assets and liabilities,
(2) disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and (3) the reported
amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
The
subsidiaries of HMEC market and underwrite personal lines of property and casualty (primarily personal lines automobile and homeowners)
insurance, retirement annuities (primarily tax-qualified products) and life insurance, primarily to K-12 teachers, administrators
and other employees of public schools and their families. HMEC’s principal operating subsidiaries are Horace Mann Life Insurance
Company, Horace Mann Insurance Company, Teachers Insurance Company, Horace Mann Property & Casualty Insurance Company and
Horace Mann Lloyds.
The
Company has evaluated subsequent events through the date these consolidated financial statements were issued.
These
consolidated financial statements should be read in conjunction with the consolidated financial statements and the related notes
to consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31,
2013.
The
results of operations for the three and six months ended June 30, 2014 are not necessarily indicative of the results to be expected
for the full year.
Note
1 - Basis of Presentation-(Continued)
Accounting
Policy for Fixed Indexed Annuities
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 the Consolidated Statements of Operations. More information regarding the determination of fair value of the FIA embedded derivative
and purchased call options, the only derivative instruments utilized by the Company, is included in “Note 3 — Fair
Value of Financial Instruments”.
Note
1 - Basis of Presentation-(Continued)
Accumulated
Other Comprehensive Income (Loss)
Accumulated
other comprehensive income (loss) represents the accumulated change in shareholders’ equity from transactions and other
events and circumstances from non-shareholder sources. For the Company, accumulated other comprehensive income (loss) includes
the after-tax change in net unrealized gains and losses on fixed maturities and equity securities and the after-tax change in
net funded status of pension and other postretirement benefit obligations as shown in the Consolidated Statements of Changes in
Shareholders’ Equity. The following tables reconcile these components.
|
|
Unrealized Gains
|
|
|
|
|
|
|
|
|
|
|
|
and Losses on
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Maturities
|
|
|
|
|
|
|
|
|
|
|
|
and Equity
|
|
Defined
|
|
|
|
|
|
|
|
Securities (1)(2)
|
|
Benefit Plans (1)
|
|
Total (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance, April
1, 2014
|
|
|
$
|
211,398
|
|
|
|
$
|
(11,776
|
)
|
|
|
$
|
199,622
|
|
|
Other
comprehensive income (loss) before reclassifications
|
|
|
|
72,402
|
|
|
|
|
-
|
|
|
|
|
72,402
|
|
|
Amounts
reclassified from accumulated other comprehensive income (loss)
|
|
|
|
(2,245
|
)
|
|
|
|
-
|
|
|
|
|
(2,245
|
)
|
|
Net
current period other comprehensive income (loss)
|
|
|
|
70,157
|
|
|
|
|
-
|
|
|
|
|
70,157
|
|
|
Ending balance,
June 30, 2014
|
|
|
$
|
281,555
|
|
|
|
$
|
(11,776
|
)
|
|
|
$
|
269,779
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance, January 1, 2014
|
|
|
$
|
133,990
|
|
|
|
$
|
(11,776
|
)
|
|
|
$
|
122,214
|
|
|
Other
comprehensive income (loss) before reclassifications
|
|
|
|
150,906
|
|
|
|
|
-
|
|
|
|
|
150,906
|
|
|
Amounts
reclassified from accumulated other comprehensive income (loss)
|
|
|
|
(3,341
|
)
|
|
|
|
-
|
|
|
|
|
(3,341
|
)
|
|
Net
current period other comprehensive income (loss)
|
|
|
|
147,565
|
|
|
|
|
-
|
|
|
|
|
147,565
|
|
|
Ending balance,
June 30, 2014
|
|
|
$
|
281,555
|
|
|
|
$
|
(11,776
|
)
|
|
|
$
|
269,779
|
|
|
|
(1)
|
All amounts
are net of tax.
|
|
(2)
|
The pretax
amounts reclassified from accumulated other comprehensive income (loss), $3,455 and $5,140,
are included in net realized investment gains and losses and the related tax expenses,
$1,210 and $1,799, are included in income tax expense in the Consolidated Statements
of Operations for the three and six months ended June 30, 2014, respectively.
|
Note
1 - Basis of Presentation-(Continued)
|
|
Unrealized Gains
|
|
|
|
|
|
|
|
|
|
|
|
and Losses on
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Maturities
|
|
|
|
|
|
|
|
|
|
|
|
and Equity
|
|
Defined
|
|
|
|
|
|
|
|
Securities (1)(2)
|
|
Benefit Plans (1)
|
|
Total (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance, April 1, 2013
|
|
|
$
|
374,066
|
|
|
|
$
|
(15,311
|
)
|
|
|
$
|
358,755
|
|
|
Other
comprehensive loss before reclassifications
|
|
|
|
(167,198
|
)
|
|
|
|
-
|
|
|
|
|
(167,198
|
)
|
|
Amounts
reclassified from accumulated other comprehensive income
|
|
|
|
(10,021
|
)
|
|
|
|
-
|
|
|
|
|
(10,021
|
)
|
|
Net
current period other comprehensive loss
|
|
|
|
(177,219
|
)
|
|
|
|
-
|
|
|
|
|
(177,219
|
)
|
|
Ending balance, June 30, 2013
|
|
|
$
|
196,847
|
|
|
|
$
|
(15,311
|
)
|
|
|
$
|
181,536
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance, January 1, 2013
|
|
|
$
|
382,400
|
|
|
|
$
|
(15,311
|
)
|
|
|
$
|
367,089
|
|
|
Other
comprehensive loss before reclassifications
|
|
|
|
(171,072
|
)
|
|
|
|
-
|
|
|
|
|
(171,072
|
)
|
|
Amounts
reclassified from accumulated other comprehensive income
|
|
|
|
(14,481
|
)
|
|
|
|
-
|
|
|
|
|
(14,481
|
)
|
|
Net
current period other comprehensive loss
|
|
|
|
(185,553
|
)
|
|
|
|
-
|
|
|
|
|
(185,553
|
)
|
|
Ending balance, June 30, 2013
|
|
|
$
|
196,847
|
|
|
|
$
|
(15,311
|
)
|
|
|
$
|
181,536
|
|
|
|
(1)
|
All amounts
are net of tax.
|
|
(2)
|
The pretax
amounts reclassified from accumulated other comprehensive loss, $15,417 and $22,279,
are included in net realized investment gains and the related tax expenses, $5,396 and
$7,798, are included in income tax expense in the Consolidated Statements of Operations
for the three and six months ended June 30, 2013, 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”.
Note
2 - Investments
The
Company’s investment portfolio includes free-standing derivative financial instruments (currently over the counter (“OTC”)
index options contracts) to hedge risk associated with its fixed indexed annuity products’ contingent liabilities. The Company’s
fixed indexed annuity product includes embedded derivative features that are discussed in “Note 1 — Basis of Presentation
— Accounting Policy for Fixed Indexed Annuities”. The Company's investment portfolio includes no other free-standing
derivative financial instruments (futures, forwards, swaps, option contracts or other financial instruments with similar characteristics),
and there are no other embedded derivative features related to the Company’s insurance products.
Note
2 - Investments-(Continued)
Fixed
Maturities and Equity Securities
The
Company’s investment portfolio is comprised primarily of fixed maturity securities (“fixed maturities”) and
equity securities. The amortized cost or cost, unrealized investment gains and losses, fair values and other-than-temporary impairment
(“OTTI”) included in accumulated other comprehensive income (loss) (“AOCI”) of all fixed maturities and
equity securities in the portfolio were as follows:
|
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
Fair
|
|
OTTI in
|
|
|
|
Cost/Cost
|
|
Gains
|
|
Losses
|
|
Value
|
|
AOCI
(2)
|
|
June 30, 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Government and federally sponsored agency obligations (1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed
securities
|
|
|
$
|
546,236
|
|
|
|
$
|
45,587
|
|
|
|
$
|
9,691
|
|
|
|
$
|
582,132
|
|
|
|
$
|
-
|
|
|
Other,
including U.S. Treasury securities
|
|
|
|
464,978
|
|
|
|
|
19,207
|
|
|
|
|
8,007
|
|
|
|
|
476,178
|
|
|
|
|
-
|
|
|
Municipal bonds
|
|
|
|
1,455,567
|
|
|
|
|
149,837
|
|
|
|
|
7,515
|
|
|
|
|
1,597,889
|
|
|
|
|
-
|
|
|
Foreign
government bonds
|
|
|
|
50,604
|
|
|
|
|
6,435
|
|
|
|
|
-
|
|
|
|
|
57,039
|
|
|
|
|
-
|
|
|
Corporate
bonds
|
|
|
|
2,599,455
|
|
|
|
|
269,905
|
|
|
|
|
5,623
|
|
|
|
|
2,863,737
|
|
|
|
|
-
|
|
|
Other
mortgage-backed securities
|
|
|
|
1,070,589
|
|
|
|
|
32,712
|
|
|
|
|
3,937
|
|
|
|
|
1,099,364
|
|
|
|
|
2,866
|
|
|
Totals
|
|
|
$
|
6,187,429
|
|
|
|
$
|
523,683
|
|
|
|
$
|
34,773
|
|
|
|
$
|
6,676,339
|
|
|
|
$
|
2,866
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
securities
|
|
|
$
|
97,224
|
|
|
|
$
|
13,127
|
|
|
|
$
|
889
|
|
|
|
$
|
109,462
|
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Government and federally sponsored agency obligations (1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed
securities
|
|
|
$
|
555,574
|
|
|
|
$
|
33,711
|
|
|
|
$
|
19,560
|
|
|
|
$
|
569,725
|
|
|
|
$
|
-
|
|
|
Other,
including U.S. Treasury securities
|
|
|
|
449,060
|
|
|
|
|
9,865
|
|
|
|
|
23,351
|
|
|
|
|
435,574
|
|
|
|
|
-
|
|
|
Municipal bonds
|
|
|
|
1,425,441
|
|
|
|
|
80,701
|
|
|
|
|
34,615
|
|
|
|
|
1,471,527
|
|
|
|
|
-
|
|
|
Foreign
government bonds
|
|
|
|
50,641
|
|
|
|
|
4,700
|
|
|
|
|
390
|
|
|
|
|
54,951
|
|
|
|
|
-
|
|
|
Corporate
bonds
|
|
|
|
2,457,727
|
|
|
|
|
188,832
|
|
|
|
|
32,150
|
|
|
|
|
2,614,409
|
|
|
|
|
-
|
|
|
Other
mortgage-backed securities
|
|
|
|
845,762
|
|
|
|
|
26,477
|
|
|
|
|
8,852
|
|
|
|
|
863,387
|
|
|
|
|
2,812
|
|
|
Totals
|
|
|
$
|
5,784,205
|
|
|
|
$
|
344,286
|
|
|
|
$
|
118,918
|
|
|
|
$
|
6,009,573
|
|
|
|
$
|
2,812
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
securities
|
|
|
$
|
84,754
|
|
|
|
$
|
10,723
|
|
|
|
$
|
3,619
|
|
|
|
$
|
91,858
|
|
|
|
$
|
-
|
|
|
|
(1)
|
Fair
value includes securities issued by Federal National Mortgage Association (“FNMA”)
of $342,198 and $336,193; Federal Home Loan Mortgage Corporation (“FHLMC”)
of $441,363 and $427,172; and Government National Mortgage Association (“GNMA”)
of $136,208 and $126,245 as of June 30, 2014 and December 31, 2013, respectively.
|
|
(2)
|
Represents
the amount of other-than-temporary impairment losses in AOCI which, beginning April 1,
2009, was not included in earnings under current accounting guidance. Amounts also include
unrealized gains/(losses) on impaired securities relating to changes in the fair value
of such securities subsequent to the impairment measurement date.
|
Compared
to December 31, 2013, the increase in net unrealized gains at June 30, 2014 was due to lower yields on U.S. Treasury securities
and slightly narrower credit spreads across most asset classes in 2014, the combination of which resulted in an increase in net
unrealized gains for all classes of the Company’s fixed maturity securities holdings.
Note
2 - Investments-(Continued)
The
following table presents the fair value and gross unrealized losses of fixed maturities and equity securities in an unrealized
loss position at June 30, 2014 and December 31, 2013, respectively. The Company views the decrease in value of all of the securities
with unrealized losses at June 30, 2014 — 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 the present value of future cash flows exceeds
the amortized cost bases. In addition, management expects to recover the entire 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 June 30, 2014.
|
|
12
Months or Less
|
|
More
than 12 Months
|
|
Total
|
|
|
|
|
|
Gross
|
|
|
|
|
Gross
|
|
|
|
|
Gross
|
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Fair
Value
|
|
Unrealized
Losses
|
June 30, 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Government and federally sponsored agency obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
|
|
$
|
13,483
|
|
|
|
$
|
637
|
|
|
|
$
|
95,845
|
|
|
|
$
|
9,054
|
|
|
|
$
|
109,328
|
|
|
|
$
|
9,691
|
|
Other
|
|
|
|
5,257
|
|
|
|
|
26
|
|
|
|
|
165,165
|
|
|
|
|
7,981
|
|
|
|
|
170,422
|
|
|
|
|
8,007
|
|
Municipal bonds
|
|
|
|
45,797
|
|
|
|
|
2,883
|
|
|
|
|
151,155
|
|
|
|
|
4,632
|
|
|
|
|
196,952
|
|
|
|
|
7,515
|
|
Foreign government
bonds
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
Corporate bonds
|
|
|
|
45,966
|
|
|
|
|
432
|
|
|
|
|
200,615
|
|
|
|
|
5,191
|
|
|
|
|
246,581
|
|
|
|
|
5,623
|
|
Other
mortgage-backed securities
|
|
|
|
259,347
|
|
|
|
|
1,463
|
|
|
|
|
79,799
|
|
|
|
|
2,474
|
|
|
|
|
339,146
|
|
|
|
|
3,937
|
|
Total fixed maturity securities
|
|
|
|
369,850
|
|
|
|
|
5,441
|
|
|
|
|
692,579
|
|
|
|
|
29,332
|
|
|
|
|
1,062,429
|
|
|
|
|
34,773
|
|
Equity
securities (1)
|
|
|
|
1,148
|
|
|
|
|
11
|
|
|
|
|
28,701
|
|
|
|
|
878
|
|
|
|
|
29,849
|
|
|
|
|
889
|
|
Combined
totals
|
|
|
$
|
370,998
|
|
|
|
$
|
5,452
|
|
|
|
$
|
721,280
|
|
|
|
$
|
30,210
|
|
|
|
$
|
1,092,278
|
|
|
|
$
|
35,662
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of positions with a gross unrealized loss
|
|
|
|
115
|
|
|
|
|
|
|
|
|
|
202
|
|
|
|
|
|
|
|
|
|
317
|
|
|
|
|
|
|
Fair
value as a percentage of total fixed maturities and equity securities fair value
|
|
|
|
5.5
|
%
|
|
|
|
|
|
|
|
|
10.6
|
%
|
|
|
|
|
|
|
|
|
16.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Government and federally sponsored agency obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
|
|
$
|
150,602
|
|
|
|
$
|
19,145
|
|
|
|
$
|
1,383
|
|
|
|
$
|
415
|
|
|
|
$
|
151,985
|
|
|
|
$
|
19,560
|
|
Other
|
|
|
|
249,765
|
|
|
|
|
22,479
|
|
|
|
|
4,450
|
|
|
|
|
872
|
|
|
|
|
254,215
|
|
|
|
|
23,351
|
|
Municipal bonds
|
|
|
|
375,523
|
|
|
|
|
26,529
|
|
|
|
|
42,899
|
|
|
|
|
8,086
|
|
|
|
|
418,422
|
|
|
|
|
34,615
|
|
Foreign government
bonds
|
|
|
|
6,738
|
|
|
|
|
390
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
6,738
|
|
|
|
|
390
|
|
Corporate bonds
|
|
|
|
582,849
|
|
|
|
|
28,634
|
|
|
|
|
12,948
|
|
|
|
|
3,516
|
|
|
|
|
595,797
|
|
|
|
|
32,150
|
|
Other
mortgage-backed securities
|
|
|
|
274,983
|
|
|
|
|
8,300
|
|
|
|
|
20,008
|
|
|
|
|
552
|
|
|
|
|
294,991
|
|
|
|
|
8,852
|
|
Total
fixed maturity securities
|
|
|
|
1,640,460
|
|
|
|
|
105,477
|
|
|
|
|
81,688
|
|
|
|
|
13,441
|
|
|
|
|
1,722,148
|
|
|
|
|
118,918
|
|
Equity
securities (1)
|
|
|
|
32,392
|
|
|
|
|
3,117
|
|
|
|
|
1,405
|
|
|
|
|
502
|
|
|
|
|
33,797
|
|
|
|
|
3,619
|
|
Combined
totals
|
|
|
$
|
1,672,852
|
|
|
|
$
|
108,594
|
|
|
|
$
|
83,093
|
|
|
|
$
|
13,943
|
|
|
|
$
|
1,755,945
|
|
|
|
$
|
122,537
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of positions with a gross unrealized loss
|
|
|
|
534
|
|
|
|
|
|
|
|
|
|
46
|
|
|
|
|
|
|
|
|
|
580
|
|
|
|
|
|
|
Fair
value as a percentage of total fixed maturities and equity securities fair value
|
|
|
|
27.4
|
%
|
|
|
|
|
|
|
|
|
1.4
|
%
|
|
|
|
|
|
|
|
|
28.8
|
%
|
|
|
|
|
|
(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 95% of the gross unrealized loss as of June 30, 2014.
With respect to fixed income securities involving securitized financial assets, the underlying collateral cash flows were stress
tested to determine there was no adverse change in the present value of cash flows below the amortized cost basis.
Credit
Losses
The
following table summarizes the cumulative amounts related to the Company’s credit loss component of the other-than-temporary
impairment losses on fixed maturity securities held as of June 30, 2014 and 2013 that the Company did not intend to sell as of
those dates, and it was not more likely than not that the Company would be required to sell the securities before the anticipated
recovery of the amortized cost bases, for which the non-credit portions of the other-than-temporary impairment losses were recognized
in other comprehensive income (loss):
|
|
Six Months Ended
|
|
|
June 30,
|
|
|
2014
|
|
2013
|
Cumulative credit
loss (1)
|
|
|
|
|
|
|
|
|
|
|
Beginning
of period
|
|
|
$
|
4,097
|
|
|
|
$
|
2,877
|
|
New credit losses
|
|
|
|
280
|
|
|
|
|
860
|
|
Losses
related to securities sold or paid down during the period
|
|
|
|
-
|
|
|
|
|
-
|
|
End
of period
|
|
|
$
|
4,377
|
|
|
|
$
|
3,737
|
|
|
(1)
|
The
cumulative credit loss amounts exclude other-than-temporary impairment losses on securities
held as of the periods indicated that the Company intended to sell or it was more likely
than not that the Company would be required to sell the security before the recovery
of the amortized cost basis.
|
Note
2 - Investments-(Continued)
Maturities/Sales
of Fixed Maturities and Equity Securities
The
following table presents the distribution of the Company's fixed maturity securities portfolio by estimated expected maturity.
Estimated expected maturities differ from contractual maturities, reflecting assumptions regarding borrowers’ utilization
of the right to call or prepay obligations with or without call or prepayment penalties. For structured securities, including
mortgage-backed securities and other asset-backed securities, estimated expected maturities consider broker-dealer survey prepayment
assumptions and are verified for consistency with the interest rate and economic environments.
|
|
Percent
of Total Fair Value
|
|
June
30, 2014
|
|
|
|
June 30,
|
|
December 31,
|
|
Fair
|
|
Amortized
|
|
|
|
2014
|
|
2013
|
|
Value
|
|
Cost
|
|
Estimated expected maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due in
1 year or less
|
|
|
|
4.5
|
%
|
|
|
|
4.1
|
%
|
|
|
$
|
299,402
|
|
|
|
$
|
277,477
|
|
Due
after 1 year through 5 years
|
|
|
|
23.6
|
|
|
|
|
20.9
|
|
|
|
|
1,576,524
|
|
|
|
|
1,461,075
|
|
Due
after 5 years through 10 years
|
|
|
|
38.1
|
|
|
|
|
38.4
|
|
|
|
|
2,542,155
|
|
|
|
|
2,355,992
|
|
Due
after 10 years through 20 years
|
|
|
|
19.9
|
|
|
|
|
20.8
|
|
|
|
|
1,327,483
|
|
|
|
|
1,230,271
|
|
Due
after 20 years
|
|
|
|
13.9
|
|
|
|
|
15.8
|
|
|
|
|
930,775
|
|
|
|
|
862,614
|
|
Total
|
|
|
|
100.0
|
%
|
|
|
|
100.0
|
%
|
|
|
$
|
6,676,339
|
|
|
|
$
|
6,187,429
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average option-adjusted
duration, in years
|
|
|
|
6.2
|
|
|
|
|
6.3
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
received from sales of fixed maturities and equity securities, each determined using the specific identification method, and gross
gains and gross losses realized as a result of those sales for each period were:
|
|
|
Three Months Ended
|
|
|
|
Six Months Ended
|
|
|
|
|
June 30,
|
|
|
|
June 30,
|
|
|
|
|
2014
|
|
|
|
2013
|
|
|
|
2014
|
|
|
|
2013
|
|
Fixed maturity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
received
|
|
|
$
|
46,309
|
|
|
|
$
|
114,804
|
|
|
|
$
|
99,249
|
|
|
|
$
|
213,986
|
|
Gross gains realized
|
|
|
|
2,600
|
|
|
|
|
9,878
|
|
|
|
|
4,127
|
|
|
|
|
14,390
|
|
Gross losses realized
|
|
|
|
(303
|
)
|
|
|
|
(471
|
)
|
|
|
|
(978
|
)
|
|
|
|
(481
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds received
|
|
|
$
|
4,843
|
|
|
|
$
|
6,299
|
|
|
|
$
|
8,491
|
|
|
|
$
|
11,133
|
|
Gross gains realized
|
|
|
|
995
|
|
|
|
|
2,776
|
|
|
|
|
1,474
|
|
|
|
|
3,344
|
|
Gross losses realized
|
|
|
|
(64
|
)
|
|
|
|
(172
|
)
|
|
|
|
(181
|
)
|
|
|
|
(387
|
)
|
Note
2 - Investments-(Continued)
Unrealized
Gains and Losses on Fixed Maturities and Equity Securities
Net
unrealized gains and losses are computed as the difference between fair value and amortized cost for fixed maturities or cost
for equity securities. The following table reconciles the net unrealized investment gains and losses, net of tax, included in
accumulated other comprehensive income (loss), before the impact on deferred policy acquisition costs:
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
Net unrealized investment gains (losses) on fixed maturity securities,
net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of period
|
|
$
|
238,854
|
|
|
$
|
411,979
|
|
|
$
|
146,489
|
|
|
$
|
423,004
|
|
Change
in unrealized investment gains and losses
|
|
|
80,577
|
|
|
|
(182,919
|
)
|
|
|
173,802
|
|
|
|
(189,828
|
)
|
Reclassification
of net realized investment (gains) losses to net income
|
|
|
(1,640
|
)
|
|
|
(8,392
|
)
|
|
|
(2,500
|
)
|
|
|
(12,508
|
)
|
End of period
|
|
$
|
317,791
|
|
|
$
|
220,668
|
|
|
$
|
317,791
|
|
|
$
|
220,668
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
unrealized investment gains (losses) on equity securities, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of period
|
|
$
|
5,695
|
|
|
$
|
3,604
|
|
|
$
|
4,618
|
|
|
$
|
720
|
|
Change
in unrealized investment gains and losses
|
|
|
2,865
|
|
|
|
1,291
|
|
|
|
4,178
|
|
|
|
4,519
|
|
Reclassification
of net realized investment (gains) losses to net income
|
|
|
(605
|
)
|
|
|
(1,629
|
)
|
|
|
(841
|
)
|
|
|
(1,973
|
)
|
End of period
|
|
$
|
7,955
|
|
|
$
|
3,266
|
|
|
$
|
7,955
|
|
|
$
|
3,266
|
|
Repurchase
Agreements
The
Company enters into repurchase agreements to earn incremental spread income. A repurchase agreement is a transaction in which
one party (transferor) agrees to sell securities to another party (transferee) in return for cash (or securities), with a simultaneous
agreement to repurchase the same securities at a specified price at a later date. These transactions are generally short-term
in nature, and therefore, the carrying amounts of these instruments approximate fair value.
Note
2 - Investments-(Continued)
As
part of repurchase agreements, the Company transfers primarily U.S. Government, government agency and corporate securities and
receives cash. For the repurchase agreements, the Company receives cash in an amount equal to at least 95% of the fair value of
the securities transferred, and the agreements with third parties contain contractual provisions to allow for additional collateral
to be obtained when necessary. The cash received from the repurchase program is typically invested in high quality floating rate
fixed maturity securities. The Company accounts for the repurchase agreements as collateralized borrowings. The securities transferred
under repurchase agreements are included in fixed maturity, available-for-sale securities with the obligation to repurchase those
securities recorded in Other Liabilities on the Company's Consolidated Balance Sheets. The fair value of the securities transferred
was $143,216 and $24,791 as of June 30, 2014 and December 31, 2013, respectively. The obligation for securities sold under agreement
to repurchase was $139,959 and $25,864, including accrued interest, as of June 30, 2014 and December 31, 2013, respectively.
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 Company’s repurchase agreements and the embedded derivatives related
to the Company’s fixed indexed annuity product are not subject to master netting arrangements and there was no offsetting
in their presentation in the Company’s Consolidated Balance Sheets.
The
following table presents the instruments that were subject to a master netting arrangement for the Company. No instruments were
subject to master netting arrangements as of December 31, 2013.
|
|
|
|
|
|
Net Amounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of Assets/
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
Liabilities
|
|
Gross Amounts Not Offset
|
|
|
|
|
|
|
|
|
Amounts
|
|
Presented
|
|
in the Consolidated
|
|
|
|
|
|
|
|
|
Offset in the
|
|
in the
|
|
Balance Sheet
|
|
|
|
|
|
|
|
|
Consolidated
|
|
Consolidated
|
|
|
|
Cash
|
|
|
|
|
Gross
|
|
Balance
|
|
Balance
|
|
Financial
|
|
Collateral
|
|
Net
|
|
|
Amounts
|
|
Sheet
|
|
Sheet
|
|
Instruments
|
|
Received
|
|
Amount
|
June 30, 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset
derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Free-standing
derivatives
|
|
$
|
708
|
|
|
$
|
-
|
|
|
$
|
708
|
|
|
$
|
-
|
|
|
$
|
300
|
|
|
$
|
408
|
|
Deposits
At
June 30, 2014 and December 31, 2013, securities with a fair value of $18,420 and $17,967, respectively, were on deposit with governmental
agencies as required by law in various states in which the insurance subsidiaries of HMEC conduct business. In addition, at June
30, 2014 and December 31, 2013, securities with a fair value of $275,888 and $274,437, 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 $250,000 as of each of these 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 on 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 on
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 89% and 88% of the portfolio, based on fair value, was priced through pricing services or index priced
as of June 30, 2014 and 2013, respectively. 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 analysis, 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 the first six months of 2014.
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. There were no significant changes to the valuation process in the first six months of
2014.
Note
3 - Fair Value of Financial Instruments-(Continued)
Short-term
and other investments are comprised of short-term fixed income 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 as equity method investments and therefore excluded from the fair value tabular disclosures.
In
summary, the following investments are carried at fair value:
|
•
|
Fixed
maturity securities, as described above.
|
|
•
|
Equity
securities, as described above.
|
|
•
|
Short-term
fixed income 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.
|
Separate
Account (Variable Annuity) Assets and Liabilities
Separate
Account assets are carried at fair value and represent variable annuity contractholder funds invested in various mutual funds.
Fair values of these assets are based primarily on market quotations of the underlying securities. Investment performance related
to these assets is fully offset by corresponding amounts credited to contractholders with the liability reflected within Separate
Account liabilities. Separate Account liabilities are equal to the estimated fair value of Separate Account assets.
Fixed
Annuity Contract Liabilities and Policyholder Account Balances on Interest-sensitive Life Contracts
The
fair values of fixed annuity contract liabilities and policyholder account balances on interest-sensitive 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.
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, both
of which represent deposits that do not have defined maturities, as well as balances outstanding under funding agreements with
the FHLB and embedded derivatives. 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.
Short-term
Debt
Short-term
debt is carried at amortized cost, which management believes is a reasonable estimate of fair value due to the liquidity and short
duration of these variable rate instruments.
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.
Other
Liabilities, Repurchase Agreements
The
Company carries the obligations for securities sold under agreements to repurchase at cost, which approximates fair value due
to the short duration of the obligations.
Note
3 - Fair Value of Financial Instruments-(Continued)
Financial
Instruments Measured and Carried at Fair Value
The
following table presents the Company’s fair value hierarchy for those assets and liabilities measured and carried at fair
value on a recurring basis. At June 30, 2014, Level 3 invested assets comprised approximately 2.0% of the Company’s total
investment portfolio fair value.
|
|
|
|
|
|
|
|
Fair
Value Measurements at
|
|
|
|
Carrying
|
|
|
Fair
|
|
|
Reporting
Date Using
|
|
|
|
Amount
|
|
|
Value
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
June 30, 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and
federally
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
sponsored agency obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
|
$
|
582,132
|
|
|
$
|
582,132
|
|
|
$
|
-
|
|
|
$
|
582,132
|
|
|
$
|
-
|
|
Other, including
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities
|
|
|
476,178
|
|
|
|
476,178
|
|
|
|
17,854
|
|
|
|
458,324
|
|
|
|
-
|
|
Municipal bonds
|
|
|
1,597,889
|
|
|
|
1,597,889
|
|
|
|
-
|
|
|
|
1,584,835
|
|
|
|
13,054
|
|
Foreign government
bonds
|
|
|
57,039
|
|
|
|
57,039
|
|
|
|
-
|
|
|
|
57,039
|
|
|
|
-
|
|
Corporate bonds
|
|
|
2,863,737
|
|
|
|
2,863,737
|
|
|
|
10,599
|
|
|
|
2,779,212
|
|
|
|
73,926
|
|
Other
mortgage-backed securities
|
|
|
1,099,364
|
|
|
|
1,099,364
|
|
|
|
-
|
|
|
|
1,046,842
|
|
|
|
52,522
|
|
Total fixed maturities
|
|
|
6,676,339
|
|
|
|
6,676,339
|
|
|
|
28,453
|
|
|
|
6,508,384
|
|
|
|
139,502
|
|
Equity securities
|
|
|
109,462
|
|
|
|
109,462
|
|
|
|
80,821
|
|
|
|
28,635
|
|
|
|
6
|
|
Short-term investments
|
|
|
68,458
|
|
|
|
68,458
|
|
|
|
68,055
|
|
|
|
403
|
|
|
|
-
|
|
Other
investments
|
|
|
5,708
|
|
|
|
5,708
|
|
|
|
-
|
|
|
|
5,708
|
|
|
|
-
|
|
Totals
|
|
|
6,859,967
|
|
|
|
6,859,967
|
|
|
|
177,329
|
|
|
|
6,543,130
|
|
|
|
139,508
|
|
Separate Account
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(variable annuity)
assets (1)
|
|
|
1,814,152
|
|
|
|
1,814,152
|
|
|
|
1,814,152
|
|
|
|
-
|
|
|
|
-
|
|
Financial Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other policyholder
funds,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
embedded derivatives
|
|
|
6,915
|
|
|
|
6,915
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,915
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and
federally
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
sponsored agency obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
|
$
|
569,725
|
|
|
$
|
569,725
|
|
|
$
|
-
|
|
|
$
|
569,725
|
|
|
$
|
-
|
|
Other, including
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities
|
|
|
435,574
|
|
|
|
435,574
|
|
|
|
17,757
|
|
|
|
417,817
|
|
|
|
-
|
|
Municipal bonds
|
|
|
1,471,527
|
|
|
|
1,471,527
|
|
|
|
-
|
|
|
|
1,468,833
|
|
|
|
2,694
|
|
Foreign government
bonds
|
|
|
54,951
|
|
|
|
54,951
|
|
|
|
-
|
|
|
|
54,951
|
|
|
|
-
|
|
Corporate bonds
|
|
|
2,614,409
|
|
|
|
2,614,409
|
|
|
|
10,181
|
|
|
|
2,543,402
|
|
|
|
60,826
|
|
Other
mortgage-backed securities
|
|
|
863,387
|
|
|
|
863,387
|
|
|
|
-
|
|
|
|
817,378
|
|
|
|
46,009
|
|
Total fixed maturities
|
|
|
6,009,573
|
|
|
|
6,009,573
|
|
|
|
27,938
|
|
|
|
5,872,106
|
|
|
|
109,529
|
|
Equity securities
|
|
|
91,858
|
|
|
|
91,858
|
|
|
|
74,279
|
|
|
|
17,573
|
|
|
|
6
|
|
Short-term investments
|
|
|
206,758
|
|
|
|
206,758
|
|
|
|
206,354
|
|
|
|
404
|
|
|
|
-
|
|
Other
investments
|
|
|
5,000
|
|
|
|
5,000
|
|
|
|
-
|
|
|
|
5,000
|
|
|
|
-
|
|
Totals
|
|
|
6,313,189
|
|
|
|
6,313,189
|
|
|
|
308,571
|
|
|
|
5,895,083
|
|
|
|
109,535
|
|
Separate Account
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(variable annuity)
assets (1)
|
|
|
1,747,995
|
|
|
|
1,747,995
|
|
|
|
1,747,995
|
|
|
|
-
|
|
|
|
-
|
|
Financial Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other policyholder
funds,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
embedded derivatives
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
(1)
|
Separate
Account (variable annuity) liabilities are set equal to Separate Account (variable annuity)
assets.
|
Note
3 - Fair Value of Financial Instruments-(Continued)
The
Company did not have any transfers between Levels 1 and 2 during the six months ended June 30, 2014. 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
|
|
Total
Fixed
Maturities
|
|
Equity
Securities
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance April 1, 2014
|
|
|
$
|
12,779
|
|
|
|
$
|
60,204
|
|
|
|
$
|
52,551
|
|
|
|
$
|
125,534
|
|
|
|
$
|
6
|
|
|
|
$
|
125,540
|
|
|
|
$
|
2,747
|
|
Transfers into Level 3
(2)
|
|
|
|
-
|
|
|
|
|
12,452
|
|
|
|
|
-
|
|
|
|
|
12,452
|
|
|
|
|
-
|
|
|
|
|
12,452
|
|
|
|
|
-
|
|
Transfers out of Level
3 (2)
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
Total gains or losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
realized gains (losses) included in net income
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
(26
|
)
|
|
|
|
(26
|
)
|
|
|
|
-
|
|
|
|
|
(26
|
)
|
|
|
|
57
|
|
Net
unrealized gains (losses) included in other comprehensive income
|
|
|
|
337
|
|
|
|
|
1,546
|
|
|
|
|
108
|
|
|
|
|
1,991
|
|
|
|
|
-
|
|
|
|
|
1,991
|
|
|
|
|
-
|
|
Purchases
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
Issuances
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
4,121
|
|
Sales
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
Settlements
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
Paydowns,
maturities and distributions
|
|
|
|
(62
|
)
|
|
|
|
(276
|
)
|
|
|
|
(111
|
)
|
|
|
|
(449
|
)
|
|
|
|
-
|
|
|
|
|
(449
|
)
|
|
|
|
(10
|
)
|
Ending balance, June 30, 2014
|
|
|
$
|
13,054
|
|
|
|
$
|
73,926
|
|
|
|
$
|
52,522
|
|
|
|
$
|
139,502
|
|
|
|
$
|
6
|
|
|
|
$
|
139,508
|
|
|
|
$
|
6,915
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance, January 1, 2014
|
|
|
$
|
2,694
|
|
|
|
$
|
60,826
|
|
|
|
$
|
46,009
|
|
|
|
$
|
109,529
|
|
|
|
$
|
6
|
|
|
|
$
|
109,535
|
|
|
|
$
|
-
|
|
Transfers into Level 3
(2)
|
|
|
|
10,056
|
|
|
|
|
12,452
|
|
|
|
|
7,109
|
|
|
|
|
29,617
|
|
|
|
|
-
|
|
|
|
|
29,617
|
|
|
|
|
-
|
|
Transfers out of Level
3 (2)
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
(519
|
)
|
|
|
|
(519
|
)
|
|
|
|
-
|
|
|
|
|
(519
|
)
|
|
|
|
-
|
|
Total gains or losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
realized gains (losses) included in net income
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
(26
|
)
|
|
|
|
(26
|
)
|
|
|
|
-
|
|
|
|
|
(26
|
)
|
|
|
|
69
|
|
Net
unrealized gains (losses) included in other
comprehensive income
|
|
|
|
434
|
|
|
|
|
2,560
|
|
|
|
|
292
|
|
|
|
|
3,286
|
|
|
|
|
-
|
|
|
|
|
3,286
|
|
|
|
|
-
|
|
Purchases
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
Issuances
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
6,856
|
|
Sales
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
Settlements
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
Paydowns,
maturities and distributions
|
|
|
|
(130
|
)
|
|
|
|
(1,912
|
)
|
|
|
|
(343
|
)
|
|
|
|
(2,385
|
)
|
|
|
|
-
|
|
|
|
|
(2,385
|
)
|
|
|
|
(10
|
)
|
Ending balance, June 30, 2014
|
|
|
$
|
13,054
|
|
|
|
$
|
73,926
|
|
|
|
$
|
52,522
|
|
|
|
$
|
139,502
|
|
|
|
$
|
6
|
|
|
|
$
|
139,508
|
|
|
|
$
|
6,915
|
|
|
(1)
|
Represents
embedded derivatives, all related to the Company’s FIA products, reported in Other
Policyholder Funds in the Company’s Consolidated Balance Sheets.
|
|
(2)
|
Transfers
into and out of Level 3 during the three and six months ended June 30, 2014 were attributable
to changes in the availability of observable market information for individual fixed
maturity securities. The Company’s policy is to recognize transfers into and transfers
out of the levels as having occurred at the end of the reporting period in which the
transfers were determined.
|
Note
3 - Fair Value of Financial Instruments-(Continued)
|
|
Financial
Assets
|
|
|
|
Municipal
Bonds
|
|
Corporate
Bonds
|
|
Other
Mortgage-
Backed
Securities
|
|
Total
Fixed
Maturities
|
|
Equity
Securities
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance April 1, 2013
|
|
|
$
|
15,146
|
|
|
|
$
|
55,527
|
|
|
|
$
|
33,083
|
|
|
|
$
|
103,756
|
|
|
|
$
|
340
|
|
|
|
$
|
104,096
|
|
Transfers into Level 3 (1)
|
|
|
|
1,000
|
|
|
|
|
18,768
|
|
|
|
|
35,533
|
|
|
|
|
55,301
|
|
|
|
|
-
|
|
|
|
|
55,301
|
|
Transfers out of Level 3 (1)
|
|
|
|
-
|
|
|
|
|
(16,663
|
)
|
|
|
|
(18,403
|
)
|
|
|
|
(35,066
|
)
|
|
|
|
-
|
|
|
|
|
(35,066
|
)
|
Total gains or losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized gains
(losses) included in net income
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
Net unrealized
gains (losses) included in other comprehensive income
|
|
|
|
(315
|
)
|
|
|
|
(824
|
)
|
|
|
|
(291
|
)
|
|
|
|
(1,430
|
)
|
|
|
|
-
|
|
|
|
|
(1,430
|
)
|
Purchases
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
Issuances
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
Sales
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
(334
|
)
|
|
|
|
(334
|
)
|
Settlements
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
Paydowns,
maturities and distributions
|
|
|
|
(12,067
|
)
|
|
|
|
(218
|
)
|
|
|
|
(579
|
)
|
|
|
|
(12,864
|
)
|
|
|
|
-
|
|
|
|
|
(12,864
|
)
|
Ending balance, June 30, 2013
|
|
|
$
|
3,764
|
|
|
|
$
|
56,590
|
|
|
|
$
|
49,343
|
|
|
|
$
|
109,697
|
|
|
|
$
|
6
|
|
|
|
$
|
109,703
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance, January 1, 2013
|
|
|
$
|
12,275
|
|
|
|
$
|
85,722
|
|
|
|
$
|
33,172
|
|
|
|
$
|
131,169
|
|
|
|
$
|
340
|
|
|
|
$
|
131,509
|
|
Transfers into Level 3 (1)
|
|
|
|
3,907
|
|
|
|
|
23,439
|
|
|
|
|
43,999
|
|
|
|
|
71,345
|
|
|
|
|
-
|
|
|
|
|
71,345
|
|
Transfers out of Level 3 (1)
|
|
|
|
-
|
|
|
|
|
(50,341
|
)
|
|
|
|
(18,403
|
)
|
|
|
|
(68,744
|
)
|
|
|
|
-
|
|
|
|
|
(68,744
|
)
|
Total gains or losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized gains
(losses) included in net income
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
Net unrealized
gains (losses) included in other comprehensive income
|
|
|
|
(351
|
)
|
|
|
|
(1,709
|
)
|
|
|
|
(418
|
)
|
|
|
|
(2,478
|
)
|
|
|
|
-
|
|
|
|
|
(2,478
|
)
|
Purchases
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
Issuances
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
Sales
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
(334
|
)
|
|
|
|
(334
|
)
|
Settlements
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
Paydowns,
maturities and distributions
|
|
|
|
(12,067
|
)
|
|
|
|
(521
|
)
|
|
|
|
(9,007
|
)
|
|
|
|
(21,595
|
)
|
|
|
|
-
|
|
|
|
|
(21,595
|
)
|
Ending balance, June 30, 2013
|
|
|
$
|
3,764
|
|
|
|
$
|
56,590
|
|
|
|
$
|
49,343
|
|
|
|
$
|
109,697
|
|
|
|
$
|
6
|
|
|
|
$
|
109,703
|
|
|
(1)
|
Transfers
into and out of Level 3 during the three and six months ended June 30, 2013 were attributable
to changes in the availability of observable market information for individual fixed
maturity securities. The Company’s policy is to recognize transfers into and transfers
out of the levels as having occurred at the end of the reporting period in which the
transfers were determined.
|
At
June 30, 2014 and 2013, there were no realized gains or losses included in earnings that were attributable to changes in the fair
value of Level 3 assets still held. For the three and six months ended June 30, 2014, realized investment gains/(losses) of $57
and $69, respectively, were included in earnings that were attributable to the changes in the fair value of Level 3 liabilities
(embedded derivatives) still held.
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
for fixed maturity securities include spread pricing, matrix pricing and discounted cash flow methodologies; include inputs such
as quoted prices for identical or similar securities that are less liquid; and are based on lower levels of trading activity than
securities classified as Level 2. The valuation techniques and significant unobservable inputs used in the fair value measurement
for equity securities classified as Level 3 use similar valuation techniques and significant unobservable inputs as fixed maturities.
Note
3 - Fair Value of Financial Instruments-(Continued)
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 relate to interest rate spreads, illiquidity premiums and default rates. Significant spread widening
in isolation will adversely impact the overall valuation, while significant spread tightening will lead to substantial valuation
increases. Significant increases (decreases) in illiquidity premiums in isolation will result in substantially lower (higher)
valuations. Significant increases (decreases) in expected default rates in isolation will result in substantially lower (higher)
valuations.
Financial
Instruments Not Carried at Fair Value; Disclosure Required
The
Company has various other financial assets and financial liabilities used in the normal course of business that are not carried
at fair value, but for which fair value disclosure is required. The following table presents the carrying value, fair value and
fair value hierarchy of these financial assets and financial liabilities.
|
|
|
|
|
|
|
|
Fair
Value Measurements at
|
|
|
|
Carrying
|
|
|
Fair
|
|
|
Reporting
Date Using
|
|
|
|
Amount
|
|
|
Value
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
investments
|
|
$
|
142,257
|
|
|
$
|
146,547
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
146,547
|
|
Financial Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed annuity contract
liabilities
|
|
|
3,629,065
|
|
|
|
3,408,658
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,408,658
|
|
Policyholder account
balances on
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
interest-sensitive
life contracts
|
|
|
77,848
|
|
|
|
78,917
|
|
|
|
-
|
|
|
|
-
|
|
|
|
78,917
|
|
Other policyholder
funds
|
|
|
340,137
|
|
|
|
340,137
|
|
|
|
-
|
|
|
|
250,044
|
|
|
|
90,093
|
|
Short-term debt
|
|
|
38,000
|
|
|
|
38,000
|
|
|
|
-
|
|
|
|
38,000
|
|
|
|
-
|
|
Long-term debt
|
|
|
199,907
|
|
|
|
214,597
|
|
|
|
214,597
|
|
|
|
-
|
|
|
|
-
|
|
Other liabilities,
repurchase
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
agreement obligations
|
|
|
139,959
|
|
|
|
139,959
|
|
|
|
-
|
|
|
|
139,959
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other investments
|
|
$
|
140,685
|
|
|
$
|
144,921
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
144,921
|
|
Financial Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed annuity contract
liabilities
|
|
|
3,515,865
|
|
|
|
3,302,333
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,302,333
|
|
Policyholder account
balances on
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
interest-sensitive
life contracts
|
|
|
78,598
|
|
|
|
79,678
|
|
|
|
-
|
|
|
|
-
|
|
|
|
79,678
|
|
Other policyholder
funds
|
|
|
346,292
|
|
|
|
346,292
|
|
|
|
-
|
|
|
|
250,000
|
|
|
|
96,292
|
|
Short-term debt
|
|
|
38,000
|
|
|
|
38,000
|
|
|
|
-
|
|
|
|
38,000
|
|
|
|
-
|
|
Long-term debt
|
|
|
199,874
|
|
|
|
218,565
|
|
|
|
218,565
|
|
|
|
-
|
|
|
|
-
|
|
Other liabilities,
repurchase
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
agreement obligations
|
|
|
25,864
|
|
|
|
25,864
|
|
|
|
-
|
|
|
|
25,864
|
|
|
|
-
|
|
Note
4 - Debt
Indebtedness
outstanding was as follows:
|
|
June 30,
|
|
December 31,
|
|
|
2014
|
|
2013
|
Short-term debt:
|
|
|
|
|
|
|
|
|
|
|
Bank
Credit Facility, expires October 6, 2015
|
|
|
$
|
38,000
|
|
|
|
$
|
38,000
|
|
Long-term debt:
|
|
|
|
|
|
|
|
|
|
|
6.05%
Senior Notes, due June 15, 2015. Aggregate principal amount of $75,000 less unaccrued discount of $24 and $38 (6.1% imputed
rate)
|
|
|
|
74,976
|
|
|
|
|
74,962
|
|
6.85%
Senior Notes, due April 15, 2016. Aggregate principal amount of $125,000 less unaccrued discount of $69 and $88 (6.9% imputed
rate)
|
|
|
|
124,931
|
|
|
|
|
124,912
|
|
Total
|
|
|
$
|
237,907
|
|
|
|
$
|
237,874
|
|
The
Bank Credit Facility, 6.05% Senior Notes due 2015 (“Senior Notes due 2015”) and 6.85% Senior Notes due 2016 (“Senior
Notes due 2016”) are described in “Notes to Consolidated Financial Statements — Note 5 — Debt” of
the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.
Credit
Agreement with Financial Institutions (“Bank Credit Facility”
)
On
October 7, 2011, HMEC entered into a Bank Credit Agreement (the “Bank Credit Facility”) that replaced a previous bank
credit agreement which was scheduled to expire on December 19, 2011. The Bank Credit Facility is by and between HMEC, certain
financial institutions named therein and JPMorgan Chase Bank, N.A., as administrative agent, provides for unsecured borrowings
of up to $150,000 and was scheduled to expire on October 6, 2015. 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 1.25%, which totaled
1.40%, as of June 30, 2014). The unused portion of the Bank Credit Facility is subject to a variable commitment fee, which was
0.15% on an annual basis at June 30, 2014.
Effective
July 30, 2014, the Bank Credit Facility agreement 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. As of July 30, 2014, HMEC’s outstanding short-term
debt balance remained $38,000; no change compared to the June 30, 2014 balance.
Note
5 - Pension Plans and Other Postretirement Benefits
The
Company has the following retirement plans: a defined contribution plan; a 401(k) plan; a frozen defined benefit plan for employees
hired on or before December 31, 1998; and certain employees participate in a supplemental defined contribution plan or a frozen
supplemental defined benefit plan or both.
Defined
Benefit Plan and Supplemental Defined Benefit Plans
The
following tables summarize the components of net periodic pension cost recognized for the defined benefit plan and the supplemental
defined benefit plans for the following periods:
|
|
|
Defined Benefit Plan
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
Components
of net periodic
pension (income) expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit accrual
|
|
|
$
|
-
|
|
|
|
$
|
-
|
|
|
|
$
|
-
|
|
|
|
$
|
-
|
|
Other
expenses
|
|
|
|
90
|
|
|
|
|
90
|
|
|
|
|
180
|
|
|
|
|
180
|
|
Interest cost
|
|
|
|
419
|
|
|
|
|
343
|
|
|
|
|
839
|
|
|
|
|
685
|
|
Expected return
on plan assets
|
|
|
|
(600
|
)
|
|
|
|
(559
|
)
|
|
|
|
(1,201
|
)
|
|
|
|
(1,119
|
)
|
Settlement loss
|
|
|
|
190
|
|
|
|
|
229
|
|
|
|
|
379
|
|
|
|
|
487
|
|
Amortization of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior service cost
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
Actuarial
loss
|
|
|
|
343
|
|
|
|
|
400
|
|
|
|
|
686
|
|
|
|
|
801
|
|
Net periodic pension
expense
|
|
|
$
|
442
|
|
|
|
$
|
503
|
|
|
|
$
|
883
|
|
|
|
$
|
1,034
|
|
|
|
|
Supplemental Defined Benefit Plans
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
Components
of net periodic
pension (income) expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit accrual
|
|
|
$
|
-
|
|
|
|
$
|
-
|
|
|
|
$
|
-
|
|
|
|
$
|
-
|
|
Other expenses
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
Interest
cost
|
|
|
|
179
|
|
|
|
|
153
|
|
|
|
|
358
|
|
|
|
|
307
|
|
Expected return
on plan assets
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
Settlement loss
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
Amortization of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior service cost
|
|
|
|
-
|
|
|
|
|
32
|
|
|
|
|
-
|
|
|
|
|
63
|
|
Actuarial
loss
|
|
|
|
40
|
|
|
|
|
51
|
|
|
|
|
79
|
|
|
|
|
102
|
|
Net periodic pension
expense
|
|
|
$
|
219
|
|
|
|
$
|
236
|
|
|
|
$
|
437
|
|
|
|
$
|
472
|
|
Note
5 - Pension Plans and Other Postretirement Benefits-(Continued)
Postretirement
Benefits Other Than Pensions
In
addition to providing pension benefits, the Company also provides certain health care and life insurance benefits to a closed
group of eligible employees. 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 will be amortized
as a credit over the average working lifetime of active eligible participants. As a result of the changes in the plan for other
postretirement benefits, the Company recorded a reduction in its expenses of $556 and $186 for the six months ended June 30, 2014
and 2013, respectively. Funding of the previously established Health Reimbursement Accounts (“HRAs”) was $132 and
$90 for the six months ended June 30, 2014 and 2013, respectively.
The
following table summarizes the components of the net periodic benefit for postretirement benefits other than pensions for the
following periods:
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June
30,
|
|
|
June
30,
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
Components of net periodic benefit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
|
$
|
-
|
|
|
|
$
|
-
|
|
|
|
$
|
-
|
|
|
|
$
|
-
|
|
Interest
cost
|
|
|
|
11
|
|
|
|
|
23
|
|
|
|
|
23
|
|
|
|
|
46
|
|
Amortization of prior
service credit
|
|
|
|
(157
|
)
|
|
|
|
-
|
|
|
|
|
(314
|
)
|
|
|
|
-
|
|
Amortization
of prior gain
|
|
|
|
(61
|
)
|
|
|
|
(59
|
)
|
|
|
|
(123
|
)
|
|
|
|
(118
|
)
|
Net periodic income
|
|
|
$
|
(207
|
)
|
|
|
$
|
(36
|
)
|
|
|
$
|
(414
|
)
|
|
|
$
|
(72
|
)
|
2014
Contributions
In
2014, there is no minimum funding requirement for the Company’s defined benefit plan. The following table discloses the
minimum funding requirements, contributions made and expected full year contributions for the Company’s plans.
|
|
Defined Benefit Pension Plans
|
|
|
|
|
|
Defined
|
|
Supplemental
|
|
Other
|
|
|
Benefit
|
|
Defined Benefit
|
|
Postretirement
|
|
|
Plan
|
|
Plans
|
|
Benefits
|
|
|
|
|
|
|
|
|
|
|
Minimum funding requirement for 2014
|
|
|
$
|
-
|
|
|
|
|
N/A
|
|
|
|
|
N/A
|
|
Contributions made in the six months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ended June 30, 2014
|
|
|
|
-
|
|
|
|
$
|
664
|
|
|
|
$
|
93
|
|
Expected contributions (approximations) for the year ended December 31, 2014 as of the time of :
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
This Form 10-Q (1)
|
|
|
|
2,000
|
|
|
|
|
1,320
|
|
|
|
|
217
|
|
2013 Form 10-K (2)
|
|
|
|
2,000
|
|
|
|
|
1,320
|
|
|
|
|
217
|
|
N/A
- Not applicable.
|
(1)
|
HMEC’s
Quarterly Report on Form 10-Q for the quarter ended June 30, 2014.
|
|
(2)
|
HMEC’s
Annual Report on Form 10-K for the year ended December 31, 2013, specifically “Notes
to Consolidated Financial Statements — Note 9 — Pension Plans and Other Postretirement
Benefits”.
|
Note
6 - Reinsurance
The
Company recognizes the cost of reinsurance premiums over the contract periods for such premiums in proportion to the insurance
protection provided. Amounts recoverable from reinsurers for unpaid claims and claim settlement expenses, including estimated
amounts for unsettled claims, claims incurred but not yet reported and policy benefits, are estimated in a manner consistent with
the insurance liability associated with the policy. The effects of reinsurance on premiums written and contract deposits; premiums
and contract charges earned; and benefits, claims and settlement expenses were as follows:
|
|
|
|
|
Ceded to
|
|
Assumed
|
|
|
|
|
|
Gross
|
|
Other
|
|
from Other
|
|
Net
|
|
|
Amount
|
|
Companies
|
|
Companies
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums written and contract deposits
|
|
|
$
|
298,163
|
|
|
|
$
|
6,712
|
|
|
|
$
|
942
|
|
|
|
$
|
292,393
|
|
Premiums and contract charges earned
|
|
|
|
185,169
|
|
|
|
|
6,893
|
|
|
|
|
862
|
|
|
|
|
179,138
|
|
Benefits, claims and settlement expenses
|
|
|
|
129,163
|
|
|
|
|
2,684
|
|
|
|
|
679
|
|
|
|
|
127,158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums written and contract deposits
|
|
|
$
|
274,199
|
|
|
|
$
|
7,509
|
|
|
|
$
|
1,013
|
|
|
|
$
|
267,703
|
|
Premiums and contract charges earned
|
|
|
|
178,344
|
|
|
|
|
7,697
|
|
|
|
|
914
|
|
|
|
|
171,561
|
|
Benefits, claims and settlement expenses
|
|
|
|
122,835
|
|
|
|
|
2,718
|
|
|
|
|
648
|
|
|
|
|
120,765
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended, June 30, 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums written and contract deposits
|
|
|
$
|
564,600
|
|
|
|
$
|
13,343
|
|
|
|
$
|
1,411
|
|
|
|
$
|
552,668
|
|
Premiums and contract charges earned
|
|
|
|
366,902
|
|
|
|
|
13,786
|
|
|
|
|
1,425
|
|
|
|
|
354,541
|
|
Benefits, claims and settlement expenses
|
|
|
|
244,040
|
|
|
|
|
6,129
|
|
|
|
|
1,235
|
|
|
|
|
239,146
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums written and contract deposits
|
|
|
$
|
526,264
|
|
|
|
$
|
14,912
|
|
|
|
$
|
1,429
|
|
|
|
$
|
512,781
|
|
Premiums and contract charges earned
|
|
|
|
354,652
|
|
|
|
|
15,361
|
|
|
|
|
1,428
|
|
|
|
|
340,719
|
|
Benefits, claims and settlement expenses
|
|
|
|
237,013
|
|
|
|
|
4,649
|
|
|
|
|
1,100
|
|
|
|
|
233,464
|
|
Note
7 - Segment Information
The
Company conducts and manages its business through four segments. The three operating segments, representing the major lines of
insurance business, are: property and casualty insurance, primarily personal lines automobile and homeowners products; retirement
annuity products, primarily tax-qualified fixed and variable deposits; and life insurance. The Company does not allocate the impact
of corporate-level transactions to the insurance segments, consistent with the basis for management’s evaluation of the
results of those segments, but classifies those items in the fourth segment, corporate and other. In addition to ongoing transactions
such as corporate debt service, realized investment gains and losses and certain public company expenses, such items have also
included corporate debt retirement costs/gains, when applicable. Summarized financial information for these segments is as follows:
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
June 30,
|
|
June 30,
|
|
|
2014
|
|
2013
|
|
2014
|
|
2013
|
|
|
|
|
|
|
|
|
|
Insurance premiums and contract charges earned
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and casualty
|
|
$
|
144,658
|
|
|
$
|
139,457
|
|
|
$
|
288,550
|
|
|
$
|
277,393
|
|
Annuity
|
|
|
6,453
|
|
|
|
5,747
|
|
|
|
12,377
|
|
|
|
10,819
|
|
Life
|
|
|
28,027
|
|
|
|
26,357
|
|
|
|
53,614
|
|
|
|
52,507
|
|
Total
|
|
$
|
179,138
|
|
|
$
|
171,561
|
|
|
$
|
354,541
|
|
|
$
|
340,719
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and casualty
|
|
$
|
9,455
|
|
|
$
|
9,100
|
|
|
$
|
18,740
|
|
|
$
|
18,070
|
|
Annuity
|
|
|
54,338
|
|
|
|
51,289
|
|
|
|
110,195
|
|
|
|
102,643
|
|
Life
|
|
|
17,842
|
|
|
|
17,210
|
|
|
|
35,976
|
|
|
|
34,529
|
|
Corporate and other
|
|
|
2
|
|
|
|
4
|
|
|
|
4
|
|
|
|
4
|
|
Intersegment eliminations
|
|
|
(232
|
)
|
|
|
(242
|
)
|
|
|
(466
|
)
|
|
|
(482
|
)
|
Total
|
|
$
|
81,405
|
|
|
$
|
77,361
|
|
|
$
|
164,449
|
|
|
$
|
154,764
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and casualty
|
|
$
|
4,895
|
|
|
$
|
4,166
|
|
|
$
|
18,922
|
|
|
$
|
14,326
|
|
Annuity
|
|
|
11,573
|
|
|
|
9,230
|
|
|
|
23,812
|
|
|
|
20,291
|
|
Life
|
|
|
5,015
|
|
|
|
5,528
|
|
|
|
8,897
|
|
|
|
9,868
|
|
Corporate and other
|
|
|
(1,031
|
)
|
|
|
7,071
|
|
|
|
(2,813
|
)
|
|
|
8,522
|
|
Total
|
|
$
|
20,452
|
|
|
$
|
25,995
|
|
|
$
|
48,818
|
|
|
$
|
53,007
|
|
|
|
June 30,
|
|
December 31,
|
|
|
2014
|
|
2013
|
Assets
|
|
|
|
|
|
|
|
|
|
|
Property and casualty
|
|
|
$
|
1,079,368
|
|
|
|
$
|
1,001,561
|
|
Annuity
|
|
|
|
6,364,058
|
|
|
|
|
5,963,348
|
|
Life
|
|
|
|
1,882,043
|
|
|
|
|
1,743,084
|
|
Corporate and other
|
|
|
|
150,741
|
|
|
|
|
154,557
|
|
Intersegment eliminations
|
|
|
|
(30,035
|
)
|
|
|
|
(35,878
|
)
|
Total
|
|
|
$
|
9,446,175
|
|
|
|
$
|
8,826,672
|
|
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (“MD&A”)
(Dollars
in millions, except per share data)
Forward-looking
Information
Statements
made in the following discussion that are not historical in nature are forward-looking within the meaning of the Private Securities
Litigation Reform Act of 1995 and are subject to known and unknown risks, uncertainties and other factors. Horace Mann is not
under any obligation to (and expressly disclaims any such obligation to) update or revise any forward-looking statements, whether
as a result of new information, future events or otherwise. It is important to note that the Company's actual results could differ
materially from those projected in forward-looking statements due to a number of risks and uncertainties inherent in the Company's
business. For additional information regarding risks and uncertainties, see “Item 1A. Risk Factors” in the Company’s
Annual Report on Form 10-K for the year ended December 31, 2013. That discussion includes factors such as:
|
·
|
The impact that a prolonged economic recession may have on the Company’s investment portfolio; volume of new business for automobile, homeowners, annuity and life products; policy renewal rates; and additional annuity contract deposit receipts.
|
|
·
|
Fluctuations in the fair value of securities in the Company's investment portfolio and the related after-tax effect on the Company's shareholders' equity and total capital through either realized or unrealized investment losses.
|
|
·
|
Prevailing low interest rate levels, including the impact of interest rates on (1) the Company's ability to maintain appropriate interest rate spreads over minimum fixed rates guaranteed in the Company's annuity and life products, (2) the book yield of the Company's investment portfolio, (3) unrealized gains and losses in the Company's investment portfolio and the related after-tax effect on the Company's shareholders' equity and total capital, (4) amortization of deferred policy acquisition costs and (5) capital levels of the Company’s life insurance subsidiaries.
|
|
·
|
The frequency and severity of events such as hurricanes, storms, earthquakes and wildfires, and the ability of the Company to provide accurate estimates of ultimate claim costs in its consolidated financial statements.
|
|
·
|
The Company’s risk exposure to catastrophe-prone areas. Based on full year 2013 property and casualty direct earned premiums, the Company’s ten largest states represented 58% 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, Florida, South Carolina, Louisiana and Georgia.
|
|
·
|
The ability of the Company to maintain a favorable catastrophe reinsurance program considering both availability and cost; and the collectibility of reinsurance receivables.
|
|
·
|
Adverse changes in market appreciation, interest spreads, business persistency and policyholder mortality and morbidity rates and the resulting impact on both estimated reserves and the amortization of deferred policy acquisition costs.
|
|
·
|
Adverse results from the assessment of the Company’s goodwill asset requiring write off of the impaired portion.
|
|
·
|
The Company's ability to refinance outstanding indebtedness or repurchase shares of the Company’s common stock.
|
|
·
|
The Company's ability to (1) develop and expand its marketing operations, including agents and other points of distribution, and (2) maintain and secure access to educators, as well as endorsements by and/or marketing agreements with education-related associations, including various teacher, school administrator, principal and business official associations.
|
|
·
|
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 include, among others, teacher layoffs and early retirements, as well as individual concerns regarding employment and economic uncertainty.
|
|
·
|
The Company's ability to profitably expand its property and casualty business in highly competitive environments.
|
|
·
|
Changes in federal and state laws and regulations, which affect the relative tax and other advantages of the Company’s life and annuity products to customers, including, but not limited to, changes in IRS regulations governing Section 403(b) plans.
|
|
·
|
Changes in public employee retirement programs as a result of federal and/or state level pension reform initiatives.
|
|
·
|
Changes in federal and state laws and regulations, which affect the relative tax advantage of certain investments or which affect the ability of debt issuers to declare bankruptcy or restructure debt.
|
|
·
|
The Company's ability to effectively implement new or enhanced information technology systems and applications.
|
Executive
Summary
Horace
Mann Educators Corporation (“HMEC”; and together with its subsidiaries, the “Company” or “Horace
Mann”) is an insurance holding company. Through its subsidiaries, HMEC markets and underwrites personal lines of property
and casualty insurance, retirement annuities and life insurance in the U.S. The Company markets its products primarily to K-12
teachers, administrators and other employees of public schools and their families.
For
the three months ended June 30, 2014, the Company’s net income of $20.4 million represented a decrease of $5.6 million compared
to the prior year, as strong annuity segment results, as well as solid earnings in the property and casualty and life segments,
were offset by a decrease in realized investment gains. After-tax net realized investment gains of $2.2 million were $7.8 million
less than a year earlier. Annuity segment net income of $11.5 million for the current period increased $2.3 million compared to
the second quarter of 2013, largely due to an increase in the amount of interest margin earned on fixed annuity assets —
driven by the growth in assets under management and continued solid investment portfolio performance — accompanied by favorable
deferred policy acquisition costs unlocking in the current quarter. For the property and casualty segment, net income of $4.9
million reflected an increase of $0.8 million compared to the second quarter of 2013, despite an increase in catastrophe losses
which included May and June hail storms in 2014. Life segment net income of $5.0 million decreased $0.6 million compared to the
second quarter of 2013 due to a more normal level of mortality costs, compared to the favorable experience in the prior year,
partially offset by growth in investment income in the current period.
For
the six months ended June 30, 2014, the Company’s net income of $48.8 million represented a decrease of $4.2 million compared
to the prior year, led by improvement in property and casualty segment and annuity segment results, as well as solid earnings
in the life segment which were offset by a decrease in realized investment gains. After-tax net realized investment gains of $3.3
million were $11.1 million less than a year earlier. For the property and casualty segment, net income of $18.9 million increased
$4.6 million compared to the first half of 2013. The property and casualty combined ratio was 98.2% for the first six months of
2014, a 2.1 percentage point improvement compared to 100.3% for the same period in 2013, including weather-related losses. Automobile
current accident year non-catastrophe underwriting results improved, coupled with a slightly higher level of favorable development
of prior years’ reserves. Homeowners current accident year non-catastrophe underwriting results were comparable to the first
six months of 2013. Catastrophe losses increased modestly in the current period, representing a $1.1 million after-tax decrease
to net income compared to the first six months of 2013. Annuity segment net income of $23.8 million for the current period increased
$3.5 million compared to the first six months of 2013, due to an increase in the amount of interest margin earned on fixed annuity
assets — driven by the growth in assets under management and continued solid investment portfolio performance accompanied
by increased security prepayment activity from the first quarter of 2014. For the six months, unlocking of deferred policy acquisition
costs had a positive, but minimal, impact on net income in both 2014 and 2013. Life segment net income of $8.9 million decreased
$1.0 million compared to the first six months of 2013 due to a more normal level of mortality costs, consistent with actuarial
expectations, partially offset by growth in investment income in the current period. Compared to the first half of 2013, across
all of the business segments, operating expenses increased reflecting the Company’s various infrastructure and technology
investments, which are intended to enhance the overall customer experience and support favorable policy retention and business
cross-sale ratios.
Premiums
written and contract deposits increased 8% compared to the first six months of 2013 primarily due to an increase in the amount
of annuity single premium and rollover deposits received in the current period, as well as the favorable premium impact from increases
in average premium per policy for both homeowners and automobile. Annuity deposits received were 16% greater than the prior year.
Property and casualty segment premiums written increased 3% compared to the prior year. Life segment insurance premiums and contract
deposits increased 2% compared to the first half of the prior year.
The
Company’s book value per share was $31.40 at June 30, 2014, an increase of 13% compared to 12 months earlier. This increase
reflected net income for the trailing 12 months and an increase in net unrealized investment gains due to narrower credit spreads
across most asset classes partially offset by slightly higher yields on U.S. Treasury securities, the combination of which resulted
in an increase in net unrealized gains for the Company’s holdings of corporate securities and municipal securities. At June
30, 2014, book value per share excluding investment fair value adjustments was $24.51, representing an 8% increase compared to
12 months earlier.
Critical
Accounting Policies
The
preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”)
requires the Company's management to make estimates and assumptions based on information available at the time the consolidated
financial statements are prepared. These estimates and assumptions affect the reported amounts of the Company's consolidated assets,
liabilities, shareholders' equity and net income. Certain accounting estimates are particularly sensitive because of their significance
to the Company's consolidated financial statements and because of the possibility that subsequent events and available information
may differ markedly from management's judgments at the time the consolidated financial statements were prepared. Management has
discussed with the Audit Committee the quality, not just the acceptability, of the Company's accounting principles as applied
in its financial reporting. The discussions generally included such matters as the consistency of the Company's accounting policies
and their application, and the clarity and completeness of the Company's consolidated financial statements, which include related
disclosures. For the Company, the areas most subject to significant management judgments include: fair value measurements, other-than-temporary
impairment of investments, goodwill, deferred policy acquisition costs for annuity and interest-sensitive life products, liabilities
for property and casualty claims and claim expenses, liabilities for future policy benefits, deferred taxes and valuation of assets
and liabilities related to the defined benefit pension plan.
Compared
to December 31, 2013, at June 30, 2014 there were no material changes to the accounting policies for the areas most subject to
significant management judgments identified above. In addition to disclosures in “Notes to Consolidated Financial Statements”
in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013, discussion of accounting policies, including
certain sensitivity information, was presented in “Management’s Discussion and Analysis of Financial Condition and
Results of Operations — Critical Accounting Policies” in that Form 10-K.
Results
of Operations
Insurance
Premiums and Contract Charges
|
|
Six Months Ended
|
|
Change From
|
|
|
June 30,
|
|
Prior Year
|
|
|
2014
|
|
2013
|
|
Percent
|
|
Amount
|
Insurance premiums written and contract
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
deposits (includes annuity and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
life contract deposits)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property & casualty (1)
|
|
|
$
|
285.4
|
|
|
|
$
|
276.1
|
|
|
|
|
3.4
|
%
|
|
|
$
|
9.3
|
|
Annuity deposits
|
|
|
|
218.3
|
|
|
|
|
188.6
|
|
|
|
|
15.7
|
%
|
|
|
|
29.7
|
|
Life
|
|
|
|
49.0
|
|
|
|
|
48.1
|
|
|
|
|
1.9
|
%
|
|
|
|
0.9
|
|
Total
|
|
|
$
|
552.7
|
|
|
|
$
|
512.8
|
|
|
|
|
7.8
|
%
|
|
|
$
|
39.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance premiums and contract
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
charges earned (excludes annuity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and life contract deposits)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property & casualty (1)
|
|
|
$
|
288.5
|
|
|
|
$
|
277.4
|
|
|
|
|
4.0
|
%
|
|
|
$
|
11.1
|
|
Annuity
|
|
|
|
12.4
|
|
|
|
|
10.8
|
|
|
|
|
14.8
|
%
|
|
|
|
1.6
|
|
Life
|
|
|
|
53.6
|
|
|
|
|
52.5
|
|
|
|
|
2.1
|
%
|
|
|
|
1.1
|
|
Total
|
|
|
$
|
354.5
|
|
|
|
$
|
340.7
|
|
|
|
|
4.1
|
%
|
|
|
$
|
13.8
|
|
|
(1)
|
Includes
voluntary business and an immaterial amount of involuntary business. Voluntary business represents policies sold through the Company's
marketing organization and issued under the Company's underwriting guidelines. Involuntary business consists of allocations of
business from state mandatory insurance facilities and assigned risk business.
|
For
the three months ended June 30, 2014, the Company’s premiums written and contract deposits of $292.4 million increased $24.7
million, or 9.2%, compared to the prior year, led by the annuity segment. For the first six months of 2014, the Company’s
premiums written and contract deposits of $552.7 million increased $39.9 million, or 7.8%, compared to the prior year, also led
by the annuity segment. The Company’s premiums and contract charges earned increased $7.6 million, or 4.4%, compared to
the second quarter of 2013 and increased $13.8 million, or 4.1%, compared to the six months ended June 30, 2013, primarily due
to increases in average premium per policy for both homeowners and automobile.
Total
voluntary automobile and homeowners premiums written increased 3.4%, or $9.4 million, in the first six months of 2014. Average
written premium per policy for both automobile and homeowners increased compared to the prior year, with the impact partially
offset by a reduced level of policies in force in the current period. For 2014, the Company’s full year rate plan anticipates
mid-single digit average rate increases (including states with no rate actions) for both automobile and homeowners; rate actions
during the first six months of 2014 were consistent with those plans. For full year 2013, the Company’s average approved
rate changes (including states with no rate actions) for automobile and homeowners were 6% and 9%, respectively. At June 30, 2014,
there were 480,000 voluntary automobile and 232,000 homeowners policies in force, for a total of 712,000 policies, compared to
a total of 717,000 policies at December 31, 2013 and 724,000 policies at June 30, 2013.
Based
on policies in force, the current year voluntary automobile 12-month retention rate for new and renewal policies was 84.5% compared
to 85.1% at June 30, 2013. The property 12-month new and renewal policy retention rate was 88.8% at June 30, 2014 compared to
89.5% at June 30, 2013. Although modestly lower than 12 months earlier, the retention rates have been favorably impacted by the
Company’s focus on expanding the number of multiline customers and customer utilization of automatic payment plans, particularly
for voluntary automobile business.
Voluntary
automobile premiums written increased 2.4%, or $4.4 million, compared to the first half of 2013. In the first six months of 2014,
the average written premium per policy and average earned premium per policy increased approximately 4% and 3%, respectively,
compared to a year earlier, which was partially offset by the decline in policies in force. Voluntary automobile policies in force
at June 30, 2014 decreased 2,000 compared to December 31, 2013 and decreased 7,000 compared to June 30, 2013. The number of educator
policies represented approximately 84% of the voluntary automobile policies in force at June 30, 2014 and December 31, 2013 compared
to approximately 83% at June 30, 2013.
Voluntary
homeowners premiums written increased 5.5%, or $5.0 million, compared to the first half of 2013. The average written and earned
premium per policy increased 6% and 5%, respectively, in the first half of 2014 compared to a year earlier. In addition, reduced
catastrophe reinsurance costs benefitted the current period by approximately $2 million. Homeowners policies in force at June
30, 2014 decreased 3,000 compared to December 31, 2013 and decreased 5,000 compared to June 30, 2013. The number of educator policies
represented approximately 79% of the homeowners policies in force at June 30, 2014, December 31, 2013 and June 30, 2013. Growth
in 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.
As
an example, in 2014 the Company initiated a program to further address homeowners profitability and hurricane exposure issues
in Florida. The Company expects to non-renew about 4,800 policies, approximately 95% of its remaining Florida book of property
business, starting with June 2014 policy effective dates. As of June 30, 2014, approximately 1,000 of the policies in the non-renewal
program have been terminated — most at the client’s request — a result that occurred sooner than management’s
expected timing. While this program will impact the overall policy in force count and premiums in the short-term, it is expected
to reduce risk exposure concentration, reduce overall catastrophe reinsurance costs and improve homeowners longer-term underwriting
results.
For
the six months ended June 30, 2014, total annuity deposits received increased 15.7%, or $29.7 million, compared to the prior year,
driven by a 29.0% increase in single premium and rollover deposit receipts accompanied by a 1.9% increase in recurring deposit
receipts. As further described in “Sales” below, the Company’s recently introduced fixed indexed annuity contract
contributed to the current period favorable result. In the first six months of 2014, new deposits to fixed accounts of $150.6
million increased 22.4%, or $27.6 million, and new deposits to variable accounts of $67.7 million increased 3.2%, or $2.1 million,
compared to the prior year. In addition to external contractholder deposits, annuity new deposits include contributions and transfers
by Horace Mann’s employees in the Company’s 401(k) group annuity contract.
Total
annuity accumulated cash value of $5.5 billion at June 30, 2014 increased 11.0% compared to a year earlier, reflecting the increase
from new deposits received as well as favorable retention and financial market performance. Cash value retentions for variable
and fixed annuity options were 94.1% and 94.9%, respectively, for the 12 month period ended June 30, 2014, with variable consistent
and fixed declining slightly, compared to a year earlier. At June 30, 2014, the number of annuity contracts outstanding of 197,000
increased 2,000 contracts compared to December 31, 2013 and 6,000 contracts compared to June 30, 2013.
Variable
annuity accumulated balances of $1.8 billion at June 30, 2014 increased 18.9% compared to June 30, 2013, reflecting favorable
financial market performance over the 12 months (driven primarily by equity securities) partially offset by net balances transferred
from the variable account option to the guaranteed interest rate fixed account option. Annuity segment contract charges earned
increased 14.8%, or $1.6 million, compared to the first six months of 2013.
Life
segment premiums and contract deposits for the first six months of 2014 increased 1.9%, or $0.9 million, compared to the prior
year, due to the favorable impact of new business growth. The ordinary life insurance in force lapse ratio was 4.1% for the 12
months ended June 30, 2014 compared to 4.4% for the 12 months ended June 30, 2013.
Sales
For
the first six months of 2014, property and casualty new annualized sales premiums decreased 1.1% compared to the first half of
2013, as growth in new automobile sales was more than offset by a decline in homeowners new business. The current period decline
in homeowners new business was largely due to continued risk mitigation initiatives.
For
sales by Horace Mann’s agency force, the Company’s annuity new business levels continued to benefit from agent training
and marketing programs, which focus on retirement planning, and build on the positive results produced in recent years resulting
in a 31.8% increase compared to the first half of 2013. Sales from the independent agent distribution channel, which are largely
single premium and rollover annuity deposits, decreased 1.7% compared to a year ago. As a result, total Horace Mann annuity sales
from the combined distribution channels increased 26.5% compared to the six months ended June 30, 2013, led by sales of the Company’s
new fixed indexed annuity product as described below. 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)
increased 12.6% compared to the first half of 2013, and single premium and rollover deposits for Horace Mann annuity products
increased 29.0% compared to the prior year. In February 2014, the Company expanded its annuity product portfolio by introducing
a fixed indexed annuity contract. This new product has been well received by the Company’s customers and represented approximately
one-third of total annuity sales for the current six months, largely single premium and rollover deposits. Previously, the Company
had entered into third-party vendor agreements to offer an indexed annuity product underwritten by the third parties.
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, has contributed to the increase in sales of proprietary life products. For the six months ended June
30, 2014, sales of Horace Mann’s proprietary life insurance products totaled $5.0 million, representing an increase of 42.9%,
compared to the prior year.
Distribution
System
At
June 30, 2014, there was a combined total of 707 Exclusive Agencies and Employee Agents, compared to 759 at December 31, 2013
and 736 at June 30, 2013. Within the 12 month decrease, there was a net increase in new Exclusive Agency appointments, offset
by termination of lower producing agents. The Company has begun to introduce higher quality standards for agents and agencies
focused on improving both customer experiences and agent productivity. These higher standards contributed to the current period
turnover.
At
June 30, 2014, there were 620 Horace Mann Exclusive Agencies, an increase of 5 compared to June 30, 2013. At June 30, 2014, in
addition to the Exclusive Agencies, there were 87 Employee Agents, a decrease of 34 compared to 12 months earlier. See additional
description in “Business — Corporate Strategy and Marketing — Dedicated Agency Force” of the Company’s
Annual Report on Form 10-K for the year ended December 31, 2013.
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 462
authorized agents at June 30, 2014. During the first six months of 2014, this channel generated $17.4 million in annualized new
annuity sales for the Company compared to $17.7 million for the first six months of 2013, with the new business in both periods
primarily comprised of single and rollover deposit business.
Net
Investment Income
For
the three months ended June 30, 2014, pretax investment income of $81.4 million increased 5.2%, or $4.0 million, (5.0%, or $2.6
million, after tax) compared to the prior year. Pretax investment income of $164.4 million for the six months ended June 30, 2014
increased 6.2%, or $9.6 million, (6.0%, or $6.2 million, after tax) compared to the prior year. The increase reflected growth
in the size of the average investment portfolio on an amortized cost basis and continued strong performance in the fixed maturity
and alternative investment portfolios accompanied by the effects of increased prepayment activity in the asset-backed securities
portfolio in the current six month period. Average invested assets increased 6.5% over the 12 months ended June 30, 2014. The
average pretax yield on the investment portfolio was 5.38% (3.61% after tax) for the first six months of 2014, compared to the
pretax yield of 5.40% (3.64% after tax) a year earlier. During the first six months of 2014, management continued to identify
and secure investments, including a modest level of alternative investments, with attractive risk-adjusted yields without venturing
into asset classes or individual securities that would be inconsistent with the Company’s overall conservative investment
guidelines.
Net
Realized Investment Gains and Losses
For
the three months ended June 30, 2014, net realized investment gains (pretax) were $3.5 million compared to net realized investment
gains of $15.4 million in the same period in the prior year. For the six months, net realized investment gains (pretax) were $5.2
million compared to net realized investment gains of $22.3 million in the prior year. The net gains and losses in both periods
were realized primarily from ongoing investment portfolio management activity. Impairment charges of $0.5 million in 2014 and
$1.0 million in 2013 were recorded in the six months ended June 30, in both years occurring in the second quarter.
For
the first half of 2014, the Company’s net realized investment gains of $5.2 million included $6.9 million of gross gains
realized on security sales and calls partially offset by $1.2 million of realized losses on securities that were disposed of during
the six months, primarily municipal securities, and the $0.5 million impairment charge recorded on five securities.
For
the first half of 2013, the Company’s net realized investment gains of $22.3 million included $24.2 million of gross gains
realized on security sales and calls partially offset by $0.9 million of realized losses on securities that were disposed of during
the six months, primarily common stocks, and the $1.0 million impairment charge recorded on two securities. The impairment charge
included $0.9 million attributable to one general obligation bond.
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, 2013, yields
on U.S. Treasury securities decreased and credit spreads were slightly narrower across most asset classes in 2014, the combination
of which resulted in an increase in net unrealized gains for all classes of the Company’s fixed maturity securities holdings.
|
|
June
30, 2014
|
|
|
|
|
|
|
Amortized
|
|
Pretax
Net
|
|
|
|
Number of
|
|
Fair
|
|
Cost or
|
|
Unrealized
|
|
|
|
Issuers
|
|
Value
|
|
Cost
|
|
Gain
(Loss)
|
|
Fixed maturity
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Banking
and Finance
|
|
|
|
79
|
|
|
|
|
$
|
528.1
|
|
|
|
|
$
|
481.3
|
|
|
|
|
$
|
46.8
|
|
Energy
|
|
|
|
69
|
|
|
|
|
|
293.3
|
|
|
|
|
|
261.3
|
|
|
|
|
|
32.0
|
|
Utilities
|
|
|
|
46
|
|
|
|
|
|
237.7
|
|
|
|
|
|
200.9
|
|
|
|
|
|
36.8
|
|
Insurance
|
|
|
|
40
|
|
|
|
|
|
210.9
|
|
|
|
|
|
181.7
|
|
|
|
|
|
29.2
|
|
Real estate
|
|
|
|
36
|
|
|
|
|
|
166.5
|
|
|
|
|
|
156.0
|
|
|
|
|
|
10.5
|
|
Technology
|
|
|
|
37
|
|
|
|
|
|
162.0
|
|
|
|
|
|
155.0
|
|
|
|
|
|
7.0
|
|
Transportation
|
|
|
|
27
|
|
|
|
|
|
148.2
|
|
|
|
|
|
136.6
|
|
|
|
|
|
11.6
|
|
Metal and Mining
|
|
|
|
18
|
|
|
|
|
|
134.5
|
|
|
|
|
|
127.5
|
|
|
|
|
|
7.0
|
|
Broadcasting and
Media
|
|
|
|
28
|
|
|
|
|
|
130.2
|
|
|
|
|
|
114.0
|
|
|
|
|
|
16.2
|
|
Telecommunications
|
|
|
|
25
|
|
|
|
|
|
127.8
|
|
|
|
|
|
117.9
|
|
|
|
|
|
9.9
|
|
All
Other Corporates (1)
|
|
|
|
196
|
|
|
|
|
|
724.4
|
|
|
|
|
|
667.1
|
|
|
|
|
|
57.3
|
|
Total corporate
bonds
|
|
|
|
601
|
|
|
|
|
|
2,863.6
|
|
|
|
|
|
2,599.3
|
|
|
|
|
|
264.3
|
|
Mortgage-backed securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Government and federally sponsored agencies
|
|
|
|
403
|
|
|
|
|
|
582.2
|
|
|
|
|
|
546.3
|
|
|
|
|
|
35.9
|
|
Commercial
|
|
|
|
38
|
|
|
|
|
|
125.7
|
|
|
|
|
|
122.8
|
|
|
|
|
|
2.9
|
|
Other
|
|
|
|
18
|
|
|
|
|
|
28.6
|
|
|
|
|
|
26.3
|
|
|
|
|
|
2.3
|
|
Municipal bonds
|
|
|
|
498
|
|
|
|
|
|
1,597.9
|
|
|
|
|
|
1,455.6
|
|
|
|
|
|
142.3
|
|
Government bonds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
|
|
9
|
|
|
|
|
|
476.2
|
|
|
|
|
|
465.0
|
|
|
|
|
|
11.2
|
|
Foreign
|
|
|
|
8
|
|
|
|
|
|
57.0
|
|
|
|
|
|
50.6
|
|
|
|
|
|
6.4
|
|
Collateralized debt
obligations (2)
|
|
|
|
79
|
|
|
|
|
|
435.5
|
|
|
|
|
|
430.7
|
|
|
|
|
|
4.8
|
|
Asset-backed securities
|
|
|
|
94
|
|
|
|
|
|
509.6
|
|
|
|
|
|
490.8
|
|
|
|
|
|
18.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
fixed maturity securities
|
|
|
|
1,748
|
|
|
|
|
$
|
6,676.3
|
|
|
|
|
$
|
6,187.4
|
|
|
|
|
$
|
488.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-redeemable preferred
stocks
|
|
|
|
13
|
|
|
|
|
$
|
22.0
|
|
|
|
|
$
|
22.2
|
|
|
|
|
$
|
(0.2
|
)
|
Common stocks
|
|
|
|
170
|
|
|
|
|
|
67.6
|
|
|
|
|
|
55.0
|
|
|
|
|
|
12.6
|
|
Closed-end fund
|
|
|
|
1
|
|
|
|
|
|
19.9
|
|
|
|
|
|
20.0
|
|
|
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
equity securities
|
|
|
|
184
|
|
|
|
|
$
|
109.5
|
|
|
|
|
$
|
97.2
|
|
|
|
|
$
|
12.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
1,932
|
|
|
|
|
$
|
6,785.8
|
|
|
|
|
$
|
6,284.6
|
|
|
|
|
$
|
501.2
|
|
|
|
|
(1)
|
The All Other Corporates category
contains 20 additional industry classifications. Health care, natural gas, industry, gaming, food and beverage
and consumer products represented $510.8 million of fair value at June 30, 2014, with the remaining 14 classifications each
representing less than $57 million.
|
(2)
|
Based on fair value, 94.8% of
the collateralized debt obligation securities were rated investment grade by Standard and Poor’s Corporation (“S&P”)
and/or Moody’s Investors Service, Inc. (“Moody’s”) at June 30, 2014.
|
At
June 30, 2014, the Company’s diversified fixed maturity securities portfolio consisted of 2,141 investment positions, issued
by 1,748 entities, and totaled approximately $6.7 billion in fair value. This portfolio was 95.8% investment grade, based on fair
value, with an average quality rating of A. The Company’s investment guidelines generally limit single corporate issuer
concentrations to 0.5% of invested assets for “AA” or “AAA” rated securities, 0.35% of invested assets
for “A” or “BBB” rated securities, and 0.2% of invested assets for non-investment grade securities.
The
following table presents the composition and value of the Company’s fixed maturity securities and equity securities portfolios
by rating category. At June 30, 2014, 94.9% of these combined portfolios were investment grade, based on fair value, with an overall
average quality rating of A. The Company has classified the entire fixed maturity securities and equity securities portfolios
as available for sale, which are carried at fair value.
Rating
of Fixed Maturity Securities and Equity Securities (1)
(Dollars
in millions)
|
|
Percent of Portfolio
|
|
|
|
|
|
|
|
|
Fair
Value
|
|
June
30, 2014
|
|
|
December 31,
|
|
June 30,
|
|
Fair
|
|
Amortized
|
|
|
2013
|
|
2014
|
|
Value
|
|
Cost
or Cost
|
Fixed maturity
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AAA
|
|
|
|
6.1
|
%
|
|
|
|
6.9
|
%
|
|
|
$
|
462.3
|
|
|
|
$
|
448.7
|
|
AA (2)
|
|
|
|
33.4
|
|
|
|
|
35.3
|
|
|
|
|
2,347.3
|
|
|
|
|
2,195.4
|
|
A
|
|
|
|
25.7
|
|
|
|
|
24.7
|
|
|
|
|
1,651.2
|
|
|
|
|
1,500.5
|
|
BBB
|
|
|
|
30.3
|
|
|
|
|
29.0
|
|
|
|
|
1,938.2
|
|
|
|
|
1,777.0
|
|
BB
|
|
|
|
2.5
|
|
|
|
|
2.2
|
|
|
|
|
149.4
|
|
|
|
|
142.4
|
|
B
|
|
|
|
1.8
|
|
|
|
|
1.6
|
|
|
|
|
104.1
|
|
|
|
|
99.6
|
|
CCC or lower
|
|
|
|
0.1
|
|
|
|
|
0.1
|
|
|
|
|
7.5
|
|
|
|
|
7.4
|
|
Not
rated (3)
|
|
|
|
0.1
|
|
|
|
|
0.2
|
|
|
|
|
16.3
|
|
|
|
|
16.4
|
|
Total
fixed maturity securities
|
|
|
|
100.0
|
%
|
|
|
|
100.0
|
%
|
|
|
$
|
6,676.3
|
|
|
|
$
|
6,187.4
|
|
Equity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AAA
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
AA
|
|
|
|
4.5
|
%
|
|
|
|
3.8
|
%
|
|
|
$
|
4.2
|
|
|
|
$
|
4.1
|
|
A
|
|
|
|
3.3
|
|
|
|
|
2.8
|
|
|
|
|
3.1
|
|
|
|
|
3.4
|
|
BBB
|
|
|
|
33.0
|
|
|
|
|
30.2
|
|
|
|
|
33.0
|
|
|
|
|
33.2
|
|
BB
|
|
|
|
1.5
|
|
|
|
|
1.4
|
|
|
|
|
1.5
|
|
|
|
|
1.5
|
|
B
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
CCC or lower
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
Not
rated (4)
|
|
|
|
57.7
|
|
|
|
|
61.8
|
|
|
|
|
67.7
|
|
|
|
|
55.0
|
|
Total
equity securities
|
|
|
|
100.0
|
%
|
|
|
|
100.0
|
%
|
|
|
$
|
109.5
|
|
|
|
$
|
97.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,785.8
|
|
|
|
$
|
6,284.6
|
|
|
|
(1) Ratings
are as assigned primarily by S&P when available, with remaining ratings as assigned on an equivalent basis by Moody's. Ratings
for publicly traded securities are determined when the securities are acquired and are updated monthly to reflect any changes
in ratings.
|
(2) At
June 30, 2014, the AA rated fair value amount included $476.2 million of U.S. Government and federally sponsored agency securities
and $586.2 million of mortgage- and asset-backed securities issued by U.S. Government and federally sponsored agencies.
|
(3) Included
in this category is $16.3 million fair value of private placement securities not rated by either S&P or Moody's.
|
(4) This
category represents common stocks that are not rated by either S&P or Moody’s.
|
At
June 30, 2014, the Company had $1,597.9 million fair value invested in municipal bonds with a net unrealized gain of $142.3 million.
Of the geographically diversified municipal bond holdings, approximately 51% are tax-exempt and 79% 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-,
with approximately 21% of the value insured at June 30, 2014. This represents approximately 5% of the Company’s total investment
portfolio that is guaranteed by the mono-line credit insurers or other forms of guarantee. When selecting securities, the Company
focuses primarily on the quality of the underlying security and does not place significant reliance on the additional insurance
benefit. Excluding the effect of insurance, the credit quality of the underlying municipal bond portfolio was A+ at June 30, 2014.
At
June 30, 2014, the Company had $562.1 million fair value in financial institution bonds, preferred stocks and common stocks with
a net unrealized gain of $49.0 million. The Company’s holdings in this sector are well diversified among numerous institutions.
At
June 30, 2014, total fair value of the Company’s European fixed maturity securities direct exposure was $298.3 million with
a net unrealized gain of $18.5 million. These securities were primarily corporate securities and $137.8 million fair value related
to the United Kingdom. The Company generally defines its country classification by issuer country of incorporation, domicile or
business risk where appropriate. Given the economic, fiscal and political uncertainties surrounding a number of European countries,
especially Greece, Ireland, Italy, Portugal and Spain (collectively “GIIPS”) and France, the Company closely monitors
its direct European securities exposures. At June 30, 2014, the Company’s European investment portfolio had (1) no sovereign
or equity security exposure in any European country, (2) no exposure in the banking and finance industry in any of the GIIPS countries
or France, (3) no unfunded exposure related to its European securities holdings and (4) no derivative or hedging instruments,
other than a minimal amount of European counterparty exposure.
The
Company also carefully monitors, and analyzes a number of factors to understand and identify, its indirect European exposure.
While many factors are considered, it is difficult to know if all potential factors which may indirectly impact the Company’s
investment portfolio have been identified. The factors the Company considers include, but are not limited to, the issuer’s
parent-subsidiary relationship, principal place of business, management location, source of revenue streams, industry classification
and asset characteristics. At June 30, 2014, the Company did not identify significant indirect exposure to European countries
in its investment portfolio.
At
June 30, 2014, the Company had $125.7 million fair value in commercial mortgage-backed securities (“CMBS”), all in
the annuity and life portfolios, with a net unrealized gain of $2.9 million. At June 30, 2014, the Company’s CMBS portfolio
was 100% investment grade, with an overall credit rating of AA, and the 38 positions were well diversified by property type, geography
and sponsor.
At
June 30, 2014, the fixed maturity securities and equity securities portfolios had a combined $35.7 million pretax of gross unrealized
losses on $1,092.3 million fair value related to 317 positions. Of this amount, $5.5 million of pretax gross unrealized losses
were on $371.0 million fair value for 115 positions that had been in a continuous unrealized loss position for 12 months or less.
Of
the investment positions (fixed maturity securities and equity securities) with gross unrealized losses, 6 were trading below
80% of book value at June 30, 2014 and were not considered other-than-temporarily impaired. These positions included structured
securities, corporate securities and equity securities. The 6 securities with fair values below 80% of book value at June 30,
2014 had fair value of $9.9 million, representing 0.1% of the Company’s total investment portfolio at fair value, and had
a gross unrealized loss of $3.4 million.
The
Company views the unrealized losses of all of the securities at June 30, 2014 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 the present value of expected cash flows exceeds the Company’s
amortized cost bases. In addition, management expects to recover the entire 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. Additionally, as of the date of this Quarterly Report on Form 10-Q, the Company is not aware
of any events that call into question the ability of the issuers of the securities to honor their contractual commitments. Therefore,
no impairment of these securities was recorded at June 30, 2014. Future changes in circumstances related to these and other securities
could require subsequent recognition of other-than-temporary impairment losses.
Benefits,
Claims and Settlement Expenses
|
|
Six
Months Ended
|
|
Change
From
|
|
|
June
30,
|
|
Prior
Year
|
|
|
2014
|
|
2013
|
|
Percent
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
Property and casualty
|
|
$
|
204.9
|
|
|
$
|
202.5
|
|
|
|
1.2
|
%
|
|
|
$
|
2.4
|
|
Annuity
|
|
|
0.8
|
|
|
|
1.0
|
|
|
|
-20.0
|
%
|
|
|
|
(0.2
|
)
|
Life
|
|
|
33.5
|
|
|
|
30.0
|
|
|
|
11.7
|
%
|
|
|
|
3.5
|
|
Total
|
|
$
|
239.2
|
|
|
$
|
233.5
|
|
|
|
2.4
|
%
|
|
|
$
|
5.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
and casualty catastrophe
losses, included above (1)
|
|
$
|
29.8
|
|
|
$
|
28.2
|
|
|
|
5.7
|
%
|
|
|
$
|
1.6
|
|
|
|
|
|
|
(1) See
footnote (1) to the table below.
|
Property
and Casualty Claims and Claim Expenses (“losses”)
|
|
Six
Months Ended
|
|
|
June
30,
|
|
|
2014
|
|
2013
|
Incurred claims and claim
expenses:
|
|
|
|
|
|
|
|
|
Claims
occurring in the current year
|
|
$
|
211.9
|
|
|
$
|
208.4
|
|
Decrease
in estimated reserves for claims
|
|
|
|
|
|
|
|
|
occurring
in prior years (2)
|
|
|
(7.0
|
)
|
|
|
(5.9
|
)
|
Total
claims and claim expenses incurred
|
|
$
|
204.9
|
|
|
$
|
202.5
|
|
|
|
|
|
|
|
|
|
|
Property
and casualty loss ratio:
|
|
|
|
|
|
|
|
|
Total
|
|
|
71.0
|
%
|
|
|
73.0
|
%
|
Effect
of catastrophe costs, included above (1)
|
|
|
10.3
|
%
|
|
|
10.2
|
%
|
Effect
of prior years’ reserve development, included above (2)
|
|
|
-2.4
|
%
|
|
|
-2.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Property
and casualty catastrophe losses were incurred as follows:
|
|
|
|
2014
|
|
|
|
2013
|
|
Three months ended
|
|
|
|
|
|
|
|
|
March 31
|
|
$
|
6.3
|
|
|
$
|
5.7
|
|
June 30
|
|
|
23.5
|
|
|
|
22.5
|
|
Total year-to-date
|
|
$
|
29.8
|
|
|
$
|
28.2
|
|
(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.
|
|
|
|
|
|
|
|
|
|
|
|
2014
|
|
|
|
2013
|
|
Three months ended
|
|
|
|
|
|
|
|
|
March 31
|
|
$
|
(4.0
|
)
|
|
$
|
(3.3
|
)
|
June 30
|
|
|
(3.0
|
)
|
|
|
(2.6
|
)
|
Total year-to-date
|
|
$
|
(7.0
|
)
|
|
$
|
(5.9
|
)
|
For
the three months ended June 30, 2014, the Company’s benefits, claims and settlement expenses increased $6.4 million, or
5.3%, compared to the prior year including a more normalized level of life mortality costs in the current period. In the second
quarter of 2014, the property and casualty non-catastrophe current accident year loss ratio of 61.8% was equal to the prior year,
reflecting improvement in the current accident year automobile loss ratio offset by adverse experience in the homeowners line.
For
the six months ended June 30, 2014, the Company’s benefits, claims and settlement expenses increased $5.7 million, or 2.4%,
compared to the prior year primarily reflecting the more normalized life mortality costs and an increase in property and casualty
catastrophe losses.
For
the first half of 2014, the favorable development of prior years’ property and casualty reserves of $7.0 million was the
result of actual and remaining projected losses for prior years being below the level anticipated in the December 31, 2013 loss
reserve estimate, primarily for accident years 2011 and prior and predominantly the result of favorable frequency and severity
trends in automobile liability loss emergence.
For
the first half of 2013, the favorable development of prior years’ property and casualty reserves of $5.9 million was the
result of actual and remaining projected losses for prior years being below the level anticipated in the December 31, 2012 loss
reserve estimate, primarily the result of favorable frequency and severity trends in voluntary automobile loss emergence for accident
years 2011 and prior.
For
the six months ended June 30, 2014, the voluntary automobile loss ratio of 69.0% decreased by 2.3 percentage points compared to
the prior year, including (1) the favorable impacts of lower current accident year non-catastrophe losses for 2014 and rate actions
taken in recent years, (2) development of prior years’ reserves that had a 0.4 percentage point more favorable impact in
the current year partially offset by (3) increased catastrophe losses for this line of business which represented a 0.9 percentage
point increase in the current accident year loss ratio. In the second quarter of 2014, hailstorms in May and June, particularly
in the Midwest and Southeast, had a more severe impact on this line of business. While the first quarter 2014 winter weather impacted
collision and physical damage claims, for the six months the Company had improved automobile liability experience compared to
the same period in the prior year. The homeowners loss ratio of 74.5% for the six months ended June 30, 2014 decreased 1.2 percentage
points compared to a year earlier, including a 1.7 percentage point decrease due to a smaller impact from catastrophe costs. Catastrophe
costs represented 25.9 percentage points of the homeowners loss ratio for the current period compared to 27.6 percentage points
for the prior year period.
For
the life segment, benefits in the current six months increased $3.5 million compared to a year earlier, primarily as a result
of an increase in mortality costs. Variability in the Company’s life mortality experience is not unexpected considering
the size of Horace Mann’s life insurance in force.
Interest
Credited to Policyholders
|
|
Six Months Ended
|
|
Change From
|
|
|
June
30,
|
|
Prior
Year
|
|
|
2014
|
|
2013
|
|
Percent
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annuity
|
|
|
$
|
65.1
|
|
|
|
$
|
62.1
|
|
|
|
|
4.8
|
%
|
|
|
$
|
3.0
|
|
Life
|
|
|
|
21.7
|
|
|
|
|
21.4
|
|
|
|
|
1.4
|
%
|
|
|
|
0.3
|
|
Total
|
|
|
$
|
86.8
|
|
|
|
$
|
83.5
|
|
|
|
|
4.0
|
%
|
|
|
$
|
3.3
|
|
For
the three months ended June 30, 2014, interest credited of $43.7 million increased 3.8%, or $1.6 million, compared to the same
period in 2013, comparable to the percentage increase reflected for the six months.
Compared
to the first six months of 2013, the current year increase in annuity segment interest credited reflected a 7.5% increase in average
accumulated fixed deposits, partially offset by an 8 basis point decline in the average annual interest rate credited to 3.66%.
Life insurance interest credited increased slightly as a result of the growth in interest-sensitive life insurance reserves.
The
net interest spread on fixed annuity assets under management measures the difference between the rate of income earned on the
underlying invested assets and the rate of interest which policyholders are credited on their account values. The annualized net
interest spreads for the six months ended June 30, 2014 and 2013 were 205 basis points and 198 basis points, respectively. The
net interest spread increase for the current period reflected lower average investment yields which were more than offset by the
benefit of increased asset-backed security prepayment activity and crediting rate decreases.
As
of June 30, 2014, fixed annuity account values totaled $3.7 billion, including $3.5 billion of deferred annuities. As shown in
the table below, for approximately 86%, or $3.0 billion of the deferred annuity account values, the credited interest rate was
equal to the minimum guaranteed rate. Due to limitations on the Company’s ability to further lower interest crediting rates,
coupled with the expectation for continued low reinvestment interest rates, management anticipates fixed annuity spread compression
in future periods. The majority of assets backing the net interest spread on fixed annuity business is invested in fixed-income
securities. The Company actively manages its interest rate risk exposure, considering a variety of factors, including earned interest
rates, credited interest rates and the relationship between the expected durations of assets and liabilities. Management estimates
that over the next 12 months approximately $625 million of the annuity segment and life segment combined investment portfolio
and related investable cash flows will be reinvested at current market rates. As interest rates remain at low levels, borrowers
may prepay or redeem the securities with greater frequency in order to borrow at lower market rates, which could increase investable
cash flows and exacerbate the reinvestment risk
.
As a general guideline, for a 100 basis point decline in the average reinvestment
rate and based on the Company’s existing policies and investment portfolio, the impact from investing in that lower interest
rate environment could further reduce annuity segment net investment income by approximately $2.4 million in year one and $7.1
million in year two,
further reducing the net interest spread by approximately 6 basis points and 18 basis points in the
respective periods, compared to the current period annualized net interest spread. The Company could also consider potential changes
in rates credited to policyholders, tempered by any restrictions on the ability to adjust policyholder rates due to minimum guaranteed
crediting rates.
The
expectation for future net interest spreads is also an important component in the amortization of annuity deferred policy acquisition
costs. In terms of the sensitivity of this amortization to the net interest spread, based on capitalized annuity policy acquisition
costs as of June 30, 2014 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 $0.20 million and $0.30 million. This result may change depending
on the magnitude and direction of any actual deviations but represents a range of reasonably likely experience for the noted assumption.
Additional
information regarding the interest crediting rates and balances equal to the minimum guaranteed rate for deferred annuity account
values is shown below.
|
|
June
30, 2014
|
|
|
|
|
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%
|
|
|
|
17.4
|
%
|
|
|
$
|
604.4
|
|
|
|
|
28.4
|
%
|
|
|
|
5.8
|
%
|
|
|
$
|
171.9
|
|
Equal to 2% but less than
3%
|
|
|
|
8.8
|
|
|
|
|
308.0
|
|
|
|
|
81.6
|
%
|
|
|
|
8.4
|
|
|
|
|
251.4
|
|
Equal to 3% but less than
4%
|
|
|
|
15.8
|
|
|
|
|
549.2
|
|
|
|
|
98.4
|
%
|
|
|
|
18.1
|
|
|
|
|
540.3
|
|
Equal to 4% but less than
5%
|
|
|
|
56.4
|
|
|
|
|
1,961.4
|
|
|
|
|
100.0
|
%
|
|
|
|
65.8
|
|
|
|
|
1,961.4
|
|
5%
or higher
|
|
|
|
1.6
|
|
|
|
|
57.6
|
|
|
|
|
100.0
|
%
|
|
|
|
1.9
|
|
|
|
|
57.6
|
|
Total
|
|
|
|
100.0
|
%
|
|
|
$
|
3,480.6
|
|
|
|
|
85.7
|
%
|
|
|
|
100.0
|
%
|
|
|
$
|
2,982.6
|
|
The
Company will continue to be proactive in executing strategies to mitigate the negative impact on profitability of a sustained
low interest rate environment. However, the success of these strategies may be affected by the factors discussed in “Item
1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 and other factors
discussed herein.
Policy
Acquisition Expenses Amortized
Amortized
policy acquisition expenses were $22.5 million for the three months ended June 30, 2014 compared to $23.0 million for the same
period in 2013. The unlocking of annuity deferred policy acquisition costs in the current quarter decreased amortization $0.4
million compared to a $1.0 million increase in the prior year.
Amortized
policy acquisition expenses were $45.5 million for the first six months of 2014 compared to $43.1 million for the same period
in 2013 with the increase primarily attributable to the property and casualty segment reflecting the recent growth in premiums
and related commissions. In addition, amortization increased in the annuity segment. At June 30, 2014, the unlocking of annuity
deferred policy acquisition costs resulted in a decrease in amortization of $0.3 million compared to a decrease in amortization
of $0.6 million from unlocking at June 30, 2013. For the life segment, the June 30, 2014 and 2013 unlocking of deferred policy
acquisition costs each resulted in an immaterial change in amortization.
Operating
Expenses
For
the three months ended June 30, 2014, operating expenses of $39.3 million increased 0.8%, or $0.3 million, compared to the second
quarter of 2013.
For
the first six months of 2014, operating expenses of $79.2 million increased 1.8%, or $1.4 million, compared to the same period
in the prior year. The current period expense level was consistent with management’s expectations as the Company makes expenditures
related to customer service and infrastructure improvements, which are intended to enhance the overall customer experience and
support favorable policy retention and business cross-sale ratios.
The
property and casualty expense ratio of 27.2% for the six months ended June 30, 2014 was comparable to the prior year expense ratio
of 27.3%, consistent with management’s expectations for the current period.
Income
Tax Expense
The
effective income tax rate on the Company’s pretax income, including net realized investment gains and losses, was 28.4%
and 29.5% for the six months ended June 30, 2014 and 2013, respectively. Income from investments in tax-advantaged securities
reduced the effective income tax rate 7.0 and 5.8 percentage points for the six months ended June 30, 2014 and 2013, respectively.
The
Company records liabilities for uncertain tax filing positions where it is more likely than not that the position will not be
sustainable upon audit by taxing authorities. These liabilities are reevaluated routinely and are adjusted appropriately based
on changes in facts or law. The Company has no unrecorded liabilities from uncertain tax filing positions.
At
June 30, 2014, the Company’s federal income tax returns for years prior to 2010 are no longer subject to examination by
the IRS. Management does not anticipate any assessments for tax years that remain subject to examination to have a material effect
on the Company’s financial position or results of operations.
Net
Income
For
the three months ended June 30, 2014, the Company’s net income of $20.4 million represented a decrease of $5.6 million compared
to the prior year. For the six months ended June 30, 2014, the Company’s net income of $48.8 million represented a decrease
of $4.2 million compared to the prior year. The decreases for the current periods were due to declines in realized investment
gains which offset income growth from the combined insurance segments. Additional detail is included in the “Executive Summary”
at the beginning of this MD&A.
Net
income (loss) by segment and net income per share were as follows:
|
|
Six
Months Ended
|
|
Change
From
|
|
|
June
30,
|
|
Prior
Year
|
|
|
2014
|
|
2013
|
|
Percent
|
|
Amount
|
Analysis of net income (loss) by segment:
|
|
|
|
|
|
|
|
|
Property
and casualty
|
|
$
|
18.9
|
|
|
$
|
14.3
|
|
|
|
32.2
|
%
|
|
$
|
4.6
|
|
Annuity
|
|
|
23.8
|
|
|
|
20.3
|
|
|
|
17.2
|
%
|
|
|
3.5
|
|
Life
|
|
|
8.9
|
|
|
|
9.9
|
|
|
|
-10.1
|
%
|
|
|
(1.0
|
)
|
Corporate
and other (1)
|
|
|
(2.8
|
)
|
|
|
8.5
|
|
|
|
N.M.
|
|
|
|
(11.3
|
)
|
Net
income
|
|
$
|
48.8
|
|
|
$
|
53.0
|
|
|
|
-7.9
|
%
|
|
$
|
(4.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of catastrophe
costs, after tax,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
included
above
|
|
$
|
(19.4
|
)
|
|
$
|
(18.3
|
)
|
|
|
6.0
|
%
|
|
$
|
(1.1
|
)
|
Effect
of realized investment gains,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
after
tax, included above
|
|
$
|
3.3
|
|
|
$
|
14.4
|
|
|
|
-77.1
|
%
|
|
$
|
(11.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per
share
|
|
$
|
1.16
|
|
|
$
|
1.29
|
|
|
|
-10.1
|
%
|
|
$
|
(0.13
|
)
|
Weighted average number of shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and equivalent shares
(in millions)
|
|
|
42.2
|
|
|
|
41.2
|
|
|
|
2.4
|
%
|
|
|
1.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and casualty combined ratio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
98.2
|
%
|
|
|
100.3
|
%
|
|
|
N.M.
|
|
|
|
-2.1
|
%
|
Effect of catastrophe
costs,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
included above
|
|
|
10.3
|
%
|
|
|
10.2
|
%
|
|
|
N.M.
|
|
|
|
0.1
|
%
|
Effect of prior years’
reserve
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
development, included
above
|
|
|
-2.4
|
%
|
|
|
-2.2
|
%
|
|
|
N.M.
|
|
|
|
-0.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
N.M.
– Not meaningful.
|
(1)
|
The
corporate and other segment includes interest expense on debt, realized investment gains
and losses, certain public company expenses and other corporate-level items. The Company
does not allocate the impact of corporate-level transactions to the insurance segments,
consistent with the basis for management’s evaluation of the results of those segments.
|
As
described in footnote (1) to the table above, the corporate and other segment reflects corporate-level transactions. Of those
transactions, realized investment gains and losses may vary notably between reporting periods and are often the driver of fluctuations
in the level of this segment’s net income or loss. For the six months ended June 30, 2014 and 2013, net realized investment
gains after tax were $3.3 million and $14.4 million, respectively. For the corporate and other segment, this decline in net realized
investment gains resulted in a net loss which was also lower than the net income reported for the first half of 2013.
Return
on average shareholders’ equity based on net income was 9% and 10% for the trailing 12 months ended June 30, 2014 and 2013,
respectively.
Outlook for 2014
At the time of this
Quarterly Report on Form 10-Q, management estimates that 2014 full year net income before realized investment gains and losses
will be within a range of $2.05 to $2.25 per diluted share. This projection incorporates the Company’s results for 2013 —
results that exceeded management’s expectations — along with the assumptions that life mortality costs will return
to modeled levels and the impact of unlocking annuity deferred policy acquisition costs will be minimal. Compared to 2013, estimated
net income for 2014 also anticipates continued improvement in property and casualty segment current accident year results partially
offset by a lower level of favorable development of prior years’ reserves. Excluding the impact of the unlocking of deferred
policy acquisition costs, 2014 annuity segment net income is anticipated to be modestly lower than full year 2013, as growth in
assets under management is expected to nearly offset an anticipated decline in the net interest spread. For the life segment, along
with the assumption that mortality will return to modeled levels, some modest net investment income pressure is anticipated as
a result of reinvestment rate assumptions, both of which are expected to result in a lower level of income compared to 2013. In
addition to these segment-specific factors, the Company’s initiatives for customer service and infrastructure improvements,
which are intended to enhance the overall customer experience and support further improvement in policy retention and business
cross-sale ratios, will continue and result in expense levels comparable to 2013.
As described in “Critical
Accounting Policies”, certain of the Company’s significant accounting measurements require the use of estimates and
assumptions. As additional information becomes available, adjustments may be required. Those adjustments are charged or credited
to income for the period in which the adjustments are made and may impact actual results compared to management’s estimate
above. Additionally, see “Forward-looking Information” in this Quarterly Report on Form 10-Q and “Item 1A. Risk
Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 concerning other important
factors that could impact actual results. Management believes that a projection of net income including realized investment gains
and losses is not appropriate on a forward-looking basis because it is not possible to provide a valid forecast of realized investment
gains and losses, which can vary substantially from one period to another and may have a significant impact on net income.
Liquidity and Financial Resources
Off-Balance Sheet
Arrangements
At June 30, 2014 and
2013, the Company did not have any relationships with unconsolidated entities or financial partnerships, such as entities often
referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating
off-balance sheet arrangements or for other contractually narrow or limited purposes. As such, the Company is not exposed to any
financing, liquidity, market or credit risk that could arise if the Company had engaged in such relationships.
Investments
Information regarding
the Company’s investment portfolio, which is comprised primarily of investment grade, fixed income securities, is located
in “Results of Operations — Net Realized Investment Gains and Losses” and in the “Notes to Consolidated
Financial Statements — Note 2 — Investments”.
Cash Flow
The short-term liquidity
requirements of the Company, within a 12-month operating cycle, are for the timely payment of claims and benefits to policyholders,
operating expenses, interest payments and federal income taxes. Cash flow generated from operations has been, and is expected to
be, adequate to meet the Company’s operating cash needs in the next 12 months. Cash flow in excess of operational needs has
been used to fund business growth, retire short-term debt, pay dividends to shareholders and repurchase shares of HMEC’s
common stock. Long-term liquidity requirements, beyond one year, are principally for the payment of future insurance and annuity
policy claims and benefits, as well as retirement of long-term debt.
Operating Activities
As a holding company,
HMEC conducts its principal operations in the personal lines segment of the property and casualty and life insurance industries
through its subsidiaries. HMEC’s insurance subsidiaries generate cash flow from premium and investment income, generally
well in excess of their immediate needs for policy obligations, operating expenses and other cash requirements. Cash provided by
operating activities primarily reflects net cash generated by the insurance subsidiaries. For the first six months of 2014, net
cash provided by operating activities increased compared to the same period in 2013, primarily due to an increase in investment
income received and growth in premiums received in the current period.
Payment of principal
and interest on debt, dividends to shareholders and parent company operating expenses is largely dependent on the ability of the
insurance subsidiaries to pay cash dividends or make other cash payments to HMEC, including tax payments pursuant to tax sharing
agreements. Payments for share repurchase programs also have this dependency. If necessary, HMEC also has other potential sources
of liquidity that could provide for additional funding to meet corporate obligations or pay shareholder dividends, which include
a revolving line of credit, as well as issuances of various securities. The insurance subsidiaries are subject to various regulatory
restrictions which limit the amount of annual dividends or other distributions, including loans or cash advances, available to
HMEC without prior approval of the insurance regulatory authorities. The aggregate amount of dividends that may be paid in 2014
from all of HMEC’s insurance subsidiaries without prior regulatory approval is approximately $82 million, of which $24 million
was paid during the six months ended June 30, 2014. 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 8 — Statutory Information and Restrictions” of the Company’s Annual
Report on Form 10-K for the year ended December 31, 2013.
Investing Activities
HMEC’s insurance
subsidiaries maintain significant investments in fixed maturity securities to meet future contractual obligations to policyholders.
In conjunction with its management of liquidity and other asset/liability management objectives, the Company, from time to time,
will sell fixed maturity securities prior to maturity, as well as equity securities, and reinvest the proceeds in other investments
with different interest rates, maturities or credit characteristics. Accordingly, the Company has classified the entire fixed maturity
securities and equity securities portfolios as “available for sale”.
Financing Activities
Financing activities
include primarily payment of dividends, the receipt and withdrawal of funds by annuity contractholders, issuances and repurchases
of HMEC’s common stock, fluctuations in bank overdraft balances, and borrowings, repayments and repurchases related to its
debt facilities.
The Company’s
annuity business produced net positive cash flows in the first six months of 2014. For the six months ended June 30, 2014, receipts
from annuity contracts increased $29.7 million, or 15.7%, compared to the same period in the prior year, as described in “Results
of Operations — Insurance Premiums and Contract Charges”. In total, annuity contract benefits, withdrawals and net
of transfers from variable annuity accumulated cash values increased $24.7 million, or 18.3%, compared to the prior year. One of
the Company’s subsidiaries is a member of the Federal Home Loan Bank of Chicago (“FHLB”) and received $250.0
million under funding agreements in December 2013. During the six months ended June 30, 2014, there was no change in the amounts
outstanding under FHLB funding agreements.
Capital Resources
The Company has determined
the amount of capital which is needed to adequately fund and support business growth, primarily based on risk-based capital formulas
including those developed by the National Association of Insurance Commissioners (“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 8 — Statutory Information and Restrictions”
of the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.
The total capital of
the Company was $1,521.0 million at June 30, 2014, including $199.9 million of long-term debt and $38.0 million of short-term debt
outstanding. Total debt represented 19.2% of total capital excluding unrealized investment gains and losses (15.6% including unrealized
investment gains and losses) at June 30, 2014, which was below the Company’s long-term target of 25%.
Shareholders’
equity was $1,283.1 million at June 30, 2014, including a net unrealized gain in the Company’s investment portfolio of $281.6
million after taxes and the related impact of deferred policy acquisition costs associated with annuity and interest-sensitive
life policies. The market value of the Company’s common stock and the market value per share were $1,277.7 million and $31.27,
respectively, at June 30, 2014. Book value per share was $31.40 at June 30, 2014 ($24.51 excluding investment fair value adjustments).
Additional information
regarding the net unrealized gain in the Company’s investment portfolio at June 30, 2014 is included in “Results of
Operations — Net Realized Investment Gains and Losses”.
Total shareholder dividends
were $19.6 million for the six months ended June 30, 2014. In March and May 2014, the Board of Directors announced regular quarterly
dividends of $0.23 per share.
During the first six
months of 2014, the Company repurchased 136,976 shares of its common stock, or 0.3% of the outstanding shares on December 31, 2013,
at an aggregate cost of $3.9 million, or an average price per share of $28.21 under its $50.0 million share repurchase program,
which is further described in “Notes to Consolidated Financial Statements — Note 6 — Shareholders’ Equity
and Stock Options” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2013. The repurchase
of shares was financed through use of cash. As of June 30, 2014, $24.5 million remained authorized for future share repurchases.
As of June 30, 2014,
the Company had outstanding $75.0 million aggregate principal amount of 6.05% Senior Notes (“Senior Notes due 2015”),
which will mature on June 15, 2015, issued at a discount resulting in an effective yield of 6.098%. Interest on the Senior Notes
due 2015 is payable semi-annually at a rate of 6.05%. Detailed information regarding the redemption terms of the Senior Notes due
2015 is contained in the “Notes to Consolidated Financial Statements — Note 5 — Debt” of the Company’s
Annual Report on Form 10-K for the year ended December 31, 2013. The Senior Notes due 2015 are traded in the open market (HMN 6.05).
As of June 30, 2014,
the Company had outstanding $125.0 million aggregate principal amount of 6.85% Senior Notes (“Senior Notes due 2016”),
which will mature on April 15, 2016, issued at a discount resulting in an effective yield of 6.893%. Interest on the Senior Notes
due 2016 is payable semi-annually at a rate of 6.85%. Detailed information regarding the redemption terms of the Senior Notes due
2016 is contained in the “Notes to Consolidated Financial Statements — Note 5 — Debt” of the Company’s
Annual Report on Form 10-K for the year ended December 31, 2013. The Senior Notes due 2016 are traded in the open market (HMN 6.85).
As of June 30, 2014,
the Company had $38.0 million outstanding under its Bank Credit Facility. The Bank Credit Facility provides for unsecured borrowings
of up to $150.0 million and expires on October 6, 2015. 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 1.25%, which totaled
1.40%, as of June 30, 2014). The unused portion of the Bank Credit Facility is subject to a variable commitment fee, which was
0.15% on an annual basis at June 30, 2014. During the six months ended June 30, 2014, there was no change in the amount outstanding
under the Company’s Bank Credit Facility.
Effective July 30,
2014, the Bank Credit Facility agreement 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. As of July 30, 2014, HMEC’s outstanding short-term debt balance
remained $38.0 million; no change compared to the June 30, 2014 balance.
To provide additional
capital management flexibility, the Company filed a “universal shelf” registration on Form S-3 with the SEC on January
5, 2012. The registration statement, which registers the offer and sale by the Company from time to time of up to $300 million
of various securities, which may include debt securities, common stock, preferred stock, depositary shares, warrants and/or delayed
delivery contracts, was declared effective on January 18, 2012. Unless fully utilized or withdrawn by the Company earlier, this
registration statement will remain effective through January 18, 2015. No securities associated with the registration statement
have been issued as of the date of this Quarterly Report on Form 10-Q.
Financial
Ratings
HMEC’s principal
insurance subsidiaries are rated by S&P, Moody’s and A.M. Best Company, Inc. (“A.M. Best”). 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.
Assigned ratings as
of July 31, 2014 were unchanged from the disclosure in the Company’s Annual Report on Form 10-K for the year ended December
31, 2013. A.M. Best did revise the ratings outlook for the Company’s property and casualty insurance subsidiaries 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 July 31, 2014
|
|
|
|
|
|
|
S&P
|
|
A
|
(stable)
|
|
BBB
|
(stable)
|
Moody’s
|
|
A3
|
(stable)
|
|
Baa3
|
(stable)
|
A.M. Best
|
|
|
|
|
|
|
Horace Mann Life Insurance Company
|
|
A
|
(stable)
|
|
N.A.
|
|
HMEC’s property and casualty subsidiaries
|
|
A-
|
(positive)
|
|
N.A.
|
|
HMEC
|
|
N.A.
|
|
|
bbb
|
(stable)
|
N.A. – Not applicable.
Reinsurance Programs
Information regarding
the reinsurance program for the Company’s property and casualty segment is located in “Business — Property and
Casualty Segment — Property and Casualty Reinsurance” of the Company’s Annual Report on Form 10-K for the year
ended December 31, 2013. All components of the Company’s property and casualty reinsurance program remain consistent with
the Form 10-K disclosure, with the exception of the Florida Hurricane and Catastrophe Fund (“FHCF”) coverage. Subsequent
to the March 3, 2014 SEC filing of the Company’s recent Form 10-K, information received from the FHCF indicated that the
Company’s maximum for the 2013-2014 contract period had been revised to $20.9 million from $20.3 million, based on the FHCF’s
financial resources, with no change in the retention, for the Company’s predominant insurance subsidiary for property and
casualty business written in Florida. The FHCF contract is a one-year contract. Effective June 1, 2014, the new contract with the
FHCF, for the Company’s predominant insurance subsidiary for property and casualty business written in Florida, reinsures
90% of hurricane losses in Florida above an estimated retention of $5.7 million up to $21.0 million based on the FHCF’s financial
resources.
Information regarding
the reinsurance program for the Company’s life segment is located in “Business — Life Segment” of the Company’s
Annual Report on Form 10-K for the year ended December 31, 2013.
Market Value Risk
Market value risk,
the Company’s primary market risk exposure, is the risk that the Company’s invested assets will decrease in value.
This decrease in value may be due to (1) a change in the yields realized on the Company’s assets and prevailing market yields
for similar assets, (2) an unfavorable change in the liquidity of the investment, (3) an unfavorable change in the financial prospects
of the issuer of the investment, or (4) a downgrade in the credit rating of the issuer of the investment. See also “Results
of Operations — Net Realized Investment Gains and Losses”.
Significant changes
in interest rates expose the Company to the risk of experiencing losses or earning a reduced level of income based on the difference
between the interest rates earned on the Company’s investments and the credited interest rates on the Company’s insurance
liabilities. See also “Results of Operations — Interest Credited to Policyholders”.
The Company seeks to
manage its market value risk by coordinating the projected cash inflows of assets with the projected cash outflows of liabilities.
For all its assets and liabilities, the Company seeks to maintain reasonable durations, consistent with the maximization of income
without sacrificing investment quality, while providing for liquidity and diversification. The investment risk associated with
variable annuity deposits and the underlying mutual funds is assumed by those contractholders, and not by the Company. Certain
fees that the Company earns from variable annuity deposits are based on the market value of the funds deposited.
More detailed descriptions
of the Company’s exposure to market value risks and the management of those risks is presented in “Management’s
Discussion and Analysis of Financial Condition and Results of Operations — Market Value Risk” of the Company’s
Annual Report on Form 10-K for the year ended December 31, 2013.
Recent Accounting Changes
Revenue Recognition
In May 2014, the Financial
Accounting Standards Board (“FASB”) issued accounting guidance to provide a single comprehensive model in accounting
for revenue arising from contracts with customers. The guidance applies to all contracts with customers; however, insurance contracts
are specifically excluded. The guidance is effective for annual reporting periods beginning after December 15, 2016, including
interim periods within those years. Early application is not permitted. Management believes the adoption of this accounting guidance
will not have a material effect on the results of operations or financial position of the Company.
Repurchase Agreements
In June 2014, the FASB
issued accounting and reporting guidance for repurchase agreements and similar transactions that distinguishes between transactions
that settle at the same time as the maturity of the transferred financial asset and those that settle any time before maturity.
The guidance requires repurchase-to-maturity transactions to be accounted for as secured borrowings rather than as sales with forward
repurchase agreements. The guidance is effective for annual reporting periods beginning after December 15, 2014, including interim
periods within those years. Early application is not permitted. Management believes the adoption of this accounting guidance will
not have a material effect on the results of operations or financial position of the Company.
Equity Compensation
In June 2014, the FASB
issued guidance to address diversity in accounting treatment of share-based payment awards that require a specific performance
target to be achieved for employees to become eligible to vest in the awards and the terms of an award provide that the performance
target could be achieved after an employee completes the requisite service period. The guidance is effective for annual reporting
periods beginning after December 15, 2015, including interim periods within those years. Early application is permitted. Management
believes the adoption of this accounting guidance will not have a material effect on the results of operations or financial position
of the Company.